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A better way to fight inflation


The Consumer Price Index is 7 percent higher than it was a year ago. Energy costs are leading this inflationary spurt as they did in the 1970s, when the OPEC cartel first choked off oil supplies and inflation followed. Gasoline is the most visible component of energy-driven inflation for people in rural areas like the Berkshires. A gallon of regular now averages $3.50, up a dollar since its lows at the end of 2020. Energy price inflation spreads through the entire economy, pushing up what people pay for commercial transportation, heating, manufactured goods and food. In economics, as in the song, “the knee bone’s connected to the leg bone.”

Inflation hawks are arguing, as they always do, that the way to control inflation is for the Federal Reserve to raise interest rates and for government to cut spending until the whole economy slows enough to keep prices from rising further. This mantra has been repeated for so many years that people accept it without question. The question is, however, whether it makes sense. Do we need to slow the whole economy when the inflation-causing culprits are energy and a few other, largely COVID-related bottlenecks?

Among the latter are computer chips, a shortage of which is pushing up prices across a swath of industries. Automakers can’t find enough chips, so they are reducing production, driving car prices up. Fewer new car sales mean fewer trade-ins, so used-car prices are up 50 percent. Rental companies that sold off their fleets when renting collapsed early in the pandemic are now buying again, pushing up prices further. Home appliances that use lots of chips are also more costly. Container ports are another inflationary bottleneck. So are some inland transportation hubs. Railroad and trucking rates are rising as goods flow again.

Then there are wages, always a hot-button issue. As unemployment declines, employers across the country have to pay workers more than before the pandemic, and they don’t like it. In leisure and hospitality, employers may have to pay much more. Wages also are climbing for transportation and warehousing workers, job categories that also need to attract workers. Nurses and teachers are quitting and need to be treated better to lure them back. Women are leaving the workforce because families cannot afford child care. Does it make sense to raise interest rates and cut government spending to create unemployment in these areas, so that harder times force people back into lower-wage jobs? I doubt that most Americans think that is fair.

A better way to deal with inflation is to target the bottlenecks. That means government encouragement of investment in energy sources like renewables that cannot be manipulated by OPEC and Russia. It means incentives to invest in science and semiconductor production where the private sector is already moving fast. It means more government spending to modernize ports, transportation infrastructure and the antiquated electric grid. It means more day care centers, so parents can work. There will be missteps in targeting investments, but nothing like the waste of letting a few problematic areas strangle growth and push up joblessness in the whole economy.

Targeting investment is what the U.S. government has always done. It subsidized the building of canals and railroads in the 19th century, and dams and waterways during the New Deal, opening up the country to development. After the U.S. entered World War II, President Roosevelt’s Treasury instructed the Federal Reserve to buy almost unlimited amounts of government debt to finance war production at low interest rates. Treasury Secretary Henry Morgenthau bragged later that he financed the whole war effort at less than 2 percent. These historic government-directed investments were much bigger than would be needed to deal with energy, semiconductors, ports, the electric grid and the other inflationary bottlenecks today. The belief that raising interest rates and cutting government spending is the best way to bring inflation down is anti-government ideology that ignores 250 years of American experience.

This article appeared on page A7 of The Berkshire Eagle on February 21, 2022


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