No One Should Be Surprised Inflation Followed Emergency COVID Spending

Special Guests: Alex Pollock, Howard Adler

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This week on Facing the Future, we spoke to two authors, Alex Pollock and Howard Adler, who have written a new book called “Surprised Again: The COVID Crisis and the New Market Bubble”. The book uses the experience of the COVID pandemic to explore  why economic crises always seem to take us by surprise and why the remedies, often undertaken on the fly, can produce unintended consequences that create problems of their own, such as spiraling inflation or market bubbles. Concord policy director Tori Gorman and chief economist Steve Robinson joined me for the program. 

The authors have interesting backgrounds that give each of them a unique understanding of how we react to our economic and fiscal crises. Alex Pollock is senior fellow at the Mises Institute who, among other things, served as principal deputy director of the office of financial research at the U.S. Treasury Department from November 2019 to February 2021. Howard Adler is an attorney who served as deputy assistant secretary of the treasury for the financial stability oversight council from May 2019 until January 2021, monitoring the financial stability of the country during the COVID crisis. 

As Pollock pointed out in our conversation, we’re only 23 years into the 21st century and we’ve already had two severe economic crises, the first of which was the great recession starting in 2008. The COVID-19 pandemic led to a shutdown among broad swaths of our economy and the government providing trillions of dollars in enhanced benefits to millions of individuals and companies to keep many businesses afloat and their employees paid.   

“The notion of mutating viruses which could create a pandemic was a well known possibility, you might even say a certainty, that we would see it at some point or another, but what nobody got was the link between the emergence of a highly contagious threatening virus and a financial panic. In between that link is politics because panic also reflected the political response to the virus,” said Pollock.

Pollock says this was less a failure of planning and more of the natural reaction to a pandemic. Adler says there is one thing that sets the COVID-19 economic crisis apart.

“Most of the recent financial crises we’ve seen have been some asset inflation which has led to the bursting of a bubble and so the crisis predominated in one or two sectors of the financial system. What nobody got was that a pandemic would shut down the entire economy,” said Adler. “People could not go to work, people could not earn a living. Businesses shut down. Restaurants, small businesses. It was a crisis across all time. During the 1918 flu pandemic, people kept working. They got sick and many died, but there was no general shutdown of the economy, and that’s what you saw here which really made it a very unique crisis. And that’s what people didn’t put together, that we’d have a health crisis that would lead to a total shutdown.” 

As the financial crisis that began in 2008 widened, many criticized the Obama administration and Congress for not having a big enough economic rescue package for the economy, leading to an anemic recovery that took years to regain the millions of jobs lost. Some took that as a lesson to make sure the federal response to the COVID shutdown was much larger, which led to faster employment recovery but also gave us the current inflation hangover. Pollock says the cost of these interventions must be taken into account the next time we have a crisis.

“There are two inflations. There is the consumer price inflation which everybody calls inflation. But there was also asset price inflation which creates its own problems as bubbles inflate and then burst, which we also had out of this. That is – as we see it – a cost of the massive interventions,” said Pollock. “They were certainly big, but they also kept going when they should have ended. We call this the Cincinnatian doctrine that you can come in to save the state, but once you’ve saved it, you have to go back to your farm.  It’s very hard to get governments and central banks to stop doing what they’re doing. That makes the ultimate cost in the aftermath where we are now bigger. Nothing is free. Interventions aren’t free, they have costs.” 

“The interventions of 2020 – massive as they were – were necessary,” said Adler. “We had to prevent the economy from shutting down. We had to get money into people’s pockets so they could eat. We had to preserve small businesses to the extent we could. Restaurants, lots of doctors would have had to close up their shops but they were able to take advantage of PPP (Paycheck Protection Program) loans. But the crisis by the end of 2020 had largely abated.” 

Adler acknowledges that there would have been some inevitable inflation just based on the federal COVID bailouts passed during the Trump Administration, but it would not have been as severe as it has been in the last year or lasted as long had the Biden Administration not engaged in more massive, inflationary spending. This is a point many in the administration would most likely argue against, as they pin the majority of inflation on COVID related supply chain disruptions.

Later in the program we also discussed the concept of “Central Banking to the Max” that Pollock and Adler explore in one chapter of their book. This is tied to the role of central banks such as the U.S. Federal Reserve in providing liquid financial assets in ways that have great impact on economic and fiscal well-being for their countries. Pollock points out that during the last financial crisis in 2008-9, for the first time in its history, the Fed acquired privately held mortgage securities.

 “The amount of mortgages owned by the federal reserve from its founding in 1913 until 2007 was exactly zero. In our view, it should be zero,” said Pollock. “Today, it’s $2.6 trillion and in addition to that the Fed owns $5.5 trillion in government debt. 

Hear more on Facing the Future. I host the program each week on WKXL in Concord N.H., and it is also available via podcast. Join our guests as we discuss issues relating to national fiscal policy with budget experts, industry leaders, and elected officials. Past broadcasts are available here. You can subscribe to the podcast on Spotify, Pandora, iTunes, Google Podcasts, Stitcher, or with an RSS feed. Follow Facing the Future on Facebook, and watch videos from past episodes on The Concord Coalition YouTube channel.

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