In stating recently that “inflation is the Fed’s job,” President Biden gave compact expression to three radically false and politically suicidal propositions: 1. The past year’s price increases are part of a process that must be suppressed. 2. Anti-inflation policies are the preserve of the central bank. 3. The Federal Reserve can suppress inflation without also wrecking the economy, the president’s own program, his party, and his political prospects.
Let me offer three counter-propositions: 1. There is no compelling reason to raise interest rates, now or later. 2. Nevertheless, future price pressures are inevitable. 3. A progressive anti-inflation strategy is possible and necessary—one that supports jobs and living standards and doesn’t involve the Federal Reserve.
Why have prices risen this year? First of all, because world oil prices jumped in the spring of 2021, while supply chain troubles hit new car production and drove up used-car prices. Those were the big items. They were onetime hits, in the case of oil largely over by July, which make new headlines every month only because the government reports price changes 12 months later. Though some effects will linger, these big shifts will drop from the news reports automatically as 2022 moves along.
Wages are also rising, finally—a bit. Since most American jobs are in services, those wages are also prices. And they are prices that are paid—this should be an obvious point—by people wealthier than those who are getting paid. Suppressing wage increases for low-wage American workers is reactionary. And it’s a result that can be achieved only by gouging those workers and their families on their debts and then cutting off their bargaining power over their jobs.
There are other things going on, including higher rents and meat prices. But in the main, the “inflation” we’ve already seen is either plainly transitory, as in the case of oil or autos, or good news, as in the case of wages. Neither justifies a policy of higher interest rates. Not now, and not for years from now, until after the next presidential election.
Why can’t the Federal Reserve hold the line without hurting workers? Because to keep to any given inflation target—2 percent per year, say, as the Fed would prefer—when some prices are rising by much more than that, means that some other prices must rise much less, or even fall. What other prices are there? In a service economy, it’s mainly wages. But to cut back wages, you need recession and mass unemployment. Want to know how that works politically? Ask Jimmy Carter.
The idea that the Federal Reserve can (somehow) bring down inflation without cost is backed by nonsense and non-thought. Milton Friedman’s old slogan “Inflation is always and everywhere a monetary phenomenon” demonstrates how far economic thought can depart from reality. There is a notion that “labor markets” somehow adjust on their own to preserve full employment. There is a claim that the Covid stimulus programs were too big and that the economy is running “too hot.” All of it is false, which becomes obvious once you realize there are 2 million fewer jobs in America now than there were in 2019, when there was no inflation to speak of. Obviously we’re running into structural changes induced by the pandemic, some of which cannot be reversed and some of which should not be reversed, but none of which the Fed can just wave away by pushing up interest rates.