Why Democrats Can’t Handle Inflation

I nflation was one of the chief culprits in killing Jimmy Carter’s presidency. Postwar inflation was bad news for Democrats in 1946 and 1920 as well. Inflation isn’t Joe Biden’s only problem today: It was the crisis at the border that first started cracking his honeymoon with the voters, it was the abandonment of Afghanistan to the Taliban that originally sent Biden into a political tailspin last August, and it is public doubts about Biden’s age and incompetence that will make it so hard for him to recover. But there is, for all of that, little doubt that inflation is Biden’s No. 1 political problem right now as his approval rating hits a new low, for which his party is likely to pay a steep and rising price at the polls this fall.

Inflation is bad news for any president, but it is particularly intractable for a Democratic president. The reason is simple: Any of the potential solutions on offer require Democrats to do the exact opposite of what they want to do. Inflation is, like any matter of monetary policy, an insanely complex problem in which no two experts agree on the details, but at its root, it is a very simple one: When there is too much money chasing too few goods and services, the prices of goods and services rise.

Also, as with many economic phenomena, inflation is driven both by fundamentals (supply of money and supply of goods/services) and by expectation (expected future supply of money and expected future supply of goods/services). Expectations are part of the vicious cycle in which workers demand more wages to keep up with the cost of living, and those higher wages drive prices up further. They also disrupt business planning, which further constricts the supply of goods and services.

There are only two fixes for inflation: reduce the supply of money, or increase the supply of goods and services. How do you reduce the supply of money? There are four ways to do this:

1. Slash public spending, so the government is injecting less money into the economy.
2. Raise interest rates, which puts recessionary pressure on the economy.
3. Raise taxes without raising spending, so the government is extracting more money from the economy.
4. Incentivize a shift from spending to savings, which reduces the amount of money chasing goods and services.

Increasing the supply of goods and services can really only be done by government by lowering the cost of supply — either by reducing regulatory burdens, eliminating environmental roadblocks to drilling and other development, cutting business taxes, reducing trade barriers, or pursuing other efforts to get government out of the hair of business.

Nowhere on this list is anything Democrats prefer to do, with the arguable exception of tax hikes — and when Democrats promote tax hikes, they almost always do it in conjunction with even larger increases in spending. They can’t make it easier for business to drill for oil or build stuff. They can’t cut spending. They can’t rework the tax burden for more consumption taxes and fewer taxes on investing (to incentivize more savings and investment and less spending).

In fact, they have spent Biden’s presidency thus far doing the polar opposite of all these things. They spent $1.9 trillion on the American Rescue Plan “stimulus,” a step so disastrous that even Vox and Politifact had to concede that it made inflation worse. Biden signed a $1 trillion infrastructure spending plan. He spent most of the fall trying to add an additional $3.5 trillion in Build Back Better spending. He’s talking about handing out student-debt forgiveness at $10,000 per graduate. Most of these things, when they were first designed or rolled out, were sold as economic “stimulus” — i.e., putting more money into the system. That could not possibly be more opposite to what is needed to fight inflation, yet Democrats are incapable of thinking in any other terms.

Moreover, progressive intellectuals have spent the past decade learning the lessons of 1929 and 2008 and forgetting the lessons of 1979–82. Both the Great Depression and the 2008 credit crisis reflected, and were exacerbated by, sudden reductions in liquidity. In each case, there were economic arguments over whether the greater culprit was too lax monetary policy creating a bubble, or too fast a contraction when it popped. In either event, a lot of progressives came away with the view that the government in 2009–10 should have spent more profligately to stimulate the economy. They developed “modern monetary theory,” which is more or less a prescription for cutting loose on public spending without worrying that inflation could ever recur or debt could ever catch up with us. No downsides! No trade-offs! Just print more money, and the party will never end. We find ourselves in the world that the MMT solons said could never return, even though many of us were old enough to remember it the last time. How do you solve a problem when your doctrine says that the problem is inconceivable and the solution unthinkable?

What does that leave? Leaning on the Fed to raise rates and do the dirty work of squeezing the economy. But Democratic politicians and progressive commentators dislike this in general and will scream bloody murder at doing it during a Democratic presidency. Moreover, it is already late in the game. Ronald Reagan lived with a politically costly recession in 1981–82 that killed inflation at the cost of making the other half of the stagflation pincer (unemployment) worse, and he reaped the benefit when the economy roared back in 1983–84. But if there is a recession that starts in 2022 or 2023, Biden and his party will be in even worse shape than they already are, which is saying something.

So, the remaining options for fighting inflation: Blame Vladimir Putin, blame Donald Trump, blame big companies for “price gouging” and “greed,” look for ways to impose price controls without the name, and offer various handouts that just subsidize more inflation. Inflation might get marginally better on its own as global supply chains continue to recover, but so long as Democrats and progressives are in charge, no solutions will be on the menu.