Pass a Law Mentality

Column 362     August 12, 2022

In every Economics 101 course there is a discussion about economic indicators. Some of the indicators are leading, some are coincidental, and some are lagging. For all of time it has been known that jobs data lags economic activity. The reason is employers are reluctant to lay off trained workers when sales start to slow down. If sales really drop and they’ve laid off workers, employers usually postpone the extra expense of hiring new workers until they have to. Therefore, the decisions involving employment lag BEHIND economic activity making them worthless for predicting the future state of economic activity.

So, when you hear politicians, bureaucrats, economists, and financial experts talk about future economic activity while basing their comments on the latest job data, here’s what you know about them. They are either lying to you, they’re ignorant, or they’re really stupid. There’s only these three options. In the past few weeks we’ve heard hundreds of discussions about the direction of economic activity based on jobs data. This is like having a locomotive engineer operate a 150-car train by looking out of the back window of the caboose and watching the tracks fade away in the distance.

I moved to Nevada from Oregon nearly four decades ago. Oregon was a socialist state back then with five-year plans and a very ingrained pass-a-law mentality for addressing problems. We used to laugh as the legislators outlawed this or that as a way to craft a utopian society. Of course Oregon wasn’t and still isn’t the only state doing this. Every state does it to some degree. And even the Legislative and Executive branches of the Federal government have more often than not been guilty of relying on outlawing problems rather than on fixing problems.

This brings to mind the “Inflation Reduction Act” which Senate Majority Leader Chuck Schumer called “one of the most significant pieces of legislation passed in a decade.”

Inflation occurs when the money supply grows faster than the supply of goods in the marketplace. When the Spaniards were shipping tons of New World gold back home that caused their domestic prices of goods and services to rise. During Germany’s hyperinflation, the government flooded the German economy with billions of newly printed marks. This process can actually work in reverse too where the supply of money or currency remains steady, but shortages of goods occur. If there’s more money than goods prices will rise.

In the past two years or so, the nations of the world flooded the world’s economies with borrowed currencies of all kinds. Interest rates were so low, some countries had negative interest rates. Then came the pandemic shutdowns which resulted in exploding currency supplies rushing up against fewer goods and services. Finally, prices started shooting higher as demand overwhelmed supply.

This massive financial dislocation of the entire world will not settle down in a few months. It may take several years. So, when the legislators say they are solving inflation by passing the Inflation Reduction Act that will only work if it shrinks the money supply while freeing up businesses to produce more goods and services.

But what does the Inflation Reduction Act do?

Private equity fund managers get to shield the majority of their income from higher taxes. So the rich get richer. The bill prints $80 billion to fund the IRS over the next 10 years to expand its audit capabilities, as well as a bevy of technology upgrades. Electric car makers get an extension of a popular $7,500 per vehicle customer tax credit for EVs. Solar and hydrogen companies and operators of nuclear reactors may benefit from a $30 billion production tax credit. All of that calls for printing more money.

Then, the bill picks up the tab on various medications while postponing increases in Obamacare premiums. Manipulating prices in the marketplace does not solve inflation. Only a reduction in the money supply versus the quantity of goods and services for sale can stop inflation.

The new bill also raises taxes on small businesses. That takes money away from small businesses which they could have used to grow. That hinders the production of more goods and services. So, all in all, the legislation is just more of the same kind of damaging policies that led to where we are today.

The only way to stop price inflation is to shut down borrowing and shrink the money supply. The inflation we’re dealing with today has momentum in its favor. Unless everyone tightens their belts together and postpones unnecessary purchases, inflation will continue which means the purchasing power of the money people have and earn will continue to fall in value.

Postponing unnecessary consumption for a year or two causes little if any hardship. Paying off debts rather than adding to them actually sets the stage for vigorous recoveries. But being fiscally responsible is not on our legislators’ radar screens. That’s obvious with the passing of the Inflation Reduction Act. If the fear is that being fiscally responsible will start a recession/depression, maybe the next step our legislators have planned for us is more conflict with Russia, China, Iran, and North Korea. Wars are a favorite tactic for hard times.

The pass a law approach to solving problems usually involves printing and spending more money. We’re certainly in interesting times.

To your health.

Ted Slanker

Ted Slanker has been reporting on the fundamentals of nutritional research in publications, television and radio appearances, and at conferences since 1999. He condenses complex studies into the basics required for health and well-being. His eBook, The Real Diet of Man, is available online.

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