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Here’s some “conventional wisdom.”
It goes like this. High gasoline prices are the main cause of inflation. Inflation is President Joe Biden’s fault, making him really unpopular. So the Democrats will lose control of Congress in this year’s elections.
That thinking is more wrong than right, but it may well produce the predicted political outcome. A lot of people believe it.
Anything right about it? The price of gasoline is much higher than usual, and it has increased at dizzying speed. In a country where SUVs have displaced sedans, that can hit your wallet hard. Somebody has to be held responsible for allowing the price run-up.
Because presidents tend to take credit for the economy when times are good, it’s natural they will get the blame when good times stop rolling. That leads to a demand for new leadership, which would mean turning the control of Congress over to the Republicans.
What Biden did wrong, according to his opponents, was to promote displacing oil with green resources. The oil companies cut back on production as they saw the rise of electric cars.
The world market price increased when the Middle East tried to keep up its income as demand fell. The U.S. oil industry saw a chance to boost its profits by riding that wave rather than displacing competitors by selling more oil at a lower price. As one industry analyst put it: “Returns have taken priority over growth.”
The economy grew as COVID-19’s impact began to be controlled, requiring more fuel. But oil production lagged, yielding higher prices and oil company windfall profits.
Then came the Ukraine war and the West’s effort to punish Russia’s aggression by buying much less of its oil and gas. That drove up oil prices. Biden seemed to acknowledge the critics of his pro-renewables policy by asking the oil companies to step up production and drilling.
But he also took steps to reduce costs. He ordered oil drawn from the Strategic Petroleum Reserve. He has now proposed that Congress should temporarily suspend the gasoline and diesel tax.
Did Biden create inflation by pushing huge federal spending and increasing the national debt?
Two-thirds of the massive COVID-19 impact and stimulus spending was adopted before he came to office and was backed by both parties. It may have been more than needed and badly controlled. It gave people more money to spend, boosting inflation and savings, and now supports increased state government outlays. Much of it remains to be spent.
As Congress and the president poured funds into the economy, the Federal Reserve seemed not to take notice. It kept interest rates at historically low levels, almost zero, instead of recognizing the economy was recovering.
Now, with inflation taking off, the Fed is raising interest rates to make purchasing more expensive. That process works, but painfully. Meanwhile the rate increases appear to push inflation before slowing it. If the Fed’s effort to catch up works too well, the economy may not only cool off but go into reverse — a recession.
Nobody likes economic uncertainty, but that’s what is happening at an extreme level. After more than two years of fighting COVID-19, the virus does not seem to be running out of variants that produce waves of cases. Activities from international trade to travel to office work are affected.
China is battling COVID-19 with measures that can shut down parts of its economy. That drives up the cost of its exports to the U.S. Supply chains have been disrupted, which also results in higher retail prices. Plus a federal law blocking imports of low-cost goods produced in China by Uyghur forced labor just went into effect.
Add to this economic turmoil the proxy war between NATO and Russia on the battlefields of Ukraine. With much at stake in the world’s balance of power, this war might continue for months or even years. Like any major war, it impacts national economies.
COVID-19 plus a tougher attitude toward China and Russia are transforming the world’s economy and having a far greater effect than short-term inflation. There’s no chance that inflation will be tamed and all will return to normal. In the U.S., pay levels and prices have changed for good.
Biden bears some responsibility, of course, and he may pay politically if the prices of gasoline, diesel and heating oil remain high. But inflation’s origins pre-date his administration and the causes are more complex than those he can influence. He is not the main force behind inflation.
Conventional wisdom suffers from such short-sighted tunnel vision. As a result, we cannot readily see the light at the end of the tunnel.
This “wisdom” may prevail when people vote, but inflation and other economic challenges cannot be brought under control simply by the outcome of the November elections.