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[Editor's Note: “For every complex
problem there is an answer that is clear, simple, and wrong.” (H. L. Mencken) I am
tired of people looking for a simple answer of who to blame for inflation.
The attached article by Barry Ritholtz outlines 15 contributors to our
current situation. While I don’t completely agree with the ranking and
would add a few additional contributors, it’s a pretty good list. -dpm] Who Is to Blame for Inflation, 1-15
Who is to blame for
the rampant inflation the United States (and the entire world) have been
experiencing over the past 12 to 24 months? Which individuals and
institutions can we hold accountable for the highest consumer price
increases in 40 years?
A variety of people
have been asking this question lately. The last time we saw an issue
generating this much interest and confusion was when the country tried to
understand who was to blame for the Great Financial Crisis (GFC). The
approach I used in assigning blame for the 2008-09 financial crisis was
based on the premise that the world is complex and ascertaining actual
causation is a challenge.1 We can use the same approach to the causes of
inflation.
People seem to like
simple, binary answers to complex questions. Econ-Twitter will tell you “It’s the Fed’s
fault; Blame Biden, no, it’s Trump’s fault.” But the world is a much more
complicated place, not easily broken into clear black and white answers —
at least, if you value accuracy. Over-simplified faultfinding is more
suitable for ideological slogans that fit on bumper stickers than actual
economic analysis.
Prices change from
moment to moment, but the factors that drive those changes can be years or
even decades in the making. We tend to overlook this, caught up as we are
in the here & now. The reality is many things have contributed to the
current inflationary pressures.
Here are 15 or so
drivers of rising prices, roughly in order.
Most of the blame goes to those at the top of the list, the bottom of the
list are very modest but real contributors:
Inflation Blame
1. Covid-19
2. Congress
3. President Biden
CARES Act 3
4. President Trump
CARES Acts 1+2
5. Consumers
(overspent without regard to cost)
6. Consumers (shift
to Goods)
7. Russian Invasion
of Ukraine
8. Just in Time
Delivery (supply chains)
9. Fed/Monetary
Policy
10.
Wages/Unemployment Insurance
11. Home Shortages
12.
Semiconductors/Automobiles
13. Corporate Profit
Seeking
14. Tax Cuts (2017)
/ Infrastructure (2022)
15. Crypto
Let’s delve into
each of these:
Covid-19: The global pandemic – and the response by
governments to the deadly and unknown pathogen – created a unique moment in
history. A majority of the workforce was unable to go to their offices or
workplaces. Essential workers scrambled to service 100s of millions of
people stuck at home. This began a cascade of reactions that dramatically
changed the structure of the economy, with lasting ramifications.
Without the
pandemic, there is no massive fiscal stimulus, no WFH, and no supply chain
disruption.
Fiscal Stimulus:
CARES Act 1, 2, & 3 represent the single largest government response to a crisis —
ever. Unprecedented in size and scope, the first CARES Act was a $2.2
trillion stimulus bill signed into law by President Trump on March 27,
2020. Next up, CARES Act II was a $900 billion extension of the original
stimulus and was signed into law by President Trump on December 27, 2021.
CARES Act 3 (aka The American Rescue Plan Act of 2021) was a $1.9 trillion
economic stimulus bill signed into law by President Joe Biden on March. 11,
2021.3 It poured even more fuel on an already smoldering fire.
The first CARES Act
legislation was the largest economic stimulus package in U.S. history at
more than 10% of U.S. gross domestic product; together with parts II
($900B) and III ($1.9T), and the fiscal stimulus was ~$5 trillion. This is
almost seven times the amount of the American Recovery and Reinvestment Act
of 2009, the $831 billion signed into law by President Obama in February
2009 in response to the Great Financial Crisis.
All of this fiscal
spending was approved by Congress – so while you can argue over the
apportionment between Biden & Trump, it is Congress that controls
the spending of government, and so deserves much of the blame.
Goods versus
Services: The work from home
(WFH) phenomena led to a shift in our consumptive habits: Fewer Services,
more Goods. Out: Travel, restaurants, entertainment, vacations, elective
(non-emergency) medical care. In: Everything that makes nesting,
homeschooling, and WFH more tolerable, from computers and desk chairs. Home
extensions and renovation led to a massive increase in demand for lumber,
landscaping materials, raw building materials, appliances, and furniture.
The shortage of
starter yeast revealed just how radically consumption had changed.
The pandemic
lockdown moved the consumer towards goods and away from services.
Pre-pandemic, consumers spent 38.7% on Goods, but a whopping 61.3% on
Services. In 2020, the demand for Goods rose 20% globally, but production
increases were barely 5%. Prices rose accordingly.
As an economy, we
suddenly began buying food via Instacart/Amazon/Target/Walmart instead of
going out to eat; we bought Peletons vs. a gym membership; we purchased
large screen TVs instead of going to the movies; we bought cars and
Winnebagos instead of going on vacation. Perhaps it’s a good sign that used
Pelotons can be found on eBay for a fraction of what they cost new.
