Thursday, February 3, 2022

The Inflation Beef

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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