President Biden says he’s doing “everything within my power” to lower inflation. But he’s not. What he’s really doing is making a calculated bet that inflation will break without forcing him to abandon some key political principles.
If he’s right, his ratings will improve, along with the odds for Democrats’ electoral success. If he’s wrong, Democrats will likely suffer a wipeout in this year’s midterm elections, with a possible recession looming over the second half of Biden’s presidential term.
inflation surged to 8.5% in March, the highest level in more than 40 years. By now, everybody knows why. Gasoline prices are up nearly 50% year-over-year, while home energy prices, for heat and electricity, are up 15%. New and used cars are still unusually expensive. Groceries cost 10% more than a year ago. Supply-chain kinks and turbocharged demand still leave a shortage of many goods, pushing prices up.
Biden is doing, well, something. He has authorized the largest-ever release of oil from the US reserve, starting in May, to put more supply on the market and lower prices. He’s suspending a clean-air rule that ordinarily limits ethanol use in the summer, which might lower gas prices in the Midwest by a few cents. He’s also bashing energy firms and other big companies for profiteering, even though there’s little evidence this is happening and Biden’s scolding wouldn’t change anything if it were.
Here’s what Biden isn’t doing
There are also some things Biden is not doing, as Yahoo Finance has been reporting during the last couple of weeks. Biden could consider some of the requests from oil and gas producers for speedier approval of infrastructure projects, such as pipelines, needed to move oil and gas from domestic drilling fields to refineries. He could back away from climate reporting rules such as those the Securities and Exchange Commission and other federal agencies want to impose. These types of moves wouldn’t automatically bring a flood of new domestic energy to market. But they could signal to lenders and investors that there will be fewer barriers to long-term energy projects, which would lower capital costs and, in turn, create more of an incentive for domestic drillers to produce.
The Peterson Institute for International Economics recently published research showing how Biden could reduce the inflation rate by 1 to 2 percentage points by lowering or repealing tariffs on imports, including the ones Donald Trump imposed on Chinese goods in 2018 and 2019. One or two percentage points might not sound like a lot, but PIIE estimates it would save the typical family around $800 per year. That’s probably a lot more than Biden’s oil release or ethanol waiver will accomplish.
Biden isn’t doing those types of things because they’d conflict with other longstanding priorities. Biden clearly doesn’t want too much new oil and gas production, because he’s pushing hard for green energy that will displace fossil fuels. He only wants enough new production to bring prices down to tolerable levels, for a while, so voters will take a more charitable view of Democrats who are in charge of the government for at least another few months. Too much oil and gas would perpetuate our addiction to cheap energy and make the green-energy transition harder.
Biden seems unlikely to undo the Trump China tariffs because they give him some leverage over China in future negotiations related to climate policy or human rights or maritime security. Biden also wants to promote more unionized manufacturing in the United States, and tariffs that make foreign goods more expensive are helpful.
Biden’s policies on green energy and domestic manufacturing are inherently inflationary, because they depend on the elimination of the lowest-cost alternative in favor of something that may be better—less carbon, more US jobs—but probably not cheaper. American-made stuff simply costs more than Chinese-made stuff, because US labor and regulatory costs are higher. Biden may be right when he says the widespread availability of green energy will ultimately lower costs, but we’re nowhere near that now.
Instead of using everything within his power to lower inflation, Biden is taking modest steps on the margin—while betting that inflation will decline on his own. This might seem foolish, given that the White House, the Federal Reserve and many other forecasters were completely wrong last year when they said a spurt of inflation would be temporary and not terribly painful.
Inflation may be easing
But the turnaround those forecasters expected may be underway, at last. Manufacturing output was surprisingly strong in March and is firmly above pre-pandemic levels, a sign COVID disruptions and supply-chain shortages are finally running their course. Car manufacturing rose substantially in March, as automakers began to get a grip on semiconductor shortages. New and used-car inflation is still high, but it has started to come down and will probably fall further as comparisons with elevated year-ago levels become more favorable.
Consumers are also finally shifting their spending patterns back toward services, which has taken longer than economists expected but is a crucial sign the economy is returning to normal. Airline bookings are strong, for instance, even though surging jet-fuel costs are pushing airfares higher. People cooped up for the last two years obviously want to get back to traveling and going out. Inflation in the services sector might actually be welcome, because some of those prices, while up sharply during the last year, are still below pre-COVID levels. As consumers spend more on services, they’ll spend less on goods, and the softer demand will lower inflation on things that have gone up the most during the last two years.
Timing is a huge risk for Biden. Economic conditions around May or June of an election year often determine how voters will choose in November. Inflation could be easing noticeably by the fall, but might still be uncomfortably high by early summer. If Biden is going to do more to combat inflation, he does not have long to decide.
Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.Follow him on Twitter: @rickjnewman. You can also send confidential tips.