Opinion: What neither party will admit about inflation


HR King
May 29, 2001
By Paul Waldman
January 12, 2022 at 12:59 p.m. EST

New government data show that inflation increased by 7 percent in December, a troubling development that any party with a claim to leadership would have to address. The Biden administration and Democrats have some ideas, though they’re less than completely satisfying. The Republican Party, on the other hand, has a plan that it knows will work, if only we implement it.
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This plan is not one they themselves have proposed, but if you look at everything they’ve said about the economy over the last few decades, it becomes clear: To lick inflation, we must raise taxes on the wealthy.
Why is that the answer? Because if Republicans are right about how economic policy works, then absolutely nothing matters more than the tax rates paid by rich people. As they tell us every time they take power and pass a massive tax cut, once you cut those rates, the economy will erupt in a volcano of prosperity, benefiting not the hedge fund managers and trust fund slackers themselves, but the commoners whose fates are determined by the noble “job creators” at the top.
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And if you raise the wealthy’s taxes — as Republicans tell us every time Democrats are in charge — growth will grind to a halt, as those plutocrats retreat in a huff to the Hamptons, refusing to come out of their safe rooms and propel the economy forward until the capital gains tax is brought back down to a justly minuscule level.

Which happens to be just what we need to address inflation! Demand is outstripping supply, people have too much money and time on their hands, and a round of salutary belt-tightening led by the wealthy will restore order.
Okay, I’m kidding — Republicans would never propose such a thing, for two reasons. First, they know their own arguments about the effects of tax policy are ridiculous. And second, doing so would require them to acknowledge what both they and Democrats would prefer not to say: Right now the economy is doing quite well on measures like job creation, growth, and incomes, and it will be hard to maintain all that if we move aggressively to cut inflation.
There is no easy and painless way to solve the problem, since most of the tools government has at its disposal to address inflation are of limited utility or would impose serious suffering. Unfortunately, neither side has much incentive to admit it.

The Biden administration wants to look like it has everything under control and is taking decisive action to bring down prices. The trouble is that most of our inflation is rooted in the pandemic, which led to a shift in spending from services to goods (raising demand) at the same time as it produced snarled supply chains and worker shortages (restricting supply).
The administration has taken a few steps, like releasing some oil from the Strategic Petroleum Reserve and working to iron out delays at ports. And it has talked a good bit about fighting against corporate monopolization and price gouging, but even many liberals think that while that’s good on the merits, it won’t have much short term impact on prices (here’s an alternative view from the Washington Monthly’s Paul Glastris). Biden is essentially taking something worthwhile he wanted to do anyway, and casting it as an anti-inflationary measure.
But to a great degree, we just have to wait for that imbalance between supply and demand to right itself. Which will take some time.

And Republicans? Most of their discussion about inflation doesn’t go beyond gleeful gloating, with content-free accusations that whatever bad is happening is obviously Biden’s fault.
If you press them for something resembling a policy idea, they’ll likely say “Cut spending!”, which they talk about in abstract terms as though doing so won’t impose pain on anyone. But the spending cuts they want are precisely those that will impose pain — just on people they don’t particularly care about. They’d never consider cutting spending on weapons systems (Congress just passed a $768 billion defense bill backed by nearly every Republican), but they’re eager to slash food stamps or Medicaid.
The one actor who can do a lot to cut inflation is the Federal Reserve — but what it will do isn’t painless either. It’s reducing the amount it spends on government bonds (“tapering”), and will raise interest rates. The goal is to do it gradually and gently so as not to trigger a recession, but the whole point is to slow the economy down, which could mean purchasing lower inflation at the price of higher unemployment and weaker wage gains.
But you won’t hear politicians say outright that the solution is some combination of waiting for things to work themselves out and making the economy a little worse so people will spend less money. Nobody wants to be quite that honest.