How to make the United States more affordable

How to make the United States more affordable

Over the past two years, debate about the economy has centered around inflation.

After inflation reached its highest level in 40 years last summer, it is now, according to economists’ measurements, approaching its normal levels. But despite the rapid slowdown, millions are still feeling pressured by the decades-long affordability crisis.

Even before the COVID-19 pandemic, Americans were struggling to afford high prices for homes, child care, college, and health care, as wages lagged far behind the rising cost of living. Treating all of this as “inflation” does more harm than good.

In traditional economic theory, inflation is a “demand-side” problem — a polite way economists use to say that people have too much money. The theory goes that too much money chasing too few goods leads to higher prices.

It is difficult to look around this country and conclude that our main economic challenge is people too much money. Seventy percent of Americans reported feeling “financial stress,” and nearly a third reported having paid a late bill in the past six months.

But there are other motives for rising prices that are rarely included in our talk about inflation.

We know, for example, that homes are becoming more expensive because there are not enough homes being built. We also know that decades of corporate consolidation in some industries has led to less competition and higher prices. The solutions to these cost barriers are relatively straightforward: build more homes and enforce antitrust laws.

But instead, over the past year and a half, we have largely looked to the Fed to lead our response to rising prices. It is unfortunate that the Fed uses one tool to deal with inflation: raising interest rates. They work more like a sledgehammer than a scalpel.

Since May 2022, the Fed has aggressively raised interest rates to slow the economy by making it more expensive to borrow money. The story goes that when businesses can’t borrow, they’re less likely to expand their operations and hire people — and when households can’t borrow, they buy less. This results in layoffs and lower wages, ensuring that workers have less money to spend on “chasing goods.”

The Fed sees the rise in unemployment rates, which could be disastrous for already struggling families, as a surprise. positive A sign that these interest rate increases are working.

There are at least two major issues with the Fed’s theory. First, inflation is falling, our economy is growing, and unemployment is near record lows. As it turns out, we don’t have to shut down the economy and sacrifice millions of jobs in order to slow inflation.

Most importantly, these interest rate increases fail to address the underlying drivers of today’s price hikes — and in many cases exacerbate the problem. The Fed cannot build more housing, break up price-gouging corporate monopolies, or lower prescription drug costs. But it can make life more expensive.

We see this clearly in the housing market. Very few people are eager to buy a home at 7 percent interest, and fewer still are willing to sell homes they finance at 3 or 4 percent interest. These higher rates push more people into renting, which drives up the cost of rent and discourages the construction of new homes.

To address the real drivers of rising prices, we must bring the concept of inflation back to reality. Manipulating interest rates cannot make life more affordable for struggling families – but public investment and sound systems that rein in corporate price gouging can.

Congress and state legislatures must be in the driver’s seat of the affordability agenda, as only these democratic institutions can finance long-overdue investments in child care, health care, housing, and education. These investments are the seeds of a stronger, more inclusive economy.

Deferring responsibility for this future to the Fed would be a grave mistake.

This column was originally published on OtherWords.org.

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