How a Virus, Vladimir Putin, and a Bunch of $1400 Checks Jacked Up Inflation
PLUS: Vive la Coco!
For the past several months, a White House-led team of economic specialists has marked each day in the same way: With a painstaking, state-by-state examination of gasoline prices and the intricate market forces pushing them relentlessly upward.
Senior officials and others close to President Joe Biden view those prices as the cost that most directly affects voters’ everyday lives, and therefore their perception of the economy as well. As such, Biden and his top advisers fixate on them with an intensity that some aides describe as obsessive. White House chief of staff Ron Klain has grown particularly absorbed by the issue, checking the average price of a gallon of gas every morning. He’s lamented that it’s the one item everyone knows the cost of because gas station billboards are so ubiquitous throughout the country.
“Could they advertise anything else?” Klain rhetorically, and ruefully, asked one recent visitor.
The White House’s focus on gas prices is bred from two sobering political conclusions top officials have made. The first is that they have little control over the problem. The second is that as prices rise at the pump, so do Democrats’ odds of a midterm wipeout — especially as the average U.S. gallon of gas hits fresh record highs.
The price of gas—which reached a record average price of $4.62 per gallon in the United States this week, which is $0.46 higher than it was a month ago and 52% higher than it was a year ago (remember when gas was dirt cheap during the pandemic because no one was driving anywhere?)—has become the public’s barometer of inflation. Klain is right: It is the one commodity nearly every American knows the price of, and it is through the roof.
The double whammy is that the price of gas affects the price of most consumer goods, since the cost of transporting goods to factories or stores becomes more expensive as the cost of fuel rises. For example, according to CNBC, the price of consumer goods increased 8.3% from April 2021 to April 2022. Food prices rose 9.4% from a year ago, with eggs (+10.3%), milk (+3.1%), and chicken (+3.4%) rising rapidly in price over just the past month. (The price of some foods, like vegetables and beef, have declined slightly in that time.)
Americans can’t escape higher prices these days. The Federal Reserve, which measures inflation using the Bureau of Economic Analysis’s Personal Consumption Expenditures Price Index, found prices increased 6.3% in April 2022 from a year ago. The silver lining: That was down 0.3% from March. Take good news when you can get it I suppose.
FiveThirtyEight recently polled 2,000 Americans and found 52% of respondents named inflation as the most pressing issue facing the country (see below). Given a list of issues to simply identify as important, inflation came out ahead, and it wasn’t even close. Even as more Republicans than Democrats singled it out, party affiliation didn’t matter: Inflation is clearly the issue on voters’ minds.
I won’t pretend to be an expert on the economics of inflation. What I do know about it is mostly a matter of political history, and because inflation has generally been low for all but the first 5-6 years of my life, I also have little personal experience with it. I think, however, I have read enough on the subject over the past few months to make some sense of what’s going on.
Our current bout of inflation is a direct result of the pandemic and policymakers’ efforts to counter what could have been its utterly devastating economic effects. As I’m certain you recall, when the pandemic hit, much of the country shut down. To prevent an economic collapse, the government pumped a massive stimulus into the economy in the form of non-repayable business loans and direct cash assistance to households. This saved the economy: While some businesses struggled and couldn’t weather COVID’s storm, the overall economy stayed afloat and remained surprisingly robust. That lifeline also enabled many businesses that otherwise would have failed during the first year of the pandemic to get back on their feet once vaccines became widely available.
All that economic stimulus came with a cost, however. Because there were fewer opportunities to spend during the pandemic, many Americans managed to save money during lockdown. (Oxford Economics recently estimated Americans saved $2.5 trillion over the course of the pandemic but have only spent $40 billion of that.) While some of the stimulus was pumped back into the economy during the pandemic, a lot of it ended up padding savings accounts, which has created a reservoir of cash that has gradually been draining into the economy and increasing inflation.
