EDITORIAL: Fight inflation now — and use growth to do it

OPINION:

The recession that never officially happened is now officially over. Numbers released last week showed the U.S. economy grew by more than 2.5% in the third quarter of 2022.

That’s welcome news at the White House, where President Biden’s economic team avoids the “R” word like a Trump rally. No one in the administration will admit that its economic plans have failed and that, rather than being in the middle of a soaring recovery after the economy reopened, things have been merely limping along.

Good news for one quarter does not mean we’ve turned the corner. Since coming into office, the Biden administration has presided over a stagnant economy that has failed to meet expectations for growth six out of seven times.

That’s about to change, but only because the bar is being lowered. Inflation is still running at about 8% on an annualized basis, up from 1.2% when Mr. Biden took office. The price of gasoline is up by more than a dollar a gallon, from $2.42 to $3.76, according to AAA. The interest on a fixed, 30-year mortgage has gone from 2.85% to nearly 7%. The consumer price index has more than quintupled, heading from 1.4% to 8.3%, and working families have lost more than $1,000 in purchasing power.

Federal Reserve Chairman Jerome Powell, late to the party as usual, finally recognized the reality and, contrary to expectation when Mr. Biden was calling inflation “transitory,” has started pushing interest rates up to bring inflation down.

Eventually, it probably will, but at a considerable cost to working Americans among the bottom half of wage earners. They’re not only looking at higher prices for food, fuel, rent and other essentials over at least the next year, but they should also be concerned about keeping their jobs. Forecasters are predicting unemployment may rise as well.

Inflation is caused by too much money chasing too few goods and services. Mr. Powell and the rest of the Fed are trying to bring it back down through painful austerity measures, but that produces recessions.

Some people shrug and say, “What else is there to do?” First, come to terms with the fact, as the Nobel Prize-winning economist Milton Friedman said, that “inflation is made in Washington because only Washington can create money.” It is the result, he said, of “too much government spending and too much government creation of money and nothing else.”

Rather than push interest rates up and settle things on the demand side of the economic equation, Congress could step in and try to force Mr. Biden to address inflation on the supply side as soon as possible.

There will be a chance to do that in the upcoming lame-duck congressional session. House Speaker Nancy Pelosi, California Democrat, is likely going to put a very expensive package on the floor that will be advertised as providing relief for people suffering from the inflationary spiral.

That was the strategy for selling Mr. Biden’s American Rescue Plan Recovery Act and the Schumer-Manchin-Pelosi Inflation Reduction Act to the American people too. What both bills did was pump money into the economy that’s causing the inflation we have now. That has to be undone.

One way to do that is to reduce spending or at least reduce the rate at which spending is expected to grow. That, added together with pro-growth moves on the tax side, such as lowering the rate on capital gains and changing the definition of cost so that people who sell assets are taxed only on the real growth in their value and not that which result in inflation, would electrify the economy like a lightning bolt.

That also means standing tough on the process established by 2010’s Statutory Pay-As-You-Go, or PAYGO, Act. That law, enacted by a unified Democratic Congress and signed by President Barack Obama, requires Congress to offset new deficits by the end of each calendar year.

Enforcing PAYGO means not waiving the requirement the president issue a sequestration order that cuts spending for a limited set of programs. Let Mr. Biden propose the cuts and let Congress argue over them.