How Much are Democrats to Blame for Inflation?

Parsing the difference between "a bit", "a smidge", "a tad", and "a scoche"

Political conversations about economics are weird: We act like everyone knows what’s going on even though most people don’t. For some reason, we’re uncomfortable with the idea that general knowledge of economics is low; we act like it’s shameful to not grasp the finer points of the field. This doesn’t make sense; humans don’t spring from the womb knowing the Heckscher–Ohlin model. You’ve either studied the discipline or you haven’t. We’re comfortable with a low level of knowledge in other fields; nobody nods along unknowingly with casual conversations about organic chemistry or Paleozoic plant life because they’re afraid of seeming ignorant. It doesn’t embarrass me at all to tell you that I had to google “that time back before there were even dinosaurs” to remember the word “Paleozoic”.

So, as we enter an election season in which voters care about inflation, we tend to talk around the issue as much as we talk about it. You often see local news pieces that basically say: “Inflation. Uh…people are against it. So…therefore…we…WE WENT TO THE GROCERY STORE AND TALKED TO PEOPLE! Yeah, that’s it. Here: This lady doesn’t like the price of orange juice.” That doesn’t illuminate much.

So, my goal here is to get into what’s happening, why, and what decisions and tradeoffs led us here. I’ll give away the ending by saying that my answer to the question “How much are Democrats to blame for inflation?” is “some” (actual numbers coming soon). But there’s more to the story. I think Democrats made some decisions that didn’t turn out well, but that those decisions were made for pretty good reasons, and that for us to narrowly ask “what effect did those choices have on inflation?” doesn’t tell the whole story.

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Everyone knows what inflation is: It’s the reason why your parents bought their first house for $50. It’s why people in old movies purchase cars with loose change and why cowboys in Westerns get in brawls over a ha’penny. Inflation hasn’t always been well understood — did you know that the Seventh Amendment requires jury trials only for disputes where the amount in question exceeds twenty dollars? That’s true; the authors didn’t understand inflation and didn’t anticipate a problem. They had no idea that they were writing a law that would one day mean “you get a trial by jury if the dispute is worth more than an Oliver Garden entrée, plus tip.”

Inflation happens when too much money chases too few goods. When economists talk about “supply-side inflation”, that’s the “too few goods” part. When they talk about “demand-side inflation”, they’re focusing on “too much money”. Any number of things can drive either side; if you’re an agrarian economy, and your crops suddenly die, inflation is around the corner. Same if you strike oil and your GDP

¹

doubles overnight; you and your suddenly-rich countrymen will quickly bid up prices. In the long run, things should balance out — people will either run out of money or companies will step up production — but in the short run, you might find yourself looking at prices in the grocery store, thinking “what the fuck?”, and looking for a TV news reporter to complain to.

We’re feeling inflation in the US due to both supply and demand-side shocks. The supply-side things weren’t really things anyone could control; the main culprits are Covid — which caused major production disruptions in China — and the war in Ukraine, which shook oil markets. These two things are why many countries, not just the US, are fighting inflation right now. And, of course, when I say “nobody could control these things,” I actually mean “Xi Jinping and Vladimir Putin control these things, but nobody knows how to influence those guys and they give as few fucks about anything as anyone who ever lived.”

Democrats did three things that boosted inflation, but before I get to those, let me talk about the big bill that passed this summer: The Inflation Reduction Act. Republicans often talk as if government spending automatically boosts inflation; that’s not really true. Government spending that isn’t paid for boosts inflation. So do unfunded tax cuts of the type that turned Liz Truss into the first British prime minister to not outlast a Sting orgasm. But the Inflation Reduction Act was paid for with tax hikes (which Republicans opposed). Even professional turd in the punchbowl Larry Summers agrees that the bill will reduce inflation. The “Inflation Reduction Act” is a strange name for a bill that’s mostly about investing in green energy and reducing medical costs, but it’s not technically a lie. It’s a bit like if the grain thresher had been named “The Hillbilly Arm Mangler”: That is technically an accurate name, even though it focuses on an ancillary feature of the thing instead of its main function.

