Controlling Inflation Requires A Better Policy Mix, Not Business Scapegoating

Thanks to errant fiscal and monetary policies, consumer prices continued their relentless climb in December. Just as predictably, politicians seem to be more interested in “rounding up the usual suspects” rather than implementing the right policy mix that would rein in inflation.

Political fecklessness in face of rising prices is not unique to the current surge. When inflation was spiking to around 6.5 percent in the early 1970s, President Nixon imposed a 90-day freeze on wages and prices and then required government approval of any planned price increase once the price freeze was over. Imposing wage and price controls was one of the worst possible responses to the inflationary problem of the 1970s.

As Milton Friedman wrote in Newsweek at the time, “freezing individual prices and wages in order to halt inflation is like freezing the rudder of a boat and making it impossible to steer, in order to correct a tendency for the boat to drift 1 degree off course.” With inflation eroding families’ incomes and savings throughout the remainder of the 1970s, clearly Nixon’s price control policy was a complete failure.

Inheriting Nixon’s inflation problem, President Ford used his WIN (whip inflation now) buttons to encourage Americans to tighten “their belts voluntarily and spend less than they had before” in order to “reduce demand” and start pushing inflation down. The historical record shows what should have been obvious at the time – buttons and abstinence do not control inflation.

Unfortunately, too many politicians and policy activists have responded to our current inflationary surge similarly. Instead of political suasion or outright price controls, they are employing inaccurate rhetoric and political scapegoating.

President Biden’s White House blames meatpackers for the inflationary pressures. Not to be outdone, Senator Warren has written three separate letters to supermarket chains tweeting out:

“Giant grocery store chains force high food prices onto American families while rewarding executives & investors with lavish bonuses and stock buybacks. I’m demanding they answer for putting corporate profits over consumers and workers during the pandemic.”

Of course, the grocery industry is a notoriously low-margin business earning 1% to 3% net profit margins, on average. Some of the largest grocers, such as Kroger KR , earn even less – the company’s net profit margin was 0.75% in the third quarter of 2021. These low margins raise serious doubts regarding the accusations from Senator Warren or analyses, such as a recent report from the Economic Roundtable, regarding grocery companies putting “profits over workers”.

Jumping on this bandwagon, a Brookings Institution piece appears to blame the same supermarkets for allowing inflation to erode the value of the raises they paid to employees. Specifically, the Brookings Institution piece argues that “many workers are earning more than they did at the start” of the pandemic but the raises are “by much less of a margin than many of us assumed” due to inflation.

Blaming companies for inflation’s pernicious effects on employees’ wages relies on the same Nixonian logic that led to the irresponsible wage and price controls. These political activists scapegoat companies or industries for a problem that, by its very definition, is created by government policies.

Higher prices at grocery stores do not drive-up rents for apartment buildings, the cost of used cars, and the prices for new clothing. Even rising energy costs, which increases the costs of raising cattle and selling groceries, cannot be the root cause of the inflation problem.

For one, these scapegoating-type explanations fail to explain why these same companies that have had the same market power for years have waited so long to gouge their consumers and employees. If companies have the power to drive up profits by generating inflation, then why didn’t they use this power in 2020? Or in 2018?

The obvious answer is that this imaginary power does not exist. Troublingly, political scapegoating distracts people from the actual drivers of inflation – errant government policies.

The federal government incurred trillions of dollars in new debt to shower the economy with all sorts of spending programs and payments to families. A majority of this newly issued debt has found its way to the Federal Reserve’s balance sheet, leading to the creation of trillions of dollars in new money. It is this excessive growth in the money supply that was directly injected into the economy that is behind the current inflationary surge.

Since only government policies can cause prices to rise economy-wide, controlling inflation requires fundamental reforms to the current fiscal and monetary policies. The search for corporate scapegoats distracts from these necessary reforms and, to the extent they delay the implementation of the right policy mix, unnecessarily increase the real economic costs created by an out-of-control inflationary environment.

Implementing the right policies that will moderate the current surge in inflation should be the government’s top priority. On a positive note, it is helpful that the political classes recognize how destructive inflation can be. Recognizing that the problem exists is inadequate, however, if the President and Congress refuse to see the central role that government policies have played unleashing inflation on the economy.

Trying to find random scapegoats to blame will not tame inflation. Only effective policies can.

Source: Forbes