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Conservative contextuality: Why the right is wrong abou...

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Conservative contextuality: Why the right is wrong about rising inflation

By Tim Cohen
16 May 2021 0

Tim Cohen is editor of Business Maverick. He is a business and political journalist and commentator of more years than he likes to admit. His freelance work has included contributions to the Wall Street Journal and the Financial Times, but he spent most of his life working for Business Day. After a mid-life crisis that didn't include the traditional fast car, Cohen now lives in the middle of nowhere in the Karoo.

Inflation has seldom been so interesting – or political. You have to be pretty long in the tooth to remember the days of 14% inflation in the US and the heady 1980 presidential campaign between incumbent Jimmy Carter and challenger Ronald Reagan.

First published in the Daily Maverick 168 weekly newspaper.

The rise in US inflation had made Carter seem ineffective and feeble, even though the cause was the dramatic spike in the oil price after the Opec cartel got a rush of blood to the head. Looking back on the election results now, it is amazing not so much that Carter lost, but by how much.

Carter was then, and is still, regarded as a good person and a moral president. But Reagan obliterated him. Reagan won 489 of the then 538 electoral votes, winning by 10 percentage points. It was only the second time, and the first in nearly 100 years, that a Republican candidate defeated an incumbent Democrat.

Ever since that first Reagan victory, inflation has accumulated a reputation as a perverse friend of conservatives; an illustration of how Democrats may be better on social issues, but are generally ignorant of the big economic picture.

When the inflation rate in the US came in at an annualised rate of 4.2% this week, the highest since 2009, conservative US politicians got on their high horses and joined the parade. It didn’t help that the Colonial Pipeline hack sparked a petrol shortage and queues at petrol stations, itself a bizarre flashback to the 1980s.

In a nutshell, the conservative argument is that US president Joe Biden, assisted by the Federal Reserve, is trying to run the US economy too hot. The Fed is providing small mountains of cheap money that are holding up the stock market while, on the fiscal side, Biden is exploding national debt by handing out Covid-19 relief cheques and planning huge infrastructure spending.

Behind this lies the sombre economic orthodoxy of the 1980s, which essentially blamed money supply for inflation.

We should look at all of this somewhat askance.

Be sceptical

Start with this question: why is inflation increasing? The answer is staring us in the face: the Covid-19 pandemic. Being such an unprecedented event, the pandemic has thrown economic planning up in the air. We are seeing movements now that will resonate for decades to come.

But, for manufacturers, the essential question at the start of the pandemic was: how much should we produce? The answer to that question was simple: less. But then strange things happened. China came back on stream faster than expected, and suddenly shortages started appearing in supply lines all over the place.

Think of all the things the world is suddenly short of: computer chips, packaging, shipping containers, plastic resin, all kinds of metals. The list is just so weird – and long.

The change has put raw material producers and component producers in a stronger bargaining position – and the result has been a higher producer price index in what is now the world’s workshop, China.

For the first time in history, economists are beginning to notice a correlation between consumer inflation in the US and producer inflation in China. Chinese producer price inflation hit 4.5% in December, rising from 2% at the start of the year. True to for, US consumer inflation hit almost exactly that level four months later.

The second reason to be sceptical of the conservative argument is that, in developed economies, there are countervailing forces when it comes to inflation that didn’t exist at the time of Carter’s presidency.

One of the big ones is a gradually ageing population. As you get older, you tend to spend less, quite possibly because you are earning less. You try to concentrate on saving. Countries have inflation rates, but every person has their own private inflation rate too.

Now, imagine that happening on a huge scale, and look at Japan, a country with a median age of 50, and where inflation goes through periods of sliding below zero and generally struggles to breach 1%.

Having said all that, the fundamentals of the conservative argument are still respected in the economics world and make instinctive sense: pump your economy too hard, you get inflation.

What does this all mean for South Africa? The good news is that commodity prices are booming but, if the problem is simply strained supply lines, that could diminish faster than people think. Faster inflation in the developed world generally means the rand weakens and local inflation also rises.

It’s important to remember this is all unprecedented. As Dani Rodrik, Harvard professor of international political economy, pointed out this week, our watchwords should be “contingency, contextuality and non-universality”. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.


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