Inflation V

 

Rain

Shine, the weather's fine.
Can you hear me, that when it rains and shines,
(When the sun shines down.)
It's just a state of mind?

Is inflation just a state of mind?

There is a saying “ Everybody task about the weather, but nobody does anything about it.” ( This isn’t quite true. The Native American Tribes should get credit for their beautiful rain dances, even if they don’t always change the weather!)  But there is also the admonition, “First, do no harm”.  If you don’t understand inflation, then you should be cautious about taking an action to combat inflation.

Inflation seems to be defined as the Year Over Year inflation. For example, the Consumer Price Index, CPI, in the one month in 2022 compared to the Consumer Price Index in that same month in 2021. However that assumes that there is nothing strange in the CPI in the previous year.

There seems to be two problems with defining inflation this way. As someone who spent his career analyzing data, first shouldn’t the data be smoothed, and second shouldn't the period defining inflation be more than just a single year. There is a children’s story about Chicken Little (or Henny Penny for our English friends across the pond). Chicken Little says the sky is falling because an acorn has fallen on her head ( i.e. one piece of data for one point in time). Foxy Loxy plays along with her mistake and takes advantage of her.

What happens if we look at smoothing the CPI? First, looking at the unsmoothed CPI it looks like January 2021, February 2021 and March 2021 were well below the expected trend. Thus comparing March 2022 with March 2021 may not be the wisest thing to do. 

Smoothing the data, using a 5-year moving average (i.e.  the moving average of the current year is the average of the current year, the previous 2 years, and the following 2 years) presents a different picture. However before we get too excited about the higher than expected observed unsmoothed CPI in 2022, shouldn’t we wonder about the lower-than-expected reported and  unsmoothed CPI in March of 2020. LOL, was anything like a global pandemic happening in 2020 that was worth noting?

And before we get all excited about the observed and reported high CPI for March 2022, shouldn’t we wonder about the change in CPI that began in the early 1970s? It seems like it is larger and more ominous than the change from last year. I have blogged about my suspicions about what happened in the late 1970s https://dbeagan.blogspot.com/2021/07/money-supply.html and it appears to have a larger and more lasting impact on inflation than the recent changes. 

Before we do something about inflation, shouldn’t we understand more about inflation?

Insurance is Sharing

 

State Farm Jingle

But like a good neighbor,
State Farm is there

Don’t let anyone tell you otherwise. Infinitesimal  is not zero.

Infinitesimal things are very, very small, but there is still something there. Zero is the total ABSENCE of ANYTHING. Humans may round things, and treat them as if they were zero,  but Mother Nature does not round. When there is a risk of something happening, then that risk can be small, but it is not, can not be, zero. If the cost of the risk is large, it is natural to try to pool that risk with others. That is what insurance is all about. If there is a risk that something can happen 1 time out of 1,000 and when it happens, there is a cost of $1,000,000, then the cost of the risk for each individual  is 1/1000 * $1,000,000 =  $1,000. Having to pay $1,000 does not mean the cost of the risk is $1,000, only that the risk has been shared. If 1,000 individuals have contributed $1,000 to a pool, then  $1,000,000 is collected and the unlucky individual gets the entire $1,000,000 to pay for that thing occurring. It is not winning, it is sharing the cost of losing. Yes, the individuals for whom the event did not happen, have paid $1,000, but they also had the peace of mind that if in the event that they were unlucky, then they could pay the cost in full.

That is what insurance is all about. Your insurance premium goes into a risk pool based on the odds of that risk. The payment is made by the manger of that risk pool. In the event that the insurance is public, like Social Security Insurance, the risk pool may not even cover all of the  administrative costs. In the event that the manager of the risk pool is a non-profit, such as Blue Cross, the administrative costs will be paid from that risk pool. In the event that the manager of the risk pool is for profit, e.g. Liberty Mutual,  administrative expenses and a profit may be made first before the risk pool pays the unlucky individual. ( Why do you think that Mutual is in the name. It is all about sharing, i.e. making it Mutual.)

The size of the risk pool should be commensurate with the risk. If the risk is 1 in 1,000 then at least 1,000 persons should be in the risk pool ( actually more than 1,000, but coming up with the exact number is why insurance companies employ statisticians and actuaries). Increasing the size of the risk pool may lower the cost to everyone in the risk pool.

