Inflation report makes Congress’s economic plan even more necessary

Greg Nash

Last week’s 9.1 percent inflation report was jarring. Indeed, Sen. Joe Manchin (D-W.Va.) found it so jarring that he placed on “hold” plans to move the long-planned economic legislation. He now says that he is willing to act now to reduce prescription drug prices and help low- and moderate-income people obtain health coverage but wants to see next month’s inflation data to decide whether to proceed on other pieces of the legislation that would combat climate change and reduce the deficit.

We now have significant evidence that inflation is slowing, but consumers quite naturally want the federal government to do all it can to rein inflation in. And, of course, few consumers want to send the U.S. economy into a recession or cause widespread hardship. So, what can the federal government do?

Although the precise details are complicated, and hotly debated by economists, the broad outlines of the choices available are relatively straightforward.

It turns out that finalizing and passing the pending economic package is one of the most important things that can be done to lower inflation while safeguarding the strong jobs market we have enjoyed since the end of the coronavirus-induced recession. 

To understand how to combat inflation, we need to understand what is causing it — and what could cause it to continue into the future. Inflation, both here and in other advanced economies, has risen to levels not seen in decades due to the compounding effects of several problems, no single one of which by itself would produce inflation nearly this high. 

First, we have lingering supply-chain problems from the coronavirus pandemic. Although lockdowns are a thing of the past for most of the world, China’s Zero-COVID Policy continues to cause major disruptions in production. Shanghai, China’s largest city, was locked down tight for almost two months recently, with other cities losing significant time as well. When factories reopen and try to make up for lost production, shipping networks overload. As dependent as we and much of the world are on Chinese-made components, this has resulted in shortages, with prospective buyers bidding up the prices of what products remain. 

The U.S. can do little to affect these problems directly. The more we contribute to reducing the coronavirus’s spread, the less likely infection surges will disrupt production in China or elsewhere.  President Biden also could reduce the price of Chinese goods modestly by dropping some of the punitive tariffs leftover from President Trump’s trade war

A second cause of inflation is a different set of supply-chain problems — these associated with Russia’s invasion of Ukraine. Western sanctions on Russia, along with Russia’s theft of Ukrainian grain stores and blockade of Ukrainian food exports, have led to shortages of food and energy, triggering large price increases worldwide. With Russia a major oil and gas producer and both countries key suppliers of grain and cooking oil, these effects will continue until the war concludes. Our aid to the Ukrainians — spectacular fruits of which can be seen in exploding ammo dumps across Russianoccupied territory — is the best way to hasten the end to that conflict, for the Ukrainians’ good and our own. 

A third major source of inflation appears to be that our economy is running unsustainably hot: that with the rapid recovery from the pandemic recession, too much money is chasing too few goods and services.  This is the one factor that separates the U.S. from Europe and other advanced economies: They provided much less relief for their people during the recession and have experienced correspondingly weaker recoveries and higher lingering unemployment. 

One way to cool an overheating economy is for the Federal Reserve to raise interest rates. That reduces investment by making it more expensive, with employers likely needing fewer workers. When this process goes too far, as it often does, the result can be a damaging recession

Another way to address an overheated economy is reducing the federal deficit. Federal deficits are important during recessions to stabilize the economy, but during a boom they can over-stoke the fire.  The economic package Sens. Manchin and Chuck Schumer (D-N.Y.) negotiated devoted half of its savings to deficit reduction. Coming at a time when the deficit was already coming down sharply and cries for deficit reduction were not dominating the airwaves, this would send a powerful signal to the financial markets. It also likely would persuade the Federal Reserve that it did not need to stomp the brakes so forcefully. 

Perhaps the biggest concern in fighting rising prices is preventing inflationary expectations from permeating the economy. If everyone expects the prices they pay to keep rising in the future, businesses will raise their own prices preemptively and workers will demand larger wage increases, making those expectations self-fulfilling. So far, expectations of medium- and long-term inflation remain quite low

To keep inflationary expectations from arising, policymakers must convince the markets and the public that the factors pushing up costs today will not continue into the future. European authorities have had trouble making this case because of their dependence on oil and gas from Russia, which has proven as unreliable as it is brutal.  

We can keep inflationary expectations low — and lower inflation in the process — if we show the markets that we are diversifying our energy supply. In particular, solar and wind energy cannot be cut off by any foreign despot. Accelerating these two industries’ growth is a major focus of the energy component of the legislation Sens. Manchin and Schumer negotiated. Seeing Congress acting proactively to reduce the deficit also should reassure the markets that Congress and the Federal Reserve are working in harmony to reduce inflation rather than pulling against one another, as has sometimes been the case in the past. 

Taking firm but measured action to counter inflation, while supporting the growth of clean energy industries that will provide more and more jobs in the future, is also a way to dampen fears of a recession, which could cause employers to shrink their workforces preemptively. 

Far from being reason to back off from the clean energy and deficit reduction portions of the pending economic plan, the recent inflation report provides a compelling reason to move forward with it.

David A. Super is a professor of law at Georgetown Law. He also served for several years as the general counsel for the Center on Budget and Policy Priorities. Follow him on Twitter @DavidASuper1

Tags Biden Build Back Better agenda causes of inflation China Chuck Schumer Climate change policy coronavirus lockdowns Covid relief COVID-19 Deficit reduction Economic recovery Economy of the United States global food crisis green economy Inflation Joe Manchin military aid to Ukraine overheated economy prescription drug prices Recession Russian invasion of Ukraine Russian oil and gas Russian sanctions supply and demand supply chain issues Trump Ukrainian exports Ukrainian wheat

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