If I controlled Congress, the President, and the Fed, here is what I would do about the “Trumpflation”:
I would begin by abandoning the idea that inflation is cured by making Americans poorer.
Raising interest rates to suppress demand reduces people’s ability to buy goods and services. Push that policy far enough, and we have a name for the result: recession.
But a recession does not produce one additional barrel of oil, kilowatt-hour of electricity, house, bushel of wheat, computer chip, or trained worker. It merely reduces the number of people able to buy them. It simply makes people poorer.
Price increases stem from shortages of crucial goods and services. When things are scarce, prices rise. Basic economics.
Inflation is a general increase in prices. When that happens, I would ask the obvious question: What has become scarce? A shortage of oranges can make oranges expensive, but it cannot by itself cause inflation.
A shortage of energy can. Energy enters virtually everything—manufacturing, agriculture, transportation, construction, heating, cooling, chemicals, and distribution.
Similarly, simultaneous shortages of food, housing, labor, transportation, and essential materials can propagate through the economy until rising prices become general.
Stagflation –the combination of inflation and recession –wasn’t merely a historical curiosity. It demonstrated that inflation and economic contraction are not opposites.
Therefore, economic contraction should not be regarded as the natural antidote to inflation.
Congress tells the Fed to pursue:
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- maximum employment and
- stable prices (along with moderate long-term interest rates).
Yet the Fed’s principal macroeconomic instrument is the price and availability of money and credit. It cannot drill for more oil, fund solar and wind energy, build a nuclear plant, train 50,000 physicians, expand a port, construct housing, manufacture semiconductors, or grow wheat.
Congress has given the Federal Reserve a dual mandate but not dual capabilities. When inflation results from inadequate supply, the Fed cannot manufacture the missing supply.
Its principal anti-inflation tool is to restrain demand—the very economic activity whose expansion is necessary for maximum employment and economic growth. The governmental tools capable of curing supply shortages reside principally with Congress and the Executive Branch: spending, taxation, regulation, trade policy, infrastructure, research, education, and production incentives.
Fighting inflation therefore requires an increased supply policy, not austerity, the dreaded program that is proven to produce only suffering.
The rich and the politicians tell the poor they must endure “a little pain” before inflation can be cured. Utter nonsense. The pain is the result of failed economic policies that were not the fault of the poor, but rather the politicians’ lack of preparedness.
Congress and the President have delegated “inflation” to the one institution that cannot directly cure a shortage, while retaining for themselves most of the tools that can.
My first anti-inflation program therefore would be a continuously updated national shortage inventory. Instead of having economists stare primarily at the quantity of dollars and interest rates, I would have specialists identify the goods, services, skills, infrastructure, and raw materials whose inadequate supply is forcing prices upward.
Sometimes plenty of a product is physically available, but its price has risen because transportation capacity, labor, electricity, insurance, financing, tariffs, zoning, licensing, or some critical intermediate input has become the bottleneck. Those should be identified by asking, “What is the constraint? What caused it? How quickly can it be relieved? What federal action would relieve it? What would that action do elsewhere?”
Then I would attack each shortage directly.
Where additional federal spending could increase supply, I would spend. If we are short of energy, I would support more energy—oil and gas when appropriate, but also nuclear, solar, wind, geothermal, storage, transmission, and research.
If we are short of housing, I would help finance housing construction. If we are short of physicians, nurses, engineers, electricians, or other essential skills, I would finance the education and training needed to produce more. If transportation bottlenecks are raising costs, I would spend to improve ports, roads, railroads, pipelines, and other infrastructure.
But spending would not always be necessary. Sometimes government itself restricts supply. A regulation unnecessarily might prevent wind energy. Tariffs can make an essential imported material more expensive. A licensing rule may prevent qualified people from entering an occupation where workers are scarce.
In those cases, I would remove the obstruction. The objective is increased net supply, not government spending for its own sake, although federal spending, by formula, does grow the economy.
Gross Domestic Product = Federal and Non-federal Spending + Net Exports
I also would stop treating federal financing as though the United States had limited dollars that government and private industry must fight over. The federal government cannot run short of dollars, so federal “debt” and deficits neither are a limitation on the federal government nor a burden on taxpayers. The federal government creates, ad hoc, all its spending money.
Federal deficit spending adds dollars to the nongovernment economy; it does not take dollars from a private borrower before the federal government can spend them. The important limitations are not the number of dollars available to the federal government. The important limitations are the availability and expandability of the real goods and services those dollars can buy.
That distinction would change the Federal Reserve’s mission. I would not respond to a shortage by raising interest rates, forcing consumers and businesses to pay more to lenders. Higher interest rates themselves raise costs for many businesses and consumers.
Instead, all policies would be coordinated around the same question: What is causing the general price level to rise, and what action will increase the relevant supply without unnecessarily reducing production and employment?
Nor would I wait for inflation before worrying about shortages. Preventing inflation should be easier and less expensive than curing it. The government already collects enormous quantities of economic information.
I would use those data to identify possible or developing constraints—energy capacity, housing inventories, transportation congestion, agricultural problems, critical minerals, skilled-labor shortages, medical capacity, semiconductor production—before they become severe enough to cause economy-wide price increases.
I continually would ask, “What if?” What if we have a war? A drought? A pandemic? A huge storm? An agricultural disease? Inflation policy should become an exercise in preventing shortages as well as curing them.
The ultimate objective would not be merely “2 percent inflation.” It would be maximum sustainable improvement in Americans’ real standard of living. Stable prices matter because inflation can reduce that standard of living. But recession reduces it too.
The governing principle therefore would be remarkably simple:c
- Before prices, prepare for the possible shortages.
- Remove governmental barriers that restrict supply. Use federal financial power where additional money can expand productive capacity.
- If prices do rise, identify the shortages. Then, increase the supply of what is scarce. And never create a recession merely to make inadequate supply sufficient for an impoverished level of demand.
The goal should not be to shrink the economy until it fits the shortages. The goal should be to eliminate the shortages so the economy can grow.
Rodger Malcolm Mitchell
#Monetary Sovereignty - Mitchell 