The Inflation Solutions Are Even Worse Than the Problem
As Americans labor under the burden of inflation, the Biden administration keeps telling us the economy is just fine. White House press secretary Karine Jean-Pierre recently said we are “transitioning” to “steady and stable growth.” As a result, she claims the American people are in a place where they can “take on inflation.”
Americans aren’t buying it. In fact, they’re buying less of everything as rising prices squeeze their wallets. Consumer confidence has plunged to historically low levels. But as bad as things are, the worst could still be yet to come because the proposed solutions are worse than the problem.
In the first place, it’s important to understand that the impacts of inflation are far worse than the official numbers indicate. The government uses a cooked CPI formula that understates rising prices. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were “sweeping.” Measured using the old formula, CPI would be running closer to 17%.
For instance, we’ve seen a staggering increase in housing prices over the last year or so. The average price of an existing home topped $400,000 for the first time ever in May. Rent has also gone through the roof. But the CPI doesn’t capture the full impact of rising home prices. The government uses a made-up number known as “owner’s equivalent rent” to calculate housing prices. This number understates the cost of housing and it makes up about 1/3 of the CPI calculation. Actual home prices are up about 20%. Rent is up over 15%. The CPI calculation for shelter is only up about 5.5%. It simply doesn’t reflect reality.
No matter how the talking heads spin it, we know the economy is a mess. We live it every day. More distressing, it’s probably going to get worse because the plans to tackle inflation are more of what caused it in the first place.
Solutions Worse than the Problem
So, what is the plan to tame inflation?
Senate Finance Committee Chair Ron Wyden (D) plans to introduce legislation to impose a surtax on “excessive” oil company profits. According to one popular narrative coming out of the Democratic Party, oil company price gouging is causing inflation. But this doesn’t stand up to scrutiny.
And while punishing “greedy” oil companies certainly has populist appeal, it won’t do anything to solve the problem. You could confiscate all of the oil company profits and hand them out to the American people and they would hardly notice the difference.
Furthermore, if you take the profit out of drilling for oil, nobody will drill for oil. It would ultimately create an even bigger supply problem than we have right now.
The inflation-fighting plan announced by the White House mostly involves spending more money. In a Wall Street Journal op-ed, President Biden claimed, “We can lower the cost of child and elder care to help parents get back to work.” Lowering the cost of childcare is code for government-subsidized childcare. He also alluded to the stalled “Build Back Better” bill, which is basically a $2.2 trillion spending plan. Biden wrote, “We can also reduce the cost of everyday goods by fixing broken supply chains, improving infrastructure…”
But government spending isn’t the solution. It’s the problem. The White House press secretary lauded the “American Rescue Plan” as the first step toward recovery. But in reality, Americans need rescuing from that rescue plan.
In effect, governments shut down the economy and handed out money for people to spend. Supplies were squeezed because nobody was producing goods and services. But demand never dropped because everybody had their pocket stuffed with stimulus money. In effect, the government flooded the economy with money even as it starved it of goods. Of course, prices went through the roof. This was entirely predictable.
Now the Biden administration wants spend more – the exact policy that got us in this inflation mess to begin with.
The Federal Reserve appears equally feckless. It took a more aggressive stance during the last FOMC meeting, raising interest rates by 75 basis points. But it remains so far behind the inflation curve that it can’t even see it.
To truly tame inflation, real interest rates need to rise above the level of inflation. Paul Volker raised rates to 20% in order to slay the inflation dragon. The current 1.5% rate is spitting into the wind in the face of an 8.6% CPI (which is understating inflation.)
Given all of the debt in the economy, the Fed can’t possibly raise rates to that level without popping the bubbles and toppling the house of cards economy. The Fed is at a crossroads – either continue the inflation fight and plunge us into a deep recession or surrender to inflation and destroy the dollar.
Neither scenario is particularly desirable. So brace yourself because things will likely get worse before they get better.