The price is wrong. Photo: Justin Lane/EPA-EFE/Shutterstock Rising prices are eroding workers’ wage gains and Joe Biden’s political capital. The consumer price index rose at a 6.2 percent annual rate in October, the highest America had seen in more than two decades. A gallon of gasoline costs about 60 percent more today than it did this time last year.
Austerity is not the answer. For at least the past four decades, the conventional policy prescription for elevated inflation has been to cut social spending and increase benchmark interest rates. This approach eases price pressures by reducing demand: When the state slashes aid to households, they have less disposable income to spend on goods and services. When the Federal Reserve raises the cost of credit, meanwhile, debt-financed consumption and investment decline.
One can reasonably argue that the optimal level of COVID-relief spending was smaller than the amount Uncle Sam ultimately authorized. Regardless, if COVID had not triggered a massive shift in consumer preferences away from services and toward goods, while simultaneously seeding bottlenecks throughout global supply chains, inflation would not be at a problematic level right now. Were America’s aberrantly expansive stimulus policies the primary driver of U.S.
Thus, the long-term inflationary outlook remains the opposite of dire, and cannot justify a turn toward fiscal austerity or tight monetary policy. Photo: Skanda Amarnath The prime-age labor-force — the population of non-seniors who have jobs or are actively seeking them — remains far smaller than it was in February 2020. If we wish to expeditiously restore employment opportunities for America’s jobless, and lure discouraged workers back into the labor market, we should not actively reduce labor demand.
All of which is to say: While it is easy to identify technically viable ways to bring down prices at little macroeconomic cost, identifying politically viable means of doing so is decidedly harder. The Democrats’ slim congressional margins render most ambitious ideas for combatting endemic price-gouging and supply constraints dead on arrival. And given Congress’s jam-packed legislative calendar, it’s unlikely to do much of anything on inflation in an expeditious time frame.
Nevertheless, Biden has left the bulk of Trump’s tariffs in place. The president seems to have done this out of political considerations; his administration has consistently worked to project an image of economic nationalism, lacing the president’s policies with “Buy American” provisions. But Republicans are going to accuse Biden of selling out the American worker to the Chinese and/or “globalists” in 2024 no matter what he does.