After months of downplaying the impact of inflation on American families, President Biden has finally come forward with a plan to fight inflation. Unfortunately, it leaves out several important elements that any real effort to reduce inflation must include.
The President laid out this new plan in an op-ed for the Wall Street Journal. The President said the plan consists of three parts, but it really only consists of a few broad goals, analyzed point by point here.
Maintain the independence of the Federal Reserve. While he is correct to do so, this can hardly be considered a real plan. Keeping control of inflation is half of the Federal Reserve’s dual mandate, as it has been since 1977.
Improve affordability for American families. This broad goal consists of reducing energy costs through releases from the Strategic Petroleum Reserve (SPR) and making new investments in renewable energy sources.
First and foremost, it is important to recognize the impact that the international response to Russia’s war of aggression in Ukraine has had on energy prices. Russia, the world’s largest natural gas exporter, created a supply shock when it invaded Ukraine and incurred strict sanctions from around the world, particularly at a time when global supply chains were already struggling.
There is still room for criticism of the President’s policies, though, even recognizing the difficulty of global economic circumstances. While the President did authorize releases from the SPR, the SPR can only slightly mitigate the effects of shortages, not solve them. Meanwhile, investing in renewable energy may promote energy independence in the long term, but it is unlikely to have much impact on prices in the short term.
At the same time, the President has taken actions that work directly against the goal of fulfilling our immediate energy needs. By sharply restricting the amount of federal land available for oil drilling and increasing the royalties oil companies must pay, the President guaranteed reduced domestic supply at a time when the country is trying to reduce dependence on foreign imports.
Fix broken supply chains. The President claims the solution here is to improve infrastructure and crack down on “exorbitant” fees charged by foreign ocean freight companies.
Restricted domestic supply is a direct result of broader problems with the nation’s supply chains. While the proximate cause for supply chain disruptions has been the pandemic, there are two other aggravating factors that the President conspicuously does not address in his plan.
First is the Jones Act, which prevents shipping cargo from one U.S. port to another unless the cargo is carried on a U.S.-flagged, U.S.-built vessel, owned and crewed by Americans. As there are only 93 Jones Act-compliant vessels, this makes shipping cargo between two U.S. ports prohibitively difficult and expensive. Consequently, while over 36 percent of domestic freight is transported by water in the European Union, that number is just six percent in the United States.
This is an issue in particular for gas supply, as there are no Jones Act-compliant tankers in the United States that can carry LNG. This often makes it more economical for refineries on the coasts to import oil from foreign suppliers than to receive it from domestic sources. Were the President to offer a Jones Act waiver, this would go a long way towards alleviating short-term supply shortages and reducing dependence on imported energy.
The other missing element of the President’s plan to address supply chain issues is the repeal of tariffs. As of 2021, average tariff rates in the U.S. had more than doubled from their pre-trade war (2018) levels to the highest rate since 1994. This has led to supply shortages and increased costs for raw materials — one study estimates that a “feasible” trade liberalization package could cut inflation by 1.3 percent.
The President is aware of the positive impact that eliminating Section 301 tariffs could have on domestic supply chains, and has indicated that he is considering dropping them. Taxpayers could have felt much better, however, had he included this in his op-ed in the Wall Street Journal.
Reduce the federal deficit. The President also takes credit for a projected $1.7 trillion reduction in the deficit this year, ignoring the context of grossly inflated crisis spending. After all, even with that $1.7 trillion reduction, the deficit is still projected to be over $1 trillion this year. Over the next decade following the end of this year, the national debt is projected to increase by two-thirds, or $15.7 trillion. The dreary fiscal situation only gets drearier the further out one looks.
True fiscal responsibility would be a welcome addition to a plan to combat inflation, but empty platitudes using misleading data is by no means a substitute.
The President also points to deficit reduction plans that look at the wrong side of the ledger sheet. Rather than aiming to rein in out-of-control spending, the President’s plan points to unlikely claims about the IRS’s ability to vacuum up vast sums of unpaid taxes from the nation’s taxpayers. On top of that, he claims to be working against offshoring of U.S. jobs and corporate income, even as his proposed changes to taxation of foreign corporate income would accomplish the exact opposite.
It’s true that presidents’ ability to control inflation is limited. Nevertheless, a bold plan to combat inflation would address supply constraints with policies that increase domestic energy supplies in the short term, do away with archaic and protectionist constraints on Americans’ ability to transport goods by water, end costly tariffs, and stop pumping deficit-financed federal dollars into the economy. These efforts could actually have a real impact on inflation. Unfortunately, the President’s op-ed instead promises more of the same ineffective policies.