Inflation in the Real World

Climate change and labor tensions won't be cured by raising interest rates

Once again, I have to bang the drum for something that I have a feeling I'm going to banging the drum about for a long time to come: it's the stuff, stupid! The reason why many goods are going up in price is because those goods are simply not there. There are a number of reasons why this is the case, from industry consolidation to simply bad luck, but one major reason is the havoc that a changing climate is wreaking on agricultural commodities around the world. This is sure to only get worse in the future.

Previously I talked about three pertinent examples: mustard, olives, and cabbages and radishes for traditional Korean Kim chi. Another example I neglected to include was tomatoes, which are also suffering the same catastrophic problems as those other commodities:

California's drought and high summer temperatures are making it difficult to grow tomatoes in the Golden State. "There's just not enough water to grow everything that we normally grow," Don Cameron, president of the California State Board of Food and Agriculture, told Reuters.

California accounts for roughly 95% of the nation's processed tomato production and about 35% of global production. In August, the Department of Agriculture reduced its forecast of California's tomato production for the year to 10.5 million tons from the 12.2 million tons predicted in January.

Last year, Lake Mead in Nevada hit a record low, which helped to trigger the first federal "water shortage" declaration for the Colorado River basin. This set off water allocation reductions to several states. Within the context of the broader drought, California is now in its driest three-year period on record, the Los Angeles Times reports.

"There's just not enough water": California drought hits grocery stores (Axios)

It's hopefully clear that if there are less tomatoes, then prices for tomatoes must rise. But prices aren't rising for everything uniformly. In fact, for a few select commodities, they are actually falling. An example is avocados. Those are actually cheaper than they have been in the last five years due to a confluence of factors:

After surging in the first-half of 2022, the wholesale price for a carton of 48 mid-sized avocados has dropped 35% to under $30 year-over-year, down 67% from the peak reached in the last week of June...

At the store level, the average unit price for avocados also has reversed course, declining 2.6% in September from a year ago. That’s a big drop from the 31% year-over-year spike seen in July and August’s 13.9% bump...Good news for consumers: The avocado glut should last at least into the middle of 2023...

Grocery prices are soaring. But this food favorite is getting cheaper (CNN)

If you read the linked article from CNN, you will find that there are a number of complex reasons why this is the case. First, there was a bumper crop in those countries which produce avocados like Mexico and Peru. Shipping was formerly delayed due to increased border checks, which have since been rescinded. And demand for avocados has lessened from other places for various reasons, meaning that more of the crop ends up in U.S. supermarkets:

Bumper crops would usually be sold across the globe,” ... “Europe has significant food inflation, so when avocado prices got high earlier this year, the demand went down in that market.” China, another big market, is dealing with pandemic-related shutdowns, port congestion and closures. The Russia-Ukraine conflict, too, has hurt exports and shipments of avocados into and around Europe... “Much of the avocado oversupply has wound up in US,”...Avocados have about a three to four week shelf life, longer than most fruits and vegetables, which allows them to be more easily and quickly diverted to other markets...

The reason I bring this up is because once again we see that the reason why prices rise or fall in the real world has to do with a lot more than merely interest rates, or the FeDeRaL ReSeRvE or "government money printing," or any of the other nonsense you read on the internet. Some of these factors are due to the fact that we live on a finite planet of atoms and molecules governed by the laws of physics and thermodynamics.

Once again I refer to this indispensable post by Blair Fix: The Truth About Inflation.

Fix points out that the inflation rate is just an average across a basket of goods, some of which may be going up in price while others may be going down in price at the same time, or staying the same. In other words, if the inflation rate is six percent, that doesn't mean that the cost of everything you buy is rising by six percent. Some items could be ten percent more expensive, or three percent more expensive, or even less expensive as the example above shows.

Furthermore, as Fix notes, if inflation were indeed caused by an increase in the money supply, we would expect prices to rise more-or-less uniformly across the board. On the other hand, if prices are not rising uniformly, we would expect inflation to be caused by other factors not related to the money supply. Yet none of this is reported in the statistics.

