The US Labor Department revealed this week that inflation hit a four-decade high in March, fueling fears of an economic recession.
While some media have suggested the inflation stems from the conflict in Ukraine and others have pointed the finger at “corporate greed,” there’s a consensus among economists that inflation is overwhelmingly a monetary phenomenon.
"I think almost everything other than the Federal Reserve is a sideshow when it comes to the dynamics of inflation," Jason Furman, a former top economist for President Barack Obama, said earlier this year.
The Nobel Prize-winning economist Milton Friedman would have agreed with Furman.
“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output,” Friedman observed during the Nixon administration.
This does not mean our government cannot help with high prices in specific areas that matter to Americans, though,
Fuel oil 70%— FEE (@feeonline) April 12, 2022
Used cars 35%
Utility gas 22%
New cars 13%
Food at home 10%
Rent (OER) 4.5% pic.twitter.com/djOCgymLcr
Not Just ‘Too Much Money’
Speaking to former US Treasury Secretary Lawrence Summers about inflation on Sunday, Meet the Press host Chuck Todd conceded that “most of the work probably has to be done by the Fed”; but he asked the economist what the Biden administration could do to alleviate inflationary pressure.
Summers offered several answers, including some good ones—and this is a reminder of a second component of inflation. To go back to Friedman, the Chicago School economist once observed that the simplest definition of inflation is “too much money chasing too few goods.”
While money is one component here, the production of goods and services is another.
Below are four examples of steps the Biden administration can take to increase production and thereby lower the prices of some goods important to Americans—at least to a degree. Each of these policies would likely attract bipartisan support.
WATCH: @chucktodd: "A recession, is it inevitable or is there a way to avoid it?"@LHSummers: “Nothing is inevitable,” but the U.S. could:— Meet the Press (@MeetThePress) April 10, 2022
- Strategic petroleum reserve release
- Tariff reductions
- Find government cost savings
- Increase immigration to ease job market pic.twitter.com/wQTVVfrNEr
1. Reduce Tariffs
Tariffs are taxes imposed on imports from other countries. Tariffs make goods more expensive than they would otherwise be. Slashing tariffs and liberalizing trade would have a clear and positive impact on Americans’ wallets.
A recent paper published by the Peterson Institute for International Economics estimated that “a feasible package of liberalization could deliver a one-time reduction in consumer price index (CPI) inflation of around 1.3 percentage points, amounting to $797 per US household.”
In other words, by simply slashing tariffs on imports, the administration could save families $800 on average.
“That is a lot of money for many households in this country,” Summers pointed out in a separate analysis. “For a household that consumes 500 gallons of gasoline a year, that is the equivalent of more than a dollar a gallon increase in the price of gasoline.”
2. Repeal the Jones Act
The Jones Act is one of those obscure laws most Americans couldn’t name, let alone explain, if their life depended on it. A section of the Merchant Marine Act of 1920, the Jones Act is a federal law that regulates US maritime commerce. Among other things, the Act requires all ships that move freight between US ports to be built in the US and crewed by Americans.
Most Americans were not aware of the country’s port problems until the pandemic, but these problems were not new; they were decades in the making, and they stem in large part from the Jones Act.
As the AFL-CIO recently admitted in a statement, the US currently lacks the shipping necessary to connect larger ports to smaller ones, which has frustrated supply chains. This prompted the union to call for a fleet of “feeder vessels,” which would create jobs and strengthen supply chains.
“Creating a fleet of U.S.-built, U.S.-flag and crewed feeder vessels to carry a portion of America’s trade along our coasts to be offloaded in underutilized ports for transportation by truck and rail to their ultimate inland destination will not only strengthen the maritime industry and create jobs aboard ship and in our ports but will help mitigate against future shipping supply chain disruptions.”
The problem is, as some have observed, no such fleet currently exists, which is why some union leaders have acknowledged the plan would require purchasing foreign-built ships—which would violate the Jones Act.
By repealing or simply suspending the Jones Act, the federal government would clear the way for the purchase of a fleet of foreign-built ships that could immediately be used to facilitate commerce between America’s struggling ports.
3. Increase Immigration
One of the overlooked factors relating to our higher prices is the difficulty some companies are having finding workers. Though unemployment is low at 3.6 percent, many Americans have opted to abandon the labor market for reasons that are not yet clear.
Some say Americans with means are simply retiring early while others attribute the record quit rate to a lack of opportunities, government labor distinctives, or pandemic burnout. Whatever the case, the US economy is entering the second year of what has been dubbed the Great American Labor Shortage.
There’s evidence that this worker shortage is actually an immigration shortage.
"This decline reflects both tougher immigration policies and the pandemic which reduced legal immigration and caused some recent immigrants to return to their native countries," David Kelly, chief global strategist at JPMorgan Funds, noted in a recent report.
Declining immigration is a big part of the US labor shortage problem.— Jon Miltimore (@miltimore79) April 13, 2022
The labor force today has 2 million fewer immigrants than it would've if immigration had just maintained its pre-pandemic level, by some calculations. pic.twitter.com/uFXUZpWgWN
By easing or removing immigration restrictions, taking in refugees from Ukraine or Yemen, or simply expanding the number of seasonal visas for foreign workers, the feds would immediately alleviate the labor shortage that has contributed to inflation and frustrated large and small businesses alike.
4. Start Cutting Government Spending
Some might contend that cutting government spending is not a bipartisan idea, but the reality is it’s both a wise and necessary step to reducing inflation. This is no doubt why Summers, who served presidents Bill Clinton and Barack Obama, mentioned it in his Meet the Press interview.
“I think we need to look wherever we can at buying things more inexpensively when the federal government is purchasing,” Summers told Chuck Todd.
This is a tepid answer, but it gets at an important part of inflation.
While it’s true inflation “is always and everywhere a monetary phenomenon,” that doesn’t mean fiscal policy plays no role. In fact, economists point out that monetary policy cannot lower inflation without cooperation from fiscal policy.
“[F]iscal policy must tighten as well,” John Cochrane, a longtime professor of economics and finance at the University of Chicago, recently told the Wall Street Journal. “Without that fiscal cooperation, monetary policy cannot lower inflation.”
Cochrane, who now serves as the Rose-Marie and Jack Anderson Senior Fellow at the Hoover Institution at Stanford University, said it’s important for Americans to realize that ending inflation “isn’t just technocrats at the Federal Reserve fiddling with interest rates.”
He’s right. Sound money is important, but it’s only one part of a healthy economy.
The Federal Reserve, which digitally printed nearly $5 trillion over the last two years, is responsible for the record inflation in the United States.
Fortunately, President Biden has some tools at his disposal to at least mitigate surging prices.