Democrats Should Punch Back on Inflation

Republicans have blasted “out of control spending” by Democrats as the main reason why inflation is so high in the U.S.  This was a successful line of attack during the midterm campaigns, since many voters listed inflation as their top concern. 

But the Republicans’ claims are grossly exaggerated. Democrats have to set the record straight, for three reasons. 

President Biden’s $1.9 trillion Covid stimulus program helped millions of Americans avoid poverty, led to an economic rebound and averted a deep recession. The spending may have contributed somewhat to inflation, but it is hard to quantify.  Impartial observers, such as Ben Bernanke, the former Federal Reserve chairman, have said that the Biden Administration made the right policy decision. 

In the short-term, Democrats have to refute Republicans’ claims that programs like Social Security and Medicare/Medicaid are inflationary and ought to be cut.  House Republicans like Kevin McCarthy (R-CA) are using a bootstrap argument: the Democrats’ Covid relief programs caused inflation, so we have to rein in all social spending.  

Looking to the long-term, Democrats have to dispel the myth that they don’t do a good job of managing the economy, compared to Republicans.  Voters have more confidence in Republicans on that issue, but it is misplaced. Historically, Democrats have demonstrated a good track record on the economy.   

Democrats Have to Play Offense

The Democrats made a huge mistake by trying to duck the inflation issue during the campaign, and they suffered the consequences.  As of this writing, the Democrats appear to have lost their majority in the House.  The Democrats probably would have failed to hold onto it, given historical trends, but they did not help their cause by essentially conceding the inflation issue to the opposition party.    

The Democrats should have proudly taken credit for President Biden’s $1.9 trillion Covid relief program, the American Rescue Plan (ARP).  Instead, they downplayed the ARP, because the Republicans attacked it relentlessly as “inflationary”.  

Now, President Biden and other Democratic leaders should go on the offensive.  The President spoke at length about the economy and inflation in his press conference on Wednesday, November 9, which was a good start.  But Democrats have to mount a sustained, consistent effort to convince voters that their economic policies are helping them.  

Democrats should educate voters on what is really causing inflation.  They should ask the Republicans, “What is your plan to fight inflation?” 

So far, the Republicans have not made any serious proposals about taming inflation. Suddenly, of course, they are worried about deficits.  But they also want to extend Donald Trump’s $1.7 trillion tax cuts, which were the main reason that the deficits soared 70% in just three years during his administration.  

What is Really Driving Inflation in the U.S.?

The factors driving inflationary surges are complicated, and it is hard to determine how much weight to assign to the various drivers.  

Still, these seem to be the main reasons:    

·       Covid-related disruptions in the labor force and supply chains

·       Affluent Americans’ high savings rate during Covid

·       The ongoing lockdowns of Chinese cities and factories

·       The war in Ukraine

·       The Federal Reserve’s slow response to inflationary trends

And, at the bottom of the list, President Biden’s Covid relief program. 

Even in modern times, a plague is very disruptive.  Covid played havoc with the U.S. economy, as workplaces shut down, either voluntarily or because of government mandates.  Manufacturing and distribution operations became badly snarled, which led to shortages of goods.  

Global supply chains were badly disrupted, partly because Chinese officials ordered a series of drastic lockdowns.  The situation was compounded for many months by a shortage of workers to unload cargo in U.S. ports, also because of Covid.  Since the U.S. imports so many goods from China, these disruptions caused prices to rise sharply. 

Meanwhile, middle and upper-class Americans who could work from home started to accumulate savings at an unusually high rate.  Their expenses fell, as they stopped commuting, going to restaurants or taking vacations.  These consumers ordered a lot of stuff…leading to a sharp jump in demand, which exacerbated the supply chain problems.   

Under Chinese President Xi Jinping’s “zero tolerance policy” for Covid, entire Chinese cities and huge factories remain under lockdown.  His policy has continued to hamper production in China, snarl supply chains and stoke inflationary pressures worldwide. 

The Ukraine War Has Played a Key Role

As the Covid-related disruptions in the U.S. started to diminish, Vladimir Putin launched his invasion of Ukraine in February 2022.  We all learned, to our surprise, that Ukraine is one of the largest grain producers and exporters in the world.  Wheat prices soared around the world, with ripple effects on other food costs.  

Sticker shock at the gas pump/Getty Images

The price of oil and gas jumped, too, as Putin cut deliveries to Western European countries that had grown dependent on Russia for their energy supplies.  Putin has weaponized his energy exports in a blatant move to force Germany and other NATO members to abandon their support for Ukraine. Since the markets for oil and gas are global, prices for U.S. gasoline have also shot up. 

Despite Republican claims to the contrary, it is primarily the conflict in Ukraine, not the Biden Administration’s energy policies, that has driven up the price of gas at the pump.  Gasoline prices have risen around the world, not just in the U.S.

