- Last week, President Biden outlined his plan to counter inflation as the rate rises to around 7%
- The President placed the blame of inflation on rising prices in a myriad of sectors including motor vehicles, prescription drugs, energy, and childcare
- His solutions include programs to cut costs as well as protect wages by investing money into industries and raising the minimum wage
- Unfortunately, the administration is missing the true causes of inflation, and many of its programs could be counterintuitive to their end goal
After much waiting, the nation was given Biden’s agenda for tackling inflation. He and Democrats on the Hill have spent the last couple of days framing the issue, claiming rising costs are due to culprits such as big business. Sen. Alex Padilla (D-CA) blamed corporate consolidation for rising prices in a Budget Committee hearing two weeks before the speech. The morning of the address, Dr. Dianna Moss of the American Anti-Trust Institute answered a question from Rep. Sharice Davids (D-KS-3) before the House Small Business committee claiming the same.
Still attempting to rebuff Republican claims that spending from the American Rescue Plan is the true cause of rising prices, President Biden added to the Democrat’s list of inflation causing agents in his State of the Union. Unfortunately, many of these woes and solutions fall into three faulty categories: price control issues that will not have a significant impact on overall inflation, popular talking points re-hashed as anti-inflation measures, or proposals which simply will not work
“Madam Speaker, Madam Vice President, our First Lady and Second Gentleman. Members of Congress…”
Before looking at the President’s remarks, let’s look at Democrat’s original inflation claims. Democrats have self-admitted that they have little proof that corporate consolidation is driving up prices. Senator Padilla’s comment mentioned above saw him ask lawyer and University of Connecticut professor James Kwak if consolidation in the agricultural sector led to increased food prices. The question was met by an anecdotal answer ending in, “I think that the, I can’t prove it, but I think that the large ownership stakes of these asset management firms could very well be leading to higher prices in the food sector.”
Or perhaps raising gasoline prices have driven up the cost to produce food, or an over 7% inflation rate has caused food prices to go up as the dollar loses purchasing power overall. Perhaps companies are charging more because they know Americans had $1,400 or more delivered to them through the American Resue Plan. To claim, without evidence, that a politically popular talking point must be to blame among a myriad of other possibilities seems illogical.
“My plan to fight inflation will lower your costs and lower the deficit…”
On to the speech. To fact-check Biden’s claims, we will be using the Bureau of Labor Statistics’ Consumer Price Index Survey (CPI-U) for the year 2021, specifically comparing the data from the CPI-U January 2022 to January 2021. The CPI-U measures how much an average American spends on a myriad of items. By taking individual data points on price increases and plugging them into a formula found at the BLS website, one can find the amount certain items contributed to the overall inflation rate.
In his speech, Biden blamed inflation on a few key categories; prescription drugs, energy, childcare and automobiles. Using the formula above, we can check Biden’s claims and see how much each of these items is affecting the overall inflation rate.
“Here is the plan. First, cut the cost of prescription drugs…”
The rising price of prescription drugs, specifically insulin, has been a big talking point in Congress. While allowing citizens to have cheaper access to life-saving medicine is a noble cause, prescription drugs are hardly a significant cause of inflation. Last year, rising prescription drug costs only contributed .00022% to the overall rate of inflation. This is price control, not inflation control.
“Second, let’s cut energy costs for families, an average of $500 a year by combating climate change. Let’s provide investment tax credits to weatherize your home and business to be energy-efficient and get a tax credit for it. Double America’s clean energy production in solar, wind and so much more…”
Biden is right about one thing; energy prices have skyrocketed in the last year. The energy CPI-U index level has risen from 198.155 to 256.207, and energy costs contributed to 25.63% of the overall rise in inflation.
This has primarily been driven by rising gasoline prices, a subset of the CPI’s energy category. The gasoline index level has risen from 193.99 in December of 2020 to 290.185 in December of 2021. This influenced the overall inflation rate by a staggering 19.81%. With the invasion of Ukraine by Russia and Western sanctions of Russian oil, prices could be set to rise again.
To be fair, Biden cannot control Putin’s wild Ukrainian craze. But what he proposes doesn’t fix the problem in the short term. Releasing more barrels of oil on the market might help tamper previous inflation pressures, but Russian-caused inflation could be a whole new beast.
Biden’s long-term goal to combat energy inflation is to switch to a greener grid. In theory, this is a fantastic idea. The wind, sun and flow of water are not dependent on geopolitical events and thus are theoretically isolated from destabilizing pressures. However, the fact remains that now our grid relies on fossil fuels, and now those prices are increasing. Creating a green energy grid will combat inflation when it comes online in 30 years, but will do little to nothing to combat present inflation.
“The third thing we can do to change the standard of living for hard-working folks is cut the cost of childcare…”
Like prescription drug price control, lowering the cost of childcare is a noble idea, but not anywhere near the biggest headache that Americans are facing in terms of rising prices. Childcare costs have contributed to a total of 0.30% of all inflation over the year of 2021. While lowering costs in this area could help marginally, it is over shadowed by the impact of other areas such as food, which contributed to a 12.59% increase in inflation.
“Look at cars last year. One-third of all the inflation was because of automobile sales. There were not enough semiconductors to make all the cars people wanted to buy. Prices of automobiles went way up. Especially used vehicles as well…”
Biden here is right and wrong. Semiconductor shortages have led to a decrease in car production. However, he did inflate his numbers. According to the BLS survey, price increases in new car sales contributed to an overall 6.29% impact on all inflation and used cars caused a 14.58% impact. However, a combined percentage of 20.87% is just over one-fifth, not one-third, of all inflation.
“If you stop and look closely, you will see a field of dreams, the ground on which America’s future will be built. That’s where Intel, the American company that helped build Silicon Valley, is going to build a $20 billion semiconductor mega site. … And all they are waiting for is for you to pass this bill…”
For many of these issues, Biden’s fix has been more federal spending. Especially in the area of automobile prices, where he urged Congress to pass around $50 billion in spending to incentivize domestic semiconductor production. The issue here is Biden’s fix will only serve to overstimulate the economy. Semi-conductors are already in high demand, companies such as Intel do not need free cash to build factories which will already find their products in high demand.
“Let’s pass the Paycheck Fairness Act and paid leave. Raise the minimum wage to $15 an hour…”
Biden also touted raising the federal minimum wage to $15 per hour. The side effect of this could be a rapid wage-price spiral. If the administration dumps unnecessary money into people’s pockets, or requires their employers to pay them more, the price of goods and services could go up to either pay now-higher wage caps, or because they know their now-wealthier consumers have the money to pay out. Employees in turn might demand higher wages (and might get them in our very tight labor market) to pay for the increase in prices, which then rise to cover the increased paychecks and so on and so forth.
The problem with the Democrat’s plan is that it only sounds nice on paper. Lowering childcare and insulin costs is a price control measure which will impact less than 1% of all inflationary pressures. Anti-big business is a nice talking point, but there is no evidence that it can be reworked to counter inflation. Finally, ideas such as making the gird more environmentally friendly, giving checks to manufactures, or raising the minimum wage, will either take too long to be effective or make the situation worse. Unfortunately for those living in the States of the Union, inflation is a here and now issue with apparently little remedy from the administration.