Talking Points

Tackle inflation by tightening Corporate America's belts

The Federal Reserve plans to fight inflation by raising interest rates this year, regardless of the uncertainty caused by Russia's war in Ukraine. It's a remedy that's been used more than once in the past, but this time around, all it will do is throw millions of people out of work without addressing the true causes of the problem.

It may be time for something more radical: limited price controls.

While some argue that the recent resurgence of inflation is caused by the economy overheating, the reality is that the causes of inflation are primarily on the supply side of the economy. Instability caused by COVID-19 continues to plague countries in our supply chains, and uncertainty over U.S. trade policy, such as holdover Trump-era tariffs and the proliferation of sanctions only make it worse. Interest rate hikes would do little to help these problems.

It's better to address them directly. 

An immediate solution would be to impose limits on certain price increases through the federal government, as was done during and after World War II, and again under Nixon. Laws preventing price gouging during emergencies also still exist in many states. Ideally, these would remain until the global economic situation stabilizes and companies create more disruption-tolerant supply chains. Such controls would not be so severe that companies can't make any profit, but be sufficient to prevent consumers from being ripped off by companies using the excuse of inflation to massively increase their profit margins during the current troubles — Matt Stoller estimates that 60 percent of price increases have gone to increase profits rather than compensate for increased costs.

It's certainly worth a try, since it is certain is that the supply of imported semiconductors, oil and gas, construction materials, and other disrupted elements in U.S. supply chains won't increase because of contractionary monetary policies. Supplies may even decrease, creating a stagflation cycle, with prices going up while the economy is slowing down, as happened in the 1970s. 

We are at risk of moving from an equilibrium that is helping ordinary Americans into good-paying jobs, despite high inflation, to one where corporations make exorbitant profits, but unemployment and low wages are widespread, with equally high inflation.

To avoid this outcome, it's time for politicians to think outside the interest-rate box and take bolder action.