President Biden recently said, “If the Republicans win, inflation’s going to get worse.” Judging by the trend in nearly all the polls, it appears that the Republicans are going to win. They may win enough to get control of both houses of Congress. Will inflation worsen, as President Biden says?
There are four primary causes for our current inflation. Contrary to the Biden administration’s position, the supply chain issues have not significantly added to the inflation problem. That’s because total supply in the economy had reached pre-pandemic levels by early summer of 2021.
Throughout 2022, even with declining real gross domestic product (GDP), total supply continues to exceed pre-pandemic levels. Although there are logistics and material shortages in some markets, the inflation problem is not really caused by supply chain issues.
Putin is also not a major contributor to inflation. Even with the sanctions from the West, Russia has been producing more oil after the sanctions than before. That’s because Putin sells at a discount to China and India, which more than offsets the lost sales from the West. There is no lack of supply that could cause prices to rise.
What are the four causes of today’s inflation?
Rising energy prices were caused by President Biden’s actions, which discouraged the production of energy and significantly reduced supply. These actions began on the first day of the Biden administration.
Then Biden increased the free money given to unemployed Americans. Many received so much money that they didn’t go back to work, resulting in the labor force participation rate falling. That led to a labor shortage. Coupled with the excess demand, wages rose significantly. That led to wage inflation.
In 2020, the prior administration deficit spent a whopping $3 trillion. The spending, however, did exactly what was supposed to do. It created a V-shaped recovery from the lockdown-induced recession. Millions of jobs were added by Spring of 2020. The unemployment rate was falling rapidly. And there was minimal economic pain.
When the economy was handed over to Biden, GDP was 6%, and it would sustain that rate for the remainder of the year. Therefore, no additional stimulus was needed.
Biden decided to “rescue” Americans by deficit spending another $3 trillion. That increased deficit spending added significantly to the excess demand that caused the inflation.
However, the primary single cause of the excess demand was the shockingly irresponsible monetary policy of the Federal Reserve. In early 2021, most of the data made it clear that potentially long-term inflationary pressures were building. Yet the Fed keep interest rates near zero and rapidly expanded the money supply until March 2022.
If the Republicans are in control, things would be quite different.
The GOP would completely reverse the Biden administration’s policies that reduced energy production. The GOP would allow the Keystone pipeline to be built, which would increase oil supply in the U.S. by 900,000 barrels daily. The GOP is also almost certainly going to allow drilling on federal land and make the permitting process easier.
That also would lead to increased supply, lower energy prices and less inflation.
The GOP’s critics always say that the GOP is heartless. As such, the GOP usually refuses to use more government money to give to those in need. Of course, the GOP answers back questioning how many are really in need. “All they really need” the GOP would say, “is opportunity.”
As such, the GOP is not likely to spend on social programs. That will eventually lead to an increase the labor force participation rate and reduce wage inflation.
Then a GOP Congress will try to reduce spending. Last year they would not have passed deficit spending another nearly $3 trillion stimulus which the Biden administration knew would overstimulate the economy.
And lastly, while the Fed is an independent agency, there is great influence put on the Fed by the sitting president. That is especially true when the Fed chair is in his last term in office and wishes to be reappointed.
Since a GOP administration would not have passed either of Biden’s large deficit increasing stimulus bills, the Fed would have no reason to buy $120 billion monthly of government bonds. That program would have quickly ended, which would have slowed the rate of growth of the money supply and reduced inflation.
Then the GOP economists would have warned of the inflationary pressures building in the economy. They would also explain how devasting inflation can be. The GOP remembers President Reagan referring to inflation as a cancer.
A GOP administration would have discussed policy with the Fed chair to ensure that fiscal and monetary policy was consistent. That likely would have resulted in the Fed starting to raise interest rates by 25 basis points in March of 2021. Then another 25 basis points every three months, for a couple of years. This is exactly what the Fed did between the end of 2016 and the end of 2018.
Following that monetary policy, the inflation rate would be about half of what it is today.
When the GOP gets back in control, look for less inflation, not more.
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