101 Inflating Inflation
Government policies are increasing inflation that harms the poor and violates the scriptural mandate about “honest measures.
Inflation is one of the two evils of macroeconomics, along with its devilish brother: Unemployment. Inflation usually happens by an over-heated economy, but poor economic policy can also inflate inflation, and that’s what we’re seeing during the current economic cycle.
Christians are concerned about inflation, because we care about the poor. At first glance, you might think that inflation causes more pain for those with more money, because inflation is the measure of the decrease of the value of money. But here’s what Henry Hazlitt wrote in Economics in One Lesson in 1946 . Inflation is a form of taxation. It is perhaps the worst possible form, which usually bears hardest on those least able to pay. It is tantamount to a flat sales tax of the same percentage on all commodities, with the rates as high on bread and milk as on diamonds and furs. The poor are usually more heavily taxed by inflation, in percentage terms, than the rich, for they do not have the same means of protecting themselves by speculative purchases of real equities.
Sergiy Saydometov and I found ten Biblical Commandments of Economics that we wrote about in our book, Biblical Economic Policy. The one that applies to inflation is called “Use Honest Measures,” which comes from Deuteronomy 25:15, “You must maintain accurate weights and measures.” In economics we call it “sound money.” Inflation destroys sound money, so the money in your pocket is not an accurate measure.
There are nine ways in which poor policy is inflating inflation.
The US Debt Clock says the total debt is now $29 trillion. What’s really important is not that specific number, but the number as a percentage of national income, which is measured as Gross Domestic Product. When my Dallas Baptist University sophomores were born, debt as a percentage of GDP was 56%. Today, it’s 125%. Greece defaulted at 130%, but the GDP of Greece is only $190 billion, about the same as Kansas or Oklahoma. But the important factor about national debt today is that it’s increasing, and that inflates inflation. As debt rises, more dollars are needed to obtain the same amount of goods. So, there is pressure on the Fed to increase the supply of money. That policy inflates inflation.
As I’m recording this in October of 2021, Congress is debating a spending bill with an announced price tag of $3.5 trillion, but insiders say it’s really more like $5 trillion. And, when you get as old as I am, you learn that these things NEVER cost less, they always cost more. As spending increases, the government occupies a larger share of the economy, and one of two things happen: Consumers have fewer goods, or more pressure is put on the Fed to monetize the debt, which causes inflation.
Just last week, we covered the topic of Deadweight Loss in our Economics class at Dallas Baptist University. It was astounding that the afore-mentioned spending and tax increase was being debated in Congress, but none of my students had ever heard the phrase “Deadweight loss.” They knew the first minute of class, that as prices go up, consumers get fewer goods. Well, when you consider that taxes are an increase in the price of goods, it stands to reason you will get fewer of them. This little diagram shows the size of the deadweight loss. Higher taxes increase deadweight loss. Let me be clear: NO ONE gets this quantity of goods. It is lost because of increases in taxes. The policy of increasing taxes inflates inflation.
Pandemic Labor Restrictions
Shutting down the economy lowered the supply of labor. Well, it’s pretty simple economics, that when there is a labor shortage, the price will go up. If we define inflation as increases in the price of goods and labor, then a labor shortage is going to cause inflation.
Southwest Airlines is cancelling flights because they can’t obtain enough labor. That causes a “two-fer” for inflation: Fewer flights causes the supply curve to move left, and a shortage of labor raises the price of labor.
Economists generally agree that a 5% unemployment rate strikes the right balance between unemployment and inflation. When it gets under 5%, employers must steal labor away from their existing job. Getting labor to move requires the inducement of higher wages. There’s that phrase again: Higher wages, which is in the definition of inflation. As of this week, unemployment in the US is 4.8%. That inflates inflation.
Fossil Fuel Fight
I have unpacked some details about the complex relationship between the Christian Worldview and energy supply in podcast # 38 Energy Stewardship.
A Wall Street Journal editorial this week denounced the poor policies that have led to an increase in the price of crude oil. The editorial board writes, “Crude oil prices have doubled since November to $83 per barrel. But U.S. producers have been slow to revive output as the Administration is threatening the oil and gas industry with a panoply of taxes and regulation. Producers aren’t going to drill more wells today, even at today’s higher prices, if they don’t think they will produce future profits.” Oil is an input price for everything that gets transported, so that will contribute to inflation Suppliers of oil have moved the supply curve left, in anticipation of higher taxes and increased regulation from the Biden administration. An increase in the cost of transportation drives up the cost of everything that is transported. That’s inflation. “For consumers it’s like a tax,” economist Kathy Bostjancic of Oxford Economics said of the price increase. And, it’s a regressive tax, because the poor pay a higher share of their disposable income on transportation than the rich. Those policies inflate inflation.
