Bad Policy Creates Inflation and Opens the Door to Even Worse Ideas
May 16, 2022 | Tags: economics, Free Markets, Government spending, Inflation, policy, Politics, REASON
It's no surprise to anybody who regularly buys groceries or puts gas in a car that prices are going up. Inflation is running at the hottest rate in 40 years, nibbling away at savings, making a mockery of budgets, and fueling fears about people's ability to make ends meet. What's infuriating is that those rising prices are largely the result of foolish policy choices and that there's actually a constituency for doubling down on political interference in the economy to further crimp our liberty and prosperity.
"The public views inflation as the top problem facing the United States – and no other concern comes close," Pew Research reported last week. "Seven-in-ten Americans view inflation as a very big problem for the country, followed by the affordability of health care (55%) and violent crime (54%)."
The understandable focus on inflation comes after yet another month of rising prices. While the Consumer Price Index shows the annual inflation rate dipped a hair from 8.5 percent in March to 8.3 percent in April, that's still "the largest 12-month increase since the period ending April 1981," according to the Bureau of Labor Statistics.
That dip can largely be attributed to a drop in energy prices which still left the category 30 percent more expensive than a year earlier. Gasoline was a whopping 43 percent pricier than in April 2021. Food, an unavoidable purchase for pretty much all of us, was 9.4 percent more expensive.
Analysts hope that inflation has peaked and is headed for an annual rate of 4 percent, which is still above the Federal Reserve's target of 2 percent. But the Producer Price Index, considered a leading indicator for prices paid by consumers, stands at 11 percent, suggesting that we're in for a bit more pain before enjoying even modest relief. Maddeningly, these soaring prices are at least partly the result of government officials attempting to "help" us through the disruptions of the pandemic and mandated lockdowns.
"Since the first half of 2021, U.S. inflation has increasingly outpaced inflation in other developed countries," Òscar Jordà, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes wrote in a March analysis for the Federal Reserve Bank of San Francisco. "Estimates suggest that fiscal support measures designed to counteract the severity of the pandemic's economic effect may have contributed to this divergence by raising inflation about 3 percentage points by the end of 2021."
The Fed economists try to soften their criticism by arguing that "without these spending measures, the economy might have tipped into outright deflation and slower economic growth." But that's speculative. Perhaps such ill effects could have been avoided with fewer heavy-handed interventions in the economy, such as business closures, or offset without flooding the world with dollars. After all, much of the planet avoided comparable price hikes.
"Governments all over the world spent heavily to combat the pandemic, of course, but few handed out cash directly to citizens as the American government did," Reason's Eric Boehm noted.
Jordà, Liu, Nechio, and Rivera-Reyes are hardly alone in their conclusions about over-the-top spending.
"Starting in March 2020, in response to the disruptions of Covid-19, the U.S. government created about $3 trillion of new bank reserves, equivalent to cash, and sent checks to people and businesses," Hoover Institution economist John Cochrane argued in a recent paper. "The Treasury then borrowed another $2 trillion or so and sent more checks. Overall federal debt rose nearly 30 percent. Is it at all a surprise that a year later inflation breaks out? It is hard to ask for a clearer demonstration of fiscal inflation, an immense fiscal helicopter drop."
"As U.S. prices continue to rise by rates not seen in decades, it's become clear that the stimulus came at a significant, unintended cost: inflation," agreed Santul Nerkar and Amelia Thomson-DeVeaux for FiveThirtyEight. "It's unclear whether inflation has reached its peak, but the situation is now economically and politically toxic, and it has left many of the same policymakers, advocates and economists now asking whether the stimulus checks were a mistake."
The situation is not only economically and politically toxic, it also didn't need to happen and "wasn't backed by evidence or economic calculations. It was shaped by politics."
The FiveThirtyEight writers pointed out that Democrats pushed for larger stimulus checks as part of their effort to win the Georgia Senate run-offs. Giving people free money was a seemingly promising way to buy ongoing support. As of February 2021, 78 percent of Democrats and 64 percent of Republicans strongly supported the idea of receiving fat checks. But vast infusions of new money into an economy erode purchasing power.
"Voters don't seem to be rewarding Democrats and Biden for the extra money granted by the stimulus," Nerkar and Thomson-DeVeaux added. "A majority of voters blame Biden for inflation — including a sizable chunk of Democrats — and disapprove of his handling of the economy more broadly."
The president is under water across the board, but the RealClearPolitics average of polling on his handling of the economy currently has Biden's approval rating at a dismal 37.1 percent.
Unfortunately, earlier political tinkering in an economy opens the door to later political tinkering as the situation deteriorates in ways that the public doesn't always understand. It offers an opportunity to be exploited by authoritarians who want greater government control of production, buying, and selling.
"The prices Americans are paying for groceries and other essentials are at all-time highs," Senator Elizabeth Warren (D–Mass.) huffed last week. "One of the reasons? Giant corporations are price gouging & reaping record profits. We need to put a stop to corporate gouging that drives up prices for families."
That's BS, as economists point out. But it's a way for Warren and her ideological allies to pass blame for the government's failures to the private sector. They propose to penalize businesses for responding to the dollar's declining purchasing power with "unconscionably excessive price increases," a term "which is disturbingly defined nowhere in the legislation," noted Reason's Liz Wolfe.
The result of yet another intervention in markets is less likely to be lower prices than reduced availability of goods if producers can't recoup costs measured in dollars that shed value by the day. No doubt, politicians will see that as yet another reason for them to blame scapegoats and push to expand their own power. When politicians break the economy, they hurt us in the short term but also create future opportunities to do harm in the name of undoing the damage they inflicted.
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