Blowing Up a Few Myths About Inflation

Inflation has been a bugaboo of right-wingers and even the political center since the 1970s. So it's not surprising that with consumer prices rising, the national discourse has suddenly shifted from yesterday's news to looming hyperinflation and fiscal ruin. But in order to understand what's really going on, you need to understand what inflation is, what it isn't, and where we actually are.

Starting in the 1980s, American politicians (from both parties, but driven by Reaganite Republicanism) have governed under the assumption that the peak annual inflation we had then was a product of too much government spending. Inflation peaked at about 14% annually in 1980, but the "great inflation" is often considered the period between 1965 and 1982, and it also includes such "externalities" as the Vietnam War, President Nixon taking the U.S. off the gold standard, the political crisis surrounding Watergate and Nixon's resignation, and the massive oil shocks of 1973 and 1979 (both stemming primarily from instability in the Middle East).

"The response to inflation has become conflated with simplistic political positioning."

Despite all those complicating factors, the conventional wisdom blamed President Carter for failing to stem rising prices, especially of gasoline, ushering the era of inflation-phobia.

So are we currently on the cusp of runaway inflation or not?

October's 6.2% inflation rate, while higher than it has been recently, doesn't measure up to our last inflationary crisis--at least not yet. While some pundits are wringing their hands about looming hyperinflation, their concerns are, shall we say, full of hot air. Hyperinflation is defined as inflation of at least 50% per month--the kind of crises afflicting 1920s Germany, 1940s Hungary, and 2000s Zimbabwe that coincide with a broader economic collapse. Those governments printed money to keep up with expenses, but with those nations' domestic economies in ruins, the money had nothing to buy, causing prices to skyrocket in a vicious cycle driven by too much demand for too little supply.

The U.S. is experiencing none of those conditions, and, indeed, the economy has been buoyed in the 21st century by emerging as the world's largest oil producer and as a net exporter of petroleum. The gross domestic product, as imperfect a measure of the whole economy as it is, has been growing since mid-2020, and the Federal Reserve has not taken any action in 2021 so far that demonstrates concern over inflation.

Even as oil production becomes increasingly unsustainable in the face of accelerating climate change and the rising costs of extraction, the U.S. dollar is still the top reserve currency in the world, unlikely to be supplanted by the euro, yuan, or Bitcoin. Even Donald Trump's reign of chaos couldn't dislodge the dollar from its perch atop the global financial system, or sidetrack the U.S. stock market. Job growth in 2021 has been generally good (revised statistics keep pushing the job numbers higher), and Goldman Sachs is now predicting that recovery from the pandemic will lead to a 50-year-low unemployment rate--3.5%--by the end of 2022.

In other words, we're seeing some consumer price inflation, but the economic fundamentals appear to be sound. So what's really going on?

In short, misdirection. Today's Republican Party has become a party of opposition to anything that could be considered a Democratic "win." Look no further than the intra-GOP strife over the votes for President Biden's bipartisan infrastructure bill. When congressional Republicans are receiving death threats from constituents for supporting a bill their own party had a hand in crafting, it's yet one more sign of a party that has gone off the deep end. (There's a similar dynamic playing out with Republicans holding the economy hostage over the debt ceiling. We can expect more fireworks on that in December.)

But infrastructure plan notwithstanding, Biden's got a few more agenda items, notably his "Build Back Better" plan, a much-overdue investment in the social safety net that includes such necessary programs as paid family leave, universal preschool, extension of the child tax credit that has kept families afloat during the pandemic, investments in clean energy and climate programs, and more.

The Republicans are universally opposed to all of those programs, so the Democrats bundled them into a budget reconciliation package that could pass the Senate by a simple majority. That entails having the entire caucus unified, however, which hasn't happened yet, and time is running out to act this year.

The sticking point in the plan, some conservative Democrats say, is the cost--and now, inflationary fears. In fact, a lot of the media coverage of the plan focuses on the total price tag, some $1.75 trillion, which is indeed a huge amount, even if it's half the size of Biden's initial $3.5 trillion proposal. The message is still the same 40-year-old line that more government spending equals more inflation.

But that's an overly simplistic argument to make. Setting aside the political machinations behind this argument, it fails to take into account that Biden's plan, as originally proposed, would have been paid for with tax increases and therefore would not have led to any net spending increase. Most of those tax increases were on the very wealthy, however, which naturally made the entire Republican Party line up against it and exposed a few Democrats' primary allegiances to big business.

