126th Edition
Things that cost too much
It’s no secret that everything costs a lot more today than it used to, especially food, housing and education. Adding the increased expense of utilities, services, and well, just about everything, many families struggle to make ends meet. What, if anything, can be done about it, and perhaps more importantly, by whom?
Before I try to answer that, I think a basic discussion of the laws of economics will provide helpful context. First, in a free-market economy the marginal price is largely determined by negotiation between a willing buyer and a willing seller. Acknowledging that a free-market economy doesn’t exist today, it still seems worthwhile to explore this relationship between buyer and seller. A willing buyer is one who has the means to purchase and has determined that the good or service is worth the offering price. In general, over the long term, sellers establish the offering price in order to maximize total revenue. Again, this is how it works in a free market economy. Crony capitalism, which exists today is much more complicated. Corruption, over-regulation, and ineffective government policies distort supply and demand, resulting in higher inflation and slower economic growth over the long term.
It is also important to understand that there is an emotional aspect of inflation affecting both buyers and sellers. If buyers feel good about their overall financial situation as well as their employment prospects, they are generally willing to pay higher prices for goods and services. Businesses take advantage of this, always keeping in mind the goal to maximize total revenue.
As prices on just about everything continue to rise, buyers will increasingly struggle with the means, but will also rethink the value proposition. For example, the astronomical cost of a college education has made a lot of people question its value. I think this trend will accelerate as prospective students consider alternatives, including learning trades, starting businesses, and attending more affordable community colleges. I’m not predicting college tuition will decline but I do think the rate of increase is likely to slow.
Soaring housing costs have led to a similar shift as families weigh the relative value between ownership and renting. The list goes on and on. Buyers prioritize, distinguish between wants and needs, and sacrifice short-term desires for long-term aspirations, just like they have always done. But these adjustments take a relatively long time to impact prices and can be offset by all kinds of short-term forces. The massively disruptive experience of the Covid pandemic was a good example.
Due to many factors, including profligate government spending and stimulative monetary policy, an inflationary mindset has existed over the past decade. Consumers, as well as businesses, expect future inflation and adjust accordingly, which tends to make future inflation a self-fulfilling cycle.
This brings me back to my earlier question – What, if anything, can be done about it, and perhaps more importantly, by whom? It’s not clear to me that basic economic forces nor government policies will be successful in reducing inflation let alone eliminating it. So, the current inflationary mindset is likely to persist. Why does this matter? Even relatively low inflation of 1-2%, which we haven’t seen in over a decade, erodes purchasing power over the long term. It especially stresses families and individuals that live on a fixed income. Retirees in particular, suffer from inflation given their incomes are relatively fixed. It also makes the American Dream of home ownership less available to more families, particularly new families who haven’t created enough savings to offset the escalation in housing costs. Inflation, over time, tends to exacerbate income inequality. In addition, it puts pressure on the Fed to keep rates higher than normal, which also hurts the housing market and the overall economy.
There are basically two ways to fight inflation. The first is for the Fed to raise interest rates high enough to put the economy in a recession, thereby lowering demand which eventually leads to lower inflation. Obviously, forcing a recession is not the ideal way to fight inflation. The second is through innovation in the free-market economy. Technological advancements and new discoveries can produce goods and services at lower prices across a multitude of economic sectors. This dynamic doesn’t work quite as well under crony capitalism, which, unfortunately, is what exists today. Hence, the inflation problem is unlikely to go away any time soon.
What all this means is that the standard of living has peaked in our country and subsequent generations will struggle and likely fall short of the standard of living of previous generations. This will be a new experience for our country. My sense is that future generations won’t like it. What they will do about it remains to be seen. I just hope they study economics, incorporate the life lessons from history, and re-embrace traditional values – faith, family, and civic responsibility. Is this too much to expect?
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Michael Kayes
*These views are my personal opinions and are not the viewpoints of any company or organization.