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Here's what I mean when I say Biden should 'focus on the economy'
Inflation and shortages are mostly due to factors beyond the president's control. But not entirely.
As I told Politico this week, I am still rooting for the president. I complain because I want him to be more successful and more popular, and I believe a better rhetorical and substantive approach to the economy and especially inflation is the number one thing he needs to improve his position.
It’s clear the administration agrees with me that he needs to project agency here, because the president has been foregrounding the inflation issue in recent weeks, including at his press conference on Wednesday where he did a mostly good job talking about the economy.1
I also believe the president has material levers at his hand to improve supply and soften prices, even though most of the drivers of inflation are out of his control. So it’s important to talk in more detail about what exactly Biden should do about prices and shortages.
As the president has correctly noted, inflation can be reduced in two ways: through policies to reduce demand, like higher interest rates, or by increasing the productive capacity of the economy so supply meets demand. The Federal Reserve will handle the first part. The second part is where the president should act directly — though it’s important to differentiate between policies that can improve supply soon enough to matter for the next two elections, and (potentially quite worthy) policies that will increase productive capacity in the medium or long term but won’t pay political dividends soon.
Here are some things the president is doing, and some things he should be doing or should be doing better, to address the supply crunch, bring prices down, and make goods and services more available in a short enough time frame to matter politically:
Issue visas for more workers. A major driver of the labor shortage that restricts American business capacity and ultimately drives shortages and price increases is the sharp drop in legal immigration levels that began with the Trump administration's desire to curb legal immigration and accelerated with COVID-driven disruptions to visa issuance and global travel. As of November, monthly immigrant visa issuance was still 16% lower than pre-pandemic levels, even though the near-stoppage of visa issuance in mid-2020 has created a backlog of hundreds of thousands awaiting visa interviews and processing. Non-immigrant visas are down even more sharply. Biden is right to call on local governments to normalize operations (like schools), but that’s not in his direct control. He should direct his own State Department (which is in his control) to normalize operations and then exceed them so the visa backlog is cleared and American businesses have more workers available to hire.
Remove Trump’s trade restrictions. Kadee Russ at the Peterson Institute for International Economics estimates that eliminating the tariffs that President Trump discretionarily imposed on Chinese imports to the US would knock about 0.26% off the US consumer price index, assuming tariff costs are passed through into consumer prices. Russ frames this as saying that tariffs account for only a small fraction of the recent inflation and that eliminating them would only produce a one-time drop in the price level, which is all true. But think about it this way: If the president has a button on his desk that lowers consumer prices by 0.26% one time, why should he do anything but smash it? There may be some more price reductions available by further relaxing restrictions on imported aluminum and steel — a shift Biden has already taken partway by converting Trump’s tariffs on these metals into a (more convoluted but less draconian) system of quotas. Softwood lumber is a harder nut to crack — the US-Canada dispute over lumber prices has been ongoing for decades, and the recent increase in the lumber tariff wasn’t at the president’s discretion. But high inflation creates more reason than ever to seek agreement with the Canadians to resolve this dispute and let more cheap wood flow into the US.
Improve port capacity and domestic goods transportation capacity. The problem here is these systems have a zillion moving parts, involving interaction between the government and the private sector. We ordinarily rely on markets to relieve bottlenecks in these systems, but that takes time the president doesn’t have politically. And sometimes the bottlenecks come from the government. The administration has announced a variety of small policies that look likely to improve capacity to some extent — things like penalizing shippers for clogging up ports by using them as container storage; operating ports for more hours per week; standing up new container storage facilities near major ports; prodding state departments of motor vehicles to issue commercial driver licenses more quickly; and creating new apprenticeship programs for truck drivers. How material the effects of these policies can be is unclear, but they’re worth a try. Longer-term policies, like major capital investments in ports, are plausibly a good idea but won’t pay off by producing near-term price reductions.
Look for dumb regulations that are creating shortages or raising prices. One of the most infuriating goods shortages in recent months has been the shortage of home test kits for COVID-19. A key driver of this shortage was bad regulation: the Food and Drug Administration approved fewer different kits than regulators in Europe did, which constrained supplies here. The administration acted too late here, but it took some good corrective steps: approving more kits from more manufacturers, setting up a government website to distribute kits that seems to be working surprisingly well, and cajoling major retailers to limit test kit prices during an interim period before capacity could be expanded. It’s worth asking much more broadly: Are there other areas where we’re unnecessarily constraining supply and raising prices through regulation? These effects can show up in surprising places: Grub Street looked into the Great Bucatini Shortage of 2020 and found it was driven by erratic enforcement of an FDA iron enrichment standard for dried pasta where we were, once again, out of whack with European regulators. Maybe there are other areas where the FDA and other agencies could ease off a bit and be more like Europe, so more goods would appear on shelves?
There are other topics the administration likes to talk about but aren’t likely to produce near-term inflation benefits. For example, like the president, I would like to see House passage of the US Innovation and Competition Act, which passed the Senate on a bipartisan basis. It would drive more US investment in semiconductors, but its benefits are much more about improving long-run economic competitiveness and insulating ourselves against future supply chain shocks than about getting more semiconductor chips into more cars in the next year.
The president also still insists on touting the Build Back Better act as an inflation-fighting measure, but he’s oversimplifying an endorsement of it to his detriment. The economists’ letter he likes to cite on this says “because this agenda invests in long-term economic capacity and will enhance the ability of more Americans to participate productively in the economy, it will ease longer-term inflationary pressures.” In simpler terms, this says the long-term effect of Build Back Better will be to add more and more-skilled workers to the American economy —meaning the children who benefit from BBB’s expanded pre-K will eventually enter the workforce and their parents might re-enter the workforce sooner if they benefit (maybe) from BBB’s child care subsidies. The letter says these long-term effects would be offset at least to some extent by BBB’s inflationary pressures, like increased demand for child care services at a time when child care workers are scarce. This isn’t likely to have much overall effect on inflation.2
But the president has identified a number of areas where his administration has real potential to increase production capacity and tame inflation at least to a modest extent. It’s good to do this, it’s good to talk loudly about the fact that you’re doing it, and it’s good political practice to take credit when inflation softens and say it’s because of your smart policies — even if much of the softening is due to abatement of emergency conditions that was sure to happen anyway.
I’d just like to see him push more on more of these opportunities, especially the immigration and trade ones where his administration has been less eager than I expected to undo the Trump legacy.
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My view on BBB remains that, even if it were going to pass, it would have little effect on inflation either way — Republicans who warn it’s inflationary aren’t on better ground than Democrats who call it an inflation-fighting bill.