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Economy

Why Biden's bet on a rapid economic rebound may have backfired – The Hill

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President Biden’s bet on a rapid rebound from the coronavirus recession may have backfired. 

The president and his top economic officials rallied Democrats around a $1.9 trillion stimulus bill in March 2021, urging Congress not to repeat the mistakes of the Great Recession and cut off support for the economy too soon. The bill was also Biden’s way of delivering on the promise made during the pivotal Georgia Senate runoffs, which gave his party a slim Senate majority: elect Democrats and get another round of stimulus checks.

Just more than a year after Biden signed the bill, U.S. unemployment rate is nearly at pre-pandemic levels, the economy has added more than 10 million jobs and gross domestic product is well above where it was when COVID-19 shattered the economy. By those measures alone, the recovery under his watch was far stronger than the slow trudge out of the Great Recession.

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But despite the rapid rebound, Biden’s approval rating is at all-time lows as Americans feel the brunt of high inflation — a risk few within and beyond the administration took seriously when he signed the American Rescue Plan (ARP). 

Consumer prices rose 1 percent in May alone and by 8.6 percent over the past 12 months, according to data released Friday by the Labor Department. Prices for food, gasoline, shelter and travel led the May inflation burst, giving Americans few ways to avoid higher prices.

“The Fed and the White House were trying to avoid the kind of long slog, decade-long recovery that there was after the Great Recession,” said Skanda Amarnath, executive director at research nonprofit Employ America.

“For some people, there was a certain complacency about inflation as a possibility. That’s probably true too. But that was viewed as a much more remote tail risk.”

It’s a risk voters are feeling. Eighty-five percent of voters said they think inflation is a very serious or somewhat serious problem, according to an Economist-YouGov poll from earlier this month. In the same, poll, 44 percent of respondents said Biden has “a lot” of responsibility for the inflation rate, and 31 percent said he has “some.”

Top Biden administration and Fed officials — along with dozens of economists — expected inflation to cool off last year as the world adjusted to life after COVID-19. Vaccination campaigns, reopening schools and a shift in spending from goods to services all figured to bring prices down and workers back into the job market.

But COVID-19 adjusted quicker. The emergence of the delta and omicron variants didn’t curb consumer spending or cost the economy jobs. Instead, it shifted a glut of saved-up money toward goods, which had been in high demand since the start of the pandemic, instead of services. 

The new variants also led to factory shutdowns, port backlogs and other pandemic-related snarls, making it even harder for manufacturers and suppliers to meet higher demand powered in part by federal stimulus.

“Inflation wasn’t transitory because COVID was not transitory. Parts of China are still locked down. We’re not even through the COVID shock,” said Claudia Sahm, a former Federal Reserve research director.

And while some of those pressures have begun to ease, the war in Ukraine has pushed inflation even higher with severe shocks to the global supply of oil, natural gas, wheat and other crucial commodities.

“There were people at the time who said given the gap, given how many people we have out of work, the American Rescue Plan is more than enough. That seems it could be especially true if you counted the excess savings as energy stored in the battery that could be used to get the economy rolling,” said Alan Cole, former chief economist for Republicans on the Joint Economic Committee.

“The U.S. has had higher inflation generally than most advanced economies, and I don’t think anyone’s saying the ARP created all of it — or if they are, they are not telling the truth. But the ARP kind of contributed more at the margins.”

Republican lawmakers, who voted in unison against the American Rescue Plan, have claimed vindication after warning Biden’s bill would trigger an inflation spiral. GOP lawmakers have centered their midterm campaign message — including their response to the Capitol riot investigation — around Biden’s failure to keep prices stable as the economy expanded.

“[My] constituents ask me about the historic gas prices, skyrocketing inflation, and the baby formula shortage,” tweeted Rep. Elise Stefanik (N.Y.), the third-ranking House Republican, on Thursday.

“Why aren’t Democrats holding primetime hearings about these crises impacting the American people?”

Stefanik’s barb came two days after Treasury Secretary Janet Yellen admitted to lawmakers during House and Senate hearings that the administration misjudged inflation and likely spurred it higher through the stimulus plan. Yellen defended the American Rescue Plan’s role in spurring the economy, though she acknowledged how critical it would be for the administration to balance out its impact on the economy.

