The Federal Reserve has effectively doubled its rate hikes five times this year. The rationale is that higher interest rates will reduce demand by lowering inflation, especially in interest rate sensitive sectors such as home and car purchases. The newly elected Republican House majority will try to cut demand even further by exerting strong pressure to “cut spending.” The recession caused by these policies would serve Republican political ends, and they know it.
The Fed and the economists and pundits who support these policies, if their economic rationale is to be taken at face value, are looking from the wrong end of the telescope. There is none. They are mainly supply shocks in critical sectors such as energy. These post-coronavirus chaos are being caused by the OPEC oil cartel, the war in Ukraine, and Russia’s attempt to use energy to force her EU member states to sit on the sidelines of this war.
Declining global energy supplies and the world’s vulnerability to OPEC decisions will not be resolved by raising interest rates or cutting spending. We will not make energy products such as gasoline for cars and trucks, home heating, power generation, natural gas for industry, diesel for trucks and heavy equipment, fertilizers, kerosene and propane available at lower prices. Worse, soaring energy prices are increasing the cost of nearly every good and service Americans buy.
Energy price inflation is nothing new. The OPEC cartel cut oil production in his 1970s and was the main cause of his decade of very high inflation. Are you really serious when members of the Federal Reserve and deficit hawks claim that the way to address these energy supply problems is to raise interest rates and reduce demand for energy products?
Supply problems have also pushed up the prices of non-energy products. Rising interest rates and cutting spending will not reduce inflation in dairy, milk, cheese, butter and ice cream. The price hikes for these products are a result of the pandemic’s decline in dairy herds and will take time to resolve. Wheat product and feed prices have been affected by drought and flooding on several continents, and of course the oil cartels and war in Ukraine. How will you encourage higher interest rates and lower spending to help farmers rebuild?
The scarcity of some types of computer chips and other high-tech components in our rapidly changing economy begs the same question. Will rising interest rates and cut spending increase or decrease investment in high-tech areas? What about outdated transport infrastructure, power plants and power grids? President Biden is pouring government money into efforts to increase production and investment in these areas. A recession designed by the US Federal Reserve (Fed) and Republicans in Congress will reduce private sector investment in these sectors. It is not added to the supply.
There are other areas where domestic price manipulation is causing inflation. Solutions in these areas require tough political decisions, not interest rate hikes or spending cuts. Healthcare costs in the US are rising every year, and it costs him at least a third more than in Europe and Canada. Healthcare is dominated by local vendor monopolies, costly and medically ineffective insurance and payment arrangements. We all know that healthcare in America is a nightmare of expensive paperwork, but the politics of attacking these cozy price-fixing arrangements is mind-boggling.
Executive compensation is another area that needs fixing. Again, everyone knows it. Management is building up the board and visibly increasing their salaries and benefits while complaining about high labor costs. The Federal Reserve’s broad monetarist approach helps divert the public eye from the outrageous abuses of these board price manipulators.
The solution would be to reform corporate governance to eradicate inflationary self-dealing, but Republicans don’t want the government to let corporations do it bluntly. As such, they look to interest rates and government spending as sources of inflation. It stops the public from blaming wealthy and law-aware criminals. Suffice it to say that early in our history, corporations were given extraordinary powers by governments not only to enrich their boards and shareholders, but also to achieve public ends.
College tuition is another area where inflation is skyrocketing due to facility gilding and huge paydays. Rising interest rates and cutting spending will do little to bring down these steadily rising costs. It will take political action.
President Gerald Ford convened the Whip Inflation Now (WIN) conference in November 1974. All the professors and business giants Ford had gathered told him he should risk a recession by raising interest rates and cutting government spending. A notable exception is Professor Otto Eckstein of Harvard University, who served on President Lyndon Johnson’s Council of Economic Advisers (1964-1966) and founded the famous early economic consulting firm Data Resources. . At the conference, Eckstein said the government should fight inflation by opening up industries whose prices were being driven up by government-sanctioned price-fixing agreements. By the mid-1980s, Presidents Ford, Carter, and Reagan had expanded the domestic oil, natural gas, electricity, automobile and related manufacturing industries, trucking, railroads, airlines, telecommunications, finance, and even retail. , has opened many of these sectors to increased competition. As a result, inflation was not a serious problem for 35 years until the OPEC cartel regained power.
The US must overshadow Eckstein’s approach to dealing with inflation today by attacking price manipulation and investing in alternative energy that is slowly being lifted out of OPEC’s control. We need to increase public and private investment in specific areas where inflation is a persistent problem, and strengthen public scrutiny of price-fixing arrangements that have pushed prices up. This is basically what President Biden’s infrastructure and anti-inflationary policies are aiming for, but the Fed’s monetarist policies undermine any smart thinking about how to increase supply.
We need to look to the far right of the telescope and focus on ways to increase supply. Inflation does not pretend to be an over-consumption problem that can be solved by creating a recession.
Dr. Paul A. London was a Senior Policy Advisor and Deputy Undersecretary for the Department of Commerce’s Bureau of Economic Statistics in the 1990s, Deputy Assistant Administrator for the Federal Energy Management and Energy Administration, and a Visiting Scholar at the American Enterprise Institute. rice field. A legislative assistant to Senator Walter Mondale (D-Minnesota) in the 1970s, he has served as a diplomat in Paris and Vietnam and published two of his books, including The Competition Solution: The Bipartisan Secret Behind American Prosperity. (2005).
