INSIGHTS: IF YOUR JUST DISCOVERING INFLATION, YOU LIKELY DON’T KNOW WHAT IT IS
GUEST COLUMNIST: John Tamny, Political Economy Editor at Forbes, Editor at RealClearMarkets and author of five books. Reprinted with permission.
“If one-half of the commodities in the market rise in exchange value, the very terms imply a fall of the other half; and reciprocally, the fall implies a rise.” – John Stuart Mill, Principles of Political Economy, p. 419
Inflation is all the rage at the moment. That it’s the economic story du jour is a likely sign that most commenters don’t really know what inflation is.
Take Neil Irwin, an economics writer for the New York Times. As he put it in a recent column, “The central fact of the American economy in mid-2021 is that demand for all sorts of goods and services has surged. But supplies are coming back slowly, with the economy acting like a creaky machine that was turned off for a year and has some rusty parts. The result, as underlined in new government data this week, is shortages and price inflation across many parts of the economy.”
The problem is that what Irwin writes about is not inflation. Reducing his analysis to the absurd, imagine if tomorrow it were announced that consumption of three Honeycrisp apples per day would protect consumers from the most deadly forms of cancer in short order.
If so, it’s no mere speculation that demand for Honeycrisps would surge on the way to soaring prices for the apple. Inflation? Nothing of the sort. If suddenly we’re paying exponentially more for apples, logic dictates that we would have reduced capacity to demand other goods and services; thus softening pricing pressures in other parts of the economy.
On the other hand, Uber and all manner of other transportation concepts are feverishly investing in driverless technology. If they succeed, transportation costs will plummet. The $50 ride to the airport will soon enough be $10, or less. Deflation? Once again, nothing of the sort. Reduced transportation costs will free up demand for other goods and services previously out of reach.
Still, investment and its impact on prices rates mention. Indeed, contrary to the Irwin-esque definition of inflation as being a consequence of too much demand born of too much growth, the reality is quite different. In truth, economic growth (think productivity) is the surest sign of falling prices. Think about it. Investors put wealth to work in order to create more goods and services at lower costs.
Investment in new ideas is what turned a rather primitive $3,995 brick-sized mobile phone with limited calling-range in 1983 into a supercomputer communications device that fits into our pockets nearly 40 years later. Crucial about these modern “phones” on which we can call anywhere, conduct our work, and summon the world’s plenty with a tap is that we can own them for next to nothing when we pair their purchase with a contract with a wireless carrier.
Growth is what happens when we increase productivity, productivity increases result from investment, and the end result is cheaper everything. What used to be costly think (computers, phones, and long distance) no longer is. Of course, this once again is not evidence of deflation precisely because lower prices in one part of the price system introduce new demands for other goods and services.
Which leads us to government spending. Members of the left believe that the surge in the past year could be inflationary because they truly believe government consumption powers growth. See above. And then just try to think logically for a minute. Or two. Governments can only spend what they’ve taken from us first.
There’s no increase in consumption from government spending, and there’s certainly no growth from it. Governments can only spend insofar as growth already occurred. More realistically, the government spending that has lefties fearful of too much prosperity is a certain economic depressant precisely because it shrinks the amount of investment that is the source of all economic progress.
Members of the right believe that deficits cause inflation. No, not necessarily. England had debt that was 260 percent of GDP in 1815, but since the country tied its pound to gold, there was no inflation to speak of. U.S. debt soared during World War II, but the dollar’s definition as 1/35th of an ounce of gold kept the greenback sound. It’s a reminder that inflation is a policy choice of currency devaluation, not a consequence of some other policy. To focus on rising prices when divining inflation is like blaming rain on wet sidewalks. It reverses causation.
With inflation, a shrinkage of the unit of money raises the amount of money required to exchange for goods and services. Which is the why behind gold as the historical standard for money. Per John Stuart Mill, gold has long been the commodity “least influenced by any of the causes which produce fluctuations of value.” In other words, gold’s value doesn’t move as much as the value of the currencies in which it’s historically been priced move. Gold is a great definer of money, and has been used for thousands of years as a definer, precisely because gold is yet again the commodity “least influenced by any of the causes which produce fluctuations of value.”
Which brings us to the 21st century. When it began a dollar bought roughly 1/270th of an ounce of gold. By 2010 it purchased roughly 1/1250th. Doesn’t anyone remember soaring commodity prices across the board in the 2000s that resembled what happened in the 1970s when gold last soared? Doesn’t anyone remember the rush into hard assets like housing that once again mirrored the 1970s?
That’s what’s so interesting about a rather sudden dour countenance on the part of conservatives about inflation. They point to the very commodity-price surges that they ignored during the 2000s. Either they don’t know what inflation is, or some are quite simply dishonest. As for members of the left, we know they don’t know what inflation is given their belief that economic growth is the driver of it.
Yes, the excitement about inflation now is the surest sign neither left nor right understands what it is. Inflation is a devaluation of the unit. Presently a dollar that purchased 1/270th of a gold ounce buys 1/1800th of an ounce. Inflation? You decide. The individuals you’re watching and reading don’t know.
ON THE ECONOMY: THE ROCK ISLAND LINE
John Dunham, Managing Partner, John Dunham & Associates
Oh, that Rock Island Line is a mighty good road. Oh, that Rock Island Line is the road to ride. Oh, that Rock Island Line is a mighty good road. If you want to ride, you got to ride it like you find it. Get your ticket at the station on the Rock Island Line. The song Rock Island Line, is a folk tune, the earliest known version of which was written by Clarence Wilson, a member of the Rock Island Colored Booster Quartet. It has been recorded by dozens of artists since then. The earliest of these recordings was made by Alan Lomax at the Tucker, Arkansas state prison farm in 1934, and later recorded commercially by Leadbelly in the 1940s.
