How to Whip Inflation Now (Again)

I n a series of television programs in the late 1970s and early 1980s, the late Nobel-winning economist Milton Friedman explained for the masses a mystery of their — and now, our — time: What causes inflation?

Then as now, people confused inflation’s cause with its effects. Friedman famously said that inflation was “always and everywhere” a monetary phenomenon, which is to say: The Federal Reserve’s printing of too much money causes it, and only the Federal Reserve’s decision to slow down the printing of new money can stop it. Yet as inflation once again rears its ugly head today, the public is once again mistaking its effects — higher wages, price spikes, excess demand for goods and services, etc. — for causes.

At the start of the Covid-19 pandemic, the Federal Reserve understandably drove interest rates to zero to keep the financial system liquid with cash. Meanwhile, Congress flooded voters with government money. Households got multiple rounds of relief checks. Smaller employers got Paycheck Protection Program grants and conventional Small Business Administration (SBA) loans. Federal student-loan payments were deferred. Federal benefits made unemployment more lucrative than work for many lower-skilled workers.

As emergency measures against a once-in-a-century pandemic, some or even all of those policies might have been appropriate. But by early 2021, it was clear that the economic emergency was over, and fiscal and monetary levers needed to be adjusted accordingly. That adjustment didn’t happen all year — indeed, the Fed only began to normalize interest rates this month — and inflation was the inevitable result, as too much cash chased too few goods and services.

Supply-chain disruptions, which have lately been cited as a contributor to inflation, are in fact one prominent side effect of all this excess cash. Because debt (mortgages, business loans, etc.) has been so cheap (that is, it has had zero or negative real-interest rates) for so long, consumers have an incentive to accumulate more of it. People stuck in their homes with more money than they know what to do with have ordered more and more stuff. The pandemic has slowed down the natural global flow of goods, and the excess consumer demand has caused more and more supply-chain breakdowns.

This, in turn, has caused policy-makers to respond in counterproductive ways. A good example here is H.R. 4996, the “Ocean Shipping Reform Act of 2021,” which passed the House in December and is now under consideration in the U.S. Senate. This bill takes a top-down regulatory approach to shipping bottlenecks. It would empower the Federal Maritime Commission (FMC) to become a kind of super-regulator of our nation’s international shipping ports. In so doing, it would reverse much of the Ocean Shipping Reform Act of 1998, which wisely deregulated the shipping industry and has continued to serve us well as the global economy has grown more complex and integrated.

Under the bill being considered in the Senate, the FMC would be empowered to enact draconian price controls on so-called “demurrage and detention fees” in ports, an arcane industry convention nonetheless vital to keeping our supply chains humming along. These fees are used as an incentive to help ensure that all that stuff gets on and off ships in a timely manner, and price controls would run the risk of removing that incentive. Gabriella Beaumont-Smith of the libertarian Cato Institute has said that, “if the incentive to promptly pick up cargo is removed, the time between when a container is unloaded and when the cargo is picked up would increase, thus exacerbating port congestion.” And if our ports don’t work, neither does anything else in our supply chains.

So that’s one supply-side effect of inflation. But what about demand? Here, the Biden administration is making the Federal Reserve’s money-draining job harder by continually postponing the resumption of student-loan payments. President Biden has repeatedly extended the 2020 emergency moratorium on loan repayment. The Wall Street Journal has reported that the moratorium is costing taxpayers $5 billion per month in addition to the national debt, and giving student-loan borrowers — many of them comfortably employed — a cash-flow subsidy of $400 per month on average. The moratorium also postpones the repayment date for Economic Injury Disaster Loans, Small Business Administration loans that accrue interest at a rate far lower than that of inflation, essentially providing free money to businesses who get to see the real value of their debts decline over time.

As if that weren’t bad enough, progressive lawmakers continue to push for the repayment moratorium to be turned into a blanket forgiveness of student loans. Senator Patty Murray (D., Wash.) has advocated that the Department of Education use the Borrower Defense to Repay program to forgive all $1.6 trillion in federal student-loan debt, essentially bailing out grad students with tax dollars and debt paid for by working-class Americans.

All this excess cash — printed by the Federal Reserve, and pushed out the door by Congress and the executive — is making inflation worse, and causing excess demand and supply-chain disruptions that are in turn regulated by the same government that screwed them up in the first place. If Congress and President Biden really want to help, they should instead get out of the way and let the Federal Reserve do what only it can, and what it should have done long ago: whip inflation now.