This argument also overlooks the fact that the spending for the reconciliation bill would be spread out over 10 years, amounting to $175 billion per year. Considering that the U.S. government budget for 2020 contained $6.6 trillion in spending, saying that increasing that spending by about 2.7% will lead to economic catastrophe is a touch hyperbolic, if not divorced from past experience (Trump's 2020 budget spending plan was a 33.3% increase over his $4.4 trillion 2019 budget, while revenues dropped to $3.4 trillion from $3.5 trillion). In addition, the U.S. GDP in the third quarter of 2020 stood at more than $23 trillion, meaning that new proposed spending would barely make a dent in the overall economy.

But the plan's effects would definitely be felt by those who need it most: the poor, the working class, parents of young children, the elderly--exactly the sort of people whom Democrats hope to win or maintain as voters in their coalition. The Democratic Party is legendarily bad at messaging, however, and it's done a poor job of selling exactly what's in the Build Back Better plan. That's allowed Republicans to frame the entire debate as one over trillions in government spending, which in their narrative is entirely wasteful.

Inflation has become the latest excuse trotted out to try and sideline this agenda. Even a couple of conservative Democrats are using inflation as an excuse to try to kill, delay, or water down the bill even more than they have already, probably fearing that Republicans will use their vote for more spending as fodder for campaign ads. (Spoiler alert: They'll do that no matter how the Democrats vote. Truth isn't a factor in GOP messaging.)

None of this is to say that inflation can't or won't be a concern. When prices go up, consumers feel the pinch. But the response to inflation has become conflated with simplistic political positioning, instead of being approached as a complex economic problem to solve.

Consider gasoline prices, which have seen some of the largest price increases lately. What you pay at the pump isn't set by the White House. Prices can vary greatly by region, and even within states. According to GasBuddy, which reports the cheapest gas available in any given market, the lowest price at the pump in Texas on Nov. 16 was $2.29 per gallon in Baytown, near Houston. Prices were significantly higher ($2.76-$2.79) in the Austin area, higher still in Dallas (up to $2.83), and up to $3.05 in El Paso. In Illinois, the lowest price in the entire state starts at $3.12 per gallon, and Californians can expect to pay nearly $4 per gallon or more.

(Gasoline in the U.S. is also heavily subsidized, keeping our prices artificially low. High prices are a global issue, with Europeans frequently paying the equivalent of $4-$5 per gallon.)

Other consumer products, such as automobiles and food, have also been getting more expensive. Global supply chains are still being disrupted by the COVID-19 pandemic. But these--both the prices of imports and the effects of the virus on the shipping industry--are also largely outside the control of the government. Even if backlogged consumer products make it off jammed-up container ships into port, the U.S. is also experiencing a shortage in long-range truckers, preventing many products from getting to markets. New cars, another product with volatile prices, are dependent on semiconductor chips that have been in short supply--a factor of global trade, rising tensions between the U.S. and China, and a lengthy production cycle. And those chips also power (and are slowing production and sales of) computers, phones, manufactured industrial materials, and appliances. Good luck getting a new PlayStation 5 in time for Christmas.

The two principal tools the U.S. government has for controlling inflation are the money supply and interest rates. With the former, there isn't a direct correlation--X dollars in the economy leads to Y% inflation. Inflation is instead a factor of how much money there is in circulation relative to the amount of products it can buy. A rise in prices caused by a continued shortage in consumer products, amplified by the ongoing disruptions to the global supply chain from the pandemic, can be intensified by a lot of new money flooding the economy. But even while some prices are going up, we're not dealing with critical shortages of basic needs (at least, none that are new; our housing market has been a mess for years).

But what is also true is that the investments in the social safety net would put money in the pockets of Americans, not big banks, and Americans, in turn, will use that money for food, bills, child care, or other needs. In other words, that money will circulate and boost the economy, allowing what inflation we have to be more easily absorbed. Leaving Americans destitute in the face of rising prices is both counterproductive and cruel.

And, in the grand scheme of things, we're not talking about that much money. A trillion dollars only sounds like a lot until you realize just how many more trillions are already out there. Biden's agenda is more about reallocating tax revenue and reprioritizing spending, rather than just letting the printing presses run wild.

Furthermore, interest rates have been at historic lows since the end of the Great Recession. Despite the warnings of inflation from many of the usual suspects, we haven't seen any of those omens of doom come true yet. If things start heating up too much, the Federal Reserve Board has a lot of room to maneuver to cool things down. It's keeping an eye on inflation, and so far, the Fed isn't too worried about it, so we shouldn't be either. What is worrisome is how much politics is intruding into this discussion. People who know better (and, let's face it, many who don't) are picking up on inflation as a problem that requires a political solution, a "solution" that will harm poor and marginalized communities more and allow the rich to keep their wealth safely out of public reach. We can't afford to get distracted in this debate.