Deficit hawks are proposing austerity again. They're wrong.
Have you ever heard of Steven Ratner? He is an economics pundit on television but he is also a big in the world of high finance. In an opinion piece in February, he argued that the current surge in inflation is the result of high levels of deficit spending by the Biden Administration.
Here’s a direct quote:
“The bulk of our supply problems are the product of an overstimulated economy, not the cause of it. Sure, there have been some Covid-related challenges, such as health-related worker shortages in factories and among transportation workers. But most of our supply problems have been homegrown: Americans have resumed spending freely, and along the way, they have been creating shortages akin to those in a shopping mall on Black Friday. All that consumption has resulted from vast amounts of government rescue aid (including three rounds of stimulus checks) and substantial underspending by consumers during the lockdown phase of the Covid crisis.”
[The entire opinion piece is available at https://www.nytimes.com/2022/02/17/opinion/inflation-supply-chain.html. It is entitled, “Biden Keeps Blaming the Supply Chain for Inflation. That’s Dishonest.”]
Before I discuss Ratner’s dubious claim, I want to remind folks of WHY the Biden Administration is spending all that money.
Perhaps some don’t remember, but I sure as Hell do. In March in 2020, many parts of the country (the parts taking COVID seriously) shut down. Kids were told to “go” to school remotely. Businesses began to conduct their activities remotely. Other businesses closed or were barely rescued from that fate by a government bailout. The economy was in free fall. Investopedia summarized the situation with this data: “The U.S. unemployment rate rose as high as 14.7% in April 2020 … and up from 3.5% in February 2022. ... The national economy, as measured by real (inflation-adjusted) gross domestic product (GDP), fell by 3.5 percent … in 2020. This was the first time that the economy shrank … on an annual basis since 2009.”
Investopedia detailed the various steps taken in that period of free fall (in the spring of 2020). Note, that this was a time when Republicans controlled the US Senate and Trump was in the White House.
A virtually unanimous Congress passed over 2 trillion dollars in spending to help individuals and businesses weather the storm. They did not bother to offset any of that because the issues were too important to let concerns about deficits stand in the way. (This is just like the massive deficit spending in World War II --- the pandemic was an equally emergency situation.)
[For details of all the actions of both the FED and Treasury – monetary and fiscal policies -- see
Meanwhile, “essential” workers were forced to bear the brunt of the pandemic. They had to go to work and many contracted the disease. Many recovered though some suffered through a long fight. Even after recovering, many faced what is called “long COVID” with persisting symptoms. Finally, one million of our fellow Americans have died. Most of those deaths could have been avoided with better public policy.
I can’t stress this point enough. There was a task force within the Department of Homeland Security specifically dedicated to making plans in advance to deal with world-wide health emergencies. But Trump disbanded it when he took office because, he said, “I’m a business person — I don’t like having thousands of people around when you don’t need them. When we need them, we can get them back very quickly.” He was wrong --- people died as a result.
[That full quote by Trump and more can be accessed at https://www.whitehouse.gov/briefings-statements/remarks-president-trump-vice-president-pence-members-coronavirus-task-force-press-conference/]” (I made a big deal about this failure by the Trump Administration back in March of 2020)]
In addition, there is evidence that after vaccines became available, there was a gap between Republicans and Democrats with Republicans being much more vaccine hesitant and therefore, dying in greater numbers. The reason Republicans are dying in greater numbers is because the anti-science nonsense that the right-wing has been peddling has created a curtain of willful ignorance among too many right-wingers. For details on how public opinion on science has changed over the years, leading to the tragic consequences for many right-wingers, see https://www.alternet.org/2022/05/political-partisanship-covid-19-deaths/?utm_source=123456&utm_medium=email&utm_campaign=10486.
I remind listeners of the “ancient history” of spending during 2020, because once the Biden Administration took office, spending money to help people get through the pandemic and to combat the subsequent recession suddenly became a partisan issue. Republicans, including the leadership of the Senate as well as the Republican minority in the House, had been quite willing to spend lots of money (without offsetting with spending cuts, thereby ballooning the deficit) when it was in support of the Trump Administration’s efforts to combat the pandemic. However, once the Biden Administration presented the American Rescue Plan in early 2021, they changed their tune completely.
Despite the fact that the $1.9 trillion in the American Rescue Plan of 2021 was absolutely essential, all Republicans suddenly became “very worried” about deficit spending. (I actually believe the $1.9 was not really enough given the long-term suffering of so many of our fellow citizens as the fight against COVID continues.)
