The Real Political Danger of InflationRoundup
tags: economic history, inflation, inequality, Price Controls
Andrew Elrod recently completed a dissertation on the history of wage and price controls in the United States between 1945 and 1980.
As the national economy reopens, prices have been rising. Year over year, the consumer price index (CPI) increased 5.4 percent in both June and July—the largest annual increases observed since the summer of 2008, a few months before Lehman Brothers failed.
What are we to make of the jump? Thirteen years ago the bulge in prices was concentrated in petroleum products and food; today the spike is driven by used cars, airfare, and restaurants—sectors acutely impacted by the pandemic. But unlike 2008, there is little reason to suspect today’s rising prices are evidence of an overactive economy. The U-6 rate of total unemployment, which includes those working part-time involuntarily and those who have quit looking for work, remains 9.2 percent. Total capacity utilization, meanwhile, remains sharply depressed at 76 percent.
Nevertheless, some venerable liberal journalists are concerned that, when it comes to inflation, younger readers are not practicing proper deference to their political forebears. “I don’t care to be condescended to by a bunch of Gen Xers and Millennials about my ’70s-bred fear of inflation,” wrote Timothy Noah—former editor of the labor desk at Politico, contributing writer to MSNBC, and senior editor at the New Republic—in July. Rising prices, he argues, are responsible for delivering forty years of Republican hegemony. As Noah put it, “Inflation is death to progressive governance because it makes people feel that the government is spinning madly out of control, and when that happens—fairly or unfairly—voters always blame Democrats and elect Republicans instead.” In a similar vein, New York political columnist Ed Kilgore warns, “I am beginning to hear echoes of the inflation panics of the not-so-distant past, which make me tremble.” There is cause for alarm, Kilgore says, in “the abiding fact that the left has no clear prescription for dealing with [inflation] . . . other than by denying its existence or significance.”
But the history of inflation politics has a very different lesson than what these writers suggest. It is true that the liberal ascendancy of the 1960s ended with both rising prices and a decisive defeat of liberals at the polls. It was not inflation that caused these losses, however, so much as a particular way of responding to it: with tighter budgets and higher interest rates. This approach has dominated anti-inflationary policy ever since. Because rising prices are fundamentally a problem of excess demand, the argument goes, the solution must involve a contraction in spending. And since governments should always keep spending low enough to prevent rising prices, any inflation at all is a sign of political failure.
There are a variety of mistakes in this argument. Inflation is not always a problem of excess demand; it can also be caused by mismatch between existing demand and existing supply—a problem of shifting supply to changing demands. (Arguably this is what we are seeing now.) Moreover, reducing the level of spending in the economy can prevent us from achieving other, higher goals, such as raising total employment and incomes or expanding public services. Indeed, managed economies across the globe have often resorted to a variety of other tools—temporary price freezes, selective price controls, national wage policies, and targeted investments to expand supply-chain bottlenecks—to respond to rising prices while preserving commitments to more important economic goals. Both Harry Truman and Franklin Roosevelt confronted inflation without hiking rates and tightening budgets, and there is no reason governments can’t manage their economies similarly today.
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