Surrendering to COVID-19 is the wrong cure for inflation
Republicans hoping to capitalize on high inflation have proposed a surprising solution: ending COVID-19 restrictions. But surrendering to COVID is the wrong cure for inflation. It would endanger public health without addressing the supply-chain snarls that are pushing prices higher. Ending pandemic inflation requires making the global economy a safe place to spend, work and live by continuing the fight against the virus.
The United States is enjoying an exceptionally strong economic recovery thanks in part to the bold stimulus actions lawmakers took last March. But businesses are raising prices, some because they and their competitors are bidding up the cost of workers and materials, and others simply because strong demand means that they can. Consumer prices were 6.8 percent higher in November than they were a year before, and almost half of households say inflation is hurting their finances.
Americans are worried about inflation, and Republicans are seizing on their anxieties by blaming anti-COVID rules. Even as the U.S. death toll from COVID passes 800,000 and the omicron variant spreads like wildfire, the GOP is pushing bills that would end President Biden’s rule that workplaces must require that workers either get vaccinated or test for COVID weekly. Republican-led states will argue against this rule in front of the Supreme Court on Jan. 7, just three days before it is scheduled to take effect.
Republican Study Committee Chairman Rep. Jim Banks (R-Ind.) has claimed that loosening public health measures would slow inflation because “… vaccine requirements and COVID restrictions have kept people from rejoining the workforce.” The GOP’s theory is that these measures raise the cost of labor by repelling potential workers and that businesses pass the cost onto their customers through higher prices.
But letting COVID win would be a terrible way to fight inflation. For one, few workers at businesses that require vaccination have quit. Moreover, the fear of getting sick is itself keeping many people from returning to work. Twenty-nine percent of unemployed people who are not actively seeking new work say fear of COVID is a barrier to doing so, the most of any issue.
COVID outbreaks also interrupt businesses’ ability to provide goods and services and can shut down factories — including foreign factories, which would be unaffected by Republicans’ reversal of COVID restrictions. Closures at meat processing plants helped cause a spike in the price of meat so pronounced that it earned the unappetizing nickname “meatflation.”
Additionally, since COVID has changed what goods and services people consume, it also seems to be causing some industries to overheat even while others struggle. For example, people are still spending less on services than they did before the pandemic (adjusted for inflation), particularly for transportation and recreation. But they are spending 18 percent more on household items and 38 percent more on recreational goods such as TVs and sports equipment.
The resulting uncertainty about future demand has already caused empty shelves and rising prices. The onset of the pandemic led to a memorable shortage of toilet paper despite (presumably) no change in total demand, because people shifted their use from commercial toilet paper to residential. Additionally, many industries that downsized in 2020 are now struggling to scale their operations back up to meet demand, including semiconductor manufacturers. The shortage of semiconductors is a leading cause of a 25 percent spike in the price of motor vehicles during the pandemic. And some businesses have raised their prices because supply chains have failed to keep up with exploding demand for imports.
If the GOP’s COVID defeatism will backfire, how should the United States fight inflation? One way is for President Biden to lift the Trump tariffs, which the Progressive Policy Institute (PPI) estimates have raised prices by roughly 0.5 percent. The Federal Reserve can also temper demand and minimize inflation by raising interest rates, as it intends to do this year. And spending will naturally slow down as the federal government’s stimulus efforts end. PPI has recommended that Congress avoid further fueling demand by increasing short-term deficits.
But constricting demand enough to control inflation without also addressing pandemic-related disruptions could keep the entire economy running below its potential. Doing so could slow or end the historic Biden boom and cost working people their jobs.
But waging an unrelenting fight against COVID would make Americans more confident that working, traveling and otherwise spending time away from home is safe. As the economy adjusts to meet demand, businesses could hire more workers to expand supply instead of raising their prices, which would generate stronger growth with less inflation.
Policymakers should keep encouraging and, where necessary, requiring vaccination. Given that COVID is likely here to stay, they must also invest in treatments, tests, insurance coverage and paid leave to make life alongside the virus safer. International cooperation is also vital, because variants that evade vaccines or treatments can arise anywhere. The United States should continue to donate vaccines around the world and should help less wealthy countries administer those vaccines efficiently.
Maximizing the economy’s ability to create goods and services can both reduce inflation and generate broadly-shared prosperity. Today, that means making consumers and workers confident that participating in the economy is safe. Fighting inflation does not require giving up against COVID-19: It requires doubling down on the fight.
Brendan McDermott is a fiscal policy analyst for the Progressive Policy Institute’s Center for Funding America’s Future.