No Senator Warren, Businessmen do not Cause Inflation
Warren’s economic ideas are closer to Chavismo than to standard economic thinking.
If you have been to a supermarket during the last year, you should have noticed that our economy is experiencing a rise in its inflation rate. In the last year, consumer prices have rose by 6.8 percent.
When economists explain this phenomenon, we usually point out the role of stimulus programs in conjunction with supply-side disruptions.
To put it simply, prices increase as suppliers cannot keep up with the economy’s aggregate demand, which is rising as a result of the unprecedented stimulus programs implemented by the United States and other developed countries.
While most policymakers understand this economic phenomenon, others are pushing a different kind of narrative. This is the case of Elizabeth Warren, U.S. senator from Massachusetts.
According to Senator Warren, inflation is not a monetary phenomenon caused by an unexpected spike in aggregate demand. Instead, she is pushing the idea that consumer prices are rising because of arbitrary decisions made by businessmen.
In a letter sent to the CEOs of Kroger, Albertsons, and Publix, Warren said: “Your company, and the other major grocers who reaped the benefits of a turbulent 2020, appear to be passing costs on to consumers to preserve your pandemic gains, and even taking advantage of inflation to add greater burdens.”
“Your companies had a choice: They could have retained lower prices for consumers and properly protected and compensated their workers or granted massive payouts to top executives and investors. It is disappointing that you chose not to put your customers and workers first,” Warren added.
In other words, Warren argues that inflation is caused by greedy businessmen and not by the U.S. government’s decision to implement a gigantic stimulus program, which is three times the size of the lost output of the U.S. economy during the pandemic.
The economic ideas of Senator Warren are completely at odds with standard economic thinking. Instead, her views are fairly similar to the ones expressed by socialist governments like the Venezuelan. Just like Chavez in 2012, Senator Warren seem to think that businessmen can simply raise their prices whenever they want.
When inflation began to rise in Venezuela back in 2012, the government’s response was not to control its fiscal and monetary policies. Instead, President Hugo Chavez (and then Nicolas Maduro) began to implement a series of arbitrary price controls. Their reasoning was similar to Warren’s, as they argued that inflation was being caused by greedy businessmen and their “economic war” against the poor.
The price controls of the Venezuelan government began by fixing the price of essential items like rise, milk, and flour. Then, the government started regulating other items, from other foods to electronics. Ultimately, the government ended up imposing a universal system of price controls that completely destroyed the entrepreneurs’ ability to profit from their services.
That system resulted in Venezuelans facing chronic and nationwide shortages of food, medicine, and basically, most items. The shortages of food caused Venezuela’s humanitarian crisis, which subsequently caused the country’s massive migration and spike in poverty rate.
This is why Senator Warren’s economic idea has to be challenged. If American policymakers start to think like the Venezuelan government did in 2012, then the United States will follow a similar route to Venezuela. If this happens, then the future of the United States will be in jeopardy.
By Jorge Jraissati
Jorge Jraissati is a Venezuelan economist and freedom advocate. He is the Director of Alumni Programs of Students For Liberty, an NGO advancing the ideas of a free society in over 100 countries. Beyond SFL, Jorge is a research consultant for IESE Business School, an economist from the Wilkes Honors College, and the President of Venezuelan Alliance, a policy group specialized in the Venezuelan humanitarian crisis. Jorge is a weekly columnist at Freedom Today Network.