Inflation Worries Don't Add Up
I'm not a macro guy, but if we're worried about the cost of living it seems like there are much bigger fish to fry.
New estimates from the Bureau of Labor Statistics are confirming substantial inflation for the first time in over a decade and now all the investor-types and macroeconomic wonks are spun up in a tizzy. Whatās inflation, you ask? Inflation is when prices go up. Itās something youāve been experiencing your entire life; itās the reason why my Grandpa Phil used to complain about modern money being āfakeā and why my father gets to reminisce about buying a soda from the fountain for a nickel. Itās also not the right thing to worry about, which is the subject of this post.
Inflation, like rising national debt, is a popular macroeconomic boogeyman, usually referenced by people lobbying against government spending or other policies, like minimum wage increases, that favor the many over the few. Right now, conservatives are gearing up to make inflation one of the main economic arguments against Bidenās Build Back Better initiative, which would funnel sorely-needed trillions into infrastructure, childcare, and other pressing investment needs. Thereās more to be said about how little we understand inflation and how over-interpreted macroeconomic concepts have led to decades of disastrous policy decisions, but for today I just want to give a quick background on the subject and then dive right into convincing you to never think about inflation again, unless you are telling someone to shut up about inflation.
2-Paragraph Background on Inflation
In our modern world, inflation is something that happens naturally and constantly. As more currency enters the economy, each dollar buys a little less and people need to demand higher prices (whether for their labor or goods theyāre selling) to cover costs. This, in turn, increases costs for someone else, and on and on we go. Investors worry about inflation because it eats into the real value of their returns, and macro wonks worry about it because they donāt have anything better to do. Regular people note it as a fact of life and either choose cheaper substitutes, or hope for a cost-of-living adjustment at the end of the year.
Inflation is counted by tracking the cost of a mixed ābasketā of consumer goods over time. Add up so much food, housing, clothes, etc. and you have a rough estimate of the cost of living. Do that year after year in different geographic regions and you have an index showing how that cost of living has changed, or differs from place to place. Authorities creating the index (there are a few) must also survey consumers to decide how to āweightā different categoriesāwhat share of a householdās total expenditures go to food, clothing, health care, etc. Weights are important because they show how much a given price increase matters. For example, the price of sports equipment might quadruple, but at 0.23 percent of total expenditures thatās a much smaller drop in the overall bucket than if the same were to happen to housing, which represents about 42 percent of total household expenditures. The weight of different consumer goods also reflects how the world is changing. For example, we might find that people over time are spending more on education as more employers demand a bachelorās degree, but less on entertainment as things become available for free on the internet. Itās all interesting, useful information but that doesnāt mean itās something that should guide our economic policy decision-making, and hereās why.
Four Reasons Why Inflation Isnāt the Thing to Worry About
American families arenāt struggling with rising prices in general, but from lacking access to basic needs. In setting weights for the consumer price index (CPI-U for short, the most commonly-cited inflation index), the Bureau of Labor Statistics estimates that housing, healthcare, education, and transportation make up 75 percent of household purchases. Housing alone is estimated to make up over 40 percent of purchases, and for 1 in 7 Americans, it makes up over 50 percent. But rather than highlighting the stifling baseline cost of housing and other essentials, the inflation conversation groups all goods together, as if rising rental car prices are equally as important as rising rent. The focus on marginal changes in price also obscures the real story. After all, what should we care about moreāthe fact that families are paying nearly half of their income on housing, or the fact that the cost rose from 45 to 45.5 percent of monthly income? With such a massive chunk of consumer costs going to a few basic needs, it seems useless and even counter-productive to think about the high cost of living as a generalized āprice problemā as opposed to a lack of affordable housing, healthcare, and so on.