However the cost to everyone in the risk pool can NEVER be zero. If you choose not to join the risk pool, then you may not have the ability to pay for the risk. That is why there is compulsory insurance. If an individual does not have the ability to pay for the risk alone, then someone else has to pay that cost. If society must pay that cost, then  society can also compel that individual to join the risk pool and/or take actions to mitigate the risk.

If you are not infected with COVID, then you can not spread COVID to others, and you will not have to pay for any medical treatments for hospitalization associated with COVID. However the risks of being infected with COVID are NOT zero.

Knowing that the risk is NOT zero also does not guarantee that you can join a risk pool. The ability to join a risk pool, i.e. get insurance,  even if you have a preexisting medical condition had to be guaranteed by the Affordable (health) Care Act, also known as Obamacare.

Risk is never zero. Acting as if risk is zero is the point of Aesop’s Fable of the Ant and the Grasshopper. The working Ant may be boring, but he is prepared when winter, the risk, comes, while the playful Grasshopper is unprepared. Only if there is no future can there be no risk. You may not want to pay the cost of joining a risk pool, but if there are costs,  and if you can not pay them, then what is the alternative? People who think that they will never lose, are the most dangerous losers of all. There is a difference between saying “I don’t like to lose” and “I never lose.”  The first statement may be true. The second statement is impossible.

Most Valuable Player

 

A Team

And they say
She's in the Class A Team
Stuck in her daydream
Been this way since eighteen

There is no I in Team.

I have argued that one of the defining characteristics of Mankind is Individual versus Team (the others being Nature versus Nurture; and  Fact versus Fiction). On that basis, both followers of baseball or football as team sports should be on the ranked highly as Team.

However football is, IMHO, an individual sport masquerading as a team sport. The National Football League, NFL, Most Valuable Player, MVP, has been awarded 67 times since 1957. (In 1997 the MVP was awarded to both Brett Favre and Barry Saunders, and in 2003 the Award was awarded to both  Peyton Manning and Steve McNair).  During that time quarterbacks have won 69% of all MVP awards, including 9 of the last 10 MVPs. Running Backs have won 27% of the time, most recently Adrian Peterson in 2012. Only three players have  won the award at any other position (Defensive tackle Alan Page in 1971, Placekicker Mark Mosley in 1982 and Linebacker Lawrence Taylor in 1986)

By contrast, no position been dominant in the MVP voting of baseball. The MVP has been awarded 199 times in Major League Baseball, MLB, since 1911. MVPs have been selected in both the National League and the American League in most of those years.  No position has dominated the sport. The highest ranked position is First Base with 18% of the MVPs. All other positions except one have more than 2% of the MVPs, with the lowest ranking being Relief Pitchers who have received the MVP 4 times. No Designated Hitter has won the MVP, although Shohei Ohtani, who was selected as the American League MVP in 2021, was both a Starting Pitcher ( a Position that won 11% of the MVPs) as well as a Designated Hitter. Four players have won at multiple positions.

Thus it appears that Football is an individual sport of a backs (Quarter and running) masquerading as a team sport, while baseball is a true team sport. Fans of Amercian football should not automatically be considered to be Team followers instead of Individuals followers. ( I admit to my own guilt. When  Tom Brady moved to the Buccaneers, I became a Bucs follower. Otherwise, even if I weren't a baseball fan, I would like to think that think I am ranked highly on the Team index.)

Clarence Thomas

One Toke Over the Line

I sail away a country mile
And now I'm returning and showing off my smile
I met all the girls and I loved myself a few
And to my surprise
Like everything else I've been through
It opened up my eyes
And now I'm one toke over the line, sweet Jesus 

Be careful of those who cry wolf. They probably are one toke over the line.

Clarence Thomas is a Justice of the Supreme Court. On Friday March 11, 2022, he stated at a hotel in Salt Lake City that the Supreme court was in danger of being politically compromised. It seems that Justice Thomas should know because he was the one who was doing the compromising.

• In January of 2022, Justice Thomas was the lone dissenter on the Supreme Court on an opinion that Former President Trump should turn over confidential documents to the Congress Committee investigating the January 6^th, 2021, Capital Riots.
  
