inflation

[kaysixteen]

paultuttle's post wrt his parents and the ever-rapidly-increasing apt rents in his area got me to thinkin'-- inflation is killing this country, and I am wondering what actions the government could realistically take to address it?   Specifically, if any of you here are old enough to remember when Nixon put a wage-and-price freeze on (1973?), what do you recall about the actual consequences of this action?   And what happened when he lifted it?  After this experience, i know we limped through the rest of the 70s with inflation murdering us, and now we see inflation that is almost as bad as the worst of those days.   There has to be something that could realistically be done, but the fact that we went through 40 years of extremely minimal inflation seems to have caused somewhat of a great forgetting, to the point where most American adults have little memory of prior inflationary eras, and this is especially true for most politicians (though obviously Joe Biden would not be amongst these)...

[Sun_Worshiper]

The government could do a few things at the margins (e.g. eliminate tariffs on imports from China), but they won't have big effects. This is just a perfect storm of supply problems and high demand and inflation will be a problem until supply increases and/or for demand decreases. 

[clean]

Hopefully we will WIN (whip inflation now!).

Government interventions really dont fix the problems.  For instance, let's say that we put a ceiling on gas at $3.  Would your life be better?  No, because if the true price of gas is $4, then no one will sell it at the lower fixed price.  So you can buy all the gas they will sell for only $3.  But there just wont be any to pump!

(I also remember odd and even license plate days).

What I REALLY remember is Paul Volker beating inflation by raising interest rates!  I remember the prime rate being 18%.  I remember some of my friends with older parents (and have heard of it from other, older coworkers) that they would go to the bank every payday and put as much as they could in the longest CDs they could get or buying 30 year bonds.  For them, it made a great retirement!!

So I dont think that the government can use tax policy and spending to get out of it. They could RAISE TAXES and cut spending, and risk putting us in a recession, but recessions and inflation are usually mutually exclusive, though not unheard of. 

Still, I think that the Covid problem and solutions are adding up.  Factories in many places were shut down (and still are in many Chinese cities as they continue to shut down entire cities).  So there is a problem with with too little supply.

Then there is the stimulus money and the end of Covid - ready or not!!  People are READY to spend the money that they have saved, and are ready to experience those deferred vacations and stuff. 

When too many dollars are chasing too few goods, and then there is a surplus of 'free' money, then it is not a surprise that prices are rising.

As for rent, home prices are up, so rent should be up.  During COVID, many landlords took a beating from dishonest tenants that could have paid, but as they could not be evicted, didnt!  So some of those landlords have to raise the rent to repay the added money that they are out or had to borrow, or however they made it through!

Then there are used cars.  When there were mask restrictions and office closures, who needed to rent a car?  Rental agencies sold off their cars.  Now, they are buying them back, and worse, the new cars that they and others want are stuck at the factory awaiting chips, among other components, that were not produced as the manufactures were shut down!

Finally, the backlog of container ships that were in the news.  COVID shut down the ability to staff the unload spots, and then, on the way back, they could not get those containers back! 

[dismalist]

Yes, the Federal Reserve held interest rates low for too long. [Maybe because Powell wanted to get reappointed as Chairman of the board of governors by Biden, maybe not.] The big Covid fiscal stimulus was thus financed by printing money. [That wasn't necessarily wrong, there was just too much of it.] The Fed is in fact raising interest rates, which will reduce printing of money, which will reduce inflation, but it is doing it damned slowly by historical standards.

Lowering tariffs is good quite apart from combating inflation, but lowering all tariffs would not change the overall price level. The increased demand for foreign goods results in a depreciation of the currency, leaving the overall domestic price level of foreign goods unchanged.

What is terribly, terribly misguided is blaming inflation on evil corporations. They must be damned stupid if they waited for Covid to raise their prices!

Someone once said "a price is information wrapped in an incentive". One doesn't want to fix prices by decree. If prices cannot ration, something else will -- waiting on line for gasoline, empty shelves, informal rationing [one per customer], and so on. In the limit we get to  the former Soviet Union [you can get that car in seven years, but, hey, you can have bread tomorrow].