One thing Democrats did that bumped up inflation a small amount was to forgive some student debt. This is something I won’t really defend; I think it was the wrong move at the wrong time. I think that forgiving some debt at a different time would have made sense, and the effect on inflation will be minimal, but it was a bad call. It also put Democrats on the back foot, politically. The only silver lining here is that I published an article last May arguing that debt forgiveness would be a political liability, so now I get to do my favorite thing in the whole world: Point out that I was right. God DAMN I was right. I am absolutely bowled over by how right I was — I hope you are, too. We should really all take a moment to truly reflect on how right I was; stop reading this article if you need to. Go do some yoga, smoke a pipe, take a long walk on the beach — do whatever it takes to absorb how profoundly, resounding, comprehensively motherfucking RIGHT I was about the effect that move would have.

The second thing Democrats did to minorly increase inflation was a series of relatively small moves early in Biden’s term that suppressed oil supply. These were mostly things that would have a small effect on energy prices in the long run, such as suspending new leases for oil drilling on public lands and cancelling the Keystone XL pipeline. This is an uncomfortable area for me, because pretty much everyone in the world prefers lower energy prices, but I…sort of don’t. It’s complicated; I basically feel that our obsession with keeping oil prices low in the short run makes it more likely that we’ll stay addicted to oil in the long run. This leads to bad outcomes like carbon emissions, deference to despotic regimes, and my mom deciding it’s no big deal to “pop over” to my place in DC from southern Virginia.

I’m basically all alone on this issue once again, because when gas prices spiked because of the Ukraine war, Biden shifted gears to become the Cheap Gas President. He’s opened up to drilling on public lands, lobbied the Saudis to pump more, and released 15 million barrels of oil from the Strategic Empty Political Gesture Reserve. None of these things will do much to affect oil prices, but let’s be fair: Neither did the anti-oil moves at the beginning of Biden’s term. Oil is a global commodity and the President can’t do much to affect it’s price, but Americans will embrace Weird Al’s Girls Just Want To Have Lunch as the national anthem before we accept that fact. Still, it’s nominally true that Biden’s actions probably had a small impact on oil prices, and thus also inflation.

The thing Democrats did that actually matters — that’s influencing inflation more than a microscopic amount — is the American Rescue Plan. This was the third round of Covid stimulus, passed shortly after Biden took office; it was the $1.9 trillion bill that included $1,400 checks to Americans who make less than $75,000. Hilariously, one of the political benefits of the bill was supposed to be that Democrats could brag about those checks when election season rolled around. And now election season is here, and the checks are featured as prominently in Democratic rhetoric as Song of the South is in Disney’s promotional materials.

But it’s important to remember what the economy looked like when the American Rescue Plan passed. Covid slammed the American economy in a way that’s unprecedented in our lifetime (unless you’re really, really old). 2020 was the worst year for economic growth since the Great Depression; unemployment spiked at about 150% of what it was at the peak of the Great Recession. The term of art economists us for this type of economy is “shitty as all fuck”. Here’s how things looked in context:

Source: Statista

Data from Bureau of Labor Statistics, chart from Federal Reserve Bank of Saint Louis.

In early 2021, the economy was shrinking, unemployment was high…this is very bad stuff. And, in a way, it’s not too surprising that an attempt to drive down unemployment led to inflation.

Broadly speaking, there’s an inverse relationship between unemployment and inflation. It’s a bit like being good at magic and having friends; if one metric is high, then the other will almost certainly be low. That’s is why the Federal Reserve — and to a lesser extent Congress — is constantly trying to strike a balance between unemployment and inflation. When one metric gets too high, the government makes changes to (hopefully) bring that number down. And that often works, but usually at the cost of giving us more of the other thing. This is just more evidence that everything is complex and that simple solutions don’t exist on Planet Earth, which is one of my most firmly held beliefs.

