When the story of 2020s wrote, the current inflationary panic could very well rival the “but his ‘duck’ emails surrounding Hillary Clinton in 2016: The impacts on American politics have been profound and decidedly negative from any progressive perspective.
I must admit that I had previously underestimated the persistence of the price increases that started to appear last fall. As Yogi Berra is credited with saying, “Predictions are difficult, especially for the future. Yet the fact remains that the most popular explanations for inflation reflect malevolent political-economic motivations.
First and foremost, we hear that inflation is due to excessive economic stimulus, especially from the perennial enemies of economic stimulus. Hence the outsized political role of Sen. Joe Manchin (D‑WV) – the self-proclaimed economic genius who worries constantly about inflation – and the endless chatter of budget hawks. From this perspective, the federal government (under Trump as well as Biden) gave people too much money and, as everyone knows, inflation is the result of “too many dollars for too few goods. As usual, what “everyone knows” serves as an inadequate guide.
Dollars chasing goods are reflected in what economists call consumer spending. If there are too many dollars, so to speak, consumer spending will exceed normal GDP growth. As economist Dean Baker notes, this has not been the case during the current panic, neither in the United States nor in the countries of the European Union, where inflation has been similarly high.
Another pandemic effect cited by Baker is the shift in consumer spending from services to goods: fewer trips and dining out, more stays and orders. Again, goods producers can adapt, but it takes time.
This takes us from the demand side — consumer spending — to the supply side. Here the problems are obvious. The disrupted pandemic “supply chains”, i.e. the transactions between companies within industries.
Like Josh Bivens of the Economic Policy Institute notes that if a producer is temporarily sidelined or forced to reduce production, this provides opportunities for competitors who are not as bothered to jump in with price increases. This dynamic is not a matter of long-term growth of monopolies, in technology or elsewhere, but a case of temporary market disruptions. Pandemic lockdowns in China – the global manufacturing colossus – have been significant, leading to downstream impacts.
The bottom line, as Bivens shows, is that profits grew rapidly, while labor costs did not. The increase in profits reflects the ability of companies to exploit weak points in the supply chain. Most of these price increases have gone to profits, not labor.
As Bivens writes, “The historically high profit margins of the economic recovery after the pandemic very uncomfortable with explanations of recent inflation based solely on macroeconomic overheating.
One of the functional aspects of capitalism is that these wrinkles tend to resolve themselves. If someone makes unusual profits in a particular niche, others move in to share the bounty, and over time profits and prices stabilize.
But in addition to the pandemic, we also have the war in Ukraine.
The EU still buys gas from Russia, but uncertainty over oil and gas production has caused global price spikes, which have ended up in gas pumps in the United States. By trying to divert oil and gas purchases from Russian sources, our oil producers “allies” like Saudi Arabia have been singularly useless.
The other major supply problem is Ukraine’s reduced grain production, which is driving up food prices around the world. Sure, the United States produces most of its own energy and grain, but rising world prices allow our domestic producers to do the same.
All of this takes longer to explain than sensationalized stories about gas prices. No tech story can stand up to the harrowing tales of families of modest financial means facing higher rents and higher fuel and staple food prices. It is clear that more social spending is needed to help those hardest hit by these price increases.
Bivens suggests an excess profits tax as a remedy. Another would be increased benefits in programs such as the Supplemental Nutrition Assistance Program (aka ‘food stamps’) and unemployment insurance to mitigate the effects of inflation on low-income families. The federal government could also do something about high prescription drug prices. The impact on headline inflation itself of these remedies is questionable, but it would help if the Democrats showed they were doing Something. The most important likely remedy is time, but in politics, those who step back and wait risk getting roughed up.
Otherwise, the US economy is doing quite well. The miraculous healing of 2021 puts employment close to pre-pandemic level in February 2020after a sharp drop in 16 percentage points. Wage growth for low-income workers, especially people of color, outpaced price growth. Where are the stories of these workers?
There is a media problem and a messaging problem. In general, the media paints a bleak and lopsided picture of the economy, and the Democratic Party fails to sort out what it has achieved, what is beyond its control, and what policies are appropriate.
New playbook needed
Politically, we have two problems. One is another indication of the Biden administration’s malfeasance, in the form of further chatter about the success of deficit reduction. It’s one thing to be blocked by a few die-hard Democratic senators over worthwhile reforms like Build Back Better. It’s another thing to celebrate the results.
It’s really an Obama rerun 2010 playbook, when his administration failed to muster a majority in Congress to support his initiatives, did not note the shortcomings of what had been passed and did not talk about what should have been done instead. . Then, in the 2010 midterm, the Democrats, as Obama said, got “bombed” and lost their majority in Congress.
Bringing employment back to almost pre-pandemic levels in one year has been a great achievement, but we can do better. Employment should keep pace with population growth — and that means 2022 people, no 2020 population.
The other political problem is the posture of the Federal Reserve, which uses the hammer at its disposal while defining everything as a nail. By raising interest rates in an effort to reduce inflation, the Fed will end up depressing job and GDP growth, while possibly adding to supply chain pain.
Last Thursday, the Commerce Department announced that GDP for the first quarter of this year fell by 1.4 percent on an annual basis. It is not news that the stock market has also plunged this year, especially in the past month, which has further delayed consumer spending. People feel and are less wealthy – and they spend less as a result.
Even the European Central Bank pointed out the gap between the Fed’s incoming bombardment and the problem it’s supposed to solve:
“Higher interest rates will not resolve the imbalance between supply and demand, energy prices and base effects that are currently driving prices up: they will not make more containers available and will not increase not the supply of semiconductors and fuel.
The fight against the pandemic has been a huge success. Supply chain disruptions cannot be blamed on the White House, nor can they be undone by the Fed raising interest rates. The economy’s inflation problem is misdiagnosed and mistreated. All of this is on top of a terrible political situation in the run-up to the mid-term elections that puts our entire democracy at risk.