Can a president get inflation under control?

Inflation.

It ended the presidencies of Jimmy Carter and Gerald Ford, demoting both to one-term presidents. And the widespread dissatisfaction with the post-pandemic situation inflation has taken a heavy toll on President Joe Biden's popularity… and may have been one of the factors that led to his decision not to seek a second term.

But is inflation really the president's fault? And what can a commander in chief do to fix it?

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The relationship between inflation and the man or woman in the White House is complex because inflation itself is complex. And while the president cannot control inflation itself, he can certainly influence it.

So let's break this down, starting with the drivers of inflation.

Inflation is the rate at which prices rise over time. Or, to put it another way, it measures how much your money is worth in relation to the goods and services you can buy with it.

The reasons for inflation are varied, but ultimately they all boil down to supply and demand. That's how all markets work. When demand exceeds supply, prices rise to compensate. When supply exceeds demand, prices fall.

Both aggregate supply and aggregate demand can be influenced by government policies, although not necessarily by the president.

Inflation starts with the Fed

Let's look at some of these possibilities, starting with the role of the Federal Reserve. The Fed regulates the amount of dollars and the rate at which they change hands in two ways. The first is to regulate short-term Interest charges and the second is through buying and selling Bonds on the free market (ie quantitative easing). When the Fed buys bonds, it essentially creates new dollars. And when it sells bonds, it takes dollars out of circulation.

Low interest rates encourage borrowing and spending, which in turn encourages inflation.

For much of the past two decades, the Fed has pursued an overly loose monetary policy, keeping interest rates at extremely low levels for years and essentially flooding the economy with trillions of new dollars through its bond purchases.

Although the Fed has pursued a restrictive monetary policy over the past two years, this does not undo two decades of dovishness. The Fed's loose policy is a major factor in the inflation we still see today.

This is not direct under the control of the President, since the Fed is designed to operate independently. The true extent of the Fed's independence is of course disputed, and the President is believed to have at least some informal influence.

However, the President plays a major role in selecting the leaders of the Federal Reserve. The seven members of the Fed's Board of Governors are nominated by the President and confirmed by the Senate to serve fourteen-year terms. The Chairman, currently held by Jerome Powell, is nominated by the President and serves a four-year term.

But at least when it comes to the Fed's day-to-day operations, the president doesn't have much say.

Inflation can be influenced by politics

The House of Representatives controls finances, although it does not do so in a vacuum. The president submits a budget to Congress, and then the horse-trading begins. Eventually, the House and Senate agree on funding bills, and the president signs them, making them law.

This is an area where one could argue that the president is more directly responsible for inflation. Deficit spending—that is, borrowing money from the future to pay for spending today—creates artificial demand and is inflationary…especially when budget deficits are as large as they are today. at over 6% of gross domestic product (GDP).

In addition, through loans, the government draws capital away from the productive private sector. The extra dollar needed to finance government spending is not invested in a new factory, chip factory or office building. It creates demand without simultaneously creating supply, which is inflationary.

Trade policy also plays a role. Free, competitive trade lowers costs and is inherently inflation-reducing. It is no coincidence that the sharp decline in inflation between 1980 and 2020 occurred at a time when free trade agreements were in vogue and tariffs were declining.

Tariffs make imports more expensive and hinder free trade. This leads to inflation.

The president does not set trade policy single-handedly. While the law gives the president a lot of latitude in setting tariffs, it is a joint effort with Congress. But it is safe to say that trade policy is one area where presidents can and do influence inflation.

What factors influence inflation outside of politics?

Not all inflation drivers are political. Demographics also play a role, and part of our current inflation is due to labor shortages. No president can make fully trained new workers appear out of thin air with the snap of a finger.

Supply disruptions also play a role, as we saw during the pandemic.

Likewise, the prices of energy and commodities are driven by global factors. Yes, a president can make it easier or harder to produce domestic crude, but a move by OPEC to increase or decrease production generally takes precedence over decisions made in Washington.

All of this means that presidential actions do have an impact on inflation. A president who balanced the budget and promoted free trade would likely preside over a country with lower inflation than a president who ran chronic budget deficits and increased tariffs.

However, it is not within the President's sole power to control inflation, nor is it realistic to expect this.

Can a president get inflation under control?

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