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Inflation: To find the cure, look first at the cause
Tuesday, August 29, 2023 21:43
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It’s axiomatic that if you wish to prevent and cure something, you first should learn the causes, and then address them.
Elements in the federal government seem to believe that the current inflation is caused by too-low interest rates and too-high government spending. Thus, we have the Fed raising rates and Congress enacting debt ceilings (spending ceilings).
Neither of these efforts is directed at the real cause of inflation: Shortages. Inf fact they both make the situation worse.
Raising interest rates and enacting debt ceilings both are recessionary. The government seems to believe inflations should be cured by recessions.
Perhapsour leaders never have heard of “stagflation,” a stagnant economy together with inflation.
The Fed claims its raising of interest rates will “help cool an overheated economy,” which is another term for slowing Gross Domestic Product growth, i.e., causing a recession.
Debt ceilings are directly intended to slow GDP growth because GDP is measured, in part, by federal spending.
GDP = Federal Spending + Nonfederal spending + Net Exports
A graph of GDP changes (blue) vs inflation. Where the lines separate or cross, you see a lack of correspondence.
Compare this graph with the one below, inflation vs. oil prices (which correspond closely to oil supplies).
The price and supply of oil (violet) closely parallels inflation.
Reducing oil prices, which would entail increasing availability or declining usage, would be significant steps in curing inflation.
The government has distributed oil from America’s oil reserves and encouraged renewable energy use. Inflation has moderated. But oil is not the only scarce item causing inflation. Consider workers.
Wherever you look, America faces acute worker shortages in some of its vital occupations — teachers, bus drivers, cops, plumbers, electricians, carpenters, surveyors, pilots, air traffic controllers, and more.
Some of the highest-stakes workplaces — hospitals and prisons — are also severely short-staffed.
Why it matters: Understaffing in these industries goes beyond inconvenience, with dire potential consequences for public health and safety, Axios’ Emily Peck reports.
And a shortage of workers leads to inflation from two causes:
To acquire workers, America’s industries must raise salaries, translating into higher prices.
The shortage of workers leads to a scarcity of products and services, which also translates into higher prices.
The Fed’s repeated interest rate increases will do nothing to alleviate the acute worker shortages, and the need to increase salaries, both of which lead to higher prices, and the scarcity of products and services.
The causes are demographic, economic, and social.
Americans are getting older, meaning fewer younger people of working age.
Add the tight labor market — unemployment in the U.S. is deficient — and there simply aren’t enough workers in the U.S. to meet demand.
Most drugs come to America this way, not via immigrants.
Americans opted out of government jobs after the COVID shock, even as the private sector rebounded.
Even with workers opting out of government jobs, there still aren’t enough private-sector workers.
Yet the government, especially the Republicans, pay to erect high walls at our border, then pay more to guard those walls.
Then, they pay more to house and protect the people caught after climbing the walls.
And all this supposedly is to stop the traffic of drugs most of which come in via legal crossings — planes, boats, the mail, and regular border crossings.
According to U.S. Customs and Border Protection statistics, 90 percent of heroin seized along the border, 88 percent of cocaine, 87 percent of methamphetamine, and 80 percent of fentanyl were caught trying to be smuggled in at legal crossing points.
In short, we are creating our shortage of workers because of a drug smuggling myth, and perhaps more importantly, because of xenophobia, while we complain about inflation.
Some of these high-stakes shortages are about wages. Government jobs, including teaching and law enforcement, typically can’t raise pay high enough to compete with businesses.
Will higher interest rates solve the wage problem? The government could help enormously by eliminating FICA, a vast, unnecessary employment cost. In our Monetarily Sovereign government federal taxes don’t pay for benefits.
What workers and businesses pay to FICA should instead be paid to the workers.
Some problems are about working conditions: Employers trying to fill in-person, high-stress roles compete with jobs offering more flexibility, including remote work.
Rather than paying for the health care insurance perk, businesses would be better able to pay for improved working conditions and more employees, to relieve stress on current employees.
And some of them are about skills: There are only so many people with a ton of expertise creating AI programs, for example. That’s the problem in nursing, too.
The federal government could and should fund universities and educational programs teaching AI and nursing. These would do far more to fight inflation than recessionist interest rate increases.
Nurses should receive federal tax benefits or supplements.
A lack of qualified workers in AI and manufacturing threatens to slow productivity and growth in areas where the U.S. is otherwise poised for giant leaps.
That’s a problem for companies in those sectors and the broader economy.
More professionals are needed in deep learning, natural language processing, and robotic process automation, the Financial Times reports.
The federal government could fund free education in the above areas.
Parents are feeling the labor squeeze on multiple fronts:
Schools nationwide are understaffed, crying for more teachers, bus drivers, and social workers.
The government should use income tax laws to control these shortages by giving special tax breaks or subsidies to people in those areas.
Child care: Parents often can’t find or afford it. That can cause them to stay on the sidelines of the labor force — making the worker shortage much worse.
A shortage of air traffic controllers is contributing to an increase in near-miss collisions, the New York Times reports.
Police departments have faced mass early retirements fueled by plummeting morale.
According to administration data, prisons have the same issue: 21% of correctional officer positions were unstaffed in federal prisons last fall.
Many younger workers have shunned the building trades of their parents. After waning for 30 years amid the zest for college prep, the high-school shop class is making a comeback.
The federal government should fund tax breaks or supplements for people learning and working in the above shortage areas.
And/or the government could support research and development of more automation in some industries where this would reduce the need for workers.
The bottom line: Demographic reality means labor shortages are likely with us for the foreseeable future.
Translation: Inflation will likely be with us for the foreseeable future, which means those unnecessary, harmful interest rate hikes could continue.
Three things could change that: a surge in immigration … a surprise flood of sidelined women into the workforce … or a recession that drives down employee demand.
The surge of immigration could occur if the ignorant, absurd restrictions we place on immigration and citizenship were to end.
What possible benefit is there for America to make immigration and citizenship so difficult and time-consuming?
Women would enter the workforce if childcare were federally funded and laws about equality of pay were enforced.
A recession is unnecessary, though probably inevitable, despite our federal government’s Monetary Sovereignty.
SUMMARY
The federal government has all the tools to end the shortages, particularly the labor shortage, that inflates our prices and slows economic growth.
It merely needs to use those tools and forget about the self-defeating interest rate increases, the purposes and effects of which are to recess our economy.
