President Biden gave remarks on Tuesday declaring inflation his top domestic priority. Like many people, he seems not to understand that inflation is a monetary issue. Biden’s proposals each have their pros and cons, such price controls on insulin, antitrust action against the meat industry, and higher spending on renewable energy. But none of them have anything to do with inflation because they don’t have anything to do with the money supply.
Inflation is happening because the money supply is growing faster than real economic output. The Federal Reserve engaged in rapid money creation during the pandemic, and the result is today’s inflation. It will go back down once the Fed draws back some of that increase and money supply growth starts to better match the real economy’s growth. That’s on the Federal Reserve, not on Congress or the White House.
The political branches’ bipartisan deficit spending binge is likely responsible for a percentage point or so in the inflation rate, but one percentage point out of eight does little to explain today’s mess.
Biden does deserve some credit for the brief time he did discuss monetary policy. The Federal Reserve, not the political branches, runs monetary policy in the U.S. President Biden’s promise to “never interfere with the Fed’s judgment or tell them what to do” is a welcome change from his predecessor’s frequent public threats to Fed officials—assuming he keeps this promise. Some of his ideologically charged Fed nominees call into question his commitment to the Fed’s independence.
President Biden instead argued that inflation has two non-monetary causes: the pandemic and Putin’s war on Ukraine. Neither of these has much to do with inflation, because neither of them affects the money supply.
Biden then contrasted his own inflation plan with Sen. Rick Scott’s (R-FL) Republican economic plan. Sen. Scott’s plan also has little to do with inflation. A text search for “Federal Reserve” throughout the Scott plan’s economic planks on its website turned up zero hits. Scott’s plan has little support even in his own party. It has zero chance of becoming law, even if Republicans retake Congress. But as Grover Norquist pointed out, Scott’s plan is a political gift to Democrats, so one understands why Biden kept invoking it. It’s smart politics.
You can see why many economists find today’s inflation speech a little frustrating. It wasn’t actually about the thing it was about.
Still, President Biden did say plenty about faster-than-inflation price increases in gas, food, and other goods that almost everyone uses. Again, the faster-than-inflation components of those price increases are not inflation. That doesn’t mean that those prices increases aren’t real or that they aren’t hurting family budgets. They deserve policy action. But they are separate from inflation, and should be treated separately. As I’ve written before and will write again, supply and demand changes are not inflation. If isn’t monetary, it isn’t inflation.
One of President Biden’s energy proposals is to make more ethanol to reduce the need for imported oil. However, he did not mention the tradeoff: higher food prices. Farmers have planted only a certain amount of corn this season (planting season is typically late April to early May). Diverting more corn to ethanol leaves less left over for food and livestock feed. The increased ethanol might shave a penny or two from the price of a gallon of gas, based on the amounts involved. The tradeoff is higher prices for meat and for any food made from corn, such as chips, tortillas, and many cereals and sweets.
To fight rising food prices (counteracting his ethanol proposal), Biden proposed an antitrust investigation against meat producers. Realistically, this is Biden looking tough while doing nothing. Considering the likely policy alternatives, that’s not necessarily a bad thing. Antitrust cases take years, and inflation will likely be long gone before any case is resolved.
Biden’s response to food prices should instead involve trade liberalization. When asked about ending the China tariffs after his remarks, Biden said, “we’re discussing it, and no decision has been made on it.” On the merits, that decision should have been made long ago. Tariff relief would lower, by an average of almost 20 percent, the prices of thousands of goods worth hundreds of billions of dollars, from clothing to medicine to electronics. Combine this with the Fed finally getting its monetary house in order, and Biden would have a substantial accomplishment to brag about—and even better, for political purposes, it would involve undoing one of his predecessor’s signature policies.
While Biden did point out the importance of ports and trucks in opening up supply networks, he offered no concrete proposals for liberalizing them. Dockworkers’ unions have long resisted automation, around-the-clock operations, and other improvements that ports in most other countries adopted years ago. Convincing unions to join the current century would be a good start, though this likely requires more political will than anyone in the White House or Congress currently has.
Biden would like to see more truckers on the road. That is an easier lift, since many of the obstacles are in Washington, and under Biden’s control. Good ideas there include lowering the federal age requirement for truckers down to 18, giving truckers more control over their own hours, and getting rid of the 220 percent tariff on truck chassis, which forces small owner-operators to pay more than triple the world price for one of their truck’s most important components. Biden did not mention these ideas, but they would help ease prices on many goods (though again, separately from inflation, because these don’t affect the money supply).
President Biden gave his speech in the first place because the public wants to see him doing something about the country’s problems. This is problematic even in good times. The president has little control over inflation, and most of his proposals harm more than they help, while leaving inflation unaddressed.
Even a serious liberalization agenda on trade, labor, and regulation would have only a small effect on taming inflation, because those policies wouldn’t affect the money supply. They would have substantial economic benefits and are worth pursuing, but it would be misleading to say they affect inflation.
President Biden is hardly alone in not knowing what causes inflation. But when your starting point is in error, there is a very good chance your policy conclusions will also be in error. There is plenty he can do to fight inflation-unrelated price increases, but aside from a glimmer of hope for tariff relief, few of those options appear to be on the table.