SYLVIE DOUGLIS, BYLINE: NPR.
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PADDY HIRSCH, HOST:
This is THE INDICATOR FROM PLANET MONEY. I'm Paddy Hirsch.
Some mixed inflation news from the Bureau of Labor Statistics today. The consumer price index - that measures the cost of goods and services in the U.S. - continued to rise up 0.4% last month, but the rate of inflation is slowing. The CPI rose 4.9% in the 12 months through April. That's down from 5% last month. But the upshot is that inflation is still unpleasantly high in the United States, and all eyes are still on the Federal Reserve to see what Fed Chair Jay Powell's next move is going to be.
The Federal Reserve isn't the only agency with inflation-fighting superpowers. Congress has got some pretty serious muscle when it comes to influencing our spending, and they're quite happy to use those powers to juice the economy. But when it comes to stopping us from running too hot, we haven't seen much in the way of legislation coming out of Capitol Hill, although there's been a fair bit of shade thrown at the Fed.
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HIRSCH: So on today's show, we're going to look at what powers the Congress has to fight inflation and find out why those powers aren't being used and what that might mean for the long-term balance of power between elected legislators and the unelected Federal Reserve. That's coming up after the break.
Inflation is one of those Goldilocks data points. You don't want it too hot. You don't want it too cold. You need it just right, which, as all loyal INDICATOR listeners know, is about 2% a year, which means that right now we are running way too hot. We've got an inflation fire burning, and the Federal Reserve has been handed the keys to the firetruck to put the fire out.
Wendy Edelberg is the director of The Hamilton Project and a senior fellow in Economic Studies at the Brookings Institution. She says just as a fire crew has a fairly limited set of tools to fight a fire, so the Fed has only a handful of weapons to cool inflation.
WENDY EDELBERG: If inflation is too high, the most effective set of tools we have is monetary policy. And what happens is monetary policymakers increase interest rates. They basically increase incentives to save and make it more expensive to borrow money to spend. And that slows down economic activity, particularly in sectors that care a whole lot about interest rates, and that helps to slow the economy and bring inflation back down.
HIRSCH: And this is just what we've been covering a lot recently, as the Fed has increased interest rates ten times in just over a year, including just last week. The base interest rate is now up to more than 5%. But still, inflation is painfully high.
Now, if you were a fire chief and you were pouring water on a fire and the fire was still burning, you might be tempted to ask, isn't there something else we can do here, like maybe call a wrecking crew to tear the house down and stop the fire spreading, or maybe call in a helicopter to dump fire retardant on the blaze? Well, our inflation fire is still burning, and monetary policy doesn't seem to be working so well. So why don't we try something else? Why don't we try using some of the fiscal powers that Congress has? I'm talking about taxing and spending.
Sarah Binder is a professor of political science at George Washington University.
SARAH BINDER: The core problem of inflation is that you've got too much money and too much demand chasing too few goods. And so one question is, can you dampen consumer demand? Can you dampen business interest in hiring and investing and building new plants and so forth? Well, one way to do that is to use the tax code to change people's and businesses' incentives.
HIRSCH: Using the tax code, aka increasing taxes, taking money out of the pockets of businesses and consumers, leaving them less money to spend. And speaking of spending, what about all the spending that Congress does - more than $6.25 trillion each year? If Congress cut some of that, it would certainly reduce inflation. And there's more.
BINDER: If we want to think about what else could Congress do with its fiscal policy powers, well, it could go after the sources, like the greatest sources of rising prices in the economy - so things like housing or questions about the cost of health care.
HIRSCH: The Congress could make laws making it easier to build homes or convert buildings into residences. It could use its powers as the owner of Medicare to bring health care costs down. It could even theoretically make savings compulsory, as we mentioned in a story last month. In other words, there's plenty that Congress could do to fight inflation. So why isn't it doing it?
Well, to be fair, it has done some things. I mean, it passed the Inflation Reduction Act last year. Now, whether or not the act will actually reduce inflation remains to be seen, but it did lower some prescription drug prices for some people, and it did raise taxes for a very small sector of the population. But since then, for the most part, crickets - which is not really a surprise, Wendy Edelberg says. I mean, take the whole issue of taxes.
