Stopping Inflation IV

In the face of the administration’s claim, there is little it can do about inflation; I’ve pointed out how changes in energy and regulatory policy will change the price trajectory. We also have a labor shortage adding to the upward cost pressures. Only now we’re matching the number of employed before Covid. Yet, we are at a 3.6 unemployment rate, which means upward pressure on wages.

Coupled with lower birth rates, we are facing labor force problems. Baby boomer retirements, already shrinking the labor force, gained momentum during the pandemic. Higher transfer payments, commuting, and childcare costs keep others from returning to work. The result is a labor participation rate of just over 62%, down from over 66% at the turn of the century.

Its possible inflation may force more people to return to the workforce, but this is far from certain. We have to look to solutions that worked in the past. The United States led the world in welcoming legal immigrants, but lately, not so much. The Trump administration made sizable cuts in new legal arrivals. So far, The Biden administration has continued the reductions rather than expanded immigration. 

The inability of both parties to confront our longstanding legal and illegal immigration problems provides little hope for relief from that direction. We forget that along with higher interest, lower taxes, and less regulation, Ronald Reagan signed the last major immigration reform. All these things combined to subdue our worst inflation until now. An increase in green cards would help, but nothing gets done. The present administration largely ignores the problem. 

If we can’t increase the labor force, we must make our workers more productive. Historically machines have multiplied labor output. However, our progress on that front leaves much desired—the U.S. lags on machination. This lack is true even though there is plenty of investment capital. We aren’t matching our competitors.

While other advanced nations with slow-growing populations have replaced workers with robots, The U.S. isn’t among the leaders, lagging in seventh place:

What explains our reluctance to mechanize? Our ports are far less efficient than other major world ports. This failure has added to supply chain disruption. The slow pace, in turn, added to our current inflation.

Labor unions and lack of political will are popular excuses for poor performance. Europe has unions and politicians, but Rotterdam is far more mechanized and, therefore, more efficient. 

Belatedly, a surge of U.S. orders for robots is occurring. Still, Government, management, and labor have to zero in on the impediments to the U.S. being at the top of mechanization worldwide.

It might be well to remember high production costs here relative to an opening up of China caused the migration of so much of our industry to that country. If we want to cut our dependency on bad actors, we have to find ways to produce profitably here. A robot costs the same the world over. Adding more and a much shorter supply line will make us much more competitive, especially in our home markets. 

Sending production overseas lowered costs, resulting in little inflationary pressure. Unfortunately, this was at a high price to some here. Now China is seeing higher labor costs due to changing demographics. One child turns out isn’t enough. With the right policies, the time is ripe to do more here. Better serving national security would be a plus.

None of this should in any way be Government subsidized. Throwing money at a problem only adds to the deficit and inflationary pressures—just the opposite of what we need to do.

When our leaders tell us there is little we can do about inflation, when I can give chapters and verses of both short and longer-term solutions indicates either a lack of knowledge or will; maybe both. 

If you don’t realize demonizing and restricting something results in less, you shouldn’t be in charge. Yet, the same unaware people are still in control. If you don’t change something, nothing will change. You continue down the wrong path.

While a changed energy policy could see results relatively soon, ordering and installing robots in highly mechanized places may take a while. More green cards could help alleviate some of our labor crunches in the coming months. Changing our immigration policy takes longer. 

If people are convinced you are serious about confronting inflation, they lose their inflationary expectations. This change in attitude lower prices by reducing hoarding and preemptory buying. A comprehensive policy combining the solutions I’ve outlined in this series is the way to lower inflation now and into the future. 

Why can’t the administration and its advisors entertain this direction change?’ I’m not alone in having these ideas. Most of them were things we did to end the “Great Inflation” of the seventies and early eighties. If they worked then, they would work now. President Reagan and Fed chairman Volcker had the courage of their convictions. We could use some of that now.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s