Supply & Demand

Inflation Is Not Biden’s Fault

Customer at a Walmart store in Chicago, Ill., in 2011. (Jim Young/Reuters)
Deficit spending alone does not increase inflation.

President Biden’s policies, actual and aspired, have and will impose many harms on American citizens. Inflation is harmful too, but most of the blame for that lies elsewhere.

President Biden’s agenda includes historically large amounts of redistribution from workers to those out of work and to members of politically connected organizations from those out of favor. Such policies reduce work, investment, productivity, and ultimately our living standards.

Controlling inflation is largely the responsibility of the Federal Reserve, which is legally independent of both the president and Congress. Inflation is, by definition, the rate of decline of the value of a dollar — a “Federal Reserve Note” as it says above George Washington’s portrait. The value of a dollar is determined by the supply and demand for those notes relative to the goods and services produced in the economy.

The “blame Biden” faction says that his policies have created shortages of many goods and services (I agree), which supposedly increases their prices relative to Federal Reserve Notes. But the policies also increase their prices relative to the goods and services where policy is not creating shortages. It’s a mistake to focus just on the goods in short supply, when all consumer goods and services count in the Consumer Price Index (CPI), and it is ultimately up to the Federal Reserve whether the notes in circulation grow more or less than the supply of consumer goods and services.

As a legal matter, Biden and Congress are not creating new Federal Reserve Notes to pay for their new and expanded government programs. But the blame-Biden faction argues that Biden’s policies are, and will be, encouraging the Federal Reserve to create new notes. At least part of their story is correct: The monetary base in June 2021 was 20 percent greater than it was a year earlier. But that might have been true even if Trump had remained president.

Economic history includes a great many instances when high federal spending coincided with low inflation. In a study titled “Inflation and the Size of Government,” the late Song Han (a senior economist at the Federal Reserve Board) and I looked across 80 countries during the postwar period together with very long histories of the U.S. and U.K. We found little relation between inflation and nonmilitary government spending, which largely reflects the creation and expansion of government transfer programs.

As shown in the chart below from the Han-Mulligan article, inflation was high around major wars when governments spent a lot on military programs. (0.05 means 5 percent annual inflation, 0.1 means 10 percent, etc.)

Source: Han and Mulligan, 2008


U.S. annual inflation spiked at more than 20 percent during its Civil War and about 10 percent during World War II, both of which were major wars from a U.S. perspective. During both wars, the elevated inflation persisted for two or three years, so that the cumulative increase in the price level was more than 40 percent in the Civil War and approaching 20 percent in WWII. Inflation also spiked around the Korean and Vietnam wars, which were comparatively small in terms of U.S. casualties and fiscal expense. U.K. inflation shows similar correlations with that country’s military activity.

A dollar was worth less after the wars than it was before. However, unlike the inflation of the 1970s, the inflation was temporary in that inflation rates returned to normal not long after the wars ended.

Distinct effects of military and nonmilitary spending are not surprising theoretically. Inflation is a particularly damaging tax for the meager net revenue it brings. Ongoing inflation becomes a last-resort tax measure, when all other tax instruments are insufficient, as they were in interwar Germany and are now in Venezuela. The U.S. is not there yet — it’s not even close.

On the other hand, rare surprise inflations might bring some revenue with less damage, especially if they are implemented in connection with rare surprise external events, such as a war in Europe or a war against a deadly coronavirus. In the macroeconomics field, this is known as the “state-contingent debt theory.” Han and I concluded that, among the various academic theories of inflation, this was the most accurate one connecting inflation to government spending.

The money supply also increased during the wars, but often so did money demand. As a result, inflation rates were typically less than money-supply growth rates.

Since 2020, the U.S. and the world have been fighting a war against SARS-COV-2. The war involves casualties, government expenses, and private-opportunity costs. The U.S. casualties have so far amounted to about 0.2 percent of the population, many of them elderly, as compared to 0.3 percent for World War II and more than 2 percent in the Civil War.

The war against COVID-19 has also involved less expense than major military wars did. I estimate that the private-opportunity costs of the pandemic were of the magnitude of a couple of months of GDP, not counting the casualties. These are significant costs, but still less than at least a year’s GDP for the Civil War estimated by Claudia Goldin and Frank Lewis. Comparable estimates for World War II suggest that its U.S. opportunity costs may have been about a half-year’s GDP.

If economic history is a guide, the annual inflation rate around the pandemic should be temporary and less than the 10 percent it was around World War II.

So far, the data fit the historical pattern. Year-over-year CPI inflation hit 5.3 percent in June and July 2021. The inflation rate for the Personal Consumption Expenditures Price Index has spiked to 4 percent. These are inflation rates rarely seen since the 1980s but also just half of the World War II peak.

Another similarity between the coronavirus war and military wars is that initially much of the inflation was hidden. During World War II, various goods such as new refrigerators and other capital goods were unavailable at any price and thereby not reflected in the official inflation statistics. At times during the 2020 pandemic, in-person education, vacation cruises, weddings, live sporting events, and many other familiar goods and services were not produced.

That inflation has been associated with wars but not the creation of government transfer programs also suggests that today’s inflation is due to the war on the coronavirus rather than Biden’s flawed left-wing agenda.

Casey B. Mulligan is a professor of economics at the University of Chicago’s Kenneth C. Griffin Department of Economics, and served as the chief economist of the White House Council of Economic Advisers in 2018–19. He is also the author of You’re Hired! Untold Successes and Failures of a Populist President, which details conflicts between President Trump and special interests.


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