Three Things Congress Can Do To Get Serious on Inflation

COMMENTARY Budget and Spending

Three Things Congress Can Do To Get Serious on Inflation

May 16, 2022 2 min read
COMMENTARY BY
Joel Griffith

Research Fellow, Thomas A. Roe Institute

Joel is a research fellow in the Thomas A. Roe Institute for economic policy studies at The Heritage Foundation.
Congress needs to curb the spending. Fast. Javier Ghersi / Getty Images

Key Takeaways

Using money created out of thin air to finance government spending comes at a cost: today’s soaring prices and a decline in real incomes.

Congress should require the Federal Reserve to stop buying new mortgage-backed securities and start unwinding its MBS portfolio.

If Congress stops the federal spending spree, stops subsidizing the housing market, and stops the war against workers and energy, inflationary pressures will ease.

Consumer prices rose 8.6% last year, the highest inflation since 1981. What can Congress do?

First, stop the federal spending spree. Spending soared from $4.76 trillion in 2019 to $6.79 trillion in 2020 and $7.02 trillion in 2021. The Federal Reserve has enabled much of this surge by printing dollars like crazy. In just two years, the Fed has used these newly minted bills to buy more than $3 trillion of government bonds, as well as trillions more of other financial assets such as corporate bonds and mortgage securities. In printing money to cover these “purchases” while holding interest rates at near-zero, the Fed has spurred an expansion of the money supply by nearly 50% in just two years.

Using money created out of thin air to finance government spending comes at a cost: today’s soaring prices and a decline in real incomes. Congress needs to curb the spending. Fast.

Second, stop subsidizing the housing market.

>>> Despite Raging Inflation, Congress Bent on Continuing Spending Spree

Congress subsidizes the mortgage markets through government-sponsored enterprises, specifically Fannie Mae, Freddie Mac and Ginnie Mae. The GSEs issue more than 90% of all residential mortgage-backed securities. By underwriting artificially low rates, Fannie, Freddie and Ginnie induce and enable borrowers to take out bigger loans, feeding the rise in housing prices and pricing out new buyers, especially young families.

The Fed has helped throw gas on this inflationary fire by purchasing $1.2 trillion of MBSs from the GSEs since March 2020. It now owns $2.7 trillion of these securities—an increase of 125% than it held in March 2020.

As a consequence, from the start of the pandemic through February 2022, home prices soared 33%. They are up 19.5% in just the last 12 months, dwarfing the prior 12-month jump of 7.1%. Adjusted for inflation, residential property prices now exceed the all-time record levels of the 2006 housing bubble. Home prices are now rising far faster than family income.

The home-price-to-median-income ratio stands exceeds 7.2, eclipsing the 7.03 peak in late 2005. Compare that to a ratio of well under 5.0 from 1980 to 2000. In less than 18 months, mortgage payments based on median home prices have increased nearly 50% due to the rise in prices combined with a near doubling of mortgage rates. The mortgage-payment-to-income ratio hit 34.9% in February—the bleakest affordability levels since 2008.

Congress should require the Federal Reserve to stop buying new mortgage-backed securities and start unwinding its MBS portfolio. Lawmakers should also sever the special status given to the GSEs, narrow their focus to financing primary home purchases, gradually reduce the “conforming loan” limits so they don’t subsidize mansions, and forbid the GSEs from offering amortization options beyond the traditional 30-year repayment term.

Third, Congress should stop the war on work and energy.

The flow of unemployment bonuses, stimulus checks and other assorted benefits—combined with a threatened OSHA vaccine mandate—disincentivized a return to work even as localities reopened after lockdowns. Now, Congress threatens to enact restrictions on gig workers who compete with unions and to advance forced unionization. Congress should abandon this labor-suppressing agenda so nonunion workers, who make up 90% of America’s workers, can get a job.

>>> Congress’ Overspending Is the Problem, Not a Lack of Tax Dollars

Congress also should refuse to support the Biden administration’s war on affordable, abundant fossil fuels. In part because of policies and threatening rhetoric designed to discourage new domestic production, oil prices nearly doubled over the past year and U.S. production remains more than 10% below pre-pandemic levels.

As far-left environmental groups block natural gas pipeline projects, parts of the Northeast continue to pay electricity prices several times higher than what customers elsewhere pay. Congress possesses the power to clarify or rewrite regulations that inhibit our access to affordable energy.

If Congress stops the federal spending spree, stops subsidizing the housing market, and stops the war against workers and energy, inflationary pressures will ease significantly.

This piece originally appeared in The Washington Times