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Ben Franklin $100 bill with US flag
Former President Donald Trump is counting on voter amnesia as he campaigns for a second term. He especially wants them to forget 2020, the chaotic last year of his presidency. In particular, he hopes the public will forget how his mismanagement of the pandemic not only cost the nation preventable loss of life, but also how it triggered price inflation, a critical economic problem, passed on to the Biden Administration and the Federal Reserve, that has been getting under control within the past 18 months.
How did mismanagement of the pandemic in 2020 cause price inflation in 2021?
Fear of Covid Brought Economic Meltdown
While medical experts were advising Trump that Covid-19 would be “five times more deadly than the common flu,” he downplayed the importance of aggressive action against the spread of Covid, including early testing to isolate the virus. In an interview with Bob Woodward on February 7, 2020, Trump admitted he “wanted to always play it down ... because I don’t want to create a panic.”
By testing for the virus, its victims can be isolated; without testing everyone is suspected of being a carrier and so the natural inclination for individuals is to isolate, both at work and in public places. Absenteeism rose in 2020, especially in jobs that required working in close proximity. Especially hard hit was the transportation industry—freight rail, harbors for container ship traffic and long and short haul trucking. Bottlenecks arose between producers and retail points of sale. Each link in the supply chain experienced greater delays as purchases were placed on back order to be delivered later depending on availability. These delays caused higher costs, which were eventually passed on to consumers in higher prices. Adding to price pressure, consumers changed their spending patterns to include on-line shopping for durable goods and tech they needed to isolate, work from home, set up online schooling for their children and lessen their family’s chances of contracting the disease.
Operation Warp Speed
A vaccine was required to get to the root cause of the supply-side constraints. Fortunately, the relevant mRNA technology had been under research and development for 20 years in government-sponsored university labs and private pharmaceutical company labs. However, in early 2020, a specific vaccine for the Covid-19 was not ready. To speed up vaccine development and manufacture under a project dubbed Operation Warp Speed, vaccine testing and production proceeded simultaneously rather than in the usual sequence in which successful FDA testing was required before manufacture. It worked: by the second half of 2020 the FDA allowed emergency use of an mRNA vaccine.
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Although Operation Warp Speed achieved faster approval and production, there was no plan to inoculate tens of millions. Instead of promoting a plan to vaccinate the public, Trump created alarm at extremely strange press conferences during which he downplayed the importance of testing for the disease, and instead suggested infusions of ultraviolet light, and injections of ivermectin or bleach, none of which had proven efficacy against Covid-19.
Downplaying the testing and delaying the distribution of the vaccine also delayed fixing the persistent supply-side bottlenecks that were causing upward pressure on costs. For durable goods delivered only after a long delay, there was considerable time lag between the cause of inflation and its effect on the price data (prices are recorded after final sale). If the bottlenecks had been relieved quickly, market forces would have returned to normal, and the rate of price increases would have been smaller and temporary. By the time the problem was handed over to the Biden Administration in January 2021 it was too late to merely unclog the sclerotic supply chain; sterner measures were required to restrain inflation. The primary tool for controlling price inflation was Federal Reserve policy to raise interest rates, which incentivized consumers to slow their rate of spending, thereby reducing the upward pressure on prices.
For the first two years of the Biden administration prices rose faster than incomes, reducing purchasing power; a tough hit for consumers. However, for the past 18 months this pattern has reversed, and purchasing power has been on the rise again. Overall, the performance of the U.S. economy is by far the best among the major developed countries for all relevant indicators—employment, wage growth, wealth creation as well as inflation—not just in the aggregate but also across income, race and ethnic demographics.
