You will not go wrong if you assume that Republican politicians oppose President Biden’s Infrastructure and Build Back Better programs because wealthy people and corporations want cheap labor. Rank and file Republicans, largely working people on the other hand, are happy to have some leverage and to see their wages going up. What Republican politicians hide from these working class voters behind attacks on minorities and conspiracy theories is the GOP’s unrelenting efforts to keep labor cheap, the very antithesis of the kind of economic populism working Americans want.
This is not new. Republican leaders during the Great Depression opposed all the key Democratic programs that still help ordinary people like Social Security, unemployment insurance, government employment programs, investments in dams and public works, efforts to bolster farm prices and a minimum wage. They opposed these programs on the grounds that they would be inflationary, run up the debt, and be socialistic, the same arguments they use against Biden’s programs today. The Consumer Price Index had fallen more 30 percent from 1929 to 1933 and unemployment stood at 25 percent but Republican saw inflation around the corner because they understood that the wealthy and corporations would have to pay workers more if joblessness dropped and people had a safety net to fall back on. When Republican leaders today say that Biden’s Infrastructure and Build Back Better programs will cause inflation and increase the debt, they are making the same argument for the same hidden reasons.
A question today is whether there are reasons to believe Republican claims about the dangers of inflation and debt that have been wrong for so many decades. Real U.S. Gross Domestic Product (GDP) will be over $23 trillion in 2021. Over the next ten years it will total close to $300 trillion if real GDP grows at 2.5 percent a year and there is just a modest amount of inflation.
President Biden’s $1.8 trillion Build Back Better program, a ten-year program to pay for things like better and less expensive health care and help for families with children, will be only 0.6 percent of this roughly $300 trillion.
Even if Biden’s programs cost $4 trillion as some are saying, $4 trillion is only 1.3 percent of GDP for those 10 years, 0.13 percent each year. That amount of additional government spending is dwarfed by private spending and cannot possibly lead to the terrifying inflation Republicans would have Americans fear.
It is also clear that Biden’s programs will add little to government debt. Much if not all of the $1.8 trillion or $4 trillion is not additional spending. It would be paid for by taxes on people earning more than $400,000 a year and on corporations that pay less in taxes now than they paid a few decades ago.
Raising taxes toward earlier levels on people and corporations who can afford it shifts money that would have been spent by the wealthy to middle class and low-income people. It will add little to total spending that might otherwise push inflation up a little. What a better safety net does is empower workers and make it harder to find cheap labor.
Americans nevertheless are right to ask why prices have risen significantly in the last year. It’s because of bottlenecks related to COVID-19, the rapid reopening of the economy, and the reluctance of workers to return to old jobs that paid poorly. Gasoline prices are up sharply because Americans are driving again instead of staying at home, and OPEC joined by Russia has refused to increase supply. The price of natural gas is up because drilling and fracking dropped sharply during COVID-19 and fuel price increases also show up in electric bills.
Surging demand for imported goods is another reason for higher prices. Consumers are spending money they saved when millions stayed home during the epidemic. Demand for computer chips has outstripped supply raising prices of automobiles, appliances, phones, and
electronics and pushing buyers to bid up prices for used cars. It will take time for new chip factories to be built in the U.S. and overseas.
Back in the early 1970s, OPEC raised oil prices from about $3 a barrel to $9 and then to $12. It was a shock and American homeowners reacted by insulating their homes. This caused the price of insulation to soar. Impatient people called for price controls, but makers of insulation added capacity and, in a year or two the price of insulation dropped back because Owens Corning and other makers brought on new plants.
Free-market adjustments to deal with bottlenecks will take place with chips and other things that are in short supply, but they will take time. Republican politicians want Americans to be angry at government for these COVID-related price increases because that might help them torpedo Biden’s programs that will improve the position of workers and trim the sails of wealthy titans. The virus kept people home and closed big sectors of the economy. Now entertainment, hospitality, day care, schools, and travel are coming back, but working people are reluctant to return to their old jobs at old wage levels. Rising wages are a good thing, but not for people who want cheap labor to do the laundry, mind the children and take care of grandparents.
The economic rebound and shifts in patterns of spending are clogging ports and driving up the costs of sea freight and trucking. Driving a truck is a hard job and it has gotten harder with delays at ports and inland terminals. Turnover among drivers was a serious problem before COVID but now drivers have employment options and might get paid sick leave and other benefits from Biden’s programs. That is generally a good thing, but Republicans who want cheap and meek labor are trying to convince voters that it is inflationary and socialistic.
The big question relating to inflation going forward is whether employers can pass on higher costs in the form of higher prices. If most cannot, the share of income going to workers will move back up toward the fairer levels of the 1950s, ’60s and ’70s. My bet is that competition will prevent further sharp price increases once things have settled down and Biden will try to use government to encourage more of this price-limiting competition, for example in health care. Republicans, true to form since the Great Depression will try to prevent government from weighing in on the side of working people by convincing voters that everything government does is inflationary and corrupt. This is the battle between Democrats and Republicans now underway, better wages and working conditions versus cheap labor. The stuff about inflation and debt, socialism and conspiracies is a smokescreen. Biden and the Democrats are the economic populists.
Paul A. London, Ph.D., was a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics in the 1990s, a deputy assistant administrator at the Federal Energy Administration and Energy Department, and a visiting fellow at the American Enterprise Institute. A legislative assistant to Sen. Walter Mondale (D-Minn.) in the 1970s, he was a foreign service officer in Paris and Vietnam and is the author of two books, including “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005).