The good news is that prices increased by only 0.2% in August, but even that amount of inflation represents an annual rate of 2.4%, which is 20% higher than the Federal Reserve’s target inflation rate of 2%. Even the good news isn’t all that good.

Inflation tends to run higher in the first half of the year (which is one reason data are often seasonally adjusted). In August of 2020 prices increased by only 1.3%, so inflation this August was 50% higher in August of 2021 than in August of 2020. Again, the good news is not all that good.

Inflation over the past year, from August 2020 to August 2021, has been 5.2%, so we are headed for uncomfortably high inflation for the full calendar year. Prices have already increased by 5% since the beginning of the year, so even if prices do not increase at all for the rest of the year, we will end the year with 5% inflation.

The fact that policymakers at the Federal Reserve, and more generally, in the federal government, are not troubled by rising inflation is in itself troubling. We saw in the 1970s that once inflation is underway, stopping it is difficult and painful. Perhaps experiences from half a century ago don’t have much influence today.

People who actually buy things have told me that the prices they pay have gone up much more than the government’s official data. That may be, but I’m looking at the numbers the federal government is reporting, and I don’t see good news there on the inflation front.

The post August Inflation Lower than Expected: Look at the Numbers appeared first on The Beacon.

Powell’s view rests heavily on interruptions in the supply chain that have caused temporary shortages leading to price spikes. Powell recognizes that declines in demand in 2020 led to low inflation that year, and says that the 2021 inflation spike is only offsetting unusually low inflation from 2020.

There are arguments leaning in the other direction, however—most significantly, the effect of inflationary expectations. Sellers are reluctant to raise prices when inflation is low, so it takes a while for inflationary monetary policies to result in actual inflation. Once people expect inflation, they are quicker to raise prices to keep up with the general rise in prices. As the 1970s showed, inflation, once started, can be difficult to stop.

Let’s set aside those various arguments and look at the official numbers from the Bureau of Labor Statistics. The most highly-publicized number is the year-over-year inflation rate (from June 2020 to June 2021), which is 5.4%. The Consumer Price Index rose by 0.9% in June alone. Those numbers reveal the spike that Powell says is temporary.

At the end of the linked article, John Williams, President of the Federal Reserve Bank of New York, says he expects inflation to be around 3% this year, dropping to 2% in 2022. That is unlikely.

Inflation in the first six months of 2021 (December 2020 to June 2021) has been 4.3%. That would be the year-end 2021 inflation rate if prices do not rise at all for the remainder of the year. That won’t happen. Williams’ projection of 3% inflation this year is wishful thinking.

Powell conjectured that the current spike in inflation is a result of prices catching up from unusually low inflation in 2020. That conjecture is questionable. For one thing, inflation in 2020 was not exceptionally low. It was 1.4% over the whole year, which is not too far from the Fed’s stated 2% target inflation rate. Going back to June of 2019, prices have risen 6.1% over the past two years, so even with a low inflation rate in 2020, the average annual inflation rate over the past two years is a bit over 3%. Even if Powell’s conjecture is correct, inflation over the past two years has been 50% higher than what the Fed says it is targeting.

People I talk with who actually buy things tell me the prices they pay are rising much faster than the official numbers. Maybe. But I’m looking at the government’s own inflation numbers and there’s not much in them to suggest that the current inflation spike is transitory.

John Williams, the New York Fed President, is expecting 3% inflation this year. I’m expecting inflation in 2021 to be above 5%. In six months, we’ll be able to look at the actual numbers and see whose estimate was closer.

The post Is Our Current Inflation Temporary? Look at the Numbers appeared first on The Beacon.

What can we expect, looking ahead? From March to December of 2020 the CPI was up 1.6%, which means that if the CPI rises 1.6% for the rest of this year, inflation at year-end will be 4.2%. There’s a good chance that inflation for the remainder of the year will be higher than that, in which case even 5% inflation for 2021 would be a conservative estimate.

