RRAPIDLY INCREASING the prices are as conspicuous as they are unpopular. Annual inflation of 6.8% has made American consumers even more worried about the economy than they were during the pandemic-induced crisis in the spring of 2020. They are gloomy (see graph), although many of them benefit from increased incomes, bargaining power over their employers – the result of a labor shortage – and soaring house prices. Their unease is a problem for President Joe Biden, whose economic management does not sound good. More than two-thirds of voters disapprove of his inflation record, according to one charge.
The White House therefore now wishes to fight against the rise in prices. But Democrats slip into a bad habit that often plagues politicians at such times: blaming greedy companies and rigged markets instead of their own flawed policies. This is a recipe for more mistakes.
Over the past year, corporate profit margins have increased as the economy has recovered. Elizabeth Warren, a senator, says it shows how businesses have exploited the pandemic to “rip off” consumers; Biden’s press secretary blasted the companies for “pushing up prices during a pandemic.” The administration believes that antitrust enforcement can help control price growth. On January 3, Biden unveiled plans to increase competition between slaughterhouses, which he attributes to a 16% increase in meat prices in the year to November. He also called for investigations into the energy and shipping sectors, sources of recent shortages and bottlenecks.
Scanning concentrated markets may be a good idea, but it won’t do much to fight inflation. It is absurd to think that companies have become more greedy in the past year or that markets are suddenly less competitive. Prices have accelerated in part because Mr Biden’s excessive economic stimulus has resulted in increased spending on physical goods at a time when the pandemic has already kicked up global supply chains. History shows that corporate profit margins are a poor indicator of inflation. In the mid-2010s, when inflation was languishing below the Federal Reserve’s 2% target, it was almost as high as it is today. In the late 1960s, as inflation soared, they fell sharply.
The risk of misdiagnosing the cause of inflation is that it ultimately leads not only to irrelevant policies, but to damaging policies. One of the risks is price controls. The Roosevelt Institute, a left-wing think tank, called on the federal government to “regulate and negotiate” more prices. Isabella Weber, an economist at the University of Massachusetts Amherst, wants “systematic consideration of strategic price controls.” Both cite high corporate profits to support their arguments.
As America learned when President Richard Nixon froze prices and wages in 1971, the controls would distort the economy and hurt growth while at best retarding inflation. Advocates today tend to call for surgeries rather than widespread freezes, but it is naive to think that the bureaucracy could succeed in micromanaging the price mechanism.
It may seem like an exaggeration to think that politicians would resurrect policies that had been so thoroughly discredited. But consider that another element of the fight against US inflation in the 1970s under President Gerald Ford was “vigorous enforcement of antitrust laws.” Then and now, the government’s eagerness to blame business has inspired bad ideas.
The uncomfortable truth for Mr. Biden is that the Federal Reserve, not the White House, controls the tool to lower inflation: higher interest rates. The government could help cool the economy by cutting spending or raising taxes. But tightening the belt, unlike denigrating companies, is unpopular. The reluctance of politicians to do what is necessary to fight inflation is why central banks are independent and why it is good news that the Fed seems to want to raise rates as early as the spring. â
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This article appeared in the Leaders section of the print edition under the headline “Beware of Snake Oil, Mr. President”