The Inflation Question

How will Harris respond?

Like many of you, I tuned in just over a month ago to watch CNN’s presidential debate, an experience that left me with strong feelings of concern for the health of President Biden and growing dismay about the upcoming election. I was appalled by much of what took place in the debate, but I am relieved by the President’s decision not to run again, and I think that we as a country are in a better place today as a result.

It should come as no surprise to any of you that I am not a fan of Donald Trump, to say the least, but I acknowledge and accept that large portions of the American public have legitimate concern about the performance, policies and priorities of the Biden-Harris administration. And at or near the top of these voters’ concerns seems to be the issue of inflation. President Biden is no longer running for re-election, but Vice-President Harris has picked up the mantle, and so it will now be incumbent upon her to address the inflation question to the voters’ satisfaction.

As you may recall, CNN’s Jake Tapper opened the June presidential debate with this question for President Biden:

President Biden, inflation has slowed, but prices remain high. Since you took office, the price of essentials has increased. For example, a basket of groceries that cost $100 then, now costs more than $120; and typical home prices have jumped more than 30 percent. What do you say to voters who feel they are worse off under your presidency than they were under President Trump?

Suffice it to say that President Biden’s response to Tapper’s inflation question was less than confidence-inspiring. [If you missed the debate, you can  watch it again here. The inflation question begins just after 1:38 on the video.] But Biden is no longer the Democratic candidate for president, VP Harris is, and so one might reasonably ask: What is it that Harris should say to the American people on the subject of inflation?

I for one would like her to address some or all of the following points:

— Inflation continues to be a real problem for many American families struggling to make ends meet. Prices for many goods and services are up 20% or more over the past several years and they continue to grow at 2-3% off this higher price level. Many American families are running up their credit card bills just to put food on the table and gas in the car, and house prices are now largely unaffordable for large segments of the US population. Acknowledging the magnitude of the inflation problem is the first step in explaining it, and VP Harris should address this head-on, with the sort of empathy for the plight of ordinary Americans regularly demonstrated by President Biden.

— The president of the United States does not control the level of prices in the economy, and neither does Congress, the Fed or business CEOs for that matter. President Biden did not cause our latest bout of inflation, and the next president of the United States does not have the power to lower prices in the economy or stop their future rise. The prices that we pay for goods and services are set in a competitive economy, and are influenced by a wide array of complex and rapidly changing forces of supply and demand, which sometimes fluctuate wildly. Yes there are things the president, Congress and the Fed can do to influence the state of the economy, and therefore the level of employment and inflation, but there is no magic wand which the federal government can wave to make inflation suddenly go away or bring prices back down to previous levels. In the 1970s, President Nixon attempted to attack inflation with price controls, a decidedly un-Republican experiment in governmental coercion which produced only long lines at gas stations, an experience we do not want to repeat again in the 2020s.

— Inflation is not solely a US problem. It is a global problem and many countries have been harder hit by inflation than has the USA. The annualized rate of increase in the US Consumer Price Index hit a peak of 9% in June 2022, but it was down to 3% just a year later and it is now under 2% by some measures, a much quicker recovery than we have seen elsewhere in the word. This recent decline in inflation does not mean that prices have come down, only that they are now increasing at a slower rate. But perhaps we can all take some comfort in the fact that we are not going through this alone. Many other countries have been harder hit by inflation than we have, and we don’t see them blaming President Biden or the Fed.

— The inflation we have all experienced over the past several years is almost entirely the result of the worldwide covid pandemic, which shut down the global economy and wreaked havoc on supply chains and the availability of many goods and services. The economic impact of covid was compounded by Russia’s invasion of Ukraine in February 2022, increasing the price of oil to record levels. As a result of covid, millions of Americans were thrown out of work, driving up the US unemployment rate to almost 15% at the end of the Trump administration. In response, the federal government with bipartisan Congressional support authorized unprecedented amounts of financial assistance for American families, businesses and state and local governments in order to keep our economy afloat. This fiscal support kept the US economy intact, and likely saved millions of American jobs, but it may also have added to the inflationary pressures created by global supply imbalances during covid, at least at the margin.

— Many Americans are concerned not only about inflation, but also about the big increase in the federal deficit and debt over the past four years. These concerns are not unwarranted, but once again a bit of context would be helpful. As with inflation, the recent rise in the US federal debt is largely the direct result of covid, which caused a collapse in economic activity and tax revenues and necessitated the government’s large emergency fiscal response. But whatever the reasons, the US federal debt is now at all-time highs and the cost of servicing that debt has increased to concerning levels, in part as a result of the Fed’s rate hikes beginning in March 2022. Relative to the size of our economy, the US federal debt is not out of line with the post-covid debt levels in other developed countries, and UST bond yields remain at very low levels, but the level of our federal debt is very high by historical standards and may not be sustainable politically. As a result, both of our political parties will need to think carefully about their respective budget priorities in the coming years, something I would like to hear at least one of the two candidates acknowledge in the coming months.

