About this time last year a wrote a couple of quick financial pieces (we’re 1 year old—yay!) This year with INFLATION!#?!! dominating the news, I thought it might be helpful to revisit this topic and clear up a few things.
The title may sound a bit controversial and counterintuitive, but it's true. People don't actually care about inflation. What they care about is purchasing power.
Prices going up is of no particular concern if you can purchase the same amount of goods and services as before.
I remember listening to a podcast years ago promising to explain “the truth” about money and the Federal Reserve (turns out it’s all a big cOn$PIrAcY!!^)!). They listed the price of things like butter, bread, flour, coffee, sugar, potatoes, and so forth when the U.S. Federal Reserve was established back in 1913, and then gave those prices more recently.
A quick calculation will show the flaw in this argument. Take the median income in 1913. Then do some simple division to find out how many pounds of coffee, potatoes, flour, sugar, and so forth one could buy in 1913 with that income.1
Then take the median income in 2013 (when the podcast was released, I think). Divide to see how many pounds of those things you could buy then. When I did the math, in every case it was over three times as much coffee, flour, bread, sugar, potatoes—and sometimes a lot more. The podcaster in question was clearly too lazy to do even this simple calculation that would have invalidated her argument. Instead, she naively listened to massively online internet libertarians.
Of course, it's a pedantic point—inflation in the short term is an erosion of purchasing power. But I think it emphasizes the fact that higher numbers by themselves are not the problem. It's the macroeconomic context. Prices were falling during the Great Depression, after all, but no one had any money to buy stuff.
It's also worth pointing out that the price of a new laptop or microwave oven back then was effectively infinite, since no one could buy those things at any price. And no one was particularly concerned about the price of gasoline back then either, because almost nobody owned a car (Henry Ford's assembly line also came online in 1913).
This illustrates a couple of problems with inflation statistics: how do you account for changing consumption patterns? And how do you account for things that didn't even exist in the past? During the famously sky-high inflation of the 1970s, for example, no one paid for a smartphone or internet access. Today most people do.
Not to mention an apples-to-apples comparisons can be misleading. People watched TV back in the 1970s. They still do so today. Older readers will remember the aquarium-sized plastic boxes with the heavy convex glass screens where you could practically make out the individual specks of light if you sat close enough. Today's TVs are light, flat, crisp, and the size of a landscape painting. Both of them are "televisions," but how do you compare prices between the two? And remember what cars looked like in the 1970's?
The podcast I referred to above also complained about gasoline prices—a common tactic. At the time gas prices happened to be high, and the host recalled filling up her car for a lot less back in the 1990s—a time when gas prices happened to be at all-time lows. Of course, they were even higher just a few years earlier. Gas prices fell of a cliff the very next year in 2014. And in 2020 oil prices actually went negative for a short time—it cost money to store the oil that nobody was buying because demand fell off a cliff due to the shutdowns in the early days of the pandemic.
If you think the U.S. president or the Fe^DeRaL rE$ErVe can unilaterally control the price of an internationally traded commodity like oil, then you may want to rethink what you think you know about the how the economy works.
Some things tend to only go up (or down) in price like durable goods, electronics and clothing, while other things like food and gas oscillate wildly in the short term, subject to the vagaries of international trade and real-time conditions (hurricanes, floods, bad harvests, refineries catching fire, geopolitical tensions, etc.) These goods are called volatile because their prices seesaw so rapidly, so they are sometimes excluded from inflation calculations for that reason. That's why economists distinguish between what they call inflation and "core" inflation.
This is the foundation of a million conspiracy theories on the internet, but it’s not a conspiracy.
But wait, wait, what about housing??? Well, there are lots of reasons house prices are going up, but it's not what we wish to measure when we look at the inflation statistics. After all, inflation is a general rise in all prices. How much have house prices gone up in San Francisco or Austin compared to Terra Haute or Green Bay? Here's Mark Blyth:
"Most people don’t understand what inflation is. You get all this stuff talked by economists and central bankers about inflation and expectations and all that, but you go out and survey people and they have no idea what the damn thing is."
