Are U.S. anti-inflation measures just spitting in the wind?

U.S. authorities are racing to tame the threat of record-high inflation through aggressive monetary policy and a new piece of legislation passed several weeks ago. But one economist argues that those measures are woefully ineffective for their intended purpose.

“For me, this inflation came from two sides of the same coin, which is too much money chasing too few goods,” said Bryce Gill, economist at First Trust.

Aside from the aggressive money printing by central banks during 2020, Gill says worldwide COVID lockdowns threw a wrench into the global production system that had supported just-in-time inventory systems for businesses around the world. Chinese lockdowns and the Russia-Ukraine conflict, he added, also create external tailwinds to inflation that’s outside the control of any central bank.

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“And I think that’s almost understating the problem,” he says. “Since the end of World War II, global trade has been trending up, and the big advantage to globalization has been that it makes things cheap. But now, post-COVID, I don’t see any way that globalization doesn’t go into decline to some extent. That’s going to make getting inflation back to 2% a pretty hard thing to do.”

With collapsing Chinese demographics and the erosion of the European manufacturing model due to soaring energy prices on his mind, Gill argues that status quo can’t exist indefinitely in a post-COVID world. The only way forward for North America, then, is to restore manufacturing and shorten supply lines, with a stronger, more integrated NAFTA being the key to picking up the slack.

“That’s all good, but the transition period to deglobalization is going to make things expensive,” Gill says. “And when you think about the green energy goals we’ve set up for ourselves, a large part of the supply chain for equipment like windmills and solar panels extends abroad. We have a lot of natural resources in North America, but a lot of production of lithium and rare earth elements is in China, so that’ll be a challenge too.”

The green energy transition is a major loadstone in the recently passed Inflation Reduction Act in the U.S. Tucked into the package is a raft of subsidies for renewable energy projects and more climate-related spending, which supporters argue could reduce the national deficit by hundreds of billions of dollars. Aside from that, the legislation provides for more manpower for the Internal Revenue Service to collect taxes, as well as a minimum corporate tax.

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But Gill argues that the government’s subsequently unveiled student loan forgiveness program would offset any savings from the Inflation Reduction Act “two or three times over.” The act’s provision to impose a corporate minimum tax, he adds, is another point of concern.

“The U.S. tax code allows companies to offset their taxable earnings with massive investments in fixed capital,” he says. “We find ourselves in a position where we want companies to invest in very large projects to restore manufacturing and shorten supply chains, and a corporate minimum tax disincentivizes that kind of large spending.”

Currently being discussed in the U.S. is another piece of legislation on permitting reform to the National Environmental Protection Act, an initiative that Democratic Senator Joe Manchin reportedly wants passed in exchange for his swing vote to get the Inflation Reduction Act over the line. That policy, should it get passed, would open the door to an expedited process of permitting for major infrastructure projects.

“There's a reason why large infrastructure projects just sit for 10 years without getting built,” Gill says. “I look at NEPA [as a type of deregulation] that can help boost production and help supply meet demand. So if that gets done, and that's a big if still, I think that will be really the positive legacy of the Inflation Reduction Act.”