I think it’s pretty clear which kind this is.

It may come as a shock for some to discover that there is no clear correlation between a rising money supply and rising prices. While it is true historically that increases in the amount of currency in circulation have often been accompanied by a corresponding rise in prices, there is no absolute correlation which is what we would expect if economics were a true science. Sometimes the money supply expands with no general rise in prices (such as in the decade-plus leading up to Covid), and sometimes prices rise without any expansion of the money supply at all.

To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.

Rapid Money Supply Growth Does Not Cause Inflation (Institute for New Economic Thinking)

If it were as simple as more money = inflation, the correlation should be pretty clear, shouldn’t it? It’s not. Nor does it account for energy prices, geopolitical tensions, or commodity destruction due to war, drought, famine, etc. Economics is not a real science. It’s predicated on ignoring the real, physical world in favor of an idealized world of abstractions. It can't incorporate this data into its model, so it ignores it. Instead, we manipulate our money tokens in a kind of rain dance like witch doctors in the apocryphal grass-hut villages.

The Supply Chain

And, speaking of rain, there has not been nearly enough of it causing the Mississippi River to dwindle to historic lows and threatening the ability to ship goods and crops along this crucial inland waterway. This also contributes to inflation.

The Odd Lots Podcast did an episode about this at the end of October. Odd Lots is, well odd, in the sense that it talks with people and experts involved with the actual real-world economy instead of just peddling free market libertarian ideology like nearly every other financial and economics podcast.

According to the guests, the drought is causing multiple problems. The shipping industry is resorting to dredging to make parts of the river passable at all due to the lack of rain. And because barges can't sink as low without hitting the bottom, they can't be loaded with as much stuff. Because barges can't be as heavily loaded, it takes more barges to move the same amount of goods. And barges can only move one direction because of the narrowness of the dredging. If there are barges coming from the opposite direction, they have to wait until the others pass because the river is not wide enough right now to move in both directions.

[13:03] “Low water causes two problems: channel depth and channel width. How this is being slowed down on the river currently—you have a tugboat that will push a pack of barges from Saint Louis to New Orleans, and they might typically push 40 barges. Well right now the max is 25 on the river.”

“The amount of grain that we can actually put in a barge is being reduced. So right now, everybody is at a 9-foot draft—we can only sink a barge nine feet down and ship it. That constitutes somewhere between 25 and 30 percent less than normal.”

“Some of the other issues—a lot of people are running daylight only hours right now. Primarily the reason for that is so that they can dredge, or dig out the bottom of the river at night. So it just to continues to make longer turns down to the Gulf and back. We have stoppages which are day-to-day. It can be five, six blockages on any given river segment. Put all that together and what that means for shippers and grain dealers and people that move product on the river is higher shipping costs.”

[19:19] “The biggest problem with this event that we have right now isn't so much the low water, it's where the low water is located. The biggest problems are Memphis south, which affects every single river segment. So there is no magic bullet: what we need are heavy rains, a flash flood that would just run off into the tributaries, into the main rivers, to provide us a little relief...Absent a widespread rain, dredging is just a band-aid on a bullet hole at this point; it's just keeping us going.”

In addition, because of the war in Ukraine, countries are buying more American grain than usual, raising the worldwide demand. When more barges are dedicated to shipping grain, there are less barges available for other commodities which are shipped along the river as well (coal, iron ore, chemicals, petroleum products, etc.), meaning that prices could rise in those sectors as well.

[33:06] “As a result, we're seeing spot barge rates skyrocket. We've seen on an important lane that we're moving raw materials heading northbound, spot rates for October in the range of nine to ten times what the annual 2022 contract rate was for that particular move, and we were lucky to be able to find that.”

In previous years, the problem was often too much water: if the water levels are too high, it's harder to load the barges and dock them because the boats float too high. Usually the biggest weather problem is hurricanes, which can destroy infrastructure like grain elevators. This year there were no major weather systems hitting the Gulf of Mexico; the hurricanes hit western Florida instead. As a result, this lack of water has caused channels to dry up in the critical shipping lanes south of Memphis. In fact, we now know that this is the lowest the water has ever been, surpassing previous lows:

[30:15] “The river is at historic lows. The gauge at Memphis, Tennessee reading water levels—they've been recording that gauge for the last 89 years. We learned through current events that 1988 was the lowest mark in that 89 year reading on the river. Well, we've surpassed that. We have set new lows on this river.”

