By Kevin D. Williamson
Thursday, February 03, 2022
Everybody hates inflation. Except when everybody
loves inflation. But right now, everybody hates inflation.
Joe Biden? That guy is hating inflation most of all. He
looks in the mirror and sees Jimmy Carter with raggedy hair plugs.
The Democrats have figured out, after a period of painful
discovery, that they have an inflation problem, a serious political liability
proceeding from several contributing causes. The disruption of supply chains
and the labor market by the Covid-19 epidemic would have, on its own, pushed
many prices higher, and that trend has been supercharged by policies meant to
mitigate the economic effects of the epidemic, such as extraordinary federal
expenditures and enhanced unemployment benefits, which in effect bought some
share of labor out of the work force. Continued high levels of spending under
the Biden administration and a Democratic Congress have kept up the
inflationary pressure, as has the expectation that any course corrections to
either fiscal or monetary policy in the near term will be modest. Democratic
hostility toward petroleum-based energy and related infrastructure (from
pipelines to export-import facilities) has contributed to higher energy costs,
and partly successful Democratic efforts to impose a $15-an-hour minimum wage
or a higher one (it is $16.45 in Palo Alto and $17.27 in Seattle) have put
upward pressure on labor costs.
Democrats could, not without some justification, argue
that there probably would have been similar price inflation under Republican
government, and if they are correct about that, which they may well be, it is
in part because Republicans have grown much more comfortable with relatively
high levels of social spending in the past decade or so, and because a
Republican president (especially a Republican president named Donald Trump, the
self-proclaimed “king of debt”) would be no more eager to shut off the stimulus
spigot or see interest rates rise than the current Democratic president is. But
that is speculation: We have a Democratic government whose policies are
contributing to the current inflation problem, a situation for which Americans
are likely to blame and punish them.
No, Joe Biden didn’t create Covid-19 — and Richard Nixon
didn’t start the Vietnam War, either. Presidents get what they get.
Americans sometimes cheer rising prices. When house
prices rise, homeowners glow, and this is taken as a sign of good economic
health — not for any real economic reason but for political reasons:
Rising prices make homeowners richer, and they make first-time home-buyers
poorer, but homeowners, who are generally older and more affluent, are more
active voters and bigger taxpayers than are the generally young and
less-affluent first-time buyers, and so their interests have weight. Rising
prices for stock shares and other financial instruments are celebrated as a
sign of good economic health for the same reason. Which is to say: If you
bought a house in Austin for $500,000 a decade ago and picked up a truckload of
Apple shares at $20 at the same time, then you are sitting pretty today — but
if you are just getting into those markets, the buy-in is steep. In a country
with slow population growth (the rate was about 1.3 percent a year in the 1990s
but is barely 0.4 percent today), there isn’t much reason to assume that a
30-year-old house is going to be worth a lot more in real terms than it was
when it was new, but driving up housing prices is the explicit goal of our
overall housing policy (see “The Committee to Reinflate the Bubble,” National
Review, June 8, 2009), irrespective of all that empty pious talk about
“affordable housing.”
Some rising prices irritate Americans more than others.
If the price of gasoline goes up $1 a gallon, then the nation screams bloody
murder with one manic voice. If the price of a gallon of milk, a pound of rib
eye, or a new sofa rises too quickly, then Americans may get mad enough for
that to be a political problem. And that is where the Democrats are right now.
Joe Biden was elected to the Senate before Jimmy Carter was elected president,
and so he has been around long enough to understand that inflation helped to
put the last nail into Carter’s political coffin even though the high inflation
of the 1970s did not start under Carter’s administration, did not directly
result from Carter’s policies (Lyndon Johnson was more to blame, but he died of
a broken heart not long after Richard Nixon’s 49-state landslide in 1972), and
was beginning to be tamed by Carter’s man at the Federal Reserve, Paul Volcker.
All important qualifiers for the historians, to be sure, but none of that was
enough to save him.
Economists will tell you that there is an important
difference between asset inflation (higher housing prices and
higher share prices) and consumer-price inflation (higher
hamburger and tennis-shoe prices), but the two phenomena are complexly
intertwined, in part because those assets form the capital that produces
consumer goods. If the price of real estate goes up, for example, then the
price of warehouses will go up, and the price of using warehouses
will go up, too, putting upward pressure on the price of everything that comes
into and goes out of warehouses — which is basically everything. Rising land
prices put upward pressure on the price of products ranging from food to
energy. Higher housing prices in economic hot zones such as the Bay Area and
Washington put upward pressure on wages in those areas and in the industries
associated with them, and firms then look to pass along that cost increase to
consumers, vendors, business partners, etc. The same low interest rates that
support high share prices and rising house prices also tend to make cars more
expensive — relatively cheap financing brings more buyers and more money into
the market, the effects of which can be particularly intense in times such as
these, when supply lines have been disrupted and cannot always keep up with
demand.