Russian Invasion of
Ukraine: Foods and energy
prices were already elevated pre-invasion, but Putin supercharged their
prices. Until this war ends, energy prices will likely remain elevated as
will grain and other foodstuffs.
Consumers: People driving during rush hour complain
about being “stuck in traffic.” They are not stuck in traffic, they are
traffic. A similar paradigm applies to inflation: Consumers who continue to
buy Homes and Cars despite substantial price increases are not suffering
from inflation, they are (in part) a driver of inflation.
Think about the
purchases of homes or used cars, despite price increases that range from
substantial to outright ridiculous. When you buy a good, despite big
increases, demand can be described as “inelastic.” So you (over)pay an
inflated price in order to get the necessitated item. It may feel like
you’re suffering from inflation (just as in traffic) but recognize you are
also a source of inflation.
Just in Time
Delivery/ Inventory shortfall: In the relentless effort to become more efficient and
profitable, warehousing inventory became anathema to corporate managers.
This dramatically reduced inventory costs but required logistics and supply
chains to be incredibly robust. As it turns out, they were not. [Mead comment: Too many purchasing mand
supply chain managers violated Purchasing Rule 101 - Having multiple
sources of supply. There were no alternate sources identifies and ready to
scale up when the primary sources dried up.]
Semiconductors
(Autos): Reopening a
temporarily closed chip fab is a complicated expensive process. In 2021,
the shortage of New and Used Cars was among the largest contributors to
price increases.
Housing: We underestimated demand for single-family
homes, and then underbuilt them for a decade. Suddenly lots of people
wanted one. The large price increases on admittedly smaller volumes are the
result. The Eviction Moratorium also plays into this; the unintended
consequences may be that landlords are raising apartment rents in order to
catch up on lost revenues from nonpaying renters from 2020-21.
For some context,
BLS reports that in 2021, on the days they worked, 38% of employed persons
did some or all of their work at home; 68% did some or all of their work at
their workplace. Compare that to the pre-COVID-19 pandemic era on 2019:
Workers were less likely to work at home (24%) and much more likely to work
at their workplace (82%).
Wages: For the past 4 decades, the bottom half of
the wage scale lagged dramatically. The minimum wage contributed to
Deflation. But nothing is forever, and the circumstances of that power
dynamic have turned. Workers,especially the bottom half of paid employees,
seem to have gained the upper hand. (We discussed this in April of 2021).
Unemployment
Insurance: When you give
Americans $1.4 trillion in Unemployment, they tend to not want to work for
$8 or $10 an hour. And, they form new businesses in record numbers.
Fed/Monetary Policy:
ZIRP QE did nothing for inflation for a decade-plus, so it’s hard to have
them at the top of the list. (I know this back of the list placement will
infuriate Fed haters, but I am aiming for accuracy). But once the fiscal
stimulus kicked in, the Fed was somewhat behind the curve. At the very
least, thru should have been normalizing rates back in 2021.
Tax Cuts /
Infrastructure: For the sake of
completeness, I am including the Tax Cuts and Jobs Act (TCJA) ($1.1
trillion, annually, from 2018 forward) and the 2022 Infrastructure bill
(minimum $1.1 trillion over 10 years). I do not believe these are big
contributors to the current bout of rising prices, but it’s just that much
more fiscal fuel for the fire.
Corporate Profit
Seeking: I am not in the
camp that seeks to place blame on rising prices in companies seeking to increase
their revenue and profits. However, as a consumer of goods, one cannot help
but notice substantial price increases in items that have very little to do
with input costs, supply chain snafus, or semiconductor production
shortfalls. While transportation costs affect all goods, some of the price
rises we’ve seen are simply people taking advantage of inflation to raise
their own prices.
You can’t have a
capitalist system where companies, shareholders and their management are
rewarded for profitability and not end up with some dubious
behavior/profiteering on the margins. But I doubt it adds up to very much,
best guess maybe 5-10% of the increases (if anyone has data showing more,
I’d be curious to see it).
Crypto: Why is crypto on this list? 4 Because
massive gains led to a series of big spends – from $100 million mansions as
Hedge funds and VCs cashed in; but do not ignore the starter homes, where
Redfin found “11.6% of people buying homes for the first time said that
selling investments in cryptocurrency had helped them save for a down
payment.”
Lamborghinis have
been sold out for 2 years, and (anecdotally) crypto profits are driving at
least some of that. Some of the larger dealerships are accepting crypto as
a form of payment.
The world is
complex, but the human mind seems to prefer simplicity, even at the expense
of accuracy. As much as we want to point a finger at a single person –
whether it’s for partisan reasons or simply as a way of expressing our
angst – this is simply not how economies in the real world actually work.
The truth is we have
many factors leading to higher prices – and some of them are showing signs
of peaking.
by Barry Ritholtz, June 28,2022
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