Asset formula

How to fuel inflation, harm the environment

Inflation has become a hot political issue around the world. In the US, the consumer price index rose at an annual rate of 8.6% in May, and EU inflation is not far behind. The root cause of the problem is that too much money drives too few goods.

Consumers saved more than usual when they cut spending during the Covid-19 pandemic, then increased their purchases after lockdown restrictions were lifted. But supplies grew more slowly because it took time to restart production and because many workers were still falling ill. While shipping bottlenecks and labor shortages further constrained production levels, rising budget deficits and continued ultra-loose monetary policies put additional pressure on prices. until 2022.

Today, US President Joe Biden says his top priority is to “bring down inflation”. Yet, in a recent speech on the issue, The Washington Post notes that he “has mingled with oil companies and shipping conglomerates”, accusing them of “seeking excessive profits instead of lowering prices for consumers”. Not only have the oil companies failed to increase production, but “the shipping cartel,” according to Biden, operated as an oligopoly, raising “their prices by as much as 1,000 percent.”

Although the war on inflation must be waged largely through monetary and fiscal policy, the administration could do much to help reduce inflationary pressures. But scapegoating specific sectors is not the solution. In fact, the administration risks adding even more inflationary pressure to the mix. Given the widespread expectation that the world will move away from fossil fuels, oil companies can hardly be expected to invest in additional capacity. And even if they rapidly increased their investments, it would take a long time before production could increase. More investment, with production coming only years later, would intensify current inflationary pressures.

Other efforts to lower prices at the pump have been equally misguided. For example, the Biden administration waived environmental rules to allow more ethanol to be added to gasoline, saying it will lower fuel prices over the summer. But a higher proportion of ethanol reduces a vehicle’s fuel economy. Motorists who travel the same distance as they would otherwise face higher costs. Worse still, increased demand for corn (the grain used to produce ethanol) will drive up corn prices, prompting farmers to shift more land from wheat to corn production and further increasing commodity prices. food overall.

On the shipping front, more competition would certainly lower prices in the long run. But the real problem is that the century-old Jones Act prevents foreign ships from competing with domestic ships for shipping between US ports. Foreign vessels arriving at US ports are required by law to unload their cargo, and trucks must then be matched with containers. These unnecessary processes created port congestion and caused delays. And these delays have further increased costs for companies whose operations have been disrupted by the unavailability of key inputs.

Ships built in the United States are estimated to be six to eight times more expensive than those built in Asia, and American crews are paid three to four times more than their counterparts on foreign ships. But US shipping companies have not had to worry about this lack of competitiveness, as they are protected from foreign competition. The cost of this protection is ultimately borne by US consumers. Higher cost ships with higher cost crews tend to increase shipping costs between ports, as well as requiring more goods to be transported to their final destination by truck or rail, which cost both more expensive than ocean shipments.

Obviously, relaxing or repealing the Jones Act would increase competition and reduce costs. And that’s not the only option available to the Biden administration. For example, by eliminating former US President Donald Trump’s tariffs, Biden could increase the annual purchasing power of the average US household by about US$797.

Similarly, raising the cap on the number of foreign workers allowed to legally enter the United States could have alleviated key bottlenecks. Throughout the pandemic recovery, employers have complained that they cannot find enough workers with the right skills. If the foreign-born US population had grown at the same annual rate over the past three years as it did between 2010 and 2018, the US labor force today would have 1.6 million more workers, allowing businesses to fill vacancies more quickly and reduce shortages. caused by delivery delays.

The Biden administration could also have removed tariffs on solar panels. Instead, tariffs were simply suspended (after much debate) for two years, resulting in an estimated loss of 100,000 jobs and a reduction in the number of solar panels that would need to be installed. Even the disastrous shortage of infant formula in the United States could have been greatly alleviated if more imports had been allowed and if the states had not obtained monopoly production rights within their borders.

Not only has the Biden administration misidentified the sources of inflation; it even adds to inflationary pressure. As if that weren’t enough, many of its recent actions – ethanol requirements, increased oil production (if that could happen), tariffs on solar panels, more energy-intensive road and rail transport carbon – harm its stated climate. and environmental objectives.

Reducing inflation and improving the environment are valid goals. But achieving them will require frank acknowledgment of contributing factors and realism in looking for ways to improve them. Unfortunately, that hasn’t been the Biden administration’s formula thus far.

Anne O. Krueger is Senior Research Professor of International Economics at the Johns Hopkins University School of Advanced International Studies, Senior Fellow at Stanford University’s Center for International Development, and former Chief Economist of the World Bank and First Deputy Managing Director of the International Monetary Fund.

Copyright : Project Syndicate


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