Resist Temptation to Fight Inflation with Short-Term Fixes

Voters’ angst over rising prices puts pressure on government leaders to take immediate action, but quick fixes usually don’t work

Photo taken by the author, Mark Hester.

One of the many ironies of politics is that economic conditions affect elections more than just about any other factor, yet there’s relatively little that elected officials can do in the short term to improve the economy. That’s especially true for inflation, the economic malady currently at the forefront of voters’ minds.

Worse, in many cases the need to appear to be “doing something” to help constituents often leads office holders to take actions that are counterproductive. With inflation stuck above 8 percent and product shortages affecting essential items ranging from baby formula to tampons to semiconductors, voters have reason to expect action. But Oregon more than most states knows that a “just do something” approach often delivers disappointing results.

Gary Conkling and I will look at what government should and shouldn’t do in response to the worst inflation in 40 years. I’ll start us off with what Congress, legislatures and others should not do – and why. All of these are policies that have been proposed in response to inflation.

Don’t lower gas taxes: The best solution to higher gas prices doesn’t require government action. Everyone should drive less. Reduced demand would lead to lower prices. If government wants to help, it should make alternatives to driving (all forms of mass transit) cheaper. There’s an important benefit of this approach: Decreasing driving is one of the best steps we can take to address climate change. Of course, this would not be a politically popular message, but it’s the right message.

Don’t cut short-term deals with foreign suppliers to increase oil production: Much of the logic for this is the same as for maintaining current gas taxes – we need to decrease fossil fuel production. But there are some other factors. Supply-chain disruptions have shown the importance of avoiding dependence on other countries for essential supplies – whether they be petroleum, semiconductors or medicine. There’s no logic in discouraging domestic production while pursuing deals with questionable governments.

Don’t enact windfall profit taxes: This proposal sounds good to voters without a strong background in business or economics. But such taxes are difficult to impose and likely would bring unintended consequences. Loosely, windfall profit taxes are one-time taxes imposed on businesses (usually entire industries) that are reaping extra profits because of unusual economic conditions – war is a common example. In reality, windfall profits are whatever the government chooses to define when it passes enabling legislation. The likelihood of agreeing on a definition that would be approved by Congress is virtually nil in today’s partisan, closely divided government. Another problem is that the businesses that reap windfall taxes often are in volatile industries that often have periods of financial distress – and, in fact, recently came out of one during the pandemic. And, lastly, history has shown that the industries targeted by these taxes are good at avoiding them.

Don’t deflect attention by blaming others: It’s true that Russia’s invasion of Ukraine has helped push up food and energy prices, but it’s far from the only factor. The focus should be on how to make us less reliable on vulnerable or untrustworthy governments, not on making excuses. And accusing American companies of price-gouging is even less productive. Enforce existing laws, which are sufficient to prevent true gouging. But don’t blame oil companies for lack of production when recent government policy and regulation have discouraged production. It’s understandable that they are reluctant to invest in more production without assurance that they could pay off the investments by continuing to produce when the current crisis subsides. The factors pushing up food prices are even more complex. One of the lessons of the pandemic is that government and business can be effective when they work together. So, work together instead of fighting. 

Next week, Gary will look at some things government can do, including fostering innovation, unsnarling supply chains, investing in infrastructure, encouraging more housing construction and lowering tariffs.