What Democrats and Republicans get wrong about inflation

Americans are pessimistic about one of the strangest economies in recent memory, and their negativity is largely due to inflation. The Bureau of Labor Statistics announced today that prices rose 7.5 percent year-over-year in January 2022, the highest figure since 1982 and, for example, more expensive milk, furniture and cars – and their prices will continue to skyrocket – for Americans. Probably.

This, of course, points the finger at who – or what – is responsible for the price we see Democrats have blamed the Covid-19 on supply chain shortages, as well as large corporations and monopolies. Republicans, meanwhile, have attacked President Biden’s legislative agenda, claiming that pieces of legislation he signed – particularly the American Rescue Plan that includes $ 1,400 incentive checks issued directly to many Americans – are responsible. And to be sure, fair or not, most Americans blame Biden.

But what Is Responsible for inflation in the United States? Is it about the epidemic supply chain, as many Democrats claim, or corporate greed? Or do Republicans have something to do with Biden’s policy?

Inflation is not just a supply-chain problem, and stimulus has probably made it worse.

One of the most consistent discussion points Democrats make is that the Covid-19-plagued supply chain is responsible for our current inflation. Biden has even said he has “everything to do” with supply chain problems, while House Democrats work to legislate to reduce supply chain problems. And many economists say the supply chain founder has also played a heavy hand in raising prices.

The thinking is as follows: Americans stopped using their gyms, nail salons and other services because their spending patterns changed rapidly in 2020 and the global supply chain – which already had problems – was not equipped to cope with rising consumer demand for sustainable products. (E.g., home workout equipment, office furniture) after the initial global economic shutdown. Combine the shortage of supply with the rapid increase in demand and you will get higher prices.

But at the same time, there are limitations to this democratic discourse, as it has become clear to many economists that American inflation is not. Just A supply chain problem: Our economic response – for example, given the trillion-dollar COVID-19 stimulus over the last 24 months – seems to be a significant differentiator.

A good way to address this is to look at Europe, which has faced similar supply chain problems and worse oil shocks, as it is more dependent on foreign oil than the United States and yet, European countries have experienced lower inflation, probably because of their smaller. As part of the official response.

Jason Farman, a professor of economics at Harvard University and chairman of the Economic Advisory Council under former President Barack Obama, said, “The global supply chain problem affects every country in the world, but the United States has more inflation than any other country.” “If you compare it to Europe, the United States has more products and more services,” he said. [in Europe]”

One of the reasons for this high cost is government spending. In 2020, a split Congress under former President Donald Trump passed two separate laws – first the $ 2 trillion Care Act in March, giving $ 1,200 checks for most unmarried adults and more families, then the $ 900 billion package in December. , Among other aids, issued a 600 target check. But then in March 2021, Democrats passed another round of government stimulus in a $ 1.9 trillion relief package – including সরাসরি 1,400 in direct payments to individual Americans – which some experts then warned could lead to inflation.

And it turns out that this latest round of government spending is at least partly responsible for our current inflation. For example, an October 2021 study found that the American Rescue Plan may have made inflation somewhat worse, putting significant (but small and temporary) upward pressure on prices, and many experts advocated their 2021 claim that additional stimulus would lead to inflation. . . Of course, Biden’s additional stimulus was arguably necessary for Americans to participate in the economy, and the poll found widespread support among Americans for further relief. This, however, has led many Republicans to claim that Biden’s policies are responsible for the historical value increase we see.

Furman stressed to me that even without a COVID-19 relief bill, inflation would probably have been higher, however, due to the restructuring economy and distorted impact distortions. Moreover, rising gas prices – one of the most practical ways for Americans to process inflation – probably have little to do with the American rescue plan and global oil dynamics. There is at least some evidence, however, that government spending has caused inflation, beyond the explanation that it is only a supply chain problem.

But not all government spending drives inflation

Critically, though, as many Republicans claim, not all government spending has the same effect on inflation. Indeed, historically government spending has not generally led to inflation. A 2015 study in the European Economic Review found, for example, that the impact of government spending on post-World War II inflation was “not statistically different from zero”. But Bill Dupore, co-author of that study and vice president of research at the Federal Reserve Bank of St. Louis, told me that the size of the intervention was important – and could help explain why government spending today encouraged inflation, but it didn’t. Not in recent memory.

“The big difference, I think, is that from now on it’s huge relative government spending,” Dupore said. “It may explain why it is not finding big impact, when it can have big impact now.”

Even so, owning one is still beyond the reach of the average person. For example, the bipartisan infrastructure bill that Biden signed into law in November is unlikely to contribute to inflation for a variety of reasons. First of all, very little has been paid for it at the moment. Second, it aims to increase the productivity of the economy – that is, to invest in new technologies and create jobs – which means it can even reduce inflation. This is different from the American Rescue Plan, whose $ 1,400 stimulus check does not build the economy in the same way, according to the economists I spoke to.

Americans, however, do not make this kind of difference in government spending. According to a January Politico-Harvard poll, 43 percent of Americans think bipartisan infrastructure bills will increase inflation, whereas only 10 percent think it will reduce inflation (although 35 percent say they think inflation will remain unchanged).

Thomas Philipon, a professor of finance at New York University’s Stern School of Business, says his biggest concern with the recent rise in inflation brought by the stimulus is that it blurs government spending water in the eyes of voters. Instead, the Philippines said, it spends political capital that cannot be used to address other important issues, such as infrastructural spending or child poverty.

“People then combine all kinds of government spending, good and bad,” he said.

Big corporations are not the biggest reason, though.

Finally, some Democrats have singled out large companies and monopolies for their perceived role in raising prices. Statistics across the party’s ideological vocabulary – Sense. Barney Sanders and Elizabeth Warren – from Biden – have claimed that big business, by raising their prices in the midst of an epidemic, is responsible for inflation, and the lack of competition has allowed corporate behemoths to raise their prices steadily.

At first glance, this explanation may seem less plausible than other inflationary messages. Profit-seeking companies did not suddenly become more profitable during the epidemic, nor were they more liberal before. In addition, corporate density has steadily increased since the 1990s – the era of historically low inflation. In a January survey of economists at the University of Chicago Booth School of Business’s Initiative on Global Markets, most experts agree on both questions: By the administration – there was no possibility of curbing inflation.

However, there is a component to the prices we see today – and how Americans are reacting to them – that can be explained by big business management. The Philippines, whose book “The Great Reversal” focuses on the lack of competition and how corporate concentration defines the modern American economy, tells me that one of the reasons inflation is so high in the United States is because prices were already so high.

“It’s not a statement about rapid inflation, it’s a statement about slowly rising profit margins that slowly suffocates the middle class,” Philippan said. “In the United States, it is particularly painful because prices are already high, people’s purchasing power, the real value of their wages has already been eroded by market forces. Then when you add an explosion of inflation to it, it’s even more painful. ”

This may explain why recent polls show that Americans are sympathetic to the arguments that blame inflation for corporate greed and why Biden is singing a fairly popular tune about inflation. But like all aspects of messaging the issue, whether Democrats or Republicans are more accurate about inflation has little to do with its potential electoral impact. Prices need to stabilize in order for Americans to feel good about the economy – and Democrats need to feel good about their prospects in 2022.

“I don’t think there’s a message that will make people feel good about 7 percent inflation,” Furman said.

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