Inflation and the Biden Budget

It is good that the Biden administration is beginning to take inflation seriously. Unfortunately, however, there isn’t much that the president and Congress can do about it. Inflation has to do with the money supply, which is the Federal Reserve’s territory. The Biden administration’s tranche of trillion-dollar deficit spending bills will likely contribute a percentage point or so to the inflation rate for the next several years. That is small potatoes compared to the Fed’s runaway money creation, which is responsible for most of the rest of today’s 7.9 percent inflation rate. At least as far as inflation goes, those bills have not been catastrophic. But they have made the Fed’s job more difficult.

Congress and President Biden can make the Fed’s job easier by undoing some of that spending and restraining themselves going forward. President Biden’s proposed budget would not do that.

Its headline item, a 20 percent minimum income tax on the very wealthiest of taxpayers, would likely have no detectable effect on inflation. It would have a small impact on the deficit, while not addressing overspending, which is the deficit’s root cause. Its negative impact on investment would harm economic growth. This would actually increase inflation, though in this case the effect would likely be too small to be detectable.

There is one area where the Biden administration can have some positive effect on inflation. Economic growth is deflationary, an underappreciated fact. The money supply is currently growing faster than economic output—that’s inflation by definition. The goal is to have them grow at the same rate.

There are two ways to do this. One is to slow money supply growth to get it closer to economic output growth, which the Fed is starting to do. The other is to grow the economy faster, so it better matches that fast-growing money supply. Both sides of the equation matter.

Fed policy remains the most powerful inflation-fighting instrument; fiscal policy from the elected branches doesn’t even come close. But economic growth can help fight inflation, too—besides being good for its own sake.

Congress and the Biden administration should loosen never-needed occupational licenses, trade barriers, energy restrictions, financial regulations, permits, and excessive paperwork. The resulting increase in growth would help to ease inflation. It would not be an inflation cure-all. But an extra percentage point or two of growth would make the Fed’s job easier at the margin. More importantly, more growth would save and improve lives.