When we talk about the growing inflationary pressures on American society, the focus is mostly on prices and costs to your regular consumer. However, inflation is a far broader economic pressure that impacts every part of life and can strain politicians, their parties and government institutions. Put more simply: inflation can bring with it political instability.
On some level, this should be intuitive. When prices for all essential goods from food, gas, housing, and more exponentially increase, people will look for solutions from their political leaders. The average working-class person cannot afford every aspect of their lives to become more expensive suddenly.
The upper classes will complain about higher prices, but they’re primarily unaffected in their day-to-day lives. This reality is not true for anyone below those lines. Higher prices eat into budgets, and people have to change their lifestyles to survive higher prices.
In a recession, people lose jobs, houses, and more. In an inflationary episode, people are working, but they’re struggling to make ends meet. The result is simple economically, but it bubbles up politically too.
Higher numbers of cabinet changes or government crises measure not only political instability but also economic policy variability, since every new cabinet that takes over power might have a new set of preferences regarding inflation and unemployment levels. In addition, since every new government is inserted in a very unstable political and institutional environment, it is also very likely to be removed in a short period. These perverse mechanisms greatly affect the way governments conduct monetary and fiscal policies, generating higher inflation and seigniorage.
They identified that faster political changes where one party sweeps in over the other and then gets swept out impacted the way politicians viewed things. Controlling inflation requires a long-term mindset. You have to plan for the future.
However, if you believe your party won’t last in office that long, you’ll only think short-term. The short-term policies can increase inflation because it’s likely going to be something like big-spending where politicians get their pet projects through a legislature or signed by a president.
The authors of the 2005 study added, “Our results imply that reforms aimed at reducing political instability and increasing economic freedom and democracy would surely help reduce inflation.”
Inflation, then, presents multiple challenges for a country. There are the obvious costs where ordinary people feel their incomes shrinking in value before their eyes, despite having done nothing. But from that, you get political pressures.
It’s worth noting that politically speaking, we’re in one of those moments on the political front. Donald Trump served only one term in office. House Democrats, after seizing power in 2018, are likely on the verge of getting swept out of control in 2022. The Senate is evenly divided, and depending on how someone like Democratic Sen. Joe Manchin feels on a given day, the party with real power in the Senate can change daily.
And even Joe Biden, whose age was a complication on the primary campaign trail, called himself a “transition candidate,” which doesn’t imply a long-term view of politics. Nearly everyone in the current political environment is focused on maximizing what they can do on a short timeline, whether real or merely perceived.
All of that explains the push from Biden and Democrats to add a massive $6 trillion in government spending over the next year. When inflation is already rising, supply is short, and demand high, Biden wants to juice the demand side of the curve even higher, creating even more pressure on prices and inflation. He’s not thinking long-term; he’s thinking about what he can do while Democrats still hold the House. That’s a very short time horizon.
In reality, Biden knows he only has from now until next summer to drive through any legislation. Because by this point next year, representatives in the House and senators up for election will be focused on their races, not legislating in Congress.
Long-term thinking when dealing with inflation looks much different. When Reagan entered office, his Federal Reserve focused on ending inflation by driving up interest rates. The plan worked, but it caused a double-dip recession in the process — a steep price to pay for ending a stagflation period that lasted through multiple presidents.
The late-60s and most of the 1970s were marked by considerable political upheaval. That was also a time of increasing inflation. The peace and love hippies turned into violent domestic terrorists. Assassinations were the norm. People felt the pressure of high gas prices.
We’ve already dealt with the political upheaval and instability of the pandemic. A wise statesman would seek to let things settle before increasing pressures on inflation. That requires long-term thinking, something we’re very short on right now.