“Progressives” mistake as “science” their habit of lumping countless idiosyncratic individuals and things, each always in an ever-changing set of deeply nuanced circumstances, into catch-all categories (such as “consumers,” “labor,” “government,” “the environment,” “the health-care sector,” “the money supply,” “the unemployment rate,” “the capital stock,” and “imports”) and then theorizing about how these big blobs of people and things interact with each other, and how these interactions can be “improved” by an apolitical, loving, intelligent, ever-diligent scientific guiding hand. That professors and their graduate students can assemble data on each of these big blobs of people and things, can write intricate equations describing mathematically how the professors and their graduate students imagine these blobs interacting with each other, and use the gathered data and sophisticated software to “test” the equation-ladened “models” seems oh-so-objective and truly scientific.
Yet most such exercises are b.s. Far too many of these exercises, when done by economists, are done in utter disregard of the meaningful, if impossible to observe from afar, differences that separate from each other each of the individuals and things that comprise each constructed blob. Far too many of these exercise are done by people whose impressive, deep, and vast knowledge of econometric techniques does not begin to compensate for their innocence of price theory, of history, and of formal and informal institutions.
Correctly taught and understood, economics reveals that reality is vastly more complex than the economically untutored mind realizes. Yet this message of complexity is unwelcome by those who want to rule and command. The reason is that to understand the reality of reality’s complexities is to understand that ruling and commanding – the actions of the “man of system” – can only worsen most individuals’ lives. Ruling and commanding of the sort that “men – and women – of system” itch to do can only disrupt for the worse, and not improve for the better, the spontaneous forces of society.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-09-20.
August 2, 2018
QotD: Economic complexity
July 31, 2018
A gruesome experiment in determining the actual need for social housing
Tim Worstall discusses an aspect of the terrible Grenfell Tower fire in London that I hadn’t considered:
The fire at Grenfell Tower in London, 14 June 2017.
Photo by Natalie Oxford via Wikimedia Commons
That the Grenfell Tower fire was a tragedy is obvious. That lessons need to be learned is equally so. At which point, OK, which lessons would we like to learn? One that would be useful is to work out how much of social housing in London – for that’s what the evidence allows us to estimate – is illegally sublet. Or, as we might also put it, how much social housing in London is not actually needed as social housing?
For sublets are, by their nature, at something close to market rents, the difference between those and the social rents being pocketed by those doing the renting out.
No, we don’t know and that might be just because we’ve not been paying the detailed attention required. But it’s also something we tend to think will have been glossed over in investigations into the events. Something that perhaps should not have been glossed over – if indeed it has.
[…] The thought that a place, in the centre of London, where we could house – safely perhaps this time – several hundred people not be used to house several hundred people? We have a housing shortage or not?
However, it’s the insight into that larger question that interests. We know that some amount of social (and or council) housing in London is illegally sublet. The very fact that it is shows that it’s not needed. Those who are paying the landlord a reduced rent clearly don’t need the property as they’re not living in it. Those paying the near market rents don’t need social housing as they’re paying near market rents. Thus subletting shows that the entire structure of – at least in that instance – the social rent isn’t necessary.
So, how prevalent is it? We know that some of it occurred at Grenfell. We’ve all admitted it, clearly, for we’ve not insisted that only those on the tenants’ listing are those who should be granted aid for having had their home burned down. So, we know there’s some. So, how much?
It’s unlikely that we’ve as much information on this concerning any other building in the country. Thus this is an excellent place to actually conduct such research.
QotD: Hostility to international trade
Much suspicion of, and hostility to, international trade is akin to atavistic superstitions that raised in some peoples suspicions of, and hostility to, mating with individuals outside of those people’s ethnic or racial or religious groups. “Only We are worthy of your seed or your womb – They are not!” “Corruption of the purity of Our race is the inevitable result of your conjugal mixing with Them!”
