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Why Washington Can’t Have an Honest Debate on Inflation


The political conversation on inflation, however, is not very good. In fact, it’s largely a charade, with enough artifice to get around all the actors involved.

Republicans, predictably, play the role of prosecutor indicting a Democratic defendant. They accuse President Joe Biden of causing a singular plague of price hikes that are “crushing” American consumers. They laugh at him for assuring the country when the problem erupted last spring that inflation would be “transient”.

These dramatic allegations have put the GOP in a strong position for midterm election gains this fall. But on the merits, they omit a lot of conflicting evidence.

Inflation surged in countries around the world as economies hampered by the pandemic picked up the pace. This process strained the supply muscles of manufacturers, especially as the pandemic created new patterns of consumer demand that companies were not prepared to meet.

The resulting inflation unquestionably caused economic hardship for millions of families, eroding the purchasing power of higher wages. At the same time, they have not been ‘crushed’ enough to prevent them from spending at a sustained pace.

This is because families up and down the income scale, thanks to Covid relief checks, usually have even more money than before the pandemic; in the jargon of economic analysts, “household balance sheets” still have “excess savings”. Unemployment has fallen back below 4%.

“Excess savings have been sufficient to cushion the impact of falling real wages on spending, even for low-income households,” said Moody’s chief economist Mark Zandi. “U.S. households are mostly in good financial shape.”

Biden’s White House wasn’t alone last year in believing inflation would be short-lived. The same was true for the Federal Reserve, the government agency responsible for monitoring and controlling inflation through the management of monetary policy.

The role of the media is always to hold the government accountable. But the unelected and relatively obscure Fed does not hold daily press briefings.

The White House, home to the most visible official of all, does. So reporters continually ask the president about solutions to rising prices, even though, in a free-market economy, no White House has much power to bring them down.

The role of the President is to answer questions. For disgruntled voters, “there is not much I can do” is not enough.

Biden therefore often resorts to the art of political performance. He joins fellow Democrats in attacking greedy corporations, even as corporations respond to market forces whether inflation is high or low — as it has for more than 30 years.

Presidents are feeling particular pressure to provide an answer on rising gas prices. Rising numbers on signs posted at the pump — determined by oil supply and demand — have voters particularly furious.

Like previous presidents under similar pressure, Biden has demanded “price gouging” investigations. Last week, House Democrats passed an anti-gouging bill. The only expected result: a few news headlines.

While the inflation debate may be largely wrong, it is not entirely wrong. Presidential policies can make inflation worse.

Indeed, economists across the political spectrum now believe that Biden’s $1.9 trillion U.S. bailout, while accelerating growth and job creation, has somewhat exacerbated inflation by overstimulating the consumer demand. Republicans are right. What’s not clear is how much of a difference the bailout made.

Presidents can also temper inflation, if only marginally. The administration’s efforts to ease price pressures by helping to smooth out supply chains are helping a little. The same goes for the record release of oil from the Strategic Petroleum Reserve.

But modest upsides are hastily overwhelmed by external shocks, from new Covid shutdowns in China to Russia’s invasion of Ukraine. Measures the administration is currently considering but has not taken, such as lifting some import tariffs that President Donald Trump has imposed on China, would be equally vulnerable.
Whether today’s inflation will eventually push the US economy into recession depends primarily on the ability of the Fed to raise interest rates to bring them down. Biden’s most important contribution to this process is his appointments to the Fed’s board.

The Fed Chairman he inherited was Jerome Powell, a Republican appointed to the post by Trump. President Barack Obama first brought Powell to the Fed board in 2011.

Late last year, Biden decided to keep Trump’s president in place. On May 12, 80 of 100 senators — including overwhelming majorities of Republicans and Democrats — voted to confirm the president’s choice.

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