Quick Note on Inflation
And 3 Things
Hi friends. I’m not off my break yet, but I wanted to briefly interrupt my break because some really big stuff has happened, and some other really big stuff hasn’t happened.
Thing 1: I’m still not dead, and you aren’t either. Whoda thunk?
Thing 2: The House of Representative still doesn’t have a Speaker. This isn’t a politics newsletter, so I’m not gonna give my opinions about stuff, but this is a huge deal. It is more than just political maneuvering and parliamentary gamesmanship; this is a demonstration that one of our political parties either has no interest in, or no longer is capable of governing. That’s a bad thing. If a monopoly in a private market leads to really bad outcomes, what do you think will happen if we have a monopoly in a political market? I know that because most people are either Team-D or Team-R we tend to think the world would be not only just fine, but hunky freaking dory if our team got everything it wanted. Anyone who believes this should do some reading about group think and collective psychosis/shared delusional disorder. Basically, if nobody challenges your ideas, you will start coming up with some pretty bad ideas (this is why yes men are so dangerous, right Elon?). One of my favorite quotes of all time applies here, attributed to the great General George Patton:
If everyone is thinking alike, then somebody isn't thinking.
But, I’m not really sure what else anyone could have expected from this situation. For at least the last 30 years there has been a consistent push by media and special interests to get the Republican Party as far to the extreme fringe as possible. Now, so many of these same people are shocked to see the result of this.
One of the reasons I left working in politics was because I watched tinfoil hat evolution take place. At first, the tinfoil hatters were ignored and dismissed. Then there got to be enough of them that they had to be humored, but ultimately they were still ignored. As they grew they couldn’t be ignored, they had to be dealt with. This was about the point where I exited political work and mostly moved on to other things because the next step—at least I thought—was obvious; soon, the reasonable people were the ones bringing the tinfoil hats for people to wear. Is it any surprise now that we now have tinfoil hatters in office, and as major players in party politics? It’s like if someone revamped their diet by replacing all fruit with Little Debbies, all vegetables with gummy bears, and all water with Mountain Dew and then were ***SHOCKED*** when they develop diabetes. What else could the outcome be?
Won’t it be fun to have government shutdown and debt limit fights with these people????
Thing 3: Before the last Congress concluded the parties got together and passed a huge bill called the omnibus funding package. Basically, they threw everything that a Congress has normally done into one big thing, then did that thing. In general, I hate these omnibus bills because nobody actually reads 4,000+ pages of legislation or takes time to really know what the impact is. That can lead to unintended consequences—although sometimes they can be good. For instance, party leaders Mitch McConnell and Chuck Schumer got rolled on this bill. Both men are generally in the "free markets are good, even if they lead to monopolies” camp. They haven’t quite realized that free markets and competitive markets are not the same thing. Anyway, this bill was so big that somebody accidentally pasted the wrong version of some legislation into the bill. McConnell and Schumer didn’t want it in there, so they had to make a deal to get it out. That deal was a good win for people who like competitive markets, as it increased funding for antitrust enforcement. Shoutout to Amy Klobuchar, Mike Lee, and Elizabeth Warren for cutting the deal, and not just giving their leaders what they want. I’ve been kinda tough on Mike Lee, and I think for good reason, but he has done some decent antitrust stuff, and I’ll write more about that later.
But, my cynic proverb—that Congress doesn’t do stuff—might be outdated, or at least might not have applied to the 117th Congress which just ended. There was quite a bit of stuff done over the last two years, and a lot of it made markets more competitive; including some things in this omnibus bill.
Inflation Note
I was really happy to see this post by Neel Kashkari, the President of the Minneapolis branch of the Federal Reserve Bank. Basically, Kashkari makes the argument that inflation was the result of an economy wide surge-pricing phenomenon, much like Uber of Lyft surge price when demand is way higher than supply.
This was refreshing because so many economists have attempted to explain the inflation by overemphasizing things like inflation expectations, and passing wage increases through to prices. You might remember that I made this same argument almost exactly 13 months ago.
Here is the key part of my post that sums up this view:
I’ve been clear that increasing capitalism is the the best outcome here. This monopolistic inflation is just one more instance where a lack of competition—ie: a lack of capitalism—has led to market manipulation.
Not all of the increase in prices can be chalked up to greedy monopolies, however. The dynamics of supply and demand would lead us to expect some price increases. The pandemic put a hard speed limit on service based markets. Unable to go do stuff, Americans chose to buy more stuff. The shift from spending on services to spending on stuff changes the supply and demand intersection. Given the pandemic, with all its work stoppages and supply chain disruptions, it was difficult for companies to produce more stuff. So, when people who were spending some of their money on services shifted that spending to buying stuff, the amount of demand for stuff increased while the supply couldn’t. More people wanting the same amount of stuff naturally leads to higher prices.
And, despite inflation, this is what is happening. People are buying more stuff. The rate of increase in stuff bought is higher than the rate of inflation, which means that despite higher prices, people are still buying more than they used to. If the supply of stuff can’t keep up, then this has to lead to some price increases.
Some business executives want people to believe the economy to be a zero sum game. I win or I lose. It’s part of why they are trying to harass the FTC. But this isn’t how economic theory works. In economics the most efficient outcome is called a Pareto Optimum. It’s a scenario where everyone is better off from a decision.
We are seeing some pareto optimization right now. Wages are rising, labor markets are more competitive than they have been in decades, businesses are making more profits, and people are still buying more stuff. Everyone is winning. But, as the FTC understands (and hopefully you do now!) the amount of winning would go up even higher with lower levels of monopoly power. Monopoly power which leads to unnecessary price inflation, and monopolists giving their own customers the middle finger.
But, I’m not trying to do a victory dance because you might also remember that there was a key problem with the surge pricing model for inflation. When inventories rose—meaning there was enough supply to fill demand—inflation didn’t go down. I wrote about being wrong on that here:
It is really nice to see a prominent economist fully embracing the surge-pricing idea. It always seemed to me like the much more obvious explanation compared to wages and inflation expectations. But, the amount that corporations scapegoated the surge-pricing and the wages and expectations models to raise prices is undervalued by economists. It’s a good step to see Kashkari publicly plant a flag away from the wages and expectations model, and hopefully others will follow. Let’s also hope that this will lead to the realization that the surge-pricing model is also inadequate because inflation persisted long past the surge dynamic.
If you miss me too much over the next couple weeks, read those two posts again and you’ll feel really smart that you knew something before most economists even knew it.
Thanks for reading The Constituent. If you’d like to support the newsletter, here are a few options.
-Thanks,
