Inflation is proving more persistent than policymakers hoped. Now that gas prices are rising, it may go even higher. The Biden administration already threw fuel on the inflation fire by sending many Americans checks last year. And there may be more to come because Biden’s current and future policies will probably make inflation worse.
In his State of the Union address, Biden promised that inflation could be curbed without tamping down growth and damaging the labor market. He promised more infrastructure through Build Back Better, more electric cars, and a reduction in trade through more manufacturing being done at home. He thinks these measures will increase productivity and reduce price pressure. He’s wrong on trade: less of it will increase inflation, in both the short and long term. He’s right that productivity can help with inflation, but it takes decades for those gains to be realized. In the short term, more spending and jobs programs will, if anything, add to inflation. These plans, combined with Biden’s push to shrink the oil and gas industry, suggest that the president is determined to increase inflation instead of reducing it.
In his short time in office, Biden has cancelled the Keystone XL Pipeline, tried to reduce the number of successful fracking applications, and made a Fed appointment, Sarah Bloom Raskin, who has been outspoken in arguing that oil companies should pay a premium when they raise capital. In short, Biden aims to shrink America’s oil and gas production at a time when the only compelling replacement for these as transportation fuel is electric cars, which use batteries that may be even worse for the environment.
To be fair, Biden’s energy policy is not yet contributing to rising gas prices. The Keystone Pipeline hasn’t been built, so halting construction does not remove an active factor in the equation. The reason for high prices is the global economy coming to life after the pandemic, the winter months, and, of course, Russia. However, Biden’s spending most of his tenure trying to shrink oil and gas production is a bad judgment economically and geopolitically, and high energy prices remind Americans why reducing fossil-fuel production before we have reliable alternatives is poor strategy. Energy prices were already high before Russia invaded Ukraine. Biden had to ask OPEC to increase supply; just a few years ago, the U.S. appeared to be nearing energy independence.
The administration is still hoping that renewables, not ramping up fossil fuel production, are the answer to rising prices. An economy that runs on solar, wind, and electric cars may sound nice, but it isn’t realistic: 80 percent of American energy comes from fossil fuels, and it’s doubtful that, even with more time, renewables will be a reliable and sufficient source of energy, especially without more nuclear power. Then again, this is all consistent with Biden’s response so far on inflation: he seems to prefer long-term, uncertain strategies to solving short-term problems.
What could the administration do instead? It could relieve inflation now and in the medium term by eliminating the Trump tariffs, repealing the Jones Act (which would reduce the costs of domestic maritime shipping), and expanding energy production—or, at a minimum, not making it exceptionally difficult for oil companies to raise capital and do business.
The Biden inflation plan is consistent with an administration whose economic philosophy appears to be that economic policy offers a free lunch. We can be good environmental citizens without meaningfully changing our habits. We can send everyone big checks without inflation. And if inflation does come, all we have to do is make more electric cars or build more things. This is wishful thinking, to put it kindly; its only silver lining is that the resulting high energy prices and rising interest rates may arouse the American public while there’s still time to change course.