These are economic realities, not moral dilemmas.
President Carter said that the nation’s economic problems were the result of a
“crisis of confidence.” Democrats in 2022, being a less articulate bunch, have
decided to blame the inflation resulting in part from their own policies on
that all-purpose bogey, “greed.”
As it turns out, Corporate America has a funny way of
indulging its “greed.”
Consider the example of McDonald’s. In many ways,
McDonald’s is coming off a very good fourth quarter, with same-store sales up
more than 12 percent around the world and up nearly 8 percent in the United
States, handily beating Wall Street forecasts. The company plans aggressive
expansion in the coming year, with $2.4 billion in new capital expenditures and
nearly 2,000 new restaurants. That’s a big deal for an old company. Sales are
up, business is booming — but the firm’s profit is lower than
expected, and its stock price declined by more than 2 percent when the
disappointing Q4 numbers were announced. And it is worth noting that this
lower-than-expected profit came at a time when the company is raising prices
— something that fast-food companies are generally hesitant to do, because
their customers are very price-sensitive. And while McDonald’s remains almost
absurdly profitable (with recent margins above the 40 percent mark), its total
revenue today is lower than it was a decade ago, meaning that it already has
captured many available efficiencies, running a business operation that is
considerably leaner than its main product is.
Strong sales, weak profit — how does that happen to a
corporate giant such as McDonald’s?
The hamburger chain is not famously generous to its
employees — Democrats have been known to mock honest food-service work as
“McJobs” — but it currently is raising its wages at company-owned stores and is
encouraging its franchisees (who own most of the restaurants) to do the same.
Assistant managers can expect to start at $20 an hour or more, and the firm
forecasts that most of its starting workers will soon earn more than twice the
federal minimum wage. As a purely mathematical and legal question, McDonald’s
could pay its workers less — but as a practical business question, it cannot
pay its workers less, just as it cannot jack up prices however high it likes.
There are two sides in a market.
And for McDonald’s, rising wages are only part of the cost
picture — basic ingredients such as beef and vegetable oil are getting more
expensive, too. So is the cost of transportation, a heavy burden for a company
that pays for as much hauling as McDonald’s does. (The company’s decision to
make breakfast items available after 10:30 a.m. at most U.S.
locations was put off for years, in spite of acute consumer demand, because of
the logistics challenges involved in getting those Egg McMuffins in the right
place at the right time.) Energy, real estate, dairy products — everything you
buy by the pound, McDonald’s buys by the ton.
And just as McDonald’s isn’t paying fry-guys more out of
the goodness of its corporate heart, neither is it raising prices out of spite.
There are underlying economic realities that cannot be wished away.
“All right,” the Democrats might argue, “maybe McDonald’s
is only passing along higher costs — and the real villain is greedy beef
producers.” It is true that beef prices rose faster than other protein prices
such as chicken and eggs. Part of that is plain biology: During the Covid-19
downturn, many kinds of animal production were interrupted, and beef ranchers
went as far as to cull animals that could not be sold or processed. Egg-laying
chickens are basically a machine you can flip on and off, but heifers consumed
as beef are usually 18 to 24 months old, meaning that ramping up production can
take a couple of years.
The purely economic factors can get pretty complicated
pretty quickly, but we should not ignore the contribution of public policy. Go
back to housing prices: Austin is a fast-growing city with a lot of high-paying
jobs and hot new tech money; Philadelphia is a city that is growing a little
bit but one that still has fewer people today than it did in 1990 — or 1920;
Detroit lost 10.5 percent of its population from 2010 to 2020 and is not
exactly the hot new place for the young and upwardly mobile. But housing prices
in all three markets rose by almost exactly the same amount — about 15 percent
— in 2020. Very different markets, very similar outcomes: That is politics at
work, not the unencumbered market.
The story at McDonald’s and a thousand similar companies
would be the stuff of populist dreams — higher wages paid for at least in part
by compressed profits — if not for the eventual effect on consumer prices.
Everybody likes to see paychecks getting bigger — until the price of a Happy
Meal goes up.
The Democrats’ talk about “greed” is moralistic nonsense,
of course, but they would rather indulge such nonsense than think seriously for
ten seconds about spending or the run-on effects of sustained economic
stimulus. Joe Biden and the Democrats want this to be someone else’s problem.
If they keep ignoring the facts, it most surely will be —
and soon.
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