Looking at the table linked above, you can see that in most years inflation tends to run higher in the first half of the year compared to the last half, which weighs against my inflation prediction in the previous paragraph. But inflation was dampened last year by a reduction in consumer demand due to the COVID pandemic, and is likely to accelerate this year as the pandemic subsides and consumer demand picks up again. That’s what we saw in March. So I’m expecting more inflation.

Then there is the easy money policy of the Federal Reserve (Fed), which may be politically difficult to reverse. Adding to pressure on the Fed is the huge federal budget deficit which is pushing the Fed to buy government bonds, which creates money. In the 1960s and 1970s the Fed was very accommodating with its monetary policy, but shifted gears in the 1980s to focus on reducing inflation. The Fed’s policy has reversed in the twenty-first century, it appears that the negative consequences are starting to appear.

The inflation rate for all of 2020 was 1.4%, but that’s deceiving because of the big drop in prices due to the pandemic. The inflation rate from February 2019 to February 2020 was 2.3%, so at that point inflation was already picking up and was only temporarily delayed by the pandemic economy. I will be surprised if this year’s annual inflation rate is less than 5%. Look for more inflation ahead.

The post Inflation Facts appeared first on The Beacon.

If you listen to the economists shaping the Biden administration’s policy agenda, they say they do not. Their basic argument is that with interest rates so low, the government can borrow as much as politicians want to spend. They think they never have to worry about paying the debt.

On April 14, 2021, Federal Reserve Chair Jerome Powell spoke with David Rubenstein of the Economic Club of Washington, DC. A transcript of their whole discussion is available on C-SPAN. Here’s the money quote about whether the Fed Chief thinks the new spending proposed by the Biden administration is sustainable:

Rubenstein: Are you worried about deficits? The debt is pretty high, $27 trillion or so, the deficit is $3 trillion or so. Is that a concern to the Fed in terms of impacting inflation?

Powell: Yes. Over time and in the longer run, the U.S. federal budget is on an unsustainable path, meaning that the debt is growing meaningfully faster than the economy and that’s unsustainable over time by definition.

But then Powell said something surprising with respect to the government’s current debt level:

Powell: It’s a different thing to say that the current level is unsustainable. It’s not. The current level is very sustainable and there is no question of our ability to service and issue the debt for the foreseeable future. I would also say that as a nation, we will have to eventually get back to a sustainable path. That’s best done in good times, when the economy is at full employment and when taxes are rolling in. This is not the time to prioritize the concern, but it’s nonetheless an important concern that we will ultimately have to return to when the economy is strong.

With the lifting of repressive state and local government lockdowns, the U.S. economy will grow rapidly this year. Worse, because the U.S. government has spent so much giving out stimulus checks, inflation has been unleashed. A trip to any grocery store, gas station, car lot, or real estate office can confirm that truth.

That is to say the time for the Fed to be concerned is now. The need for action to put the U.S. government onto a sustainable fiscal path will come much sooner than many expect.

But the leadership for that action will not come from the White House. Powell seems to understand the action will be needed and will require the Fed to hike interest rates. The question is when will he and the Fed take steps to rein in President Biden’s unsustainable spending spree by making the debt to fund it too costly to consider?

The post Fed Chief Says U.S. on Unsustainable Fiscal Path appeared first on The Beacon.

The venerable trust fund’s long reign as the biggest single lender of money to the U.S. government has come to an end, because Uncle Sam has a new sugar daddy: the U.S. Federal Reserve! Political Calculations provides the analysis for how that has happened:

The U.S. government has gone on a borrowing binge since the global coronavirus pandemic reached the nation’s shores and the number of known cases began increasing relentlessly at the end of February 2020, just over two months ago. From 26 February 2020 through 29 April 2020, the U.S. government’s total public debt outstanding has increased by $1.427 trillion, from $23.427 trillion to $24.854 trillion.

