How to Solve America’s Inflation Crisis

Commentary

Ahead of the 2024 U.S. presidential election, polls indicate that the primary focus for most Americans is on domestic issues such as inflation, jobs, crime, illegal immigration, education, and health care. Global matters like international pacts and security alliances take a back seat to these pressing concerns. Inflation, in particular, has emerged as a significant public worry.

A Sharp Increase in Government Spending

While supply chain disruptions during the pandemic contributed to global inflation, the primary driver has been a significant rise in government spending. Early in his term, President Joe Biden passed the American Rescue Plan, a fiscal stimulus aimed at boosting the economy, particularly targeting lower-income families to mitigate the pandemic’s impact.

Biden introduced public expenditure plans exceeding $6 trillion, about 30 percent of the annual U.S. GDP. These included infrastructure projects like green energy expansion and increased welfare distribution. Ongoing conflicts like the Russia-Ukraine war and the influx of illegal immigration further escalated government expenditures.

Over the past four years, the United States added nearly $10 trillion to the national debt, increasing it from around $27 trillion in 2020 to nearly $36 trillion by October 2024. This translates to an average debt per citizen of $105,000 regardless of age.

For the average American, the rising cost of living is most evident in two main areas.

Over the past five years, 97 percent of occupations have seen wages fail to keep pace with inflation, with restaurant servers being a rare exception. Analysis from Moneywise using data from the U.S. Bureau of Labor Statistics and Redfin indicates that inflation rates are likely to continue outpacing wage growth in most sectors.

A Point2 Homes report from April 2023 revealed that housing prices in 68 of the 100 largest U.S. cities have doubled in less than a decade. Rent costs have surged by 10 percent in the past year, with the median monthly rent experiencing a significant increase. This, combined with a supply-demand imbalance, has led to the average U.S. home price rising from around $200,000 to approximately $400,000.

In 2023, a Federal Reserve report underscored the impact of inflation on American households. U.S. families now carry a total household debt of $17.8 trillion, a concerning figure.

The report also revealed that in 2023, 17 percent of adults were unable to pay all their bills, and 63 percent barely had enough savings to cover a $400 emergency expense. Various welfare programs have contributed to the $10 trillion increase in public debt over the past two years.

So, how do the candidates propose to tackle inflation?

Harris’s Responses to Inflation

When addressing inflation, Harris has distanced herself from Biden. A significant aspect of inflation is the rising housing costs, primarily driven by strong demand and high construction expenses. Census data shows that the number of new privately owned housing units has returned to historical average levels, but construction costs remain elevated.

Harris is advocating for a $25,000 tax credit for first-time homebuyers. While this plan is likely to stimulate more demand, it could potentially lead to further increases in home prices, impacting lower to middle-class individuals and first-time buyers the most. Therefore, despite good intentions, Harris’s policy might inadvertently harm the very group she aims to assist.

Another key aspect of her housing policy is the commitment to build 3 million affordable homes during her first term if elected. This initiative would necessitate congressional approval and coordination with local governments to prevent conflicts over zoning and permitting regulations. With housing supply already at historical average levels, government spending on housing could compete with private sector investments, potentially driving construction costs higher while marginally increasing housing supply.

To address rising food prices, Harris has proposed a federal ban on food price gouging as a measure to combat inflation. However, data from CSIMarket shows that grocery stores’ pre-tax profit margin in the third quarter of 2024 stands at 1.81 percent, indicating no significant price gouging.

Trump’s Inflation Strategy

A central element of Trump’s economic plan involves increasing tariffs on foreign nations. Trump argues that foreigners, including the Chinese and other exporting countries, will bear the cost, sparing Americans. While exporting countries may initially reduce prices to maintain sales, economists suggest that consumers may eventually absorb a portion of the added costs in the long run.

Another key aspect of Trump’s platform focuses on lowering energy costs by deregulating drilling and substantially boosting U.S. energy production. Additionally, Trump aims to reduce government spending by cutting bureaucratic waste, lowering corporate taxes to incentivize bringing manufacturing jobs back to the U.S., and curbing expenditures by deporting illegal immigrants.