“many economists say that the foundering supply chain has played a heavy hand in driving up prices”
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“it’s become clear to many economists that American inflation isn’t just a supply chain issue: Our economic response — namely, the trillions of dollars of COVID-19 stimulus paid out over the last 24 months — appears to be a meaningful differentiator.
A good way to tease this out is to look at Europe, which has faced similar supply chain issues and an even worse oil shock, as it is more dependent on foreign oil than the U.S. And yet, European countries have experienced lower inflation, perhaps due in part to their smaller government response.”
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““If you look compared to Europe, in the United States goods consumption is higher, and services consumption is higher than what it is [in Europe].”
One reason for that higher consumption is government spending. In 2020, a divided Congress under former President Donald Trump passed two separate pieces of legislation — first the $2 trillion CARES Act in March, which doled out $1,200 checks to most single adults and even more to families, then a $900 billion package in December that, among other aid, issued $600 targeted checks. But then in March 2021, Democrats passed another round of government stimulus in a $1.9 trillion relief package — including $1,400 direct payments to individual Americans — which some experts warned at the time might cause inflation.”
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“Furman stressed to me that inflation likely would have been high even without a COVID-19 relief bill, however, because of a reopening economy and base effect distortions. Moreover, rising gas prices — one of the most tangible ways in which Americans process inflation — likely have nothing to do with the American Rescue Plan and much more to do with the dynamics of global oil. There is at least some evidence, though, that government spending has caused inflation, beyond the explanation that it’s merely been a supply chain issue.”
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“not all government spending has the same effect on inflation. In fact, historically government spending hasn’t usually led to inflation. A 2015 paper in the European Economic Review found, for example, that the effect of government spending on inflation post-World War II was “not statistically different from zero.” But Bill Dupor, a co-author of that study and vice president of research at the Federal Reserve Bank of St. Louis, told me that the size of the intervention matters — and that could help explain why government spending today has spurred inflation but hadn’t in recent memory.”
“With American consumers spending freely and many supply chains still snarled, year-over-year inflation may have notched yet another four-decade high in January.
The factors that have accelerated prices since last spring remain largely in place: Wages are rising at the fastest pace in at least 20 years. Ports and warehouses are overwhelmed, with hundreds of workers at the ports of Los Angeles and Long Beach, the nation’s busiest, out sick last month. Many products and parts remain in short supply as a result.
And reports indicate that the expiration of stimulus checks and other government aid has yet to slow Americans’ appetite for shopping.”
“Many of the meat-industry problems the Biden administration identifies as in need of fixing are very real. For example, the administration says meat prices are through the roof. That’s true. The administration says the meatpacking industry is highly consolidated, with just four giant companies responsible for slaughtering and processing nearly 7 out of every 8 pounds of beef (and slightly lower amounts of pork and poultry) we eat every year. That’s true, too. (It was also largely true 20 years ago and 100 years ago.) The Biden administration has also argued large meatpackers have been busy “raising prices, underpaying farmers—and tripling their profit margins during the pandemic.” Also true.
The Biden administration believes meat prices are sky high due largely to this industry consolidation and lack of competition.”
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“the real obstacle that’s preventing ranchers and farmers that utilize these facilities from supplying more meat to more Americans is an outdated federal law that props up the large processors while preventing local meat producers from selling steaks, roasts, and other cuts of meat to consumers in grocery stores, at farmers’ markets, and elsewhere in their communities.”
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“farmers and ranchers who want to sell their meat commercially (or for it to be re-sold) in this country must have their livestock slaughtered in USDA-inspected (or state equivalent) slaughter facilities, where an inspector must be present and inspect every animal that’s slaughtered. In order to be sold commercially, meat from those same animals also must be processed (cut into steaks, ground up, cured, etc.) in a USDA-inspected processing facility. There’s a shortage of slaughter and processing facilities available to most small farmers and ranchers, and many plants are owned by a handful of large companies that don’t cater to those farmers and ranchers. As all this suggests, the current system poses a giant hurdle to many small farmers and ranchers.”
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“As a fix, the Biden administration proposes, under a wordy header announced this week—the Biden-Harris Administration’s Action Plan for a Fairer, More Competitive, and More Resilient Meat and Poultry Supply Chain—to give $1 billion to smaller meat processors so that they can ramp up their production efforts, which would in theory provide farmers and ranchers with more choices for slaughter and processing. The plan also includes other elements, including “launching a new portal to allow farmers and ranchers to report unfair trade practices by meatpackers.””
