This week in Bidenomics: Crazy talk on inflation
Don’t worry about inflation! As long as Congress passes President Biden’s $4 trillion spending plan, inflation will go away—according to President Biden.
Wait! Worry about inflation! If Congress passes Biden’s $4 trillion spending plan, inflation will devour middle-class America—according to Senate Minority Leader Mitch McConnell, Biden’s chief Republican nemesis.
Like so many other things, inflation is now politicized. So if you’re trying to figure out whether this is a problem or not, you probably won’t do it by listening to elected officials.
Inflation is now running at 5.4%, year over year. That’s more than three times the average inflation rate during the 10 years before the coronavirus pandemic. About half of the rise in prices is due to distortions caused by the pandemic. So without those anomalies, inflation would be around 2.7%, still higher than the prior 10-year average of 1.7%.
Biden and many economists insist this bout of inflation is temporary. But Biden and his fellow Democrats may be privately worried that it’s more serious than that. In remarks on the economy on July 19, Biden mentioned inflation several times, unprompted. He repeated his view that it’s temporary, but also acknowledged that unchecked inflation “would pose a real challenge to our economy.”
Then he said the cure for inflation would be enacting his proposals for enhanced child and elder care, and paid leave, which are part of Biden’s American Families Plan. “These steps will enhance our productivity, raising wages without raising prices,” Biden insisted. “That won’t increase inflation. It will take the pressure off of inflation, give a boost to our workforce, which leads to lower prices in the years ahead.”
That’s dubious logic. One thing that causes higher-than-normal inflation is rising labor costs, which producers pass on to consumers via higher prices. If Biden’s plans did boost productivity, as he claims, then wages could rise without triggering more inflation. But only some of his proposals would improve productivity. Researchers at the Penn Wharton Budget Model found that the programs Biden mentioned would increase productivity, but that GDP and average wages would both decline slightly if Congress enacted his entire plan. The downside is a big increase in the national debt—which Biden didn’t mention during his recent remarks on the economy.
So Republicans must be right, then? Biden’s plan will cause runaway inflation? Ahem. Don’t buy that logic, either. McConnell claims that the $1.9 trillion American Rescue Plan, which Congress passed in March with only Democratic votes, is the main cause of current inflation. And if $1.9 trillion in spending caused 5.4% inflation, wouldn’t Biden’s call for another $4 trillion in spending cause even more inflation? “All that same borrowing and spending is supposed to be what the doctor ordered to fight inflation?” a sarcastic McConnell asked on the Senate floor on July 19. “Inflate our way out of inflation?”
Thing is, there’s little evidence the ARP caused higher inflation. In theory, putting more money in people’s pockets, as the ARP did, should boost demand and raise prices—assuming supply doesn’t expand to meet the new demand. But supply normally does expand if more consumers suddenly materialize. It just takes time. And consumers don’t readily pay higher prices, just because. Sometimes they wait for prices to fall, or substitute cheaper products, or just change their minds and decide not to buy. Besides, if temporary stimulus does cause inflation, then inflation should abate as the stimulus gets spent. Temporary inflation, in other words.
Forget politicians. Economists don’t know where inflation is heading, either. Michael Strain of the right-leaning American Enterprise Institute argues that the additional $4 trillion in spending Biden wants would turbocharge demand, quickly goosing inflation and catching the Federal Reserve flat-footed. But Mike Konczal and J.W. Mason of the left-leaning Roosevelt Institute say supply would swell to meet demand, creating a superboom that boosts pay and makes workers better off, with manageable inflation.
So what should ordinary people do about inflation? Three things:
Forget about national inflation and gauge your personal inflation. While some things are getting more expensive, many things aren’t. If you need to buy a car or a house, inflation is a definite problem. But if you don’t, it’s a good time to enjoy bargains on electronics, clothing and sporting events. Many things that got costlier during the pandemic will continue to get cheaper as consumer spending rotates away from goods, into services that nobody could spend money on during the pandemic.
Push for a raise. Businesses are supposedly desperate for workers, so see if you can make it work for you. If not, consider changing jobs and snagging one of the signing bonuses many employers are offering. If your income rises by more than inflation, your personal inflation rate is 0 or less.
Ignore politicians. Democrats and Republicans, alike. Their mission is to make inflation sound better, or worse, than it is, with no concern for ordinary people until the next election rolls around.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips, and click here to get Rick’s stories by email.
Read more:
Get the latest financial and business news from Yahoo Finance
