Rampant inflation will damage the economy but, as usual, politicians are playing political games instead of doing something about it. The Republicans see it as a cudgel to beat the Democrats in the November midterms rather than working with the administration to find solutions. Why give Biden a lifeline? The Democrats, for their part, variously deny, deflect – or blame Putin. Let’s stop making political points and consider how to cure inflation without tipping the country into recession, as happened 40-odd years ago when Fed Chairman Paul Volcker hit the brakes hard and killed both inflation and the economy.

Conventional economic theory posits that too much money in the economy leads to inflation. Most economists blame Biden’s 2021 $1.9 trillion stimulus bill and advocate that the Federal Reserve raise interest rates while government slashes budgets. But will these measures lower inflation? Or will they do more harm than good?

Biden’s 2021 $1.9 trillion stimulus bill, following Trump’s $3 trillion stimulus, did indeed pump too much money into the economy, especially as it came just as American households started spending the immense savings they had accumulated during the pandemic. Americans started splurging on ‘revenge travel’ and other deferred consumption. But the recovery from covid came with a lot of great benefits, i.e., the lowest unemployment and best wage increases in a generation. While managing inflation we need to protect those long-delayed working and middle class gains.

Interest rate increases make sense if increased money supply is the only cause of inflation – but it is not the only cause. Many other factors, not just an increased money supply, disrupted markets. Businesses are short of workers; a problem they caused. Too many companies took the stimulus payments intended to keep their employees on the payroll, distributed the money to shareholders and executives and fired their workers anyway. Now demand is back with a roar but most of their old employees have, given what happened, gone elsewhere. Anyone unlucky enough to take an airplane this last month has seen the result. Lost luggage and canceled flights cost both consumers and businesses a lot of money.

Can’t find a new or used car? When demand for new cars died at the beginning of the pandemic, automotive companies canceled their advance orders for the sophisticated computer chips integral to modern cars. The electronics industry – suddenly swamped with new demand for computers and other IT equipment as locked down populations turned to ZOOM, online education, and Amazon – stepped in and filled the order books of the chip manufacturing companies. Now the pendulum of demand has swung back to cars. Unfortunately, the computer chip manufacturers cannot pivot that quickly. To complicate matters, Taiwan, South Korea, and China make 84% of the advanced computer chips in the world and supply chain disruption threw a monkey wrench into the gears.

Ninety percent of the world’s commerce moves by ship. COVID19 closed ports around the world, leaving thousands of merchant ships stranded waiting for ports to reopen. Demand has returned but shipping has still not gotten untangled. The cost of shipping one container from Shanghai to Los Angeles, for example, rose from $2,000 in 2019 to $18,500 in 2022; now it looks to settle at a ‘new normal’ of about $8,000. All this happened after the Trump administration imposed tariffs on commodities essential to the manufacturing sector such as lumber, aluminum, and solar panels. The finely tuned marvelous world of ‘just-in-time-low-inventory’ manufacturing, wholesaling, and retailing fell apart leading to shortage of goods just as demand increased.

Spending one hundred dollars to fill your gas tank? Normal supply and demand calculations don’t apply in this market. Saudi Arabia colluded with Russia to kill American fracking companies when demand dropped during the pandemic. They dumped crude oil on the market driving prices so low that U.S. companies had to pay refineries $39 a barrel to take their crude oil. The world started driving again and demand soared. The Saudis and the Russians got together again and restricted production, pushing crude oil to $139 a barrel. Unfortunately, American fracking companies now lacked the cash to drill for more oil to meet demand.

Finally, came the war in Ukraine. The United States and our allies targeted Russia’s oil and gas exports to bring Putin to heel. Putin responded by reducing exports to Europe, no sweat off his back as the resulting price increases have actually increased Russia’s net revenues. The war blocked Ukrainian (and some Russian) exports of grain and other food commodities at a time when world weather had clobbered food production. Given that those two countries are the biggest grain and vegetable oil exporters in the world, food prices soared even more.

Raising interest rates would cut U.S. consumption but do nothing to address supply chain disruptions, and shortages of chips, oil and gas, containers, and food deficits. Slashing U.S. government costs sounds good but what do we cut? The U.S. Government has been starved for resources for decades. For example, our consulates are so understaffed that they must delay business visa interviews for months, exacerbating the cost of doing business.

Politics have made things worse. Out of fear of political attack, the Biden administration has been afraid to revive the JCPOA, the nuclear agreement with Iran that Trump killed in 2018. Iran may be the only country in the world with sufficient excess capacity to put a couple of million barrels a day into world markets by year’s end.  For the same reason, the Biden administration fears to reverse Trump’s tariffs, a quick way of increasing supply of key goods and lowering prices in the United States. Reversing Trump’s tax cuts would reduce the money supply as much as a Fed interest rate increase, without targeting the middle class. But imagine what the Republicans would do with that. As we said in the beginning, politicians need to cooperate – not to score points – if we are to get out of this mess.