In particular, many economists have concluded Biden’s American Rescue Plan, which provided $422 billion worth of $1,400 checks to households in 2021, ended up overheating the economy. At the time, most believed the biggest mistake policymakers could have made was to under-stimulate the economy and generate an anemic recovery, as happened in 2009 in response to the Great Recession. It wasn’t a bad idea: Many Americans were still struggling to get by as a result of the pandemic, but in retrospect, the bill should have been targeted more toward those who needed it. (Admittedly, my political instincts told me a broad-based stimulus would gain wider acceptance by the American public than a narrowly-tailored one. Polls supported that hunch—78% of Americans approved of the plan—but we’re paying for it now and any political benefits Biden hoped to gain from it have vanished.)
The way all that money has been spent has also affected inflation. Originally, Americans spent most of their money during the pandemic on consumer goods and household items, which makes sense if people are boxed up in their homes with nowhere to go and surplus money on hand. That created a demand (and in some cases, a shortage) of those goods, which drove up their prices, and so far, consumers generally have shown a willingness to foot that bill even if they’re not happy about it. More recently, however, retailers like Walmart, Target, and Amazon have reported drops in profits while spending on items related to travel (i.e., flights, hotels, amusement park tickets, etc.,) is up. Home sales have also slowed down. This shift in spending habits raises the possibility there may be some inflationary relief in sight this summer as sectors of the economy that struggled during the pandemic (namely anything that has to do with “going out”) may begin siphoning off some of that extra cash that has been flooding the “staying-in” market. (It needs to be noted, however, that the bottom 20% of wage-earners have already spent whatever money they managed to save during the pandemic. If their wages aren’t keeping up with inflation, they may be struggling to get by at the moment.)
That’s the demand side of the problem. On the supply side, because many factories chose not to operate at full capacity during the pandemic due to health and safety protocols, fewer goods were produced. High demand and low supply will most definitely raise prices. Most expected this problem to ease as regular production resumed, but China’s difficulty in dealing with COVID this year is extending this problem. For most of the pandemic, the Chinese government was able to contain COVID outbreaks, but Omicron and all the new variants undermined those efforts. China has responded by putting massive segments of its population under lockdown and shuttering factories. Consequently, fewer goods and parts (most notably microchips used in automobiles) are being manufactured. Complicating all this are supply chains that are either lacking the economies of scale to operate efficiently or the dock workers and truck drivers needed to unload and transport goods.
There was some hope at the beginning of the year that a lot of these issues would get ironed out and the economy would return to normal. As mentioned earlier, the new COVID variants (and China’s response to them) messed up that plan, but so did Russia’s invasion of Ukraine. To deprive Russia of the cash it needs to wage its war, European nations have tried to ween themselves off Russian oil exports. That jacked up the price of oil, though (and there’s some indication Russia is weathering the market disruption just fine, as it still sends oil to China, only now at a higher price, although time may eventually tell a different story.) Additionally, because Ukraine is a global breadbasket, Russia’s invasion is driving up the price of food. Many countries rely on Ukrainian agricultural products to feed their people, but Ukraine is struggling to get its crops to market. Part of Putin’s strategy in Ukraine appears to be to deny Ukraine its ability to export food in order to put political pressure on Ukraine’s trading partners to accept a resolution to the crisis on Russia’s terms. If the crisis is prolonged, however, many countries won’t be able to afford the food, which could prove catastrophic.
That’s the basic essence of the problem we’re dealing with today: An overstimulated economy that is still out-of-sorts due to the pandemic, a Chinese economy that remains crippled by COVID, and an immensely disruptive war in Ukraine. So given these factors, what can we do to fix our inflation problem?
