Poliy Problem

Stakeholders

As a result of the massive drop in U.S. exports, the trade deficit widened significantly, dropping the GDP growth by 3.20%. This large trade deficit can negatively impact the U.S.’ exchange rate – weakening its economic power internationally.  In addition, this has caused the U.S. to enter a period of counter-cyclical inflation, where, since consumer confidence is low, prices are raised, which decreases consumer demand, and this continues in a cycle. Though the government has no further plans except for an interest rate hike, researchers suggest that they should support demand, incentivize firm hiring, and repair balance sheets in the private and public sector to aid the recovery. 

Risks of Indifference

At this current stage, if the situation does not improve, the Federal Reserve is preparing to introduce an interest rate hike of 50 basis points, which could cause companies to trim capital expenditures budgets in turn affecting many citizens due to the inflated cost of products and leading to additional political crises. In this case, for example, a $40,000 loan would increase by about $10 a month, or another $600 over the time of a five-year loan. Not only that, but without some form of policy change, the crisis could worsen and cause a recession, though this appears to be unlikely.

Policy Options

Though economists have labeled the Q1 of 2022 shrinkage as not indicative of a future recession, the upcoming 2022 midterm elections have prompted urgency for the Democrats to minimize the economic and political fallout from rising inflation and increased prices of household goods, with the most pressing issue being the increased price of gasoline. In a news conference in April, Senator Maria Cantwell (D-WA) and Representative Frank Mallone Jr. (D-NJ) announced a forthcoming bill to increase the power of federal regulators to investigate prices in the oil and gas industry, promising to crack down on price-gouging amidst soaring gasoline prices. The second proposal, The Gas Price Relief Act, comes from Senators Maggie Hassan (D-NH) and Mark Kelly (D-AZ), who call for a federal gasoline tax holiday through January of 2023. Though the Biden administration has indicated that they are considering this option, many Democrats remain unconvinced and believe that gas companies would raise prices after the tax pauses and pocket the extra profit. Republicans have voiced their own concerns as well. Money from the federal gas tax is currently funding the government’s infrastructure program and losing this key funding will stall the program without a guarantee that consumers will actually see the benefit of the tax holiday. Representative Kevin Brady (R-TX) countered these proposals by calling for a less restrictive drilling policy, resulting in a greater supply of oil and gas and therefore, lower prices. Some Republicans, like Senator Kevin Cramer (R-ND), believe “price itself will [fall] eventually because [high prices] will shrink demand.”