"Think about the fact that most people talk about house price inflation. There is no such thing as house price inflation. Inflation is a general rise in the level of all prices. A sustained rise in the level of prices."
"The fact that house prices in Toronto have gone up is because Canada stopped building public housing in the 1980s and turned it into an asset class and let the 10 percent top earners buy it all and swap it with each other. That is singularly not an inflation."
Mark Blyth – An Inflated Fear of Inflation? (The Real News via Naked Captialism)
In the specific case of Canada, this article mentions a number of reasons why housing has gotten more expensive in recent years (similar factors are at play in the rest of the world):
In Ontario, a quarter of all home buyers are investors. A recent survey found that 20 per cent of homeowners under 35 in the Greater Toronto Area own more than one property. The Canada Mortgage and Housing Corporation links skyrocketing housing costs to speculative investment. Even the Bank of Canada is now concerned about the role the commodification of housing is playing, and has noted how investor buying has doubled in the past year. Therefore, simply adding supply isn’t the solution…
We stopped building public housing. NIMBYs and BANANAs. Everyone's moving to Austin. Private equity and the Chinese buying up housing stock. Zoning regulations. Speculation. There is no shortage reasons why housing goes up in price, but they are not the things we wish to measure when we measure CPI. But that’s not “cheating” and it’s not a conspiracy.
Plus, housing prices aren't like prices for detergent or flights to Hawaii. When you buy a house, you agree to pay a mortgage for a number of years (typically 30). The current price of a house is basically set by factors like the the local real estate market and local taxes. But the mortgage (i.e. the housing cost) is based on 1.) The price of the house when you bought it; and 2.) The interest rate at the time you bought it. Therefore people with the most expensive houses might be paying the least amount of money for housing in some instances because they’ve lived in it for 40 years, or the interest rate was particularly low when they bought it, or property taxes happen to be low where they live.
So house prices are difficult to accurately capture with inflation statistics, because inflated housing values are theoretical until you sell the house. That's why they try to estimate housing costs by estimating what it would cost for people to rent the house they are currently living in. Not a perfect measure, but there is no perfect measure. That also makes inflated asset values more generally (like stocks) difficult to capture with inflation statistics.
All of this to say that the health of the economy and the people in it can't be boiled down to simple statistic like the inflation rate, GDP, or the median income. You can't say that people are doing well because the inflation rate happens to be low. People have to spend money on things like shelter, health care and education, after all. I thought this comment to the Mark Blyth piece above made a good point.
The point [Blyth] was making is that the price change in housing is the result of a policy restructuring of the market: no new public housing and financial deregulation.
The price of food is similarly a response to policy changes: industry consolidation and resulting price setting to juice financial profits.
The point is distinguishing between political forces and market forces. The former is socially/politically determined while the latter has to do with material realities within a more or less static market structure.
This is a distinction essential to making good policy but useless from a cost of living perspective.
Not a Net Loss
As I mentioned before, inflation isn't driven by the amount of money in the economy, it's driven by the amount of spending. If people aren't spending, then there isn't any inflation2. After all, you could have an economy where nobody is spending any money and just barely getting by from day to day and there wouldn't be much inflation. But would we consider that to be a successful economy?
So when people are saving and spending, that's the sign of a healthy economy. Inflation doesn't happen when people aren't spending money, which is why inflation has been traditionally associated with a strong economy. It's also why it was such a mystery when we did have inflation even amidst economic stagnation. A new word even had to be pressed into service to describe it: stagflation. In all likelihood this was caused by oil prices which tripled virtually overnight in the 1970s for geopolitical reasons before finally stabilizing in the 1980s.
People act as though, if the Treasury printed up a trillion dollars and stored it on pallets in a locked warehouse somewhere in Washington DC, the inflation rate would inevitably rise. As though the mere existence of dollars somehow magically causes inflation! Talk about voodoo economics!
