Deficit spending, not ‘price-gouging,’ is driving inflation

In a recent speech, Vice President Kamala Harris announced plans to ban what her campaign labels as “price-gouging” on food. 

Americans are indeed concerned about rising costs, exemplified by egg prices increasing by 19 percent over the last year. But inflation is not caused by price-gouging. It can, however, be caused by increases in the money supply combined with unsustainable fiscal deficits, both of which should sound familiar. And other parts of Harris’s agenda would likely make the problem worse, as they would increase budget deficits.

The assertion that food producers are price-gouging is highly questionable to begin with. There is plenty of competition among farmers, processors, wholesalers and retailers to attract inflation-weary customers and keep prices down.

Supermarkets earn a profit margin on sales of approximately 2 percent. Even if some firms exercise monopolistic power and charge high prices, that does not necessarily cause inflation, which measures how fast prices rise each year.

Inflation results from government monetary and fiscal policy, not from corporate greed.

With the federal government running deficits close to $2 trillion a year and growing, and with no plan to raise taxes to pay back the debt, those who own government bonds have good reason to expect those bonds to decline in value.

This motivates people to try to sell their bonds in exchange for other things, increasing demand for and driving up the prices of goods and services. This is one big reason why inflation rose so drastically in 2021 and 2022.

Also, as plenty of astute observers have pointed out, during the pandemic, the government added $5 trillion of stimulus spending with no plans to raise taxes to pay for it. Americans consequently increased their spending on goods and services and demand expanded rapidly relative to supply.

Put this all together, and it’s easy to see why prices rose so much, with year-over-year inflation reaching 9.1 percent in June 2022. The cause was government recklessness. Government price-controls will not end it without creating shortages.

Although inflation has now fallen below 3 percent, it is still too high. Given the prospects of high and rising future deficits, people remain less willing to buy government bonds. Partly to entice more people to buy them, interest rates on those bonds have risen — but this means more and more government spending goes to pay interest on the debt.

The growing cost of interest payments is another reason the next president may exert pressure on the Federal Reserve to ease its monetary policy and lower interest rates, which may again contribute to inflation by reheating the economy and consumer demand.

Then there is the fact that future deficits are expected to rise because a growing share of government spending is on Social Security, Medicare and Medicaid, entitlement programs not subject to annual budgetary limitations.

With all these challenges in mind, how can the next president and Congress limit budget deficits and keep inflation down? The answer is simple: Take steps to reduce both entitlement spending and discretionary spending without also enacting significant tax cuts.

Instead, Harris proposes further increases in deficit spending, such as expanding Affordable Care Act subsidies and raising the child tax credit by making it refundable. Former President Donald Trump’s plan to reduce taxes on Social Security benefits would also increase deficits — in this case by between $1.6 and $1.8 trillion over 10 years.

Without credible plans to run future government surpluses, expect more inflation.

We need a chief executive willing to make hard choices and not blame someone else, such as corporations, for our economic woes.

Tracy C. Miller is a senior research editor with the Mercatus Center at George Mason University.