That America has called its latest piece of pro-state legislation an "Inflation Reduction Act" may well come to be seen, in due course, as the defining irony of Joe Biden's presidency. There seems little in the Act likely to significantly impact inflation in the intended way. We know from history that once inflation hits levels where everyone feels the pinch, it tends to become self-sustaining. We also know that trying to control prices or wages under such conditions tends not to work and can make things worse.
The time to reduce the risk of inflation was before it started, by being aware of the possibility that massive money creation might eventually — under certain triggering conditions — cause problems; and by not getting complacent, as Mario Draghi for example seems to have done, that because we had not had the triggering conditions for a long time, that could be relied on to be permanent. (Comparable to the delusion, popular a couple of decades ago, that busts had been eliminated, simply because the boom had lasted longer than usual.)
It is unfortunate for America, and for the rest of the world, that the time when caution was, and is, particularly needed has coincided with the White House being occupied by one of the most spendthrift Presidents in US history. In sharp contrast to Donald Trump, Mr Biden's approach receives support from an army of pro-state intellectuals. There still appear to be a few financially responsible politicians in America, otherwise Mr Biden's original $4 trillion plan might have been implemented, rather than the c.$2 trillion committed so far.
Signs of suppressed inflation have been hiding in plain sight for years, prior to the recent wake-up call. (Among other things, progressive shrinkflation and skimpflation; and consistently faster-than-headline inflation in sectors where efficiency gains from the IT revolution — an effect that will run out eventually, and may already be starting to do so — haven't exerted downward pressure on prices.) Either successive Presidents have chosen not to listen to the warnings of their economic advisers or, more likely, those advisers didn't bother with warnings, choosing instead to look the other way.
Of course America is not unique in this respect. The UK, the rest of Europe and Japan have all adopted comparable programmes of money expansion and ballooning state expenditure. It's conceivable, however, that they might have felt a bit more restrained without the USA's example.
Governments' best hope at this point for controlling inflation is to commit to fiscal prudence — not to engage in posturing, let alone indulging in even more state largesse.