Inflation didn't originally refer to prices all. Rather, it referred to an increase in the money supply. Often this was because new lands were conquered or a new mine was discovered in the era of specie. Later on, people noticed that when money was more abundant producers were able to raise prices. Thus, it came to mean what it refers to today: a general increase in prices. This association was later cemented by the economics profession as historian Rebecca Sprang describes:
The word “inflation” only began to refer to money and economics in the mid-1800s. For centuries before that, it solely meant the action or condition of being filled with air. (Balloons were inflated. Charles Darwin, on his youthful expedition to South America, described the “inflation” of a puffer fish.)
Moreover, when “inflation” entered economic usage in the 1860s-1870s, it meant increasing the money supply — what today might be called “economic stimulus.” By issuing greenbacks, for example, the Lincoln administration had, according to its critics, “inflated” American currency. It had also, of course, helped to finance and win the Civil War. Yes, prices rose, but the term inflation wasn’t intended to convey that, and they rose because of military necessity driving up demand.
In the early 20th century, however, economist Irving Fisher’s “equation of exchange” (MV=PT) established an apparent necessary relation between money supply and price levels.
The charismatic Fisher’s fame, burnished by his public-health campaigning and ties to the eugenics movement, fueled buy-in for the idea. He was the first celebrity economist, a man whose pronouncements were quoted far and wide. If he said inflating the currency would automatically lead to rising prices, few would challenge him. Yet, Fisher was far from infallible: He failed to predict the 1929 stock market crash.
What Scaremongering About Inflation Gets Wrong (Washington Post)
Blair Fix points out the problem with this definition (MV=PT) . It is an equation that is an accounting identity, therefore it must be true by definition! But it doesn't really tell us anything:
The nice thing about this accounting identity is that it is true by definition. So if you tie a theory of inflation to it, your ‘predictions’ will always work.
The problem, pointed out by critics, is that this identity tells us nothing about causation. It could be that printing too much money causes prices to rise. Or it could be that rising prices drive people to borrow (and hence ‘create’) more money.
The Truth About Inflation (Economics From the Top Down)
John T. Harvey points out some of the other flaws with this equation. The idea that money growth causes inflation rests on four assumptions:
M: That which is money is easily defined and identified and only the central bank can affect it’s supply, which it can do with autonomy and precision.
V: The velocity of money is related to people’s habits and the structure of the financial system. It is, therefore, relatively constant.
P: The economy is so competitive that neither firms nor workers are free to change what they charge for their goods and services without there having been a change in the underlying forces driving supply and demand in their market.
T: The economy automatically tends towards full employment and thus T (the existing volume of goods and services) is as large as it can be at any given moment (although it grows over time).
Henry goes through the flaws in these assumptions, especially the idea that the government can force an increase in the money supply on an unwilling public without the cooperation of the private sector.
[P]erhaps the real nail in the coffin of the “money growth==>inflation” view is this: the phenomenon that Milton Friedman identifies as key to the whole process, i.e., the excess of the money supply over money demand, cannot happen in real life…
Remember that Friedman used a helicopter–indeed, he had to, for there was no other way to make the example work. This wasn’t just a simplifying device, it was critical, for it allowed the central bank to raise the money supply despite the wishes of the public. However, that can’t happen in the real world because the actual mechanisms available are Fed purchases of government debt from the public, Fed loans to banks through the discount window, or Fed adjustment of reserve requirements so that the banks can make more loans from the same volume of deposits.
All of these can raise M, but not a single solitary one of them can occur without the conscious and voluntary cooperation of a private sector agent. You cannot force anyone to sell a Treasury Bill in exchange for new cash; you cannot force a private bank to accept a loan from the Fed; and private banks cannot force their customers to accept loans. Supplying money is like supplying haircuts: you can’t do it unless a corresponding demand exists.
The other important thing to note is that inflation cannot be net loss to the economy as a whole, because if someone is paying more, someone must also be getting more.
This is also true according to the laws of accounting. In double-entry bookkeeping, money doesn't just simply disappear. Where else would the it go? Another dimension? The moon?
