Friday, January 6, 2023

On Inflation

[Note: I originally started writing this piece on December 23, 2022, then got held up with holiday festivities. More posts for the new year coming soon.]

It's Not the Stimulus

Today’s inflation is frequently attributed primarily to the nearly $4.9 trillion economic stimulus packages provided by the US federal government in 2020 and 2021. As the story goes, the government printed a bunch of money and handed it out to people, who then went and spent it on things they normally wouldn't have, causing the economy to experience "unnatural" aggregate demand, thereby causing inflation.

First, this money wasn't "printed" but rather "keystroked" into existence. While this may seem pedantic, it's important to emphasize because of the connotation people have with "money printing" and historical examples of hyperinflation.

Second, there's no evidence of higher-than-normal spending by American consumers. US household spending is largely in-line with pre-COVID trends:

Mainstream economics posits that increasing fiscal deficits (i.e. the US federal government spends more than it collects in taxes) is a root cause of inflation. And yet, they provide no explanation as to why inflation hit multi-decade highs in 2022 despite a shrinking budget deficit. In fact, total US tax receipts in 2022 were $4.9 trillion, equal to the total COVID-19 related fiscal stimulus packages from 2020 and 2021. Said differently, the US government recouped its entire two years' worth of COVID-19 stimulus in the fiscal year 2022. It ran a budget deficit, and the new dollars created from its spending will be returned in future periods via taxes, just like the stimulus dollars. Unfortunately, this reality is never reported by the mainstream news media. 

It's also worth noting the US has lower rates of inflation than other parts of the developed world, including the EU and the UK, despite its much more aggressive fiscal spending programs.

In order to understand today's inflation, we have to go back to the Global Financial Crisis and the austere policies our elected officials chose to embrace.

Yesterday's Austerity is Today's Inflation

Following the Global Financial Crisis, President Obama emphasized austerity as a policy prescription. He wrote that the government should "tighten its belt" in solidarity with small businesses and families. He also decried how the US was "borrowing" from China in order to pay its bills, and that its long-term debt and deficits were unsustainable. The austere policies resulting from these fundamental misunderstandings were devastating to the US economy, resulting in the slowest job recovery on record, as millions of Americans lost their homes and saw their businesses collapse.

The ripple effects of these policy choices are still being felt today. In order to survive, businesses needed to lay off employees. When people are unemployed, they not only become disenfranchised, they also miss out on critical skills development, training, and experience. A quick anecdote: I am having work done on my basement/mudroom at the moment, and was recently chatting with my general contractor. He noted how difficult it is to find reliable, skilled workers to execute jobs that are up to the quality standards that is to be expected from a licensed contractor. There simply aren't enough people available with the skills needed. While they have a healthy backlog of jobs (especially for this time of year), they are struggling to convert that backlog into actual sales because of the limits on skilled labor. He also mentioned how his father, who owns their business, basically had to lay everyone off following 2008, and their family-owned operation never reached the same employment levels it had been prior to the GFC. Part of this reflects the weak economic recovery; part of it is exemplary of the psychological scarring that remains to this day. Simply put, business owners who went through that experience are much, much more reluctant to hire additional workers for fear that they would have go through a similar experience.

He also noted how how this effect can be seen with their suppliers, many of whom have hired inexperienced workers over the last couple years. This has created frictions in how they work together. For example, they have to be much more careful about purchasing 2x4's, because the less-experienced workers not catch a 2x4 that is warped to the point where it can't be safely used for construction. Little pain points such as these add up, and contribute to the additional labor costs and supply constraints. Everything is more difficult to secure. This is a real resource problem, not a monetary one, and contributes to rising costs. It shouldn't come as a surprise to anyone who's brain hasn't been poisoned by mainstream and Austrian economics that unemployment is sub-optimal. It causes permanently lost productivity, raises real costs, and lowers our general standard of living. We are bearing the brunt of these policy mistakes today, in the form of elevated inflation, worsening quality of services (e.g. hotels not offering as frequent turndown services because they can't afford to hire enough workers), and general anger and resentment towards one another.

Moving Forward

So, we know what the causes of today's inflation are. What about solutions? A federal job guarantee is one - we would effectively anchor the value of the dollar to employment. This would be an improvement from our current paradigm, which intentionally keeps people unemployed in order to "support" the value of the dollar. What's strange about this arrangement, though, is that we don't guarantee employment, but we DO guarantee payments to people who either can't find work. This seems sub-optimal and exposes us to potential inflation, because the newly created dollars aren't necessarily leading to enhancing productivity. They end up being spent on some essential good or service, then sit in a company or rich person's bank account, who doesn't spend it back into the economy.

On a more local level, I think there are compelling options. We should devote a portion of public dollars and real resources towards apprenticeships and vocational training. Our country is long workers doing things on computers and short workers doing things with their hands, whether that be plumbers or dental hygienists. I spoke with my plumber recently, and he has palpable anxiety about retirement: his body can only handle so much, and his skills are in plumbing, not working on a computer. I propose we find similar people and offer them money for either full or part-time apprenticeships, to ensure we have workers with the necessary skills to perform labor that is needed, and also compensate people who have great skills that they're no longer able to leverage into consistent income. A skeptic may argue this is unnecessary "government meddling in affairs," but I would argue that the government (i.e. the public) has had its thumb on the scale of certain types of work at the expense of others. I was required to pass Type to Learn to graduate from my public elementary school, and to write a sophomore research paper to graduate my public high school. This ostensibly favors certain skill development over others: woodshop was an elective, not mandatory for graduation. 

We are also facing a childcare shortage, for myriad reasons. My best idea to help in this regard is to create a pool of seniors who are living off income from social security, but want to make a little extra money and love taking care of children. Grandparents love spending time with grandkids; for seniors who don't have grandkids to take care of, or who just love children, they would get incredible joy and happiness helping take care of young children, so that younger moms and dads can do more productive work.

We should start having these conversations with local political leaders so we can galvanize resources and put this terrible inflation to bed.

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On Inflation

[Note: I originally started writing this piece on December 23, 2022, then got held up with holiday festivities. More posts for the new year ...