Happy Halloween? The ghosts of inflation have arrived

by | Oct 26, 2021 | Biden Administration, Blog Articles, Covid-19, Energy, Inflation, Vaccines, Why America Matters Book

Photo by Sabina Music Rich on Unsplash 
“The inflation we’re experiencing is not transitory.  It’s here to stay, and its effects will be horrific.”

 

The inflation we’re experiencing is not transitory.  It’s here to stay, and its effects will be horrific.

Inflation will eviscerate the stored value that the middle class holds in cash, savings, retirement accounts, bonds, etc., while greatly reducing the purchasing power of income from wages and salaries. In a prolonged inflation, the middle class will, like the working class, be forced to use more and more of its income to fund consumption, primarily consisting of shelter, food, and energy. Because, at least for most, income from labor will not be able to rise as quickly as food, energy and other costs, the middle class will eventually begin a divestment process in which it disgorges stores of value.  Financial investments along with hard assets such as jewelry, metals, and coins, and even furniture and vehicles, would be monetized to maintain consumption of basic goods and to pay ever increasing taxes.

Not only is this process unjust, it is also dangerous. Even a cursory reading of history demonstrates that whenever there are economic dislocations of this magnitude, social and political unrest inevitably follows.  It’s time for our leadership (both government and corporate) to recognize the potential dangers here, and take actionable steps including investing in the real economy.  While there is no silver bullet, the priority should be on job-creation and providing initiatives for small and medium-sized businesses. Throwing more stimulus money at pork-barrel projects and handouts will not solve it, but rather will have severe unintended consequences over the long-run.

Some of the forces contributing to rising prices include global supply chain disruptions and labor shortages in the US domestic economy.  The Biden administration’s policy programs, which have included multiple cash payments to individuals impacted by pandemic related lockdowns, euphemistically referred to as “stimulus” or “pandemic relief,” are in fact creating incentives for individuals to avoid returning to the workforce. These handouts are intended to curry favor and votes from the recipients, but they undermine the American work ethic and encourage sloth and free-riding. Of course, once these programs are introduced, recipients expect them to continue.

Related to the labor shortage have been supply chain disruptions, manifesting in a shortage of truck drivers, airline crews, warehouse staff, retail and hospitality workers, and others furloughed in 2020 and now without adequate incentives to return to the labor force.  Residual pandemic policies which shuttered manufacturing plants and restricted access to border entry facilities have created massive backlogs at our ports.  Legitimate national security concerns regarding imports of telecoms, semiconductor and other technologies have nonetheless exacerbated the situation.  Vaccine mandates will make matters worse. Eventually, markets will respond, and other supply chains will be developed, but this takes time.  In the meantime, prices will rise to reflect the reality of a constrained global supply chain that was optimized for perfection, but which failed under the stress of international crisis.

High inflationary environments benefit the elite – capitalists and rentiers (those who make money from interest and dividends, rather than their labor) – at the cost of nearly everyone else.  It’s not just retirees on fixed incomes who lose, it’s the working and middle classes who suffer most from rising prices on everything from housing to food to energy, and who find that their wages simply cannot keep up.  Inflations trigger a clear response from corporations, which adapt quickly by moving prices to protect their profit margins – and returns to shareholders – at the expense of both their workers and their customers.  Wages don’t adequately adjust because these companies have strong incentives to keep labor costs down, and over the long run this will lead to labor unrest and even violence as workers become increasingly desperate.

Enforcement of vaccine mandates and similar restrictive measures are both short-sighted and dangerous.  They will inevitably result in both labor shortages and further supply chain disruptions, as the US economy is experiencing in 2021. When these restrictive mandates are combined with fiscal policies that create disincentives to work in favor of staying home and collecting checks from the government, the American economic model – historically characterized by high labor mobility and opportunity – is doomed to struggle.

On the other hand, the solution is as simple as it will be effective.  End the draconian vaccine mandates and end “pandemic relief” payments that produce perverse incentives.  Create proper incentives for people to return to the work force, and reduce artificial barriers to employment, and people will return to work.  It really is not any more complicated than that. Labor markets will function when they are allowed to.

 

“Happy Halloween?” is an extract derived from Michael Wilkerson’s upcoming book, Why America Matters: The case for a new exceptionalism. © 2021 Michael Wilkerson

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