There are predictions of an unhappy Christmas because goods are stranded on cargo ships waiting to port at Los Angeles or Long Beach. Well, fewer gifts won’t affect MY Christmas, and I hope it won’t affect yours. As a matter of fact, it might be a good lesson for all of us, about the real meaning of Christmas. But back to the ports.
Fed Chairman Jerome Powell told a House Financial Services Committee meeting last week, that a surge in prices this year “is a function of supply-side bottlenecks over which we have no control,” Then who does? Answer: The ports are operated by one of the strongest unions in America: The Teamsters. Those guys and girls driving trucks that more the containers around are making over $100,00 a year, according to the book Arriving Today, by Christopher Mims. As members of the International Longshore and Warehouse Union, they make three times the salary of average dock workers. It’s a pretty good guess that they are the highest-paid short-haul truck drivers in the world. Why? It’s real simple: They have monopoly control over the bottle-neck that exists in the import chain: The docks.
You might wonder why the federal government does not order a government take-over of the docks to save Christmas. But that would mean that the Democrats would have to take on the labor unions. You should count on an unhappy Christmas, without presents. It’s explained clearly in our Economics textbooks: The purpose of unions is to raise wages. That policy inflates inflation. I discuss that topic in podcast #52 titled Unions Cause Dis-Union in the Union.
Fed Bond Buying
The Federal Reserve Bank has changed its prescription for inflation. Historically, it was 2%, but now they have said they will accept a long-term average of 2%. It was above 5% over the last reporting quarter.
In March 2020, amid financial panic over Covid-19, the New York Fed was creating money to buy up to $75 billion of assets every day. It’s now buying $120 billion a month in treasure bills and mortgage debt instruments. They claim they will taper the buying after their next meeting, but I’ve watched them long enough to know they will back off at the first sign of a decrease in GDP. The Fed’s Economic Humanism is the topic of my podcast #21, where I unpack in more detail why they think their objective is to save the economy, instead of to stabilize prices, as Milton Friedman wanted them to do. Oh, and that was their first mandate when the Federal Reserve Bank was founded in 1913. This idea of saving economic growth – or saving Christmas as we’re calling it today – is a second mandate that most conservative economists do not support. In their very good book Economics in Christian Perspective, Victor Claar and Robin Klay make this very clear, “As Keynes and his critics both pointed out, policy actions designed to stimulate employment today will lead to greater inflation tomorrow.”
I had five grandkids in the van last week and the nine-year-old asked, “How does the Government know how much money to make?” Pretty good question for a youngster. To simplify the answer, I skipped the part about the Federal Reserve Bank not being a part of the government. Although the independence of the Fed is essentially gone, from my point of view, and I explain that in podcast #62 The End of Fed Independence. Back to my answer to my grandchild, “They don’t know how much money to print,” I answered. And if they print too much, what happens?” Her nine-year-old cousin explained that a one-hundred dollar bill would buy only 10 cents worth of goods. Ok, he exaggerated a little, but he understands that printing too much money causes inflation, which hurts the poor. I wish he could get an audience with the President to explain it to him!
Low Interest rates
The Federal Reserve has kept interest rates near zero for multiple months in a row. This is just unprecedented. When I tell my sophomores, “money is Free!” They respond as you might….Huh? Okay, it’s not free, but you can borrow it almost interest free. Even before the pandemic, three central banks had NEGATIVE interest rates: The European Central Bank, Norway, and Japan. But back to the Federal Reserve Bank of the United States. Interest rates were near zero during the entire eight years of the Obama administration. They edged up during the Trump administration, because the economy recovered. The Covid pandemic caused them to fall to zero, where the Fed promises to keep them until 2023. The demand curve goes does. When items are cheaper, people consume more. That applies to money also. As people use more of it, it inflates inflation.
I’m not always right about these things, but I saw this one coming, and that was not a very hard prediction to make. In March of 2021, the Federal Reserve Bank was saying they would not raise interest rates until 2023. In that same month, I predicted increasing inflation would force them to increase rates in the first quarter of 2022. There. It’s on tape, let’s see who’s right. As Danish Physicist Neil Bohr quipped, “Prediction is difficult, especially about the future.” And predictions are even more difficult when you’re working in the dismal science.
Just last week, President Biden called for the formation of a “Green Peace Corps.” It’s not clear what they would do, maybe lobby for more government spending. But at the very least, they would drain 1.6 million workers from the private sector, causing….wait for it….can you guess? A shortage of labor which causes even more inflation. Really: The President made speeches on two consecutive days: The first one announcing unemployment had reached under the 5% mark, to 4.8%, and the next one announcing his intention to remove 1.6 million workers from the private labor force. That policy will inflate inflation.
Maybe the President and his advisors need to listen more carefully to my grandkids. They seem to understand what contributes to inflating inflation better than he does.
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