EDELBERG: So the most effective thing they could do would be to find the people who are most financially desperate and are most sensitive to changes in their income and tax them because that would most effectively reduce aggregate demand across the economy. That would be terrible, terrible policy.
HIRSCH: OK, so taxing the poor isn't a good idea. And I guess that taxing the rich - OK, in fact, taxing pretty much anyone is never very popular. What about spending?
EDELBERG: There is no such thing as a spending cut that is going to not hurt someone.
HIRSCH: And this is the problem with fiscal policy. It's great when you're juicing the economy. Voters love it when the government cuts taxes and throws money around. But when the economy is running hot, Sarah Binder, our political scientist, says those fiscal tools go right back in the box.
BINDER: One of the things Congress really does not want to do, regardless of which party you're in, is impose costs on voters. And that's immediately what would be entailed by many - not all, but many of the prescriptions if we wanted to use fiscal policy to lower inflation.
HIRSCH: The net result is that Congress has pretty much stepped out of the fight against inflation and effectively handed off to the Federal Reserve. But Wendy Edelberg at Brookings says it's actually not a bad thing.
EDELBERG: Painting with a very broad brush, I think policymakers - fiscal policymakers have done a decent job of staying out of the way of the Fed. And that's not nothing. That's a real thing to stay out of the way and say, we're not going to try to put undue pressure on the Fed to make their jobs even harder than it already is. Like, that's not nothing. That's a useful thing.
HIRSCH: Yeah, the Fed needs time and space to do what it needs to do. And Sarah Binder says its monetary policy tools are a lot more effective in the short term than the fiscal instruments that Congress possesses.
BINDER: Fiscal policy doesn't necessarily act all that quickly, right? We might not feel the effects, say, until tax rate increases go into effect in, say, the following fiscal year. So lawmakers have to think about the tools here - how quickly they'll reach their effect, how much political and electoral cost they'll be to those lawmakers by using those fiscal policy tools rather than delegating everything to the Fed.
HIRSCH: As for giving all of that power away to the unelected Federal Reserve, well, there are plenty of arguments for having a nonpartisan body managing monetary policy. And while members of Congress might pout in public about the Fed having so much sway, Sarah says...
BINDER: Members are perfectly happy to cede that power, to give that power to the Fed, to push them to use their powers and then to blame them when they go too far. Congress wants to delegate that power, and as whether or not they can claw it back, they might not want it back because trying to dampen the economy is not typically politically popular.
HIRSCH: But that doesn't mean that fiscal policy is off the table altogether when it comes to fighting inflation. In fact, Sarah says, it's quite likely that Congress will deploy its fiscal tools sooner rather than later.
BINDER: Keep in mind what's on Congress' plate right now, which is that they are about to run smack and hit their heads on the debt ceiling. That is how much debt the Treasury can issue in order to pay for all its spending obligations. Republicans want the administration and Congress to lower spending - in a pretty severe way, according to Democrats. And so it does seem that a package of spending cuts will be on the horizon.
HIRSCH: Now, Sarah says we shouldn't expect too much from Congress for all the reasons we've already mentioned. She says the Federal Reserve will remain front and center in the fight against inflation.
Wendy Edelberg at Brookings agrees, but she says there is one tool that we haven't mentioned that the Congress could well deploy to help cool the economy. It's kind of a government superpower, actually, and it's one that we're all rather familiar with. It's delay.
EDELBERG: Postponing spending could be very effective policy right now. If policymakers are thinking, well, we either are going to stand up this big spending initiative right now, or maybe we could wait a year - yeah, waiting a year - that's great policy.
HIRSCH: Stalling, dragging its feet, playing for time. Hang on. Isn't that just government business as usual?
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HIRSCH: This episode was produced by Viet Le, with engineering by James Willetts. It was fact-checked by Sierra Juarez and Dylan Sloan. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.
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