  
• In March of 2022, it was disclosed that Justice Thomas’s wife, Ginni, had texted with the White House Chief of Staff seeking to overturn the presidential election and had attended the rally preceding the Capitol Riots. Justice Thomas’s wife  was among those who would have benefited if had his dissent had been  the majority decision.
  
  
• In April of 2022, Justice Thomas became the first sitting Supreme Court Justice who was photographed with, and appeared to endorse, a candidate for the Republican candidate for the Senate in Georgia, Herschel "The Turkey” Walker.

Senator Cruz said that Justice Thomas is a fine justice and should not have to recuse himself from any cases involving the election of 2020, including the investigation of election tampering by then President Donald Trump in among others, his infamous calls with Georgia's Governor Kemp and Secretary of State Raffensperger. Senator Cruz did suggest that Justice Ketanji Brown Jackson recuse herself from any cases involving Harvard University.

Senate Minority Leader "Yertle the Turtle" McConnell and House Minority Leader McCarthy both  defended Justice Thomas as did many other prominent Republicans.

The Supreme Court is in danger of becoming politicized. However the danger is coming from precisely those who are crying the loudest about the danger.  The call is coming from inside the house!!!

Reverse Robin Hood

 

 Adventures of Robin Hood Theme

He called the greatest archers
To a tavern on the green,
They vowed to help the people of the king,
They handled all the trouble
On the English country scene,
And still found plenty of time to sing.

There has been a reverse Robin Hood at work in the US.

Using official US Census reports on income, the average household has a demonstrably smaller share of income, and the upper income households are receiving an increasing larger share of income. The effects may have been hidden by inflation, but these effects are evident.

Income by group is reported in current dollars and in 2019 dollars where the effects of inflation are considered ( e.g. 1979 dollars are restated as 2019 dollars).  If inflation is not considered, it appears that all income groups have increasing incomes.

However if inflation is considered the distribution of incomes is markedly different.

Mean incomes in 2019 USD in the lowest (0%-20%) through fourth (60%-80%) fifth have remained virtually constant, while the mean incomes in the top 5% have increased, particularly from 1981, the beginning of the Reagan, supply-side, tax cuts.

The distribution of income appears to be skewed to higher incomes, where that distribution should not include incomes less than zero. The Census reports the mean and median incomes. The ratio of the mean to the median has been steadily increasing over the reporting period. If the mean is not equal to the median, a third statistic, the mode or most common value, has been estimated by an empirical formula that can be used if the distribution is skewed moderately or less. If the mean, mode, and median are all equal, a distribution is said to be normal. If the distribution has a positive skew, i.e. towards higher incomes, the mean will be greater than the median which will be greater than the mode.

Without considering inflation, the estimated mode was continuously increasing until 1990, at which point it began an erratic decrease. However when inflation is considered, and a moving 5 year average is used to dampen year to year fluctuations, the mode of income has been  continually decreasing during the entire period.

The skewing of income toward higher incomes and the stagnation or decline of the most common, mode, income, has been masked by inflation, but when inflation is considered, the decline is evident.  Where is Robin Hood when you need him?

Geography

 

Where in the World is Carmen Sandiego?

Well she sneaks around the world from Kiev to Carolina
She's a sticky-fingered filcher from Berlin down to Belize
She'll take you for a ride on a slow boat to China
Tell me where in the world is Carmen Sandiego?

Geography is destiny.

The capital of the United States is Washington, D.C. The financial capital of the United States is New York City.  The entertainment capital of the United States is Los Angeles. The capital of Country Music is Nashville, etc.

The capital of the Russian Federation is Moscow.  The financial capital of the Russian Federation is Moscow.  The entertainment capital of the Russian Federation is Moscow.

The United States has a polycentric geography.  There is not one major city or metropolitan region.  There are several.  The Russian Federation has a monocentric geography.  There are really only two major metropolises in the Russian Federation: Moscow and St. Petersburg/ Leningrad/ Petrograd.  That second city by its original name was the capital city of the Russian Empire when Tsar Peter the Great desired to create a European Capital.  It is probably convenient to consider Moscow and Petrograd as one region

If there is a single center, it becomes possible for one faction, or man, to dominate and control that center.  If that faction, or man, acts crazy, then the whole country may act crazy.  In the United States, if one man or faction controls one city, there are still centers that can be control by the opposition, which can then act as a check to that craziness.