Or only slightly differently: protectionism is much like in-breeding. Like in-breeding, protectionism weakens the economy that practices it. Like in-breeding, protectionism causes the group that practices it to become ever-more stupid, uncreative, fragile, and vulnerable – a population of pathetic misfits destined to be weaker and poorer than are their more-cosmopolitan and open neighbors.
Don Boudreaux, “Quotation of the Day…”, Café Hayek, 2016-09-14.
July 28, 2018
July 27, 2018
“Tariffs are the classic example of government interventions with concentrated benefits and dispersed costs”
Robert Higgs on what he describes its supporters as “waging the trade war to end all trade wars”:
… even as Trump spouts venerable fallacies to justify and seek support for his destructive trade policies and related ad hoc actions, he and his supporters have sometimes offered a strange defense of their tactics: they purport to be seeking, at the end of the game, universal free trade, a world in which all countries have abandoned tariffs, quotas, subsidies, and other government intrusions in international exchange. In Wilsonian terms, they claim to be waging the trade war to end all trade wars. The idea is that by raising U.S. tariffs, they will induce other governments to lower and ultimately eliminate their own.
Of course, this rationale may be nothing more than wily claptrap, tossed out as a rhetorical bone to Republicans who favor freer trade. The administration’s actions to date certainly give no indication that it is aiming at global free trade. On the contrary. So the Wilsonian gambit may consist of nothing but hot air.
But if Trump and his trade advisers actually take this tactic seriously, they are deluding themselves.
First, and surely obviously, U.S. tariff increases will not induce other governments to lower their own, but to raise them, as the EU, China, Mexico, Canada, and other trading partners have already demonstrated. That’s why it’s called a trade war — because the “enemy” shoots back. History has shown repeatedly, most notably in the early 1930s, in the wake of the Smoot-Hawley Tariff Act of 1930, that such trade wars only spiral downward, choking off more and more trade, despoiling the international division of labor in accordance with comparative advantage, and thereby diminishing real income in all the trading countries.
Second, the prospect of the U.S. government’s ever abandoning tariffs is slim to none. Tariffs are the classic example of government interventions with concentrated benefits and dispersed costs. This character makes them attract great support from protected special interests and little opposition from the general public — including other producers — when they are enacted or extended. They are easy for politicians to put in place and diabolically difficult for anyone to eliminate. Although the costs are great — much greater than the benefits for the economy as a whole — hardly anyone’s costs are great enough to justify mounting a potent political attack on the tariffs.
People who get tariffs put in place to protect them in the first place are well positioned to marshal strong opposition to any political attempt to eliminate these taxes on consumers who buy from competing, foreign suppliers. Consumers rarely know anything about why foreign goods are priced as they are, and producers, in general, are usually not affected enough by tariffs on imported raw materials and components to justify well-funded politicking against them.
July 26, 2018
The Trump tariffs are working exactly as designed
That is, they’re becoming a drag on the economy and will take away a lot of the economic activity that was stimulated by the tax cuts enacted earlier. Warren Meyer says that it’s time that congress reclaimed the tariff powers it has outsourced to the executive branch over the years:
I Know Congress Hates To Challenge A President of Its Own Party, But…
…Congress simply has to pare back the tariff authority it has delegated the President. It is simply insane that Trump can just unilaterally impose 20% tariffs on foreign automobiles, a $200 billion new tax on US consumers.
It is appalling to see Trump following the usual blue model of economic regulation, imposing one intervention after another, each meant to fix the unintended consequences of the last intervention. Steel tariffs increased costs to domestic auto makers, so Trump proposes tariffs on foreign autos. When tariffs result (inevitably) in counter-tariffs on US agricultural exports, Trump proposes more agricultural subsidies. People (not me) lament gridlock in government and want more fluid lawmaking — well here it is. And it sucks. It is mindless and reactive and emotional and totally ignorant of economics.
