What Happened To Productivity? should be a weird and unusual post, but we have such a lousy education system that it isn’t. Therefore, Lobotero can end his post with this absurdity.
Lots of excuses of why this is……excuses does not help the situation…..many blame the output of the workers….why? Workers only produce what they are told to produce…..
I still think that some sort of price controls would help me and my fellow Americans that are struggling with the situation these days.https://lobotero.com/2022/07/13/what-happened-to-productivity/
We are supposed fix inflation with price controls? Workers only produce what they are told to produce? How can lobotero be serious? lobotero doesn’t understand basic economics; he apparently has no idea what causes inflation. Because our government educates us so poorly, most of us don’t even understand why our currency has value. So, here begins an explanation.
What Is Inflation?
Why is our money worth anything? We have fiat money. What does that mean? The value of the US dollar comes from the fact that our government requires us to pay our taxes in dollars. That is, in order to pay our taxes, we need to acquire some of the limited supply of dollars our government prints. Otherwise, a dollar bill has very little intrinsic value. It is just fancy, used paper. However, because we have to pay our taxes using dollars, and dollars are quite portable, we can easily use our nation’s currency as a convenient medium of exchange. So, we do.
What is inflation? We experience inflation when the supply of money increases relative to the supply of the goods and services. Inflation usually occurs when our government spends a bunch of money and/or the Federal Reserve (see U.S. Treasury vs. Federal Reserve: What’s the Difference?) monetizes public debt by printing a bunch of money. Printing money to spend and printing money to pay off public debt can both lead to increases in the money supply. Nevertheless, we usually experience inflation when our government spends significantly more that it collects in taxes. Then the money supply generally increases, and the supply of goods and services cannot keep up.
What about the opposite, deflation? We experience deflation when the supply of money decreases relative to the supply of the goods and services. Because government officials rarely spend less than they collect in taxes, we don’t experience deflation very often. Since most government leaders thoroughly enjoy spending our money, inflation is the norm,
Inflation and deflation are possible because the value of money behaves like the value of grain, cattle, precious metals, wood, and so forth. The value of money is affected by the supply of money and the demand for money. That is, money, like any other commodity, is subject to the economic laws of supply and demand. The demand for money stems primarily from our need to have it so that we can pay our taxes. The supply of money primarily depends upon government spending.
Note also that government borrowing can temporarily limit the effects of excessive government spending (spending more than we pay in taxes), but even the high taxes we pay can only support so much debt. Eventually, our government must either print lots of money to “pay off” the interest on the debt (which results in inflation), or our government must reduce spending, and we must pay a large a large amount of interest on the public debt. Since paying off the interest on the debt makes the problem of excessive government spending altogether obvious, most politicians prefer to print money, and that is our current situation.
Consider the options. We have tried all of them. What can we do when our government spends and borrows lots and lots and lots of money? What has happened as the result of each option?
- In order to spend more and more and more money, in our name our government officials have borrowed more and more and more money. Borrowing limits inflation by diverting private investment to government spending, that is, more government “investment” and less private investment. The end result is steadily increasing government debt and a steady increase in the amount of the government’s budget going towards paying the interest on that debt. Why do something so foolish? Spendthrift politicians like this because they get to spend that borrowed money before the bill comes due.
- In order to spend more and more and more money, in our name our government officials are now printing more and more and more money. Instead of borrowing money, the Federal Reserve has been printing money to support a flood of spending. Why? Because we are already up to our ears in debt, the private market has little interest in loaning our government more money. So, today’s spendthrift politicians have opted to print and print and print more money, and the result has been the worst bout of inflation in decades. Instead of paying increasingly larger interest payments on public debt, today’s spendthrift politicians would have us believe we can print more and more and more money, and there won’t be any negative consequences.
- In order to pay off our nation’s debt, on increasingly rare occasions our government officials have reduced government spending. Reduced government spending leaves more money available for private investment. Increased private investment almost invariably results in increased productivity and an increase in the supply of goods and services. That makes our money relatively more valuable. What is the downside? We have to decide which government services we need to reduce or do without. Unfortunately, too many conniving politicians and greedy citizens don’t like that.
The third option is obviously the one we should prefer, but it takes a knowledgeable, disciplined, and patriotic electorate to make it happen. Let’s see what we can do here to spread some knowledge.
Why me? Am I an economist? No. I am just a voting citizen. As voters, we all need to understand the basic functions of our government. We all need to understand how government regulates our economy, and that includes the regulation of our money. Therefore, I am sharing what I have learned.
To Be Continued
What subjects will we consider in future posts?
- How Much Money Do Our Leaders Want To Spend?
- What Additional Factors Can Produce Inflation?
- What Is Wrong With Price Controls?
- Why Is Inflation A Tax?
- What Should We Do?