In his column at Yahoo! Finance Rick Newman identifies a number of strategies that the Biden Administration might use in trying to counter inflation:
- Fix supply chains and boost domestic manufacturing.
- Promoting competition.
- The “build back better†plan.
critiquing and, to some degree, rejecting each in turn. While I suspect that President Biden will tout BBB as inflation-fighting, I’m skeptical. I think it’s more likely to be inflation-producing. As we are learning to our sorrow, there’s truth in Milton Friedman’s lament that inflation is always and everywhere a monetary phenomenon.
When you increase consumption without increasing either production or imports by extending credit to ourselves (borrowing), it produces inflation by definition. The childcare provision of BBB promises to increase productivity but productivity and production are not the same. It could increase production but it’s as or more likely to have no effect on production.
Furthermore, Mr. Newman is confusing inflation with price increases. President Biden does have some prospective tactics for lowering prices, largely by reversing things he’s done since coming into office. For example, he could encourage additional production of oil and gas in the United States. However, the political costs to him among progressives in that are such I don’t expect him to do it.
Highly targeted tax cuts for business investment could increase production but those, too, would bear political costs and I’m concerned that as is habitual for Congress the “targeted” part will be omitted and exacerbate our present problems without materially increasing domestic production.
I think it’s far more likely that President Biden will cross his fingers and hope that the Fed pulls his inflation onions out of the fire, focusing on additional fiscal stimulus to ease the pain of inflation which IMO is precisely the wrong strategy.
You don’t mention labor. I think it fair to say that a lot of people think wages end up being a major driver of inflation. How should we approach that? Increase labor supply?
Steve
Wage price spiral doesn’t seem to be what’s going on right now but it’s a definite risk if inflation continues. What to do about it? First, keep commodity prices stable. Second, hold the line on public employee wages and pseudo-public employee wages.
That would be what, 10% of workers unless you have pretty liberal definition on the pseudo part.
Steve
“As we are learning to our sorrow, there’s truth in Milton Friedman’s lament that inflation is always and everywhere a monetary phenomenon.”
When inflation is properly defined – a reduction in the purchasing power of the currency – its an absolute truth.
But we also have non-monetary policy initiatives causing certain prices to rise. Biden’s idiotic energy policy is a prime example. Paying people not to work is another, disrupting the currency / production of goods balance. BBB would be nothing but this on steroids.
“I think it fair to say that a lot of people think wages end up being a major driver of inflation.”
The Phillips curve has long since died. Public sector wages should be brought under a market umbrella not because of inflation (even they may give rise to expectations), but because its a flat out political bribe.
As I’ve been saying since this topic hit the blog the last few months, inflation isn’t transitory, and the Fed is truly in a box. From a political point of view, the relative evils of lower real wages vs flat out recession are right in front of our eyes for anyone who cares to see.
It’s not in a box. They know exactly what they should have done and should do. They just don’t know how they’ll keep their jobs if they do what needs to be done.
IMO Dr. Powell should be subject to public ridicule, preferably in the stocks in the town square.