It Would Take Big Moves To Tackle Big Inflation. Don't Look To Congress For That.
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In July 1946, faced with surging post-war inflation as consumers rushed to buy all the goods they couldn’t during World War II, President Harry Truman got a memo from Federal Reserve Chairman Marriner Eccles with possible solutions.
Cut government spending at federal, state and local levels; raise taxes; and cut off credit extended by federal agencies, Eccles suggested. “I am aware that the program here proposed is drastic and difficult to carry out,” he wrote, in an understatement.
Almost 80 years later, Washington confronts a similar burst of inflation. And policymakers don’t have any better ideas.
Rep. John Yarmuth (Ky.), the Democratic chairman of the House Budget Committee, acknowledged most of what’s been proposed so far only nibbles around the edges of the problem.
“I can say this easily because I’m retiring: Congress really is almost powerless in doing anything about inflation, at least in the short term,” Yarmuth told HuffPost.
Over in the Senate, Democrats are working on a bill that would require Medicare to negotiate with drug makers for lower prescription costs, which obviously would save people money ― but not until next year.
Another part of the bill, at least as it’s been envisioned, would hike taxes on corporations and higher earners, fulfilling one of Eccles’ suggestions.
But Mark Zandi, chief economist at Moody’s Analytics, warned those would only be a slight drag on growth and thus have only a minor impact on prices.
“High income households have lots of cash and other assets to maintain their spending despite their higher tax bills,” he said. “Similarly, large corporations are flush and won’t significantly rein in their expansion plans if they have to pay a modestly higher tax rate as lawmakers are discussing.”
“Bottom line is that lower taxes for high income individuals and multinationals have done little to lift growth, and simply resetting tax rates back closer to where they were will do little to rein in growth,” Zandi continued.
A handful of Democrats have backed a windfall profits tax to discourage corporations from excessively raising prices. However, leaders have not indicated such a provision could make it into the forthcoming tax and prescription drugs bill.
Sen. Joe Manchin (D-W.Va.) has suggested that using higher taxes to “get our fiscal house in order” would be good for the economy.
But Sen. Tim Kaine (D-Va.) said higher taxes would be more about fairness and paying for new spending than fighting inflation.
“I would use that to dramatically expand affordable child care, bring down prescription drug costs, and also hold health care premiums down, which are anti-inflationary in the sense that those are big bites out of people’s pocket,” he said. “So I think there’s a fairness element on the tax side, but it also gives you the pay for things that are anti-inflation.”
Meanwhile, Democrats in the House took aim at inflation by passing a bill in June that would use Agriculture Department programs to help farmers afford fertilizer, to set up a special investigator to look at competition in the meatpacking market and to boost the availability of biofuels to bring down gas prices.
So I think there’s a fairness element on the tax side, but it also gives you the pay for things that are anti-inflation.Sen. Tim Kaine (D-Va.)
Part of the problem is uncertainty over the cause of inflation, Yarmuth said. Republicans blame the size of the last stimulus package, passed in early 2021 with no GOP support. Democrats point to external factors like the Russian invasion of Ukraine, continued supply chain issues and a recent lockdown in China that stunted production there.
“I don’t think anybody really has a good handle on that right now,” Yarmuth said.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office and president of the conservative think tank American Action Forum, placed the blame squarely on the 2021 stimulus.
The current situation doesn’t resemble 1946 as much as 1951, he said. That year, the economy grew at a blistering 10% rate, federal spending rose by 50% to fight the Korean War and inflation rose by 6% for the year.
“That’s just classic, excessive spending in a tight economy. They got inflation. And that’s what they did with the American Rescue Plan last year,” Holtz-Eakin said.
Holtz-Eakin said neither cutting spending or raising taxes was likely to happen on a big enough scale to matter. “So all eyes are on the Federal Reserve and its financial tightening as the main weapon to fight the inflation,” he said.
The Fed, for its part, is trying to fight inflation by crimping consumer spending through higher borrowing costs. Still, Fed officials have acknowledged they are attacking only half the problem and are powerless to counteract supply problems stemming from things like COVID lockdowns in China or the war in Ukraine.
In June, GOP members of the House Ways and Means Committee rolled out their own policy prescriptions, in general form. They include canceling unspent covid relief money, pursuing “permanent tax relief” and increasing U.S. energy production to bring down gas prices.
Rep. John Yarmuth (D-Ky.), chairman of the House Budget Committee, said there's not much Congress can do to hold back inflation in the short run. (Photo: Pool via Getty Images)
But Yarmuth noted the Keystone pipeline, a favorite Republican talking point, would not come online for years if it were built, and Holtz-Eakin said tax cuts that increase demand would only fuel more inflation.
Another idea would be to cut tariffs on goods arriving from overseas, particularly China. The higher prices paid to import those goods get passed on to retail prices and, so the theory goes, a reduction in tariffs would mean lower prices.
However, that idea is a non-starter politically, especially after former President Donald Trump touted tariffs as a way to get back at China for selling so much to the United States.
Trump said Tuesday it would be a “terrible mistake” to remove the tariffs. “Certain senators are fighting hard to get this done, even saying such ridiculous things as it ‘causes inflation.’ Those senators should be questioned as to their real motives!”
The same day as Trump’s statement, a group of five Republican senators said they opposed language to ease the tariffs in a bipartisan bill to boost U.S. production of semiconductors.
Holtz-Eakin said the tariffs did not make any sense and had not yielded any results, contrary to Trump’s belief. “So why would we hold on to this thing, which is not doing any good?” he asked.
Yarmuth said passing an immigration overhaul could help tame inflation by expanding the legal labor force, but he admitted that, like other ideas, it was not politically possible.
Because the president always gets blamed for the economy and there’s “a fertile petri dish” for fallacious inflation explanations, Yarmuth said Democrats can only continue to debunk their opponents’ claims.
“All we can do is say, ‘No, that’s not right,’” he said.
And that may not be enough for Democrats facing an already rocky midterm political path, with historical parallels. In the 1946 midterms, during another big inflation spike, Truman saw his Democrats lose 57 seats in the House and 12 in the Senate to lose control of Congress.
This article originally appeared on HuffPost and has been updated.
