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The Real Inflation Risk

While the risk of sustained US inflation should not be ignored, nor should it cloud our view of what is really at stake in the current post-pandemic economy. American democracy is in trouble, and a robust, inclusive government-led recovery may offer the last best chance of putting it on a sounder footing.

CAMBRIDGE – With the annual inflation rate in the United States reaching 5% in May, economists and investors are right to be apprehensive about deficit spending, public debt, and the risk of sustained price growth – which is higher now than it has been for almost four decades. But it would be a mistake to respond to these concerns by pumping the brakes on the economy.

No, the government cannot borrow and spend as much as it likes without paying any costs, as some progressives would have us believe. But nor can those worried about inflation ignore the deeper problem afflicting the US: deep political polarization, accompanied by an erosion of trust in government. A rapid economic recovery, spearheaded by public policies that encourage employment and wage growth, is the best chance the US has to restore trust in government – and in democracy. The real risk stemming from inflation is that it will distract us from this fundamental issue.

To be sure, there is no silver bullet against political dysfunction. Some commentators are understandably worried that the US has already reached a point of no return. After all, a majority of Republicans cling to the false belief that Donald Trump won the 2020 election, and by some estimates, 15% of the US population are adherents of the pro-Trump QAnon conspiracy theory. These figures point to a difficult road ahead. But we should remember that people tend to trust democracy more when it delivers on its promises of stability, shared prosperity, and effective measures to fight poverty.

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