Cents and Non-Cents About Inflation

Yes, inflation is back:  6% as of October, which is nothing like the 13.5% that brought down Jimmy Carter in the election of 1980.  The exact numbers don’t really matter. Rising prices, especially gasoline prices, are always bad news for the party in power. We must remember, and keep saying, that Joe Biden is trying to improve the quality of life for all Americans, and of course the Republicans will try to change the subject and create division. 

If you were taught anything at all about inflation, it was probably that “inflation is too many dollars chasing too few goods.”  This definition creates the impression that people aren’t involved. 

Actually, inflation means that prices rise, and people raise prices. If you buy a sack of flour for your bagel factory, you price the bagels not on what you already paid for the flour, but on what you anticipate the next sack will cost. Once the idea of inflation gets started, it takes on a life of its own. Inflation actually has three components:

1) Economic, which has to do with the dollars and the goods
2) Psychological, it becomes real when people believe in it
3) Political, the political debate influences the psychology, which changes the economic reality 

CNN reports: 

“Republican Rep. Jim Jordan of Ohio blamed Biden for the rising prices in gas in a tweet Monday, noting that the average gas price increased by 86 cents per gallon from June 2020 to June 2021 and pointed at “President Biden’s economy!” to explain the difference in cost. Similar arguments have been made by Republican Sen. Chuck Grassley of Iowa as well as right-wing groups on social media.” ✴

So, it’s all Biden’s fault.  In fact, the true culprit is elsewhere. Here is the Washington Post of January 28, 1981:

“President Reagan yesterday removed the remaining price controls on gasoline, propane and U.S.-produced crude oil, in what aides called a first step in his promised campaign to “deregulate America.”

The lifting of the network of petroleum regulations permits refiners and gasoline retailers to change whatever they chose for their products, and some service station operators may test the market with sharp increases.” ✦

That’s right, the price of gasoline was once regulated. Instead of continuing the regulations, the Republicans repealed them.  This paradox has been repeated in U.S. history over and over since the New Deal.  Everyone insists that we must have a free-market economy.  Then, when things don’t work out as expected, which is much of the time, everyone wants the government to protect them from the logic of the free market.  When a hapless president steps in to help, that’s regulation, and everyone knows that regulation leads inevitably to socialism.

Unfortunately, instead of defending Biden, some academic and Wall Street insiders are joining the pile-on. These include former Obama Treasury Secretary Lawrence Summers, who says inflation should temper Biden’s ambitions,♦ and Steven Rattner, a former Summers adviser who now heads Bloomberg’s investment arm. 

Rattner recently wrote an “I told you so piece” for the New York Times,❖ that, in part, blames government stimulus checks for Americans having saved $2.3 trillion more during the pandemic than they otherwise would have saved. Now, he warns, all this money is about to be spent  on “everything from postponed vacations to clothing,”  thus driving up inflation. Rattner ignores the fact that almost all of the increase in savings went to the very rich. Close to half (42%) went to the richest 1%. In all, 80% of the increased savings went to the richest 20% of the population.♣ 

The London based Center for Economic Policy Research did an extensive study and came to the opposite conclusion from Steven Rattner. 

“The bottom line from these three sets of considerations is that, although large by historical standards, the savings accumulated by US households during the pandemic do not appear to be ‘excessive’ when set against the extraordinary need of many American families and the unprecedented government intervention to support them. It is certainly possible that some of these savings will pay for extra travel and entertainment once the COVID-19 nightmare is behind us, but our conclusion is that the resulting boost to expenditures will be limited.”♥

A recent poll ♣ shows that 62% of voters believe that Biden is at least somewhat responsible for rising inflation, and this is rapidly emerging as the main Republican attack point in the 2022 elections. Now, it may seem to be the ultimate proof of muddled thinking to claim that an inflationary trend that started months ago is the result of Biden’s spending that hasn’t even begun yet. However, remember that sack of flour in the bagel factory? If enough people are convinced that inflation will occur because of Biden’s program, then it will occur just because everyone believes it and is raising prices to stay ahead of anticipated rising costs. 

Energy policy is one of the few tools available to Biden that might reduce inflation. Biden has released 50 million barrels of oil from the Strategic Reserve and has convinced a number of allied nations to take similar steps. Of course, this doesn’t guarantee that the refiners will actually lower prices at the pump instead of pocketing even greater profits. The president has also called on the Federal Trade Commission to investigate the gas industry for raising prices beyond increases in their actual costs. ♥

As the economist Paul Krugman pointed out, spending a few trillion dollars over the next ten years is nothing compared to the size of the total economy over that time, $288 trillion. The Biden program is far too small to have any real inflationary impact. (Even if government spending did cause inflation, which it doesn’t – S.M.)

Krugman concludes,

“So don’t believe politicians who are trying to portray Biden’s investment agenda as somehow irresponsible and radical. It’s highly responsible, and it’s an attempt to restore the all-American idea that government should help create a better future.” ★

This is the message that Democrats need to repeat on every possible occasion.