The Economist (2022-01-08)

10 Leaders TheEconomistJanuary8th 2022

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apidly rising pricesareasconspicuousastheyareunpop­

ular. Annual inflation of 6.8% has left Americanconsumers

even  more  anxious  about  the  economy  than  theywereduring

the  pandemic­induced  crisis  in  the  spring  of  2020.Theyare

gloomy (see chart), even as many of them enjoy risingincomes,

bargaining  power  over  their  employers—the  resultofa labour

shortage—and  soaring  house  prices  (see  Finance&economics

section).  Their  unease  is  a  problem  for  PresidentJoe Biden,

whose economic management does not poll well.Byonecount,

over two­thirds of voters disapprove of his recordoninflation.

The  White  House  is  therefore  now  keen  to  fighttherisein

prices. But Democrats are slipping into a bad habitthatoftenaf­

flicts  politicians  at  such  a  moment:  blaming  greedycorpora­

tions  and  rigged  markets  instead  of  their  own

flawed policies. It is a recipe for more mistakes.

Over  the  past  year  corporate  profit  margins

have  surged  as  the  economy  has  recovered.

Elizabeth  Warren,  a  senator,  says  that  this

shows how businesses have exploited the pan­

demic to “gouge” consumers; Mr Biden’s press

secretary  has  castigated  firms  for  “jacking  up

prices during a pandemic”. The administration

thinks that antitrust enforcement can help control price growth.

On January 3rd Mr Biden unveiled plans to increase competition

among slaughterhouses, which he blames for a 16% rise in meat

prices in the year to November. He has also called for investiga­

tions into the energy and shipping industries, the sources of re­

cent shortages and bottlenecks.

Scrutinising concentrated markets may be a good idea, but it

will not do much to fight inflation. It is absurd to think that cor­

porations became more greedy over the past year or that markets

are suddenly less competitive. Prices have accelerated in part be­

cause Mr Biden’s excessive economic stimulus led to a surge in

spending on physical goods at a time when the pandemic had al­

ready bunged up global supply chains. History shows that com­

panies’profit margins are apoor guideto inflation. In the

mid­2010s,wheninflationlanguishedbeneaththeFederalRe­

serve’s2%target,theywerealmostashighastheyaretoday.In

thelate1960s,asinflationtookoff,theyfellsteeply.

Thedangerofmisdiagnosingthecauseofinflationisthatit

eventuallyleadsnotjusttoirrelevantpoliciesbuttodamaging

ones.Oneriskispricecontrols.TheRooseveltInstitute,a left­

wingthink­tank,hascalledforthefederalgovernmentto“regu­

lateandnegotiate”moreprices.IsabellaWeber,aneconomistat

theUniversityofMassachusettsAmherst,wants“asystematic

considerationofstrategicpricecontrols”.Bothpointtohighcor­

porateprofitstosupporttheirarguments.

AsAmericalearnedwhenPresidentRichardNixonfrozepric­

esandwagesin1971,controlswoulddistortthe

economyandharmgrowthwhileatbestdelay­

inginflation.Today’sadvocatestendtocallfor

surgicalinterventionsratherthanacross­the­

boardfreezes,butitisnaivetothinkthatthe

bureaucracycouldmakea successofmicroma­

nagingthepricemechanism.

Itmayseemfar­fetchedtothinkthatpol­

iticians would resurrect policies that had been

so  thoroughly  discredited.  But  consider  that  another  plank  of

America’s  hapless  inflation­fighting  in  the  1970s,  under  Pres­

ident  Gerald  Ford,  was  “the  vigorous  enforcement  of  antitrust

laws”.  Then,  as  now,  the  government’s  eagerness  to  pin  the

blame on businesses inspired bad ideas. 

The uncomfortable truth for Mr Biden is that the Federal Re­

serve, not the White House, controls the tool to bring down in­

flation:  higher  interest  rates.  The  government  could  help  cool

the economy by cutting spending or raising taxes. But belt­tight­

ening,  unlike  bashing  corporations,  is  unpopular.  Politicians’

unwillingness to do what is necessary to fight inflation is why

central banks are independent—and why it is goodnewsthat the

Fed looks as if it will raise rates as soon as the spring.n

Democrats seem dangerouslydrawntoschemestolimitthegrowthinprices

Index of consumer sentiment

Uni. of Michigan survey, Q1 1966=

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2020 2021

Beware snake oil, Mr President

Lowering inflation

M

exico’s presidentgets many of his ideas from the 1960s

and 1970s. Back then Mexico had yet to embrace economic

liberalisation or democracy, and state­owned energy companies

dominated the economy. As a young politician, Andrés Manuel

López Obrador watched Pemex, the oil giant created by national­

ising private firms in the 1930s, spread largesse around Tabasco,

his home state. Mexico has changed a lot since those days, as has

the energy business. Mr López Obrador’s thinking has not. 

Since becoming president in 2018, Mr López Obrador has re­

peatedly tried to recreate that antiquated model of state­led and

fossil­fuel­powered energy. He has pumped public money into

building a refinery in Tabasco, at a cost of at least $8bn, and into

propping up the ailing Pemex. His latest attempt to turn back the

clock is a constitutional amendment which, if passed, will hand

back  control  of  the  electricity  market  to  the  state­owned  elec­

tricity  company,  cfe(see  Americas  section).  It  would  be  a  dis­

aster for the country. 

Mexico opened up its oil and power industries timidly in the

1990s  and  then  more  boldly  in  the  2000s—an  admission  that,

without private investment, it could not keep up its oil output or

provide adequate, affordable power. A series of presidents tried

to  liberalise  energy  markets;  Mr  López  Obrador’s  predecessor,

Congress should reject President Andrés Manuel López Obrador’s dirty, costly energy policy

High-voltage mire

Mexico