In recent decades a recurring economic problem was deficient aggregate demand required to generate full employment. Inflation was not a problem. But now, the problem is increased spending on deficient supplies, driving up prices.

Inflation is said to be “too much money chasing too few goods.” But this simplistic observation neither explains why this is happening nor leads to pragmatic solution.

Classic cost-push inflation experienced during the mid-20th century was attributed to organized labor demanding higher wages to meet rising prices, leading management to further raise prices — an upward spiral pushing prices up.

Inflation of the late 1960s and early 1970s involved OPEC and rising energy prices, exacerbated by then-record federal deficits of the Reagan Administration. It took tight monetary policy with painfully high interest rates to bring inflation under control.

This current inflation resembles post-WWII inflation. During WWII, full employment brought increasing incomes to workers. They were unable to spend this income on civilian goods that were unavailable or rationed and under federal price controls. Earnings went into war bonds that helped finance the war, and built up a stock of savings.

After the war, fed by accumulated savings, demand for housing, automobiles, appliances, and everything else increased dramatically.  Factories and farms replaced worn out capital equipment. But switching from production of planes tanks, and guns to automobiles, tractors, and appliances could not turn on a dime. With release of price controls and that pent-up demand fueled by savings, prices soared.

This pandemic, and recovery, however gradual, has led to a somewhat similar situation. During the depth of the pandemic, consumer spending dropped dramatically. Many employees, particularly in service industries like travel and leisure, were laid off as those businesses shut down. Other employees, such as those in health services and meat packing, continued to work under stressful and dangerous conditions. 

As much of the economy was shutting down, urgent measures were required to keep workers and businesses financially afloat, and the economy from tanking. Even President Trump and his corporate and Republican supporters who are not fans of the Keynesian solution — any port in a storm — with support of Democrats, supported massive government spending to keep workers and businesses afloat. However imperfect were these measures, such spending was necessary to keep the economy from going into deep recession.

Federal spending continued under the Biden Administration — this time without Republican support. Nevertheless, federal spending kept many children out of poverty and families financially afloat during difficult times. With much of the economy shut down, and limited demand for goods and services, the American savings rate actually increased.

With signs that the pandemic is easing and, with it, easing restrictions, the pent-up demand fed by savings, against restricted supplies, is causing prices to rise. So why the restricted supplies and supply-chain problems?

There are several reasons. The “efficiencies” of international trade and “just in time” inventory management are double edged swords. Just as a finely tuned highly sophisticated machine is “efficient,” while it is running, the slightest glitch can cause it to stop.

Reduced prices enabled by efficient use of resources and international trade is at the cost of dependency on foreign suppliers. This pandemic was international, a major glitch on foreign production and transport of inputs and product.

Efficiencies of “just in time” inventory management reduce costs of maintaining inventory. But with any glitch in the supply chain, there is no inventory on hand to sell.

This pent up demand combined with supply issues explain the “money chasing goods” phenomenon. And, even corporations with no supply issues find general inflation a convenient reason to increase prices — because they can, thus exacerbating inflation.

There are various issues related to the labor market. Employers cite difficulty in hiring workers to fill vacancies. A frequently cited reason is that workers have been spoiled by government largesse, and “just don’t want to work.”

It is surely far more complicated than that, involving both the pandemic and demographics. The massive Baby Boom generation, born between 1946 and 1964, is now between the ages of fifty-eight and seventy-six. Many have already retired. The remainder soon will be retired or contemplating it, reducing the size of the labor pool.

The pandemic that forced people out of the labor market has caused many to revisit their work-life balance. Some, particularly those believing they could afford it, actually liked spending more time at home, and have opted for early retirement. While some may regret it later, that does not increase the labor force of today.

Others have used this tight labor market to seek more lucrative employment. Many, especially those in high-stress, low paid, jobs in travel and leisure have successfully gravitated to more rewarding employment. We can expect ever fewer employees willing to prepare our food, serve it to us, and clean up after us for poverty wages. Consider that in Switzerland, yes, restaurant prices are high. But chefs and wait staff are paid a living wage — and customers are willing to pay for the luxury of having someone else doing the work of feeding us.

Many workers in health care and education professions are fed up with overwork, harassment, and abuse by politicians and elements of the public. They are considering early retirement, or more satisfying work.

Still others are concerned about health risks as the pandemic is not yet over. 

Getting people back to work in health care, education, travel and leisure, and all the rest of it would lead to greater national economic efficiency and help to counter inflation.  

That leaves it to the Fed and tighter monetary policy to reduce demand. But to reduce demand through higher interest rates without causing recession is a tight rope to walk. And tighter monetary policy does not increase supply.

Many women would like to get back to work if affordable child care were available. The pending Biden legislation would address this, and directly reduce costs of pharmaceuticals. But that legislation is essentially dead for now.

Current inflation remains a political as well as an economic issue.

— John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears monthly in the Monroe Times.