These tariffs, when combined with earlier actions, will result in tax increases on consumers that swamp the tax cuts Trump and the Republicans were so proud of last year.
Jon Gabriel on the most recent “fix” for one of those unintended consequences:
A few months back, President Trump declared that “trade wars are good, and easy to win.” Now, just as nearly every economist on the left and right predicted, Americans are being hurt.
The White House slapped tariffs on imported steel and aluminum. China retaliated with planned tariffs on soybeans, meats and various agricultural products. Mexico, Canada and the European Union also struck back at farm goods and other U.S. exports.
A smart leader would notice his mistake and end the destructive policy. Instead, Trump declared that “tariffs are the greatest” and created a multibillion-dollar federal program to mitigate a small part of the mess he created.
Since Agriculture Secretary Sonny Perdue estimated $11 billion in damage to the industry, he announced a $12 billion payoff to make up the difference.
The administration used emergency executive powers created during the Great Depression; that way Congress wouldn’t get to weigh in.
“This is obviously a short-term solution that will give President Trump time to work on a long-term trade policy and deal to benefit agriculture as well as all sectors of the American economy,” Perdue told reporters.
It’s certainly short-term, but hardly a solution. Trade deals and networks are disrupted, farmers can’t plan for the future, and non-agricultural industries are still losing money. Not to mention all the American consumers watching prices rise on all sorts of household goods.
But red states have a lot of farmers and the midterms are just three months away. Maybe borrowing a few billion dollars will hide enough economic pain to convince voters to keep Republicans in power for two more years.
July 25, 2018
Britain, refugees, and migrants
Alex Noble explains why Britain needs migrants, but not all migrants:
Nurses, doctors, engineers, scientists, computer programmers – our society is very advanced and a big chunk of our economic strength is based on advanced services that need skilled people like these. And there aren’t enough native Brits skilled in these areas – our demand outpaces our supply of people. We need lots of computer programmers and only relatively few native Brits are qualifying in computer sciences. And the shortage of young Brits taking STEM subjects is worsening.
So far so good – we need a supply of skilled migrants for the foreseeable future. Hopefully we can all agree on that.
Do we need unskilled migrants?
Because when people with no skills come to the UK, we suffer and so do they. They are either forced into crime, fall into modern slavery, or find themselves exploited working on the black market.
When they are forced into crime, we see more stabbings and rapes and burglaries and murders.
When they fall into modern slavery we see more people-trafficking, more forced prostitution.
When they are exploited, they are forced to work below minimum wage, and the jobs that young British teenagers might have taken are taken by those willing to work for a pittance just to stay alive. When they find themselves working in the black market, they pay no tax and have no protections.
Modern Britain does not need or desire these things – young people enslaved and forced to work for low pay, exploited, or forced into crime. These are profoundly negative developments for our society, and a grotesque abuse of people who were mislead into coming here for what they thought would be a new life.
Modern Britain does not need unskilled migrants, and should not enrich their slavers.
And that brings us to refugees.
Are there genuine refugees? Yes of course.
But we know what refugees look like – men, women and children staggering over the border into the nearest safe nation with the clothes on their backs and often not much else. Poverty-stricken and unable to return to the homelands, they throw themselves on the mercy of their neighbours. Refugees don’t abandon their families in war zones and travel thousands of miles alone. They do not have thousands of dollars to give to slave traders for a seat on their rickety barges.
What we see on the boats are not refugees.
They are mostly young men coming for a better life. And while we cannot begrudge them those intentions, we have already discussed why unskilled migrants cannot be welcomed here in large numbers. And unskilled migrants they mostly are, because skilled migrants come armed with work permits and speak the language. At the very least they have documentation to prove who they are, because being able to prove you are an Iranian heart surgeon is important. Being able to prove you are a penniless and unskilled Eritrean, who doesn’t speak English……………that’s not an identity worth retaining at a border check.
And so the Mediterranean sea floor is littered with their travel documents.
