The U.S. is in the midst of an inflation crisis marked by out-of-control costs, broadening price pressures, and declining real incomes. Each month, Americans are spending $460 more than last year to buy the same goods and services; the Federal Reserve is responding by rapidly hiking interest rates. To gauge an expert’s perspective on this national quandary, I interviewed Professor Casey B. Mulligan of the University of Chicago Department of Economics.
Professor Mulligan served as the chief economist of the White House Council of Economic Advisers from 2018 to 2019. At UChicago, his Economics of Socialism class applies theories of collective action, market chaos, labor, and more to examine the economic performance of socialist countries such as the USSR, China, and Venezuela. Students in Mulligan’s class also consider the potential effects of socialist policies on the American economy.
In my conversation with Professor Mulligan, we discussed the meaning and causes of inflation, the specific circumstances under which inflation rates spiked to a forty-year high, and the role of the Federal Reserve in mitigating inflation.
Professor Mulligan and I paid special attention to the Inflation Reduction Act, which President Joe Biden signed in August 2022. The legislation imposes a 15% minimum tax on corporations, compels drug companies to negotiate with Medicare, expands the Affordable Care Act, and spends $369 billion on environmental reforms—all in an effort to battle inflation. Yet Wharton School of the University of Pennsylvania predicts that those initiatives will have “no meaningful effect on inflation in the near term.” Even the supposed long-term result—a 0.1% decrease in inflation—is statistically insignificant.
Professor Mulligan’s own analysis of Biden’s legislation suggests that it will reduce employment by 900,000, annual GDP by 1.2%, and average household income by $1,200. On the plus side, Mulligan suggests that the act will increase the rate of inflation and the federal budget deficit. He explains in the interview how the provisions in the act discourage labor, capital investment, and productivity—thereby reducing demand for dollars. Supply of dollars, meanwhile, does not change; the act does not mention the Federal Reserve. As a result, dollars are worth less and more dollars are required to buy the same goods, increasing inflation instead of curbing it.
We wrapped up our conversation by talking about unemployment and labor force participation, and about how adverse incentives in the Inflation Reduction Act might affect both of those variables.
It is always a pleasure to benefit from Professor Mulligan’s experience and insight. I hope that our conversation sparks and bolsters your interest in the art of economics, as “the dismal science” should by no means be esoteric.