Inflation has another definition
Until last week, I did not realize there was a rift in the political world around how one defines the economic concept of recession. The concept seems less economic and more political. For decades the definition of recession was tossed around as two consecutive quarters of declining or negative growth in gross domestic product.
But last week, the Biden administration asserted that there was no technical definition for recession, at least to the extent of two quarters of negative growth. You have to consider a broader set of factors, like growth in non-farm payroll, increases in wages, changes in consumption, and the number of people entering the labor force before drawing the conclusion that the economy is slowing down.
The Republicans and conservatives are, of course, taking issue with the change in the definition of recession. The general consensus among them was that the change in definition signaled by the Executive Office of the President, the Treasury secretary, and the chairman of the Board of Governors of the Federal Reserve System not only demonstrated coordination between the Federal Reserve and the Administration, but served as a gimmick for painting a view of a stronger economy. The Republicans also, and rightfully so, saw the Democrats taking the opportunity to rebrand Mr Biden’s Build Back Better legislative initiative which has yet to pass the Senate.
I see another change in the definition of an economic concept. This time the concept is inflation and the flip is occurring in Georgia.
How Abrams and Kemp define inflation
Georgia is three months away from elections for governor as Democratic candidate Stacey Abrams; incumbent Republican candidate Brian Kemp; and Libertarian candidate Shane Hazel vie for four years in the Governor’s Mansion. The three candidates have different views on the causes of and solution to Georgia’s inflation problem.
Abrams’ recommendation for combating inflation involves additional spending. She wants to see increases in wages and wants to increase spending out of the state’s Affordability Housing Trust Fund from the current level of $3 million to $32 million.
In addition, Ms Abrams wants to create a permanent Emergency Rental Assistance fund, including distributing $450 million in rental assistance funds from the Biden administration that have yet to be distributed by the state of Georgia.
Mr Kemp appears to focus his inflation fight on the prices faced by taxpayers at the gas pump. An exemption on the state’s gas tax has been extended until 13 August. In addition to maintaining Georgia’s budget surplus. Mr Kemp has set low spending limits on state revenues.
Both candidates appear to define inflation as an environment where taxpayers are paying higher prices for the goods they need in order to get by. This takeaway is broad, but remember that the policy stances espoused by politicians have to follow Policy Pronouncement 101: policy should give you enough room to be flexible, especially when you are selling political packages claimed to help, but in reality, and with time, will demonstrate the opposite.
But just how impactful would these recommendations be on the causes of inflation? Are they just band-aids? If state policy does not have an impact, why discuss them at all?
The monetary definition of inflation and the consequences…
What Mr Kemp and Ms Abrams have left out of their broad definitions of inflation is the dollar. With a central bank sitting at the corner of Peachtree Street and Tenth Street in Midtown Atlanta, you’d figure the candidates would make an appointment with Federal Reserve Bank of Atlanta president and chief executive officer Raphael Bostic and get a working definition of the concept.
Inflation, in summary, is a monetary phenomenon where the supply of money has been so increased and distributed that there is too much money chasing too few goods. As Libertarian candidate Shane Hazel has observed, the money sloshing around in the economy is not sound. Since it is not tied to an asset like gold, the central banks are exploiting the fiat spawned by the lack of tether, printing money beyond restraint.
The root cause of inflation is not a politically sexy discussion. The failure to explain in basic terms why Georgians are experiencing inflation based on the above definition is not going to rile up voters. Political power is about bagging and dragging voters to your side of the aisle and the narrative has to push those emotional buttons.
And the button pushing is unfortunate because it means touching people “in their feelings” and quite frankly that type of manipulated and uneducated voter should not be in any voting booth.
Neither Kemp or Abrams’ plans aid Georgia’s fight against inflation. Quite the opposite. Abrams’ plan takes excess money and puts it in the hunt for too few goods. Makes no difference whether the money is distributed directly to the taxpayer and then she buys goods and services herself, or if the government takes the money and provides it directly to the vender. Her plan provides the final piece of the “too much the money chasing too few goods” process.
If Mr Kemp believed a tax policy would do the trick, he would advocate for raising the sales tax (Yuck!! I know). But if he understood the causes of inflation, that inflation was a monetary phenomenon, then he would aim policy at slowing down spending thus reducing the need to put more money into the system.
Stacey Abrams and Brian Kemp should either remain silent on inflation or at, maximum, learn the causes of inflation and share that knowledge with voters. What they are proposing in terms of spending and taxation provides political optics and nothing more.
4 August 2022
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