My Turn: Let’s repeal the inflation tax

For the Monitor
Published: 1/31/2022 5:31:36 PM
Modified: 1/31/2022 5:30:06 PM

Families across the Granite State are feeling the pain of higher prices. According to recent data released, consumer prices were up 7% on average over the past twelve months. But averages apply to groups, not individuals.

(Imagine putting your left foot in a bucket of boiling water and your right foot in a bucket of ice water … on “average,” you’d be comfortable). Looking beyond the headline numbers, we see most people are experiencing higher inflation.

Let’s begin with energy prices. Gasoline prices are up about 50%. Gas service used to heat homes was up around 24% while fuel oil was up 41%. Why is this happening? It’s complicated, but let’s remember that Biden rejoined the Paris climate accord on his first day in office and canceled the Keystone pipeline shortly thereafter.

Since then, oil has risen dramatically. It’s not just energy prices that are rising. Cars, food, and furniture prices, to name just a few items, are also going up. What the heck is going on?

Well, for the most part, supply and demand determine prices. So let’s look at both. We all know that the pandemic impacted global supply chains as factories shut down to comply with public health policies. This was a bigger problem in certain industries, such as semiconductors, because chips are used in many products. The disruption snowballed and spread rapidly. Inventories fell, shortages emerged.

The pandemic also increased demand. People saved money that might otherwise have been spent on dining out, vacations or other services. And the government then gave out lots of money, allowing some people to stay on the couch as the economy reopened.

Bank accounts (and many waistlines!) grew fatter. And because the pandemic didn’t disappear, consumers were still cautious: instead of doing things, we bought stuff. Lots of stuff.

Unsurprisingly, as supply went down and demand went up, prices rose. Extra savings are being spent, so demand should moderate a bit. Fixing supply disruptions, however, will take some time.

The logic of just-in-time, most efficient and lowest cost supply chains have proven vulnerable to shocks. Many businesses are now converting to just-in-case, most resilient, and adaptable supply chain strategies. This means being less dependent on production in China (or elsewhere).

While there’s no easy fix here (just think of how long it takes to build a semiconductor plant), dynamic business leaders are adapting. Government should let the markets do their work and stay out of the way.

This means we’re likely to have inflation for some time. That’s a problem because inflation is a hidden tax, one that doesn’t affect everyone the same way. It hurts those on tight budgets. This happens because commuting costs and grocery bills are a bigger portion of low and middle-income family budgets. Inflation hurts the poor more than the rich.

Senator Rand Paul has also noted inflation also harms small businesses. According to a report he wrote called “Inflation: The Hidden Tax”, 45% of small businesses reported taking out a loan to cope with the pressures of inflation last year and 74% say inflation has negatively impacted their business’s financial health. And let’s remember that small businesses are the backbone of the New Hampshire economy.

So what can be done to alleviate the inflationary pressure?

To begin, Washington needs to stop acting like a drunken sailor on shore leave. The out-of-control spending must be contained.

The Federal Reserve Bank of San Francisco has noted that Biden’s $1.9 trillion American Rescue Plan directly created inflation. Further, the president recently noted that “If price increases are what you’re worried about, the best answer is my Build Back Better plan,” the Administration’s plan to expand our welfare state.

What?! Seems the president is offering to throw more money around when there’s an inflation problem driven by, well, too much money. Even the nonpartisan Congressional Budget Office notes that Build Back Better would increase the deficit by more than $150 billion, a development that itself may increase inflation. Don’t get me wrong, I’m all for supporting hard-working families, but can’t we do so without stoking inflation?

It’s not just fiscal sobriety that we need. We also need monetary discipline. The Federal Reserve has been flooding the economy with money, something that reduces the value of each dollar in our pocket, which in turn drives prices higher.

To make this clear, imagine you are one of 100 people in your town and there are only 100 widgets to buy and everyone has $100. Widgets would be priced at $100. Now imagine everybody is given an extra $50 but the supply doesn’t change. Each item would soon increase from $100 to $150. Fortunately, the Fed has indicated that it will stop the bond-buying program it uses to push money into the economy. It can’t stop soon enough.

We also need to rethink our climate policies. Let me begin by proposing a change in approach. Let’s end climate alarmism. We can easily move to cleaner energy sources by replacing coal with natural gas or building nuclear plants. America should also invest more in basic science.

For example, researchers at Lawrence Livermore National Lab recently generated burning plasma, a critical step towards potentially infinite clean energy from fusion. Why not invest more in science to exploit the endless frontiers of technological innovation? Let’s remember the stone age didn’t end because we ran out of stones. We need to stop our focus on minimizing the use of reliable energy and instead focus on new energy sources.

Repealing the inflation tax is not complicated, but it is hard to do. It requires we begin with a goal of doing no harm. That means stopping Washington’s spend-a-thon and supporting private industry to fix supply chains. It also means rethinking Biden’s green-flationary climate policies and focusing on science and innovation. Let’s be clear. Today’s inflation tax is a mess of our own making. It’s time to clean up the mess.

(Vikram Mansharamani is a Lincoln resident, Harvard University lecturer, and author of “Boombustology: Spotting Financial Bubbles Before They Burst.”)

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