When inflation rises, what's Biden going to do?

The original name of the field of economics was political economy.  That may again be quite appropriate in 2021 as we get an even larger government that is going to make a lot of economic decisions.  Given the huge monetization of debt and the rapid increase (about 75%) in money supply in 2020, it can be expected that inflation will pick up in the coming quarters.

How will a left-wing government likely respond to this?  The classic way is to impose price controls to shift the blame from the politicians and the central bankers who created the inflation to the "greedy businessmen" who are raising prices.  Obviously, price controls don't work.  Economists across the political spectrum realize that, but it's a common political tool to shift blame and placate the public.

How might this play out in a Biden administration?  When inflation picks up, there will likely be a call for price controls, probably through executive decrees rather than legislation, at least at first.  When there are price controls and prices are set below market levels, there will be shortages.  At that point, public unhappiness increases. 

A second effect is that those manufacturers really hurt by the price controls lobby for exemptions for their products.  Here's where the nasty political angle comes in.  Obviously, companies that are well regarded by the Biden administration — i.e., are Democrat contributors — will more likely get relief.  This will be clearly true in areas like green energy.

It can be anticipated that non-favored industries and firms whose executives are not making contributions to the Democrats would continue to suffer.  This obviously will cause distortion in the economy.  It will be a crisis that the Democrats won't let go to waste, as they turn it to their advantage through incentivizing increased contributions to their candidates and causes.

Tom H. Sleeter is an Oak Brook, Illinois–based financial adviser and money manager.

Image: Marc Nozell via Flickr, CC BY 2.0.

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