It seems as if inflation has been relatively tame these last few years. However, with increased big government spending come mounting deficits and unsustainable debt levels. One way to deal with reckless spending, large deficits, and high debt is to monetize those problems with inflation. New big government programs with massive new regulations, mandates, costs, and taxes can also lead to considerable fear, uncertainty, and doubt. The result – a slowdown in economic activity. All of these things can result in inflation. Is inflation starting to hit America? How bad might it get?
Some signs are pointing to the very real possibility of inflation. The Wall Street Journal this week reports that consumers are paying 4% more for beef in July than last December, plus the futures market for cattle has been up about 11% since July! What’s the reason? Well, certainly, foreign demand for American beef is one factor. But, another important factor is simply that ranchers are afraid to invest in larger herds because of uncertainty over the economy.
Consider orange juice as another example. Remember the days when you could buy those half-gallon, 64 ounce cartons of OJ. Well, one well known company has cut the size of the carton down to 59 ounces while keeping the price the same. That’s not a direct price increase. It’s about an 8% quantity decrease. For consumers, it still amounts to inflation. They will pay more to get 64 ounces of OJ for their families. One wonders if all those researchers who study inflation take into account cuts in quantity or quality as a source of inflation. Or, do they just assume the products have the same quantity with the same price and therefore, inflation is zero?
Another example. Many consumers are facing increased credit card fees. Why? Because of new big government regulations on banks, banks have been forced to cover expenses with increased fees. That’s inflation for consumers who have to pay the higher fees.
With continued big government plans to spend, tax, borrow, and regulate our economy more and more, inflation seems likely in 2011. How bad might it get? The answer is probably tied to how long the current fiscal and monetary policies continue.
By the way, coming in September, my new book Choosing the Good Life: Two Competing Economic Visions for readers who want to understand economics from the point of view of a consumer. It will be available in print and Kindle editions. Consider getting yourself a copy.
Citizen Economics Blog – News, Analysis, Insight, Practical Knowledge by Gerard Francis Lameiro, Ph.D.
Why Is Unemployment So High This Labor Day?
Unemployment is in the news again. In a detailed op-ed piece in The Wall Street Journal this week, Robert Barro shows why he believes unemployment would be significantly lower if unemployment benefits had not been extended from the standard 26 weeks to 99 weeks. His calculations indicate that unemployment might be under 7% right now if only the unemployment benefits had not been extended to 99 weeks. Is he right? Why is unemployment so high this labor day? Let’s talk about it now.
In economics, we know that when we tax something, we get less of it. We also know that when we subsidize something, we get more of it. It’s just common sense. Taxing something like smoking cigarettes, discourages smoking cigarettes because the price goes up for smokers. Similarly, if we subsidize something, we encourage it because we create an economic incentive for that activity.
Incidentally, that’s why we shouldn’t tax income, savings, and investment. Taxing income, savings, and investment is essentially taxing economic growth. We want more economic growth and prosperity, not less.
So, Mr. Barro is right that subsidizing unemployment benefits beyond some reasonable level does not make economic sense. Of course, as a society, we need to be compassionate. Some individuals and families need help desperately. But, at some point, we encourage people to stay unemployed. The fact that during one of the worst times in this recession, March 2009, there were 3.9 million people hired (while 4.7 million people left their jobs), meant the economy was adding workers. Would more people have been hired if their unemployment benefits had been close to running out? The answer is – probably yes.
Indeed, the fact that the share of long-term unemployment (people unemployed for more than 26 weeks) hit a whopping 46.2% in June of this year, eclipsing any other recession since World War II, is a strong indication that we are encouraging people not to seek employment.
While the duration for unemployment benefits might be partially the cause of high unemployment this Labor Day, there are other root causes such as high taxes that continue to grow higher.
Choosing the Good Life Blog by Gerard Francis Lameiro, Ph.D.