Genuine refuges stagger over the nearest safe border – we must help them if we can.
The unskilled migrants travel here in boats, trafficked by modern-day slavers into the underworlds of our nations. They may have hope in their hearts, but they are bringing misery into a society that cannot absorb them.
July 24, 2018
The impact of licensing on previously unlicensed jobs
In the current Libertarian Enterprise, Sean Gabb looks at the recent outrage at Jeff Bezos and Amazon and recounts how at least one job he’d done in the past is now closed off to casual entrants due to the growth of licensing:
Let us imagine a natural order — that is, a world without states, or at least a world without the extended patterns of state-intervention that now exists. In such a world, wage labour would continue to exist. There are benefits in working for someone else. An employee commits to a contract of permanent service, in return for which he receives reasonable certainty of payment. Not everyone is or wants to be an entrepreneur. Not everyone finds it suitable to keep looking for unsatisfied wants and the most rewarding means of satisfying those wants. This being said, there would probably be much less wage labour than there is now.
If the present order of things does little to deter men like Mr Bezos, it does much to deter little people from starting little businesses — little business that sometimes replace, but more often supplement employed income. When I was much younger, the easiest way I found of making extra money was to drive a mini-cab. I went to the nearest cabbing office. I showed my clean driving licence. I showed a certificate of hire and reward insurance. I handed over £25 rent for the week, and was given a two-way radio and a cabbing number. That evening, I was taking prostitutes to their clients and pushing drunks up their garden paths. You cannot do this nowadays. Cabbing is licensed and regulated. It costs thousands to get a licence, and the regulations about age and type of vehicle add tens of thousands more to the costs of entry. You cannot get into cabbing unless you can pay these entry costs, and unless you are able to pay them back by working there full-time and long-term. A casual business has been made into a profession.
This is an example of which I have personal knowledge. But there is a vast range of little businesses that bring some money to little people. They have nearly all been placed out of reach. The effect is to increase the supply of unskilled labour seeking employment. Think of a supply and demand diagram. Shift the supply curve to the right. Make it more elastic. Money wages will be lower than they would otherwise be. Conditions of work — and these are part of the overall wage — will be worse. Make laws to prevent the market from clearing, and there will be more unemployment.
A further point I mention without choosing to develop is mass-immigration. This is not the kind of movement you would see in a natural order, where virtually the whole cost of entry and adjustment fell on the individual entrant. It is a movement encouraged and subsidised by the State — encouraged by institutional political correctness, and subsidised by laws that amount to forced association. The effect in economic terms is again on the supply curve for labour.
I have no reason to believe that Mr Bezos and Amazon have done anything to bring about this state of affairs. They simply operate in the labour market as they find it. No one is forced to work for Amazon. Amazon is not a legal monopoly, and has no power to force down wages. It pays at least the going rate. It is not a charity, and cannot be expected to behave as a charity. Blaming Amazon for how it pays and treats its workers makes no more sense than blaming a clock for telling the time.
He also touches on the state-created legal situation of limited liability:
I turn to the objection that Amazon is a limited liability company. This is an objection I accept. Limited liability companies exist because of a grant of privilege by the State. They are treated as persons, responsible for their own debts. Their owners have no liability beyond the value of the shares they own. This grant allows companies to gain more investment capital than they otherwise might. It allows them to grow larger and to exist for longer than they otherwise might. It allows even the most entrepreneurial company to turn gradually into a private bureaucracy, trading favours with the various state bureaucracies. Limited liability turns business into the economic arm of a malign ruling class.
So far as Amazon benefits from limited liability, it is an illegitimate enterprise. But this is not the end of the matter. Amazon almost certainly could exist without limited liability. It would instead have raised its investment capital by selling bonds. It would then only be in form what it plainly is in substance — that is, a projection of its owner’s ambition to achieve greatness. It would still have grown large, and it would have grown large by giving its customers what they want.