Most economists say it’s hard to blame the White House for trying to repair the economy as quickly as possible. Even former Treasury Secretary Larry Summers, the top Democratic critic of Biden’s economic policy, spurned the stimulus package because he believed the money would be better spent on the president’s broader Build Back Better agenda. That bill has fallen by the wayside amid concerns from Sen. Joe Manchin (D-W.Va.) about its potential impact on inflation.

Even so, experts agree there is far more Biden could do to try to bring prices down.

In a fiery Friday speech, Biden blasted Big Oil companies for reeling in record profits instead of expanding production with gas prices above $5 per gallon on average nationwide.

“Why don’t they drill more? Because they make more money not producing oil. Prices go up on the one hand. No. 2, the reason they are not drilling is they are buying back their own stock, should be taxed quite frankly. Buying back their own stock and not making new investments,” he said.

But Amarnath, of Employ America, said Biden should work with the industry to increase output through agreements to purchase oil for the Strategic Petroleum Reserve at set prices, giving them cover if market prices for oil go down amid the glut of products. Amarnath also said the U.S. government should deploy the Treasury Department’s exchange stabilization fund to help keep prices down for crucial commodities hindered by the war in Ukraine, sanctions on Russia and Chinese lockdowns.

“Having some individualized attention on these markets would help, but you’d have to really do that systematically ahead of time. That takes a lot of work and that kind of work, just to be blunt, doesn’t happen anywhere within the government.”

Sahm, the former Fed research director, also expressed concerns about Biden’s plan to lean on the Fed to bring down inflation when much of the forces driving prices higher are beyond the bank’s control.

“[The Fed] should have moved sooner last year and it probably would have had some effect on inflation, but it would have had no effect on food and gas prices,” Sahm said. 

“When the Fed lowers inflation, it does it by reducing people’s ability to spend. It’s not a happy way that we get inflation down,” she continued. “The Fed’s lever is impoverishing people. Hardship in the United States is never equally shared.”

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Yellen Sounds Alarm on China ‘Global Domination’ Industrial Push – Bloomberg

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US Treasury Secretary Janet Yellen slammed China’s use of subsidies to give its manufacturers in key new industries a competitive advantage, at the cost of distorting the global economy, and said she plans to press China on the issue in an upcoming visit.

“There is no country in the world that subsidizes its preferred, or priority, industries as heavily as China does,” Yellen said in an interview with MSNBC Wednesday — highlighting “massive” aid to electric-car, battery and solar producers. “China’s desire is to really have global domination of these industries.”

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Opinion: The future economy will suffer if Canada axes the carbon tax – The Globe and Mail

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Open this photo in gallery:

Poilievre holds a press conference regarding his “Axe the Tax” message from the roof a parking garage in St. John’s on Oct.27, 2023.Paul Daly/The Canadian Press

Kevin Yin is a contributing columnist for The Globe and Mail and an economics doctoral student at the University of California, Berkeley.

The carbon tax is the single most effective climate policy that Canada has. But the tax is also an important industrial strategy, one that bets correctly on the growing need for greener energy globally and the fact that upstart Canadian companies must rise to meet these needs.

That is why it is such a shame our leaders are sacrificing it for political gains.

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The fact that carbon taxes address a key market failure in the energy industry – polluters are not incentivized to consider the broader societal costs of their pollution – is so well understood by economists that an undergraduate could explain its merits. Experts agree on the effectiveness of the policy for reducing emissions almost as much as they agree on climate change itself.

It is not just that pollution is bad for us. That a patchwork of policies supporting clean industries is proliferating across the United States, China and the European Union means that Canada needs its own hospitable ecosystem for clean-energy companies to set up shop and eventually compete abroad. The earlier we nurture such industries, the more benefits our energy and adjacent sectors can reap down the line.

But with high fixed costs of entry and non-negligible technological hurdles, domestic clean energy is still at a significant disadvantage relative to fossil fuels.

A nuclear energy company considering a reactor project in Canada, for example, must contend with the fact that the upfront investments are enormous, and they may not pay off for years, while incumbent oil and gas firms benefit from low fixed costs, faster economies of scale and established technology.

The carbon tax cannot address these problems on its own, but it does help level the playing field by encouraging demand and capital to flow toward where we need it most. Comparable policies like green subsidies are also useful, but second-best; they weaken the government’s balance sheet and in certain cases can even make emissions worse.

