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Asymmetric Inflation

America is on the road to recovery. Fiscal and monetary stimulus is brewing a magnanimous concoction to lift the economy. While the stimulus ingredients are similar around the world, the paths are diverging. This outcome reflects the policy choices made a year ago in America, which pre-funded vaccine development for preferential access. Most of the world lags America in distribution because of their position in the vaccine queue, not their policy response. The result is a multi-speed global recovery that will have the modest benefit of different leaders at different times that reduces the variability of global growth.The greater challenge is diminished growth in the long-term as tax increases and debt service crowd out other fiscal programs. Fortunately, America faces this global challenge with higher growth prospects as the Millennial generation workforce proportion increases. Carpe diem.


Rapid enactment of the American Recovery Plan has brought growth forward from the second and third quarters. The summer travel season may be the best quarter in a generation.

The balloon is inflating. In response to one of the most sudden and catastrophic economic events in a century, governments worldwide flooded the world with fiscal and monetary stimulus. The Pandemic required a material response. While the US sits on the cusp of normalcy as the vaccine’s distribution pushes forward, consumption growth reaches unheard of levels despite unemployment levels reminiscent of the Great Recession. This economic contrast highlights the uneven policy response that is magnifying one of the secular trends of the times: inequality.


The US is on the vanguard of the recovery, which is evident in the recent GDP data (exhibit 1). While consumption and investment recovered their losses from last year, exports continue to drag. The latter point highlights that the recovery is primarily an American phenomenon, not a global one. This situation leads to an asynchronous recovery that may smooth global growth while permitting varying leaders and laggards. Critical to the outcome is the fiscal policy response, which America addressed overwhelmingly. The challenge is that the ebullient summer may lead to sluggish growth starting in the fourth quarter.


Exhibit 1. GDP Contribution by Component

Source: Federal Reserve Economic Database, CRM Calculations.


A sword, not a scalpel. The size of America’s policy response to the Pandemic was unseen since the World War II. There is little doubt that the situation called for dramatic policy action. Economic theory leaves little room for debate on whether to support deficient demand. In contrast, there is a material discourse on where and how. The fiscal stimulus evaded the discussion by adding something for everyone (exhibit 2). Indeed, the absence of targeted programs ensures one beneficial outcome: there should be little debate that politicians didn’t try to assuage the concerns of all constituents.


Exhibit 2. American Rescue Plan

Source: Joint Committee on Taxation. Capital Risk calculations for categories.

https://www.jct.gov/publications/2021/jcx-13-21/


The programs addressed the major deficiencies of the moment: extended employme