July 22, 2018
Debunking the “King Cotton” school of history
In the current issue of Reason, Dierdre McCloskey discusses the claim that America became rich only or primarily due to exploitation of slave labour in the south:
Map showing which areas of the United States did and did not allow slavery between January 1861 to February 4 1861. On February 4 1861, the Confederate States of America was created. Territories and states which had not specifically banned slavery are colored red/pink.
Map by Golbez, via Wikimedia Commons.
In his second inaugural, Abraham Lincoln declared that “if God wills that [the Civil War] continue until all the wealth piled by the bondsman’s 250 years of unrequited toil shall be sunk…as was said 3,000 years ago, so still it must be said, ‘the judgments of the Lord are true and righteous altogether.'”
It is a noble sentiment. Yet the economic idea implied — that exploitation made us rich — is mistaken. Slavery made a few Southerners rich; a few Northerners, too. But it was ingenuity and innovation that enriched Americans generally, including at last the descendants of the slaves.
It’s hard to dispel the idea embedded in Lincoln’s poetry. TeachUSHistory.org assumes “that northern finance made the Cotton Kingdom possible” because “northern factories required that cotton.” The idea underlies recent books of a new King Cotton school of history: Walter Johnson’s River of Dark Dreams (Harvard University Press), Sven Beckert’s Empire of Cotton: A Global History (Knopf), and Edward Baptist’s The Half Has Never Been Told: Slavery and the Making of American Capitalism (Basic Books).
The rise of capitalism depended, the King Cottoners claim, on the making of cotton cloth in Manchester, England, and Manchester, New Hampshire. The raw cotton, they say, could come only from the South. The growing of cotton, in turn, is said to have depended on slavery. The conclusion — just as our good friends on the left have been saying all these years — is that capitalism was conceived in sin, the sin of slavery.
Yet each step in the logic of the King Cotton historians is mistaken. The enrichment of the modern world did not depend on cotton textiles. Cotton mills, true, were pioneers of some industrial techniques, techniques applied to wool and linen as well. And many other techniques, in iron making and engineering and mining and farming, had nothing to do with cotton. Britain in 1790 and the U.S. in 1860 were not nation-sized cotton mills.
Nor is it true that if a supply chain is interrupted there are no possible substitutes. Such is the theory behind strategic bombing, as of the Ho Chi Minh trail. Yet only in the short run is it “necessary” for a good to come from a particular region by a particular route. A missing link can be replaced, as in fact it was during the blockade of raw cotton from the South during the war. British and other European manufacturers turned to Egypt to provide some of what the South could not.
QotD: A touching naivety
… the typical “Progressive” continues to imagine the state to exist in the same way that a four-year old child imagines Santa Claus to exist: as a super-human force for good that possesses a supernatural capacity for pursuing and achieving that good. There is, in practice, no epistemological difference between the belief of many children that dusk on December 24th causes reindeer to fly and the belief of many adults that minimum-wage legislation causes the incomes of all low-skilled workers to rise. Higher-skilled workers, and the labor unions that represent them – as well as some firms that use fewer low-skilled workers than are used by their competitors – are only too happy to promote this juvenile fantasy.
Don Boudreaux, “Bonus Quotation of the Day…”, Café Hayek, 2016-09-04.
July 20, 2018
No end in sight for our national fake poutine crisis
A few key posts from the Twitters to illustrate the problem:
I'm sorry to say, nine months after this story, the National Post did not get action. https://t.co/yuYS7QSymO
— Jake Edmiston (@jakeedmiston) July 18, 2018
Like out west and in BC, people really have no idea what we mean by squeaky curds and why it is pointless to buy them there.
— wheatie (@wheatie4) July 18, 2018
As @perreaux just discovered, this is untrue (if only because, for starters, plenty of westerners have been to Quebec). You can obtain squeaky curds from individual dairy farms or lots of places in the Ottawa Valley; there’s just no supply infrastructure for urban poutine.
