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America is experiencing inflation, and Republicans are saying it’s because Democrats want to help out average Americans instead of just attending to the wants and desires of billionaires and the fossil fuel industry, as we’ve been doing since 1981.
In fact, most of today’s inflation was set up by Ronald Reagan when he kicked off the turn of our government from Keynesian to neoliberal economic policies in 1981. Without his neoliberal “free trade” and “monopoly-is-okay” policies we wouldn’t be experiencing most of it.
First off, inflation is typically caused by one of two things (or a combination of both): demand exceeding supply of goods/services or a devaluation of a nation’s currency by “printing money.”
That “printing money” part is the one everybody seems to understand because it’s been relentlessly pushed by gold bugs since Nixon closed the gold window in 1971. In theory it happens when a country “prints” or brings into being more money than it normally would to just keep up with a growing economy, but it’s extremely rare.
The money supply of a country typically grows as a country’s economy grows, and shrinks when the economy shrinks as happened during the Republican Great Depression. In addition, governments are fond of having around a 2 percent per year rate of inflation so they can pay off their debts with cheaper dollars (which is the source of most of the gold folks’ complaints).
And there are some concerns that by using “monetary policy” (changes in interest rates and the money supply) to bail our criminal bankers out of the Bush Bank Crash of 2008, the Fed may have gone overboard.
But it’s very hard to significantly and rapidly devalue the single reserve currency of the world; there are so many trillions of dollars in circulation all over the planet. Most of the world’s oil is denominated in dollars, for example. A few trillion is a drop in the bucket (the Fed “created” trillions to loan to banks in 2008, but wound most of it back down before the pandemic without creating inflation).
In terms of real inflationary pressures, a far more real and immediately recognizable cause comes from people wanting to buy goods that aren’t available.
There are three parts to that.
1. People want to buy goods because they’re afraid to use services
We humans tend to spend our disposable income in a way that balances goods and services. One month you buy a new microwave, the next month you go to dinner and a movie three times.
For almost two years, we stopped spending money on services (think restaurants, theater, travel, hotels) but most Americans still had money, so we bought more goods than normal. It’s like comfort food: it feels good to spend money and get stuff (or services).
But people are afraid to go to restaurants, so they’re buying goodies for themselves to get that “consumer” feeling.
By any measure the total demand for total goods has been up since the fall of 2020 (after demand for services collapsed six months earlier), and Here’s a graphic from Fed projections of upcoming supply and demand, made in May of last year. Notice that the top line is “zero”: there being enough supply to meet demand. And then Covid hit, demand increased and supply collapsed (we’ll get to why in a moment).
The best way to stop that “excess in demand” is to resolve the end so people can get back to buying services, but the GOP is fighting any effort to do that in the hopes that by keeping people sick and freaked out they will gain a political advantage over the Democrats.
2. Our “supply chain” used to be domestic: now it’s international
The inflation of the 1970s was 100% caused by two major shocks from the Arabs cutting off our oil supplies because we took Israel’s side in a war with them in 1973 and the Shah fell, cutting off Iranian oil in 1979. Gas went from 36 cents a gallon to “unavailable,” and because gas and oil run everything in our economy from farm machinery to factories to transportation, the prices of everything went up.
In other words, our “oil supply chain” was not under our control and so we were at the mercy of world oil markets controlled by OPEC.
This moment is similar with regard to supply, only this time for all goods instead of just oil.
China shut down two of the world’s largest ports — Shenzen in May for a month and Ningbo-Zhoushan for the same in August — because they found Covid-infected workers in those ports and the country is committed to zero Covid (they’ve had fewer than 5000 deaths since the virus first appeared; we’re approaching 800,000).
That was massively disruptive to our supply chains, raising prices for shipping and delaying the arrival of goods, as Bloomberg documented in excruciating detail in August.
The predictable result was both a radical increase in the price of shipping and a multi-months-long delay in goods heading to the US. When those goods started arriving in November, they jammed our ports until President Biden hit shipping companies with a $100/container/day fine if they couldn’t figure out ways to get stuff on the road.
They figured it out in the past month, but the entire process kept more goods out of the market thus driving up prices as wholesalers and retailers outbid each other for goods to sell to the public.
None of this would have been an issue if Reagan hadn’t renegotiated the General Agreement on Tariffs and Trade (GATT) to pave the way for the creation of the World Trade Organization (WTO), and George W. Bush hadn’t walked China into the WTO in December of 2001.
Most Americans didn’t even notice (although Bernie was loudly opposed), as it was so soon after 9/11, but at the time China, with four times America’s population, had a GDP of only about $2 trillion. Today their GDP is over $17 trillion.
Letting every industry in America move their manufacturing (and, thus, their labor costs) to China blew the lid off; their GDP will equal ours ($21 trillion) within a year or three.
In the meantime, instead of getting furniture, clothes and toys from the Carolinas, machined goods from the industrial Midwest, and tech products from California and Texas, we now have to wait for boats to arrive from China for all of it. Seriously: go into a WalMart this week (if you dare brave the anti-maskers) and try to find anything made in the USA.
And waiting for those goods to arrive causes supply chain disruptions that in turn cause shortages which drive up inflation.
As the BBC’s Economics Editor Faisal Islam noted just last week:
“Container ships are the juggernauts of global trade. In the five years after China joined the WTO [in 2001], the number of containers on ships coming in and out of China doubled from 40 million to more than 80 million. By 2011, a decade after the country became a WTO member, the number of containers going in and out of China had more than trebled to 129 million.
“Last year it was 245 million, and while about half of the containers going into China were empty, nearly all those leaving China were full of exports.”
These products used to come to us by truck and train, from one American city to another. Now they come from China, Vietnam, Mexico and other low-wage countries — all so corporate America can keep its labor costs down. And when “supply chain issues” happen, so does inflation.
3. Reagan ended real competition in major industries
Most important, we have multiple industries that are now controlled by functional monopolies (as I detailed in “The Hidden History of Monopoly: How Big Business Destroyed the American Dream”) and are thus no longer subject to competition-mediated pricing pressures.
This was a key part of Reagan’s neoliberal policies, following the dictates of Milton Friedman that corporations, not government, should determine what’s a “free” and “competitive” marketplace.
It’s why hospitals are marking up sutures 675% along with pretty much anything else they want to price-gouge you on: the local, community-owned hospital is dead and it’s almost all giant chains now. Every industry in America, in fact, is now dominated by 3-5 companies that act as a cartel or oligopoly with the explicit goal of minimizing competition and maximizing profits.
American industry has never, in our entire history, been more profitable, and American consumers have never in our history been more severely ripped-off. It’s why in America we pay five times as much as Europeans for cell service, internet service, and as much as ten times as much for pharmaceuticals, among other things.
The average American family pays $5000 a year more than Canadians, Mexicans or Europeans for total average annual family purchases because in 1983 Reagan instructed the DOJ and several other agencies to stop enforcing the Sherman and other anti-trust acts and nobody has restarted them since (although Biden is talking about it now). The last big breakup was initiated by Nixon and finished by Carter: it was AT&T, which has now recombined as a new monopoly.
So these giant companies are making up for lost time, jacking up the prices of everything they can to recover lost 2020 profits. The result looks like inflation but, in reality, it’s just good old fashioned price gouging, something past presidents (FDR and Nixon in particular) use to prosecute companies for.
In summary, inflation is a very real concern. But it’s not Biden’s fault, it’s not simple, and if there’s any politician you want to point a finger at, I’d argue what my wife threatens to put on my tombstone: that “it all started with Reagan.”
Originally posted at The Hartmann Report