President Biden has declared many times in recent weeks that fighting inflation is his top economic priority. Although the Federal Reserve is primarily responsible for maintaining price stability, Biden’s attitude is the right one at a time when prices are rising at their fastest rate in over 40 years and Americans across the political spectrum rate inflation as the biggest problem facing the United States. Unfortunately, in their sincere desire to “do something” about inflation, the Biden administration and many in Congress have embraced expensive and gimmicky giveaways that will more likely than not make the problem even worse.
Last week, Biden called on Congress to suspend the federal gas tax for 90 days and encouraged state governments to suspend their own gas taxes. It’s understandable that the president wants to relieve pain at the pump for families, but his proposal would save the average American family less than $50 while costing the Treasury roughly $10 billion. That’s the same cost as a bill to fund the purchase of covid vaccines, tests, and treatments that has been stalled for months, in part because of disagreements about how to pay for it.
Unlike that covid funding bill or other targeted investments, a suspension of the gas tax would not be economically beneficial. Oil refineries are already operating at or near their maximum capacity, meaning gas supply cannot be significantly increased in the near-term. The base price of gas will likely rise to offset the effect of the tax holiday, because if it doesn’t, the amount of gas people are seeking to buy at a lower effective price will outstrip what can be supplied and consumers will experience shortages. And to the extent oil companies and gas stations can pass any savings onto consumers, that money will be used to bid up prices in other sectors that are also experiencing supply shortages. Inflation is the result of too many dollars chasing too few goods and services, and giving away more dollars to bid up prices is the last thing policymakers should be doing right now.
The proposed gas tax holiday by itself may not be a major cause for concern, but it’s part of a troubling trend of gimmicky giveaways that suggests the president’s political and economic advisers are pushing him to grandstand about inflation instead of actually addressing the problem. Biden has repeatedly extended a pause on student loan payments and interest accrual while framing it as a way to provide economic relief for families struggling with inflation, but all this did was give educated professionals $85 billion more to throw on the inflationary fire. If Biden proceeds with a proposal to cancel $10k of student debt per borrower (on top of the $6k he has already effectively wiped out through the payment moratorium), that would cost another $250 billion.
Those aren’t the only sources of red ink: other executive orders President Biden has signed since taking office increased deficits by roughly $400 billion. The Honoring Our PACT Act, a veterans benefits bill that received very little scrutiny before passing through Congress last week with Biden’s support, would add at least another $270 billion to deficits. And although the bipartisan innovation bill currently being conferenced by the House and Senate could potentially reduce inflation in the long-term, it is likely to add at least $50 billion more to deficits. Add it all up, and that’s over $1 trillion of deficit-increasing policies supported by an administration that called for $1 trillion of deficit reduction in its most recent budget proposal.
Although many of these individual policies have clear merits, it’s disappointing to see policymakers doubling down on what is ultimately inflationary fiscal policy by not offsetting their costs. In their well-intentioned effort to foster a robust jobs recovery following the collapse caused by covid, the White House ignored the warnings of economists who said their $1.9 trillion American Rescue Plan was too much deficit-financed stimulus and would likely lead to inflation, then they spent several months dismissing the inflation that did materialize as transitory. There is simply no excuse for continuing to champion deficit-increasing policies now that full employment has returned and the economy is clearly overheating. At this point, it’s macroeconomic malpractice.
Instead, Biden should draw from the Inflation Action Plan released earlier this month by the New Democrat Coalition in Congress. As I wrote at the time it was released, many components of that plan would address both the supply and demand contributors to inflation by strengthening supply chains, reducing barriers to trade, cutting onerous regulations, increasing energy production, investing in innovative research, and making fiscal policy more responsive to our macroeconomic needs. These policies could help make it easier for the Federal Reserve to tame inflation without pushing the economy into a recession.
To Biden’s credit, he has already endorsed or enacted some of these proposals. For example, a budget reconciliation bill being negotiated between Sens. Joe Manchin and Chuck Schumer with his blessing would make significant investments in expanding energy supply while reducing deficits, both of which would help tamp down on inflation. This presents a clear contrast with Congressional Republicans, whose proposed inflation “remedy” of more budget-busting tax cuts is just another gimmicky giveaway. But there’s little benefit in one major bill being deficit-reducing if the net savings don’t come close to covering the costs of all the other spending policymakers are approving through additional legislation or executive action. The administration and its allies in Congress must commit themselves to fiscal discipline in policy, not just rhetoric.
The American people don’t want policymakers to paper over the effects of inflation, they want their leaders to work on actually bringing costs down. That means Democrats must eschew new spending plans unless the benefits are carefully targeted and the costs are concurrently offset. No matter how well-intentioned broader proposals to give people cash may be, they will neither provide meaningful relief to families nor will they improve the party’s political prospects. Ultimately, the only thing gimmicky giveaways will do is make inflation worse.