Addressing Inflation

William A. Galston’s Wall Street Journal column today is on the political necessity for President Biden to take inflation seriously:

Tucked away in the latest NBC survey is a question that deserves the full attention of the Biden administration and Democrats in Congress: “Do you think that your family’s income is going up faster than the cost of living, staying about even with the cost of living, or falling behind the cost of living?” Only 7% of respondents reported that they were getting ahead and 31% that they were breaking even, while 61% said they were falling behind.

They are not mistaken and Mr. Galston’s concern is not misplaced:

A recent report from the Bureau of Labor Statistics shows that while wages rose rapidly during 2021, overall prices rose much faster. On average, corrected for inflation, workers experienced a 2.4% drop in the purchasing power of their hourly wages. And because hours worked remained steady, this drop extended to weekly and monthly paychecks.

It is true, as the administration insists, that prices are rising rapidly throughout Europe as well. But as Obama administration veteran and Harvard economist Jason Furman points out, “The United States has had much more inflation than almost any advanced country in the world.”

It is also true that economic growth has been faster in the U.S. than elsewhere. But as the administration is finding out the hard way, aggregate growth isn’t a counterweight to declining real wages. Despite the sharp fall in unemployment, only 38% of Americans approve of President Biden’s handling of the economy, down from 52% in April of 2021.

Unfortunately, his suggestions for just what President Biden should do are pretty meager:

The Biden administration is stuck with a tough problem. If I were president, I would be attacking it head-on, beginning with a major speech explaining what is happening and followed by regular public events highlighting efforts to attack various dimensions of the problem, from reducing the backlog at ports to recruiting and training truckers to making sure grocery shelves are stocked.

In the short term, the news may not be good. For example, government statistics are lagging behind private surveys of rental costs, which are likely to apply upward pressure to official inflation statistics in 2022.

Fighting inflation will be difficult, but playing it down will make matters worse. Americans want to see their leaders working on what the people think are the most important problems, even if progress is slow.

I would suggest with emphasizing to our political leaders a very simple equation:

Inflation = Nominal GDP – Real GDP

The policies the administration has supported have boosted nominal GDP. There needs to be more emphasis on real GDP now rather than just in the long term. Infrastructure spending is a long-term matter. It won’t do much to reduce inflation now.

The alternative is to accept a lot less growth in nominal GDP.