By most measures, the U.S. economy is doing well — but not when it comes to inflation. Consumer prices rose 8.5% in the year to March. Wages are rising too, though not fast enough to keep up. That means financial stress for many families, especially those on fixed incomes or with meager savings. With midterm elections approaching, President Joe Biden’s administration is likely to be judged on how it deals with this problem.
It should admit that effective short-term options are few. Inflation will stay high as long as the economy faces an excess of demand over supply. The Federal Reserve has rightly begun to tighten monetary policy. The administration can help by refraining from further fiscal stimulus, and it has wisely tapped the Strategic Petroleum Reserve to blunt the spike in energy costs caused by sanctions against Russia. Beyond this, short-term fixes might do more harm than good.
Effective steps to boost supply are what’s needed. These take time to work, but the effort won’t be wasted even if, thanks to the Fed’s actions and the easing of production bottlenecks, inflation subsides later this year: Expanded supply would then mean higher real incomes.
Public investments such as those included in last year’s infrastructure bill are eminently desirable — and there’s a good case for doing more, so long as it’s responsibly financed. But the paybacks from such projects are unavoidably distant. Helping the labor market match workers and jobs would boost supply more quickly. Three broad approaches would be especially valuable.
First, increase the rewards for work, especially for those on low incomes or only weakly attached to the labor force. The best way is to permanently expand the earned-income tax credit — a measure that subsidizes low-wage workers. Policy makers should also address tax and benefit anomalies that discourage work. For instance, elderly low-wage workers often face a high implicit tax rate: If they stay employed they’ll pay more in payroll tax than they’ll receive in enhanced Social Security benefits. Fixing such accidental penalties costs money, but higher employment would offset much of the outlay.
