The Case for Inflation

If you’re wondering whether I am going to argue the current rate of inflation is not an issue, do not worry. Temperatures here in the Great White North have run 10 to 15 degrees above normal, so brain freeze is not at fault. Inflation, especially excessive inflation, affects the economy and the general population. Unless you’re Barre Seid, the Chicago businessman who just gave $1.6 billion to a GOP PAC to prop up the flailing campaigns of Dr. Oz, J.D. Vance, Hershel Walker and Ron Johnson. Inflation needs to be alot higher than seven or eight percent before Mr. Seid misses a meal or has to sell one of his many multi-million dollar homes.

This post is about the parable of a frog in a pot of boiling water. As long as the water temperature rises incrementally, the frog does not notice until it is too late. But turn up the heat all at once and you’re looking at a reptile revolt. Such is the case with inflation over the past quarter century.

For the 12 years (1997-2008) the average annual rate of inflation was 2.67 percent. Eight of those twelve years, the GOP controlled the White House and the Senate. I do not recall any Republican complaining about inflation when they were in power. Because that was normal. An inflation rate between two and three percent is considered acceptable.

In contrast, the average annual inflation rate for the next 12 years (2009-2020) was 1.42 percent. Which means, for a dozen years, inflation was on average 1.25 percent less than accepted or normal. Much of that decline resulted from two global phenomena, first the Great Recession followed by a worldwide pandemic. Think of it as a volcano where the magma is heating up below the surface with no place to go. Eventually there is a crack in the magma dome and the volcano erupts.

If prices had increased at a typical inflation rate for the past 12 years, prices would be where they are today, maybe even higher. Like the frog in hot water we would not have panicked. But when that burner is turned up to high all at once, it shocks us.

When I worked at the National Governors Association we were in the middle of what was called the “new economy,” based on technology and information. Then Colorado Governor Roy Romer was the chair and invited his son Paul, a future Nobel Prize winning economist, to address his colleagues at the NGA annual meeting. Paul’s message. “The new economy still operates under old economy rules.” There will still be business cycles with alternating periods of economic growth and recessions. Despite gains in productivity there will still be inflation.

In 2018 Paul Romer and William Nordhaus won the Nobel Prize in economics for their work on long term growth and its relationship to climate change. That day back in 1993, he earned one for speaking the simple truth. We should have listened better.

And While I’m At It…

A similar principle applies to the cost of a college education and why the Biden student debt forgiveness program not only makes sense, it is a necessary realignment in public education resulting from state abdication of its past commitment. According to The Chronicle of Higher Education, 25 years ago aggregate state funding for public colleges and universities was 140 percent above federal spending for the same purpose. Little by little that commitment fell to 12 percent today. Not because federal spending rose which it has not, but due to state budget reductions during the great recesssion followed by attacks on higher education by the leader of the political party who openly admitted, “I love the uneducated.”

In other words, public colleges and universities have gone from state-funded to state-supported to barely state subsidized. To stay in business, there was only one choice. RAISE TUITION. And that is where the frog in boiling water comes in. Incremental increases in tuition over 25 years spread out the pain until students got the bill in the form of their student loan principal when they graduated.

Public support of higher education is “pay it forward” at its best. General tax revenue appropriated for this purpose was the price we all used to pay to keep tuition affordable for future generations. As states cut higher education budgets, we shifted that burden onto the backs of individual students.

I’ll use my own experience to demonstrate the impact. In 1971, my in-state annual tuiton at the University of Virgina was $1,600. Today, it is $18,900. “Isn’t that the cost of inflation?” you ask. My $1,600 annual tuition would cost $11,705 today. In other words, each new in-state student pays $7,195 above inflation. That’s almost $30,000 over four years. And the numbers increase exponentially if you include graduate or professional school.

Is it totally fair to those who already paid off their student loans or to those with a taxable annual income exceeding $125,000? Probably not, but nothing is ever totally fair when it comes to funding formulas. But it is significantly more equitable than asking matriculating students to make up the entire shortfall for the decline in public support for higher education.

For what it’s worth.

2 thoughts on “The Case for Inflation

  1. All points well-expressed and will-taken, Doc. Thanks for opining even while exploring other vistas.
    (Not sure if you’ve kept up with local news while away. But the new Editor of the FBNL made a call for new columnists from the community in yesterday’s issue. I immediately thought of you. Lord knows, you have important things to say, if you are game for handling the heat!)🤗

Comments are closed.