— Voters are increasingly concerned about the sustainability of their Social Security benefits, in part as a result of the Republicans’ recent about-face on this issue. This past spring, House Republicans called for a $1.5 trillion reduction in Social Security benefits, an increase in the retirement age to 69 and cuts in disability payments, all of which got pulled from the Republican Party platform at the insistence of former President Trump, who has now committed not only to maintain Social Security benefits but also to make them tax-free to the recipient. For their part, Democrats have pretty consistently resisted Social Security benefit cuts and have instead looked to address the growing funding gap, in part by raising the cap on earned income subject to FICA tax, which would raise a lot of money but may or may not be the optimal way to address this issue. Despite what you might hear on social media and in the halls of Congress, the financial solvency of Social Security is not in immediate danger, but it will be in a decade or so, due to demographic changes in the US population. In the meantime, Social Security reform remains the third rail of American politics—step on it and you die—and we should probably not expect either candidate even to acknowledge the need for eventual Social Security reform while pandering for votes this November. But wouldn’t it be refreshing if one of them did, ideally from the left this time?

— Interest rates in the US remain at high levels, as the Fed works to mitigate the continuing inflationary pressures resulting from the legacy of covid and the strong and growing US economy. This too has been a burden for many American families who must borrow to make ends meet, as well as for home buyers who have seen mortgage rates double over the past several years. Many people believe that the Fed has held rates too high for too long, particularly in light of recent indications of a slowing economy. But former President Trump, who regularly bashed the Fed while he was in office and running for re-election, has called on the Fed to maintain high rates at least until after he wins this November. To her credit, VP Harris has so far refused to comment on Fed policy, consistent with longstanding tradition, which in my view at least reinforces her image as the more presidential of the two candidates.

— Most importantly, VP Harris must commit to supporting the continued growth and strength of the US economy, even when this comes at some cost to other Democratic policy priorities. During the final year of the Trump administration, US unemployment reached almost 15% and it fell to below 4% earlier this year. Real GDP growth (net of inflation) during the Biden administration has been higher than at any point since the global financial crisis (2008). And for eighteen months now, nominal wages have been rising at rates above the rate of inflation, increasing the purchasing power of middle-class American families, albeit slowly. These are all good things, which candidate Harris should acknowledge and pledge to support.

—Whether we like it or not, there is not a lot that any future US president can do to reverse the recent rise in prices experienced in this country and across the world. But what the president can do is to avoid making the current situation worse by pursuing irresponsible policy proposals of the sort we have been hearing lately from candidate Trump. Corporate profits are now at or near all-time highs, and while this does not mean that US corporations must be ‘price gouging’ their customers (as some Democrats have alleged), it does suggest that further budget-busting cuts in corporate income taxes are unwarranted. Eliminating income taxes on Social Security payments also seems imprudent, as does cutting taxes again for the richest Americans, who seem to be doing just fine while the rest of the country is having trouble making ends meet. And we should dismiss out of hand Trump’s proposal to impose a 10% across-the-board tariff on all US imports, which would likely raise even further the cost of living for American families and businesses, at least initially.

It is quite possible that I am missing something important here, and some readers may well disagree with me about Biden’s debate performance, the political dynamics for November, or my commentary on inflation.  But I do think it would be very refreshing, and healthy for our political culture, if at least one of the two presidential candidates would come clean with the American people on the issue of inflation, even if it means acknowledging their own administration’s role in contributing to the problem. 

It may be unrealistic to expect this sort of straight-talk from former President Trump, but Vice-President Harris has the opportunity to speak plainly to the US people, much as FDR did during his fireside chats in the 1930s. Yes, he did this only after taking office in 1933, but sometimes the most important thing a candidate can do when campaigning for office is to tell the American people what they need to hear, rather than what they want to hear, which is not something we have seen much of recently in this country.

But there is still time for VP Harris to do this, and if she can do so convincingly, I think she may well carry with her a surprisingly large share of currently undecided and disengaged voters and find herself sitting behind the Resolute Desk next January.

Which for me at least would be a big relief.

Links

Trump Promises Lower Rates, which the President Does not Control, NY Times August 1, 2024

Inflation 2024: A Global Comparison, Global Finance, May 2024

The Biden Administration has Approved $4.8 Trillion in New Spending, Committee for a Responsible Federal Budget, September 2022

White House Fact Sheet on Republican Plans to Cut Social Security, Medicare, Medicaid and the Affordable Care Act, March 2024

How Not to Panic about Social Security, Paul Krugman, NY Times, February 2023