Personally, I fear unemployment more than inflation. Both are very bad; I just think that unemployment is typically worse. Unemployment throws families into crisis; it can lead to crushing debt and/or uprooted lives (I’ve lived this and it blows). Inflation also sucks — it hits everyone in the economy, including those on a tight budget — but in many cases it amounts to an annoyance more than a catastrophe. The exception to this rule would hyperinflation, but nothing the US is experiencing is anything close to hyperinflation. Hyperinflation gets insane; in Hungary after World War II, prices doubled every 15 hours. Run the numbers on that: At that rate, it takes about nine days for a can of soup to cost as much as a brand new Tesla (that’s not a joke!).

One last thing about inflation: A little inflation can be good. That’s partly because of the inflation/unemployment tradeoff; you don’t really want inflation to be zero. The Federal Reserve tries to get inflation to hold steady at two percent, and some people think the target number should be slightly higher. It’s also true that inflation tends to help money borrowers — who are usually less wealthy — and disadvantages money lenders, who are usually more wealthy. This is another reason why people like me often see mild inflation as not really the worst thing in the world.

Still: People like me got it wrong here. The question “How much are Democrats to blame for inflation?” arguably has a numerical answer: It looks like the American Rescue Plan was responsible for maybe about a third of the inflation we’re experiencing. We were shooting for two percent inflation, ended up at eight percent, and without demand-side inflation (which is largely driven by government spending), we might be at about six percent. This is according to research by Adam Shapiro at the Federal Reserve Bank of San Francisco, which has been tweeted by Jason Furman, who in my opinion is one of the best economists there is. Here’s the upshot of Shapiro’s research:

Source: Federal Reserve Bank of San Francisco

What did we get in exchange for those two percentage points of inflation? Well, as you might expect, we got faster economic growth and lower unemployment. Contrary to stereotypes about European governments throwing money from helicopters while American capitalists cackle at poor people starving in the streets, virtually no European governments passed a stimulus as aggressive as the American Rescue Plan. So, just as it shouldn’t be surprising that we have slightly higher demand-side inflation than our rich-country peers, it also shouldn’t be surprising that we have relatively low unemployment and high economic growth.

Source: OECD

Source: Brookings Institution.

Should Democrats have seen the post-Covid bounce-back coming? Maybe — there was a debate at the time about whether the ARP was too much medicine. On the other hand, the ARP was one of the things that caused the bounce-back. In hindsight, a stimulus in the just-north-of-a-trillion region probably would have been better than the $1.9 trillion bill that passed. I think Democrats did overshoot. But they (we?) overshot for good reasons: They (we?) were concerned about unemployment and overall growth, and those concerns were valid. We wanted to be damn sure to drive down unemployment, and we did that, and we now have about two points of inflation as a result. Whether we should have seen that coming and whether the tradeoff was worth it is for each person to judge.

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In an alternate universe, the supply-side inflation shocks (Covid and Ukraine) didn’t happen, and US inflation is at four percent, not eight percent. And in that universe, we’re all sitting around going “huh, four percent…that’s a bit too high.” I’ll bet Democrats wish they were running for office in that alternate universe. But they’re not, and in this universe, inflation is on voters’ minds.

The “good news” for Democrats is that Republican attacks this election season are mostly focused on crime. If we get our asses handed to us on Tuesday, it’ll probably be more because of crime than because of inflation (though it can be both). We bit our tongues when “defund the police” idiocy was sweeping the nation in 2020, and now crime has spiked, Republicans are poised to do well, and long story short: It all hurts the working poor. There must be a tear in the space-time continuum that causes any mistake made by anyone to end up screwing the working poor.

But if we’re talking about mistakes, then I have to put my hand up. Though I may be the most correct man in the universe (see above gif), I was wrong to support all $1.9 trillion of that stimulus. It caused about two extra points of inflation. And whether you characterize those two points as "a smidge", "a tad", or "a scoche", it’s definitely two points too many.

1. If you’re not familiar, GDP is “gross domestic product”, and it’s basically a measure of how much stuff an economy made. So, high GDP = “you’re rich”, low GDP = “you’re Afghanistan” (sorry, Afghanistan — I’m rooting for you, but it’s true).