Although US President Joe Biden has now made inflation his top economic policy priority, his administration’s efforts to alleviate the problem have been ineffective and even counterproductive. As if that wasn’t bad enough, most of his recent actions run counter to stated environmental and climate goals.
WASHINGTON, DC – Inflation has become a hotly contested political issue around the world. In the United States, CPI rose at an annual rate of 8.6% in May, and EU inflation is not far behind. The root cause of the problem is that too much money is chasing too few goods.
Consumers saved more than usual as they cut spending during the COVID-19 pandemic, then increased their purchases after lockdown restrictions were lifted. But shipments picked up more slowly because it took time to ramp up production again and because many workers were still getting sick. While supply shortages and labor shortages continued to constrain output levels, rising budget deficits and continued ultra-loose monetary policy continued to put downward pressure on prices into 2022.
Now US President Joe Biden says his top priority is to “reduce inflation”. However, in a recent speech on the subject, the Washington Post Notes that he “meddled with oil companies and shipping conglomerates” and accused them of “chasing excessive profits instead of lowering prices to consumers”. Not only have the oil companies failed to increase production, but “the shipping cartel,” Biden claims, has acted as an oligopoly and “increased their prices by as much as 1,000%.”
Although the fight against inflation must be largely carried out through monetary and fiscal policy, there is much the government could do to ease inflationary pressures. But scapegoating specific sectors is not the answer. In fact, the government risks adding more inflationary pressures to the mix. With widespread expectations of the world moving away from fossil fuels, oil majors are unlikely to invest in additional capacity. And even if they increased investment quickly, it would be a long time before production could ramp up. More investment, the production of which takes place years later, would increase today’s inflationary pressures.
Other efforts to lower prices at the pump have also been misguided. For example, the Biden administration has waived environmental regulations to add more ethanol to gasoline, claiming it will lower fuel prices in the summer. However, a higher proportion of ethanol reduces a vehicle’s fuel consumption. Motorists who drive the same route as they would otherwise have to face higher costs. To make matters worse, increased demand for corn (the grain used to make ethanol) will increase corn prices, prompting farmers to shift more land from wheat to corn production, and food prices overall continue to rise.
On the shipping front, more competition would certainly lower prices in the long run. But the real problem is that the centuries-old Jones Act prevents foreign ships from competing with domestic vessels for maritime traffic between US ports. Foreign ships arriving in US ports are required by law to unload their cargo, and trucks must then be matched with the containers. These unnecessary processes have caused port congestion and delays. And these delays have further increased costs for companies whose operations have been disrupted by the unavailability of critical inputs.
Subscribe to Project Syndicate
Enjoy unlimited access to the ideas and opinions of the world’s leading thinkers, including long reads, book reviews, thematic collections, short-form analysis and predictions, and exclusive interviews; each new edition of the PS quarterly Magazine (print and digital); the whole hp Archive; and more. Subscribe now hp Bonus.
American-built ships are estimated to be six to eight times more expensive than Asian-built ships, and American crews are paid three to four times more than their counterparts on foreign ships. But US shipping companies don’t have to worry about this lack of competitiveness because they are shielded from foreign competition. Ultimately, the cost of this protection is borne by US consumers. Higher-cost ships manned by more expensive crews tend to increase transportation costs between ports, forcing more cargo to be shipped to its final destination by truck or rail, both of which cost more than ship-to-ship shipping.
Obviously, relaxing or repealing the Jones Act would increase competition and reduce costs. And that’s hardly the only option available to the Biden administration. For example, by removing former US President Donald Trump’s tariffs, Biden could increase the annual purchasing power of the average American household by an estimated $797.
Similarly, raising the cap on the number of foreign workers legally entering the United States could have removed important bottlenecks. During the recovery from the pandemic, employers have complained that they are not finding enough workers with the right skills. If the foreign-born US population had grown at the same annual rate over the past three years as it did between 2010 and 2018, the US workforce would have 1.6 million more workers today, allowing companies to fill vacancies faster and increase the Decreasing shortage caused by delays in delivery.
The Biden administration could also have removed tariffs on solar panels. Instead (after much debate) tariffs were merely suspended for two years, resulting in an estimated 100,000 job losses and a reduction in the number of solar panels expected to be installed. Even America’s catastrophic infant formula shortages could have been greatly alleviated if more imports had been allowed and if states had not been granted monopoly production rights within their borders.
The Biden administration not only misidentified the sources of inflation; it even increases inflationary pressures. As if that weren’t bad enough, many of its recent actions — ethanol requirements, increased oil production (when possible), tariffs on solar panels, more carbon-intensive trucking and rail travel — are detrimental to its stated climate and environmental goals.
Inflation reduction and environmental improvements are desirable goals. But achieving them requires open acknowledgment of the contributing factors and realism in finding means to improve them. Unfortunately, that hasn’t been the Biden administration’s formula so far.