[clean]

More thoughts on inflation - It is NOT the current government's fault edition:

Let's talk about food inflation for a moment.  Eggs... Well, there are 2 problems for egg producers. If you have been watching the news (chicken wing prices, for instance) you will note that there has been an outbreak of bird flu  that has killed (or caused to be killed) entire farms of fowl.    The second shoe is a two part problem (for 2 feet).  We have had droughts in the grain areas reducing harvests, and most of Ukraine's 2021 harvest is stuck in Ukraine (or moved to Russia). 

Pork prices... several factors here, some mentioned above, regarding grain prices.  Others are COVID related.  Entire processing plants were shut down from COVID, because the workers spread it quickly, and then the processors were 'spread out' (slowing them down) to avoid further spread. 
Another issue is political, but California related.  California law requires certain 'cruelty free' processes be followed in the pork production process for all pork sold in California.  Well there are not a lot of places that could do that initially, it takes time to adjust to the demands placed on the producers, it increases costs of the producers, and the end result is a much higher price for beacon! 

Fuel prices are adding to transportation costs, and retailers and transportation companies are simply no longer able to absorb those costs.  Last week the news had interviews with truckers indicating that it was now costing $1000 to fill up a truck! 

My local McDonalds has on its sign that starting wages are now at least $13 an hour  (26ooo a year for a 2000 hour work year).  The fall out from The Great Resignation is that people are demanding higher wages to go to work, and as illustrated by Musk last week, they want to work from home!

None of these inflation drivers are 'the fault' of Washington! 

[dismalist]

More thoughts on inflation - It is NOT the current government's fault edition:

Let's talk about food inflation for a moment.  Eggs... Well, there are 2 problems for egg producers. If you have been watching the news (chicken wing prices, for instance) you will note that there has been an outbreak of bird flu  that has killed (or caused to be killed) entire farms of fowl.    The second shoe is a two part problem (for 2 feet).  We have had droughts in the grain areas reducing harvests, and most of Ukraine's 2021 harvest is stuck in Ukraine (or moved to Russia). 

Pork prices... several factors here, some mentioned above, regarding grain prices.  Others are COVID related.  Entire processing plants were shut down from COVID, because the workers spread it quickly, and then the processors were 'spread out' (slowing them down) to avoid further spread. 
Another issue is political, but California related.  California law requires certain 'cruelty free' processes be followed in the pork production process for all pork sold in California.  Well there are not a lot of places that could do that initially, it takes time to adjust to the demands placed on the producers, it increases costs of the producers, and the end result is a much higher price for beacon! 

Fuel prices are adding to transportation costs, and retailers and transportation companies are simply no longer able to absorb those costs.  Last week the news had interviews with truckers indicating that it was now costing $1000 to fill up a truck! 

My local McDonalds has on its sign that starting wages are now at least $13 an hour  (26ooo a year for a 2000 hour work year).  The fall out from The Great Resignation is that people are demanding higher wages to go to work, and as illustrated by Musk last week, they want to work from home!

None of these inflation drivers are 'the fault' of Washington!

Glad you brought this up, Clean. We mustn't confuse changes in relative prices with a change in the price level. To get the relative price change, subtract the inflation rate form the individual per cent price change. All the examples stem from supply shocks.

Except for wages. Real wages are falling [a little], i.e the wage increase is less than the price level increase.

[clean]

If memory serves, before the COVID shutdown, I remember McDonalds offering $10 an hour, and higher wages for the late shift.  So $13 an hour is a 30% increase in the wage (expense) while inflation since the start of covid is not yet 30%!

similarly, my preferred Whataburger meal is a Whatajunior (#7)  before covid it was less than $6, and last week it was $7.15!  That is a $1.15 increase (a 20% increase over that time) - still higher than inflation!

[dismalist]

If memory serves, before the COVID shutdown, I remember McDonalds offering $10 an hour, and higher wages for the late shift.  So $13 an hour is a 30% increase in the wage (expense) while inflation since the start of covid is not yet 30%!

similarly, my preferred Whataburger meal is a Whatajunior (#7)  before covid it was less than $6, and last week it was $7.15!  That is a $1.15 increase (a 20% increase over that time) - still higher than inflation!

Sure, Clean. It is average wages that are lagging inflation, not necessarily McDonald's wages. As I don't run McDonald's, I have no clue why.

