President needs better advice on addressing inflation
President Joe Biden is getting bad advice about inflation. It’s unclear if that advice is coming from political strategists or from economic advisers. Either way: It’s still bad. The advice? That Biden should blame inflation on “corporate greed.”
By most measures, the economic recovery has been strong, thanks largely to expansionary fiscal and monetary policy. Unemployment is 3.9%, a rate that a mere year ago the Congressional Budget Office hadn’t expected the economy to reach until 2026. Output growth for 2021 also looks likely to exceed past forecasts. Stock markets are up more than 20% over the past year.
But one metric has been casting a shadow over all this sunshine: inflation.
Inflation has been higher, and persisted longer, than most economists predicted. Instead of abating as the economy reopened, it recently hit its highest level in nearly four decades. Sharper price growth is due partly to COVID-related supply-chain problems, and partly to stronger demand. Many of the same policies that enabled better-than-expected unemployment and gross domestic product have also led to worse-than-expected inflation numbers. High price growth is one downside of running the economy hot.
Democrats have struggled with how to message this mixed outcome. Focusing on those many positives risks looking like they’re dismissing voters’ concerns about inflation. So, White House officials and other Democrats have pivoted their messaging toward some warmed-over populist talking points about “corporate greed.” Don’t worry, Dems now argue, the federal government will crack down on those profit-hungry jerks and force them to offer better prices!
This is nonsense. Corporations are always greedy. It’s their job to make a buck. They’re charging higher prices, and booking higher profits, because that’s what happens when demand shoots up and supply is relatively constrained.
To be sure, some industries are likely too concentrated, and uncompetitive, and might benefit from government intervention. One is meat processing. But it’s not clear Biden’s specific fix for that industry (loans and grants to tiny operators) would measurably reduce meat prices. And meat and poultry represent only about 1% of total consumer spending.
Maybe the White House thinks doing “something” about the meat industry is good policy no matter what. Or maybe they’re convinced that blaming “greedy corporations” for inflation is popular. But since it’s not an effective strategy for bringing down inflation, it could well backfire. Biden has publicly professed the ability to quash inflation through these measures; what happens if (when) inflation instead remains high?
Presidents have limited tools for fighting inflation. Biden has been reluctant to pull even those levers, such as lifting tariffs or accelerating the process for legal immigration. In any case, it’s the Federal Reserve’s job to maintain stable prices. Biden does have the ability to shape leadership at the Fed. He’s so far made one good choice, in renominating Jerome H. Powell as Fed chairman. Biden has three other Fed board seats to fill though. He has dragged his feet on nominations — even though he’s a year into his presidency and the country faces its greatest inflation threat in a generation.
If Biden is truly worried about the threats posed by inflation, he will immediately nominate three professionals with a track record of political independence and a credible commitment to stabilizing prices. Markets need to trust that the Fed is willing to take the punchbowl away if necessary. Even during an election year.
Those Fed slots don’t get much attention. But they’re the most important contribution Biden can make to getting inflation under control - and his political agenda back on track.