Politicians and pundits are increasingly using reductive, inaccurate narratives to explain away inflation. These "folk economic" theories are misleading, and our leaders are missing the point on the true drivers and solutions to our economic troubles.
In an ever-changing, increasingly-complex world, the search for answers is an unending process. For people unfamiliar with certain topics, it can be tempting to find the most simple answer to the latest issue or ailment. This tendency can be found across multiple disciplines, from mistaken beliefs about the solar system to reliance on “natural” medicines. Folk economics describes these same attitudes, in regard to economics and public policy making.
In a February column for the New York Times, sociologist Tressie McMillan Cottom defined folk economics as the “human impulse to describe complex economic processes in lay terms.” Cottom went on to connect this to the way politicians describe the national budget and debt through the lens of balancing a checkbook and how many crypto enthusiasts view any new technology as an inevitable life-changer. While the concept of folk economics has been around for decades, its use as a lens to understand contemporary politics has been restricted to a handful of academic papers. This is a missed opportunity, as much of the national discourse on economic policy is driven by folk economics. During the current inflation crisis, politicians from across the political spectrum have leaned into the tactic—to potentially disastrous consequences.
Economist Paul Krugman drew inspiration from Dr. Cottom for his own column relating folk economics directly to policy making. Krugman elaborated that the “folk” described by the theory are not just the uneducated. They can be, and often are, members of the educated elite: politicians, pundits, and other leaders of society. One belief that has maintained popularity among this crowd is that deficits and government spending cause inflation. Conservative adherence to this austerity dogma forced President Obama to scale down his planned response to the 2008 Financial Crisis.
History is repeating itself: as policymakers search for a “culprit” for inflation, conservatives have placed the blame squarely on the Biden Administration’s COVID spending. Krugman specifically blamed Sen. Joe Manchin (D-WV): “The folk economics position—where by ‘folk,’ I mainly mean Senator Joe Manchin—is that excessive government spending caused inflation, so now we have to call off any new spending.” While Manchin does have unsupported beliefs, he is not alone in his stances. Congressional Republicans have adopted the same talking points moving into the 2022 midterms. During a press conference, House Republican Conference Chair Elise Stefanik stated that “inflation is skyrocketing because of Democrats reckless and wasteful spending."
This is unequivocally false. Biden’s largest legislative accomplishments, the American Rescue Plan (ARP) and the Infrastructure Investment & Jobs Act (IIJA), did not cause inflation to “skyrocket.” In fact, the opposite happened: the ARP barely moved the inflationary needle, while the IIJA will be actively deflationary. Research from the Federal Reserve Bank of San Francisco found that the ARP increased inflation… by 0.5%. Over two years. This is an insignificant number compared to the total inflation rate, which was last measured at 6.4% annually in February. The IIJA has yet to fully release its funding, meaning that its total impact will not be quantitatively measured for some time. However, research from both liberal and conservative economists projects that the act will “reduce inflationary pressures.”
Conservatives and Manchin have arrived once again at the flawed equation “government spending equals bad.” Meanwhile, elements of the Democratic Party have focused on their own flawed boogeyman: corporate price-gouging. Politicians, like Sen. Elizabeth Warren (D-MA), have latched on to the idea that inflation is occurring because dishonest companies are raising prices purely to pad profits. President Biden himself has begun leaning into this message, particularly in regards to gas prices. However, this new communication strategy has arrived despite reported opposition from members of the White House Council of Economic Advisors. Leading Democrats have begun embracing price-gouging theory not on its evidence-backed merits but on its popular public polling. This is yet another example of folk economics: people would rather blame an abstract entity than admit that inflation is a complex phenomenon with multiple causes and no simple solutions.
Price-gouging theory suffers from similar pitfalls as inflationary government spending theory. Both misrepresent the full story of inflation in order to push a political narrative at the expense of economic truths. Overall, current inflation was caused by a worldwide supply chain crisis combined with shifting spending habits as a result of COVID-19. Meanwhile, certain sectors are struggling with the additional challenges created by Russia’s invasion of Ukraine. A research report from Third Way dissecting the supply chain crisis found a list of contributing factors: labor shortages in the trucking industry, shipping container shortages, COVID, demand volatility, and others. Adding to existing difficulties is what Employ America calls the “Putin Shock.” Russia being cut off from the global economy will create shortages in the products it was a major exporter of: oil, metals (like nickel), agricultural commodities (like wheat), and fertilizer. While stimulus packages helped enable increased demand, they were only a small part of wider trends. One of the most important trends was caused by COVID itself: as restaurants and other service-based businesses were forced to close, consumers began spending record amounts on goods instead.
Neither fiscal policy nor price gouging accurately explains inflation. However, price gouging theory is at least based on an array of anecdotal evidence. In a column for the American Agora published in March, Kevin Sciacktiano discussed multiple examples of predatory pricing. The most important of these were OPEC intentionally restricting oil supply and meatpacker JBS Foods settling a price-gouging lawsuit in February. While these examples of market manipulation are concerning, they do not explain economy-wide trends. Washington Post columnist Catherine Rampell explained in November that higher profits and higher inflation are both a result of skyrocketing demand. At the beginning of the pandemic, inflation and profits both plummeted, with oil prices even turning negative. These trends have now reversed, as the recovering economy enables consumers to spend once again.
As inflation continues to rise, politicians have looked to assuage their supporters’ concerns by turning again to folk economics. While blaming political enemies for inflation may test well with voters, platitudes are not functional solutions. Whether the blame allegedly lies on Big Government or Big Oil, neither political story accurately reflects economic reality. Inflation will remain for the foreseeable future, and no single solution will suddenly emerge.
Alex Moskovitz is a freshman C.L.E.G. major in the School of Public Affairs. He is a Staff Writer and Deputy Editor at the American Agora.
Image courtesy "Biden for America," Creative Commons.