Some of the factors will be difficult to address head on. We can’t vaccinate China’s population, and worries about inflation stemming from Russia’s war in Ukraine have to be balanced out against other strategic concerns. Some argue we could bring down the price of gas by drilling new wells and completing pipelines here in the United States, but it would take years to bring those operations online. (Those who insist we’re now paying the price for not expanding domestic oil production should remember we’re also now paying the price for not developing alternatives to fossil fuels.) Additional measures like tapping the strategic oil reserve or suspending the gas tax would only put a dent in the price of gas. Western governments have reached out to Middle Eastern petrostates to see if they would be able to supply Europe with fuel; they appear willing to pump more oil but it remains to be seen how quickly they can deliver their product to the continent or if doing so would bring down gas prices.
There are other actions the government could take to lower inflation, but it doesn’t appear the political will is there to do so at the moment. Biden could eliminate the tariffs the Trump administration placed on Chinese imports. Doing so comes with the risk of Biden looking “soft on China,” however. It also isn’t clear how beneficial it would be to end the tariffs. The Peterson Institute for International Economics estimates doing so would only lower inflation by 0.3% (although possibly up to 1% if those gains are extended to American-made goods.)
Another step some have recommended is allowing more migrant workers into the country. Many industries, particularly in food production, are reporting a shortage of workers for positions immigrants typically fill. This is putting upward pressure on wages and limiting production capacity. Migrant workers could address this problem. The economics of that plan seem dubious to me, though. Would inflation really be brought under control by introducing more consumers to an economy that’s already short on goods? I don’t know. Having said that, though, as a moral matter, I support making it easier for people to immigrate to the United States. I just don’t want them exploited once they get here, and some of the tone of this argument has an exploitative vibe to it. Reducing inflation also has to be done within the context of paying people decent wages and providing them with decent working conditions.
Liberals have argued inflation is a byproduct of corporate price-gouging. They point to soaring business profits as evidence CEOs are padding their pockets while the rest of us pay higher prices at the pump and during Walmart runs. But as Catherine Rampell at the Washington Post points out, prices (and, in turn, profits) should rise during periods of inflation, and there isn’t much evidence this period of surging profits is any different from what goes on in the American economy all the time anyway. I’m all for doing something about economic inequality in this country, but it doesn’t seem to make sense to me that inequality is a source of inflation right now when that problem has been around for decades. Still, raising taxes on the wealthy to vacuum up some of the excess money in circulation might help ease inflation.
That leaves us with what the Fed is able to do to, and what they can do is raise interest rates. Some argue the Fed identified the problem of inflation too late and are now moving too slowly to raise rates. At the same time, many are worried that raising rates would not only cool off the recovery but plunge the country into a recession. The goal is for the Fed to raise interest rates *just right* so that inflation is held in check without inducing a slowdown. They call this a “soft landing.” (My gut—and I can’t say I trust it all that much—tells me it wouldn’t be a bad thing to raise rates regardless because keeping them low would hinder our ability to counter a future economic downturn. Why not raise them when there’s an actual economic problem a rate hike would address?)
So what should the Fed being aiming for? Alan Blinder wrote an interesting article in the Wall Street Journal this week essentially arguing for a tempered approach to inflation. He points out the Fed can influence the money supply but it doesn’t have control over events in Ukraine or China. Wars and pandemics have their own effects on the economy, and should either end, it’s possible much of the pressure we’re currently feeling from inflation could lift. If we are too zealous in reducing inflation in the meantime, though, we could unnecessarily drive up unemployment when a correction beyond the Fed’s control is just around the corner. By his own estimate, then, Blinder thinks the Fed should aim for a 1-2% reduction in inflation, which is roughly the amount of inflation he attributes to excess stimulus. (The rest he attributes to the war and the pandemic.)
Blinder’s approach seems to make sense to me, especially when we compare the American economy to the other G7 economies. According to the June 2022 OECD consumer price index report, prices rose 8.3% in the US from April 2021 to April 2022, but over that same period of time, prices rose 7.8% in the United Kingdom (Brexit seems to be a factor there), 7.4% in Germany, 6.8% in Canada, 6.0% in Italy, and 4.8% in France (which has a 4% cap on increases in energy prices). Only Japan (2.5%) has dodged inflation. Western economies are running hot right now, and the United States is not alone in that regard. It probably is running hotter than in other nations, though, due to its generous stimulus, so at least initially it might be wise for the Fed to bring the American economy more in line with its western peers while hoping markets adjust to the shocks produced by the war in Ukraine and the pandemic.
