Thursday, March 6, 2014

Why I Don't Have a "Beef" With Rising Beef Prices

The always thorny issue of price inflation got stuck in my mind, after an evening newscast a couple of weeks ago. In the meat aisle of a grocery store, a shopper held up a package of ground beef for the news camera. "It's more than eight dollars!" she ranted. "How am I going to continue feeding my family if the price of meat keeps going up? After all, I've got to save money so that I will be able to afford to send my kids to college!"

A number of thoughts came into my mind at once, upon hearing her complaint. Even though this was a middle class worker with middle class expectations, the price of meat represented a threat to her, because it was just part of a much larger array of expenses she faced. Whereas to me, the meat still seemed like a bargain, considering how little eight dollars is capable of buying in services. But I digress. In the U.S. for as long as I can remember, beef has been treated by many shoppers as a staple good. If indeed one thinks of it that way, perhaps it's easy to feel threatened. One should be able to save money for needed services! Why aren't producers cooperating??

But lower income individuals and people in many nations tend to treat meat as a tasty addition to meals, rather than the primary component. Plus the fact that not much is really needed at one time, for the protein allotment that maintains a stable metabolism. Was it irrational to expect the shopper to adjust her thinking? For one thing, the rising cost of beef is due to supply side factors which everyone could see coming in recent years, as drought conditions have worsened in the U.S. and ranchers have been forced to sell off increasing portions of their herds. Less beef available, means higher prices.

Common sense though this may seem - and while the evening news has also covered relevant drought stories numerous times - it's easy to get caught up in how a rising price could be affecting one's personal situation. Therefore, it's also easy for political factions and special interests to shift blame to the wrong places. The frustration for many a market monetarist is the degree to which rising prices such as this - which are so often a result of supply side factors - continue to misguide central bankers.

As a result, when central bankers react to consumer frustration by tightening money supply, less money all around is available for the everyday economic activities which were already in progress. It becomes more difficult for people to coordinate the money that remains in the system at any given moment. The fact that less money is available in the specific time intervals it is actually needed, only further destabilizes the economy. And yet, central bankers often attempt to rectify supply side circumstance which are out of their control. The sad part is that not enough central bankers think in terms of nominal stability. As a result, they are now inclined to "side" with the frustrated shopper, to the detriment of all.

In other words, normal "moving parts" of  the economy can either be shortchanged or over represented, when resources and assets of random quantity are given too dominant a role in monetary policy calculations. Of course this rationale may not satisfy the consumer. Why aren't food prices a part of core inflation, the shopper wants to know? Because the central bank could throw up its hands and tighten money supply further, yet the shopper is still likely to end up with the aggravating price tag in spite of it all. If that were not enough, more jobs and businesses have bit the dust in the meantime.

There's other ways to think about the situation. It was interesting to me that the above mentioned shopper expected the price of her food to make up for (what are in fact) artificial limitations on services supply - as opposed to the real limitations in food production which were making her grocery bill higher. How could she be expected to consider, that artificial service and knowledge use limitations were the greater culprit? Without such knowledge, what country is not going to have a population which is resistant to price increases of any kind, controllable or not?

New readers could readily mistake my argument as a need to reduce services. However that is not the point I wish to make. What is important, is changing the way services are structured, so that they can actually grow in importance and scope. If services could be coordinated in local marketplaces through direct patterns (instead of the limitations of taxation and redistribution), many of them would no longer have to remain on the negative side of the ledger, in national accounting terms. That would make services true wealth, instead of the present day subtraction from wealth that has taken away so much hope for the future.

More people need to be actively participating in the economy on a regular basis. The more that everyone has stake in ongoing economic activities, the greater the ability for nations to overcome supply side shocks of all kinds. If the grocery store shopper does not have to worry so about the costs of college and whether her children can make their way in the world, the price of that package of beef is not going to seem like such a big deal.