Unfortunately, these arguments hold little sway for Pierre Poilievre’s Conservatives, who called for a vote of no-confidence on the dubious basis that the carbon tax is driving the cost-of-living crisis. Nor is it of much consequence to provincial leaders, who have fought the federal government hard on implementing the tax.

Not only is this attack a misleading characterization of the tax’s impact, it is also a deeply political gambit. Most expected the vote to fail. Yet by centering the next election on the carbon tax debate, Mr. Poilievre is hedging against the possibility of a new Liberal candidate, one who lacks the Trudeau baggage but still holds the line on the tax.

With the reality of inflation, a housing crisis and a general atmosphere of Trudeau-exhaustion, Mr. Poilievre has plenty of ammunition for an election campaign that does not leave our climate and our clean industries at risk. The temptation to do what is popular is ever-present in politics. Leadership is knowing when not to.

Nor are the Liberals innocent on this front. The Trudeau government deserves credit for pushing the tax through in the first place, and for structuring it as revenue-neutral. But the government’s attempt to woo Atlantic voters with the heating oil exemption has eroded its credibility and opened a vulnerable flank for Conservative attacks.

Thus, Canadian businesses are faced with the possibility of a Conservative government which has promised to eliminate the tax altogether. This kind of uncertainty is a treacherous environment for nascent companies and existing companies on the precipice of investing billions of dollars in clean tech and processes, under the expectation that demand for their fossil fuel counterparts are being kept at bay.

The tax alone is not enough; the government and opposition need to show the private sector that it can be consistent about this new policy regime long enough for these green investments to pay off. Otherwise, innovation in these much-needed technologies will remain stagnant in Canada, and markets for clean energy will be dominated by our more forward-thinking competitors.

A carbon tax is not a panacea for our climate woes, but it is central to any attempt to protect a rapidly warming planet and to develop the right businesses for that future. We can only hope that the next generation of Canadian leaders will have a little more vision.

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Business leaders say housing biggest risk to economy: KPMG survey – BNN Bloomberg

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Business leaders see the housing crisis as the biggest risk to the economy, a new survey from KPMG Canada shows.

It found 94 per cent of respondents agreed that high housing costs and a lack of supply are the top risk, and that housing should be a main focus in the upcoming federal budget. The survey questioned 534 businesses.

Housing issues are forcing businesses to boost pay to better attract talent and budget for higher labour costs, agreed 87 per cent of respondents. 

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“What we’re seeing in the survey is that the businesses are needing to pay more to enable their workers to absorb these higher costs of living,” said Caroline Charest, an economist and Montreal-based partner at KPMG.

The need to pay more not only directly affects business finances, but is also making it harder to tamp down the inflation that is keeping interest rates high, said Charest.

High housing costs and interest rates are straining households that are already struggling under high debt, she said.

“It leaves household balance sheets more vulnerable, in particular, in a period of economic slowdown. So it creates areas of vulnerability in the economy.”

Higher housing costs are themselves a big contributor to inflation, also making it harder to get the measure down to allow for lower rates ahead, she said. 

Businesses have been raising the alarm for some time. 

A report out last year from the Ontario Chamber of Commerce also emphasized how much the housing crisis is affecting how well businesses can attract talent. 

Almost 90 per cent of businesses want to see more public-private collaboration to help solve the crisis, the KPMG survey found.

“How can we work bringing all stakeholders, that being governments, not-for-profit organizations and the community and the private sector together, to find solutions to develop new models to deliver housing,” said Charest.

“That came out pretty strong from our survey of businesses.”

The federal government has been working to roll out more funding supports for other levels of government, and introduced measures like a GST rebate for rental housing construction, but it only has limited direct control on the file. 

Part of the federal funding has been to link funding to measures provinces and municipalities adopt that could help boost supply. 

The vast majority of respondents to the KPMG survey supported tax measures to make housing payments more affordable, such as making mortgage interest tax deductible, but also want to maintain the capital gains tax exemption for a primary residence.

The survey of companies was conducted in February using Sago’s Methodify online research platform. Respondents were business owners or executive-level decision makers.

About a third of the leaders are at companies with revenue over $500 million, about half have revenue between $100 million and $500 million, with the rest below. 

This report by The Canadian Press was first published March 27, 2024.

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