President Biden’s plan to fight inflation shows that he has learnt nothing
Inflation is at near 40-year highs and a recent poll found that “a quarter of respondents blamed President Biden directly for inflation.” Not surprisingly, with midterms coming up in November, President Biden feels the need to outline his plan to deal with this problem. His plan — set out in the Wall Street Journal — doesn’t offer much hope.
To have a plan for fighting inflation, you ought to have some idea of what caused this inflation in the first place, yet President Biden appears puzzled:
Inflation is elevated, exacerbated by Vladimir Putin’s war in Ukraine. Energy markets are in turmoil. Supply chains that haven’t fully healed are causing shortages and price hikes.
Putin is a favorite whipping boy when it comes to energy prices, but gasoline prices were rising well before his invasion of the Ukraine. Indeed, they have been on a steady upward march since President Biden was inaugurated. If energy markets are in turmoil, President Biden himself is partly to blame. As for supply chains and shortages, real GDP — a measure of stuff in the economy — is back above its pre-Covid-19 peak.
Absent from this brief list of reasons for higher prices is any mention of the Federal Reserve and a 40% increase in the money supply since late 2019.
Given this failure to grasp the causes of the problem, it is no surprise that the proposed solutions are useless. “My plan has three parts,” President Biden writes:
First, the Federal Reserve has a primary responsibility to control inflation. My predecessor demeaned the Fed, and past presidents have sought to influence its decisions inappropriately during periods of elevated inflation. I won’t do this. I have appointed highly qualified people from both parties to lead that institution. I agree with their assessment that fighting inflation is our top economic challenge right now.
Where in any of this is anything amounting to a plan, or even to part of one?
Second, we need to take every practical step to make things more affordable for families during this moment of economic uncertainty—and to boost the productive capacity of our economy over time. The price at the pump is elevated in large part because Russian oil, gas and refining capacity are off the market. We can’t let up on our global effort to punish Mr. Putin for what he’s done, and we must mitigate these effects for American consumers. That is why I led the largest release from global oil reserves in history. Congress could help right away by passing clean energy tax credits and investments that I have proposed. A dozen CEOs of America’s largest utility companies told me earlier this year that my plan would reduce the average family’s annual utility bills by $500 and accelerate our transition from energy produced by autocrats.
We can also reduce the cost of everyday goods by fixing broken supply chains, improving infrastructure, and cracking down on the exorbitant fees that foreign ocean freight companies charge to move products. My Housing Supply Action Plan will make housing more affordable by building more than a million more units, closing the housing shortfall in the next five years. We can reduce the price of prescription drugs by giving Medicare the power to negotiate with pharmaceutical companies and capping the cost of insulin. And we can lower the cost of child and elder care to help parents get back to work. I’ve done what I can on my own to help working families during this challenging time—and will keep acting to lower costs where I can—but now Congress needs to act too.
This starts off promisingly; half of the solution to our current inflationary woes does lie in boosting “the productive capacity of our economy.” But when it comes to gasoline, the Biden administration has repeatedly done the opposite, and occasional releases from the reserves are nowhere near enough to mitigate these policy blunders.
The rest is a rag bag of spending proposals: “clean energy tax credits,” “building more than a million more [housing] units,” “lower[ing] the cost of child and elder care” by spending more money. All of this is especially bizarre because:
Third, we need to keep reducing the federal deficit, which will help ease price pressures.
In fact, a deficit doesn’t lead to inflation unless it is covered by printing money (if it is covered by borrowing, the purchasing power is simply shifted from the pocket of the lender to the federal government). But leaving that aside, how is a plan which calls for both a reduced deficit and oodles more spending coherent?
President Biden seems to think that hiking taxes will do the trick. But again, whatever that might do for the deficit will reduce supply in the economy and increase inflationary pressures, which is precisely what all this is intended to avoid.
The Biden administration hasn’t got a clue how to deal with inflation. This is shown by the fact that it has gone from saying that “no serious economist” was worried about “unchecked inflation” last July, to saying that it was a “good thing” in October because it showed the strength of the economy’s recovery from COVID-19, to saying that it’s a conspiracy by greedy corporations in December, to being Vladimir Putin’s fault in February.
The maddening thing is that they do not need to be this utterly incompetent. There are good economists like Larry Summers and Jason Furman — former Clinton and Obama guys — who have called this right and offered good advice, yet the Biden administration continues to misdiagnose every problem as a demand-side deficiency. Until this changes, our economic outlook will be unlikely to improve.