With wages as with prices, we must get away from the idea that rising wages or prices cause inflation. Nay, together they are inflation. Rising prices are the definition of inflation, not its cause.

What one observes with your McDonald's data is a change in relative wages and prices. To figure out how much, subtract the inflation rate. Then there might be something worth analyzing to do with the market McDonald's operates in. But that's not about inflation.

Therefore, let's not lose sight of the theory that too much of the government deficit financed by printing money is what has caused our current inflation.

[ciao_yall]

The question is where those extra dollars are going.

If wages are going up and prices are going up, how much is going to executives and shareholders, and how much is going to make sure the employees earn a living wage?

[dismalist]

The question is where those extra dollars are going.

If wages are going up and prices are going up, how much is going to executives and shareholders, and how much is going to make sure the employees earn a living wage?

Wages on average are going up less [a little] than prices. Workers are worse off. Capital owners are better off [expectations of future profits aside]. That's why we have an employment boom at the moment -- the demand for labor has gone up. The "great resignation" it's been called, workers switching jobs for better pay. This will not last much longer. Wages -- again, on average -- will catch up. Once the inflation comes to be expected, it won't matter [except for fixed long term contracts for a while].

The only person to make sure an employee earns a living wage is the person him or herself.

[Anselm]

The question is where those extra dollars are going.

If wages are going up and prices are going up, how much is going to executives and shareholders, and how much is going to make sure the employees earn a living wage?

It looks like housing and government spending. 

I see no relief from inflation anytime soon.  The supply problems have to be solved first.  I am happy to see the wage increases for the lowest paid workers.   However, we can expect more automation in those sectors. 

[dismalist]

The question is where those extra dollars are going.

If wages are going up and prices are going up, how much is going to executives and shareholders, and how much is going to make sure the employees earn a living wage?

It looks like housing and government spending. 

I see no relief from inflation anytime soon.  The supply problems have to be solved first.  I am happy to see the wage increases for the lowest paid workers.   However, we can expect more automation in those sectors.

Supply problems, and they existed broadly for lack of labor, are at worst very specific and limited at the moment. Total real output is now comfortably above pre-covid levels.

How soon inflation comes down depends on the Fed right now.

[kaysixteen]

Awright you gots me.   I am for all intents in purpose a socialist, when it comes to government regulation of the economy.   Too many people are in real want, privation, and suffering now, and corporate profits are extremely high.   Minimum wage at the federal level was bad at $7.25 in 2007.   You get the idea.   I think the Amazons of the world should actually pay taxes.   Sue me.

[dismalist]

Awright you gots me.   I am for all intents in purpose a socialist, when it comes to government regulation of the economy.   Too many people are in real want, privation, and suffering now, and corporate profits are extremely high.   Minimum wage at the federal level was bad at $7.25 in 2007.   You get the idea.   I think the Amazons of the world should actually pay taxes.   Sue me.

Dear K-16, in my yute I was a socialist, too! I sure as hell hope we all were.

Amazon's owners do pay taxes. The minimum wage makes people we want to help unemployed or otherwise worse off.

None of what I explicate says you can't help people. Give money to people one want's to help. 

We have policies for this, and they are often not ungenerous, just often full of dysfunctional conditions, such as you earn $1 more and there's no more Medicaid for you.

[clean]

I think the Amazons of the world should actually pay taxes.

What taxes are they not paying?
They pay unemployement taxes they pay social security taxes on the wages they pay. IF they dont pay property taxes it is because the local governments trying to entice them to open a distribution center in THEIR town, have offered tax holidays.

Income taxes?  Why doesnt Amazon pay income taxes?  They booked huge losses early on.  Using the current tax code, they can use these losses to offset profits in later years.  If I remember the numbers, companies can carry losses forward up to 15 years.  IF the losses are sufficient to offset the later profits, then taxable income is zero, and taxes on zero are zero.

As a natural person, you can similarly carry losses forward.  You can deduct up to $3,000 in investment losses forward every year.  In addition, if you sell your house for a profit, it is tax free up to $250,000 in profit. 

There are also some incentives that companies may be given to support societal goals, that may reduce taxes.  For individuals, mortgage interest is tax deductible (though less beneficial after the last tax reform that increased the standard deduction).  Student loan interest is deductible, and capital gains are taxed at favorable rates.