It’s (Still) The Economy, Stupid

When I walk into my grocery store, salad greens are one of the first things I see. The price was $1.99 for many years and that price is etched into my memory. Today, that same product is $4.99. My wages haven’t kept pace. I flinch a little every time I go down that aisle.

Americans are feeling it. Wages have not kept pace with price inflation. So, it should be no surprise that people still feel anxious about the economy. Yet President Biden and his team continue to tout slowing inflation and the media continues to express wonderment about Americans’ gloomy outlook. But both can be true and there is no paradox: Inflation is getting better (well, at least not getting worse) while people are still flinching at the higher prices. What can policymakers do to help?

First, stop with the tariffs already.

Last year Americans paid $72.5 billion to the federal government in taxes on imported goods. Those tariffs raise producer prices and a lot of it gets passed down to consumers. Despite this, more tariffs might be in the works. President Biden is reportedly considering raising import taxes on electric vehicles and other manufactured goods. Donald Trump suggested that if elected he would impose 60% tariffs on imports from China and 10% duties on imports from the rest of the world.

Bloomberg Economics ran the numbers on what Trump said. The result? The core personal consumption expenditure price index, which is the Fed’s preferred gauge for prices, would go up by 3.7%, well above the 2% target the Fed is trying so hard to reach. It’s worth noting that U.S. policies have tried to incentivize American companies to diversify their sources and become less dependent on China, something that has had some limited success previously. This doesn’t change the fact that tariffs mean higher prices for American producers and consumers.

Second, stop telling companies how much to charge for things.

Legislators and policymakers may mean well, but lashing out at companies at congressional hearings will not have the desired effect. For instance, if Tyson’s is charging high prices for meat and making a profit large enough to attract more competition, we would see new entrants to that market. That’s apparently happening with two other U.S. chicken companies merging to form a formidable competitor.

Third, stop blaming companies.

The recent “shrinkflation” campaign was bizarre. Biden’s Super Bowl Sunday video about smaller ice cream cartons without smaller price tags overlooks key economic factors which are driving prices higher. Sticking with the ice cream example, these manufacturers—like those in so many other industries—have faced supply chain disruptions related to the pandemic, Russia’s war on Ukraine, and higher input prices, including that of sugar.

It also turns out that severe trade restrictions contribute to high U.S. sugar prices. Since 2020, these prices have risen on a sustained, increasing trend, as per USDA reports. It’s well known that the federal sugar program has a net cost for U.S. jobs, according to a U.S. Department of Commerce study, and is a massive drain on consumers, estimated at $2.4 to $4 billion by Iowa State University scholars. That makes the “shrinkflation” message something of a strawman. Reforming harmful protectionist trade policies would be a great way to incentivize domestic commerce and industry, and is the simplest way to bring ice cream prices down.

Similarly, if Wendy’s wants to experiment with rush hour prices, they should be able to do it without getting attacked by Washington. Lots of industries charge different prices for different times of the day (including taxis, Uber UBER , tollways, and restaurant delivery services). In any event, who wouldn’t like to be able to get a Wendy’s Frosty for a lower price outside of rush hour? And if it was a success, then the extra business would be good for Wendy’s and for their employees, who need their restaurants to stay in business. The point is, let companies set their own prices. Consumers will always vote with their pocketbooks.

The angst showing up in the polls is real. Confusion about price levels and rates of change is common, but it’s important to understand the difference if you want to understand what people are feeling. Bill Clinton’s strategist James Carvill said it best back in 1992: “It’s, the economy, stupid.”

That means revisiting lots of harmful domestic economic and trade policies. More import taxes, more micromanaging of the economy, and more complaining about rational business practices will not have the desired result.