What Should Democrats Do About Rising Inflation?


IInflation is a serious problem for the first time in decades. From the late 1960s, the inflation rate began to increase; The 1.6% in 1965 peaked at 14.8% in 1980. Paul Volcker, then chairman of the Federal Reserve, reversed this path in the early 1980s by pushing interest rates up to l ‘adolescence. It created what was then the deepest recession since the 1930s. Unemployment soared, unions were dismantled, social spending was cut, and in 1986 inflation fell below 2 %. The working class, agitated throughout the 1970s, has become passive and frightened. But inflation has remained low, averaging less than 2.7% from 1983 to 2020 (when it was only 1.2%).

That changed earlier this year. In the latest reading for the 12 months ending October 2021, the Consumer Price Index (CPI) was up 6.2%. This is not without precedent in the post-Volcker era. There were similar spikes in inflation in 1990 and 2008, but they quickly subsided. This one can also burn, but it might not be.

Democrats’ reaction to this price fear has often been elusive, dismissing it as not real or as unimportant or “transitory.” This is wrong both on the facts and on the policy. It’s real, it’s important as long as it lasts, and only a diviner knows if it’s transitory. More recently, they blamed the corporate greed, which has always accompanied us, and the high profits, which have accompanied us for decades. Many progressive economists argue that inflation is confined to a few product lines: goods (rather than services) and energy, led by gasoline, which more than doubled in price over the year. . One problem with this argument is that the price indexes released by the Cleveland and New York federal reserve banks that suppress extreme price changes to isolate underlying trends are also on the rise. Outliers grab the headlines, but other prices are rising as well.

The standard remedy – raising interest rates and causing a recession – would be catastrophic in an economy still recovering from the shock of Covid. But we can’t deny that huge deficit spending and an infusion of trillions of dollars raised out of thin air has something to do with the problem. The deficit spending funded a remarkably generous, albeit too temporary, aid program. It increased household incomes despite sudden and massive job losses in the first months of the pandemic. This aid still keeps millions of households afloat and has left many others with unusually high savings balances.

It would be a crime to reap these benefits, but an immense amount of purchasing power has been introduced into an economy that has been stretched to the limit, with workers in some hard-to-find regions, strained global supply chains vulnerable. to interruption (a lesson for union activists!), a preference to keep only the smallest possible stock and a public infrastructure in tatters after decades of underinvestment.

Since the start of 2020, the Fed has pumped $ 4.5 trillion into the financial system, mostly by buying treasury bills with money created out of thin air. These injections helped lubricate the financial system at the onset of the crisis, but did little or nothing to stimulate the real economy. Instead, they fueled another kind of inflation: asset inflation. We are living in one of the great bubbles of all time. Most of the earlier bubbles focused on one thing: in the 1920s and 1990s, stocks; in the early 2000s, houses. It operates on several fronts: stocks, start-ups (first “unicorns”, now “decacorns”), cryptocurrencies, NFTs and collectibles, ranging from art to sneakers. Houses, one of the essentials of life, are out of reach due to speculative mania. These things never end well.

The stimulus spending has mostly disappeared; people are emptying their bank accounts. This will reduce demand and likely make holdouts more willing to take a job. (Their numbers are grossly inflated, but they do exist.) That should ease inflationary pressures. Eventually the supply chain will pull itself together.

But the longer-term ambitions of the start of the Joe Biden era – to truly build back better – come with economic risks. Support payments in Covid relief bills are models for some of the redistributionist social spending we’d like to see made permanent, but unless the spending is paid for by taxes on people with money to spare rather than by borrowing, this has a high inflationary potential. There is a belief on the left that you can fund a social democratic agenda just by taxing the rich, but there just isn’t enough money out there to do it. Additionally, we want to tax the billionaire class out of existence, which means they cannot serve as ATMs in perpetuity. Greening the energy supply could also be inflationary. If fossil fuel production is limited, prices will rise until new sources are brought online in large quantities. It will take a bit of clever politics to get over all of this, and it’s not clear that Biden has the skills or the will to do so.

Doug Hin wood

Mmuch of the recent rise in the inflation rate, both in the United States and abroad, is not due to an overheating economy or excess stimulus; it is the result of supply and demand factors that are linked to the pandemic. With people understandably hesitant to return to many in-person services, consumers have shifted their spending toward goods such as cars, household furniture, televisions, and camping gear, as many industries are under stress. supply and bottlenecks.

Covid-19 has played a role in almost all of the dramatic price increases over the past year. I believe that inflation will subside once people and our public infrastructure adjust to the changes brought about by the pandemic. We must of course continue to work to vaccinate as many people as possible and put in place other public health measures so that people want to return to the services. In November, consumer spending on services remains well below pre-pandemic levels, while spending on goods exceeds them. These dynamics are playing out in an economy whose GDP is still significantly lower than we expected without a pandemic. Therefore, as people shift their spending toward more services, spending on goods will decrease and relieve pressure on supply chains, which will stabilize prices. The United States must also be a leader and a major contributor to the international response to the pandemic, so that the global economy can operate with less disruption.

But while public health initiatives and infrastructure investments are essential, Democrats should also experiment with new policy responses, especially in categories that make up a large chunk of the average household budget, like housing, energy, etc. food and medical expenses.

Over the past 40 years, our government has primarily used a political tool to fight inflation: raising interest rates to slow the economy. But given the current supply chain disruptions and the ongoing public health crisis, this response would only make matters worse. What we are experiencing is not the result of too much global demand, but of supply problems coupled with changes in demand. For example, a semiconductor shortage has led to the production of fewer cars, just as more Americans are looking to buy them. Raising interest rates would increase the cost of borrowing and discourage investment by automakers, investments that are necessary to expand production and access to semiconductor chips. Rather than comparing the headline inflation rate with the Federal Reserve’s 2% target rate, we need to consider industry-specific factors. If Democrats do this, they will find that there are many solutions to the price hike.

Democrats in Congress are working to pass the Build Back Better Act, which would fight inflation in the long run in some of these sectors, from public investment in affordable housing to transitioning our energy supply to sources. more diversified and renewable. And if inflation weren’t instrumentalised by Republicans and cited as the cause of President Biden’s lower approval ratings, Democrats wouldn’t need to do much in the short term. Yet at the local, state, and federal levels, there are ways for governments to immediately tackle inflation that are also just good policy. For example, housing is one of the most important components of the average household budget. While the adoption of the Build Back Better Act would trigger historic public investment in new housing, this political solution would take some time to affect prices. But municipalities, states and the federal government can implement rent stabilization policies now to bring down housing costs. In 2019, Oregon and California were the first states to adopt policies that regulate how much rent can increase each year. More than 180 municipalities already have some form of rent stabilization policy. Democratic officials across the country could implement similar measures and launch public education campaigns to help their constituents take advantage.

Energy costs have also been a major contributor to inflation over the past five months. Although recent price increases in this sector are largely linked to pandemic disruptions, controlling energy prices is difficult because they are inherently volatile and influenced by geopolitics and the financial sector. Moving away from fossil fuels will offer long-term solutions to this price variability. But in the short term, Democrats may demand more transparency and control. They can also expand the eligibility and coverage of programs like the Low Income Home Energy Use Assistance Program (LIHEAP) and invest more in campaigns that educate the public about these lesser-known programs.

Being proactive in dealing with the major expenses that households face each month, and continuing to tackle the pandemic that has caused or exacerbated the rising costs, can be a unifying political agenda for Democrats – one that uses all levels of government to demonstrate that Democrats are committed to improving the quality of life for all.

THEauren Melodia

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