Ramen, anyone? The Bush Miracle Marches On!

I often wish I had a better grasp of economics. I find it an inherently interesting subject that, if rightly understood, stands in very close relation to political science (in the fundamental sense of politics as figuring out what to do about the fact that we each have to deal with all these others in the world, and economics as figuring out how we will deal with the material requirements of bodily life in the context of our plurality). Maybe the old-fashioned term ‘political economy’ captured that better.

Unfortunately, the vast majority of economists are also zealous free-market capitalists who desperately want to elide the difference between the general science of economics and the prescriptive mandates of their personal ideology. The economics classes I took in college left me practically choking with anger for precisely this reason. I signed up for “Intro to Macro-economics”, not “Capitalists Neocon Ideology 101”. But anyway, that’s another story. I just wanted to preface this post with a disclaimer providing full disclosure of my econo-retardation.

As I understand it, the most basic inflationary scenario (aside from the government just printing tons of money) is that everyone suddenly has more money, thus expanding demand, but the supply of goods remains the same, causing prices to rise. This is supposedly why economists are generally so chary about government interventions to reduce unemployment or raise wages. If everyone just gets more money, prices go up, and general purchasing power doesn’t actually increase. One does wonder, though, why you don’t hear more economists protesting Bush-style tax-slashing on the same grounds. If everyone gets the same retarded $400 check from the IRS, don’t prices just rise to compensate for the extra cash? Anyway, this scenario is called demand-pull inflation. It is most generally managed by monetary policy, which influences the economy by employment of the remarkably blunt instrument of interest rates. When the Fed raises interest rates, credit becomes more scarce, slowing economic activity and reducing demand.

It can also be managed through fiscal policy, but we all know that won’t happen, because our president has budget priorities based on apocalyptic visions and tax policy designed to give loads of money to his rich buds. Federal fiscal policy is currently (and embarrassingly) destructive and profligate. It is more ‘problem’ than ‘solution’. Since the Federal Reserve would seem to be the only federal institution not currently inhabited by greedy monkeys and howling religious lunatics, monetary policy is what we have.

The other primary inflationary scenario involves prices being raised to maintain firms’ margins in the face of rising production costs. In this scenario, demand may not have expanded. Wage pressure has gone up, firms are expanding their profit margins, commodity input prices are rising, or taxes are going up. This is called cost-push inflation, and it has usually been managed by so-called ‘supply side’ policies like union-busting, tax cuts, and deregulation – all intended to reduce the overhead firms incur to bring goods to market.

The problem with this model of managing cost-push inflation is that it assumes that supply is always a function of human economic activity. It usually is, but in the cases of some commodities (like, oh, I don’t know….OIL), supply is influenced by all the usual factors but ultimately limited by a single absolute constant: the amount of oil in the ground. Because there is no supplier of crude oil whose taxes we can lower in order to induce him or her to make more. There’s just the oil that’s there in the ground. There will never be any more than what is already there. Factors relating to extraction and refining being maximally efficient, the scarcity of oil will only ever increase. Ever.
Supply-side policies have a hard time coming to grips with inflation driven by commodity-depletion because their model of supply, like so many things in neo-liberal economics, seems to rest on the hidden assumption that the earth is flat and extends in every direction. In their model, there is always more, and everything can grow forever in a proper policy environment.

Unfortunately, the Earth is quite round. Its surface has finite room for growth, and its interior contains a finite volume of resources.

Are current energy prices amenable to supply-side policies? I frankly have no idea, though it seems to me that if they are, the place to start would be to encourage peace and stability at the international level and to pursue better relations with the Arab world. Too bad, though, since our president is clearly intent on starting World War III instead.

But what if rising energy prices reflect a decline in the amount of oil and gas that can be gotten out of the ground, regardless of overhead or processing costs? Since petroleum or natural gas are involved at some point in the manufacture or production of just about everything, would continuously rising energy costs mean a permanently inflationary economy? How would that scenario shake out in the political realm?

This caught my eye today.

WACO, Texas (Reuters) – Dallas Federal Reserve President Richard Fisher on Thursday said core inflation was near the top of its acceptable range, echoing hawkish remarks he made earlier this week that signal more rate hikes to come. … “In contemplating monetary policy from this point forward, the brow begins to furrow. Most forecasts expect growth to slow from its previous pace … due to volatility in prices for natural gas, gasoline, certain chemicals and building supplies. To protect their profits, businesses may become more aggressive in pressing for price increases,” he said.


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