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Inflation has evolved alongside Covid-19, Joe Sullivan writes.
Illustration: Staff; Getty Images (1); Dreamstime (1)
About the author: Joe Sullivan is a senior adviser at the Lindsey Group. He served from 2017 until 2019 as the special adviser to the chairman of the White House Council of Economic Advisers.
A new variant of inflation, it seems, evolves roughly every few decades. In the 1960s, it appeared to be a matter of monetary policy. By the 1980s, however, economists were detecting a new variant, one native to government budgets rather than central banks. Though “everywhere a monetary phenomenon” in the 1960s, by the 1980s, inflation appeared to have evolved into something that was “everywhere a fiscal phenomenon.”
Now, evolving alongside Covid-19, another variety of inflation seems to have emerged: inflation as a public health phenomenon. If you look under the hood of headline U.S. consumer prices, you now see the fingerprints of public-health problems almost everywhere. Policymakers pretend otherwise at the peril of the American people.
The genesis tale in America’s current inflationary episode is used-car prices. Once obscure, used-car prices became an inflationary barometer of significance sufficient to draw scrutiny from Wall Street and earn tweets from the White House. The plot starts with the lack of vaccines in the developing world. That precipitated a predictable series of Covid-19 outbreaks in Southeast Asian factories in summer 2021. Shuttering facilities that produce the computer chips required in many new cars, these outbreaks created a shortage of new cars, compelling Americans to satiate demand for vehicles by bidding on what’s in used car lots. And so the U.S. consumer price index started the upward acceleration that defines the onset of the ongoing inflationary period. The ghosts of unutilized vaccinations at home and abroad continue to haunt the consumer price index. In parts of America with lower vaccination rates, inflation is higher.
Like the supply bottlenecks that started today’s inflationary episode, the ones that now perpetuate it arise mainly from matters of public health. According to the U.S. Bureau of Labor Statistics, last month, 1.12 million Americans reported not entering the labor force at all because of the pandemic. Their return to the workforce would halve the drop in labor force participation that has occurred since March 2020, the drop that is now the cause of the labor shortage that is fueling wage-price inflation. Other barometers of the labor market point to pandemic-induced supply constraints. Last month, for instance, 1.9 million employed Americans reported losing wages because their employer either closed or lost business due to Covid-19.
Sure, fiscal and monetary policy are still relevant. But inflation is high even in countries, such as Germany, that responded to the pandemic with more muted fiscal expansions than did the United States. It’s also high in countries, such as Canada, where the central bank responded with a more-tepid monetary expansion than the Federal Reserve. Fiscal and monetary policy still matter for inflation—at the margin. Hence inflation is, yes, marginally higher in the U.S. than in Canada or Germany. But inflation is high globally, including in the U.S., because of a global pandemic.
The Centers for Disease Control and Prevention, wittingly or not, has already embraced a role on the frontlines of the fight against inflation, a “top priority” of President Joe Biden’s. The CDC describes its latest quarantine guidance as intended to facilitate, among other goals, a “return to work,” which would ease inflationary conditions in the labor market. On Dec. 27, a day when the U.S. logged 544,000 new cases amid widespread labor shortages, the CDC lowered its recommended quarantine period following a positive Covid-19 test for those who are asymptomatic or mildly ill from ten days to five. Assume those diagnosed with Covid-19 are representative of the population as a whole, and two-thirds of all cases are mild or asymptomatic. If so, then the CDC’s revision in quarantine guidance effectively increased U.S. labor supply by 224,500 people between Jan. 2 and Jan. 6 (days six through ten for those who tested positive on Dec. 27).
The CDC’s latest announcements may be encouraging, as is the White House’s push to get at-home tests into American households. But the Biden administration can do much more to alleviate inflation by addressing the problem at its origins in the ongoing Covid-19 pandemic.
At home, it can ensure that the entirety of the United States public health bureaucracy is at least taking reasonable steps to mitigate economic disruptions from the pandemic. It still isn’t. For instance, as testing expert Michael Mina has said, the Food and Drug Administration still evaluates medical tests, including PCR tests, based solely on their utility in answering traditional medical questions, like one’s individual diagnosis, rather than public health questions relevant to the whole population, like their infectiousness to others. PCR tests remain the “gold standard” in terms of individual diagnoses. But the FDA lacks a regulatory pipeline to even consider the approval of a PCR test that would differentiate individuals diagnosed with Covid-19 who are no longer contagious from those who remain contagious—a distinction that matters more to the economy than your doctor. The Biden administration should excise these sorts of regulatory atavisms out of the federal government.
In a world where supply chains remain stubbornly global, inflationary disruptions to the deliveries of goods Americans want are virtually inevitable until the rest of the world is vaccinated. The most literally disinflationary thing the Biden administration could have done may well have been to vaccinate the foreign workers who make the computer chips used in cars. The Biden administration can’t change the past. To minimize the inflation in America’s future, however, it should listen to Democrats in Congress and do more to vaccinate the rest of the world.
To say that minimizing inflation is beyond the purview of public health authorities is to ignore the dismal science of economics. The less inflation overshoots the Fed’s long-run target of 2% today, the less the Fed will need to raise interest rates to achieve this target. Higher U.S. interest rates, all else equal, mean more unemployed Americans. And higher unemployment typically means higher rates of suicide, substance abuse, psychiatric issues, and overall death from cancer and heart attacks. If that isn’t a public health concern, what is?
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