Inflation – What Can Congress Do?

Eakinomics: Inflation – What Can Congress Do? The Federal Reserve surprised nobody by announcing that it was raising its policy rate by 0.25 percent and would defer announcing a strategy for reducing the size of its balance sheet to the near future. This non-news was accompanied by a cacophony of chatter about the number, pace, and size of future rate hikes; alternative views of the best strategy for balance sheet reduction; and speculation on if and when the Fed might actually push the economy into a recession. Yawn. Nothing new. Meanwhile, over on Capitol Hill, members of Congress are increasingly asking: What can Congress do to fight inflation? The short answer is: not much. Granted, Congress could pass a sharp tax increase to knock down aggregate demand and tame inflation quickly. It would also necessarily have to be large enough to cause a sharp downturn in growth. Since “I Caused the Recession of 2022!” is not the campaign bumper sticker lawmakers are looking for, put that to the side. Congress only has a few viable candidates for inflation reduction:   Do no more harm. Congress delivered the American Rescue Plan’s $1.9 trillion deficit-financed stimulus into an economy already growing at 6.5 percent. That was a mistake not to be repeated. Increase the amount of capital and labor in the economy. More capital and labor would permit greater production and supply, which is the only real way to reduce inflation without harming growth. The problem is that it is not feasible to change the overall capital stock more than a trivial amount in, say, the next year. And while one might see labor force participation recover and more workers become available, Congress has limited policy tools here. Immigration policy has an important role to play here, but it won’t materially alter the inflation outlook. Make the capital and labor more productive. This is really (2) in disguise, as it simply increases the effective supply of capital and labor. Over long periods, it is possible for new technologies to raise productivity, new business models to deliver a better bang for the buck, and education and training to raise the skills of the workforce. But how much can happen in 2022? Not much. For a given amount of capital and labor, lower the cost of production. Excessive regulations, for example, make production more costly, so statutory checks imposed on the regulatory state could make regulations more efficient, reduce costs, and lower price pressures somewhat in the near term. Similarly, a well-designed tax cut can reduce production costs and lessen price pressures. But these are one-time relief for an ongoing problem, so the impact is limited. Notice that nowhere on this list is scapegoating large corporations or any of the other nonsense that has been floated by the White House. If it looks like the answer to the question “what can Congress do to tame inflation?” is “not much,” you are correct. The reality is that Congress will have to rely on the Fed in the near term.