Biden’s empty inflation rhetoric

WASHINGTON, DC — In response to soaring prices, US President Joe Biden said this month that “fighting inflation” was his “top economic priority.” He promises that his administration “will continue to do everything in its power to bring down prices for the American people.” Yet despite these declarations of commitment, Biden has refused to lift the Trump administration’s tariffs on goods imported from China.

Consumer prices are rising at their fastest pace in four decades. In May alone, the consumer price index rose 1%, putting it 8.6% above its level a year earlier. And the problem is not just rising food and energy prices. Although core inflation, which excludes these factors, is not accelerating, it is at a high level and not declining, indicating that inflation is entrenched throughout the economy.

By boosting consumer demand well above the economy’s capacity to produce, the Biden administration’s $1.9 trillion stimulus package, passed in March 2021, has contributed to the sharp rise in prices to the consumption. Now, the job of guiding the economy to a low and stable inflation environment falls largely to the US Federal Reserve.

Biden has made a commendable effort to ensure Fed decisions are independent of political influence. And after being too slow to recognize the scale of the inflation challenge in 2021, he has at least adopted the appropriate rhetoric for now. But since the president’s tools to fight inflation are very limited, no option should be left out.

In a March 2022 policy brief from the Peterson Institute for International Economics, economists Gary Clyde Hufbauer, Megan Hogan and Yilin Wang estimated that eliminating Trump’s trade war tariffs would directly reduce CPI inflation by 0.3 percentage point. And as businesses try to compete amid falling domestic and import prices, the cut could be as much as 1.3 percentage points over the longer term.

Moreover, Hufbauer, Hogan and Wang find that a broader set of trade liberalization policies would produce an even greater effect. They outline a plan that would include cutting Trump’s Chinese tariffs; duty relief on Canadian timber; the relaxation of rules that exclude foreign competitors from US government procurement; tariff capping on a range of goods; and expanding the scope of duty-free imports from developing countries. This plan would reduce tariffs, duties and quotas on $610.5 billion of imported goods, directly reducing CPI inflation by 0.5 percentage points. In the longer term, the reduction could reach two percentage points.

Faced with inflation of 8.6% which may not represent a peak, cuts in this range may seem small. But with the typical household spending $460 more per month than last year on the same goods and services, every little bit counts. And even if the trade war tariff cut had no effect on inflation, it would still benefit the economy. Trump’s protectionism has been a failure in itself: it has reduced, rather than increased, manufacturing employment.

In a December 2021 working paper studying U.S. tariff increases in 2018-19, Aaron Flaaen and Justin Pierce estimate that moving a domestic industry from relatively light tariff exposure (at the 25th percentile) to relatively heavy (at the 75th percentile) was associated with a 2.7% reduction in manufacturing employment. Any benefits of import protection have been eclipsed by rising input costs for domestic producers and employment costs resulting from retaliation from other countries.

The White House has considered lifting the Trump tariffs for months, but has refused to act. US-China relations are increasingly adversarial, and the administration is likely reluctant to defuse unilaterally. Biden may also be concerned about weakening support among labor unions (which tend to favor protectionist measures).

But if Biden is still swayed by those considerations, then he actually hasn’t made fighting inflation his “top economic priority.” The White House must signal that it understands the seriousness of the problem. It means going beyond rhetoric and demagogic attacks on the supposed profit of domestic oil refiners. This means that other important priorities will have to take second place.

Certainly, concerns about China are legitimate. But the current tariff regime must disappear. The protectionism that hurts American businesses and raises prices for consumers is inefficient and harmful. Instead, the administration should focus its efforts on stopping the forced transfer of technology from U.S. companies, lead a serious multilateral effort to compel China to comply with international law and standards, and take additional steps to establish US economic leadership in the Pacific region. And it should increase support for basic research, so that the United States can continue to innovate more than China.

Biden has yet to deliver on his promise to “do everything” he can to bring prices down. Reducing tariffs is a handy fruit. Choose it, Mr. Chairman.

Michael R. Strain is director of economic policy studies at the American Enterprise Institute.

Copyright: Project Syndicate, 2022.
www.project-syndicate.org

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