In These Times
Last month, I wrote a story in these pages discounting the burgeoning hype over inflation. Yet this hype persists. Sen. Joe Manchin (“D”-WV) has repeatedly invoked the inflationary threat to oppose President Biden’s massive Build Back Better (BBB) legislative package. And on December 11, the Wall Street Journal’s editorial board duly awarded Manchin a cookie, proclaiming his vindication.
In the words of Richard Nixon, let me say this about that.
You may have heard that “war is the continuation of politics by other means,” a quote credited to Prussian general Carl von Clausewitz. Well, anti-inflation policy is the continuation of class war by other means. In the current case, the specter of inflation is being spuriously invoked to block Biden’s social spending initiatives.
However bad you think inflation is, or might get, it has nothing whatsoever to do with BBB. The vast bulk of that spending is offset by revenue increases. The addition in spending from programs in the bill is associated with a nearly equal subtraction of spending due to increased federal revenue, so there would be scant increased upward pressure on prices.
It is fair to note the we have seen the second straight month of raised inflation data. The usual practice among economists is to take a year-to-year measurement, from the most recent month for which data has been published to the same month, one year prior. From November 2020 to November 2021, the annualized rate was close to six percent. Whatever we think about this number, it will probably provoke policy changes, which we will get to in a moment. But before we do, a few things to consider:
By November 2020, the pandemic and recession were in full swing. A depressed economy usually means depressed prices. Presently, the economy is growing at a healthy pace, and the price pressure is towards the upside, so the range from November 2020 to last month provides a biased picture of the longer-term trend. We would not expect this pace to continue until November 2022 and after.
An inflation measure comprises a multitude of price changes. Not all of them change for the same reason. One source of change is observed in the fast-food industry. This industry is characterized by low profit margins. Price changes in this sector are disproportionately due to changes in labor costs. My colleague Dean Baker points out similar growth for average production workers and for those in hotels and childcare. Inflation of this type is a good thing, because low-wage workers are making more money.
Another inflation source has been energy. U.S. presidents do not control the price of oil. A more likely influence would be the president of Saudi Arabia, if it had a president. Even so, oil and natural gas prices are beginning to trend downward from their recent peak.
Presidents, especially Democrats, always get blamed for gas price increases, but never get credit for price declines. The truth is, they don’t have much to do with either. So it will be again next month, with the release of the next wave of data. In their desperate grasp for clicks, the commercial or politically reactionary news media love to publicize price outliers on the high side, never the low. When prices turn around, it’s all crickets.
For example, since late October, oil prices have actually declined by 15 percent. That’s pretty big, though car owners should not get too excited. That cut will take a while to work its way into gas prices at the pump. Inflation expectations as reflected in the yields of bonds have decreased too. Last week, the price of hogs, wheat and natural gas dropped. All of these commodities are ubiquitous in the U.S. economy.
Has CNN host Wolf Blitzer revealed these dramatic facts? I would be shocked. Instead we get pictures of gas prices in excess of $4.50 a gallon, but folks, that’s in California. The national average price per gallon happens to be $3.33.
Some price changes are due to kinks in the supply chain — another thing presidents have little control over. The blessing here is that, under capitalism, there are advantages to filling such supply gaps before one’s competition is able to. In time, supply chains tend to heal themselves.
In other markets, sellers with few competitors have what economists call “pricing power.” Some on the Left attribute price hikes to predatory monopolists. The weakness of this logic is that, if such increases made possible higher profits, why weren’t they made previously? If we acknowledge that monopolists always want to maximize profits, in one sense their power to set prices is illusory.
There is a maximum feasible price that is beyond their control, depending on what the market will bear. The monopolists’ only discretionary power is to cut prices, which is not much of a power to envy, unless it serves the purpose of destroying competitors. For example, when the OPEC cartel increases oil production and reduces oil prices, it tends to eliminate the least profitable alternative energy sources. Fracking is said to be unprofitable if the price of a barrel of oil falls below $50.
The monopoly angle is salient as a longer-term matter, when remedies include either increased competition or socially-owned public enterprises. Monopolies can abuse their employees and be socially retrograde in other ways. As a short-term matter, however, their role in inflation is overplayed.
An important signal of inflation, either more or less of it, is the interest rate that wealthy investors and financial institutions are willing to pay for very safe assets, such as Treasury bonds. Presently, the market interest rate on a ten-year bond is less than 1.5 percent. If you expected inflation to be six percent, as the purchaser of a bond, you are paying the seller 4.5 percent to hold your money. It’s like depositing $100 and, after a year, getting back $95.50. If you are willing to do this, I want to be your banker. Do Joe Manchin and The Wall Street Journal understand this? I suspect they do. The high rollers who buy U.S. Treasury bonds don’t expect the inflation rate to remain that high, which is why the market interest rate is where it is.
In my recent piece, I wrote that one month of bad data does not a trend make. Neither does one additional month. It may be enough, however, to provoke dangerous policy responses by the Federal Reserve. It already is effective in blocking BBB, as news reports Wednesday announced that the bill has effectively been “shelved,” in large part due to Manchin’s objections.
In the case of the Fed, the danger is that it will stop increasing the money supply by more rapidly reducing its purchase of financial assets — the so-called “taper.” Fed bigwigs can also have an impact by suggesting they might take direct action to push up interest rates, which in the recent past has caused havoc in financial markets and had a broadly discouraging impact on business investment and on consumer spending on durables like cars and houses. It’s kind of like blowing up a wedding party — dogs, children and all — to eliminate a single terrorist. (Yup, we do that too.)
Despite everything, the U.S. economy has nearly returned to its pre-pandemic peaks from the beginning of 2020. It still has a way to go in terms of employment, even with an unusually low unemployment rate of 4.2 percent. The BBB bill will advance those gains, if it’s actually passed. Running scared from inflation, meanwhile, will have the opposite effect.