By most measures, the American economy is doing quite well…continuing job growth, low unemployment, and strong consumer spending along with recovery from the pandemic. But inflation remains troublesome. As long as people are paying more for eggs, milk, and gas, everything else goes out the window. And the occupant of the White House takes the heat.
Bills passed under the Biden administration, including the latest one that enables Medicare to negotiate with big pharma for lower drug prices, along with other measures to fight inflation, were opposed by Republicans. But these bills are convenient whipping boys used by these same Republicans to hammer Democrats for the alleged “spending responsible for inflation.”
Politically, it doesn’t matter that inflation was occurring before this recent legislation. And it doesn’t matter politically that inflation has been, and is, a world-wide phenomenon, or that oil prices are determined on the world market. Gas prices are up and, therefore, “it must be Biden’s fault.”
Republicans urge the administration to ignore environmental consequences, and “drill, baby, drill.” But increasing American oil production would have but a marginal effect on oil prices set on the world market. Domestic oil companies could ramp up production under existing circumstances if they so choose. But let’s face it, they like these high prices, and are not inclined to do anything to favor Democrats.
Republican politicians who find current inflation politically convenient will not cooperate with Democrats to do anything to take pressure off prices. They are already threatening to reverse inflation-reducing measures passed by Democrats when they regain power.
Inflation is politically toxic. It not only is tough on especially middle and lower income recipients, but harmful to the macro economy if not brought back to lower levels, such as to the Fed’s target of two percent.
This inflation is mostly supply-driven. A hangover from the pandemic, deteriorating infrastructure, war in Ukraine, shortages of labor due to increasing retirements of the huge Baby Boom generation, and potentially made worse by the Supreme Court’s decision on Roe v. Wade that would further limit women’s participation in the work force, include the many factors that inhibit supply.
These supply factors are long run matters on which we cannot count on political cooperation to address. It is therefore up to the Fed to struggle with a short run solution, a task for which the Fed is ill-equipped. The Fed’s major tool is geared to the demand side only, through affecting the money supply and interest rates. In this case, it is raising interest rates to restrict business and consumer spending.
Hence the Fed’s dilemma; to raise interest rates enough to curb inflation risks curbing consumer and business spending enough to cause recession. The prospect of a “soft landing,” curbing spending enough to tame inflation without causing recession, is becoming ever more difficult and unlikely. Even with recession, or a miraculous “soft landing,” none of this addresses supply constraints that underlie the current inflation.
The recent decision of OPEC to cut oil production was a gut punch to the Biden administration and Democrats, especially coming so close to the mid-term elections, as Republicans gleefully anticipate regaining control of Congress. There was a mid-summer period during which Democrats held the prospect of at least cutting the losses generally suffered by the party in the White House during mid-term elections. Gas prices were actually falling for a short period.
Regarding women’s choice and Roe V. Wade, “the dog caught the car.” Republicans who long campaigned against abortion rights finally got their wish as the U.S. Supreme Court overturned Roe. V. Wade, leaving the issue up to the states. Would this apparent Republican over-reach fire up Democrats, and cause enough independents and even Republican-leaning women to vote Democratic, enough to give Democrats hope of limiting Republican mid-term gains?
Democrats characteristically run weak, ineffective, campaigns while Republicans hit brutally with everything they have, or even imagine they have. Democrats do best when Republicans over-reach. With the first Kansas surprise—the second being the unexpected rise of Kansas University football from perennial door mat to surprising victories—it appeared that, just maybe, Republicans might have over-reached. During a primary election with usually small turnouts, but not this time, a proposal to amend the Kansas Constitution to eliminate legal abortions was soundly defeated. Even Republicans of that Republican state prefer such decisions to be made by women and their physicians, not politicians.
Taking this cue from Kansas, Republican candidates across the nation are now generally slow-walking or ignoring the issue of women’s choice. However, as time goes on, political energy over such issues generally diminishes. This, along with OPEC’s decision to cut production, takes the air out of the balloon regarding Democratic hopes to retain control of congress.
Pay no attention to generic polls showing a rather even split nationally of voters favoring Democratic or Republican control of congress. Elections for the House are determined by district. There are very few competitive House races, and gerrymandering distinctly works to favor Republicans. Even U.S. Senate races that once favored Democrats have shifted either to an even split, or to Republicans.
Although not the real economy, tanking financial markets cast another pall over the economy. The Fed is expected to continue raising interest rates, seen as bad for stock prices. As long as money managers put more emphasis on interest rates than they do on the state of the general economy, rising interest rates will place continuing downward pressure on markets, reinforcing the old cliché, “don’t fight the Fed.” If rising interest rates slow down the economy enough to decrease corporate profits, this will put further downward pressure on stocks. That’s not a prediction, but merely an observation of what generally happens.
Meanwhile, the Fed will continue what it is not equipped to do, that is, to attempt to tame inflation by curbing demand, even as this inflation is primarily caused by supply constraints.
— John Waelti’s column appears monthly in the Times. He can be reached at jjwaelti1@tds.net.
