Originally published in the New York Times.
In an interview with Lester Holt of NBC last week, President Biden hewed closely to his talking points on inflation, which over the past 12 months has risen at its fastest rate in 40 years. “The reason for the inflation is the supply chains were cut off,” he insisted, as he has done several times before.
Well, no. That’s both simplistic and misleading.
For starters, the supply chains have not been “cut off,” just stretched. And supply issues are by no means the root cause of our inflation. Blaming inflation on supply lines is like complaining about your sweater keeping you too warm after you’ve added several logs to the fireplace.
The bulk of our supply problems are the product of an overstimulated economy, not the cause of it. Sure, there have been some Covid-related challenges, such as health-related worker shortages in factories and among transportation workers. But most of our supply problems have been homegrown: Americans have resumed spending freely, and along the way, they have been creating shortages akin to those in a shopping mall on Black Friday.
All that consumption has resulted from vast amounts of government rescue aid (including three rounds of stimulus checks) and substantial underspending by consumers during the lockdown phase of the Covid crisis. There has also been an unforeseen shift in what consumers are buying: With travel still sluggish and many people still wary of returning to entertainment venues, a hunk of purchasing has moved to goods — particularly “durables” like cars, electronics and building materials for housing — for which production and distribution capacity is limited.
It’s a classic economic case of “too much money chasing too few goods,” resulting in both higher prices and, given the extreme surge in demand, shortages. A spending increase of the magnitude we’re seeing — 25 percent on durable goods in 2021 over 2020, according to the Bureau of Economic Analysis — would have challenged the capabilities of manufacturers under the best of circumstances.
Much has been made, for example, about the very real shortage of semiconductors. But that gap has occurred despite manufacturers delivering a staggering 1.15 trillion chips in 2021, handily eclipsing the previous annual record. That looks to me like a demand problem creating a supply problem.
And yes, when chips are in short supply, auto companies must curtail production and prices rise. I just ordered a new car and had to pay well above the sticker price (and face an indefinite wait).
Among the ripple effects: a surge in used car prices, which are up 55 percent over January 2020 levels. Cars are not alone. Over that same period, furniture and bedding prices rose 19 percent and laundry equipment became 33 percent more expensive.
In this environment, shipping delays are hardly surprising. The Commerce Department reported last week that imports into the United States surged by almost 21 percent last year. No wonder that the volume of goods arriving at the port of Los Angeles hit record levels in 2021 — as did delays in unloading all the additional ships.
This is not to say that the current situation was easily foreseeable. While some economists warned of looming inflation, few anticipated the shift in spending and its effects. Also unexpected was the “Great Resignation,” the rise in people voluntarily leaving their jobs, as well as the decision by several million Americans to return to the labor force slowly or not at all as the pandemic waned.
The Great Resignation has created shortages of a different kind — labor shortages — in the service sector, both for businesses for which demand remains mixed (like restaurants) and those for which demand has increased during the pandemic (just try to get a plumber or an electrician to show up at your house). As a result, inflation in service prices, while more moderate than those in goods, remains higher than the Federal Reserve’s target of 2 percent.
Note to Mr. Biden: You can’t blame clogged ports for that.
What to do about all these shortages? Here again, Mr. Biden was misleading in his conversation with Mr. Holt. “We got Intel to come in and provide $20 billion to build a new facility,” he said, referring to a recent announcement by the chip manufacturer of a new semiconductor plant to come in Ohio.
Winning that new plant was a great accomplishment. But it’s not a solution to today’s problems; the plant isn’t scheduled to turn out its first chip until 2025.
The real solution is more complicated. Some shortages will ebb naturally on their own, as consumers, having sated their thirst for adding that extra room on their house, return to more normal spending patterns. Other shortages will take longer to moderate and will require robust action, particularly by the Federal Reserve.
For its part, the White House needs to be more honest as it rolls out initiatives. It has promised robust antitrust enforcement, but while that is long overdue, it will have no discernible impact on competition or prices for years. And the high prices of meat and hearing aids, both of which Mr. Biden has vowed to address, are not at the heart of the current problem.
The Biden administration needs to shift its approach. In particular, with the economy steaming along, it should make deficit reduction as important as its other initiatives. (Smaller deficits reduce net spending by government, thus helping offset demand by consumers.)
But here again, Mr. Biden has been disingenuous. His Build Back Better plan claims to be deficit neutral, but that assertion is made credible only by using the fuzziest math. Over the first five years, the plan would add about $750 billion to the deficit, according to an analysis of the Congressional Budget Office’s estimates. With this year’s fiscal gap estimated at $1.3 trillion, any new version of the plan should reduce the deficit substantially in its early years using honest math.
That’s how Bill Clinton pivoted after he took office in 1993: He unexpectedly raised taxes in his budget to address the pressing matter of the federal budget deficit. That decision served the country well — and ultimately also served him well.