Lawmakers say they have ideas on how to tackle rising prices, but economists say many of them are too small to make a big difference or could backfire. (Photo: FREDERIC J. BROWN via Getty Images)
In July 1946, ffaced with rising post-war inflation as consumers rushed to buy all the goods they couldn’t during World War IIPresident Harry Truman got a memo from Federal Reserve Chairman Marriner Eccles with possible solutions.
Cut public spending at the federal, state and local levels; Increase taxes; and cut credit from federal agencies, Eccles suggested. “I am aware that the program proposed here is drastic and difficult to carry out,” he wrote in an understatement.
Nearly 80 years later, Washington is facing a similar inflationary outburst. And politicians have no better ideas.
Rep. John Yarmuth (Ky.), the Democratic chairman of the House Budget Committee, acknowledged that most of what has been proposed so far is only a small part of the problem.
“I can easily say this because I am retiring: Congress really is almost powerless to do anything about inflation, at least in the short term,” Yarmuth told HuffPost.
In the Senate, Democrats are working on a bill that would require Medicare to negotiate with drug manufacturers to reduce prescription costswhich would obviously save people money, but not until next year.
Another part of the bill, at least as envisioned, would raise taxes on corporations and higher earners, fulfilling one of Eccles’s suggestions.
But Mark Zandi, chief economist at Moody’s Analytics, cautioned that that would only be a slight drag on growth and thus have only a minor impact on prices.
“High-income households have plenty of cash and other assets to support their spending despite their higher tax bills,” he said. “Similarly, large corporations are flush and won’t significantly slow down their expansion plans if they have to pay a slightly higher tax rate, as lawmakers are discussing.”
“The bottom line is that lower taxes on high-income individuals and multinationals have done little to boost growth, and simply resetting tax rates closer to where they were will do little to slow growth,” Zandi continued.
A handful of Democrats have backed a windfall profits tax to deter corporations from raising prices excessively. However, leaders have not indicated that such a provision could be included in the next tax. and prescription drugs invoice.
Sen. Joe Manchin (DW.Va.) suggested that using higher taxes to “get our fiscal house in order” would be good for the economy.
But Sen. Tim Kaine (D-Va.) said higher taxes would have more to do with fairness and paying for new spending than fighting inflation.
“I would use that to dramatically expand affordable child care, lower prescription drug costs, and also keep health care premiums low, which are anti-inflationary in the sense that they are big bites out of people’s pockets,” he said. “So I think there is an element of fairness on the tax side, but it also gives you payment for things that are anti-inflationary.”
Meanwhile, Democrats in the House took aim at inflation. by passing a bill in June that would use Agriculture Department programs to help farmers buy fertilizer, set up a special investigator to watch competition in the meatpacking market, and increase the availability of biofuels to lower gasoline prices.
So I think there’s an element of fairness on the tax side, but it also gives you payment for things that are anti-inflationary.Sen. Tim Kaine (D-Va.)
part of the problem it is the uncertainty about the cause of inflation, Yarmuth said. Republicans blame the size of the latest stimulus package, passed in early 2021 without GOP support. Democrats point to external factors such as the Russian invasion of Ukraine, ongoing supply chain problems and a recent shutdown in China that stunted production there.
“I don’t think anyone really has a good handle on that right now,” yarmuto said.
Douglas Holtz-Eakin, a former director of the Congressional Budget Office and chairman of the conservative think tank American Action Forum, placed the blame squarely on the 2021 stimulus.
The current situation does not look so much like it did in 1946 as it did in 1951, he said. That year, the economy grew at a blistering 10% rate, federal spending increased 50% to fight the Korean War, and inflation rose 6% for the year.
“That’s classic, excessive spending in a tight economy. They got inflation. And that’s what they did with the American Rescue Plan last year,” Holtz-Eakin said.
Holtz-Eakin said neither spending cuts nor tax increases are likely to happen on a scale large enough to matter. “So all eyes are on the Federal Reserve and its financial tightening as the main weapon to fight inflation,” he said.
The Fed, for its part, is trying to fight inflation by limiting consumer spending through higher borrowing costs. Still, Fed officials have acknowledged that they are tackling only half the problem and are powerless to counter supply problems stemming from things like the COVID lockdowns in China or the war in Ukraine.
In June, Republican members of the House Ways and Means Committee released their own political prescriptions, generally. They include canceling unspent covid relief money, seeking “permanent tax relief” and increasing US energy production to lower gas prices.
Rep. John Yarmuth (D-Ky.), chairman of the House Budget Committee, said there isn’t much Congress can do to contain inflation in the short term. (Photo: Pool via Getty Images)
But Yarmuth pointed to the Keystone pipeline, a favorite republican talking pointIt wouldn’t be online for years if it were built, and Holtz-Eakin said demand-increasing tax cuts would only lead to more inflation.
Another idea would be to lower tariffs on goods arriving from abroad, particularly from China. The higher prices paid to import those goods are passed through to retail prices and, according to theory, a reduction in tariffs would mean lower prices.
Yet that idea is politically impossible, especially after former President Donald Trump touted tariffs as a way to get back at China for selling out so much to the United States.
Trump said on Tuesday that it would be a “terrible mistake” to remove the tariffs. “Certain senators are fighting hard to get this done, even saying such ridiculous things as ‘it causes inflation.’ Those senators should be questioned about their true motives!”
On the same day as Trump’s statement, a group of five Republican senators they said they were against language to ease tariffs in a of two political parties bill to boost US production of semiconductors.
Holtz-Eakin said the tariffs made no sense and had brought no results, contrary to Trump’s belief. “Then why are we holding on to this thing, which isn’t doing any good?” he asked him.
Yarmuth said that passing immigration reform could help control inflation by expanding the legal workforce, but admitted that, like other ideas, it’s it was not politically possible.
Because the president is always blamed for the economy and there is “a fertile petri dish” for bogus explanations of inflation, Yarmuth said Democrats can they continue to discredit the claims of their opponents.
“All we can do is say, ‘No, that’s not right.'” he said.
And that may not be enough for Democrats facing a ya rocky midterm political road, with historical parallels. In the 1946 midterm elections, during another big spike in inflation, Truman saw his Democrats lose 57 seats in the House and 12 in the Senate to lose control of Congress.
This article originally appeared on HuffPost and has been updated.