Asked about his plan for a dangerous opponent, boxer Mike Tyson once said: Everybody has a plan until they get punched in the mouth. President Biden has proposed various plans to deal with inflation.
Prices rise when goods become scarce or the money supply expands rapidly. Pandemic-induced holdups in the supply chain have caused scarcity; the Federal Reserve has increased the money supply more than 40% in the past two years alone. After spending months dismissing inflation as transitory, the administration is now taking it seriously.
But American consumers have been hit with dizzying combinations of rights and lefts. The rights come from real shortages or surpluses. Prices are signals wrapped in incentives. Couches, cars and Christmas gifts are expensive because shipping and transportation are months behind. Attempts to manage prices that dont relieve the underlying scarcity are worse than doing nothing. The hit from the left is the prospect of an economic plan consisting of taxes, subsidies, price controls and attempts to manage shortages.
Economists across the ideological spectrum agree that government plans to manage prices havent worked. But the notion lives on, with the hope that this time will be different. In the 1970s, when a federal board was organized to manage price increases, the results were massive profits for a few corporations and the loss of jobs and consumption choices for the middle class. Any Biden administration plan for controlling prices would clash with a key progressive initiativeraising workers wages. Keeping wages low while recruiting millions of workers for the holiday shopping season is the implicit goal Mr. Biden has set for his anti-inflation plan.
On the money-supply front, the Fed is making noises about backing off on aggressive expansion. But a CNBC report estimated that more than $5 trillion in cash is sitting in corporate coffers and bank accounts. Middle-class savers who have been holding cash will see its value eaten awayeffectively a tax on the middle class, which progressives promised not to levy. Some of the rich will put their cash in real estate, heightening shortages of housing.
Whatever you think of Congresss bipartisan infrastructure initiative, its timing is unfortunate. It will be sharply expansionary on the fiscal front, with new demands on labor markets straining to find workers. All that cash from Fed monetary expansion is out there ready to be spent. Mr. Bidens Build Back Better plan would make these problems worse by injecting trillions into the economy.
Things arent yet so bad that a plan cant make them worse. In a recent paper for the Law and Economics Center at George Mason University, I evaluated one policy for managing pricesa top-down approach directed from Washington. I found that such plans are thwarted by information problems (officials dont know enough to direct resources or decide prices) and incentive problems (the power to decide which prices will be allowed to increase, and which will be held down, will be corrupted by politics).
Were already stuck with supply-chain bottlenecks and too much cash. A government price plan can only make things worse. Aint that a punch in the mouth?