— Colby Cosh (@colbycosh) July 18, 2018
You're both right. I was surprised to hear how many people weren't aware cheese curds were supposed to squeak. So without a discerning cheese curd public – of the kind in Ottawa and Quebec – you're not gonna have the demand to support daily shipments from rural dairies.
— Jake Edmiston (@jakeedmiston) July 18, 2018
But also, [dairy supply management is a crock of shit dot macro]
— Colby Cosh (@colbycosh) July 18, 2018
The legacy dairymen all assure me that there is no market for niche or innovative dairy products, such as [checks notes] what is now the defining item of our national cuisine?
— Colby Cosh (@colbycosh) July 18, 2018
Fiat currency and the impact of cryptocurrencies
At Catallaxy Files, Sinclair Davidson explains some of the advantages and disadvantages of both fiat (government-issued) and private currency:
As George Selgin, Larry White and others have shown, many historical societies had systems of private money — free banking — where the institution of money was provided by the market.
But for the most part, private monies have been displaced by fiat currencies, and live on as a historical curiosity.
We can explain this with an ‘institutional possibility frontier’; a framework developed first by Harvard economist Andrei Shleifer and his various co-authors. Shleifer and colleagues array social institutions according to how they trade-off the risks of disorder (that is, private fraud and theft) against the risk of dictatorship (that is, government expropriation, oppression, etc.) along the frontier.
As the graph shows, for money these risks are counterfeiting (disorder) and unexpected inflation (dictatorship). The free banking era taught us that private currencies are vulnerable to counterfeiting, but due to competitive market pressure, minimise the risk of inflation.
By contrast, fiat currencies are less susceptible to counterfeiting. Governments are a trusted third party that aggressively prosecutes currency fraud. The tradeoff though is that governments get the power of inflating the currency.
The fact that fiat currencies seem to be widely preferred in the world isn’t only because of fiat currency laws. It’s that citizens seem to be relatively happy with this tradeoff. They would prefer to take the risk of inflation over the risk of counterfeiting.
One reason why this might be the case is because they can both diversify and hedge against the likelihood of inflation by holding assets such as gold, or foreign currency.
The dictatorship costs of fiat currency are apparently not as high as ‘hard money’ theorists imagine.
Introducing cryptocurrencies
Cryptocurrencies significantly change this dynamic.
Cryptocurrencies are a form of private money that substantially, if not entirely, eliminate the risk of counterfeiting. Blockchains underpin cryptocurrency tokens as a secure, decentralised digital asset.
They’re not just an asset to diversify away from inflationary fiat currency, or a hedge to protect against unwanted dictatorship. Cryptocurrencies are a (near — and increasing) substitute for fiat currency.
This means that the disorder costs of private money drop dramatically.
In fact, the counterfeiting risk for mature cryptocurrencies like Bitcoin is currently less than fiat currency. Fiat currency can still be counterfeited. A stable and secure blockchain eliminates the risk of counterfeiting entirely.
July 19, 2018
“Sustainability”
At Coyote Blog, Warren Meyer explains why it makes little sense to push for higher and higher levels of recycling when the costs of recycling are greater than ordinary disposal:
Sustainability is about using resources in a way that can be reasonably maintained into the future. This is pretty much impossible to really model, but that is not necessary for a decision at the margin such as recycling in Washington DC.
When people say “sustainable” at the margin, they generally mean that fewer scarce resources are used, whether those resources be petroleum or landfill space.
Gosh, if only we had some sort of simple metric that summarized the value of the time and resources that go into a service like recycling or garbage disposal. Wait, we do! This metric is called “price”. Now, we could have a nice long conversation about pricing theory and whether or not prices always mirror costs. But in a free competitive market, most prices will be a good proxy for the relative scarcity (or projected scarcity) of resources. Now, I am going to assume the numbers for DC are correct and are worked out intelligently (ie the cost of recycling should be net of the value of materials recovered, and the cost of burning the trash should be net of the value of the electricity generated). Given this, recycling at $75 a ton HAS to be less “sustainable” than burning trash at $46 since it either consumes more resources or it consumes resources with a higher relative scarcity or both.