Therefore inflation cannot be a net loss to the economy; it can only redistribute income.
Now, that might be a good thing or a bad thing. If prices are going up because service workers are finally getting a long-overdue raise, meaning that upper-class urban professionals have to pay a bit more for discretionary activities like dining out and food delivery, then that might be a desirable outcome. In this case inflation redistributes income down the ladder—income that will mostly be spent—and thus is not a net loss to the economy as a whole.
If prices are rising due to industry consolidation, then that is not so desirable an outcome for most of us.
In the 1970s, rising oil prices set by the OPEC cartel transferred a huge amount of wealth from the industrialized world to Middle Eastern sheikhs and dictators. This has been described as one of the largest wealth transfers in all of human history3. That is not so desirable an outcome. In this case, it was a net loss to the domestic economy in the U.S. (but not the the global economy as a whole—and some of the money did wind up in the hands of domestic producers).
Of course, even if those dollars don't disappear from the ledger, their purchasing power may decline, as we noted above. Again, it's purchasing power that matters, not abstract numbers. Inflation also redistributes income from savers to spenders and from creditors to debtors. Again, this can be a good or bad thing depending on your values.
In fact, inflation can be a useful tool for redistributing wealth. If wages and the cost of goods increase but the price of assets remain static or increase at a slower rate, it facilitates a transfer of wealth from those who derive income from savings, assets, and rent to those who derive income from work. By contrast, if the rate of return on investment is higher than the average increase in wages and growth then wealth will accumulate for those who are already asset-rich, as outlined by Thomas Piketty in his book Capital in the Twenty-First Century.
Cryptocurrency Is Bunk (Jacobin)
Price Rises
The problem with CPI (i.e. the inflation rate) is that it's an average. An average can be deceiving, because some items could be going up in price a great deal, while the price of other items barely budges or might even be declining at the same time. And just a handful of items might be going up significantly distorting the whole measure. Thus, CPI alone presents a distorted picture of actual price movements in the economy, which is what the statistic is theoretically designed to measure in the first place.
Take these three numbers: 69, 70 and 71. You don't have to do the math to tell me that the average (also called the mean) of these numbers is 70. If you did add all those numbers together and divide them by 3, you would get the same result. In this case, the result is intuitive.
Now let’s take these numbers: 1, 100 and 109. What is the average?
It's also 70.
That's why averages are deceiving!
When we can have both positive and negative numbers in the mix, it can be even more deceiving. The average of -100 and 100 is 0. Wow, no inflation!
And when you have billions of prices like in the real world, these distortions can make the whole measure, for all practical purposes, meaningless.
To compensate for this, professional scientists are trained to give something called the standard deviation when giving out averages. The standard deviation tells you how much the data scatters around the mean. In the first example, the answer is "not much." In the second example, the answer is "quite a lot." A high standard deviation would seem to imply that it's something more than simply "too much money" that is causing inflation.
After all, if rising prices were simply caused by an increase in the supply of money, there would be no reason for the price of one commodity to go up much faster than another, would there? Why would an increase in the money supply cause people to buy, say, more used cars but less televisions? Or more computers and less blenders? Or more chicken and less steak?
Instead, if the price of certain things are rising much faster than others, it might indicate that there is something else going on besides simply "government money printing" (like supply chain bottlenecks, rising energy prices, or a shortage of key components like computer chips, to name a few).
Perhaps demand for some things have gone up due to societal changes (like a sudden increase in the demand for videoconferencing equipment). Perhaps there is a shortage of workers in some important sectors (like meat processing plants and transportation). Perhaps there is a supply shortage due to a lack of plant and equipment (like semiconductor factories or lumber mills). Perhaps bad weather in certain parts of the world affected the harvests of things like coffee and chocolate. Perhaps a ship is stuck in the Suez Canal.
And, of course, if the cost of energy rises, then the price of everything will go up because we depend on energy both to manufacture goods and transport them to consumers. Even server farms have to pay for electricity.
