President Biden’s poll numbers have declined over the last few months, and although there are many competing explanations for why that has happened, plenty of pundits (of all ideological leanings) are blaming his struggles in part on the recent increase in inflation. Is that fair? Not at all, for reasons that I will explain shortly.
The good news for the White House is that presidents are often both unjustly blamed and wrongly praised for things beyond their control. Even if the new monthly inflation report (which will be released today, after this column has been published) meets forecasts by being slightly higher than the previous months’ numbers, there is nothing that President Biden will be able to do but take the heat. But he will surely trumpet a better-than-expected report, and even if the immediate news is bad, he will be able to take a victory lap when inflation does ultimately die down.
The question is what to do while waiting for that to happen, because even though there is very little that any president can do in this situation, it is important to appear to be trying.
This is especially important in light of the central point of Part One of this two-part column, which is that public discussion about inflation has gone from bad to worse. That is, whereas the commentary among pundits and politicians has been badly misinformed all along, we have now moved into what I call the “Inflation, am I right?” phase of the public’s discussion, where people are now so accustomed to complaining about inflation that they think they can bring up the topic completely out of context and be confident that everyone will roll their eyes knowingly and say, “Right, this inflation sure is bad, huh?”
Again, the extra-bad news here for the Biden administration is that inflation is now being mentioned out of context. It is frustrating enough when someone tries to opine about inflation and says something head-slappingly wrong. It is even worse when people think that merely invoking the word inflation in any conversation is the key to being seen as serious and informed.
As bad as that meta-level grousing about inflation can be as a political matter, however, it is important to go back to basics and explain both why the inflation that we are currently experiencing is not especially bad and why the Biden team cannot do much about it. What they can do, however, is use the public’s current inflation pessimism to push through policies that are good ideas on their own merits.
One of former President Obama’s advisors famously said that “[y]ou never want a serious crisis to go to waste.” That was a reference to the Great Recession of 2008-09, when the President genuinely could do a lot to prevent an even bigger crisis, and the advisor’s comment was meant to say that there were good ideas that would address the crisis while also advancing a broader policy agenda.
In the case of inflation, however, because there is so little that this or any other president can do, the best move is to focus entirely on policies that have something to do with prices and are good ideas on their own merits.
Hyperinflations Are Bad. This is Not Hyperinflation.
No president can say the words, “inflation is not so bad.” The fact is, however, that inflation is generally not bad. As I said at the end of Part One of this column, however, it is true that hyperinflation is very, very bad. Countries that experience hyperinflations, most notably Germany in the 1920s, become not just economic basket cases but political tinderboxes. It rarely ends well.
But a hyperinflation is orders of magnitude worse than anything like the inflation we are experiencing, where the most recent monthly estimate was that prices had risen at a 7.0 percent annual rate through December 2021. At its worst, Germany’s hyperinflation saw prices rise more than 20 percent per day, and it took less than four days for prices to double. Inflation peaked at 200 billion percent in 1923.
Yes, inflation in the US had been averaging one to two percent per year over the last four decades, so seven percent looks worse by comparison (which is why so many headlines talk about “historic” rates of inflation). Even so, US inflation before 1982 was much higher than seven percent.
Those of us who remember the pre-1982 period would not want to return to those days, but they were not anything like a hyperinflation. Many inflation-phobes are convinced that every increase in inflation is a slippery slope toward certain and inevitable hyperinflation, but the facts show that US inflation has gone up and down in the single-digit range for decades—even though every increase saw some people panicking and saying that the recent uptick was going to open the floodgates. Notably, inflation doubled from 2016 to 2018 (with no Republicans blaming Donald Trump, of course), but then dropped back down again in 2019 and 2020.
Why and When Is Inflation Good?
Even so, seven percent inflation is undeniably higher than it has been in forty years, so why is that not itself a terrible thing, even if it does not lead to hyperinflation? One part of the answer is that inflation had been too low for too long.
Come again? Was it not a policy failure for inflation not to have hit zero for all of those forty years? Although it is true that seven percent or eight percent inflation is higher than any economist thinks is the ideal target rate, nearly every economist (as I noted in Part One) believes that inflation should be positive—not zero—every year. The question is how high it needs to be.
Few people noticed, but the consensus among monetary policymakers for the last few decades was that the annual inflation rate should be two percent. And that is what the Federal Reserve (the Fed, or the nation’s central bank) tried to engineer. Even fewer people noticed that the Fed was having a difficult time getting the inflation rate up to two percent. In fact, in the ten years ending in 2020, only three years saw inflation at or above two percent.
During that time, a growing number of economists were coming around to the idea that the two percent target was too low. The growing consensus was that inflation should be increased to four percent annually. This is because the tools to improve a weak economy are more potent when the inflation rate is a bit higher. If the Fed reduces interest rates below the inflation rate, it produces a “negative real interest rate,” which makes borrowing by businesses to expand a weak economy much more attractive. But when inflation is near zero, that gives the Fed very little room to maneuver. They cannot push interest rates below zero, so when the economy needs a further boost, low inflation rates work against the Fed’s efforts to help the economy grow.
In addition, even though most people strongly resist absolute declines in their wages, some wages do need to go down while others rise. Having a somewhat higher inflation rate gives employers more latitude to change inflation-adjusted wages without directly cutting anyone’s nominal wage or salary.
