If you haven’t seen or heard the idea of “herding cats” you’ve
missed an amusing notion about futility. So, I hope you can appreciate the incomprehensible
complexity of trying to manage a herd/group composed of cats, dogs, and
jackasses. Unfortunately, that is what our national leaders are expected to be
able to do while simultaneously being members of that selfsame herd. Now
imagine having to move this immiscible population and not being one of the cats
or dogs but being one of the jackasses.
As difficult as this fanciful
task would be, it would also be simplicity itself compared to managing the
problem of inflation in the US. Just as the above imaginary herd is composed of
different groups whose members would not all get along well with members of the
other groups; the US’s population is both more varied and more immiscible. Normally
we extol the diversity and differences of the American population as a source
of strength, vitality, and incongruently unity. Just consider our national
motto: “E pluribus unum”; that is “out of many, one.” Of course, we struggle
with rising to that credo across many facets of our society. Facets that often
display deep and problematic fissures threatening to disrupt, divide, and
destroy the social fabric of the nation.
Inflation is an economic force which operates through and
because of human actions. Of course, that does not mean that most of the
actions or the humans acting have any appreciation of or understand of how what
they are doing is altering the course of inflation. That’s part of the magic of
economics, it operates through the ‘invisible hand’ that Adam Smith explained
about the market. While Adam Smith saw inflation as something beneficial to
society, he may have underappreciated some aspects of how the processes of
inflation play out through people’s lives. Nevertheless, the connection between
how people act and how inflation progresses is inseparable.
Since inflation can be harmful to a society’s economic
wellbeing, nations’ leaders endeavor to keep it under control. Leaders can try
to control inflation via many methods. Most of which do not work especially
well nor result in less harm to an economy, and some methods will make things
worse. The US has established the Federal Reserve (aka, the Fed) to expressly
act to manage and hopefully avoid inflation levels which create risks to the
stability of the US’s economy. The primary tool available to the Fed is to
raise or lower the discount rate that banks are charged to borrow money form
the Fed. This rate flows through the financial systems and raise or lower the
costs for anyone to borrow money. If inflation is increasing and is determined
to be producing problems for the economy, then the Fed will raise their rate.
If the economy is at risk of stalling or contracting, then the Fed and lower
the rate and encourage spending. The Fed’s goal is to keep the economy in a
‘sweet’ spot that keeps the economy on track.
The Fed’s ability to control inflation is premised upon the
principle that when they raise or lower interest rates that the financial
system will respond in predictable, and thus manageable ways. This has proven
to be generally true for recent decades because the financial system and its
processes do respond to those changes. Therefore we should expect the Fed’s
reaction to the current US inflationary surge will be effective in driving it
back down. Except, that expectation comes with some caveats and requirements,
and is based upon some assumptions that need to be applicable.
The efficacy of the Fed’s decisions to raise interest rates
going forward until the increasing inflation rates are driven down will work,
eventually. That is one of the caveats. Raising interests rates doesn’t
immediately stop inflation. Even if the Fed raised rates very high or very
rapidly, there is no requirement that inflation stops at the moment, in a day
or two, a week or two, a month or two, or well in any definite time interval. To
make this more problematic, raising interest rates can produce other impacts
upon the economy that can be disruptive to the US’s and the world’s economy in
other ways, and can do more harm to the US and its citizens than the inflation
would do. This unpredictability and capability to have both positive or
negative impacts is another caveat.
There is also the assumption that the Fed’s interest rate methods
that apply to the Supply and Demand model are consistent with the conditions on
the ground. There is little about the current inflationary causes that are
producing the inflationary effects. If your model doesn’t reflect the variables
that are at play, then the model is fundamentally flawed and highly likely to
fail to produce the results that the model expects. This is the problem that
the Fed has with their efforts to control Inflation. It is also directly
related to the problem that the Administration has in controlling inflation.
They lack not just the controls that can enable them to manage inflation, but
their skills and understanding of what their best strategies should be are not
in their toolkit.