In the meantime, we can be thankful we don’t live in Turkey or Venezuela, where, for reasons unique to those countries, prices are up 73.5% and 1,198% respectively over the past year. And let’s not sit on the positive aspects of the current economy, either: Unemployment is low, there are a lot of jobs available for workers right now, and wages are rising (although maybe not necessarily fast enough to keep up with inflation.) Still, inflation hangs like a cloud over the economy, and a lot of people are worried a recession—maybe one induced by the Fed to cool off the economy, maybe one generated by consumers who tighten their wallets to cope with rising prices—is looming. Hopefully prices stabilize before it gets to that.
Inflation causes economic pain, but there’s another reason to hope inflation eases in the near future: Voters have a tendency to punish political parties that preside during periods of inflation. Even though Biden and the Democrats certainly bear some responsibility for the current rate of inflation, it could be disastrous for voters to throw Democrats out of office and return Republicans to power at the moment given their recent history. I’m worried the economy is going to hang too heavily on people’s minds when they head to their voting booths this fall, though. Those White House advisors who keep their eyes on the price of gas aren’t just worried about their own job prospects; they also know the future of American democracy may depend on how agitated voters get while refueling their cars.
Signals and Noise
They will bend over backwards to blame anything but guns:
Don Trump, Jr.: “If it wasn’t for the gun, this kid would be a well-adjusted, reasonable individual — he’d be a wonderful human being, right? He wouldn’t have done the exact same thing with a bat, or a bomb, or some sort of improvised device, or a machete?” Or a candlestick or a lead pipe or a rope or a slingshot or a frying pan or a cattle prod or poison darts or nunchuks or a flamethrower or a Pez dispenser or a stuffed animal or a battleship or a Cruise missile or an android or a lightsaber or the Infinity Gauntlet. That’s the point, DJ: He did what he did because he could get his hands on a gun.
A week ago, Rep. Chris Jacobs, a Republican from suburban Buffalo, announced his support for a federal assault weapons ban and a limit on high-capacity magazines. Pretty reasonable idea. Within a week, pressure from his state party and Don Trump, Jr., compelled him to end his re-election campaign. (Follow-up article: “What Makes a Republican a ‘RINO?’” by William Saletan.)
Last week, a Republican legislator said his constituents needed an AR-15 to protect their property from wild boars. This week, from Rep. Ken Buck: “In Colorado, an AR-15 is a gun of choice for killing raccoons before they get to our chickens. It is a gun of choice for killing a fox.”
Must-Read Article. By Susie Linfield, for the New York Times: “Should We Be Forced to See Exactly What an AR-15 Does to a 10-Year-Old?” (Then read Charlie Sykes at Bulwark+: “What the AR-15 Does to a Child’s Body”) Linfield’s article focuses on whether or not photographs of the victims in Uvalde should be made public, taking you through the arguments on both sides. (Remember, it was a photograph of Emmett Till’s mutilated body that finally made the nation reckon with lynching.) Sykes explains precisely why a wound from an AR-15 is so lethal. Both reach the same conclusion: At the least, legislators should be forced to view the photos.
Trump Watch 1: Jonathan Swan notes Trump appears to believe Gov. Brian Kemp’s 50-point victory over David Perdue was not legitimate.
But it sure is weird how Republican lawmakers running in primaries this year haven’t raised any questions about the legitimacy of the vote counts in their races.
Trump Watch 2: At a rally in Wyoming this week, Trump called Rep. Liz Cheney “one of the nation’s leading proponents of the insurrection hoax.” He continued, “Look at the so-called word insurrection, January 6 – what a lot of crap.”
