This article in Vox by Alex Yablon makes some good points on understanding inflation and its history,
“The messy true story of the last time we beat inflation“. I agree with Mr. Yablon’s statement: ” inflation moderated when globalization increased imports and labor competition, not because investors had “anchored expectations” about central bank policy”, and ” New logistics infrastructure, trade deals, and methods of inventory management allowed firms to get cheap commodities and components from the other side of the world astonishingly quickly.”
Inflation and the changes in our standard of living ( economic growth ) is all about the supply and demand of the goods we need to support our standard of living in the long term. It is a monetary phenomenon a lot of the time because monetary supply and demand changes much more rapidly than the availability of goods themselves. If you produce more goods with fewer people, you are being more
efficient, your economy grows and living standards rise regardless of monetary policy. Energy in general is paramount in producing more things, it takes enormous amounts of energy to produce aluminum and steel, and plastic comes from oil. Cheap oil allows us to distribute the lowest production cost goods to anywhere the demand is, and to travel and recreate more which allows us to consume more of those goods. Shocks to our oil supply occured in the late 1970’s, 2008, and now again today because of the war with Russia and our own war on domestic supply by the Biden administration. The supply chain from China has been disrupted by Covid, but also from their own economic debt problems and the fact that their labor and input costs are finally catching up a bit with us because of all the growth they have experienced over the last 2 decades as well as the tariffs we have imposed.
Where does that leave us going forward? High interest rates are supposed to reduce demand, but they also reduce supply by impacting goods producing companies that need more working capital, just less so than the demand side. This is the worst way to solve the supply and demand imbalance, but it is the only real lever the central bank has. Reducing the competition for housing could be better accomplished by increasing the down payment requirements to qualify for FHA loans. Our National government should reduce spending, and there is a lot of wasteful spending, but that becomes a political weapon against those who advocate for reductions.
We need to increase our own workforce and improve their productivity. We can do this by removing vaccine mandates and making sure our government benefits are not so generous that they encourage people to leave the workforce. We need to reduce the number of employees within government so that they will work in the private sector instead. The so-called “Inflation Reduction Act” did the exact opposite.
This can be done without impacting retirement benefits for Medicare and Social Security. For health care costs we need to get new students into Nursing and Doctor positions faster. We need to allow more flexibility and specialization in health care workers and infrastructure so they can be used more efficiently. We need to listen to our manufacturing companies on what it will take to bring some of those high productivity jobs back to the US from overseas so that our economy is less reliant on the service sector. This will take time, but we need to start now. We need to end the war on oil. Low oil prices and increasing our renewable energy stock are not mutually exclusive. Our use and need for fossil fuels will go down over time as we build more wind and solar, but there are technical, financial, resource and environmental issues with improving the electric grid and energy storage capability to make wind and solar more reliable, which I’m all for, but will take more time than people realize. Black outs and brown outs in the name of promoting renewable energy is not reasonable. We could use more nuclear power too because its a very reliable source of non-CO2 energy. Civilization today is dependent on having abundant cheap energy, we cannot afford to make mistakes with it.