Inflation, deflation and the presidency
To the Editor:
The economy of this great nation, and indeed, the world, is a huge thing that, like those supertankers and container ships that help keep it all running, does not change direction very fast or easily short of some major shock to the system.
This is why Presidents tend to get credit and/or blame for things their immediate predecessors did or put in motion.
There is also very little that a president can do to or for the economy without the help of Congress. That is because almost everything that will seriously affect the economy involves either spending money or collecting money (taxes), and Congress writes the budget. How closely that budget comes to what a president wants to do depends on whether or not the president’s party has a majority in one, both, or neither of the two houses, and by how much.
Inflation is more money in the marketplace chasing the same amount of goods, or the same amount of money chasing less goods, causing prices to rise. Prices going down is called deflation, and that scares economists and the managers of the Federal Reserve even more than inflation, because it is a sign or a pathway to recession and unemployment.
Keeping prices from going either up or down too fast is mostly the job of the Federal Reserve, over which the president has almost no control at all. So, who’s to blame for the inflation? Well, both Trump and Biden did things that contributed to it.
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Under Trump, the big ones were the huge tax cut (people and companies having more money to spend) and the deal with OPEC to cut oil production by 20% for two years which raised gas prices very quickly (it expired in 2022 after Biden took office).
Under Biden, it was mostly the spending on programs to keep families and businesses afloat during the COVID crisis, which was intended to prevent a severe recession with even higher unemployment and business failures. That appears to have worked fairly well, but at the cost of inflation, although much of the inflation was also due to shortages of things caused by breakdowns in supply chains.
There is one major item of inflation that neither of those presidents had much to do with — housing prices. The cause of that is that our housing industry has not been building enough units in the lower income parts of the market for a long time. Some of that may be a hangover from the financial crisis of 2008. But, whatever the cause, there is a shortage of homes on the market both for sale and rental. Competition for what is available drives up prices. Both candidates have spoken about that problem.
Harris has addressed it directly with proposals to both help new buyers, and programs to provide incentive for investors and builders to build more in the needed price range. That means spending money. If she is elected, she will send proposals to Congress, and Congress will do with and to them as it decides.
Trump has expressed the belief or hope that his deportation of a huge number of people will free up enough housing units to make a real difference. There are a variety of opinions on how well that might work, if at all. The money spending part would be in the deportation project. I don’t know of anything else he has in mind about housing costs.
Mr. Trump does have one plan that could be very inflationary, his plan for tariffs. He speaks as though he believes that the tariff is paid to our government by the exporting country’s government. This is not true. If he believes that, he is mistaken. The effect of a tariff is, and always has been, to increase the price of the imported item. The tariff is paid to the Customs Service by the importer, the business or individual who ordered the item from a producer in the other country. Customs then allows the shipment to go out into the country from the port of entry. If the importer is a business (usually the case) they add the tariff cost to the price of the item for the consumer. Who pays the tariff? We do, the American consumers.
Another inflation that grabs attention is gas prices. The price of gasoline is firmly tied to the price of oil, which is a world price. When the price of oil goes down below some level, producers, that is the ones who pump it out of the ground and go looking for it, whose costs of production are not covered by that price, cut or stop production. Then, the price goes back up. OPEC’s members can manipulate the price by increasing or decreasing production. A president has one tool other than deal making with them with which to affect oil prices. He (or, perhaps, she) can sell oil from the national petroleum reserve when the price is too high to bring it down a bit, or buy oil to replenish the reserve and increase the price when it is too low. The only way to get the price of gas at the pump below the level determined by the oil price at which producers cut back production is to subsidize somebody to maintain an artificially low pump price. Then the question is where that money will come from. Promises to drastically lower the price of gas need to answer that question.
I am not going to try to take up the much talked about subject of “Greedflation,” also known as “price gouging”, it is too complicated, both in history and the present, and this letter is already long.
I’ll close with a quote from the novelist Philip K. Dick: “Reality is that which, when you stop believing in it, doesn’t go away.”
Robert G. Wertzler
Franklin