You know something is messed up when the vice president’s chief of staff has to warn the Secret Service that the President of the United States might turn on the VP and put his life in danger. That’s what happened on January 5, 2021.
Mo Brooks—the first speaker at Trump’s 1/6 rally and one of the most ardent proponents of Trump’s 2020 Big Lie—is back from his political death. Trump endorsed him in 2021 for Alabama’s open senate seat, then unendorsed him this year as Brooks’ campaign faltered. (Brooks said it was because Trump wanted him to work to remove Biden from office, which Brooks wasn’t willing to do.) Brooks’ polls numbers have recovered, however, perhaps because there isn’t another viable MAGA alternative in the race. He appeared on FOX News Sunday last week declaring his opposition to gun control because the people need guns in the event their government becomes dictatorial:
Um, I’m not sure we’re on the same conceptual wavelength here, Mo! I’m guessing what he actually means is he wants the people to have guns in the event they want to get dictatorial. Brooks may be more dangerous than Trump; they’re both clowns, but Brooks has resolve. Also, did you watch that clip through to the end? It gets kind of weird because he ends up “speak[ing] from personal experience.” He was at that congressional baseball practice a few years ago that a gunman attacked. In the interview, Brooks called himself the target of an “assassination.” Rather than regulate guns, he wants to end the “motivation” that drives these horrific people to do what they do. But where, Mo, would someone ever get the idea to use guns to attack the government and those who serve in government?
More of Brooks from that same interview. It seems he’ll stand by Trump’s Big Lie (“he was robbed”) even after Trump abandoned him. When it comes to Trumpism, Brooks is out to prove he’s more Trump than Trump is.
Trump Watch 3: From Ryan Lizza, for Politico: Trump’s new target is transgender people, and it’s a topic his supporters rally around. Writes Lizza, “There is a cynical strategy at work here. Targeting marginalized groups for ridicule forces more responsible actors to stand up for them. As Democrats have learned, Trump’s goal is to get them to spend their time outraged and defending the targets of his attacks rather than talking about their own message.” But there is a potent way to fight back against it: Tell Trump to stop picking on vulnerable people. (“We have families out there trying to find a way to make ends meet, transgender kids trying to find a way to make it through the school day without getting picked on, seniors trying to find a way to pay for their prescription drug bills, and the last thing they need is a bully like Don Trump making it harder for them to get by. Rather than punching down, why not lift people up for once?”)
The Ohio House has passed a law banning transgender students from playing high school sports and requiring genital exams in the event of a dispute. In 2021, Ohio’s high school athletic association reported there were 11 transgender athletes playing high school athletics.
More LGBTQ panic: By Mia Jankowicz, for Business Insider—“Marjorie Taylor Greene Groundlessly Claims Straight People Face Extinction Within 150 Years Because of LGBTQ+ Education”
Rep. Billy Long (R-MO): “When I was growing up in Springfield, you had one or two murders a year. Now we have two, three, four a week in Springfield, Missouri, so something has happened to our society and I go back to abortion.” Well that took a turn! By the way, I checked, and there were 26 homicides in Springfield, Missouri, in 2021. That’s more than double what it was two years earlier and certainly more than a city its size should record, but also not exactly 2-4 per week, Billy!
BTW, here’s Billy Long’s platform for his Senate primary:My platform 1.) Get to resign 2.) Have appoint as VP 3.) Get to resign 4.) Finish 5.) Finish the wall
Might step one involve the phrase “pretty please?”
Rep. Louie Gohmert (R-TX), speaking on Newsmax: “If you’re a Republican, you can’t even lie to Congress or lie to an FBI agent or they’re coming after you.”
By Peter Smith and Deepa Bharath, for AP: “Christian Nationalism on the Rise in Some GOP Campaigns”
Florida has passed some of the strictest abortion laws in the country. It also ranks third behind New York and Illinois in the number of abortions performed per capita. What’s going to happen there if Roe v. Wade is overturned?
