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“Inflation is when you pay $15 for the $10 haircut you used to get for $5 when you had hair.” Sam Ewing
Sam Ewing is a former baseball player and not an economist. But he provided a good definition of inflation.
Inflation is the overall increase in prices for goods and services over time. We don’t need economists to tell us inflation is occurring. It is pretty obvious when you go to the grocery store.
Why prices are going up is a more complicated story. Despite inflation being a well defined phenomenon with known basic causes, economists disagree about the specific reasons for today’s price increases.
This article discuses inflation and what some economists think is causing the current increases.
Contrary to many news reports I assert it is not President Biden’s fault, nor is it being caused by the pandemic relief spending.
Of course there are honest differences in opinion in economics as in everything else. Not everyone interprets the numbers in the same way. But it is also true that some economists are employed to spin the numbers for political reasons.
Reading the news it is clear that right-wing politicians, economists and pundits are hyping the fear of inflation to oppose and discredit President Biden’s agenda.
It is necessary to separate the legitimate concerns about inflation from the political rhetoric.
University of Chicago economist Austan Goolsbee provides one, of many, historical examples of Republican politically convenient inconsistency on inflation. Speaking on a Pitchfork Economics podcast, he reminds us that in 2017 Republicans “...pushed a 2 trillion dollar tax cut for high income people and large corporations...”
He says Republicans had no concern about the tax cut causing inflation or resulting in budget deficits.
But they now claim Biden’s $1.9 trillion pandemic relief package will cause inflation and deficits.
Economically tax cuts and government spending have the same effect. The only difference between the two actions is which party is in control.
There are a number of causes for inflation. The most common is when demand for goods and services exceeds the supply (or the ability to produce more) and pushes prices up. Increasing costs of production, like wages and raw materials, can also create pressure to raise prices. Companies will pass on the increased costs to consumers (if they can) to maintain profits.
The Federal Reserve increasing (or decreasing) the money supply by decreasing (or increasing) interest rates can affect inflation. This is theoretically the tool used to control inflation.
But interest rates primarily impact large durable goods purchases that people borrow money to buy cars, houses, business investments, etc. Most people buy everything with credit cards (borrowed money), but the interest rate rarely affects average consumer’s buying decisions. They buy what they want.
So controlling inflation with interest rates is an example of accepted economic theory that only partially works in the real world.
Inflation is a problem. Inflation causes your buying power to erode. The long term average has been about 3% per year. The FED’s goal is 2% per year. But 2% per year adds up to 20% in 10 years, which is a big jump for the cost of food, housing, medicines or other necessities, especially if your wages are not increasing at the same rate.
This is good for borrowers who pay back the loan with money that is worth less. But It is bad for most working people who’s wages rarely keep pace with inflation.
So the news reports of prices going up 6-7% last year can be frightening. But many economists say this is not normal or caused by the usual factors. The Economic Policy Institute blames the “rapid reopening of economic sectors that were almost completely shuttered for a period by COVID, along with supply-side distortions remaining as the pandemic continues to roil around the world.”
A Forbes magazine article says “inflation has been driven by supply chain disruptions and pent-up consumer demand for goods following the reopening of the economy.“
A Brookings Institute article agrees that the 2021 inflation is pandemic related and suggests it will be temporary.
Austan Goolsbee agrees that recent inflation is related to the pandemic recession. This recession (unlike prior recessions) affected the service sector. Tourism, restaurants, hair cuts, dentist visits and live concerts closed down because of pandemic restrictions and people’s fear of contact.
He says 2021 was not the same as the 1970s when there was an “overheated economy” because of spending on the Vietnam War, the Arab oil embargo, consumer demand, cost factors and a snowball effect once inflation got started.
Professor Goolsbee also refutes the notion that COVID relief spending is causing inflation. He says this spending cannot be inflationary because it is not increasing overall spending or demand.
The relief money is replacing lost income for the millions of people unable to work and businesses that would have failed because of the pandemic. It is disaster relief and not economic stimulus. It is not increasing overall demand or Gross Domestic Product (GDP) that could fuel inflation.
Refuting the false notion that President Biden is to blame for the inflation is simple common sense. The U.S. has 1.53 million businesses and 330 million people, all pursuing there own self interests in a “free market” $14 trillion dollar economy. Government can influence what happens with laws and taxes but it is impossible to control all this individual activity.
Inflation can also occur because of the power large multinational corporations and the greed of capitalism. Companies larger than nations have monopolistic and oligarchic power not subject the competitive “free markets.”
The few massive oil companies can control gas prices. The recent increases in gasoline prices are making up for lost profits due to reduced consumption during the pandemic.
President Biden (or any president) has no authority to set gas prices. The federal government does not set wages or prices in the free market. Consumer and producer behavior does. Don’t blame Biden for what he can’t control.
How do we dig out of the mess we are in?
Professor Goolsbee suggests to end the pandemic economic problems we must end the pandemic. Since 40% of the population refuses to take sensible actions like wearing a mask or getting vaccinated, good luck with that plan.