Of course, there are other ways to move goods around. What about trucking?

Once again we can turn to the Odd Lots podcast, who interviewed a trucker a few weeks ago. We hear a lot about a driver shortage. The reason for this is because most truckers are paid by the mile, and not by the hour. Because of this model, any additional time and effort required to do their job besides driving is not compensated.

So all the time waiting to load and unload trucks, for example, is basically eaten by the drivers. Because drivers have an eleven hour window out of fourteen to drive each day, the time spent waiting cuts into the time they are actually earning money. The industry is exempted from having to pay workers overtime based on outdated rules which date from the Great Depression. As a result of the huge—and growing—disparity between the hours drivers spend working and what they actually end up earning, more and more drivers are walking away.

[6:55] “With the distribution of freight in America, the entire system is set up and predicated on the fact that all of the time [in]efficiencies and problems get downloaded onto the drivers because there's no cost associated with their time, and there never has been. So you just end up sitting and waiting. And it could be for any reason under the sun, and it's been like that basically since forever.”

[7:48] “The average trucker in America, although they are allowed to drive eleven hours a day, only drives on average about six and a half hours because their day gets sucked up with waiting to load and unload so much that they literally lose almost forty-five percent of their available driving time. There’s been a lot of discourse about problems with the supply chain. Well, a pretty major problem is when 45 percent of your trucking capacity is being held up.”

Industry consolidation has meant that the trucking industry is dominated by a few giant megacarriers, just like every other industry. These megacarriers have simply decided that continually hiring desperate people and churning through them is simply the cost of doing business (just like Uber and Amazon). There's no cost associated with wasting the drivers' time for the giant megacarriers, so they make it a part of their business model. This is the real reason for the so-called "driver shortage," rather than a lack of qualified people with CDLs, according to the guest:

“As Professor Steve Viscelli said in his book The Big Rig: Trucking and the Decline of the American Dream, it doesn't cost them any extra money to manage driver retention and driver churn, so these companies have essentially built it into their operating model that you just don't pay overtime and you dont worry about it.”

“So it just might be—as much as the libertarian part of my brain doesn't want this—that the government might have to say, this industry—and the supply chain system that keeps America going—is dependent on having professionals and safe people that are happy with their jobs and want to stick around, and this model of not paying them isn't sustainable.”

“So maybe, and I could be wrong, maybe it is—like the Guaranteeing Overtime for Truckers Act—there's that requirement that drivers be paid for their time in order to force all of these clowns to actually pay people what they're worth and to stop the ongoing churn and retention cycle.”

According to this "libertarian", the costs of this model are externalized to the wider society. The cost is offloaded to drivers, who have to work long hours without pay and are forced to sign abusive labor contracts to get the required training, turning them into virtual debt peons. It's offloaded to governments who pay money to this critical sector to recruit more drivers because of the high turnover. And it's offloaded to the rest of us who have to pay the costs associated with more accidents (including potentially our very lives) because more inexperienced drivers are on the road. He also notes that, because trucking can't be offshored like manufacturing and call centers, the industry has used every other means at its disposal to push wages down to the same poverty levels as every other sector of the American economy (with the benefits going to owners and shareholders, of course).

Add to that the high prices of diesel fuel which truckers have to pay for. While the electrification of cars is touted as a magic-bullet solution to our energy problems, long-haul trucking is likely to remain powered by diesel fuel for the foreseeable future. And despite fantasies of robot-driven convoys to ease the labor shortage, the podcast guest pours cold water over that idea on his Substack newsletter:

Will you be able to pull yourself away from scrolling Regina Tinder in time to dodge that deer that just jumped out over the road? How about that drunk person walking down the side of the highway, who maybe strays a little too far from the shoulder? What if it is winter time, and you are pulling an empty van trailer, and that cold prairie wind pushes on the side of your rig so hard that you lose traction and possibly jack-knife? Will you be able to snap out of your technology induced coma in time to take over driving before you plant your Waymo truck out in the frozen rhubarb?