So all sorts of things can cause prices to rise that have nothing whatsoever to do with the money supply. Economists like to quote Milton Friedman as if they are quoting scripture: "Inflation is always and everywhere a monetary phenomenon."
Yet common sense clearly shows that this isn't the case. Honest economists are finally starting to admit that we have no general theory of inflation.
Not Uniform
So are prices rising uniformly (i.e. broad-based inflation)? If so, it might validate the libertarian "too much money" hypothesis.
Thankfully, we know the answer to this question thanks to economist Blair Fix and his blog Economics From the Top Down. Fix is doing important work, so head on over to his blog and support his work on Patreon if you can. Fix dives into the numbers and finds out that, no, prices are not rising uniformly across the board. Some things are going up in price a great deal; others are hardly going up in price at all.
The Truth About Inflation (Economic From the Top Down)
Fix ponders why the standard deviation is never provided when reporting inflation numbers. Surely professional economists cannot be ignorant of the standard deviation and its importance. After all, understanding statistics is a major part of their job description!
Yet the standard deviation is never provided with CPI, giving the impression that prices are rising uniformly. That is, if the headline inflation rate is six percent, then the price of everything must be going up roughly six percent, from hamburgers to used cars to hotel rooms. I can't emphasize this point enough. As Fix notes (emphasis mine):
The trouble is that averages are a mathematical identity — they are true by definition. I can calculate the average of any conceivable set of numbers. But that doesn’t mean my calculation will be informative. That’s because averages define a central tendency, yet do not indicate if this tendency actual exists...
The idea that averages should be reported together with a measure of variation is a basic part of empirical science. And yet when economists study inflation, this practice is conspicuously absent. Why?
Fix considers two possible legitimate reasons why this information would be withheld. The first is because the standard deviation is quite small, and thus can be omitted like in my first example above. But when he does the math, the finds that this is not the case. The standard deviation is actually quite large. That is, in the real world, prices scatter a great deal around the mean.
The second possible reason it can be omitted is because the standard deviation is consistent. Therefore, even if the standard deviation is large, if it is roughly the same every time we can omit it on the assumption that it's just baked in to the statistic itself. That is, if the scattering of prices around the mean is roughly the same every time, it is not especially worthy of note.
Once again Fix dives into the numbers and finds out that this is not the case, either. The standard deviation varies over time almost as much as the inflation rate itself. Therefore, CPI is a very misleading statistic because it doesn't really tell you what's actually going on with prices in the economy—the very thing that statistic is supposed to measure!
The real story of inflation — the one that goes largely unreported — is of wildly divergent price change among different groups of commodities.
The only remaining explanation is an uncomfortable one, but nonetheless is the only one that appears to be consistent with the facts: that economists intentionally wish to deceive the public.
Why would economists—whom we theoretically trust to give us an accurate picture of the economy—deliberately ignore established conventions of the scientific method like standard deviation? It smacks of malpractice. Fix concludes:
Here’s what I think is going on. I treat the ‘does-it-work-in-theory’ joke as a litmus test for ideology. It’s a test to see if someone elevates ideas above evidence. The more they do so, the less they are doing science and the more they are promulgating ideology. Apply this litmus test to mainstream economics, and you see that it is a secular priesthood masquerading as science.
The core philosophy of the economics profession is small-’l’ libertarianism. By equating inflation with government spending, economists—who are the handmaidens of private power—can constrain the government's ability to meet its citizens’ needs, therefore they have no desire to investigate further. It shows that economics is not a science, but an ideological project based on a set of fundamental axioms about the world which are inviolable. It’s closer to theology than any kind of empirical science, and economists are the modern equivalent of priests upholding the existing social order to an increasingly disenfranchised public.
