Cornell Law Review

Imagine that we had to fight and adapt to the COVID-19 epidemic using only vintage 1970s technology. No mRNA vaccines; no designer anti-viral drugs. Want to work from home? Try that on a dial-up modem that transmits about 800 bits of information per second (today’s high-speed internet is literally one hundred million times faster).

Nevertheless, that is where we are with our law and policy responses to high inflation, another COVID by-product. In most highly developed economies, governments have handed management of inflation entirely over to their central banks, and for good reason.1 With inflation largely beaten by central bankers (albeit with notable exceptions such as Brazil) for nearly five decades, there has been little effort to design, let alone implement, other legal institutions that could help slow sharp increases in the prices facing consumers.

This dearth of good ideas is unfortunate because it turns out that relying exclusively on central banks may not be ideal. Central banks generally fight inflation by slowing economic activity: less money for investment, fewer jobs, lower consumer demand.2 But almost by definition that requires some amount of economic hardship, particularly for individuals who lose work as a result of the central bank’s policies. In the United States, these families are disproportionately Black.3 While central banks today say that they are aiming for a “soft landing” in which inflation slows but major economies avoid significant additional damage, leading bankers also predict a significant likelihood of recession and widespread unemployment.4 There is reason to think that many central bankers will be prone to “overshoot” or fight inflation more aggressively than might be optimal for their economy. Central banks also deploy inflation-fighting tools that can undermine bank stability, damage government budgets, drive up taxes, or all of the above.

In short, while it would be good to have some alternatives or complements to central banks, there is little intellectual or political effort in that direction. The two are likely related. In some sense, the tools for fighting inflation (outside the doors of a central bank) are obvious. Given the laws of supply and demand, if we want prices to fall, we just undercut demand. Governments could slash their spending (reducing demand for all the things governments buy, and also putting lots of people out of work), impose big new taxes—especially taxes on new purchases—or both. But we do not see governments pursuing those policies, for the obvious reasons that they would be hugely unpopular and have highly undesirable side-effects. Perhaps it is little wonder, then, that academics have not spent much time trying to show elected officials how to fight inflation.

But what if there were policies that could slow inflation while also potentially commanding some significant degree of political support? Gerald Ford campaigned on a slogan that he would “WIN,” or “whip inflation now,” and he lost resoundingly. Other writers have pointed out recently that some stalled policy proposals, such as reformed anti-trust law, could help lower prices,5 but of course, the problem is exactly that those proposals have so far failed to pass. Are there any WIN-wins out there, policies that election-sensitive officials could support that would reduce the need for damaging central bank interventions?

This Article attempts to sketch what such a policy would have to look like, and offers some concrete examples. The key insight is that driving people out of work and taking away their money are not the only ways to cool consumer demand. We can also reduce spending today by encouraging families to delay consumption to the future, such as by saving for retirement or buying insurance. We have to be careful, though, that incentives to encourage savings and insurance do not simply end up stimulating more present spending. I argue that retirement savings and health-insurance policies targeted at lower-earning families are especially likely to hit this sweet spot. For example, providing a government-funded bonus to Obamacare marketplace plans, or just making it much easier to sign up for and stay enrolled in those plans, would make families better off—usually a key element of any electorally viable policy—while also encouraging them to defer spending. More generally, we should lower the “taxes” on our collective attention and patience that stop us from saving and insuring: no one likes hassles, so making our lives easier in that way would likely be popular. But unlike many other ways governments often find for scoring more votes, making people happy without giving them cash should be at worst inflation-neutral.

To read this Article, please click here: Incentive-Compatible Inflation Policy.