The problem with using a common-sense metric like actual real-world prices is that we’ve had two generations of westerners raised to “believe” in recycling the way their forebears used to believe in the Holy Ghost. It’s not a matter of economic efficiency, it’s a moral and quasi-religious belief inculcated from the time they first started kindergarten. Explaining that it’s worse for Mother Gaia to try to recycle 100% of the waste our society produces is — if you’ll pardon the expression — a waste of time, because they were never argued into believing the virtue of recycling, so you’ll never argue them out of it.
July 18, 2018
QotD: Understanding how company profits can be used
In its fight against company tax cuts, [the Australian] Labor [Party] peddles the myth that company tax cuts are a windfall for big businesses and their shareholders, this week even launching ads suggesting [Australian PM] Malcolm Turnbull supports company tax cuts because he’ll personally benefit as an investor.
It’s a myth easily debunked. Think about it. What exactly can a company do with the extra money retained from paying less tax? It can only spend profits in two ways: paying dividends to shareholders or spending more on its operations.
Dividends are subject to tax, including withholding tax for foreign shareholders. Suggesting Turnbull or any other investor will get a windfall is a blatant lie.
In fact, many shareholders will pay more tax to make up the greater difference between the company tax rate and their own tax rate. That’s how dividend imputation works, as Labor well knows.
Alternatively, the company can spend more on things like technology, plant and equipment, funding research and development, expanding its sales force or opening new shopfronts or branches. In other words, more money paid in wages to workers and buying goods and services from suppliers.
All of that spending is also taxed. Workers pay income tax. GST [Goods and Services Tax] is collected on goods and services. Suppliers pay company tax or income tax themselves.
Lower company tax simply allows a business to use more of its money on something productive before the money is collected by government.
Nyunggai Warren Mundine, “Bill Shorten’s Labor would kill the reforms of Hawke and Keating”, Financial Review, 2018-06-26.
July 17, 2018
Measuring Inflation
Marginal Revolution University
Published on 10 Jan 2017Inflation is common in a modern economy. Shifts in supply and demand for goods and services cause prices to change accordingly. When the average level of prices rises, that’s inflation. It means that you’ll need more money to purchase the same stuff.
Inflation in the United States can be measured using the Bureau of Labor Statistics’ Consumer Price Index (CPI) – a weighted average of the price increases. We can calculate the inflation rate by the percentage change in the CPI over a given period of time.
How much do prices actually change? Well, using FRED, we can see that, over the past thirty-three years, prices have more than doubled. That may seem like a lot. However, wages have also risen, on average, by more than prices during that time period. Inflation doesn’t necessarily mean that we’re worse off.
The inflation rate in the United States has averaged at about 2.5% per year since 1980, which is fairly low and indicative of a stable economy. Prices may be increasing, but the changes are small. Wages have time to catch up. You can be confident that the $5 in your pocket isn’t going to be worth drastically less in a year.
Let’s take a look at a different scenario — one that’s playing in Venezuela right now. As the country faces an economic crisis, inflation is skyrocketing. Rates reached 180% in 2015 and have continued to rise since. 5 bolívar in your pocket could be worth less even by the end of the day.
But Venezuela still doesn’t compare to the hyperinflation that Zimbabwe experienced in the 2000s, reaching dizzying rates of billions of a percent per month. (See MRU’s previous video for more!)
While some inflation is perfectly normal, high rates of inflation make it difficult for consumers to use a nation’s currency. If the value is changing a lot by the week, day, or even minute, people don’t want to hold onto or accept the currency for goods and services — leading to a full blown currency crisis.
Up next, we’ll take a deeper dive into what causes inflation and its consequences.
