Politicians often seem to live in an alternative universe, where they act as if they can unilaterally dispense with the laws of economics by the sheer power of their words. President Joe Biden provided the latest example of this phenomenon, although he is carrying on a long tradition.
“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” the president said in recent remarks defending his multitrillion-dollar spending plan. “These steps will enhance our productivity, raising wages without raising prices, and won’t increase inflation. It will take the pressure off of inflation.”
As Americans slowly emerge from the pandemic shutdowns, they have become understandably concerned about rising prices for houses, consumer goods, food and automobiles. They aren’t imagining things. The consumer price index, which measures inflation, rose sharply in June — and is at a 13-year high.
Most people don’t track government statistics, but they are facing sticker shock. Housing prices have soared 20 percent in the last year, with bidding wars now typical. Additional dealer market is the norm on new cars — and the average used-car price is up nearly a third from the same time last year.
The president is right that unusual COVID-19 conditions are partly to blame. Car prices are up because a computer chip shortage forced manufacturers to slow production. Now that cars are heavily computerized, these chips are essential. That shortage sparked hot demand in the used market. Supply chain disruptions have likewise put appliances in scarce supply.
But Biden is in Fantasy Land if he believes that spending another $3.5 trillion on a stimulus package — plus a $550-billion infrastructure bill — will reduce inflation pressure. Republicans are right to raise the specter of the Jimmy Carter era — a dismal time of gas lines after oil-price shocks propelled inflation to double-digit levels. The crisis largely undermined his presidency.
The president needs an economic refresher. The federal debt has topped $28 trillion. When government prints money and cycles it into the economy, it pushes up prices. If the government provided all Americans with, say, a $10,000 subsidy to buy new cars, the price of those cars would probably rise around $10,000. We see this throughout the economy — as federal student aid has driven up the cost of college tuition.
The 1970s-era price shocks had their roots in 1960s-era Great Society spending. “Prices actually started creeping up in the mid-1960s, when the federal government was spending heavily on both the Vietnam War and the Great Society,” NPR recalled. President Richard Nixon exacerbated the problem with scarcity-producing price controls, it noted, but ultimately “prices bounced even higher.”
Although the GOP is correct in sounding the alarms, Republican presidents and lawmakers seem only to discover the dangers of government spending when they aren’t in power. The debt climbed $7.8 trillion during President Donald Trump’s administration — one of the largest increases relative to the size of the economy in American history.
Unfortunately, Republicans discover debt problems when Democrats are in charge and vice versa. Liberal economists are once again downplaying spending concerns and assuring us that inflation is only a temporary event. Sadly, Americans might have to endure a long spell of inflation given that, as we noted above, politicians don’t always grapple with reality.
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