Inflation fears shouldn’t be a pretext for class war


Last month I wrote a story in these pages brushing aside the burgeoning inflation hype. Yet this hype persists. Senator Joe Manchin (“D” -WV) has repeatedly cited the inflationary threat to oppose President Biden’s massive Build Back Better (BBB) ​​legislative package. And in December 11, the the Wall Street newspaperThe editorial board duly awarded Manchin a cookie, proclaiming its justification.

In the words of Richard Nixon, let me say this about it.

You may have heard that war is the continuation of politics by other means, ”a quote attributed to Prussian General Carl von Clausewitz. Well, the anti-inflationary policy is the continuation of the class war by other means. In the current case, the specter of inflation is falsely invoked to block Biden’s social spending initiatives.

As bad as you think inflation is, or may become, it has nothing to do with the BBB. Much of this expense is offset by increases in income. The increase in program spending in the bill is associated with an almost equal subtraction of spending due to the increase in federal revenues, so there would be a slight increase in the upward pressure on prices. .

It’s fair to note that we have seen the second consecutive month of increased inflation data. The usual practice of economists is to take a year-over-year measurement from the most recent month for which the data was released to the same month, a year earlier. From november 2020 to november 2021, the annualized rate was close to six percent. Whatever we think of that number, it’s likely to cause policy changes, which we’ll get to in a moment. But before doing so, a few things to consider:

In November 2020, the pandemic and the recession were in full swing. A depressed economy usually means depressed prices. Currently, the economy is growing at a healthy pace and price pressure is on the rise, so the November range 2020 last month provides a biased picture of the long-term trend. We don’t expect this pace to continue until November. 2022 and after.

A measure of inflation includes a multitude of price changes. Not all change for the same reason. A source of change is seen 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 reports similar growth for average workers in production and for those in hotels and daycare centers. Inflation like this is a good thing, because lower paid workers make more money.

Another source of inflation has been energy. US presidents do not control the price of oil. A more likely influence would be the president of Saudi Arabia, if it had a president. Despite this, oil and natural gas prices are starting to trend lower from their recent peak.

Presidents, especially Democrats, are always blamed for increases in gas prices, but never for price cuts. 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 search 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 just crickets.

For example, since the end of October, oil prices have actually fallen by 15 percent. It’s pretty big, although car owners shouldn’t be too excited. This reduction will take some time to work its way into gasoline prices at the pump. Inflation expectations as reflected in bond yields have also declined. Last week the prices of pork, wheat and natural gas fell. All of these products are ubiquitous in the US economy.

Has CNN host Wolf Blitzer revealed these dramatic facts? I would be shocked. Instead, we get pictures of gas prices going over $4.50 a gallon, but guys, it’s California. The national average price per gallon happens to be $3.33.

Some price changes are due to problems in the supply chain – another thing over which presidents have little control. The blessing here is that under capitalism there are advantages to closing such supply gaps before the competition is able to do so. Over 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 the price hikes to predatory monopolies. The weakness of this logic is that, if such increases have resulted in higher profits, why weren’t they achieved before? If one accepts that monopolists always want to maximize their profits, in a sense their power to fix prices is illusory.

There is a maximum achievable price that is beyond their control, depending on what the market will support. The only discretionary power of monopolies is to lower prices, which is not really a power to envy, unless it is used to destroy competitors. For example, when the OPEC cartel increases oil production and lowers oil prices, it tends to eliminate less 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 in the longer term, when remedies include either increased competition or company-owned state enterprises. Monopolies can abuse their employees and be socially backward in other ways. In the short term, however, their role in inflation is overestimated.

An important signal of inflation, whether large or small, is the rate of interest that wealthy investors and financial institutions are willing to pay on very safe assets, such as treasury bills. Currently, the market interest rate on a ten-year bond is less than 1.5 percent. If you expected inflation to be 6%, as a buyer of a bond you are pay the seller 4.5 percent to keep your money. It’s like depositing $100 and, after one year, recover $95.50. If you’re ready to do it, I want to be your banker. Did Joe Manchin and The Wall Street Journal understand that? I suspect they do. The big guys who buy US Treasuries don’t expect the inflation rate to stay that high, which is why the market interest rate is where it is.

In my recent article, I wrote that a month of bad data doesn’t trend. Another month either. However, that may be enough to elicit dangerous policy responses from the Federal Reserve. It is already effective in blocking BBB, as media reported on Wednesday that the bill had indeed been shelved ”, in large part because of Manchin’s objections.

In the case of the Fed, the danger is that it will stop increasing the money supply by reducing its purchases of financial assets more quickly – what is called tapering. The Fed’s bigwigs may also have an impact by suggesting they could take direct action to drive up interest rates, which in the recent past has wreaked havoc on financial markets and had a negative impact. largely discouraging impact on business investment and consumer spending on durable goods like cars and homes. . It’s like blowing up a wedding party – dogs, kids and all – to take out a single terrorist. (Yes, we do too.)

Even so, the U.S. economy has almost returned to its pre-pandemic peaks since the start of 2020. It still has some 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 actually passed. Running scared of inflation will have the opposite effect.


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