The inflation response that might have been

The war in Ukraine called for more from Biden than we got

Recently, there has been a lot of online argument concerning problems in the American economy, why we have them, and what the Biden administration ought or ought not to say and do about them. It seems to me that Biden has two big problems: inflation (or, really, a big, income-sapping rise in the cost of important and or salient parts of the household budget, like gas and housing), and the state of American politics (which means that things really need to be quite good to keep Biden’s approval ratings out of the gutter and his chance at something other than an electoral wipeout from tumbling to zero). There is not very much that Biden can do about the second of these two things. And there is also not very much that Biden can do about the first, either. 

In the light of hindsight, one might have wished that last year’s fiscal stimulus was a little smaller or spread out over a longer period of time or made more contingent on the state of the economy, and one might also think that the Fed could have begun the tightening process a little sooner. But given the way events have unfolded over the past year, it does not seem to me that we could have spared ourselves all that much inflation with a smaller stimulus. And, furthermore, it seems to me that a much more aggressive path of monetary tightening would have done far more harm than good. The world economy was dealt a bad hand, in a lot of ways, and accepting the cost of that bad fortune in the form of high inflation rather than slower growth in nominal incomes and employment seems like clearly the right choice.

The president, moreover, does not have very many tools at his disposal for tackling an inflation that is the result of robust aggregate demand running into nasty supply shocks. But Biden can’t just shrug and do nothing; there are important elections this November and fairly or not people are going to hold Democrats accountable for the fact that gas costs a fortune and grocery store shelves are still annoyingly understocked and their adult children still live at home because rents are sky high. And so the White House has been tinkering where it can, while also adopting messaging that inflation is really about greedy corporations gouging customers in the midst of a crisis, rather than any errors Democrats have made.

Now, I have various concerns about greedy and powerful corporations, and I think that in a society which was capable of having nuanced discussions there could be a productive conversation about how market power interacts with broader supply and demand issues. But we don’t seem to live in that society, and it is at any rate important to acknowledge that our current inflation is not really about a sudden change in behavior on the part of those greedy and powerful corporations. I don’t think that the administration’s rhetoric is dangerous, as Catherine Rampell does, and I certainly reject the notion that the key to crafting a good political response to current troubles is to talk to economists. But I am not a fan of the administration’s rhetorical strategy, which doesn’t seem politically effective but which also, and more importantly, represents a failure to pursue a different and in my view more promising approach.

The conventional wisdom in American politics seems to be that it is not a good idea to ask the American people to accept sacrifices for the sake of some broader goal. These days, America seems to be filled with self-absorbed jerks who expect the world to cater to their every little whim. And, furthermore, the pandemic illustrated that even in the midst of a major global crisis many Americans react to earnest pleas to exercise self-restraint for the sake of the welfare of others with childish petulance, or even violence. So if anyone in the White House had suggested in the early days of the war that the president should reset his agenda and frame his policy goals in terms of national sacrifice for the greater good, it is not hard to imagine how that person might have been ignored and/or escorted from the building.

And maybe that would have been the correct response to that hypothetical piece of advice. It is very easy to get caught up in Sorkinism and faith in the power of eloquent speeches to override deep, structural political problems, and very easy to recall instances where naive hope on the part of political movements and their leaders ended in spectacular electoral wipeouts.

But there are two reasons why it might have been worth it for Biden to gamble on an agenda reset, framed in terms of national sacrifice. One is that the war was going to hit American pocketbooks no matter what, no rhetorical strategy was going to distract Americans from that fact, and so the administration may as well have tried to cast that economic pain as the bearing of a noble burden in pursuit of important national aims. And the other is that the war really is a watershed event, which really ought to reshape our policy goals and the urgency with which we pursue them. Americans are aware of the war in Ukraine and do seem to support our efforts to help the Ukrainian military (while sensibly opposing direct military involvement). There is reason to think the public might have been receptive to broader policy arguments which were framed as a response to the war, and which better contexualized high food and energy prices as a consequence of the war which needed to be borne with resolve.

If the administration had been willing to take a chance on that sort of message, Biden might then have thrown his weight behind an all-of-the-above energy bill, which included some sort of progressive taxation component, which was framed as a sober and sensible response to the challenge posed by the war and by inflation, and which was ideally written with a lot of input from Joe Manchin. The idea being that it is good to give the public a clear understanding of what you’re doing and why and how it is supposed to help, and that it is good to give yourself an opportunity to pass some things that you want to pass, which might also have some small but meaningful effect on inflation down the road—or which might at least encourage the Federal Reserve to be a little less aggressive, in the knowledge that fiscal policy will not be exacerbating the inflation problem over the medium term. 

