Inflation Is Bad, Right?

One needs to set aside his/her personal bias in order to learn. A few months ago I wrote an article addressing the Tea Party/Ron Paul notion of returning to the Gold Standard. I had to set aside my own personal bias – that returning to the Gold Standard was literally a moronic idea – and educate myself about why the Gold Standard was abolished in the first place. Re-learn some economic history, really. That is the only way to really understand an issue, forget temporarily what you know, and challenge yourself to start over.

My first and only economics professor was 97 or 98 years old. Mr. Johnson reminded me of the man from the American Gothic painting, only that man’s father. He arrived in class carrying a small ceramic coffee cup. From my seat in the front row, I never could tell if the cup actually contained coffee. He would pause during a lecture and sip, though even then I was never able to tell if the cup actually contained coffee. I suspect now that the cup was really to settle his hand, which trembled incessantly.

Mr. Johnson’s voice was very quiet; he was 98 or maybe even 100 years old. His ability to make any sounds at all was probably very close to expiring, as was he.

When he drew on the chalkboard, supply-and-demand curves were all he managed to draw. And those were faint, ghostly  images seeming to foretell Mr. Johnson’s own future as a discorporate entity.

Needless to say, I remember more about Mr. Johnson and his quaking coffee cup than I do micro- or macroeconomics.

Over the last 10 months or so, I have been pushing economic thought and theory into my brain. Economics is a fascinating discipline; really! I have come to the conclusion that “Common Sense” is anything but common. I say that because most people probably had a very similar experience in Economics 101 & 102 as I; a day-to-day boring exercise in Supply-and-Demand curves. Thus, what has happened is that people either have no memory of their economics course or incomplete knowledge of basic economic thought.

Republicans, Democrats, and especially the Tea Party, take advantage of the ignorance of voters, making comments that ridicule each other, or perpetuate myths about Inflation, the Federal Reserve, Central Banks, and the Gold Standard.

Any economist will debunk a return to the Gold Standard. Any financial adviser will debunk a return to the Gold Standard. Now, you could scream, “Conspiracy Theory!” and then never really understand anything, and be perpetually perplexed by the world; or, you could set aside those crazy notions and live in the real world.

Now, for Inflation.

The Tea Party would have you believe that inflation is a result of manipulations of financial markets by both the Republicans and Democrats. Simply google “tea party inflation” to see what I mean. The Tea Party mixes “devaluation of the dollar,” and “inflation,” and uses an inevitable fiscal manifestation as an example of bad government. The notion that inflation is a symptom of bad government exemplifies ignorance of economics, and undermines the credibility of the entire Tea Party.

Here’s how:

Prices on everything go up. Prices increase as a natural process of business and economics.

Ask yourself this: Do I want to be paid next year the same amount I am paid this year? The answer is “no;” I hope to be paid more. You get a raise. The cost of your raise could be passed along to the consumers through a slight increase in the cost of your companies product.

Here’s another more topical example. In 1930, the Mars Candy Company introduced the world to Snickers. Snickers was named after a horse, by the way. The Snickers Bar was sold for 20 cents. Today, a Snickers Bar can vary in cost a lot; at Wal-mart I’ve seen them for $0.50, bought them at a gas station for $0.79 to $1.29.

We can calculate inflation on a Snickers Bar this way:    (($1.00 – $0.20) / $0.20) x 100 = 400%

Wow! The price of a Snickers Bar has gone up 400% since its introduction! But, can we blame the price increase of a Snickers Bar on bad government? Is Franklin Delano Roosevelt, Lyndon B Johnson, and Jimmy Carter responsible for our candy costing more? Not hardly. Yes, the Federal Government can somewhat control the supply of money vis-à-vis the Federal Reserve, and the supply of money can influence inflation. These influences are hardly fully responsible. But, the Tea Party would have you believe that.

Obviously, a 2011 employee at Mars is not going to be happy working for 1930s wages. Mars Company needs to invest in new equipment to maintain product quality over the years. Chocolate, peanuts, sugar, and all the ingredients for a Snickers Bar may cost more. All of those variables change the price of a product. When people get really excited about a product, the demand may exceed the supply, which can drive up the cost – particularly in a FREE MARKET.

Because inflation is an element of the FREE MARKET within the definition, one who complains about inflation might also be complaining about FREE MARKET forces at work. Thus, the Tea Party needs to pay particular attention to their rhetoric regarding Inflation.

Price Inflation also, obviously, includes compensation for higher wages, over time. And, higher costs of raw materials, over time. And, the cost of entitlements: retirement, health care, insurance over time. The notion we would pay the same for a Snickers Bar today as a Snickers cost in 1930 is simply wrong-headed.

Demand-Pull is the term used to describe when the consumer market influences prices.

Supply-Push is the term used to describe prices increasing as a result of increases in wages, raw materials, or taxes.

During the Republican Debates, the comment “the dollar has lost 97% of its value since 1930” was frequently bandied about, used as an example of how bad government is, how our government has mismanaged our money supply. That notion is simply wrong.

Not to say that the Federal Government hasn’t set bad fiscal policy, such as the price controls implemented by Nixon, a Republican, no less. People cite Obama as being a “Socialist,” yet no one recalls the prices controls implemented by Richard Nixon which created the financial crisis of the early 1970s. Government price controls are a fine example of Socialist Fiscal Policy, by the way.

I am picking on the Tea Party as TP advocates seem to the most vocal regarding returning to a Gold Standard, eliminating the Federal Reserve, and citing inflation/currency devaluation as examples of “bad government.” To be clear, all of these elements are great examples of ideas set forth as “common sense,” when these ideas are not “common” or “sensible” at all.

On a more somber note, that these ideas even have a life points towards the growing ignorance of the U.S electorate, flaws within our educational system, flaws within the knowledge base of an individual.

Very troublesome.

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