That’s a lot of money to borrow, and for all practical purposes, all of it was loaned to the U.S. government by its new Number One creditor, the U.S. Federal Reserve, to whom the U.S. government now owes more money than it does to its previous largest single creditor, Social Security. According to the Federal Reserve’s H.4.1 statistical release for 29 April 2020, the Fed holds $3.945 trillion worth of U.S. Treasury securities, up from $2.465 trillion back on 26 February 2020, shortly before the number of known coronavirus cases in the U.S. began their rapid rise, which triggered the government actions that crashed the economy.

Our sharp eyed readers who do the math will catch that the Federal Reserve’s holdings of U.S. government-issued debt securities increased by $1.480 trillion, more than the amount by which the federal government’s total public debt outstanding increased over the same period of time.

How is that possible? Under current law, the Federal Reserve is prohibited from directly loaning money to the U.S. government, so it is actually acquiring debt securities that were originally issued by the U.S. Treasury when it borrowed money from banks and other financial institutions. The Federal Reserve can then pay them for their holdings of U.S. treasuries through its open market operations, much like how the lender you might have originally gotten your mortgage through might sell it to another financial institution. The money that was borrowed is still owed under the same terms as before, but now it’s paid back to a different entity.

Doing that gives the original creditor more money to be able to go out and loan even more money to the U.S. government, which in the current environment, the Fed will then pay to acquire it from them. That process will repeat until the Fed decides it has had enough and tries to stop. Like it has before, which didn’t really work out all that well for it.

In any case, that’s how the Fed went from holding less than one in ten of all the dollars the U.S. government has borrowed to about one in six, making it the new single largest creditor to Uncle Sam.

So to answer the question of how the Fed’s holdings of U.S. treasuries is increasing faster than the rate at which the U.S. government is borrowing money, it’s because the Fed’s holdings are being tapped out of the larger pool of treasuries held by U.S. individuals and institutions, which is then quickly replenished.

To summarize, all the Federal Reserve had to do to bump the Social Security Trust Fund from being the U.S. government’s top creditor was to practically loan it every single dollar it borrowed during the last two months, and then some. At some point, you have to wonder if the Fed will start lending directly to the U.S. government, dropping the pretense of going through the inefficient process they are using now to supply the government with funds it can spend.

At the end of their analysis, Political Calculations asked “How do you suppose the Fed will want to be paid back? And where do you suppose the U.S. government will get the cash to do that?”

Anthony Harries and James R. Harrigan’s 2017 analysis of the U.S. government’s borrowing situation seems especially prescient now for answering those two questions:

If federal borrowing is growing steadily at an average pace of 6 percent per year, yet foreign and American investors are slowing their lending, and the trust funds have no surpluses left to lend, where is the government getting the money it’s borrowing? And where will it get more in the future?

The answer is the Federal Reserve. Prior to the Great Recession, the Fed was increasing its annual lending to the US government by almost 6 percent per year. The Fed then dramatically increased its lending during the recession – that’s what all the “quantitative easing” talk was about. On average, since 2001, the Fed has increased its lending to the federal government by over 11 percent annually.

The U.S. government has borrowed more money than any government in human history. Politicians have convinced voters that government debt doesn’t matter or that, by the time it does, some magical solution will present itself. The ugly truth, though, is that there simply aren’t enough investors left on the planet willing to loan the U.S. government enough to maintain its spending habits. So the Federal Reserve takes up the slack. And this is where things go from bad to worse, because the Federal Reserve prints the money it loans.

When the Fed prints more money, every one of the dollars already in circulation, from those in people’s savings accounts to those in their pockets, loses some value. Prices go up in response. That’s inflation....

For nearly a century, politicians have treated deficit spending as a magic wand. In a recession? Government must spend more money! In an expansion? There’s more tax revenue, so government can spend more money! Always and everywhere, politicians argued only about how much to increase spending, never whether to increase spending. Past politicians left massive deficits, and the debt they created, for future generations to fix. The future has now arrived. There is simply no one left from whom to borrow.

To summarize, everyone will be paying more than they otherwise would for everything. Whether it’s through taxes or through inflation, they’ll be paying for years and years to come.