Florida Gov. Ron DeSantis used the threat of a $27.5 million fine to force the Special Olympics to rescind its COVID vaccine requirement for the games it has scheduled this week in Orlando. DeSantis also vetoed a $35 million line item that would have funded a new practice facility for MLB’s Tampa Bay Rays after the team communicated their support for gun control. (Not that I support welfare for professional sports teams; just noting how much of a bully DeSantis is.)
Did you hear the one about the suburban Chicago school district that was going to grade students based on their race? It turns out the “local” news story wasn’t true, but plenty of people bought it. See “Anatomy of a Fake” by Don Moynihan.
The nationwide shortage of baby formula is getting worse.
By Caitlyn Owens, for Axios: “Omicron is Outrunning the Vaccines Designed to Fight It” (“Efforts to update COVID vaccines can't seem to keep up with changes in the virus itself. New variants appear to be even more immune-resistant than the original Omicron strain, raising the possibility that even retooled vaccines could be outdated by the time they become available this fall.” Conclusion: “Three doses of the existing vaccines are still very good at preventing severe disease and death, despite the drop in effectiveness against infection….Keeping up with a virus that is evolving this quickly is inherently in tension with collecting the data traditionally required to make big regulatory decisions. In this case, the implications are likely relatively minor. But if a more dangerous variant that requires new vaccines emerges, the current situation suggests that very tough choices will have to be made.”)
RealClearPolitics Polling Averages (Favorable/Unfavorable)
Mitch McConnell: 25.8%/56.0% (-30.2%)
Nancy Pelosi: 34.6/56.8 (-22.2)
Chuck Schumer: 30.0/46.8 (-16.8)
Kevin McCarthy: 28.0/44.3 (-16.3)
Kamala Harris: 39.2/51.3 (-12.1)
Joe Biden: 43.5/51.2 (-8.6)
Donald Trump: 43.9/50.9 (-7.0)
Garbage Time: Vive la Coco!
(Garbage Time theme song here)
Just a brief note here, but American Coco Gauff finished second at the French Open Saturday. Ranked #18 in the world, Gauff hadn’t dropped a set all tournament until she lost two in a row to 2020 champion Iga Świątek of Poland. The final score was 6-1, 6-3; Gauff never found her groove and the match ended just over an hour after it started. Świątek is playing tough right now, so while Gauff had hoped for a better showing, it’s nothing for her to be ashamed of. Learn from it and get better, which she can really devote herself to doing now that she just graduated from high school. And I mean just graduated:
Gauff will be playing for the women’s doubles title on Sunday. I’m pulling hard for her because I saw her play a singles match here in DC at the Citi Open back in 2019. She’d just finished a run at Wimbledon, so the grandstands were packed with fans hoping to see the next phenom in action. She’s got a game that translates to both clay and grass, so she could be a champ soon.
On the men’s side, Rafael Nadal is hoping to add to his record 21 Grand Slam singles titles Sunday morning against #8 Casper Ruud of Norway. Nadal, the undisputed king of clay, has won the French Open thirteen times, so I wouldn’t bet against him. He already took down Novak Djokovic in a classic quarterfinal and found himself in an evenly matched dogfight with Alexander Zverev before Zverev rolled his ankle and had to withdraw. At that point, the match had been going on for three hours and Nadal and Zverev had only made it to 6-6 in the second set (the first set went to a tiebreak.) Ruud has to hope Nadal is exhausted, but I’ve seen an exhausted Nadal find a way to triumph. Maybe Nadal won’t be as motivated to win knowing the chip won’t be going to Djokovic if he loses, but it’s also hard to imagine he’d let an opportunity to go up two titles on Djokovic slip away at the Grand Slam venue he has dominated for the past two decades. We’ll know within a matter of hours.