I'm always struck by vast reality gulf between the techno-optimists you read online—most of whom just type away at a keyboard all day for obscene amounts of money—and the people who, you know, actually do the work! This is why Odd Lots is perhaps the only economics and finance podcast worth listening to.

And, finally, that brings us to the railroads.

Railways are based on the same abusive model as every other industry moving goods around in America. You've probably heard that railroad employees get zero sick time and have to work long shifts and be constantly on call. The reason is because of something called "precision scheduling" or PSR for short.

Precision scheduling requires much longer trains—about 150 cars. Because of this length requirement, trains have to wait around until they reach it, meaning that the engineers and conductors are at the mercy of arbitrary just-in-time schedules. It also means that there is less need for engineers and conductors because there are fewer trains in operation. The reason for this is, as always, to squeeze more profits from the industry for the sake of absentee shareholders and private equity (including so-called "good billionaire" Warren Buffet). In fact, railroad industry profits are at all-time highs.

P.S.R. is an operational strategy that aims to minimize the ratio between railroads’ operating costs and their revenues through various cost-cutting and (ostensibly) efficiency-increasing measures. The basic idea is to transport more freight using fewer workers and railcars.

One way to do this is to make trains longer: A single 100-car train requires less track space than two 50-car ones since you need to maintain some distance between the latter. More critically, one very long train requires fewer crew members to run than two medium ones.

Another way to get more with less is to streamline scheduling so that trains are running at full capacity as often as possible.

All this has worked out poorly for rail workers writ large. Over the past six years, America’s major freight carriers have shed 30 percent of their employees. To compensate for this lost staffing, remaining workers must tolerate irregular schedules and little time off since the railroads don’t have much spare labor capacity left.

Why America’s Railroads Refuse to Give Their Workers Paid Leave (NYMag)

There is human toll to this. The BBC reports that a railroad worker didn't want to get "punished" for taking time off, so he avoided going to the doctor for a checkup when he wasn't feeling well. The result was that he ended up having to have part of his intestines removed for a health issue which could have been easily treated if caught early enough:

Like roughly 30 million other Americans, the 45-year-old railroad worker doesn't have any paid sick leave and he didn't want to get punished for taking time off.

According to Gabe, his company's attendance policy meant marks against a worker for any time away, "so I was putting off going", he said. When he finally scheduled an appointment, the doctor told him he had a gut infection. If caught early, it could have been treated with medication, but as it was, Gabe learned he would have to have some of his tissues removed.

Rail strike is cancelled - at the cost of paid sick leave (BBC News)

If the railroads shut down, it won't just cause higher inflation, it will cripple the American economy! And this is happening just before the consumerist frenzy that is Christmas. Politicians—not greedy businessmen—will get the blame, which is why the President is throwing labor under the bus just when it seemed the Democrats might start to be tepidly a bit more pro-labor once again.

Rail workers say quality-of-life concerns not resolved under deal imposed by Congress (PBS)

The "chickenization" of absolutely every critical sector has turned the U.S. economy into house of cards. Industries have been squeezed to the breaking point. While Silicon Valley oligarchs and financiers earn more than they can spend in a hundred lifetimes, the lifeless bipedal automatons who make the economy go are barely getting by. As Karl Polanyi reminded us years ago, no one could tolerate living in a “pure” free market economy; it would lead to the “demolition of society.” I think we’re seeing that right now.

So, to summarize, climate change has devastated crop yields across the globe and is also affecting the movement of those crops. Energy prices are high, and there's a war going on in Eastern Europe. And a labor force pushed to the brink for the sake of greedy shareholders has finally had enough and is pushing back. All of this means that the inflation rate is higher than it has been in a generation. And none of this is magically going away anytime soon.

But I’m sure a few interest rate hikes will fix all this, right?