The post The Fed Becomes the U.S. Government’s Biggest Creditor appeared first on The Beacon.

Nothing of the sort has happened, of course. For the past few years, prices and spending have appeared moderate by historical standards. However, that is largely because they are reported in nominal terms, not real (inflation-adjusted) terms. From the Great Recession until very recently, general measures of inflation were about zero. An increase of premiums of eight percent when general measures of inflation are about zero is a lot more than an increase of eight percent when general measures of inflation are about three percent.

Actuaries at the Centers for Medicare & Medicaid Services, a government agency, have just updated their estimate of future health spending:

For 2018 and beyond, both Medicare and Medicaid expenditures are projected to grow faster than in the 2016–17 period, and more rapidly than private health insurance spending, for several reasons. First, growth in the use of Medicare services is expected to increase from its recent historical lows (though still remain below longer-term averages). Second, the Medicaid population mix is projected to trend more toward somewhat older, sicker, and therefore costlier beneficiaries. Third, baby boomers will continue to age into Medicare, with some of them dropping private health insurance as a result. And finally, growth in the demand for health care for those with private coverage is projected to slow as the relative price of health care—the difference between medical prices and economywide prices—is expected to begin gradually increasing in 2018 and as income growth slows in the later years of the projection period.

The vanity of Obamacare was that more central planning would reduce wasteful use of resources through “value-based” and “accountable” care. In fact, demand for health services by the privately insured will shrink only because prices outpace our ability to pay for them as government weighs down our prosperity.

* * *

For the pivotal alternative to Obamacare, see Priceless: Curing the Healthcare Crisis and A Better Choice: Healthcare Solutions for America, by John C. Goodman, published by Independent Institute.

The post Health Spending and Prices to Rise, 2018 through 2025 appeared first on The Beacon.

I’ve written on this blog multiple times about the government of Venezuela and the polices it has enacted. I’ve argued that falling oil prices aren’t to blame for the country’s troubles and that the once-high oil prices only masked the underlying shortages caused by government policy. I’ve discussed how the major price controls put in place in Venezuela have made it difficult to impossible for people to find goods ranging from toilet paper and feminine hygiene products, to meat and flour.

Here we are again. The Venezuelan government is once again proving its complete ignorance of basic economics. Its people are paying the price. According to the BBC, Venezuelan president Nicolas Maduro announced that the country’s minimum wage and pensions would increase by 50 percent in an effort to combat the country’s rampant inflation, which the IMF projects will reach 1,600 percent this year. The monthly wage will now be over 40,000 bolivars—about $60 at the official exchange rate ($12 on the black market). For perspective, this is about enough money to purchase a single pair of pants.

In discussing the minimum wage increase (the fifth in the past year), Maduro stated, “To start the year, I have decided to raise salaries and pensions. In times of economic war and mafia attacks...we must protect employment and workers’ income.”

Yikes. Where do we start?

First, the idea that the minimum wage will protect workers and their income is fallacious. Here’s another of those “economic zombies” I discussed last week. The fact of the matter is, when you make things more expensive, people buy less. This holds true for everything—from lemonade to ladders to labor. By making workers more expensive, employers will be faced with tough decisions on how to recoup their losses. They will likely have to cut work hours or fire their employees.

Second, such measures will do precisely nothing to combat inflation or stabilize the overall price level. As the late economist Milton Friedman once said, “Inflation is always and everywhere a monetary phenomenon.” That is, inflation is caused by an increase in the money supply.

Increasing the amount of money in the system or mandating higher wages does nothing to increase wealth. As economist Antony Davies explains in this short video,

Money derives its value from goods and services. Printing money doesn’t make more goods and services appear. It simply spreads the value of the existing goods and services around a larger number of dollars.

The prices of goods and services adjust to reflect the change in the money supply. As more money is printed, it will take more of the devalued currency to buy the same goods and services as before. Therefore, increasing the amount of money in people’s pockets doesn’t increase their wealth or make them better off at all!

