Inflation has become a hot-button political issue around the world. In the US, the consumer price index rose at an annualized rate of 8.6% in May, and EU inflation is not far behind. Root Cause: Too much money chasing too few goods. When consumers cut spending during the pandemic, they saved more than usual, then increased purchases after the lockdown was lifted. But supplies grew more slowly, as it took time to revive production and many workers were still getting sick. While shipping bottlenecks and labor shortages further constrained production, an increase in the fiscal deficit and ultra-lax monetary policies put further pressure on prices through 2022.
Now, US President Joe Biden says his top priority is to “reduce inflation.” Nevertheless, in a speech on this, The Washington Post noted, he “stuck in oil corporations and shipping groups”, accusing them of “pursuing excessive profits”. to drive down prices for consumers.” Not only have oil companies failed to boost production, but the “ocean shipping cartel,” Biden claimed, acted as an oligarchy, “to raise their prices.” has increased by up to 1,000%.”
Although the war against inflation should largely be waged through monetary and fiscal policy, there is much the US administration can do to help ease inflationary pressures. But scapegoating specific areas is not the answer. The administration risks adding even more inflationary pressure to the mix. Given the widespread expectation that the world is moving away from fossil fuels, oil companies can hardly be expected to invest in excess capacity. And even if they increased investment rapidly, it would take a long time for production to increase. More investment, with additional supply only coming years later, will intensify today’s inflationary pressures.
Other attempts to reduce prices at the pump have been equally misguided. For example, the Biden administration has waived environmental regulations to allow adding more ethanol to gasoline, claiming it would lower fuel prices in the summer. But the high proportion of ethanol reduces the fuel economy of the vehicle. Motorists who cover the same distance as they otherwise drive, face higher costs. Worse, higher demand for the corn used to make ethanol would drive up corn prices, prompting farmers to shift more land from wheat to corn crops, further increasing food prices overall. Will be
On the shipping front, more competition will drive down prices in the long run. But the real problem is that the centuries-old US Jones Act prevents foreign ships from competing with domestic ships for maritime shipping between US ports. Foreign ships arriving at US ports are required to unload their cargo, and then trucks must match the containers. These unnecessary procedures have created port congestion and caused delays. And those delays have further increased costs for businesses whose operations were disrupted.
American-built ships are estimated to be six to eight times more expensive than ships built in Asia, and American crews are paid three to four times more than their counterparts on foreign ships. But US shippers need not worry about this lack of competition, as they are protected from foreign competition. The cost of this protection is borne by US consumers. High-cost ships operated by high-cost crews increase shipping costs between ports, as well as forcing more cargo to be carried by truck or rail to their final destination, which costs more than sea shipments.
Relaxing or repealing the Jones Act will increase competition and reduce costs. And it’s hardly the only option available for the US. By eliminating former US President Donald Trump’s tariffs, Biden could increase the average American household’s annual purchasing power by an estimated $797. Similarly, raising the limit on the number of foreign workers entering the US legally can reduce barriers. Through the recovery from the pandemic, employers have complained that they are not getting enough employees with the appropriate skills. If the US foreign-born population grew at the same annual rate over the past three years as it did between 2010 and 2018, there would be 1.6 million more workers in the US labor force today, allowing businesses to fill vacancies more quickly and This will help in reducing the shortfall. The US could also remove tariffs on solar panels, driven by delivery delays. Instead, the tariffs were suspended (after much debate) for only two years, leading to the loss of an estimated 100,000 jobs and a reduction in the number of solar panels to be installed. Even America’s disastrous baby-formula shortage could have been significantly reduced if more imports were allowed and if American states were not given monopoly production rights within their borders.
The Biden administration has not only misidentified the sources of inflation, but it is also increasing inflationary pressures. As if that’s not bad enough, many of its recent actions—ethanol requirements, increased oil production (if it could happen), tariffs on solar panels, more carbon-intensive trucks and rail shipping—are damaging to its stated climate. and environmental objectives.
Reduction in inflation and improving the environment are both worthwhile goals. But achieving them will require a clear acknowledgment of the contributing factors and realism in finding means to improve them. Unfortunately, based on the evidence, this has not been the formula of the US administration so far. ©2022/Project Syndicate
Anne O. Kruger is the former Chief Economist of the World Bank and currently Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies.