In his recently released book The Cloud Revolution, Mark Mills relayed to readers the remarkable fact that “it is one thousand times cheaper to light up a room today than it was at the dawn of the twentieth century, and ten thousand times cheaper than in 1845.” So what’s up with this big decline in price? Reduced economic growth since the mid-19th century, or reduced demand for electricity?
With only slight exaggeration, that’s seemingly how expert economists like Jason Furman would explain the alleged mystery of falling prices. Thoroughly of the belief that consumption and “demand” are the drivers of economic growth, individuals like Furman see rising demand as the same as rising prices. Except that demand is logically a consequence of economic growth. Production is what enables the demand.
If anyone doubts this, try to be a “consumer” for a living. Unless someone else shifts the fruits of their production to you in the form of spending money, unless someone pays you to buy things (not totally unreasonable in modern times given the fascinating evolution of work), or unless you’re the inheritor of the fruits of past production, purchasing goods and services will be an impossibility absent production first. But that’s a digression, at least in a sense.
Back to the purpose of this piece, the well-regarded economist in Furman published an op-ed last week listing his reasons for us to “Keep Worrying about Inflation.” Sadly, Furman’s demand-side view of the world has rendered his reasoning a little bit shaky.
Furman asserts that one major driver of rising “inflation” going forward will be that “the economy is beginning 2022 with much tighter labor markets than a year ago.” Which is irrelevant on a lot of levels. For one, all economic activity stateside is part of a global whole. The U.S. isn’t some economic island of autarkic activity as much as the work done here is divided up with labor forces and factories around the world. Assuming shortages of people or capacity in the U.S., American businesses have access to physical and human resources around the world.
Much more important about the economic growth that Furman incorrectly deems inflationary is that the growth by its very name signals reduced labor pressures. Indeed, economic advance is a consequence of investment that enables greater and greater amounts of production with fewer and fewer human and physical inputs. In other words, alleged human and physical shortages take care of themselves via the growth that economists wrongly believe is the source of rising prices. Growth is all about falling prices simply because the why behind investment is to yet again produce more with less. See Mills above. If economic growth takes off, a certain sign of it will be falling prices.
Furman then writes that another source of rising prices will be that “demand should remain above pre-pandemic trends, while supply will continue to lag behind.” No. Demand is once again the logical consequence of supply. We produce so that we can consume, which means there’s no way supply will “continue to lag behind” demand.
To the above, Furman might reply that the products and services we’re demanding have changed since the gradual end of the lockdowns, thus unearthing supply/demand imbalances. Ok, but if so, there would be no inflationary implications emerging from such a scenario. Think about it. Higher costs for certain goods and services due to surging demand logically signal falling costs for other goods and services. Put another way, if Furman has $100 burning a hole in his pocket that he intends to spend on ground beef, ice cream, and candy bars, what happens if the price of ground beef doubles? Obviously he’ll have fewer dollars for ice cream and candy. Supply/demand imbalances cannot cause the general price level to rise.
Furman then argues that “consumers, businesses, forecasters and financial markets all expect near-term inflation to be about 1 to 3 percentage points higher than a year ago.” Which means what? If we ignore that TIPs indicate very little market expectation of “inflation,” the reality is that consumer expectations about prices are much more than meaningless. Goodness, did consumers expect with the dawn of flight that it would eventually be accessible to everyone? Flat-screen televisions fetched $25,000 when the 21st century began, but today we can get a much better flat screen for a few hundred. Did consumers expect this? No. Which speaks to the confusion informing Furman’s analysis. He misses once again that investment is what powers economic growth, and growing businesses are rewarded for investment that enables the production of much more for much less.
Put another way, high prices are manna from heaven for businesses looking to grow by – yes – pushing them down. Furman resides in an academic world in which producers seek to gouge customers care of their alleged “pricing power.” Not really. “Price gouging,” assuming it’s possible, is the way in which businesses place bull’s eyes on themselves. The best businesses get that way by relentlessly charging less and less for more and more. Basically, Furman gets it backwards. Once again.
Still, it’s worth asking the question: will prices remain elevated? It’s certainly possible. Let’s not forget what’s true, and what’s already been mentioned in this piece: nearly all production nowadays is born of intense global cooperation among producers. These ties that bound the world together were tragically shredded to varying degrees by alarmists like Furman in 2020. In which case, only an academic like Furman could expect the remarkable symmetry that existed before March of 2020 to be recreated overnight. Recreating and improving on what prevailed before politicians panicked will be a challenge. In short, prices could potentially remain elevated for reasons Furman doesn’t list.
It’s all a long way of saying that what concerns Furman shouldn’t concern readers. It shouldn't because it's not inflation. Inflation is a devaluation of the currency. Naturally the latter doesn’t come up in Furman’s analysis, which is a basic signal telling us that he’s worried about something he doesn’t really understand.