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.

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Stopping Inflation III

In the previous two posts, I pointed out how we have restricted instead of expanded the supply of crucial commodities leading to higher prices. Higher prices are just another way to say inflation. Another way to raise prices is to add to costs. According to Forbes, the United States is no longer in the top 15 countries to do business. While U.S. News & World Report rates us the 6th best nation overall, it drops us down to #45  in their “open for business” category. Why isn’t the U.S.at the top of the business-friendly? What does it mean for prices now and into the future?

I discussed Ezra Klein’s lament that the Government couldn’t do things reasonably a few posts ago. Government policy determines whether a place is an excellent place to get things done. Comparing a Government-sponsored high-speed rail in California and a private venture in Florida, the latter exists while the other is a rumor. Already owning the right of way, the private railroad didn’t have to deal with governments. Unfortunately, most businesses don’t have that luxury. Hence our poor ratings.

Two things vex people in dealing with governments: who are the responsible person I can deal with, and how much time will it take to get approvals? Faced with these hurdles, it’s no wonder many businesses decide to set up shop elsewhere. Being bounced from one agency to another while being hit with lawsuits from environmentalists, nimbies, native Americans, and preservationists have been the fate of far too many ventures.

For those unable to go elsewhere, costs can be open-ended and only recovered at higher prices—a housing project scheduled for one-year development that takes three results in expensive houses. How we can turn this around while still respecting the concerns of others is the challenge. 

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Yes, Pres. Biden, You Can Stop Inflation

The Biden administration claims it can do little about inflation and leaves it up to the Federal Reserve (Fed) to tame prices. The Fed can bring inflation to heel if it will raise interest above the expected inflation rate. Anything less adds to costs while still encouraging borrowing. For instance, you’re buying a house with a 5% mortgage. It sounds high by recent standards, but if inflation is over 8%, the actual rate is -3 plus the interest tax deduction. This interest rate won’t deter people from buying houses or other capital goods. It just adds to demand and costs. Aso, don’t forget rising interest rates add 100s of billions to what we pay on our national debt, adding to rather than solving the problem.

However, if you drive up the interest rate above today’s 8-9% inflation, the economy probably will fall out of bed as it did in the early 1980s. People forget at the same time Fed. Chair Paul Volker was driving interest rates to 18%; we laid the groundwork for a rapid recovery. 

The Carter Administration deregulated industries such as Airlines, Railroads, and Telecommunications. Pres. Reagan extended this trend by dumping gasoline price controls, among others. He also cut taxes where inflation had pushed people into ever higher brackets. These were all supply-side incentives and turned the early ’80s recession into the excellent expansion that continued through the ’90s. 

It may be too late to avoid a recession, but we can try. Biden needs to emulate Carter and Reagan by expanding goods and services rather than maintaining his current roadblocks. The quicker we increase supply, the less the Fed will need to raise interest rates. 

Energy is essential to everything we do; it’s the place to start. Once again, let me lay out the economics. I’ve said it before, the view our future production doesn’t affect world prices is bogus. Yet, the Washington Post economics writer Charlotte Rampell echoes others by saying our energy production doesn’t affect prices. 

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Deepening the Divide

Nothing illustrates our nation’s division better than the recent primetime January 6th hearing. The mainstream media uniformly promoted the show and then gave it lavish praise. The “never Trump” old Republican establishment joined in approval. How you view the presentation tells what side of the country’s divide you reside.

Like many Americans, I was horrified as people broke into the Capitol. The first thing that crossed my mind was where is the president, and why isn’t he addressing the situation? There is no question Trump’s failure to act immediately was abominable. We all saw his dereliction. The house looking at his actions or lack thereof impeached him.

Not satisfied by the impeachment’s failure, the house set up a select committee to look into the happenings of January 6th. With all the unanswered questions, this is reasonable. If the FBI knew the possibility of violence, why weren’t measures taken? Shouldn’t there have been a significant police presence with a vast crowd? What was everybody doing from the president on down? 

Most significant events involve a broader context. We knew who was responsible for Pearl Harbor, but did all our battleships need to be huddled in the harbor every weekend? What was the intelligence? We have historians and archaeologists to explore the bigger picture. 

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Ezra Klein, Elites, and Industrial Policy

Liberalism and building paired are already in the oxymoron territory, but I am intrigued. The New York Times’ town crier to its highly educated elite audience, Ezra Klein, recently wrote an article headlined, “America needs a Liberalism that Builds.” Klein would have us believe government industrial policies would be superior to markets, say, achieving the lofty goal of overcoming global warming. Adam Smith and all the human progress since “The Wealth of Nations,” be damned, mercantilism, now renamed “Industrial Strategy,” is the way to go. 

Even though markets accompanied by compatible regulation have produced rising living standards wherever tried, Klein is unimpressed. Building things in the U.S. may be difficult due to regulatory and legal roadblocks, but other nations build things such as kilometers of rail much cheaper. The implication is all we need to do is follow how the governments of Germany, Japan, and Spain build railroads. Adapt the methods of their bureaucracies of handling projects to our problems, costs tumble, and we achieve our ends.

I’ll never know why Klein chose railroads to illustrate his theme, but let’s look at it closely if that’s his argument. The grandest government-sponsored h rail project in the U.S. is the California High-Speed Rail (CHSR). Approved in 2008 to connect the important population centers of Los Angeles and San Francisco with a high-speed 520-mile line, the cost has already ballooned from $33 billion to $80 billion. CHSR now says it will complete the 171-mile single-track section between Madera and Bakersfield by 2030. 

The Florida East Coast Railway, a private freight line, started the Brightline high-speed passenger service in 2012 and, by 2018, completed the 70-mile service between Miami and Palm beach. The 170-mile link to Orlando will be in service next year. The entire project will cost about $1.75 billion, raised through private financing. Isn’t the contrast between CHSR and Brightline the better comparison? The private company is outdoing Klein’s government entities.

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