Whiting column: Traditional strategies won’t curb today’s inflation
This isn’t your father’s inflation. Consequently, we can’t end today’s inflation with yesterday’s strategies.
Traditionally, the tools were raising interest rates, decreasing government spending or increasing taxes. Historically, inflation slowed after five years, accompanied by recession. Today, these strategies are long term and counterproductive.
Inflation in 1964 was 1%. By 1980 it was 14%. The increase was caused by the Vietnam War effort, which decreased unemployment and increased government spending. Interest rates rose to 14%; personal income tax rates increased to a maximum of 70%. Inflation ended because 10.8% unemployment and recession reduced consumer spending, and government reduced spending due to decreased income tax receipts.
Today’s inflation is a result of: 1. an increase in money supply; 2. a decrease in product supply, and; 3. increased product cost structure.
Consequently, this inflation can be curbed only by dealing with today’s causes, not traditional strategies.
Whenever new money is introduced into an economy that isn’t a result of an increase in productivity, inflation will result. In 2020 and 2021, six different stimulus bills infused $5.8 trillion into the economy. The resultant spending was not only the inflationary spark but put several logs on the fire. A significant portion of stimulus checks went into savings and/or reducing debt, which will continue to accentuate spending and prolong the inflationary period. The money and productivity disparity were accentuated when people were, in effect, being paid not to work.
To take the air out of the inflationary balloon, we can’t add more logs through new government spending. The December 2021 proposal of another $3.5 trillion was derailed by Sen. Manchin, but a $1.75 trillion compromise has emerged. One can debate the need, but its passage will increase inflation, because it’s not a result of increased productivity. Any new increase in disposable income will increase inflation. For example, forgiveness of college debt will add fuel to the inflationary fire.
Whenever supply of a product goes down, price increases. The COVID business activity decline meant retailers and manufacturers did what was logical: reduce their inventory and production. Supply chain issues occurred because transportation companies laid off employees, mothballed aging semis, trains, planes and ships, anticipating fewer products to transport.
No businessperson understanding economics could anticipate the government dumping $5.8 trillion into everyone’s pocketbooks and geometrically increasing consumer spending. Price goes up when supply goes down and leaps when accompanied by increased demand.
Supply will increase as companies increase production. The biggest hurdle is finding employees to hire and train. Six months ago, the government did authorize additional man hours in the ports to unload waiting ships. This helps, but given the government receives weekly port status reports it’s a strategy that could have been implemented in 2020.
Wages, energy, raw materials, components, taxes and regulatory compliance all increased product cost structure. The two main culprits: wages and energy.
The number wanting, willing and needing to work decreased, requiring employers to significantly increase wages. We like increased wages, but they are always an inflationary factor, especially when unrelated to an increase in productivity. There is an economic argument that productivity decreases when employees know they have the power and don’t have to maximize their efforts, because they can easily find another job.
The only solution is for wage increases to occur from increased productivity and merit as opposed to seniority.
Energy has the largest effect, because it’s pervasive. Oil prices not only affect commuting to work and family activities but transportation of every product we purchase.
Because we choose to buy oil and natural gas from foreign countries instead of utilizing our own, we are subject to their pricing. When they have us over a “barrel,” they aren’t going to lower prices. It’s in their vested interests to keep raising price, receiving our money and taking it out of our country so we can’t utilize it economically.
The only strategy that will end this inflationary bulldozer is to return to energy independence; we have the energy resources. If economic hardship, as opposed to physical involvement, is the desired route to convince Putin to leave Ukraine, we must be prepared to supply Europe with oil and natural gas. Energy independence allows us to control the price of energy and hence inflation. Inflation prevents us from buying the electric vehicles that will someday reduce our demand for oil.
It’s important to remember our world is a closed environmental system; the negative aspects of energy production are the same whether they occur in our country or another.
The current inflation rate is 8.5%; however, the effective rate is much higher. The government doesn’t include food, energy and housing because it feels they are too volatile. The problem is these are the three main areas occupying our budget. Since 2020, the price of gas has risen nearly 100%, food 14.6% and rent 27%, meaning the budgetary effect is over 33%.
Inflation is not equitable. The people who can least afford higher prices are the most affected. They also tend to be the first to lose their job when the resultant recession occurs. The longer inflation is present, the harder it is to control. “Bandwagon” pricing occurs. Some companies may not be as affected but raise price anyway because it’s expected and acceptable. Consumer apathy occurs. We don’t shop around or negotiate as usual because we say, “What’s the use, everything is high.”
In today’s economy, raising interest rates is counterproductive. It decreases the number of people who can buy a house, increasing demand for rentals and increasing rents. Competition lowers price, but higher interest adds to costs for current entrepreneurs and inhibits new startups.
It’s our personal responsibility to make the hard decisions necessary to control inflation. Our fathers expect it.
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: email@example.com.
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