Whiting column: Not your father’s inflation, part 2
This still isn’t your father’s inflation.
Our column last August discussed our current inflation genesis being factors different from previous inflationary periods. Consequently, traditional strategies weren’t going to be punctually effective, necessitating new strategies. The past nine months has reinforced the necessity.
The Fed admits a recession is required to lessen inflation and raising interest rates is their primary focus which takes years. This is significant because recessions function geometrically not arithmetically and are harder to stop than start. We must understand the additional factors contributing to this inflation if we are to understand the new strategies required to stall it.
Economic spending occurs from four main sources: government, organizations, individuals and business. Obviously, the largest is government spending at all levels.
It’s not the individual consumer. We don’t have a surplus of money, are only spending money on essentials, are frugal not frittering money away.
It’s not the entrepreneur. They are watching their pennies, keeping their costs down only spending on items which will increase productivity. They must make a profit to stay in business.
Both individuals and small business must make sure their revenue matches expenses; they don’t have a choice.
Such isn’t the case for government and most other tax-supported organizations. They don’t have an incentive to be efficient or go the extra mile meeting the needs of their “customers.” They don’t have a history of decreasing spending because tax receipts are down. They can automatically increase their revenue through taxes or deficit spending. Interest rates don’t affect the spending level of the largest spender. They borrow as necessary, regardless.
As we discussed in August, any increase in money supply not related to an increase in productivity is inflationary. Sadly, three of the largest areas of government expenditure are: employees, interest on the national debt and social programs such as stimulus payments, unemployment/welfare, etc. Their necessity can be debated, but they don’t directly increase productivity generating additional revenue and profit.
Many other economic factors increase inflation: singular and complementary occurrences, wage/price spiral, market polarization, and immigration. Singular activities would include forgiving college debt and state tax rebates. We enjoy them, but they increase spending. Complementary occurrence example is the increased price of new cars dictating we drive our car longer increasing our demand for car repairs.
The wage/price spiral is the rolling snowball of inflation. Higher wages increase consumer demand for products/services and increase business costs. Both precipitate higher prices. Higher cost of living means employees demand higher wages; on and on. Historically, wage increases must stop first to avoid a recession.
The market polarization concept (MPC) emerged 15-20 years ago. Simplistically, our market changed from a dominant middle market to a two extreme market. Traditionally, most consumption was in the middle. We desired middle priced-middle quality products. An OK product at an OK price. We didn’t buy cheapest because we were employed and could afford better. We didn’t buy the most expensive because we couldn’t afford it. Consequently, the two end markets (the poles) were very small; the middle large.
The advent of Wal-Mart type stores increased our focus on cheap prices. We decided for some products/services the inherent lower quality was fine. We just needed “it.” The quality of the “toaster” didn’t matter. The resultant savings meant extra money. We decided to spend it on higher quality/price items in the area(s) which were most important to us. The gourmet cook wanted the most expensive “toaster.” MPC invaded all product/service markets: skiing, golf, clothing, cars, motel rooms, restaurants, music, etc. It didn’t matter.
Consequently, the two extreme markets on each end grew which meant the middle market shrank significantly. MPC resulted in the bankruptcy or consolidation of stores that were successful in the middle for decades such as Montgomery Ward, Sears, JC Penney, and the equivalent in each market type.
During inflation, MPC doesn’t help. The higher market because of its nature doesn’t lower prices. The lower market raises prices because we must buy more at a lower price increasing demand.
Immigration, regardless of source, facilitates inflation. There is increased demand for all products especially food, energy and transportation. The need for additional housing means rents rise and the resultant increased production of rental and residential housing pushes building material and labor costs higher. The demand for infrastructure, welfare, police, education and other governmental services increases and these expenditures occur for a year without the consequent increase in productivity or tax revenue.
Many strategies to minimize the inflationary effect of these causes are self-evident. Others such as decreased governmental spending seem difficult to execute. We can help. Moderating our perception of “need” would help. We often feel we need two or more cars and seldom drive them for 200,000 miles, larger home, fancier food, multiple televisions and phones, new clothes because we’re convinced, they’re out of style. You get the idea.
We can comparison shop and negotiate a little more even though it’s difficult because we’re busy working multiple jobs and raising a family.
We can remember inflation means we should invest in ourselves. An economic basic is we are paid for bringing value to the marketplace. If we provide two or three times more value, we benefit. The better we recognize and meet the needs of others the more they will want to pay us for our services regardless of the value of the dollar. Our productivity has increased, limiting its inflationary effect.
It is our responsibility to do our part to slow inflation.
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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