A Thought-Provoking Op-Ed In Forbes

A Benjamin Cole post

Advances in production and information have created an ongoing surfeit of goods, argues Kevin O’Marah, in a Forbes March 17 op-ed.

O’Marah makes a good case that the incredible U.S. retail network—think WalMart—can easily meet any increase in demand. O’Marah concludes that inflation is dead.  O’Marah could have gone further: thanks to the globalization of the U.S. supply-side, the idea of demand outstripping supply is outdated.

No longer does a Big Steel, or Big Auto, set prices. Steel, autos and consumer goods come from all over the world into the United States, and the domestic market is saturated with product.

With the passing exception of oil (a peculiar market dominated by global thug states), it is difficult to conceive of a product or good in short supply, rationed by higher prices.

Anyway, Inflation Paves The Way To Higher Supply

Supply-side improvements are always a good idea; every sensible economist agrees. That said, when there are “shortages” of a product—say oil—the way to greater supply is often paved by higher prices. Who can deny that higher oil prices led to today’s glut? To become hysterical about inflation every time oil or corn prices rise is to misunderstand the nature and beauty—and effectiveness—of the price signal. Let the price signal work.

Housing—The Exception

Market monetarists and others of late have been more closely examining housing markets, and in general concluding that onerous state and local regulations create some regional shortages, that are in fact settled by higher prices, which could be called “inflation.” In good times, bidding may propel housing prices up in famously attractive U.S. markets along the coasts.

The solution to housing costs, or “inflation,” does not lie in the U.S. Federal Reserve, and to fight housing costs by tight money to suffocate the economy to get rid of a fever.

In fact, there probably is no (political) solution to higher housing prices. Powerful and often wealthy homeowner groups do not want condo high-rises, with ground-floor retail, plopped down into their neighborhoods. Nobody wants more traffic on their streets.

Take the City of Newport Beach, a GOP-enclave in famously conservative Orange County, California. To build a structure of greater than 250,000 square feet there, you need approval…by the city voters. Every well-positioned city in California is much the same. In a free market, there would be a wall of condos along the Pacific Ocean.

Add on, that housing prices in attractive cities probably “should” rise with rising disposable incomes, and as perceived investments. The federal tax code may be  another villain in house prices, and certainly local governments are, but not the Fed.

BTW, if the Fed is causing house prices to explode, how do you explain Detroit?

Conclusion

Has any modern nation prospered by fighting real-estate inflation? And when was the last time the United States faced inflation even above 5%, a rate at which was once met by casual shrugs by most economists?

The Fed is fighting the last war.

Print more money.

2 thoughts on “A Thought-Provoking Op-Ed In Forbes

  1. I am supposing that if the Fed adopted NGDPLT, we’d stop having dismal 1Q’s that serve only to confuse their supposedly data-dependent stance rather than enlighten. There are just so many thing wrong with the Fed’s brand of IT, I am rather shocked that there isn’t a huge wave of rising tenor wanting something else. Awful policy = awful results. Print more money.🙂

    • God, we need stable monetary policy, like last year already. Words just simply cannot express my frustration with these Fed critters doing whatever they happen to feel like on any given day, and then just thumbing their noses at the Congress like they have nobody to answer to. The insanity has got to stop.

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