This just in: There are a lot of moving parts when it comes to the causes and cures for inflation. Some are more important than others. Some causes and cures that we want to avoid, exist only because we don’t have the political will to do the right thing.
Inflation, in its simplest form, exists because we are willing to pay more money for something that we once paid less for. We do this because we have to or we do this because we want to. It really doesn’t matter.
Why would we “have” to pay more? Usually there are two reasons for this. First, it could be that those controlling the production of some necessary good have made the decision to charge more. This occurs when a few control the production of something vital. Let’s call this Cartel. We pay more for this good in spite of the price increase. This “lack of impact” on demand by a price increase is a measure of the items “price elasticity.” Price goes up and demand remains constant means the produce has low price elasticity. Gas is a good example of this. We buy it no matter the cost. You may say, “I drive less and thus price has impacted me.” This may be true but energy costs don’t just impact individual driving. Energy costs control the costs of nearly everything you will touch today. You will still touch them, you will still buy food, you will still watch TV etc; regardless of the price.
The second reason we “have” to pay more is scarcity. As a product becomes more scarce, the price for that product will go up. Now, we can choose not to buy the product and this may lessen the meaning of “have” to pay. However, if we want an electric car and there are not enough of them to meet demand, we will “have” to pay more to move up in the waiting line for that car.
Scarcity and Cartel dictate that we will pay more. Paying more = inflation.
On the other side of the coin. Sometimes we are willing to pay more simply because the value of a given amount of money has dropped for us. When you have a little bit of money, maybe you eat a lot of Ramen Noodles. Then when you win the lottery, you eat steak and ice cream all day. The more money you have, the less each bit of that money means to you.
We are now in a long overdue phase of wage increases. Wages have been mostly stagnant for the last decade but now they are on the rise. People are making more and so, they are spending more. They are no longer holding onto their money as tightly as they once did because each dollar now has less value. This puts more and more money the economy. More money means that money is worth less…to the economy. Thus inflation.
The Federal Reserve has a tool to combat this. They raise the interest rate and thus people will borrow less money. This is very effective since we don’t only spend the money we earn. We also spend the money we borrow. Since it is now more expensive to borrow, people will borrow less and thus, the amount of money flowing through the economy is lower. This will slow inflation.
So, how would I fix this?
First of all, I’d keep making incremental increases in the interest rate. I expect the Fed to continue doing this for at least another year.
Secondly, I would open the borders. I don’t mean literally, throw open the gates. I mean make it easy for foreign workers to enter our country. Don’t make them all citizens but somehow make them tax-paying contributors to our economy. If we want to unclog the production bottlenecks that are causing the “scarcity component” of inflation, we need the labor. Let them in. Politically, neither political party is interested in solving immigration. This is too convenient an issue to blame on each other. However, we can create growth without boundless wage growth which contributes to inflation. For example, and I am only making this up on the fly: An immigrant is granted a worker visa. They can stay in the county for as long as they hold a job. They pay taxes which fund schools and medical costs and such. Their wages, as a immigrant worker, can be no more than 90% of a worker that is a citizen. They can also make up no more than 10% of any given workforce. In this way, we are not taking away jobs and we are allowing for wage growth with some dampening effect.
Lastly, hold the feet of energy companies to the fire. They have spend decades getting subsidies. Stop that cold. Put an upper limit on profits. Yes, this is putting a control on a capitalist industry but, its for the greater good. In fact, we do this sort of thing all the time.
Or, we can do nothing. Don’t raise interest rates because we don’t like that. Don’t increase the size of the national labor pool because those new people are not white. Don’t regulate an industry because you think unregulated capitalism is a good thing (spoiler: It’s not).
We can always do nothing.
“Nothing happens until something moves.” Albert Einstein
Now for a video…
Time to save the world.
Up, up and away…
Jim
