Whiting column: Controlling inflation reactively is a tardy policy
Dealing with inflation reactively is long term and involves unintended consequences.
Economic theory defines inflation as devaluation of the consumer dollar. We know it means prices go up. Inflation has hit 8%. Presidential advisors have said the rate is only 5% (as if that wasn’t bad enough), because household energy, gasoline, food and housing have a history of fluctuation.
Consequently, higher inflation is not significant, because it is short term: transitory, it will pass. So does eating spoiled food, but not without pain.
It isn’t realistic to disregard items that constitute the majority of our household budgets. We must control inflation now and should have worked to prevent it. Supply and demand determine cost and price, which dictates how it should be controlled.
Our system reacts to inflation with fiscal and monetary policy. Fiscal policy entails raising taxes and reducing government spending to reduce demand. Both strategies are long term because they require debated legislative approval, and how often does government reduce spending?
The Federal Reserve Bank reacts with monetary policy by decreasing money supply and decreasing borrowing by raising interest rates. It is long term and has limited effect on the average consumer. Cash sales aren’t affected. Only those borrowing for big-ticket items such as house or car are affected. Those utilizing credit cards as a borrowing method aren’t typically making the decision based on interest rate.
High interest rates generate an unintended consequence by increasing the difficulty for entrepreneurial startups, decreasing competition, which increases price.
Waiting for long-term policy solutions to work is not an adequate alternative. One need only look back to the Carter presidency to see the economic consequences — 14.6% inflation led to the Fed moving interest rates to 17.6%, combining to generate 9.4% unemployment and a 4% decrease in wages.
These long-term legislative and Fed strategies are reactive. We need leadership to be proactive. Most inflationary pressures are predictable if one watches the forces affecting supply and demand, so actions can be taken before inflationary pressures reach the crisis level.
Oil is an example. The price of gasoline has risen 50%. Because inflation never exists in isolation, we don’t have money available for other purchases. It applies pressure to the price of other goods through increased transportation costs. Because we consume and rebuy food, the pressures are especially consequential in food prices.
In 2019, we produced 12.3 million barrels per day, 2021 11.1 million; consuming 18.9 million barrels and 19.7 million, respectively. These numbers were known and because demand as increased every year the continued trend predictable.
Reduced production required us to import oil from other countries: 7.86 million barrels per day in 2020. This reliance increases price, results in more dollars (approx. $400 million per day) leaving the country, expanding our trade deficit, limiting the domestic multiplier effect, their political desires and demands influencing our decisions. We are naïve to believe that dollars we and others flow into the Middle East as oil flows out isn’t financing terrorism. We are endangered by our own money.
Motivated by valid environmental goals, we made it more difficult and costly to produce oil and stopped supply pipelines at a time when domestic demand was increasing. Obviously, we want to decrease our use of fossil fuels, but the inflationary damage of doing so with stagnant or increasing demand can be avoided if leadership thinks proactively.
Producing enough oil to meet our current needs is the proactive approach. Both our own government and OPEC admit we have more untapped oil reserves than any other country. Economically, production (supply) doesn’t affect demand, only price.
This proactive approach would enable us to decrease our production as our demand decreases. As electric vehicles, trains and planes become affordable, less susceptible to cold, go 500 miles on a charge, haul a family on vacation and heavy commodities, individuals and businesses will clamor to buy them. No legislation required. The demand for oil will decrease dramatically. Pipelines and refineries will shut down on their own, and we can reduce production without inflationary issues.
Production has environmental consequences, but when worldwide demand exists, worldwide production will meet it. The climate change ramifications are going to occur whether the production occurs here or in another country. Climate is worldwide. Oil consumption in foreign countries, just as in ours, will only decrease when their needs are met in another fashion.
Inflation reduces the money and time we and other countries have available to allocate toward alternative ways to meet this need. Let’s focus our money and efforts on this rather than on inflationary prices that should have been anticipated and minimized.
Inflation is nondiscriminatory. It affects everyone, except the government. It, in effect, transfers increased prices to us. Obviously, there are additional factors from inventory shortage to increased population, wage increases to supply chain issues producing the inflation we are feeling, but most are also predictable and controllable with proactive efforts. They will be discussed in the next column.
It’s our personal responsibility to encourage our political leaders not only to be economically reactive but proactive.
Bryan Whiting feels most of our issues are best solved by personal responsibility and an understanding of non-partisan economics rather than government intervention. Comments and column suggestions to: firstname.lastname@example.org.
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