Does the President Have Control Over Inflation?

On Tuesday night, President Biden used his State of the Union address, in Congress, to touch on a range of pressing issues, including infrastructure, insulin prices, Roe v. Wade, Chinese surveillance, and the war in Ukraine. But he chose, early on, to address one topic that Americans feel especially strongly about. “Here at home, inflation is coming down,” Biden said, to waves of applause. “Gas prices are coming down. Food prices are coming down.” He added, “Inflation has fallen every month for the last six months.” Inflation is consistently found by polling to be one of the most despised forces in American society—and this is true almost regardless of whether inflation is actually a problem at a given time. In 2013, during a period of relatively low inflation (less than two per cent), a Pew survey found that eighty-two per cent of Americans felt that inflation was a “moderately big” or “very big” problem. Last year, when inflation was dramatically rising (in December, it was 6.5 per cent), ninety-three per cent of people surveyed said that the problem was, likewise, “moderately big” or “very big.” “People always hate inflation,” Betsey Stevenson, a professor of public policy and economics at the University of Michigan, told me. She noted that it was important to keep the numbers in perspective. “Even when inflation was at historic lows, survey data showed that eighty-three per cent of Americans thought inflation was a problem.”

These unending negative associations have made inflation an irresistible political weapon. Recently, blaming Biden for causing inflation has been a favorite strategy of the political right. “Biden’s Inflation Quickly Making Americans Poorer,” a headline on the Heritage Foundation’s Web site last fall read. In January, the newly appointed Republican House Ways and Means Committee chair Jason Smith, of Missouri, released a statement titled, “Congress Must Confront Joe Biden’s Inflation Mess.” In reality, though, inflation and its causes are more nuanced than their use in politics would suggest, and whether inflation is increasing or on the decline, it’s unclear how much influence a particular Administration has over it. Biden likely doesn’t deserve the blame for inflation’s rise; he also can’t credibly claim to be responsible when it goes back down.

When it comes to directly influencing which way the inflation rate goes, Stevenson said, “The President has very few levers. And, in this particular case, the Administration has not been an important driver of inflation.” She added that some economists would likely point out things that the Biden Administration could have done differently that might have muted the inflationary pressure the economy has seen in the past couple of years. “But those things are small.” Generally, inflation occurs when more people want to buy stuff than there is stuff to buy. Nearly every advanced economy has been experiencing higher inflation than it did prior to the pandemic, irrespective of the political leanings of the party in power. The United Kingdom, for instance, is struggling with higher price increases than in the U.S. while under the leadership of a conservative government; in Australia, prices of many goods have risen, and a conservative government was recently voted out in favor of a more liberal one. More generally, the largest twenty economies in the world experienced consumer price increases of nine per cent between November, 2021, and November, 2022. In other words, the U.S. is far from alone.

Criticisms of Biden’s performance center on the idea that the Administration did too much to provide aid to families during the pandemic, including through the American Rescue Plan, a 1.9-trillion-dollar spending bill that was enacted by the Democrats in March, 2021. (This followed the CARES Act and other rescue bills passed in 2020.) The bill authorized significant new government spending, including by sending checks to families who qualified. At the time, critics argued that this would leave people with too much money to spend, while productivity struggled to recover after the pandemic shutdowns. Economists such as Stevenson believe that there may be some truth to this argument, but that it still represents only a small amount of inflationary pressure, and that the benefits outweighed the costs by a significant measure. “I still believe, when we write the history of government spending coming into and out of the pandemic, that we will write a story of success,” she said. The spending helped the labor market bounce back after one of the deepest losses since the Great Depression. “The value of that, of not creating a generation of disconnected workers, is quite high. And that’s what the government spending was aimed at doing.”

Wendy Edelberg, the director of the Hamilton Project and a senior fellow in economics at the Brookings Institution, agreed. “It’s true, the American Rescue Plan was very large and untargeted and included checks to households that probably weren’t in terrible financial shape,” she said. “Directionally, I’m very confident the American Rescue Plan boosted inflation.” At the same time, she went on, “I’m also confident it lowered unemployment and took a lot of kids out of poverty, and did a lot of good.”

The more obvious culprit behind the sharp rise in prices is the remarkable confluence of global events during the past two or so years. The first was the pandemic, which led to partial shutdowns of entire countries, shuttered factories and businesses, and an interrupted flow of goods around the world, which created a cascade of shortages, including of crucial components such as chips. Then, in February, 2022, Russia invaded Ukraine, which created uncertainty in oil and gas markets, leading to spikes in prices, as well as disruptions to food supplies, especially stocks of wheat. These events occurred against a backdrop of record heat waves, floods, and other weather events caused by climate change, which exacerbated food shortages in many parts of the world.

The Federal Reserve has taken aggressive steps to cool the economy and bring inflation down through interest-rate increases, which make it more expensive to borrow money and, in theory, lead to layoffs and reductions in wages—all of which reduce demand and prices. William Spriggs, an economics professor at Howard University and a former assistant secretary for policy at the Labor Department, said that he becomes frustrated when he hears officials from the Federal Reserve pledging to continue raising rates until even more people are out of jobs. “Now, do you believe too many people are working, or do you believe avian flu, Vladimir Putin, global warming, the pandemic, and the fact that we had half the world out and not producing and we ran out of chips are to blame?” Spriggs said.

Everything in the economy is connected in a vast and complicated global web, Spriggs said, and the Federal Reserve could be doing a much better job of explaining that to the American people. When there are chip shortages, for example, auto manufacturers can’t finish their half-built cars, and the cars end up sitting in factories, waiting for chips, which can take months. People who need to buy cars might then try to buy used ones, which causes used-car prices to go up, and then those waiting lists grow long, too. Similarly, when Russia and Ukraine, two of the world’s largest producers of wheat, can’t produce as much as they once did, producers in other parts of the world that previously grew barley or corn might switch to growing wheat, even if the climate for it isn’t ideal. Then, Spriggs said, you add the massive heat waves that have plagued Europe, Africa, parts of China, and other regions, which further disrupt farm yields. Suddenly, there is less wheat but also less barley and corn.

“Who’s using those other grains—the barley, the corn? Well, it turns out chickens eat them,” Spriggs went on. “So if you happen to be someone who produces eggs, the stuff that you feed your chickens goes up. And, because of the war, the price of your gas goes up. And everyone’s screaming and hollering that the price of eggs went up.” He added, “There’s this chain reaction, which we as economists teach in intro to economics.” Without effective, clear communication from the Federal Reserve about the tangle of causes behind price increases and goods shortages, it leaves the “Biden gave people too much money” argument room to grow. “Part of the whole issue comes down to expectations,” Spriggs said. “So when I go to the grocery store and see the price of eggs has gone through the roof, I’m not shocked, and I understand why.” ♦

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