by Ramesh Ponnuru
Prices have been increasing at the fastest rate in decades, but we haven’t been having a debate about inflation. We’ve been having five. We might do a better job of thinking through the issues if we distinguish among them.
The first debate concerns the magnitude of the current inflation: how long it will last and how high it will get.
It started last spring, when some economists sounded the alarm that we were likely to see the highest inflation in a generation. Others argued first that inflation would remain subdued and then that it would prove “transitory.” It has now stayed high for long enough that Federal Reserve chairman Jerome Powell has retired the term.
How harmful this inflation is has touched off a second debate. Optimists have claimed that it will help many, maybe even most, Americans because it allows borrowers to repay their loans with devalued dollars. The pessimists, who have the public on their side, have emphasized that the real value of wages has fallen over the last year.
Debate number three takes up what is behind the inflation. Some politicians and activists point to corporate greed and increasing business concentration. But these explanations don’t explain: Business concentration didn’t fall for four decades starting in the 1980s and then suddenly rise last year, and it’s hard to believe greed followed this pattern either. The more serious dispute concerns the extent to which disruptions stemming from COVID-19 have caused higher prices, and to what extent the overstimulation of the economy has. In other words, how much of the problem is “supply” and how much “demand”?
This debate leads quickly to the fourth one: What should we do to combat inflation? Among the proffered solutions: slowing down the Fed’s asset-buying, raising interest rates, cutting regulations to address shortages, restraining federal spending and — this one is the favorite for the corporate-greed theorists — imposing price controls.
And from there we move to the fifth one: How much of this is President Joe Biden’s fault? No prize for guessing the line of division on that one.
All of these debates are obviously related. Gauging how much harm inflation has done depends, for example, on what’s causing it: A supply-generated inflation should not be expected to help borrowers and or to be easily countered by the Fed. But mixing up these issues can lead to mistakes.
Biden supporters have sometimes pointed to supply-chain disruptions as a way to deny inflation is his fault. His opponents often prefer to put the focus on loose fiscal policy, which makes his culpability clear. But this way of looking at the issues is just a groove we’ve fallen into.
The current inflation can be largely a supply issue and, at the same time, one Biden ought to be doing more to address. Scrapping the Jones Act, which makes it more expensive to transport goods, would be a start, and waiving it is entirely in the president’s power.
Biden’s spending isn’t just a demand issue, either. When critics say COVID relief money made it too easy for people to avoid work, they’re talking about a supply effect.
When I say “we” should distinguish the questions raised by this inflation, I very much include myself. Last spring, I was skeptical of the argument that fiscal and monetary policy were dangerously loose in a way that threatened high inflation.
Previous predictions along these lines, like the ones made after the great recession a decade ago, had not come true. The speed with which money changes hands remained low. Market expectations of inflation over the next five to 10 years remained near or below the Fed’s target.
I’d still stand by most of what I wrote then. At year’s end, monetary policy looks only a little too loose, judging by the gap between actual spending levels throughout the economy and their expected levels.
I erred, though, in thinking that we therefore need not worry about inflation. (“Stop Worrying About Inflation” was the headline on an op-ed I co-wrote in February. Oops.) The inflation warnings I was disputing didn’t dwell on supply chains, so I didn’t either. But supply shortages turned out to be crucial — and then more persistent than I initially assumed.
We’d make the opposite mistake if we assumed that because inflation hawks were right about the first two debates, they got everything else right, too. So far, the fear that heightened inflation expectations would take on a life of their own has not materialized: Bond markets are still pricing in inflation near 2% over the next decade.
If we’re lucky — and after underestimating the inflation of 2021, that qualifier is important — a year from now all of these debates will look less important.
