A state-focused think tank like the Mackinac Center can offer solutions to many problems stemming from poor government policy. Other times, though, call for it to advise state policymakers on ways they should respond to problems not of their own making.
For the most part, inflation is one of those problems.
The United States is grappling with an inflationary episode not seen since 1981, when Ronald Reagan was a first-year president and “Indiana Jones and the Raiders of the Lost Ark” was a smash hit.
In June, the widely reported Consumer Price Index revealed significant inflation, increasing 9.1% over 12 months (although it has moderated since). The CPI measures prices for a basket of consumer goods and services for urban residents, including housing, energy, food and transportation.
Inflation is an invisible tax; it makes what we earn worth less. Consider the nearby chart of recent price changes in the spending categories that matter to most people.
Bad policy choices play a large role in causing these increases. One policy actor is the Federal Reserve. As Nobel laureate Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” The Federal Reserve made a conscious decision to make access to money easy through historically low interest rates, and its effect was compounded by record federal spending during the pandemic.
To counter the damage of easy monetary policies, the Federal Reserve is now hiking interest rates to make borrowing more expensive. As the price of almost anything rises, households and businesses demand less of it. This is true of bread and bacon — and loans to invest in housing or finance automotive purchases. The challenge is that the Federal Reserve isn’t good at engineering a “soft landing,” the expression often used to suggest it can reduce inflation without also causing or exacerbating a recession.
Michigan’s state lawmakers can’t change Federal Reserve decisions. What they can do is properly prepare for the next rainy day, whether it is induced by our central bank or not. To the Legislature’s credit, the fiscal 2023 budget does just that to some degree, but there’s also more that could be done by the Legislature and by Michigan’s many local governments. Being prudent in spending is a good place to start. It would reduce pressures to raise income tax rates, an act that would add stress to households during trying times.
