Fighting inflation by tightening the belt of American companies
The Federal Reserve plans to fight inflation by raising interest rates this year, regardless of the uncertainty caused by Russia’s war in Ukraine. It’s a remedy that’s been used more than once in the past, but this time all it will do is put millions of people out of work without addressing the real causes of the problem.
It may be time to move on to something more radical: limited price controls.
While some Argue that the recent resurgence of inflation is caused by the overheating of the economy, the reality is that the causes of inflation are mainly on the supply side economy. Instability caused by COVID-19 keep going countries in our supply chains, and uncertainty over U.S. trade policy, such as Trump-era tariffs and the multiplication of penalties only makes things worse. Interest rate hikes would do little to solve these problems.
It is better to contact them directly.
An immediate solution would be to impose limitation of certain price increases through the federal government, as has been done during and after World War II, and again under Nixon. Laws preventing price increases in emergencies also still exist in many states. Ideally, these would stay until the global economic situation stabilizes and businesses create more disruption-tolerant supply chains. Such controls would not be so severe that companies cannot make any profit, but would be sufficient to prevent consumers from being ripped off by companies using the inflation excuse to massively to augment their profit margins during the current unrest — Matt Stoller estimates that 60% of price increases served to increase profits rather than to offset increased costs.
It is certainly worth a try, as the supply of imported semiconductors, oil and gas, building materials and other disrupted items in US supply chains is certain not to increase. due to restrictive monetary policies. Supplies may even decreasecreating a cycle of stagflation, with prices rising as the economy slows, as happened in the 1970s.
We risk moving from an equilibrium that helps ordinary Americans find well-paying jobs, despite high inflation, to an equilibrium where corporations make exorbitant profits, but unemployment and low wages are widespread, with inflation just as high.
To avoid this outcome, it is time for politicians to get out of the interest rate framework and take bolder action.