There was more than one center in the Soviet Union, but these centers were in fact the major cities of conquered countries that were once part of the Russian Empire: Kviv/Kiev, Baku,  Kharkov, and Odessa in Ukraine; Minsk in Belarus; Baku in Azerbaijan; Tashkent in Uzbekistan; etc. Thus when they were no longer a part of Russia, there was no check on Moscow.

If there is a flash point that should concern us all, it is the isolated Russian Federation enclave on the Baltic Sea, Kaliningrad.  This was once the East Prussian city of Königsberg that was captured  by the Soviet Union during WWII and became a major naval base.  If the Russian Federation invaded Ukraine because it feared it might join NATO, what must it think about this mostly military base that is surrounded by NATO countries.

Stimulus

 

After Midnight

After midnight, we're gonna let it all hang down
After midnight, we're gonna chug-a-lug and shout
We're gonna stimulate some action
We're gonna get some satisfaction
We're gonna find out what it is all about
After midnight, we're gonna let it all hang down (after midnight, after midnight)

What kind of action does a supply-side stimulus get?

Supply side economics assumes that increasing the supply of goods can stimulate the economy.  This is the opposite from demand side economics, also known as a Keynesian stimulus, which seeks to increase the demand for goods, by increasing the purchasing ability of buyers. Actions during COVID such as increases in unemployment benefits, checks to everyone, or student debt relief have been demand side stimuluses, not supply side stimuluses.

To properly execute a supply-side policy, it is necessary to properly define the production equation of suppliers.  The production  equation is traditionally thought to be a function of only capital and labor. However capital is needed not only for investment but also for supplying the raw materials, goods, that are needed to produce a product.  Economists do not classify goods as simply as free and priced.  Economists use an additional attribute besides price, Exclusivity.  A good is Exclusive if it can not be used by more than one person at a time. For example my eating a piece of bread means that you can not also eat that piece of bread, i.e. it is Exclusive.  By contrast, my watching a movie does not prevent you from also watching that movie, i.e. it is Non-exclusive.

This leads to not just two classes of goods, Private and Public, but four classes of goods. These include Priced and Exclusive, which are Private goods, and Non-priced and Non‑exclusive, which are Public goods. But it also includes Natural Monopolies: Priced and Non-exclusive; and Common Resources: Non-priced and Exclusive. Suppliers acknowledge natural monopolies, e.g. a cable TV company.  My watching cable TV does not prevent my neighbor from also watching cable TV, but both of us separately pay the cable TV provider.  ( if you have cut the cord like I have, substitute Disney+ or any streaming provider in this example.) The initial cost of natural monopolies  is often high, thus society offers protections, e.g. an exclusive franchise to offer cable, to industries to encourage then to make that initial investment.  Industry seems less inclined to acknowledge  Common Resources.  Fishing stocks are a common resource.  It is exclusive. If I eat a fish, then you can not eat that same fish. That fish might be free and the stock may seem vast but it IS limited.  Just as it is in society’s interest to encourage industries to invest in natural monopolies, society may spend to increase, or regulate to protect, that common resource.  Fishing stocks are regulated to prevent overfishing.  An educated workforce may be necessary for suppliers, but education is a common resource and society invests in education to provide this work force.  Just because a good does not have a price does not mean that society can’t regulate, or spend, to ensure that this common resource will continue to exist.

“Supply side” economics, as it is currently practiced, stimulates the economy by encouraging INVESTMENT.  If the production equation did not require any common resources, including public education and public highways, as raw materials, then neglecting measures to stimulate labor, encouraging investment should increase supply in the long run.  However if the production equation relies on common resources, eliminating regulations on, and decreasing expenditures for, common resources will in the long run DECREASE supply.  Thus the so-called “Supply side” policies have seemed to serve only to reward investment. It provides no reward for labor, and reduces common resources.  Truly supply-side economics would also ensure that common goods, as regulated and/or provided by society, are available. Supply side stimulus might be an alternative to demand side stimulus, but what had been practiced has NOT been supply-side economics, even if it is called supply-side economics.  It is more properly “INVESTMENT”  economics at the  expense of Labor and Common Resources.