by
Bill Lauritsen
PCDCC Legislation Committee Member
PCDP Central Committee Delegate
If you ask economists about inflation, you will receive many differing opinions. On the one hand, they will say that the current supply/demand inflation is a sign of a healthy economy trying to adjust rapidly to leaving the COVID shutdowns. The current problems with supply chain issues are a perfect example. Factories were closed, all those shipping containers – as well as ships - were in the wrong place and the fossil fuel industry reduced production while no one was driving, and planes sat idle.
Most economists tell us not to worry as this will all work itself out as supply catches up to demand. On the other hand, other economists will point to systemic problems with our national and world economy. We don’t produce enough here of what we consume thus relying on places like China. A decaying infrastructure doesn’t help either. Our economy is a complicated affair although politicians – and just about everyone - are looking for simple answers. On the “one hand or the other”, that is why Harry Truman always wanted a “one handed” economist. Like the TV weatherman, economists always hedge their forecasts for unforeseen circumstances. Nothing is ever simple when you are not 100% sure of the future and there are always multiple reasons for economic conditions.
So, let’s look at the supply chain. Because demand was way down, businesses either stopped or drastically slowed down. In addition, the supply chain couldn’t keep up with the rapid change in consumer demand. If you remember the “bath tissue” shortage, companies had to adjust from supplying institutional customers (schools and businesses) to meet the greater demand from at-home residential customers. These were different “supply chains” and it wasn’t that easy to switch from one customer chain to another. In fact, in the middle of this “crisis,” I noticed my local supermarket had stocked individually paper wrapped tissue rolls in huge cardboard boxes at the end of the aisle while the regular shelves were still empty. Those shelves are stocked by the suppliers themselves, not the supermarket, and those suppliers were entitled to the shelf space but had no supplies - plastic wrapped tissue destined for home use. The supermarket had to purchase its own supply of tissue from a different supply chain meant for commercial customers and stock it at the end of the aisle. Putting it on the shelves where the residential tissue is stocked would have violated some agreement with the companies that made the tissue even if the brands were the same. Take this one example (TP) and multiply it across the whole economy. Logistics or supply chains, developed over years or decades, don’t change overnight. As those changes are made to meet new demands, there will be times when the supply just can’t keep up with demand; when demand exceeds supply, costs will rise.
This type of supply/demand inflation is radically different from the “stagflation” experienced in the 70’s. Then, in addition to stubborn high inflation, we experienced high interest rates (upwards of 20% for some short-term instruments) and high unemployment. This was also called “cost push” inflation with much of the push due to rising oil prices caused by international political frictions, and independent of actual demand. The increased cost of oil “pushed” through the entire economy. Today interest rates are still at all-time lows (your savings account is lucky to see 1%), we are not as dependent on foreign oil and businesses are begging for workers. You could say that we are experiencing a labor shortage, which also has an upward effect on inflation as workers demand more. In any case, we do have the worst inflation seen in years, yet it is nothing like the stagflation from the 70’s.
Should we worry? If interest rates were to skyrocket as they did in the 70’s, we should worry. Economists, however, don’t see that happening anytime soon. What we are seeing is pent up demand as many have been restricted from traveling, shopping, etc. With COVID restrictions easing and people sitting on cash, we are spending again, and this drives up prices.
Will inflation ease?
That’s a good question. As the demand/supply issue works itself out and supply chains adjust, it should, but only time will tell. There could be other factors as well. If there is an outbreak of another COVID variant, demand would likely ease as people would be more careful in their spending and traveling habits. As I write this, the price of crude oil is down 10% on expectations of less travel because of the new Covid “Omicron” variant.
The bigger and longer-term issue involving cost inflation in our economy is infrastructure. Broken and outdated infrastructure subtracts billions, if not trillions, of dollars from our Gross Domestic Product. This not only involves physical infrastructure, e.g., broken bridges, substandard highways, crumbling transit systems, overused and unreliable electric grids, etc., but also overly expensive medical and educational systems that subtract billions from our economy and serve as a drag on other spending with both higher insurance premiums and direct costs. Medical and drug costs have skyrocketed over the past few decades, far out-stripping general inflation. There is currently a push to rein in drug costs by allowing Medicare, Medicaid, and other insurers to negotiate prices. The pushback from the drug companies (Big Pharma) has been relentless, as you may have seen in the political ads on TV. Patients have become profit centers to these companies, and they are not willing to let go.
Education is another source of long-term inflation. As with medical costs, tuition at both public and private universities and colleges has increased at rates far exceeding general inflation. Gone are the 50’s, 60’s and 70’s when you could go to a public university, receive a small scholarship or grant and leave with little or no debt. Now students are leaving school with back-breaking loans in the tens of thousands of dollars just for a regular four-year degree. Add a graduate or professional degree and loans can exceed $100,000. Why is this a problem? People with high student loans to repay often put off starting families, buying houses, and purchasing cars or appliances. One should question why tuition costs have skyrocketed. But what is even scarier is that many on the other side of the political spectrum want to privatize all education. Think about leaving high school with debt hanging over your head. How did we come to see students as profit centers? The rising price of health and education are major contributors to this type of cost push inflation.
There are several proposals (i.e., Build Back Better) to rectify these long-term problems. “Fixing” our physical infrastructure will go a long way to bringing the cost of just about everything down. Not having to wait in traffic jams; less wait time at airports; cheaper and more reliable utilities; better and faster internet; corrected supply chain bottlenecks, etc. would all reduce the cost of goods and services to the consumer. Letting Medicare negotiate drug prices would reduce the price of drugs to the consumer, reducing insurance premiums and co-pays, as would controlling other out of control medical costs. Reducing education costs would not only allow people to graduate with less debt but allow graduates to start their adult life sooner and participate in our consumer-oriented economy instead of re-paying loans that reduce eligibility for a mortgage. Inflation has many contributors, and some are not so evident. While it seems likely the current inflation bubble will ease, we need to concentrate on the more institutional and long-term causes for the future.
