Economic Healing Through Honesty: What is Inflation

Politicians obfuscate about what inflation is, once again kicking the can down the road with more empty populist policies devoid of honest and real solutions.

August 15, 2022

By: Bobby Casey, Managing Director GWP

inflation One of the things that keeps hope alive is the knowledge that goals are attainable. It’s a psychological vulnerability in humanity. It’s also necessary to keep us going. Without it, people can find themselves having a massive existential crisis.

I think part of weathering hard times, be it economic, personal, or emotional, is seeking a balance. We can’t go through life jaded about the last bad thing, and we can’t go through life thinking every pile of crap is an unrealized gem.

In an ideal situation, politics serves to tie macro realities to the constituency. That’s not what is happening. It gives us hope where there is none, to mask the dangers of what is real. People aren’t given a chance to solve the real problems with real solutions because there is still the greater agenda to keep people as dependent as possible on the government.

We’re both told that presidents don’t control gas prices, while the POTUS takes credit for lowering gas prices. We’re told that by overestimating the inflation rate for July and coming up short of that, there was in fact no inflation. Our attention is shifted toward large corporations and Wall Street, while ignoring small businesses and rates of production.

The recent passing of the “Inflation Reduction Bill” is even more ominous. The rule of thumb is: whatever the bill’s name is, the opposite effect should be expected from its contents and enactment.

For example, the “Affordable Care Act”. The cost of healthcare and health insurance went through the roof after that bill was passed.

Or the “Farm Bill”. It helps about 10% of the overall farms in the US, and mostly the larger commercial farms.

So here comes the “Inflation Reduction Act”, and I’m fairly certain it will do nothing to offset inflation.

First off, let’s clearly define what inflation is and what it is not.

Inflation is an increase in the supply of money. That’s it. If production keeps pace or exceeds it, then the economy is healthy. If it doesn’t, we have problems.

Inflation itself is not the increase in prices. That’s a byproduct of inflation. Very few people still stick to the original definition of inflation, and that is largely politically driven.

If you accept inflation as increase in money supply, then there is only one entity to blame: The Federal Reserve (or respective central bank). If you accept that inflation is price hikes, then it’s easier to deflect the blame away from the central banks and toward “evil corporations and industries”.

How exactly does the US government plan to offset inflation? A reasonable person would think that when staring down the barrel of a recession, the best thing to be done is to cut the spending, so as to cut the borrowing, so as to cut the printing of money.

Not the case here. This bill seeks to offset inflation, by hiking taxes for more revenue to slow printing.

If wages and production cannot keep up with the rate of inflation, taxation, and regulation, there’s no way this bill works. None of these three things are offsetting the other.

Reason lays out some of the elements of the bill:

  • Dedicates about $300 billion of new revenue to reduce the long-term budget deficit, but is more honestly a plan to pay for about an eighth of the borrowing Congress approved since Biden took office.

  • Giving the IRS a massive budget boost to hire 87,000 new agents means more tax audits aimed at the middle class.

  • The Joint Tax Committee (JTC), a nonpartisan number-crunching agency within Congress, found households earning between $50,000 and $75,000 are more likely to see a tax increase than a tax decrease next year.

  • Higher-earning households are more likely to see tax increases, but households earning more than $1 million next year are actually far more likely than lower-earning households to get a tax break.

  • It “would also reduce average after-tax incomes for taxpayers across every income quintile over the long run,” the Tax Foundation reported on Wednesday. Those tax increases will reduce long-term economic output by about 0.2 percent and could eliminate 29,000 jobs.

  • The expanded subsidies for purchasing of health insurance via the Affordable Care Act’s marketplaces is likely to push inflation higher.

  • The bill’s aim to reduce carbon emissions to 40 percent below 2005 levels by 2031 may be plausible, but just barely.

Meanwhile, businesses are experiencing a sort of economic tug of war:

  • Hike in prices –> Reduced demand

  • Tightened labor market –> Higher wages

  • Lower more costly production –> Lower profit margins

This will continue because the recent legislation being passed addresses none of these things. It pushes populist ideals like taxing the rich and green energy.

Here’s what is happening, but being totally ignored by the political class:

The prerequisite for more consumption is not more money. It’s more production. The faster and more goods and services the economy produces, the faster and more each individual can consume. Production determines consumption.

In short, labor productivity decreased 4.6 percent in the second quarter of 2022. Output decreased 2.1 percent while hours worked increased 2.6 percent. This marked the sharpest decline in labor productivity since 1948 – roughly 74 years ago.

What this means is that people are working more and producing less. They are, in essence, working in reverse. Hence, there will be less goods and services to consume, which will further drive consumer price inflation.

The push for productive activity is provided by the mental and physical ability of workers to produce new goods and services with the least expenditure of energy and material possible. That is to say, to produce more at a lower cost. The ability to cheapen production leads to economic growth.

If people keep ignoring the true definition of inflation, they will continue to ignore the true cause of recessions. Ignoring what the real nature of the problem is might be comfortable in the short term, but leads to no real long term solutions.

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