If that sounds a bit odd, consider a recent Washington Post story (among the zillions of news articles in which reporters breathlessly jump on the “inflation is horrible!” bandwagon). The headline, “‘That raise meant nothing’: Inflation is wiping out pay increases for most Americans,” includes a direct quotation from a worker who was upset that inflation had “negated” his recent raise, which also happened to be almost exactly seven percent.
While that worker’s disappointment is understandable, the fact is that they are quite wrong. The raise meant that their buying power did not decrease. That is, if the worker’s boss were to say, “Oh, so since it meant nothing, I guess you won’t mind if I take it away,” the worker would naturally be incensed. Of course the raise meant something.
As it turns out, wage growth is beating even the higher rates of recent inflation for many workers, especially at the lower end of the pay scale. That is, inequality is in fact becoming slightly less bad, even as inflation hits “historic” highs.
If everyone’s wages and salaries rose by seven percent while prices were also increasing by seven percent, then everyone would be standing still. Even if the Fed does not move its target up that high, having a two percent or four percent target necessarily means that those whose pay does not match the inflation rate will lose buying power. That is, someone who receives a two percent raise when inflation is two percent might say that “the raise meant nothing,” but the people who receive a one percent raise or no raise at all will fall behind by a bit. And as I noted above, that is in fact a good thing, no matter how counterintuitive it might seem.
Temporary or Permanent?
So even if inflation were to permanently stay at seven percent (or whatever number is announced this morning), we could have a perfectly healthy economy in which everyone knows how much their raises will improve their after-inflation standard of living. As it happens, however, inflation is not going to stay at seven percent, and even if it rises this month, it will not stay that high for much longer.
How can I be so sure? After all, even a liberal commentator recently claimed that the Biden “administration has bungled plenty of … issues, [including s]uggesting inflation was temporary.” How is that a “bungle”? Apparently, Biden was supposed to have said that inflation will not come back down, even though that is not true? At worst, the White House was a bit too optimistic about how quickly inflation would return to previous levels, but they were not wrong about the direction.
There is, as Paul Krugman puts it, a divide among economists between “Team Temporary” and “Team Permanent.” I agree with Krugman that most of what we are seeing is still transitory supply chain issues. More importantly, as Krugman pointed out, the case from Team Permanent only works if everyone comes to expect inflation to remain permanently higher—for example, as I described above, seeing seven percent inflation rates causes everyone to demand seven percent raises going forward, because everyone expects inflation to continue to rise at seven percent, which then becomes a self-fulfilling prophecy.
Again, there is nothing unhealthy about a permanent seven percent inflation rate. Retirees who rely on Social Security would receive cost-of-living increases, savings accounts would start to pay more than seven percent interest, and so on. I still would prefer a four percent target for other reasons not pertinent here, but the sky would not fall if we found ourselves permanently at seven percent inflation every year.
Krugman is even less worried than I am, however, because he notes that data show that “Americans … don’t expect … inflation to persist.” This means that no one is building seven percent (or even three percent, it turns out) inflation into their expectations, so the current uptick in inflation is not becoming psychologically entrenched. And this is good news, because as I noted, permanence can only happen if everyone adjusts their inflation estimates upward.
And even if inflation is going to fall on its own, the Fed has already started to push up rates to cool the economy. I happen to think this is unwise, but it is certainly true that the Fed can always cool inflation by reining in the economy (which will reduce job and wage growth, but the Fed is hoping not to do too much damage on that front).
While We Are Waiting
No matter whether one is on Team Permanent or Team Temporary, then, there is reason to expect inflation to fall soon. Even if the problems with supply chains are not quickly resolved or are not the ultimate problem, the Fed is taking direct action.
And this means that, as a strict policy matter, the Biden team did not bungle anything by saying that inflation would be temporary, because it will be. More to the point, the two methods by which inflation will fall—the underlying supply problems are worked out, or the Fed pulls back the throttle—are not in the White House’s control.
Again, however, Biden needs to make it look like he is doing something, to show that he is not insensitive to people’s frustration. Which means that this is political theater, not a policy debate. And that further means that we are back to where this column began, with the administration being given an opportunity to use this minor crisis to advance some other goals.
The White House, accordingly, has announced that it was going to intensify the fight against monopolies. Some pundits have ridiculed Biden for blaming “corporate greed” for the increase in inflation, especially because monopolies set prices above what a competitive market would charge but are not able to increase prices at a higher rate over time, which is what inflation measures.
That critique, however, is not only politically obtuse but simply beside the point. It is politically obtuse because, as the title of this column suggests, Biden has to respond to lies with deceptions. That is, people are lying when they say that inflation is Biden’s fault, so Biden has no choice but to fight fire with fire. And the critique is beside the point because even though busting up some monopolies would not change the long-term inflation rate, it would in fact reduce some prices right now. The people who are angry because “that raise meant nothing” do not care that a one-shot price reduction for something that they buy is not going to reduce inflation in 2023 or 2024, whereas they do care when they get a bargain price now.
This passing mini-crisis, then, allows the Democrats to try to reverse decades of inaction on fighting growing monopoly power. Americans who travel across the Atlantic are amazed that intra-Europe flights are so inexpensive, as are cellphone services there—two industries that are highly concentrated in the US.
As one Democratic pollster reportedly told the President: “You need a villain or an explanation for this. If you don’t provide one, voters will fill one in.” The good news for Joe Biden is that the villains in his story are in fact villainous. No, this is not an anti-inflation strategy, because no president can have an anti-inflation strategy. It is, however, a way to respond to calls for “action” by doing something that looks to be aimed at inflation and in fact achieves a very good policy outcome.