The Chicago, Rock Island and Pacific Railroad began life as the Rock Island and La Salle Railroad Company in 1852, with its first tracks between Chicago and Joliet. Eventually, the line stretched from Chicago to Galveston in the south and Denver in the west. It went bankrupt in 1980, and now most of its routes are operated by Union Pacific. The consolidation of the American railroad system from literally hundreds of private companies to just a few dozen today demonstrates the difficulty of developing and operating infrastructure systems.
From back in the days of the ancient Egyptians and Sumerians, when kings and pharaohs controlled irrigation works, to the Romans who built over 50,000 miles of roads, to the canal systems of the 1700s and the railroads of the 1800s, and even to the cellular networks and internet backbone of today, it has taken a huge amount of capital and manpower to develop any network system. This can be a road network, an electrical network, or a sewer network. The high capital costs, and advantages to scale is why infrastructure-based industries tend toward monopoly. It is simply too expensive to maintain duplicate sewer pipes, or electric lines, or rail tracks. Over time, firms end up consolidating to the point where there is only one service provider, and often that provider becomes the government. In instances when private companies maintain the natural monopolies they are tightly regulated, and both their prices and services are often controlled by Public Utilities Commissions.
This is exactly what happened to the passenger rail network in the United States, and from the advent of the motorcar, road networks were almost all maintained by government (or at least government sanctioned) monopolies.
With such a large amount of the nation’s infrastructure under the control of government entities, it is no wonder that there has not been significant investment in new technologies and systems, and why maintenance is often deferred. States and localities have an easier time capitalizing projects than they do spending for maintenance from their operating budgets, which is one reason that roads, bridges and government buildings are often left to deteriorate to the point where they need to be reconstructed.
Following the 2008 recession, government budgets have become more strapped, and Federal infrastructure spending has been growing only slowly. On top of this, as would be expected when natural monopolies are the norm, companies providing newer forms of infrastructure (like cellular and internet services, or web search technology), are spending more resources on merger and acquisition activities than they are on developing new systems.
Both of these factors have led to the current crisis that is occurring across nearly all parts of the nation’s overall infrastructure. As the government-imposed shutdowns in response to COVID-19 have dramatically and rapidly changed the way business is conducted, the infrastructure systems that had been optimized for the old way of doing things simply broke down. Telephone and internet systems designed for a world where people worked from centralized locations had to quickly adapt to one where workers were disseminated – often to rural areas. Transportation systems collapsed under the weight of both heightened drop shipment deliveries and massive changes in purchasing patterns from services to goods. In addition to this, labor shortages caused by regulations, changes in ocean freight patterns, and people dropping out of the workforce, have helped to intensify delivery delays and shortages.
Add to this a system that was already deteriorated by years and years of deferred maintenance and underinvestment, and it is no wonder that the country is experiencing shortages and price increases.
According to a recent article on Bloomberg, firms across the world are buying more material than they need to survive the breakneck speed at which demand for goods is recovering and assuage that primal fear of running out. The frenzy is pushing supply chains to the brink of seizing up. Shortages, transportation bottlenecks and price spikes are nearing the highest levels in recent memory, raising concern that a supercharged global economy will stoke inflation.
The Council of Supply Chain Management Professionals’ Logistics Managers Index (LMI) for April was 74.5, the second-highest reading in its history, and up 2.2 points from April, and the 9th straight month of tightening capacity. According to the April report, both upstream and downstream firms reported significant continued growth in utilization of logistics services. Indexes for inventory costs, warehousing prices and transportation costs all grew rapidly in April and the rate of growth is increasing over time.
When asked about the next 12 months, respondents predicted that while warehousing capacity would grow slightly, transportation capacity would continue to contract. They predicted continued high rates of growth for costs in inventory, warehousing, and transportation, with all three metrics registering in the mid-80’s (out of 100).
Not only is the infrastructure in the US limited, so too is the worldwide system for moving cargo between countries. High demand for goods and a shortage of shipping containers have steamship lines running at capacity, and shortages of dockworkers on the west coast have led to port delays that are rarely seen in the US. This has pushed up freight rates and led to even more delays for imported products – particularly products from Asia. The Baltic Dry Index has hit a ten-year high, meaning that shipping bulk cargos is getting more expensive. The Cass Freight index which tracks shipping expenditures is at an all time high, and well above where it was pre-COVID.
And this is before the grain harvest comes in, something that demands a huge share of the nation’s rail cars and barges. The ability to expand the trucking network has been hampered by a driver shortage, and once the maintenance portion of the capital expenditures is removed, combined the seven Class 1 rail operating companies invested just $5,904.5 million in new equipment and facilities in 2018, $6,350.2 million in 2019 and $5,319.4 million in 2020.
Finally, the recent hijacking of the Colonial Pipeline, which brought 1970s style gas lines to the eastern part of the country, and further elevated diesel costs, shows the limited availability of backup capacity for the movement of liquid cargos – particularly petroleum. This will be further hampered by the shutdown of the Keystone pipeline project, which will force even more oil to move by rail.
Simply put, that Rock Island Line is no longer a mighty good road. It does not even exist. The overall lack of investment in the nation’s (and even the world’s) transportation infrastructure is coming home to roost. I don’t think I could say it better than Jeff Cox at CNBC, inflation is coming to the US economy on an 18-wheel flatbed.