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“The USDA has been aware of many of the aforementioned problems with its meat-inspection scheme for decades. As I explain in my book, Biting the Hands that Feed Us: How Fewer, Smarter Laws Would Make Our Food System More Sustainable, when the agency commissioned a study 10 years ago to look at ways to streamline these regulations, the authors of the study concluded “that no one with the USDA or . . . working as professionals within the meat industry believe[s] that streamlining regulations will ever occur.”
Righteous pessimism hasn’t stopped people who care about small farmers and the livestock they raise from trying to come up with various fixes. The PRIME Act, a tremendous bill that has repeatedly failed to pass Congress, would, I explained in a piece in the The Hill in 2018, “provide states with the option to regulate livestock slaughter and sale within their borders.” Local solutions exist, too, but the federal government largely ignores or seeks to undermine them. States such as Wyoming and Colorado that have sought to use federal law to foster more local competition have bumped up against threats from overzealous USDA bureaucrats.”
“consider the public debt—especially the federal debt, which ballooned as a result of large budget deficits in recent years. (In 2020, the federal government raised $3.4 trillion in revenue and spent $6.6 trillion.) The interest cost of the national debt was $253 billion in 2008, equivalent to $325 billion in 2021 dollars; it remained around that level through 2015. Even though the debt doubled in those years, sharply falling interest rates and low inflation helped contain costs.
But that was yesterday. With today’s higher inflation and rising interest rates (perhaps with more to come), the Congressional Budget Office (CBO) estimates that the interest cost of public debt is $413 billion in 2021, stated in current dollars. Obviously, any dollar spent on interest cannot be spent on government benefits or services.
Looking ahead, the CBO expects more of the same. For 2026, it projects that the interest rate on 10-year Treasury bonds, currently 1.5 percent, will be 2.6 percent, and that the interest cost of the federal debt will rise to $524 billion. For 2030, the projections are 2.8 percent and $829 billion, respectively, all stated in current dollars for the noted years.
Now we are talking about real money. To put $829 billion into perspective, in 2020 the United States spent $714 billion on the military, $769 billion on Medicare, and $914 billion on all nondefense discretionary spending, all stated in 2020 dollars. Back-of-the-envelope calculations strongly suggest that some spending categories will have to give.”
“The Fed has penciled in three rate hikes this year, and the first could come as soon as March.”
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“Adam Ozimek, chief economist at freelancing platform Upwork, said the Fed misjudged how large the inflation spike would be, though he still thinks — as the Fed previously argued — that price increases will eventually start to cool on their own. He said the danger instead is that the Fed will overreact to levels of inflation that ultimately prove temporary, hurting the millions who still haven’t returned to the labor force.
“Inflation is by any measure extremely high, yet labor slack remains significant as well and we are far from full employment,” he said. “The policy challenge is far more complicated than in 2018, when Powell faced uncertainty about labor slack but without the added pressure of high inflation.”
Still, others have praised the Fed’s restraint amid the price spikes, keeping rates low and allowing the job market to heal more quickly. They argue that inflation is significantly being fed by supply chain issues that the central bank isn’t equipped to solve.
Former Fed Chair William McChesney Martin once said the central bank’s job was “to take away the punch bowl just as the party gets going.” But Sahm argued that a few rate increases don’t have to ruin anything.
“Things are getting better,” she said. “We need to pour a little less punch in the punch bowl.””
“Some of the causes are fairly self-evident: Entering the third year of the Covid-19 pandemic, the US — and much of the rest of the world — is grappling with a supply chain crisis. That means most goods, from game consoles to oranges, are more difficult to get to store shelves for one reason or another, whether it’s a lack of critical tech components or a backup at ports due to labor shortages. But US consumers simply haven’t stopped buying, and that demand-supply disjunction has caused record inflation.
Some economists, as well as President Joe Biden, take the view that the pandemic — and the pandemic-snarled supply chain — are the primary culprits, and inflation will ease as the US keeps combating the pandemic and implements supply-chain fixes. On Friday, according to CNN’s Kaitlan Collins, Biden told reporters that “the reason for inflation is that we have a supply chain problem that is really severe.”
Others, though, are concerned the problem is bigger than that. Former Treasury Secretary Larry Summers, for example, has also pointed to government spending as a reason for increased inflation, and believes it’s far from a bump in the road.”
