NEWARK, NJ – March 22, 2022 – The country is now plagued by inflation. The president, however, blamed the inflation on Putin. After all, because the sanctions imposed on Russia in response to its invasion of Ukraine led to a drop in oil imports from Russia, oil prices rose. The problem with this story is that prices were rising before the current war. It is true that this war exacerbated inflation, but inflation was already a problem, to which the current administration contributed.
The main source of inflation has been the supply chain crisis due to the pandemic. In the absence of a plan to reopen a stalled economy, there were bound to be disruptions in the supply of markets, thus driving up prices. But when the Federal Reserve (FED) maintains an easy money policy through near-negative interest rates, that too will contribute to higher prices.
Although the Biden administration has had no say in Fed policy, it has helped drive up energy prices with its war on fossil fuels. Just to be the anti-Trump, Biden issued executive orders canceling the Keystone XL pipeline among other things. Not only has this led to the loss of thousands of well-paying union jobs, but it has increased our dependence on others. Now, without enough oil to import and without our own ability to make up the difference, oil prices can be expected to rise.
This affects not just prices at the pump, but all prices. Rising energy prices lead to higher production costs, higher heating costs for homes and offices, higher costs of goods and services because transporting goods to market is more expensive. Progressives pushing for green energy are myopically focusing on transportation, which they say should involve more mass transit systems and electric cars. They often fail to take into account the impact of rising energy costs on the cost of virtually everything. Besides, they don’t care.
For the elites pushing green energy, the desire for cheap oil is misplaced and downright deplorable. Whether those who suffer the most from inflation are ordinary workers whose incomes are in the middle of the distribution, it does not matter. What they don’t understand is that the war on fossil fuels has been equated with a war on the middle class. After all, if it really was a matter of public interest, there would have been a transition period. Investments in green energy could have occurred alongside the continued production of fossil fuels.
Those among the elites who recognize that inflation is a problem see the solution, to the extent that they are willing to endorse one, in the Fed raising interest rates. Either way, ordinary workers get the tree. The standard treatment of inflation is for the Fed to tighten the money supply, which means raising interest rates. This actually makes it more expensive to borrow money. As a result, businesses have less to invest in expanding their operations and creating jobs. On the contrary, a tightening of the money supply leads to a recession with higher unemployment.
So let’s repeat what’s happening here. With inflation, the price of goods often exceeds any increase in wages they may have received. Because inflation devalues money, the value of their salaries has gone down. With inflation, especially when it is 7.9% – the highest in decades – workers have effectively taken a pay cut at a time when they are forced to spend more on basic necessities like food and heating their homes. As the public complains about inflation, the Fed responds with interest rate hikes, leading to a recession in which workers, whose wages were previously devalued, now lose their jobs.
Sometimes some elites decry minimum wage hikes on the grounds that they might lower employment, but the same voices mysteriously fall silent when rate hikes to fight inflation will also lower employment. Given all of this, it’s hard to believe that the elites really care about ordinary workers.
Some elites would have said that it’s hard for those earning less than $300,000 a year to withstand this kind of inflation, but they could offer some helpful advice nonetheless. Among them, people should take the bus and instead of eating meat, people should eat lentils. If it echoes Marie Antoinette saying that those who couldn’t afford bread could always eat cake, it’s exactly the same thing.
Yet they are ramping up green power with the attitude that if the price of gas at the pump gets so expensive, then the masses will naturally have to change their behavior. They want pump prices to go up because they want people to drive less. But for ordinary workers who don’t have a good public transport option, it’s not viable. Either the wealthy absorb higher prices at the pump or they buy electric cars. Electric cars are simply not affordable for ordinary workers.
Like so many other issues, the elites are disconnected from the masses on the subject of inflation. And yet, for those heavily invested in the market, inflation threatens their holdings. Otherwise, why would they demand that the Fed take action to curb inflation, even if it means recession and unemployment for many others? It should be emphasized that historically and statutorily, the Fed’s primary obligation is to maintain the integrity of the banking system and maintain price stability. In other words, the fight against inflation comes before the fight against unemployment.
Congress relies on the Fed to manage the economy through monetary policy because it does not want to be responsible for the consequences. Congress could achieve the same goals through fiscal policy. This would require raising taxes during inflation to dampen demand and lower prices, and lowering taxes during a recession so people can increase demand. By relying on the Fed, Congress is relieved of all responsibility. But here is the main difference: the Fed is only supposed to serve the banking industry while Congress is supposed to represent all interests, including those of ordinary working people.
When the President of the United States blames Putin for inflation, it could be ignorance. But that’s hardly the case given the economic advisers he keeps company with. Rather, it distracts from the harsh reality that this administration in particular and progressives in general care no less about the effects of inflation and how inflation affects the lives of ordinary working people.
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Oren M. Levin-Waldman, Ph.D.
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Professor Oren M. Levin-Waldman is the author of the following published books.
Restoring the middle class through wage policy: arguments for a middle class
Understanding public policy in the United States.
The minimum wage: a reference manual
Wage policy, income distribution and democratic theory
The case of the minimum wage: competing political models
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