Talks on this kind of bill are ongoing on the Hill, but the administration seems oddly afraid of engaging with them or pushing them along or trying to reap political benefits from them. And look, if we had a magic wand, we would do things differently and elect 100 senators who want to end our dependence on fossil fuels and solve climate change yesterday. Since we don’t, a different rhetorical and legislative approach, framed around the war, seems like it might have been one useful way to make the best of a very difficult political situation.

Furthermore, the administration could have taken the opportunity to move its trade strategy in a more coherent direction. In the context of the war, it does not make any sense to have stupid trade fights with steadfast allies like Canada which also exacerbate supply-chain problems. But neither does it make sense to drop tariffs against China in the vain hope that doing so will magically fix inflation. It is certainly worth talking to China to see whether some sort of entente is possible, of the sort that might create distance between China and Russia, and the US should be prepared to make meaningful concessions to China to achieve that sort of result. But optimistic assessments suggest that dropping tariffs on Chinese trade could reduce inflation by about a percentage point. That seems to me a small benefit relative to the political price the Biden administration would pay. 

More importantly, the geopolitically and economically sensible route forward is one in which America reduces its dependence on China while improving the resilience of its supply chains by deepening trade relationships with friendly and ideally democratic countries. Yes, “tedious neoliberalism”, in Matt Yglesias’s phrase, would suggest that we should import cheap stuff from whoever is willing to sell it to us. But the problem with the West’s naively neoliberal approach to China was not simply that we followed it during a period of chronically weak demand, such that jobs lost to import competition were not quickly replaced by others. The problem was that the underlying logic of the approach—that if we engage economically with other countries in a politically agnostic way then everything will turn out swell for the liberal West—was flawed. What we ought to have done was to practice globalization as if democracy mattered.  

And that’s what we ought to do today. Right now America is putting on a charm offensive around the world, hoping to lure important emerging markets to the West’s side of the Ukraine conflict. And it is having a difficult time doing this because the United States has been stingy and unreliable with its economic overtures. Across Latin America, governments would rather deal with China than with us. That’s a massive fail on our part. We should have a standing invitation to democratic Latin-American countries to join a free-trade area of the Americas, and we should offer members of that area investments in infrastructure and green energy which are at least as generous as what China has made available through BRI. We should be similarly open to deeper ties with democratic countries elsewhere in the world. 

Obviously, the domestic politics of new trade deals are formidable. But we are in a different place now than we were a decade or two ago, both economically and geopolitically. There is a difference, furthermore, between trade strategies which have often seemed designed to ship American jobs abroad for the sake of corporate profits, and one which is focused on diversifying production away from a hostile China. And it seems possible to me that there may be more of a political return to a trade strategy which is coherent and which has a clear national-security logic than there is to one which lacks any broader content apart from appeasing small domestic interest groups with naked protectionism, or one which exposes the administration to large political costs for a small and short-term economic benefit. But the strategy could only work, domestically, if it were bold and clear and framed as an urgent response to a world changed by Russia’s invasion.

It isn’t hard to think of other attractive policy ideas which could have been repackaged as part of a broad agenda to strengthen America and bolster its position as leader of the free world. Let’s do more to fund education at all levels, and let’s get that child tax credit made permanent so we can secure America’s future, and let’s take opportunities to raise revenue where we can—progressively and on sources of carbon wherever the politics allows. Give people an agenda to vote on in November, rather than hoping that fear of the other party will overcome voters’ desire to express their frustration at pump prices.      

To be clear, none of this would have much effect on inflation before the November elections. The course of inflation over the next six months will be determined by what happens to the global market for food and energy commodities and by the path of Fed policy. And look, it could be the case that the president’s best possible political strategy, given this unfortunate reality, is to just deflect blame as hard as he can. But the war actually is a really big deal. And a response to it which provides Americans with a clear narrative, that places American global leadership front and center, which casts economic hardship as part of a noble struggle, and which also maybe creates soom room for progress on some desirable policies—it seems like a strategy worth taking a bit of a gamble on. Alas, the moment for it may have come and gone.