The Federal Reserve Moved Too Slowly

The Federal Reserve Bank, not the Administration, has the primary responsibility for controlling inflation. In hindsight, the Fed was slow to recognize that inflation was becoming entrenched in the U.S.  The Fed should have moved more quickly to raise rates to slow the economy.  The Fed should also have started earlier to shrink its balance sheet, which would indirectly increase interest rates. 

This is not meant to be finger-pointing. Distinguished economists such as Janet Yellen, the Treasury Secretary and former Fed chair, and Paul Krugman, a Nobel prize winner, also believed that inflation would be temporary.  After Fed Chairman Jerome Powell and other Board members realized their mistake, they took bold action by raising interest rates sharply. 

The Fed’s scope of action is limited, however, because international factors are playing such a huge role.   The Fed cannot force the Chinese government to reverse its lockdown policy or Putin to withdraw from Ukraine.   

Biden’s Program Added to Inflation…But How Much? 

President Biden’s American Rescue Plan did contribute to inflation, but it’s not clear how much. 

Ben Bernanke, the former chairman of the Federal Reserve, has said that Biden’s spending program contributed “somewhat” to inflation.  But Bernanke emphasized that without the American Rescue Plan the U.S. probably would have entered a harsh recession.  In his opinion, Biden and the Democrats made the right policy decision.     

Analysts at the Federal Reserve Bank of San Francisco came to a similar conclusion.  They estimated that the ARP may have added 3% to core inflation in 2021, which is significant. (Core inflation strips out fluctuations in energy and food costs, which are volatile.)

However, the SF Fed analysts cautioned that there was a lot of uncertainty about their estimate. And, like Bernanke, they agreed that the Biden programs helped to avoid a sharp economic downturn:

“However, without these spending measures, the economy might have tipped into outright deflation and slower economic growth, the consequences of which would have been harder to manage. “

In other words, the Biden Administration made the right move.

We are focusing on the American Rescue Plan because President Biden’s two other major initiatives have not had an impact on inflation. The $1.2 trillion Infrastructure and Jobs Act, passed in November 2021, carries a large price tag, but relatively little money has been awarded yet to specific projects. Infrastructure projects are long-term and complex, so they have a long lead time before work actually begins.

The Inflation Reduction Act, passed in August 2022, provides $433 billion, mostly to fight climate change, but it will also raise $739 billion in tax revenue. The Congressional Budget Office and the Penn Wharton Model group have both estimated that this law will have virtually no impact on inflation.

Republicans Ignore Some Inconvenient Facts 

The $1.9 trillion of spending under the American Rescue Plan was too large, in retrospect, but we have to remember the context in which the legislation was passed. 

When President Biden took office, 10 million Americans were out of work, and many had been unemployed for a long time. The U.S. economy was in a very precarious state, with unemployment at 6.4%.  Thanks in large part to the ARP, the economy recovered rapidly and the unemployment rate fell to 3.5%.  Under Biden, the U.S. economy has outperformed most other large countries’. 

Furthermore, it’s not clear that the ARP increased most Americans’ income or consumption levels, that is, raised aggregate demand for goods or services.  The ARP focused primarily on helping lower-income people maintain their income, not increase it. The checks were sent primarily to Americans who were out of work or barely scraping by. 

Those eligible under the ARP’s guidelines received a one-time payment of $1,400 per individual and $1,400 per dependent. If they were out of work, they were also eligible for a temporary $300 increase in Federal unemployment benefits, on top of the usual $400 benefit. The supplemental increase was important, since many Americans had exhausted their state unemployment benefits by the time the ARP was passed.

In most cases, the ARP replaced some of the wages that those people had lost; it did not increase their spending power.  They spent their checks on buying food or paying their rent.  They were not splurging on orders from Amazon.

The ARP set income limits for eligibility, so it had little impact on affluent Americans or their spending.  They were the ones who put additions on their houses or bought a lot of fancy items.

Finally, the ARP’s supplemental unemployment payments stopped in September 2021, over a year ago.  So any impact they might have had on inflation ended…but inflation still remains high. 

Biden Should Focus on Inflation in His State of Union

President Biden should tackle the cost-of-living issue head-on in his State of the Union speech and educate voters about the real reasons for inflation. 

In particular, the President should call upon Americans to support Ukraine, despite the rise in gasoline prices.  Biden should turn the table on Republicans like McCarthy, who infamously said, “We’re not going to write a blank check for Ukraine”.  The President should tell Americans that it is their patriotic duty to defend democracy and freedom in Europe. Biden could remind voters that the Inflation Reduction Act’s support for electric vehicles should reduce the cost of driving in due course.

The President should call the Republicans’ bluff and point out that they do not have a credible plan for fighting inflation.      

The 2024 election campaign will start all too soon. Democrats have to seize the initiative and set the record straight on inflation, now. 

The Wall Street Democrat