Interest rates

Inflation causes real suffering. But raising interest rates will make the situation worse | Isabelle Weber and Mark Paul

TToday, US policymakers face a stark choice. Either they can fight inflation by continuing to raise interest rates to generate unemployment and lower aggregate demand. Or, they can employ a surgical approach that rein ins the price hikes that have fueled inflation, while encouraging investment to overcome chronic supply chain problems.

The current inflation situation has not been that all goods in the economy are becoming more expensive at the same rate. Specific goods – food, fuel, cars and housing – suffered massive price shocks, dramatically increasing the general level of inflation. To control these changes would require aggregate demand to contract to levels unsustainable for the average American, making people too poor to buy goods and thus reducing bottlenecks. Rate hikes are not only ill-suited to drive down these essential prices, but risk a recession putting millions of people out of work.

It’s not just a bad choice for economic growth; inducing a recession has a broad electoral and social spectrum consequences. The burden of the pandemic and inflation has been distributed very unevenly, with low-income households and black and brown communities bearing the heaviest burden in both emergencies. Relying on rate hikes means once again shifting the burden onto their backs. But there is an alternative: Emergency Price Stabilization Act just introduced in Congress and the Inflation Reduction Act point the way in a more promising direction.

To be clear, policymakers are at a legitimate impasse. Inflation, that is, a rise in the general level of prices, is hitting the American people hard, causing a real crisis for many of them who are struggling to meet their rising bills. So far, the response to inflation has relied on the Federal Reserve. The Fed is continuing its war against inflation, after once again raising its key rate by 75 basis points. For ordinary Americans, continued rate hikes may not sound like big news, but they are. In fact, recent Fed actions have helped push mortgage rates up nearly two percentage points year-to-date, adding hundreds of dollars a month to average mortgage payments and making homeownership increasingly out of reach for many middle-class American families.

But mortgage rates aren’t the only thing affected by Fed tightening. In fact, higher rates are akin to tightening the economic brakes, slowing down investment, which often leads to layoffsand certainly dragging down construction desperately needed new housing. In today’s economy, where much of our economic hardship stems from too little investment, too few quality jobs, businesses profiteerand international conflict, Fed tightening is the wrong choice for the woes of our time.

For the most part, policymakers acted as if rate hikes were the only option on the table to bring inflation under control – in neoliberal good fashion, the saying “there is no alternative” prevailed. But the emergency price stabilization law introduced last week by New York Congressman Jamal Bowman would give policymakers the tools to tame inflation and bring the economy back into balance without slowing it down by sacrificing workers and reducing the necessary investments. (We both advised Congress on the legislation). Specifically, the legislation would broaden the scope of the White House’s Supply Chain Disruptions Task Force to combat price explosions stemming from supply-side issues.

This would give the task force the power to recommend to the president to use targeted price stabilization measures, including price controls, to limit price increases of systemically important goods and services: gas, housing, food , electricity, etc Contrary to conventional wisdom, price control rather have success story in the United States when used correctly and, while not a magic bullet, they are a powerful tool for controlling inflation and protecting low- and middle-income Americans. This is especially true when market power – be it landowners, oil companies or meat cartels – is at stake.

But price controls can only buy time for measures that address underlying supply issues and price behavior. Other parts of the new law are equally crucial, including measures that would gather better data on corporate earnings to determine the extent to which rising prices play a role in driving inflation, something voters, including the majority of Republicans, already think this is a significant problem. And this type of surveillance is not at all exaggerated. Many states already have laws on the books to prevent companies from defrauding consumers during events such as natural disasters. Why not in turbulent economic times?

And what about those necessary investments that rate hikes would slow down? Well, the law contains measures to control inflation by doing the exact opposite: increasing production capacity, which will dampen inflation by increasing supply. The Emergency Price Stabilization Act not only provides an escape from the impending dangers of a recession or even stagflation. Combined with the Inflation Reduction Act, it presents an alternative logic for economic policy-making. One that allows us to react to sectoral shocks with targeted measures while investing in the future.

We live in a time of overlapping emergencies – pandemic, climate change and intense geopolitical tensions coincide. We must be prepared for future shocks to the global flow of goods. US oil prices are falling for now, but the global energy crisis is far from over. Europe is preparing for historic gas shortages in the coming months. This has serious consequences not only for consumers across the Atlantic, but also for global fossil fuel prices and critical supply chains such as Germany’s chemical and engineering industries. Bringing the whole economy down every time supply chains collapse under the weight of these emergencies is not sustainable.

Targeted price stabilization and limits on corporate profits will not solve the war in Russia or the chronic underinvestment in the US economy. But they will protect workers and economic prosperity by providing government with better tools to fight inflation, manage corporate power and prepare the ground for urgent investment. Importantly, these measures ensure that Congress does not sit idly by as the Fed fights inflation on its own, especially at times like these when it is simply not equipped with the resources to target problems. realities facing the country.

We need more than the Fed to fight inflation and react to price shocks. With economists finally coming around to the idea that inflation may be fueled by more than just workers getting too big a slice of the economic pie, it’s high time policymakers acted.

  • Mark Paul is an assistant professor at the Edward J Bloustein School of Planning and Public Policy at Rutgers University.

  • Isabella Weber is assistant professor of economics at the University of Massachusetts Amherst and author of How China Escaped Shock Therapy.