Now many countries don’t mind some inflation. In fact, many governments “target” an inflation rate of 2 to 3 percent per year. Venezuela, however, is on the verge of (or perhaps already in the grips of) what’s called “hyper inflation.” This occurs when a country experiences rapid price increases and a fast erosion of the real value of its currency. While most people wouldn’t notice if the price of their goods increased by 2 percent over the course of year, they’d certainly notice if the price increases by 500 percent.

The results are never good.

In Weimar Germany, for example, waiters climbed on tables to announce new prices every half hour. Workers collected their wages in wheelbarrows. People used banknotes as kindling. Children played with worthless marks, turning them into kites and other crafts. Others used money as wallpaper. Throughout history, other countries have struggled under the crippling effects of hyperinflation. Zimbabwe and Hungary offer two other well-known examples.

Unfortunately, those who suffer the most under these policies are the people of Venezuela. Hard-working people are watching helplessly as the money in their pockets becomes practically worthless. They wait in endlessly long lines for a chance at purchasing the few goods on the shelves. They look at their savings and their retirement accounts and realize they have no way of recouping their losses. Now, with yet another increase in the minimum wage, workers will have to again worry whether or not their jobs will be there in the coming weeks and months.

Oh, Venezuela, while I love good examples for principles lectures, I’d be thrilled if you’d stop giving me so many.

The post More Money, More Problems: Venezuela’s Minimum Wage Won’t Help Inflation appeared first on The Beacon.

Wonkblog has a post inspired by the dentist who paid a lot of money to shoot Cecil the lion, asking why he—and dentists in general — make so much money. Interesting stuff; I’ve never really thought about the economics of dental care.

But once you do focus on that issue, it turns out to have an important implication—namely, that the ruling theory behind conservative notions of health reform is completely wrong.

For many years conservatives have insisted that the problem with health costs is that we don’t treat health care like an ordinary consumer good; people have insurance, which means that they don’t have “skin in the game” that gives them an incentive to watch costs. So what we need is “consumer-driven” health care, in which insurers no longer pay for routine expenses like visits to the doctor’s office, and in which everyone shops around for the best deals.

Krugman goes on to insist that dentistry is a consumer-driven market: Insurance is far less prevalent in dentistry than in medicine, and most dental care is routine and preventive. Yet, he points out, costs of dental care have risen at the same rate as costs of other health care, not at the rate of other consumer goods and services.

With respect to prices (an important factor in cost, but not to be confused with cost), Professor Krugman is not quite right. In the Consumer Price Index, the price of going to a dentist rose 2.8 percent in the twelve months to August 2016, versus 4.3 percent for going to a doctor. The price of services other than medical services rose 2.8 percent, so dentistry does not seem out of line. On the other hand, the price of seeing “other medical professionals” rose only 1.3 percent, and prices for all items less medical care rose just 0.7 percent, so it certainly looks like something might be going on in dentistry that needs reform.

What Professor Krugman missed was the supply side of dentistry, not the demand side. “Other medical professionals” includes professions like physical therapy, which some describe as “midlevel.” Dentistry, however, remains controlled by state-level licensing, which excludes midlevel practitioners who can provide some services at lower cost.

The Pew Charitable Trust has researched this supply-side problem and advocates solving it with dental therapists:

... midlevel providers similar to physician assistants in medicine—[who] deliver preventive and routine restorative care, such as filling cavities, placing temporary crowns, and extracting badly diseased or loose teeth. As states grapple with provider shortages, especially to serve vulnerable populations, a handful have acted to allow dentists to hire these practitioners, and many others are exploring the option.

So, price competition in dentistry is due not to a lack of government controlling the demand, but rather to government limiting the supply of less expensive options. Hopefully, that is changing.

* * *

For more on healthcare reform, please see the Independent Institute’s widely acclaimed book, Priceless: Curing the Healthcare Crisis, by John C. Goodman.

The post Krugman’s Bite on Dentistry Lacks Teeth appeared first on The Beacon.