Diapers, food, rent — around the world, prices are rising. So what can we do about it?The traditional explanation for inflation is "too much money chasing too few goods." The people who give this answer, like Larry Summers, are usually arguing for less money. Summers thought the U.S. and other industrial democracies were pumping too much money into the economy to keep it on life support during the pandemic. While I think that money could have been better targeted to consumers and workers and not so much to business owners — I should write at least one entry about business owners being prosecuted for fraudulent use of these funds — that money helped end that recession almost as soon as it began. The alternative would have been much worse, especially since peak unemployment was the highest since the Great Depression. As much as it could be an example of "everything is connected to everything else and there is no free lunch," I'll take a temporary surge in inflation as the price to pay for preventing more suffering while people were staying safe at home.
Right now, inflation is inescapable. At the grocery store, the gas station, and in almost every country in the world, people are playing more — way more — than they did just a couple of years ago for everything.
In this video, we explore three explanations for why prices are rising, as well as different policy options for bringing them down.
In addition to being callous, the advocates of "too much money chasing too few goods" usually aren't as vocal about making more goods, which leads directly to supply shocks, the second explanation for inflation. I've written about supply shocks to explain the causes and effects of the chip shortage, baby formula shortage, and gas prices. That works very well as an explanation for why specific goods increase in price, but other than energy prices, which affect the prices of everything else, it doesn't work as a general explanation.
By the way, it's not just goods that are in short supply relative to demand; services and labor are in short supply as well. That means that the full version of the first explanation should be "too much money chasing too few goods, services, and employees." Increasing interest rates, which is inverting the yield curve, would be counterproductive on the supply side of the equation. Instead, it works by reducing demand. I'm an environmentalist who thinks over-consumption is a problem, but deliberately increasing suffering to destroy demand is not the way I want to do this. I'd prefer greater efficiency to reduce waste and a more educated populace who will choose to consume more responsibly and sustainably. Inflation while keeping people employed might actually help that goal.
Companies investing in their factories or other facilities and hiring more employees and paying them better would also help with increasing supply of goods and services, as well as induce more people to join the labor force.* Instead, they are engaging in massive markups, i.e., profiteering, and sending the increased profits to their investors and executives. This is normal capitalist behavior, but that doesn't mean it's desirable. It's particularly bad when it's the result of monopoly power, which I wrote about in Vox explains how 4 companies control the beef industry for a late National Food Day and John Oliver examines tickets plus MSNBC covers Ticketmaster hearing. The solution to that is regulation and breaking up monopolies, which Vox recommends, but doesn't elaborate on. Maybe Vox will do so in a future video. If so, I'll post it here.
A fringe idea that Vox didn't list is one I mentioned in passing this past August.
One of these days, I should write a post about the Kondratiev Cycle, how it relates to inflation, and why the time of the current rise in prices fits the cycle. Maybe when I'm on vacation, which isn't now.I am on break, but I think this idea deserves a post of its own and I've blogged enough for today. In the meantime, stay tuned for the highlights of tonight's episode of "Saturday Night Live" as the Sunday entertainment feature.
*I acknowledge there are limits to increasing the labor force. The pandemic has killed more than one million Americans, disabled many more, and prompted a lot of retirements. I have a long rant about the long-term effects of a decreasing labor force and what to do about it in CNBC asks 'Is The U.S. Running Out Of People?' Read more there.