Inflation is Global
The other thing to note is that the current inflation is global phenomenon. If inflation is simply due to "government money printing," than why is it happening simultaneously all over the world? Every country has different fiscal policies, after all. If you want to blame inflation on "government money printing," then you would have to explain why this would cause prices to rise in Germany, England, Spain, Russia, China, Korea, Turkey, and pretty much everywhere else in the world right now. These countries don't use dollars. Surely the FeD3RaL Re$ErV!e can't affect domestic prices everywhere on earth.
China has a big inflation problem and it's pushing up prices worldwide (CNN)
I've had people try to tell me that it's because the dollar is the "world's reserve currency," and this means the Fed can somehow control prices everywhere. But they clearly don't understand what that term means.
All a reserve currency means is that the central bank has to manage the money supply for two different—and possibly competing—interests. One is the domestic market and the other is the international market. When Germany sells goods to Turkey, for example, they denominate the price in dollars, so there needs to be enough dollars to conduct that transaction. They also hold a large portion of their trade surplus in dollars. But that doesn't by itself affect the amount of exchange between those two countries, nor the level of domestic spending, nor the value of the currencies of those respective countries (the Euro and the Lira). If anything, it causes the reserve currency to be overvalued, hurting exports.
Instead, all the evidence points to some kind of global catastrophe—like, say, a pandemic—as the primary source of inflation in this case rather than “irresponsible” government spending (irresponsible for who?).
People like to denigrate MMT as the "Magic Money Tree," yet still act as though constricting government spending and the money supply will somehow magically end the supply chain crisis, or the lack of computer chips, or inclement weather, or labor unrest. There is a real world of atoms out there with real constraints that no amount of symbol manipulation can solve.
Common People
Another common retort is that the government gave too much money to ordinary people in the form of checks during the pandemic, causing inflation.
This seems easily disprovable. All we would have to do is look at the places which gave their citizens the most stimulus money, and the places which gave their citizens the least stimulus money—or none at all. If pandemic support were the cause of inflation, then we would expect to find a clear correlation between that and the domestic inflation rate.
But I'm not aware of any such correlation. If there were a correlation, it would have been shouted from the rooftops by the proponents of austerity by now.
Not to mention that the money largely offset lost wages and revenue during the lockdowns when businesses were closed and a lot of workers were forced to stay home. Did it offset it too much? I doubt it, but even if it did, it will work itself out soon enough. And what was the alternative—to let people suffer? As this Reddit comment points out, “For some reason everyone thinks the super dole from a year ago is inflationary, but that slashing corporate tax rates in half in 2018 was not. They both have an effect, only one is over and no longer applies, and the other still stands.”
Six Things They’re Not Telling You About Inflation (Daily Poster)
Profits
Another curious thing is that corporate profits are at all-time highs. For example, meat packer profits are up 300 percent even as meat prices continue to soar for consumers at the supermarket.
This should not be the case. In classical economic theory, higher prices should eat into profits, or at least make sure they don't go up very much. Accordingly, businesses should not be able to pass along 100 percent of the increased cost of an item to the consumer, because consumers could simply avoid purchasing the item altogether or purchase it from another company that passes along slightly less of the price increase4.
Also, according to standard economic models, when the price for something goes up, people buy less of it. This is shown by fancy "supply and demand" curves depicted on blackboards in "Econ 101" classes everywhere. Clearly, people buying less of a product is incompatible with skyrocketing profits for the makers of that product.
Instead, the evidence indicates that businesses are deliberately raising their prices and blaming "inflation" for the price increases. This is only possible due to massive consolidation in almost every sector of the economy.
Incidentally, that's the very definition of a monopoly—when firms are able to de facto set prices instead of having markets dictate prices to them. It's not having one sole supplier in a market with zero competitors whatsoever (which practically never occurs).
Having just 3 or 4 companies control 90 percent of a market is effectively a monopoly, even though there is theoretically still "competition." Similarly, if a company has “just” 40 percent of a market, for example, while none of it's competitors have more than a few percent, it’s still a monopoly even though it’s not the only company in the market.