The US’s inflation is being caused by many factors, most of
which the government can’t do much to change under current conditions. A major
reason that the government lack such controls is that they are looking at a
direct and even predictable product of economic theory that doesn’t fit within
their established controls, procedures, and processes. Everything that they thought
they needed to be able to manage did not include institutional mechanisms for the
factors and variables that they now need to use and to depend upon. A key
dimension to this economic conundrum is the extreme dominance of the US being a
Consumer Economy on both the products and services front.
The problem with the Consumer Economy is the ‘consumer'. The
consumer is not one variable but a multifaceted composite of things. Consumers are
not homogeneous. They vary along income levels, wealth levels, and financial conditions.
The environments that they live in differ from state to state, region to
region, rural/suburban/urban communities, political affiliation & composition,
business & employment types, and costs that arise from where they live; and
of course, there are numerous other factors that are affected by inflation and
conversely affects inflation. This complexity of the ‘consumer’ is one reason
why the normal institutional-based tools don’t directly factor in these
attributes.
That doesn’t mean that the ‘consumer’ can’t be an effective
tool in managing and directing inflation, just that it requires more
sophisticated strategies and policies. Given inflation has a component of consumer
“fear” which can feed upon itself, one aspect of managing inflation requires
addressing the “fear”. This can only be accomplished by engaging with the
public beyond just what the current inflation data is, or explaining what other
variables are contributing to inflation are and why. It requires that the consumer
can be shown that there are actions and decisions that they can take to help
themselves and the country in reigning in inflation. If the public is passive
or feels helpless toward inflation then they are more likely to fall prey to
acting in ways that increase inflation.
Since Demand (by consumer) promotes inflation when Supply
does not match it, the economic equation tells us what can produce a
difference. For some items which are in demand, consumers have the option to choose
a substitute, to defer a purchase, to forego the purchase entirely. If an item
is increasing in cost, then if you don’t buy it there will be an economic
response. If someone else buys it, then they are spending more of their money
for less value, and this increase the funds that you have for a later time (low
cost) or a different choice (better value). Depending upon the nature of the Supply-side
problem that made the item scarce, the reduced demand eventually brings the price
down because of other economic principles.
Not all Demand items can be avoided, at least not easily. If
you need fuel for heating, cooking, transportation, production, or other essential
purpose then you can’t just choose to not buy fuel. But does that preclude any other
options? Are any of the following options available to some consumers?
- · Reduce heating level even one degree creates a cost reduction.
- · Shorter showers reduce costs.
- · Large washing and/or dryer loads (frequency) will reduce costs.
- · Activities that use fuel and which can be reduced or whose efficiencies can be improved reduce costs and lowers demand which reduces price.
- · Fuel for transportation can be reduced by some consumers through options like car-pooling or more organized outings that combine two or more trips into one trip that uses less fuel.
Similarly, increasing food costs do not submit easily to a decision
to not buy food. However, food is a very nebulous area of supply. We don’t all
eat the same foods any more than are the foods that we do choose to eat the
only choices available to us. Consumers who see the costs of their food items
rising can be competing with each other and contributing to some part of the cost
increase. Now, those costs can be rising from other factors as well; but does
that mean that there are no other food items which would be as nutritional and
less costly? Once, again each purchase decision is trading a quantity of your money
for a value of the goods you purchase. If you pay a lower cost for another item
then you gain additional funds for your other demands. It is the very ‘invisible
hand’ of economics.
It is along these and other lines of action that consumers
can engage and act toward inflation and help themselves. As much of a problem
as inflation is, it can be transformed from a ‘fear’ into an advantage or even
an opportunity. Remember, your economic situation is relative to that of the
other consumers in the population. If inflation in a Consumer Economy is dependent
on the consumer then the consumer is not powerless unless they choose to be, don’t
understand the connection, or are afraid.
The enigma regarding our COVID Inflation is that it is
mostly a willful unknown. The complexity of the puzzle might succumb to something
as simple as choosing not to be afraid; and our shortcut out is to choose to
see the answer in our choices.
