In the face of the administration’s claim, there is little it can do about inflation; I’ve pointed out how changes in energy and regulatory policy will change the price trajectory. We also have a labor shortage adding to the upward cost pressures. Only now we’re matching the number of employed before Covid. Yet, we are at a 3.6 unemployment rate, which means upward pressure on wages.

Coupled with lower birth rates, we are facing labor force problems. Baby boomer retirements, already shrinking the labor force, gained momentum during the pandemic. Higher transfer payments, commuting, and childcare costs keep others from returning to work. The result is a labor participation rate of just over 62%, down from over 66% at the turn of the century.

Its possible inflation may force more people to return to the workforce, but this is far from certain. We have to look to solutions that worked in the past. The United States led the world in welcoming legal immigrants, but lately, not so much. The Trump administration made sizable cuts in new legal arrivals. So far, The Biden administration has continued the reductions rather than expanded immigration. 

The inability of both parties to confront our longstanding legal and illegal immigration problems provides little hope for relief from that direction. We forget that along with higher interest, lower taxes, and less regulation, Ronald Reagan signed the last major immigration reform. All these things combined to subdue our worst inflation until now. An increase in green cards would help, but nothing gets done. The present administration largely ignores the problem. 

If we can’t increase the labor force, we must make our workers more productive. Historically machines have multiplied labor output. However, our progress on that front leaves much desired—the U.S. lags on machination. This lack is true even though there is plenty of investment capital. We aren’t matching our competitors.

While other advanced nations with slow-growing populations have replaced workers with robots, The U.S. isn’t among the leaders, lagging in seventh place:

What explains our reluctance to mechanize? Our ports are far less efficient than other major world ports. This failure has added to supply chain disruption. The slow pace, in turn, added to our current inflation.

The Biden administration claims it can do little about inflation and leaves it up to the Federal Reserve (Fed) to tame prices. The Fed can bring inflation to heel if it will raise interest above the expected inflation rate. Anything less adds to costs while still encouraging borrowing. For instance, you’re buying a house with a 5% mortgage. It sounds high by recent standards, but if inflation is over 8%, the actual rate is -3 plus the interest tax deduction. This interest rate won’t deter people from buying houses or other capital goods. It just adds to demand and costs. Aso, don’t forget rising interest rates add 100s of billions to what we pay on our national debt, adding to rather than solving the problem.

However, if you drive up the interest rate above today’s 8-9% inflation, the economy probably will fall out of bed as it did in the early 1980s. People forget at the same time Fed. Chair Paul Volker was driving interest rates to 18%; we laid the groundwork for a rapid recovery. 

The Carter Administration deregulated industries such as Airlines, Railroads, and Telecommunications. Pres. Reagan extended this trend by dumping gasoline price controls, among others. He also cut taxes where inflation had pushed people into ever higher brackets. These were all supply-side incentives and turned the early ’80s recession into the excellent expansion that continued through the ’90s. 

It may be too late to avoid a recession, but we can try. Biden needs to emulate Carter and Reagan by expanding goods and services rather than maintaining his current roadblocks. The quicker we increase supply, the less the Fed will need to raise interest rates. 

Energy is essential to everything we do; it’s the place to start. Once again, let me lay out the economics. I’ve said it before, the view our future production doesn’t affect world prices is bogus. Yet, the Washington Post economics writer Charlotte Rampell echoes others by saying our energy production doesn’t affect prices.