In the case of meat production, if higher prices meant more money for the actual producers, then that might be a good thing, especially if they are having a hard time making ends meet. But the producers say they aren't seeing any of those higher prices. Instead, it's meat packing companies using monopoly power to squeeze both producers and consumers in order to make windfall profits.
So in this case the redistributive effects of inflation are bad. Instead of money being redistributed downward, as with a minimum wage increase, it is being distributed upward, from consumers to monopolies. Blaming inflation is a smokescreen. None of this has anything to do with "government money printing," green energy, spending on infrastructure or domestic social programs, or the national debt. That’s all just a convenient excuse.
Wages
People get very angry when wages go up. But only wages for certain people.
For example, the wages of CEOs have "inflated" 940 percent since the 1970s. Meanwhile "ordinary" workers' wages have grown by a mere 12 percent. If the minimum wage had “just” kept pace with productivity growth, it would be $26 an hour today.
Where was all the handwringing about HyP3RiNfLaT!oN when the salaries of CEOs and other managerial types grew by orders of magnitude? Yet paying the McDonald’s worker a few more bucks an hour is going to wreck the economy? Come on! What they’re really saying is, if money goes to the non-elite, you get inflation. If it goes to the elite, you don’t get inflation. Very convenient, isn’t it?
Hyperinflation
I’m sorry, but hyperinflation isn't paying 10 cents more for a cup of coffee, and it’s not a slight shrinkage of your peanut butter jar. It has a very specific definition: "In 1956 Phillip Cagan, an economist working at America's National Bureau of Economic Research, published a seminal study of hyperinflation, which he defined as a period in which prices rise by more than 50% a month."
So the next time someone starts carelessly throwing that world around and insisting it’s going to happen “any day now,” you might want to remind them that this has not happened in the United States since the Continentals that funded the Revolutionary War went out of circulation. And you might show them this chart:
Now That’s Hyperinflation (Econbrowser)
In fact political instability (like an insurrection) and the inability to effectively tax the rich have been historically more likely to cause hyperinflation that a government spending money on its own citizens or upgrading its dilapidated infrastructure.
Prices Must Change
People feel like prices should never change. But that would invalidate the whole purpose of a market economy!
The purpose of prices is to allow for decentralized economic production. Prices allow producers to coordinate between themselves. For example, constructing a building requires a large number of different specialties, and those entities need a way of coordinating their efforts. Prices serve that purpose, from suppliers to contractors to designers. Or, say, bringing milk or corn to your table takes a long, complex chain of different people working together, from the farmers in the field, to distributors, to trucking companies, to warehouses, to grocers. Those are just a few examples. It even allows business entities in different countries to work together.
The only alternative to this arrangement would be for some sort of centralized entity to manage and control all those diverse aspects of production. But it's very hard to do that, if not impossible, in large-scale economies. That was one of the major flaws of the Soviet system. Central planning worked well enough to transform an agrarian peasant economy into an industrial superpower, but it had a hard time running a consumer economy after that. They were plagued by surfeits and shortages, because no one was sure how much to produce, or what people’s preferences were because there was no feedback provided by markets and prices. Instead, they had to blindly meet quotas established by the central government.
Prices aren't magic. They aren't perfect. They don't reveal some kind of Platonic truths about the universe. They allow for decentralized production. That's it.
Even a market skeptic like me recognizes this.
Prices also send signals telling producers what to produce more of and what to produce less of. If the price for something is going up, that’s a signal that people want more of that item causing producers to jump into the market and make more of it. If the price for something starts going down—say, buggy whips after cars were invented, or bread because everyone’s eating low-carb—it's a signal to produce less of that, or perhaps to start making something else. It’s valuable real-time feedback. Of course, it’s not perfect and it doesn't always work out that smoothly in real life, but that’s the concept, anyway.
But here's the thing: in order for this system to work, prices have to change! I mean, that should be obvious, shouldn’t it? If prices stayed the same forever, markets wouldn’t work, would they?
We saw this during the pandemic. Prices told producers to make more masks and medical equipment. A lot of times cameras and other videoconferencing equipment weren’t available at any price because there were not enough of them around, signalling the need to make more. There was no need to wait for an order from Central Command. But in order for these signals to be sent, prices had to rise!
