Monday, April 15, 2024

Our Economic Reality: Do You Prefer Higher Unemployment - Or Higher Inflation? There Is No 3rd Option

                                                                     



In a previous post I cited a Wall Street Journal piece:

What’s Wrong With the Economy? It’s You, Not the Data

Showing how little Americans know about the economy. For example, Half of the respondents to the WSJ survey defined inflation incorrectly, conflating high prices with high inflation. The sobering fact is that once prices rise they seldom go back down to what normal plebes believe to be 'proper' levels, in this case pre-pandemic.

But the true guide for high inflation is whether the overall year's average rate is higher than the long term average inflation rate. Beyond this most survey takers seem not to know (or care) that a good economy, i.e. growing jobs, higher GDP etc. is by its nature going to be a more inflationary one. It will inevitably be more inflationary after a once in a century pandemic, given supply side problems which predictably increase scarcity of supply and hence costs -  if demand ever increases (as it did after the pandemic).  

But it is even more basic, more fundamental than this. In the 1970s the Federal Reserve developed what it called:  "the Employment Cost Index."   -  basically a per capita index of how much cost is attached to keeping each 'unit' of workers in jobs. This includes benefits and overtime pay, as well as regular salary. The higher this index, the greater number of people employed. Also the scarcer the remaining workers available, so employers must compete for their services.

The lower the index the greater the number out of work. But....the lower the inflation rate, because the more people earning means more money in circulation an also more instances of demand for higher wages.  As  noted in a Baltimore Sun Business piece from January, 1997 (Employment Cost Is A Hot Number):

"When available workers become scarce, employers must often bid more for their services and then raise consumer prices to make up for  higher costsEconomists and Wall Street investment firms have learned that every 1.3 million people out of work cuts inflation by 1%."

Is this a mind blower? It should be!  Also that when the Fed commenced a series of rate cuts in the early 2000s (under Alan Greenspan) the effect was a transfer of wealth from savers to borrowers and Wall Street speculators.  The savers ended up with lower fixed bank interest rates, while borrowers got lower rates, i.e. for mortgages, other loans, credit cards.  Meanwhile, the speculators got the benefit of 'cheap money' which fed the stock market and the DOW.  But for savers the effect was to drive up the cost of money and chase many into the stock market - where they risked their retirement nest eggs.  

For sure, people need to wrap their brains around the fact that there's little Biden can do to staunch inflation (WSJ, April 12, p. A1).  As noted therein most factors (like the Key Bridge collapse in Baltimore, the Ukraine war and ongoing labor shortages  are beyond his control. As the piece observed:

 "Most economists concur there is little Biden can do at this point to bring down inflation.  Absent major tax increases or spending cuts that could curtail spending - but even those would take time to work their way through the economy."   

Adding:

 "As frustrated as voters are by inflation, the annual pace of consumer price increases has fallen significantly since mid- 2022, when it peaked at round 9 percent.  To the surprise of many economists that has come despite stronger- than- expected economic growth and a resilient labor market.  Just last week, new data showed that the economy has added a seasonally-adjusted  303,000 jobs in March, far more than economists had anticipated." 

Another cogent aspect is how companies have exploited the inflation trope to pad their profit margins (e.g.'WSJ: 'Big Profits, High Prices: There Is A Link', March 15, p. A2).  Columnist Greg Ip notes therein that there "is  a factual core" to Biden's SOTU accusations of corporate "price gouging".  Ip goes on to cite profits increasing by 41 percent since 2019 while prices went up 17 %, "outpacing both labor and non-labor costs."

Finally, it is well to point out that inflation can vary according to location.  As the main story ('Inflation Dips To Lowest In 3 Years')  in the Business section of the Denver Post noted yesterday: 

 "Outsized declines in food and gasoline prices pushed consumer inflation in the Denver-Aurora-Lakewood area below 3 % for the first time in three years according to a bimonthly update from the U.S. Bureau of Labor Statistics."

The takeaway from all this? 

Your blunt, bare bones binary choice is either : a) more people out of work, or b) more inflation. Don't like the choice? Too bad! There are no third options, or manifest fantasies whereby low inflation co-exists with low unemployment.

What I have described is what our current economic reality offers. If you really pine for less inflation then we risk deflation, and you can ask the Japanese about their decades in that pit!   E.g.

Japan’s Three Lost Decades – Escaping Deflation | Nomura Connects

The key point to bear in mind is that irrespective of how bad you believe inflation is under Biden, electing Trump will make it ten times much worse.  Why?  Dumpster Donnie has already come out and said he will be imposing a 10% tariff on all outside goods, and their nations.  Contrary to Dotard's "economics" or imaginary fringe beliefs, tariffs aren't paid by foreign governments.  So he won't be hurting them.  He will be dunning his own low wage earning MAGA crowd and any would-be new voters dumb enough to be suckered by his BS.

Remember that all the foreign nations Dotard wants to whack with his tariffs are paid initially by U.S. companies that import whatever goods - whether baby formula, Apple iPhones, Nike running shoes, guitars or HDTVs - and then these higher prices are passed on to American consumers. Result? Higher costs, more inflation. 

Thus, Trump's universal tariffs would push costs up on just about everything and increase inflation dramatically.  Worse, the increased costs will hit the low-income, rural demographic the hardest, most of whom are diehard Trump supporters.   This is because they spend a larger share of their income on goods.  Thus, if baby formula goes up 25% low income people - laborers, family farmers, etc. will feel it much more than Wall Street mavens.  

Americans then need to wake up about the actual workings of their economic system and grasp that another Trump reign will not confer any economic advantages.  Indeed, they will likely be worse off than they are now, given the fallout from Trump's intended tariffs. Rather than make a reactionary voting pick this November it is better to make an intelligent one.

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