Why Inflation May Last Much Longer
by David Reavill
It’s been 40 years since this country faced inflation like we’re experiencing today. It was back in the 1970s when Jimmy Carter was President, and the United States was dealing with many problems, all leading to higher inflation. As a country, we were paying off the enormous debt created by the Viet Nam war and the government debt created by the social program called the Great Society. Created by President Johnson, its stated aim was to eliminate poverty in the country. As you can see, that problem is still with us.
Contributing to the inflation problem, the Organization of Petroleum Exporting Countries first embargoed our oil supplies and finally settled on raising US export prices. The result, just like today, was much higher prices at the gas pump, and just like that, inflation was roaring ahead. Sound familiar?
Not willing to stand back and let the market take its course, the politicians in Washington set off to cure the inflation problem. But their cures seemed only to make matters worse.
Later on, as inflation began to wane, Richard Nixon instituted wage and price controls. Policies that have been demonstrated to create massive shortages but do little to control prices.
But I’m jumping ahead of our story. Let’s go back to Jimmy Carter. During the Carter presidency, we were all introduced to a new economic term: COLA, the Cost of Living Adjustment. COLA increases were the way that Washington used to manage the adverse effect of inflation on those people who received Government Benefits. The largest of these groups are the Social Security recipients. There are over 70 million Americans who receive some Social Security benefits. And throughout 2023, they will receive an 8.75 increase over this year’s rate.
In other words, nearly 20% of the population will now have more dollars to pay bills and buy goods and services. And when these additional dollars pursue the same amount of goods and services, economists call inflation.
The most puzzling aspect of this year’s COLA increase is how they arrived at that 8 3/4% increase. My understanding of the COLA adjustment is based on the average price change for the previous year. But last year, only one month saw a rise of 8 3/4% or more. The other 11 months all had inflation that was below that level. So the average inflation rate last year was well below 8 3/4%.
Yet another example of how the big spenders in Washington went over and beyond a reasonable level of budgeting. And while it may seem like a short-term generosity. It will add even more fuel to the inflationary fire in the long term.
The State Houses are also hopping on the increased payments bandwagon. In 2023, 27 States are slated to raise their minimum wage requirement. The least amount any employer can pay their workers. And six of the most progressive states, California, New York, Massachusetts, Connecticut, Oregon, and Washington, will likely double the current minimum Federal Wage Rate to a remarkable $15 per hour.
No matter the task, employers must compensate workers at a minimum of $15 per hour in those six states, and in another 21 states, the minimum wage is also mandated to rise by State Law.
Inflation creates a dire situation for many. In the 1970s, we found the political momentum for COLAs to be impossible to stop. However, COLAs and many other “solutions” just worsened matters.
When you boil it all down, printing money out of Washington does not help. Pumping money into our financial system only contributes to inflation. It is a lesson that we should have learned from the stimulus. It’s no accident that inflation followed the multi-trillion dollars Washington poured into the country. Those excess dollars caused inflation.
Now, Washington will pump more dollars into the system via COLA increases, and the result will be the same. Ditto for the State wage increases.
Governments do not create wealth and prosperity. At best, they can distribute wealth, but usually inefficiently and inequitably.
The way to cure the inflation problem is the same way it was done in the 80s, provide the private sector with the incentives needed to enhance productivity and increase economic activity.
Government, with all its plans and programs, is not the solution. More often than not, Government is the problem.
An interesting picture of the Russian Economy emerged overnight. There is no doubt that the War in Ukraine is a major effort by Russia and exerting a significant price on their Economy.
Top line, Russian GDP fell at a 4% annual rate last month, the 8th month when economic output dropped. No doubt, due to the tremendous war effort Russia is going through. Resources are being diverted from the civilian Economy to the war economy. In civilian economic growth, Russia ranks last among all the major economies.
However, Russia ranks ahead of 16 other G20 countries in terms of their Purchasing Managers. In this leading economic indicator, Russia is near the top. Another indication is that resources are used for the military and not for civilian consumption.
We will get the latest report on Initial Claims for Unemployment Insurance in just a few moments. These are people who have recently lost their jobs. You may recall that a year after the Covid Pandemic began, economists had hope that initial claims would decline to the 150K level. Unfortunately, we’ve never achieved that rate, indicating that the recovery has not been as strong as hoped. Only a tiny change is expected, once again predicted to be slightly over 200K.