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“lockdowns and being stuck at home — unable to travel or go to restaurants, bars, and live events — have shifted what Americans are spending their money on. Less money spent on travel or experiences, combined with stimulus funds, has driven many Americans to buy more consumer goods. That, combined with supply chain problems decades in the making and exacerbated by the pandemic, has led to the current, precipitous rise in inflation.”
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“While the US has spent trillions in pandemic relief, however, inflation is also occurring elsewhere in the world, where governments have taken different approaches to dealing with the fallout from the pandemic — suggesting that government spending doesn’t tell the whole story.”
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“While the Biden administration is doing what it can to fix supply chain issues and drive down rising gas prices, most of the tools to address inflation are in the hands of the Federal Reserve.”
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“One way the Fed plans to cool the economy is “tapering” — gradually decreasing the $120 billion it spends per month on government-backed bonds, which has injected money into the financial markets during the pandemic. In November, Fed Chair Jerome Powell announced the central bank would reduce that amount by $15 billion each month. The purchasing program is supposed to end halfway through 2022, but as the New York Times reported in early December, it could finish more quickly as the Fed attempts to reduce inflation.
“At this point, the economy is very strong, and inflationary pressures are high,” Powell said in late November. “It is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at our November meeting, perhaps a few months sooner.”
Along with that could also come interest rate hikes, although the Fed has not announced specific plans to do so.”
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“Beyond monetary policy, though, the other massive piece of the puzzle is the supply chain — and that’s something politicians and policymakers have much less control over. Biden has attempted to ease supply chain woes by running the Port of Los Angeles 24 hours a day, clearing the docks so goods don’t wait for days on cargo ships stranded in the water. And the release of 50 million barrels of oil from the US Strategic Petroleum Reserve last month was geared toward reducing gas prices, which have already begun to fall.
Most likely, however, the supply chain will remain snarled for the foreseeable future — keeping inflation higher than we’re used to — and policymakers will have to react to that reality.”
“there is one thing Biden could do to immediately provide consumers with relief. He could eliminate the tariffs imposed by former President Donald Trump.
Those tariffs, which Biden has been stubbornly unwilling to reverse during his first year in office, are adding roughly 0.5 percent to annual inflation across the economy. That’s the conclusion drawn by Ed Gresser, a former assistant U.S. Trade Representative who is currently the vice president and director for trade and global markets at the Progressive Policy Institute, a center-left think tank. Trump’s tariffs on washing machines, solar panels, steel, aluminum, and a host of Chinese-made goods are a “secondary but noticeable contribution” to overall inflation right now, Gresser writes.”
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“Biden could cut tariffs without having to wait for Congress or the Federal Reserve to act. Similarly, cutting tariffs would not come with some of the negative tradeoffs that other actions might. Raising interest rates will harm the economy in other ways (for example, by making it more expensive to borrow). Lifting tariffs will ease inflation and provide a tax cut to many American businesses. It is quite literally a win-win.”
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“Politicians might want to deploy tariffs (to raise prices) for a number of reasons: to protect domestic industries, to influence where in the world individuals choose to invest, to retaliate against what they perceive as unfair trade practices from other countries, and so on. But all those goals—and tariffs are poor ways of accomplishing most of them—are second-order functions. To the extent that any of those things occur, they happen because tariffs raise prices.”
“Inflation can act as a regressive tax if rising prices are centered on necessities and if workers in poorer bargaining positions are unable to obtain pay increases. When inflation was growing at about 2 percent per year pre-pandemic, a person making $15 an hour, or $30,000 annually, would lose about $600 a year without a pay increase—not a trivial amount for someone living paycheck to paycheck.
But 2 percent inflation growth is no longer our reality. Prices are now up 6.8 percent since last year, which is the sharpest increase in 39 years. If a $15-per-hour worker didn’t receive a pay raise over this last year, his real earnings could fall by as much as $2,040.
Some workers did see a bump in their paychecks, albeit not enough to offset inflation. After accounting for increases in nominal earnings, the Bureau of Labor Statistics has estimated that, on average, workers experienced a 1.9 percent pay cut over the last year due to inflation. This means a $15-per-hour worker likely saw $570 disappear from his wallet.”
“The reason for the plunging lira is no secret. In contrast to virtually every economist on the planet, Turkish President Recep Tayyip Erdogan insists that low interest rates and cheap money fuel a thriving economy that fights inflation. His claims—dubbed “insane” in some quarters—don’t seem to have done much for the value of the currency. Nevertheless, he sticks to his policy and fires officials who disagree.
Instead, what Erdogan has actually accomplished is a surging money supply that dilutes the value of the lira and has driven Turks to despair.”