Previously published on July 17, 2022 in
By Milton Ezrati, Chief Economist at Vested
Since the latest inflation news was abysmal and because the polls say clearly that Americans worry first and foremost over inflation, the Biden White House, apart from its latest deflections, has come up with a plan that it claims will deal with the matter. It is far from an encouraging document. Except for its commitment to off load most of the effort onto the Federal Reserve (Fed), it offers little that can help except over the very long run. There is nothing in it to promise immediate relief from the rising costs of groceries or filling a car’s gas tank or even recharging the families exorbitantly expensive electric vehicle.
Fed primacy in this is the correct answer. Inflation is always and ever a monetary problem. The Fed has begun an anti-inflation effort, but because it must now reverse the effects of years in which easy monetary policies effectively financed huge budget deficits – a classic prescription for inflation — it has a long way to go. The best the White House can do is encourage Fed policy makers in their effort, which fortunately the plan seems to do.
It would of course help if the president had offered steps to narrow budget deficits. The plan claims to do that through tax hikes on corporations and wealthy Americans. Some economists might dispute whether tax hikes are the best way to narrow deficits, but that debate aside, the rest of the plan would neuter any budgetary relief from such tax hikes by offering a phalanx subsidies, tax credits, and spending initiatives on infrastructure, of instance, on wind and solar, on electric cars, for charging stations, for affordable housing, and to encourage people to become truck drivers, presumably to relieve supply-chain issues. On balance, then, the White House offers nothing on the budgetary front.
Plan documentation justifies all this otherwise deficit-widening spending by claiming that it will for one ease pressures on oil prices by replacing fossil fuels with alternatives, what it refers to as “real energy independence.” That might be a worthy goal, and in time it might even do what the White House claims it will do, but even the most optimistic estimates indicate that this kind of substitution would take years, possibly even decades to have effect. The same is true of the plan’s proposal to relieve oil dependence by imposing new, stricter milage requirements on new cars and trucks. The past has shown that such measures can reduce oil use and presumably relieve price pressures, but that history also shows how such effects only unfold over the space of years. The little immediate help on fuel prices in the plan comes from the release of oil from the strategic petroleum reserve, which is too small to have any substantive effect. It would also try to increase supply by penalizing companies that refuse to develop what leases they have, even when that lack of development is because Washington has refused permits.
Proposals claim they would ease housing prices with tax subsidies to encourage the construction low-cost housing. This might help at the margin. The only other real estate proposal would encourage local governments to change zoning rules and other regulations that create barriers to homebuilding. This has theoretical merit but is politically impractical. Such barriers almost always have the support of powerful local interests that mayors and city councilors will not cross simply because the White House thinks it is a good idea.
Two other areas receive White House attention — food and pharmaceuticals. On food, the Biden-Harris plan looks to break the power of large wholesalers. There may be anti-trust reasons to attack these firms, but there is little evidence that they have caused the recent rise in food prices. After all, they had market power during periods when food prices were much lower. As for the proposal to help American farmers, it is hard to imagine a world in which Washington could give more support to American farmers than it already does.
Giving Medicare the power to negotiate for lower drug prices, the White House claims, will ease inflation. This idea, floated many times in the past, is hotly debated in economics and policy circles. Whatever its potential merits, it offers little in the fight against today’s inflation. Drug prices in the past year and a half have actually had a moderating influence on inflation. According to the Labor Department’s consumer price index, prescription drug prices have risen only 2.5 over the past year compared to 9.1 percent for prices generally.
Except for the welcome commitment to the Fed, this plan offers more rhetoric than practical ways to alleviate the immediate inflationary pressures plaguing Americans. Those parts that do offer practical help would do so only over the longest of time horizons, too long to do much for those suffering today.