So for libertarians to grouse about prices changing is the height of disingenuousness and ideological schizophrenia. Do they expect prices to only go down? As we saw above, the inflation rate hides the fact that prices are rising and falling for all sorts of things all across the economy at any given moment. That's not a flaw. That's how it's supposed to work! And that’s according to their own ideals.
Right now prices are telling us several things. There is a pandemic raging around the world. Our supply chain is dangerously brittle. There are critical bottlenecks for a number of items. Industries are consolidated to an unhealthy degree. Our "essential workers" are horribly underpaid. Globalization has perhaps gone too far. Raw materials are not infinite. Severe weather events are increasing.
Markets aren't infallible and prices don't just tell you what you want to hear.
Conclusion
So why does any of this matter?
We've all seen the footage of container ships stacked outside the port of Los Angeles. We've all heard about the shortage of computer chips. We've all heard about supply chain bottlenecks. We’ve all heard about extreme weather. We’ve all heard about the “great resignation.”
2021 supply shortages: Year of waiting followed by year of anxiety (Deutsche Welle)
The World’s Most Profitable Traffic Jam (Matt Stoller, BIG)
Right now, workers are getting a better deal than they have in a generation. Wages at the bottom of the income ladder are rising for the first time in memory. Not enough, but they're rising. The need to attract workers and the ability for workers to finally go elsewhere has put a brake on the abuse many workers have to endure (myself included). Union activity, which has been moribund for a generation, is on the rise.
I think there is a desperate desire right now to slow the economy down and raise the unemployment rate to put power back in the hands of business and employers. Despite ostensibly being a democracy, the needs of the business community always come first, and those of workers dead last or not at all.
Inflation scaremongering is how they’re planning to accomplish this.
Now, that's not to dismiss the very real pain of rising prices, especially for those without much of a financial cushion to fall back on and those who have to spend nearly all their income to survive. It’s important to acknowledge that reality.
But people's beliefs about inflation aren't really based on rationality. Like most economic beliefs held by the populace at large, they're really just religion in disguise.
I've read how people are blaming the president for inflation. Really? Please explain that one to me. And I've read that Republicans currently think inflation is worse than do Democrats (it's flipped when their guy is in office). I don't think there are different price tags for Republicans and Democrats, are there? It's all just perception, not reality. And it’s no secret who owns the media.
It's no different than when people blamed the king or the pharaoh for poor harvests, or the witch doctor for the lack of rain in times past. It's Cargo Cult thinking. We're no more rational than our forebears thousands of years ago toiling away in the fields when it comes to things like this. Certainly today's proliferation of conspiracy theories should drive that point home.
This is a once in a generation opportunity. I would hate to see us lose this chance based on fearmongering and misinformation by the most cynical of political actors.
It extremely hard to find good data on this. But even taking the highest median estimate then and the lowest now, the calculation still holds true. This paper from the IRS notes that, "The only data for the period March to December 1913 show that there were fewer than 400,000 tax returns filed which met the $3,000 minimum income filing requirement." (U.S. population was about 97 million at the time).
This is known as the velocity of money—how fast money is changing hands.
An even larger wealth transfer was the one from the bottom 90 percent to the top 10 percent. From the Blyth interview above:
“And there is that RAND study from November 2020 that was adeninely entitled, ‘Trends in Income 1979 to 2020,’ and they calculated, and I think this is the number, but even if I’m off, the order of magnitude is there, that transfers, because of tax and regulatory changes, from the 90th percentile of the distribution to the 10 percentile, totalled something in the order of $34 trillion. That’s how much was vacuumed up and practically nothing trickled down. So when you consider that as a mechanism of extraction, why are worrying about inflation (from wages)?”
Goods that you have to continuously buy like food are callled inelastic—there is demand for them no matter the price. Discretionary items that you can defer buying are called elastic—demand waxes and wanes.