Biden's anti-inflation plan doomed to fail

"One way to fight inflation is to cut wages and make Americans poorer. I think I have a better plan: cut your costs, not wages. Make more cars and semiconductors in the US. More jobs in which you have a earn a decent income, instead of depending on logistics chains abroad. Let's make it in the US. My plan to fight inflation is going to cut your costs." The above is an excerpt from Joe Biden's State of the Union address earlier this week. It's amazing how much economic nonsense and contradiction he managed to cram into that small piece of text. 

Becoming less dependent on foreign countries is simply a euphemism for 'protectionism'. No economy has benefited from this in the medium term. To call that the economic egg of Columbus is not exactly a sign of economic insight. Wages that are reduced, that does not occur. In the US wages have not fallen once in the past decades. And as for the brilliant idea of ​​fighting inflation by cutting costs… 

Public enemy number one
When I heard Biden, I immediately thought of his predecessor Gerald Ford and the year 1974. Inflation was very high then as now. So high that President Ford declared it public enemy number one. He started a campaign to fight that. Millions of WIN (Whip Inflation Now) badges were created and given away. 

Ford's plan included many measures to rein in inflation, such as carpooling more, turning down the thermostat a bit, or starting your own vegetable garden. His predecessor, President Richard Nixon, froze all wages and prices for a time in 1971 to fight inflation. That freeze did not last long and did not help. Retailers who were not allowed to charge higher prices took their products off the shelves and sold them on the black market. The result: inflation, just not visible in the statistics. Freezing prices to fight inflation is on a par with Canada's Rhinoceros Party, once founded by a few comedians, to eliminate crime by repealing all laws. 

Inflation problem not touched
Economists have now virtually unanimously judged the WIN campaign as one of the stupidest economic policies ever. It didn't help, because it didn't get to the heart of the inflation problem. Namely that there was too much money in circulation. It is no coincidence that inflation became the problem in the US and beyond, after the summer of 1971. When President Nixon de-pegged the dollar from gold (the economic event of the last 100 years in my view, as described in 'Turning Point 1971') . That decision made it possible to print too much money and that led to persistent inflation. You don't combat that with vegetable gardens, carpooling or a degree lower in your house, but by letting the money presses run less hard. 

That finally happened in the US, when in 1979 Paul Volcker (someone who was there when Nixon made the 1971 decision and yelled "you write a good book" to me when we last saw each other) was appointed chairman of the Fed. . He went straight to the money presses, which got inflation back in the loft. 

I fear Biden's brilliant plan to 'cut costs and produce more domestically' is doomed to fail. Protectionism, apparently the core of his economic program, demonstrably works, increasing inflation and not decreasing inflation. Higher inflation slows down economic growth in the long run and thus the growth of employment and impoverishes the working American. Don't you believe that? The facts since 1971, hence 'turning point' speak for themselves.

Edin Mujagic

Edin Mujagić is an economist and manager at Beleggingsfonds Hoofbosch. He focuses on global central banks, and in his blogs he writes mainly about developments in interest rates and inflation. He has also written several books.

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