Major cost burdens are driven by direct policy, not broad macroeconomic factors. Inflation can be expected to increase the cost of college by an additional 1 or 2 percent in a given year; based on average tuition in the U.S., that would amount to an extra $250-$500 per year. But that difference pales in comparison to the cost difference driven by higher-ed policy decisions made at the state level: Across the U.S., tuition at a public 4-year university varies from $14,389 in Utah to $28,681 in Vermont. So, for a family trying to send their kids to college, what matters moreāhow a state decides to fund and subsidize college tuition, or the price growth resulting from inflation? Health care offers a similarly stark example of the importance of issue-specific policy: According to the RAND corporation, prescription drug prices in the U.S. are roughly triple those in other countries. This is not the result of runaway inflation, but of the federal governmentās inability/refusal to negotiate the price of drugs as is done in most other countries. The same is true for essentially all other major cost areas. Even transportation costs, which are largely driven by the price of fossil fuels, are greatly affected by state and local fuel taxes, the presence or lack of tolls, and the availability of public transit, which can affirm or negate the need for a car. If MSNBC talking heads and macro nerds yammering about inflation are genuinely concerned about the cost of living, they should be focused on the policy decisions that drive huge differences in price, not inflationary changes that amount to small fluctuations.
Broad āprice levelsā donāt reflect economic reality for American families. Although tracking overall prices is a worthwhile endeavor for academic purposes, they donāt translate well to reality. For example, college tuition composes 1.56 percent of the CPI-U. But for college grads attempting to pay off debt, the government defines a low burden as 8 percent of monthly income, and payments often reach well over 20 percent. In reality, very few people spend 1.56 percent of their income on college tuition; they spend either none, or much much more than that. In other words, the CPI-U is an average that reveals relatively little about what is going on with American households struggling to make ends meet. Childcare is an even more extreme example of how little inflation indices can tell us about the welfare of American families: The CPI-U attributes just 0.77 percent of its overall weight to childcare and nursery school, suggesting that the average family pays less than one percent of monthly income on childcare. And while that may be true in aggregate, we know that childcare costs thousands of dollars per month and is a major economic drag on families with young children, forcing parents to choose between working and earning, or saving by staying home to care for their kids. The inflation discourse offers no insight into such problems, and can even actively obscure them by presenting the rising cost of living as the result of vague macroeconomic factors rather than specific policy failures, like the failure to fund universal childcare.
Thereās no reliable way to reduce or reverse inflation, and we wouldnāt want to if we could. This fourth and final bullet is perhaps the only one you really need: The biggest reason not to worry about inflation is that thereās nothing we can do about it. Other than *not* raising the minimum wage or *not* making transformative infrastructure investments, inflation doomsayers have little to offer in terms of solutions. But of course, the affordability of basic needs is not what inflation hawks are worried about; they are just trying to leverage economic pessimism to oppose progressive policies. Thankfully, there is a lot that can be done to decrease the cost of living for American familiesāinvestments in public housing and transit, affordable college and childcare, as well as more direct regulation of key industries like healthcare can do much to reduce or eliminate out-of-pocket costs and ensure everyone has their basic needs met. But in general, prices rise when costs go up, and that happens for many complex and legitimate reasons, like increased wages for the workers who produce the goods in question, which is something we cannot and should not impede.
To sum up, Iād just like to say that I really donāt believe anyone is ever going to be made appreciably better off by modestly cheaper goods. Or, more accurately, by modestly less increasingly expensive goods. The idea that, at $12,000-$15,000 per year, childcare could be affordable with a 2 percent increase but prohibitive at a 4 percent increase is obviously absurd. The same is true for housing, health care, college education, and all other major cost areas that are driving economic hardship for American families and workers. Even high prices on smaller-ticket items like fresh vegetables require more thoughtful consideration and active policymaking than simply not investing a bunch of money in the things everyone desperately needs. And to the extent that cheaper goods are nice, it sure seems like weāre getting plenty of them from our highly-monopolized, low-wage, low-quality Amazon economy.
Ok, so inflation is a silly thing to worry about and thereās no clear path to prevent it. But what does that have to do with taxes? Well, taxes are how we fund a lot of public goods and funding public goods, it turns out, is the best way to control costs for Americans trying to make ends meet. In future posts, I will break down some detailed examples of public programs that can deliver windfall savings for families and massive economic benefits for the overall economy.
But for now, consider yourself inoculated against inflation fear-mongering.