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Opinion What a serious Republican plan to address inflation could look like

A shopper in a supermarket in New York on March 28. (Andrew Kelly/Reuters)
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Wednesday’s monthly inflation report shows that fighting the scourge of rising costs will take time. That means Republicans should start to get serious about how they propose to tackle it if they win the midterms. If they do it right, they can both fight inflation and hit a political home run.

A smart plan starts by understanding what’s causing our inflation. Democrats seem to believe that it is largely the result of the pandemic‘s effects on labor markets and supply chains. But that’s mostly wrong, although these things surely affect some prices on the margins. Inflation’s real cause is the massive expansion of the money supply that the United States used to fight the pandemic’s economic impact.

The federal government ran nearly $6 trillion in deficits in the past two fiscal years, about triple what it was expected to run. Much of this was financed by the Federal Reserve, which has bought roughly $3 trillion in government bonds since the fourth quarter of 2019. That amounted to printing money out of thin air, a recipe for inflation.

Much of that new money went straight into people’s bank accounts because many recipients did not need it to pay their bills. Households and nonprofit organizations held about $1.3 trillion in bank accounts and cash in the first quarter of 2020; by the end of last year, they held more than $4 trillion. Prices for virtually everything are rising because people are spending their windfall.

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This makes a serious anti-inflationary policy difficult for Republicans to pull off. Rapidly rising interest rates will increase the returns to saving, which will cause some people to stop spending. But that’s in the purview of the Federal Reserve, not Congress. Congressional Republicans should call loudly for rapid interest rate hikes and pledge to conduct oversight hearings of the Fed to monitor its activity. But the Fed’s statutory independence limits what Congress can do.

The GOP’s preferred approach, saying no to new domestic spending, is insufficient. At best, it merely stops a bad problem from getting worse, but the big money infusion has already been unleashed. A serious anti-inflation agenda would try to get some of that money back through new taxes and reduce future inflationary pressure by cutting existing spending, thereby reducing the Fed’s ability to further expand the money supply through the purchase of federal debt. But advancing a typical, orthodox Republican plan to cut that spending would be impossible to pass because of united Democratic opposition. It would also hand Democrats a potent political weapon by reigniting decades-old stereotypes about penny-pinching Republicans.

A party that’s willing to think outside the box can avoid this trap and make a dent in inflation. A comprehensive program to dramatically cut back government benefits and tax breaks for people and businesses in the top 1 percent of income for their age cohort or firm size could cut government spending permanently and immediately reduce the deficit, fiscal stimulus and inflationary pressures.

A program such as this would combine populist politics with conservative economics. For example, supply-siders have long argued that provisions such as the mortgage interest tax deduction or the exclusion of employer-paid health insurance premiums from taxable income distort markets. How about eliminating those and other tax breaks, but only for people in the top two tax brackets? This would affect only, for instance, married couples with more than $431,900 in taxable income, who can easily afford the extra taxes.

This populist conservative approach also lets the GOP start a conversation about entitlement reform on sounder political footing. The Manhattan Institute’s Brian Riedl notes that the government could save $1 trillion or more over a decade simply by paring back the Social Security cost-of-living increases or Medicare premium subsidies it provides to wealthy seniors. Adopting such a proposal would also change the political narrative around these costly programs. Instead of talking about throwing Grandma out of her nursing home, it would highlight how the current system borrows money from Bob Cratchit to pay for Ebenezer Scrooge’s retirement cruises.

Such a program could be political gold. The ongoing political realignment means that Democrats, not Republicans, are increasingly the party of the ultra-rich. Democrats also dominate in tax-favored institutions such as universities and in the cash-rich Big Tech or finance industries. Democratic donors and pressure groups will line up to stop a GOP program that seeks to take away the wealthy’s special favors, but that simply reinforces the argument that Republicans fight for forgotten Americans.

President Biden and his fellow Democrats are already demanding to see the Republican plan to fight inflation. A serious, original strategy could have real and immediate impact and would be good politics.