The Senate Budget Committee recently held a hearing on inflation. While it brings much-needed attention on an issue that’s hitting American businesses and families hard, the premise of the hearing was flawed.
Instead of a thoughtful discussion, Sen. Bernie Sanders (I-VT), Chairman of the committee, made it into a blatantly political, misguided attempt to blame businesses for rising prices.
Attempting to shift blame only increases the likelihood that policymakers will misdiagnose the real causes of inflation, prolonging and exacerbating higher prices for families, and risking a recession.
Setting the record straight
Economics teaches us that when supply is constrained and/or demand rises, prices rise to an equilibrium between the available supply and demand as we noted in a letter to Sen. Sanders before the hearing.
Pandemic related shocks combined with a tight labor market, and loose monetary and fiscal policy have limited the supply of many goods and at the very same time boosted demand with an obvious result: broad based price increases.
Economists have refuted the idea that only recently have businesses chosen to raise prices. As the Washington Post editorial page writes, “What actually happened is that demand soared for many products as the economy recovered. Often, there were not enough products to meet it, thanks to supply chain hiccups and labor shortages, so prices went up.”
The Post also points out that even officials in President Joe Biden’s Treasury Department “have been unsettled by the White House’s attempts to blame some large corporations for inflation, skeptical of that explanation for the recent rise in prices.”
The only ones cheering attacks on businesses are Democratic political strategists.
Bottom line: Policymakers should be working on solutions that address the real root causes of inflation.
Monetary policy remains the best tool for fighting it, but here’s what won’t lower prices for families and small businesses: a Congressional hearing based on politics rather than economics and designed to shift blame onto American businesses.