Invest More or Obsess About Inflation and Debt: It’s our Choice
This piece was originally published by The Hill on July 20, 2023. You can read it here.
Inflation fell again in June according to a Bureau of Labor Statistics’ report on July 12. That’s good news but more important for the country’s future is the Bureau of Economic Analysis release on June 29 of its monthly report on the Gross Domestic Product. Two data series in that report, both dealing with investment, should be getting more attention as inflation recedes because investment driven growth is what the country needs.
The two BEA data series covering investment are 1) Gross Private Domestic Investment and 2) Government Gross Investment by the Federal, State, and local governments. They tell us that the country, despite heroic efforts by the Biden administration, is still not investing enough year after year to win the future in a world with serious competitors like Xi Jinping’s China, swiftly changing technology, climate change and a dangerous war that is reshaping the geo-political landscape.
The U.S. has unmatched physical resources, resources that China, Russia and even our allies in the Eurozone and Asia cannot match. Those resources, however, need investment to develop. What the country needs is less luxury spending by the swollen 1 percent and more investment in areas covered by the two BEA data series — structures, industrial and transportation equipment, intellectual property products, climate and more. Without such a shift, the country’s enormous physical and human resources will not be used to deal with the issues it faces in the increasingly uncertain world.
The investment data in the BEA report shows that President Biden’s American Rescue Plan, Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act, and the CHIPS and Science legislation — $3 to $5 trillion in total — are only the beginning of the investment surge the country needs. Progressive economists like John Kenneth Galbraith, President John F. Kennedy’s influential teacher and friend, have been lamenting U.S. underinvestment in its public plant since the 1960s. In the intervening years, friends and competitors have been modernizing faster than we have.
The basic reason for this is that a series of all-too-influential inflation hawks at the Fed and small government reactionaries have come to dominate the Republican Party since Galbraith wrote. Indeed, the Federal Highway Act of 1956 championed by Republican President Dwight Eisenhower that created the Interstate System could never get the support of today’s Republican Party. That 1956 infrastructure legislation required small increases in the fuel taxes paid mostly by truckers and hard negotiations between myriad regional and business interests that today’s reactionary ideology-driven Republican Party would never support.
The surge in inflation that the Fed and Republicans are relentlessly hyping lasted roughly 15 or 16 months from March 2021 to July 2022. It followed decades of low inflation and was caused by temporary COVID dislocations, Russia’s war, and a rapid economic recovery that created temporary bottlenecks.
For the past 12 months from June 2022 to June 2023 the Consumer Price Index (the CPI) increased only 3 percent, less than one-third of what it was in the 2021-2022 period. The inflation hawks, however, say 3 percent is not good enough. They seem to believe that sellers and employees have the power to simply decide to raise prices and wages and get away with it indefinitely. In fact, most sellers and employees lack the power to push up prices and wages arbitrarily for very long because there are competitors in most goods and services sectors who gradually will undercut and take sales away from those who are too greedy. That is how the economy works.
The fear of renewed inflation caused by runaway wages is a smokescreen. The real fear of wealthy reactionaries is that tight labor markets will make workers and the “help” more expensive. Even after a decade of falling wages in the 1930s, anti-New Deal reactionaries were still saying higher wages would cause inflation in 1938 and 1939. In reactionary circles, little has changed.
The U.S. focus in 2023 should be on continuing to increase investment as Biden has done not slowing the economy to further reduce fading inflation. Vladimir Putin’s gigantic mistake in Ukraine and China’s emergence and change are just two of the world-altering issues facing the U.S. political system and its economy. To be managed, they all require more investment and faster economic growth here in the U.S. not reductions in private and public spending.
Political leaders, the Fed, media and the public need to see past fading inflation, and the supposed problems caused by a tight labor market and put more money year after year into public and private investments. Slowing economic growth as the Fed and reactionaries want to do will not help deal with any of the serious issues the country faces. Solutions will require investment by the private sector and government. High interest rates and restrictive government investment budgets to slow growth are exactly the wrong approach.