But here comes Ratner and others who agree with the Republicans saying the increase in inflation is evidence that the US government is spending too much. The result has been that the Democratic leadership has had to cajole and plead with Senators Joe Manchin and Krysten Sinema to support Biden’s programs. In effect, those two now have veto-power over what will get through the Senate. One of the results is that the expanded child tax credit which when originally passed was designed to last only till the end of calendar 2021 was not extended. The reason? Manchin decided the deficit had finally gotten “too big”. A program that had cut child poverty dramatically was severely curtailed after 2021 ended.
Sorry to be blunt but this deficit phobia is total garbage – and I would use a barnyard epithet if I hadn’t been speaking on the radio. The current inflation is not being caused by deficit spending but by two things: a disruption of supply chains --- made worse by the war in Ukraine --- and successful price gouging by large corporations.
The so-called solution proposed by Ratner and too many economists is the traditional one – the FED should hit the economy over the head with rising interest rates to combat the inflation. The result will be increased unemployment and less wage pressure.
[For details on why such restrictive monetary policy actions will do more harm than good see the following Levy Institute Public Policy Brief: “Is it Time for Rate Hikes? The Fed Cannot Engineer a Soft Landing but Risks Stagflation by Trying,” by Yeva Nersisyan and L. Randall Wray available at https://www.levyinstitute.org/pubs/ppb_157.pdf]
But of course, so-called wage pressure is not a problem. Wages have failed to keep pace with inflation this year. Thus, a policy of high interest rates to raise unemployment to reduce wage pressure is a solution to a non-problem. Instead, as has been clearly visible in the internal communications of large corporations, the biggest companies in the US have taken advantage of the surge in inflation to pad their bottom lines --- to raise prices MORE THAN THEIR COSTS --- to increase their profit margins.
[The evidence for this is in the public presentations made by boards to directors to their stockholders. For evidence, see an opinion piece by Lindsay Owens in the New York Times, “I Listened In on Big Business. It’s Profiting From Inflation, and You’re Paying for It.” (May 5, 2022) available at https://www.nytimes.com/2022/05/05/opinion/us-companies-inflation.html?referringSource=articleShare]
Here’s where a little knowledge of economics can be very helpful. The famous “competitive model” that all economics students learn actually applies to very few real-world businesses. Farmers do for the most part act as “price takers.” A corn farmer will learn the price of corn he or she can get if she or he offers it for sale that day by listening to specialized radio broadcasts every morning. Shareholders wanting to sell shares on the NY stock exchange learn the price of particular shares by checking the ticker. Companies wanting to buy oil on the spot market in Rotterdam, can check the internet daily. However, most businesses, even the small mom and pop hardware store or restaurant SET their prices. Large companies like GM, Exxon-Mobil, Oscar Meyer Meats, Johnson and Johnson, etc. are NOT price-takers. They are, instead, price MAKERS. The technical term is they ADMINISTER their prices. (Yes, there are limits but they have a lot of leeway.) Currently, the prices they have set are making the inflation worse. The fact that there is inflation which was initially caused by supply disruptions, gives them cover to claim they are “victims” of inflationary pressures while their profit margins are ballooning.
There is a straightforward solution. It is called an excess profits tax. All profits above those reported for tax purposes after calendar year 2019 should be subject to a 50% surcharge (the actually percentage could vary) with the extra revenue returned to the general public as a payroll tax holiday. The result will be, take home pay will be higher at the lower end of the income pyramid (the payroll tax for social security has an upper limit so the super-rich will get no more extra income than the rest of us --- something that would not happen if the cut were to the income tax) and companies will have less incentive to engage in price-gouging if their excess profits will be taxed away anyway. This is not a pie-in-the-sky proposal. The US government has had excess profits taxes before --- especially during wartime.
[For some details see Reuven AVi-Yonah, “Time to Tax Excessive Corporate Profits: We did during WWII and in the 1980s. It’s the right way to deal with ‘inflation’ that is pure price-gouging.” The American Prospect (April 18, 2022) available at https://prospect.org/economy/time-to-tax-excessive-corporate-profits/
Dealing with inflation this way is not rocket science! It’s just good public policy. Ratner’s way would do much more harm than good – It might, in fact, do not good at all.
Michael Meeropol is professor emeritus of Economics at Western New England University. He is the author with Howard and Paul Sherman of the recently published second edition of Principles of Macroeconomics: Activist vs. Austerity Policies
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