How Do We Fix Inflation?


 Financial FAQs

I said last week that: “Many of us remember when a gallon of gas was less the $2, or a quart of milk less than $1, or housing was last affordable in the 1970s. I remember the inflation surges in housing. What happened?”

So, Shouldn’t we as voters be able understand how to fix inflation such as we just experienced with the COVID-19 pandemic? That didn’t happened on November 5. Trump was able to convince most of his voters to blame someone rather than learn what needed to be done, and had already been done, to cure the problem.

It is now doubly important because if Trump raises tariffs and begins to deport undocumented workers on ‘Day One’ of his presidency as promised, inflation will soar again and the U.S. economy will quickly go into a tail spin.

Why couldn’t Trump voters see this? Their anger was fostered by an out of control social media catering to their own interest groups by elevating conspiracy theories and denigating scientific facts to keep their audience rather than what is good for most Americans and the American economy.

It has always been difficult to pierce the fog of propaganda and obfuscation that has dogged anything related to our economy because the U.S. economy is the most complex in the world with its competing mix of private and public enterprise needed to to make it work.

The retail Consumer Price Index (CPI) in the FRED graph above dating from 1980 is the eaiest way to understand why we had high inflation spikes and how long it took for it to return to normal.

Simply put, the spikes that hurt most Americans were due to supply shortages mostly out of our control. The 1980 spike was mainly because of an oil shortage that took a decade to reverse. In 2022 the other high spike was the COVID-19 pandemic that shut down supply chains and took approximately three years to recover.

It didn’t matter which political party was in charge—Republicans in 1980 and Democrats in 2022. Both parties had the tools to mitigate the inflation surges that took some time, as I said.

How were they solved? Both political parties used their financial institutions, mainly the Federal Reserve and Treasury Department, and did not disparage them as Trump’s MAGA supporters do as a matter of policy. Because they control the flow of money—regulating whether there is too much (inflationary) or too little (deflationary) money is in circulation to counter the supply disruptions.

But playing the blame game that has enraged so many working class voters doesn’t solve the inflation problem, though it did win enough workers to the Republican side. They now must prove they actually know something about its causes.

What will hinter any good faith effort to tame inflation is the maldistribution of the money supply. Too much of it is in too few hands, a hallmark of what has been called the second Gilded Age that has favored the wealthiest since the 1970s, and not ordinary workers dmaged most by higher inflation whose household incomes have stagnated since then.

We have working solutions to the inflation that has plagued the American economy for decades. But deporting undocumented workers and raising tariffs will raise inflation, since tariffs are a tax on imports, and fewer immigrants form the backbone of the supply sector (restaurants, transportation, retail, construction) that has been the backbone of this recovery. It will cause a labor shortage, which means fewer goods and services will be produced, thus raising the price of things, as well.

This is the most basic of Econ 101 priinciples, but Trump was able to fool his voters because there is a general ignorance of economic principles.

And our capitalist system hasn’t been helping the working class since the 1970s, as I’ve said in past columns. The increasing income inequality created an almost unstoppable anger that grew after decades of income loss for working class voters as more and more wealth was shunted upward creating ever larger budget deficits.

If we are able to reverse the income inequality with more progressive taxation policies that pay for a better social benefits, for instance, we might convince more voters to realize government isn’t the problem and inflation is really governed by the common sense rule of supply and demand.

They might then not choose someone who only knows how to blame but rather vote for real economic solutions to mitigate inflation.

Once Roosevelt created the New Deal in response to the Great Depression, governments began to work for ordinary Americans—from social security to a federal minimum wage, to workers rights. Only such a private-public partnership will help to cure our inflation problem.

Harlan Green © 2024

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen





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