(Editor’s note: This article originally appeared online through The Hill.)
Much of today’s economic debate is plagued by a basic category error.
Policymakers, commentators and even central bankers talk endlessly about inflation, when what households actually experience is something different: prices.
Inflation is the rate at which prices are changing. Prices are today’s cost. And for millions of Americans, the problem isn’t that prices are rising quickly — it’s that they already are too high and have been so for too long.
This distinction matters because it reveals a deeper government failure. Monetary policy is good at influencing inflation over time. It is far less effective at reducing specific prices or restoring affordability once structural distortions are baked in. Confusing the two leads to bad economic policy.
The affordability crisis, especially in housing, health care and education, is not about Federal Reserve decisions. High prices in these areas are the result of non-monetary policy choices that restrict supply, subsidize demand or both. Treating them as monetary problems invites a response that is ineffective at best and counterproductive at worst.
Start with housing. The United States suffers from constrained supply, which cannot keep up with growing demand.
Zoning rules, permitting delays, environmental reviews and local political vetoes have made it difficult or impossible to build where people want to live. These constraints raise prices by design. Families that own their homes want to protect their investment, which requires restricting supply growth. Their gain comes at the expense of inadequate shelter for millions, mostly younger workers and families.
Fiddling with interest rates does nothing to solve this. In fact, it can make the problem worse — distorting mortgage costs, discouraging construction, locking existing homeowners in place and introducing widespread uncertainty. Neither changing the money supply nor tweaking the rate the Fed pays banks will cause new homes to be built. At best, we can slow price growth. But that doesn’t address the problem of excessively high prices in the first place.
Health care offers a similar lesson. High prices are not an inherent feature of medical markets. They are the predictable result of fiscal and regulatory design. Government policy heavily subsidizes demand through public programs while restricting supply through licensing, scope-of-practice limits and other barriers to entry. The only way to balance growing demand against flagging supply is for prices to rise. There’s no “monopoly capitalism” problem here, but another demonstrated failure of health care socialism.
Again, the Fed’s interest rate decisions are irrelevant to the root cause. Money mischief neither removes subsidies nor boosts supply. The mismatch between cause and cure could hardly be clearer.
Education, insurance and energy follow the same pattern. Prices remain high because competition is constrained, entry is restricted or costs are socialized. These are structural outcomes. Monetary policy can’t affect the economy on this deep a level. The most the Fed can do is alter economy-wide demand, which might keep inflation moderate, but doesn’t address the supply-demand mismatch at the micro level caused by Uncle Sam.
We need to move beyond interest rate fundamentalism: the belief that adjusting the price of credit can solve nearly every economic problem. This is a superficially appealing doctrine because it avoids political conflict.
Monetary policy operates at a distance, requires no legislation and allows policymakers to claim technocratic neutrality. This is classic political misdirection. By refusing to liberalize the economy in the key sectors of housing, health care and education, legislators and bureaucrats have deliberately embraced a policy framework that shrinks the whole economic pie, and unfairly distributes the slices, besides.
Furthermore, structurally bad economic policy makes central bankers’ jobs harder. Monetary policy has no graceful exit. Central banks can slow the pace of price growth but they cannot bring prices down without engineering outright contraction. That may reduce measured inflation, but it does so by lowering incomes and employment — hardly a victory from the perspective of household wellbeing.
The result is a fundamentally incoherent portfolio of policy choices. Officials celebrate falling inflation while families continue to struggle with rent, insurance premiums, tuition and medical bills. The disconnect breeds cynicism, and rightly so.
A free-market approach, which is the only kind that will work, starts from a different premise: Affordability comes from supply, competition and price discovery, not from suppressing demand. If prices are too high, the first question should be what’s preventing firm entry or expansion, as well as substitution by households. Monetary policy can’t do the required structural work. The most we can ask for is for central bankers to give markets the liquidity they need so prices accurately reflect information about resource scarcities.
To be clear, price stability remains a worthy goal for the Fed. But we need an honest assessment about the limits of monetary policy. Using interest rates to compensate for regulatory and fiscal distortions may produce better inflation statistics, but it leaves the real problem untouched.
Fed policy can never restore affordability when the real problem is economy-wide structural bottlenecks. Until policymakers and commentators stop confusing price levels with price growth, monetary policy will continue to be blamed for factors beyond its control. Scapegoating can be emotionally satisfying. But that won’t save the American household from budgetary pain.
Alexander William Salter, a member of the A-J editorial board, is an economics professor in the Rawls College of Business at Texas Tech University and a research fellow at TTU’s Free Market Institute. The views in this column are solely his own.
This article originally appeared on Lubbock Avalanche-Journal: Salter says affordability a structural problem monetary policy can’t fix | Opinion
Reporting by By Alexander William Salter, special for the Avalanche-Journal / Lubbock Avalanche-Journal
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