What Democrats and Republicans Are Wrong About Inflation

Americans pessimistic about one of the strangest economies in recent memory, and their negativity has a lot to do with inflation. This was announced today by the Bureau of Labor Statistics. in January 2022, prices increased by 7.5% compared to the same period last year.the highest since 1982, and as such, more expensive milk, furniture and cars – and the fear that their prices will continue to grow rapidly – are likely to remain the focus of American attention.

This, of course, has led to many accusations about who or what is to blame for the price increases that we are seeing. Democrats have blamed for supply chain shortcomings due to COVID-19 and also large corporations as well as monopolies. Republicans, meanwhile, attacked President Biden’s legislative agenda claiming that his signed statutes – The American bailout plan is primarily to blame, with $1,400 in stimulus checks paid directly to many Americans. And for sure, whether it’s fair or not, most americans to blame Biden.

But what is responsible for inflation in the US? Is it all about the pandemic supply chain, as many Democrats argue, or is it corporate greed? Or is it more to do with Biden’s politics, as the Republicans claim?

Inflation is not just a supply chain problem, and stimulus has likely made it worse.

One of the more consistent Democrats’ views was that the COVID-19-hit supply chain is to blame for our current inflation rate. Biden even went so far as to say supply chain problems “all there is to do“At the same time, while House Democrats are working to create legislation focused on improving supply chain problems. As well as many economists say it supply chain played a heavy hand in price gougingtoo much.

The mindset goes like this: Americans have stopped using their gyms, nail salons and other services as their spending patterns changed rapidly in 2020 and the global supply chain – which already had problems – was not suited to surge demand for consumer durables (eg home workout equipment, office furniture) after the initial global economic downturn. Combine this rapid growth in demand with a shortage of supply, and you get higher prices.

But at the same time, this Democratic view has its limits, as it has become clear to many economists that US inflation is not simply supply chain problem: Our economic response, namely the trillions of dollars in COVID-19 stimulus paid out over the past 24 months, seems to be significant difference.

A good way to understand this is to look at Europe, which is facing similar supply chain problems and an even bigger oil shock as it is more dependent on foreign oil. than the USA However, European countries experienced lower inflationperhaps partly due to their smaller government response.

“Global supply chain problems affect every country in the world, but inflation has been higher in the United States than in other countries,” the report said. Jason FurmanProfessor of Economics at Harvard University and Chairman of the Council of Economic Advisers under former President Barack Obama. “When compared to Europe, the consumption of goods in the US is higher and the consumption of services is higher than it actually is. [in Europe]. ”

One reason for this high consumption is government spending. In 2020, a divided Congress under former President Donald Trump passed two separate pieces of legislation. $2 trillion CARES Act in March, which handed out $1,200 checks to most single adults and even more families, and then a $900 billion package. in December which, among other things, issued $600 address checks. But then, in March 2021, the Democrats passed another round of government stimulus in the form of a $1.9 trillion relief package, including $1,400 direct payments to individual Americans, as some experts were warning at the time. can cause inflation.

And it does seem that this most recent round of government spending is at least partly responsible for our current inflation rate. For example, an October 2021 paper found that the American Plan of Salvation probably worsened inflation a bitcausing significant (but small and short-lived) upward pressure on prices, and many experts supported their 2021 claims that additional stimulus lead to inflation. Of course, Biden’s additional incentive may have been Americans need to participate in the economy at the time and vote found wide support among Americans for greater relief. But it also led many Republicans argue that Biden’s policies are responsible for the historic price increases we’re seeing.

Furman stressed to me that inflation would likely be high even without the COVID-19 relief bill, however, due to the economic recovery and main effect distortion. What’s more, rising gas prices—one of the most tangible ways Americans are coping with inflation—probably has nothing to do with the American bailout plan, and much more to do with global oil price movements. However, there is at least some evidence that government spending caused inflation, beyond explaining that it was just a supply chain problem.

But not all government spending leads to inflation.

However, it is important to note that, despite the claims of many Republicans, not all government spending has the same effect on inflation. In fact, historically, government spending has generally not led to inflation. BUT paper 2015 in the European Economic Review found, for example, that the effect of government spending on inflation after World War II was “not statistically different from zero. ” But Bill Duport, co-author of this study and vice president of research at the Federal Reserve Bank of St. Louis. Luis told me that the size of the intervention matters, and it may help explain why today’s government spending has spurred inflation, but it hasn’t in recent times.

“The big difference, I think from now on, is just the enormity of government spending,” Duport said. “That might explain why he didn’t find big effects, although they could be big now.”

However, not all government spending approved by the Biden administration is likely to have contributed to inflation. For example, the bipartisan infrastructure bill that Biden signed into law in November was unlikely to contribute to inflation for a number of reasons. First, very little was paid in this moment. Secondly, it is aimed at building up the productive potential of the economy, i.e., investing in new technologies and creating jobs, which means that it can even bring down inflation. This is different from the American bailout, whose $1,400 stimulus checks don’t move the economy in the same way, according to the economists I spoke to.

Americans, however, do not necessarily make this distinction when it comes to government spending. According to January Politico-Harvard Poll43 percent of Americans believe that the bipartisan infrastructure bill will increase inflation, and only 10 percent believe it will reduce inflation (although 35 percent believe that inflation will remain unchanged).

Thomas Philippon, a professor of finance at NYU’s Stern School of Business, said his biggest concern is recent stimulus-driven inflation because it muddies the waters of government spending in the eyes of voters. This, in turn, Philippon said, is wasting political capital that cannot be used to address other key issues, such as spending on infrastructure or child poverty.

“Then people lump together all kinds of government spending, good and bad,” Philippon said.

Large corporations are not the main reason, but…

Finally, some Democrats have singled out big companies and monopolies because of their perceived role in driving up prices. Figures across the entire ideological spectrum of the party – from Sens. Bernie Sanders as well as Elizabeth Warren Biden – argued that big business, by inflating their prices in the midst of a pandemic, is to blame for inflation, and that the lack of competition has allowed corporate giants to steadily increase their prices.

At first glance, this explanation seems less plausible than other reports of inflation. Profit-driven companies didn’t suddenly become more profit-driven during the pandemic, and they weren’t more generous before. In addition, corporate concentration has been growing steadily since the 1990s – an era of historically low inflation. January Poll of Economists at the Global Markets Initiative at the University of Chicago’s Booth School of Business, most experts agreed on both issues: inflation was not explained by the decision of large firms to get richer, and antitrust interventions like those pursued by the Biden administration could not contain inflation.

However, there is an element in the prices we are seeing today and how Americans are reacting to them that can be explained by the madness of big business. Philippon, whose book The Great Reversal focuses on how lack of competition and corporate concentration has defined the modern American economy and told me that one of the reasons inflation matters so much in the US is because prices were already so high. from the very beginning.

“This is not a statement about rapid inflation, this is a statement about slow profit growth that is slowly suffocating the middle class,” Philippon said. “One of the reasons this is especially painful in the US is because prices were already high, people’s purchasing power, the real value of their wages, has already been going down because of bargaining power. Then when you add a spike in inflation to that, it becomes even more painful.”

This may explain why recent polls have shown that Americans sympathize to arguments that explain inflation corporate greedand why Biden is singing a rather populist song about inflation. But, as with all other aspects of reporting on this issue, whether Democrats or Republicans are right about the facts of inflation has very little to do with its potential impact on elections. Prices need to stabilize for Americans to feel good about the economy and Democrats to feel confident about their chances in 2022.

“I don’t think there is any signal that would make people feel good about 7 percent inflation,” Furman said.