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President Joe Biden and his allies in Congress are rightly concerned about surging prices. High and persistent inflation has surprised most policy makers, including at the Federal Reserve, and has defied easy fixes. The only sure solution is to curb demand, as the Fed is beginning to. Doing that without tipping the economy into recession will be quite a challenge.
How can the federal government help? Biden has promised to let the Fed get on with it, which is surely welcome. His other suggestions, though, have mostly been either beside the point or simply counterproductive. Ideas that would actually make a difference seem of little interest to his administration.
For instance, Biden is again calling for a brief gas-tax holiday. Even his friends in Congress seem unpersuaded by the idea. They’re right to be. Pausing the federal levy of 18.4 cents a gallon would, for a start, further undermine the Highway Trust Fund, which the tax finances, and which already faces an ominous shortfall. The savings would be modest and partly self-defeating — because they’d add to the demand for gas, serving to push prices back up. In the end, producers would probably gather most of the benefit.
Indeed, the economics points, if anything, to the opposite proposal: Leave the gas tax in place, and, along with Europe, impose a tariff (as opposed to an outright ban) on imports of Russian energy. Under current conditions, supplies of energy are maxed out and relatively fixed in the short term. This means that a tariff would hit Russia’s income more severely than it would raise energy prices for consumers. Such a plan is better targeted in every way. It would punish Russia more effectively for its invasion of Ukraine while moderating the squeeze on energy supplies, and it would yield revenue that could pay for financial assistance to those worst affected by higher costs.
At the moment, note, energy is an unusual case because the supply response to changes in price will be so muted in the short term. Where that isn’t so, lower tariffs would feed more readily through to consumers in the form of lower prices. Thanks to former President Donald Trump’s misguided commitment to import barriers, there are many opportunities to enjoy this free lunch.
One plausible estimate suggests that a moderate but broadly based effort to roll back so-called “national security†tariffs and other barriers (including the preposterous bundle of restrictions on shipping known as the Jones Act) could knock a percentage point off the inflation rate for one year. To be sure, this wouldn’t solve the problem, but it would certainly make the Fed’s job easier.
Biden’s lassitude on trade promotion might prove to be among his most consequential failures. It’s compounded by an array of other interventions that militate against an effective supply-side response to America’s current predicament. The administration’s zeal for antitrust frequently comes off as thinly veiled anti-capitalism. The president has chosen to call out US energy producers as latter-day robber barons instead of courting them as partners in improving America’s long-term energy security. His spending plans, however virtuous on the merits, provide endless accommodations to organized labor, all of them serving to weaken the economy’s ability to raise productivity, cope with shocks and lift living standards.
Democrats are understandably alarmed at their prospects in the midterm elections. In emergencies, presidents are expected to rise above such calculations and do what’s right. At times like these, it might even pay off politically.
—Bloomberg