TL/DR –
The article discusses the affordability crisis in the United States, pointing out the role of multiple factors and policies on both sides of the political aisle in creating the current environment. It highlights the impact of inflation, particularly when income doesn’t match rising costs, the Inflation Reduction Act’s potential of exacerbating inflation, and how the Trump administration’s tariffs could increase prices. The article also mentions the Federal Reserve’s interest rates hike to control inflation, the impact of the federal deficit and national debt on inflation, and suggests less spending and tax policies that reduce the deficit as possible solutions.
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“Affordability Crisis: The Search for Culprits and Solutions”
The topic of affordability, or its evident absence, is currently making waves. Conversations revolving around the affordability crisis are echoing from the White House to New York City, with politicians like newly-elected NYC Mayor Zohran Mamdani, Virginia Governor Abigail Spanberger, and New Jersey Governor Mikie Sherrill partially or fully focusing their campaigns on this issue. Now, even President Trump is turning his attention to this critical matter.
The current discourse could benefit from Walt Kelly’s famous Pogo quote, “We have met the enemy and he is us.” The responsibility of creating our unaffordable climate doesn’t fall on a single culprit but a myriad of individuals and programs across the political spectrum.
Between 2021 and 2023, the American economy was hit with an inflation spike. However, it’s worth noting that inflation and affordability aren’t the same. Inflation signifies a general increase in prices, while affordability is linked to particular goods such as groceries and utilities. Affordability becomes a problem when income fails to keep up with escalating prices, something consumers observed in 2022 as their buying power shrunk due to the rapid rise of goods and services prices. Realizing the gravity of the situation, Washington decided to step in.
The Biden administration introduced the “Inflation Reduction Act” of 2022 as an ‘historic down payment on deficit reduction to fight inflation’. Although the act did manage to control some pharmaceutical prices, it fell short of addressing the real issue. Ironically, it injected $891 billion into an economy that was already on the boil to finance several of the administration’s pet projects. This contradicts the necessary approach to tackle inflation.
The Trump administration’s response was to impose tariffs on imported products, which were intended as a negotiation tool to influence U.S. trading partners accused of unfair trading practices. While successful in a few cases, it must be remembered that tariffs are essentially a tax. Most often, this tax trickles down to the consumer, who ends up paying more for goods and services, further hampering affordability.
The Federal Reserve, tasked with stabilizing prices and maximizing employment, decided to raise interest rates to control money circulation within the domestic economy and restrain inflation. However, such a move also increases borrowing costs, making credit cards and mortgages less affordable.
The issue of debt isn’t exclusive to consumers. The federal deficit for the current fiscal year is projected to be $1.8 trillion. This sum will be added to the $39 trillion national debt, resulting in a total annual servicing cost of $970 billion. The interest payments on this federal debt increase spending, thereby contributing to overall inflation and price hikes.
The question of affordability thus remains. Our national tendency to resort to fiscal policy tweaks (taxing and spending) to address immediate economic and social concerns often exacerbates the problem. The solution seems simple: spend less and implement tax policies that shrink rather than expand the federal deficit. However, this won’t be a walk in the park for elected officials. On a positive note, European leaders are facing similar challenges. Former president of the European Commission, Jean-Claud Juncker, candidly admitted, “We all know what to do, we just don’t know how to get elected, after we have done it”?
Contributor: Michael A. MacDowell, President Emeritus of Misericordia University and a director of the Calvin K. Kazanjian Economics Foundation. He lives in Estero.
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