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Is Inflation Just Part of the Ride?

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By Mark Friedman

Inflation has been a cause for anxiety and real difficulty. Especially in low and middle-income households and among the elderly, people feel powerless as they watch their living standards erode. Factors driving inflation the most – food, fuel, and rents – are things people cannot do without. The resulting frustration has been exploited by politicians in the U.S. and globally, although they rarely offer helpful solutions. Mercifully, there are signs that inflation is slowing. 

What caused inflation to spike after decades of relative price stability? The causes you may have heard in the news are likely familiar. The COVID-19 pandemic was a major cause, with long-lasting effects. Production halted for many products, including many from China. Global supply chains were disrupted. The war in Ukraine pushed gas and grain prices up. However, there are signs that these difficulties are being alleviated. Gas prices are slowly coming down. The “Global Supply Chain Pressure Index” maintained by the Federal Reserve Bank of New York has fallen steadily since the beginning of the year.

Were government policies mostly to blame, as is especially alleged in the U.S.?  In the recent U.S. Congressional elections it was charged that infrastructure and COVID-related spending boosted household incomes excessively, and even unfairly, citing instances where workers staying home were rewarded more than those who continued to work. Many point to the American Rescue Plan passed early this year. (These critics usually ignore the larger CARES act passed under the Trump administration.) Studies vary on the inflationary impact of the fiscal stimulus in the U.S., from some calling it negligible to others naming it as the primary cause. 

A frequently cited study from the San Francisco Federal Reserve concludes that government spending accounted for three percentage points of the price level increase in 2021, over half of the inflation increase.

These authors show that U.S. inflation was considerably higher than in European countries in the first half of 2021, a sign that U.S. stimulus policy made the difference. However, those doubting the impact of U.S. policy also compare the U.S. with the rest of the world, which is also experiencing high inflation. It is noteworthy that now (as of October 2022) some European countries suffer higher inflation than the U.S., notably Germany, a country long considered to be especially cautious when it comes to inflation.

It is likely that the sharp increase in government spending at least played a role in the U.S. inflation dilemma. We are continually “fighting the last war,” that is, learning the wrong lesson from a previous crisis. Most economists believe the recovery from the Great Recession took longer than was necessary because government stimulus spending was not big enough. The Biden administration took this to heart in promoting the $1.9 trillion American Rescue Plan. Few expected the economy to recover as quickly as it did. Nonetheless, with supply backups continuing, and households with income ready to spend, we had the classic inflationary case of “too much money chasing too few goods.”

If policy mistakes were made, it is important to place them in perspective. In the spring of 2020 unemployment reached nearly 15%, a level that would be associated with a full depression if it was prolonged. The potential for the economic crisis to worsen could not be ignored. Furthermore, the stimulus brought remarkable benefits. In spite of depression-level unemployment, the poverty rate barely moved. Most surprising coming after such a severe recession, childhood poverty fell drastically last year, a direct result of a more generous Child Tax Credit arising from COVID crisis legislation.

Progressive economists, such as Josh Givens of the Economic Policy Institute, place the blame squarely on corporate market power, which allows sellers to set the price. The reasoning goes, why do corporations raise prices? Because they can. Givens points out that from the start of the pandemic through 2021 corporate profits increased nearly 54%. Givens and others are quick to dispel the idea that worker wage demands are to blame, since prices, as well as corporate profits, have risen faster than wages. 

From the standpoint of Prout, inflation and the other economic crises arising from the pandemic point once again to the need to build a more just and stable economy from the ground up. In the end, it is the system that is the problem. There has never been a greater challenge to globalization as we have known it in the past half century. During that time, corporations squeezed out the last bit of short-term profits with tight global supply chains that left little room for error. Maintaining inventories was thought wasteful, and local sourcing completely irrelevant. Now economists and business elites are often speaking a word that is new to them, “resilience.” Prominent commentators are lamenting that we have traded away resilient economies that are resistant to disruption for a false semblance of efficiency. 

A Prout economy is inherently resilient. Prout builds a localized economy, with necessary goods produced locally. Localized economies are not only likely to be more environmentally sustainable but are also less susceptible to disruptions from other parts of the world.

Prout also promotes economic democracy – a cooperative-based economy. Its primary feature, worker cooperatives, also contribute to a resilient economy. Worker-owners do not get laid off in economic downturns, so recessions are less severe. If a disaster strikes a region, there could be assistance from neighboring socio-economic units. Local disasters need not spread globally. But government support in a disaster such as a pandemic would not be questioned in a political and economic framework where human well-being is paramount.

Inflation is countered by a highly productive economy that is not prone to supply shortages. Research shows that cooperatives are more likely to employ new technology than conventional businesses. This, along with high worker morale, contributes to highly productive enterprises. Cooperatives also help keep economies local – workers will not vote to export their jobs. As local residents, they have a stake in the vitality of their communities.

In the short term, inflation is slowing as the supply bottlenecks of the previous two years are easing. Alert citizens should resist attempts to use inflation as an excuse for policies that will halt worker wage growth, such as monetary policy that increases unemployment by raising interest rates, or budget cuts that reduce our ability to meet human needs. But we have a larger task: to transform our economy to one with built-in stability. Such an economy will also be democratic, fair in its distribution practices, prosperous, and ecologically sustainable. 

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Yes, inflation is caused by private or state accumulation of economic power at every step–extraction of raw material, production, sales and services. It does not matter whether people have access to little or much money, still they are victimized by corp or state capitalist greed. And those who issue more money to solve the situation, and even keep exporting raw materials without developing their own diversified industries, suffer more from inflation.

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