The correlation between inflation and a lack of accountability

Posted 5/24/22

Everytime we go grocery shopping, fill up our cars, or buy new appliances, we all feel it. Inflation is up 8.5% over last year, the highest rate in over 40 years.

Many analysts, including …

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The correlation between inflation and a lack of accountability


Everytime we go grocery shopping, fill up our cars, or buy new appliances, we all feel it. Inflation is up 8.5% over last year, the highest rate in over 40 years.

Many analysts, including President Joe Biden’s own White House Council of Economic Advisers, point to the federal government’s COVID-response policies as the main culprit. 

It’s not surprising that if you send millions of Americans big unencumbered checks, they’re going to spend that money on stuff. The increased demand for goods and services will create shortages, and in turn, producers will increase prices in response to the demand. There’s too many dollars going after too few goods and services.  

To illustrate the causal relationship between our government’s largesse and rising prices, inflation is running hotter in the U.S. than anywhere else in the developed world. According to an April analysis by four economists at the Federal Reserve of San Francisco, the U.S. government was relatively more lavish in its spending during the pandemic than these other countries. So, we have more inflation. 

It’s not just analysts hindcasting, either. Prior to the pain we feel today, analysts far and wide argued that massive government stimulus spending through the COVID-19 pandemic would result in rising costs. All the warnings were ignored, and here we are. 

And now that those projections turned out to be highly accurate, the government is overtly shifting blame to Russian President Vladimir Putin and corporations. 

Two weeks ago, Sen. Elizabeth Warren, D-Mass., tweeted “The prices Americans are paying for groceries and other essentials are at all-time highs. One of the reasons? Giant corporations are price gouging & reaping record profits. We need to put a stop to corporate gouging that drives up prices for families.”

Warren and her ideological allies in Congress introduced a bill to penalize businesses for raising prices in the wake of the U.S. dollar’s declining value. The bill would trigger consequences to companies that engage in “unconscionably excessive price increases.” What exactly falls into that category is not defined anywhere in the bill. Basically, the government would decide for businesses what is the right price to charge for their goods and services, and if the businesses guess wrong, they face penalties. What could possibly go wrong? 

To many, price controls may seem like a straightforward way to address a problem, but if you want to see what happens when this policy is enacted, South American countries like Venezuela and Argentina have regularly employed price controls to deal with inflation. Without exception, the controls precede shortages. Prices function as signals to consumers. If prices are kept low relative to demand, goods evaporate and shelves stay empty. When the controls are lifted to deal with shortages, inflation comes raging back worse than ever. In Argentina, there’s a regular cycle of price controls to inflation.

The U.S. had its own experience with shortages driven by price controls. After the oil crisis of 1973, the Nixon and Ford administrations enacted price restrictions on gasoline, which created long lines at gas stations. The price controls discouraged oil and gas production and exploration, and the artificially low prices made it easy for people to fill up with more than they needed. Gas stations couldn’t keep up with demand. 

Following the Iranian oil crisis of 1979, then-president Jimmy Carter revoked most of the price controls, and whatever controls remained were eliminated after Ronald Reagan took office. 

Warren’s pet price control project isn’t likely to go anywhere in Congress, but it provides a distraction away from any accountability. Besides blaming the greed of corporations for problems it helped to create, the Biden administration is also blaming Russia for higher prices. The White House on May 11 released a fact sheet detailing its case that the rising prices, which started well before any conflict in Ukraine, are largely due to the conflict in Ukraine. 

The Federal Reserve is raising interest rates, which will suck some of the excess cash out of the economy, but it comes at the price of more expensive credit and loans, which slows economic growth. 

Writing in Reason Magazine, reporter Eric Boem argues the Biden administration could have a much better impact on getting inflation under control by lifting tariffs, which would lower the price of imported goods. It could also lift barriers to legal immigration, which would help ease labor shortages and improve supply chain problems. Biden could also suspend regulations that make shipping between American ports more expensive. 

However, this shift in policy toward reduced regulation would require the federal government to admit it created the problem in the first place and would do better to release its grip on the economy. 

Don’t hold your breath. Government tends to move in one direction. As the November elections approach, we’re likely to see more denials of responsibility and greater promises to “do more” to solve the nation’s economic pain. If voters don’t wise up, the value of the dollars in our wallets will continue to decay.