The necessity of rationing assumes that demand is outstripping supply. That's not the case when corporations are price gouging. Egg farms are not selling more eggs than ever before, nor would they if prices were exactly what they were before COVID.
Furthermore the harmful side effects of price controls are often exaggerated. Again, egg farmers are not going to suddenly just kill all of their chickens and switch to building datacenters because we only implemented price controls on necessities like food. Nixon's price controls went fine, as but one example.
Finally, your solution of raising rates does not decrease the need for basic staples like food, so it's not a solution at all. Who cares if inflation for Tesla's or SUVs are at 8% or higher, that's a rich person problem. What matters is the inflation for necessary goods and services, like food and shelter, and your suggested "solution" doesn't really solve anything. All it does is maybe put people who need the money out of work.
Funny you say that...
> Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.
https://www.pbs.org/wgbh/commandingheights/shared/minitextlo...
Hungary has more than two times the inflation of the EU average. The highest in the EU.
Price controls on flour and gas/petrol led to people buying a lot more compared to supply. This led to gas stations closing. People started baking more, but price of bread exploded because folks bought flour and bakeries were in a tight spot (I don't remember the exact chain of events).
Of course grocery shops increased the price of everything else relatively to make up for the loss on the controlled items.
Clearly, tackling inflation should be independent from providing basic necessities like food and shelter and healthcare.
It'd have the same effect as interest rate rises in removing consumer demand without the kinda icky feeling of just sending that money to the income statement of a bank as mortgage payment increases.
Obviously not a silver bullet, but perhaps another tool to make available.
Let's rip the young off so that we can prop the securities up and help the banks!
In the case of profit-driven inflation, you could tax excess profits.
The last sentence is exactly why you need to tax the big owners and corporations and not the workers, because they control most of the additional money supply in the profit-driven inflation.
(That being said, and as was noted, of course government can also run a surplus with the windfall tax, and that takes the money out of circulation entirely. However, as I explain above, inflation can be more complex, it might be money oversupply in only parts of the network, not the whole network.)
Where does the extra profit go (in the absence of windfall tax)? I doubt it goes to expanding production, because without windfall tax, you won't see demand change (and, btw, with windfall tax you don't have to estimate, you will directly see customers having more money to spend). So it will go into stock buybacks, real estate and other ways to inflate asset bubbles. These are seemingly easier ways to park money than to make actual real investment decision of expanding certain production.
whereas just removing the money would also work.
To me, there are two economies - the "real" one, which is what goods and services people produce, and what material inputs they need, and a "virtual" one, which describes savings, loans, the flow of money, and all the property relationships people have.
Normally both are mostly in sync (because trade is bidirectional, flow of goods and services one way, and flow of money and property the other way), but in the case of inflation, you have nominally less goods and services to flow than you have of money (might be caused for different reasons, money being injected, supply shock, etc.).
Now, when economists talk about decreasing grow to match money supply in the economy (through e.g. higher interest rates), what they really mean is to restricting the real economic flow of goods and services in order to match the virtual flow of financing.
The problem with the idea is, the virtual economy is the thing that should really be fixed, not the real one. Breaking the real economy implies that means of production will have to be rebuilt at some point in the future to match the demand again; for example, if you close a factory, and let everybody go, it will be additional effort in the future to start the factory again, rehire the qualified people, and re(dis)cover the institutional knowledge lost in the process.
Whereas adjusting the virtual economy means just changing people's expectations, because that's what money (and other finance assets) are, a share of goods and services obtainable in the future. I had this much money, and I expected to buy 20 eggs for what I got, but it was suddenly discovered that real economy is not able to provide everybody with the money to spend on eggs with 20 eggs, but only say 10 eggs. So my expectations of the future have to change, in order for virtual economy to be adjusted.
So I would argue, breaking the real economy to match the broken virtual economy is always worse for the society as a whole in the long-term, because that means that the real production will have to be rebuilt, instead of just adjusting everybody's expectations to a new reality.
The reason why (neoliberal) economists are in love with the idea of recession rather than inflation is, of course, political. They don't want expectations to be adjusted, because that means all the rich people (and other people with financial assets and other savings) will become poorer and will have to reenter the investment competition again. While people who mostly live from labor (who are often borrowers in the modern economy as well) will be hit less by inflation than the recession (possibility of unemployment and total loss of income). So reducing inflation at the expense of employment and growth is essentially curtailing the production of the economy as a whole so that the incumbent property owners could keep their power structure. It's actually very anti-competitive and anti-free market. (But nobody really wants a free market anyway.)
- It usually takes at least a year before tax changes are proposed before they take effect
- They are always accompanied by spending increases that neutralize any potential deflationary effects
- You actually can't actually increase taxes that much. For example, the US Fed has quantitatively tightened roughly $600 billion in the past 6 months. The Biden corporate tax increases are estimated to bring in $50 billion, and windfall tax proposals also tend to hover around that order of magnitude.
I’m sure someone smart can come up with many better ways to tame this, other than just turning the inflation knob.
Sure, but inflation doesn't affect everyone equally. Rent increases or mortgages increases are part of inflation, but do not affect everyone. Nor is the price of many goods if you don't buy them.
Why is this taken as a fact? You hand out money to people with money. It is a zero sum game.
The reason you need to increase rates with inflation is to make it viable to sit on the currency. Otherwise you need to sell it as fast as possible to avoid inflation.
No expression of confidence intervals, no need for error bars on this statement? As repeatable as gravity perhaps?
If we were to honestly restate the above with reference to uncertainty, we’d struggle just to get past the idea that inflation is measurable in any accurate way, never mind that it can be deliberately influenced so easily.
There are only 3 ways to decrease inflation:
- Interest rates
- Price controls. This tends to have a lot of harmful side effects, such as the necessity of rationing and discentivizing the production of whatever you're price controlling. You only really do this for a few goods, so this doesn't help overall inflation much, if at all.
- Effective policy and investments increasing, the quantity or quality of goods and services. This is perhaps the "best" way to decrease inflation, but it takes years, if not decades to materialize. More importantly, it requires the elected members of government to formulate and agree on, which unfortunately is becoming increasingly rare.
>all you are doing is causing misery and maybe adding fuel to the fire as people already maxed out buying essentials are in fact going to seek (require) higher salaries when you add to their cost of living.
This is moot because when interest rates were 0, inflation was outpacing wage increases. Let's say that wasn't the case and inflation was 10% and wages increase 10%. All evens out right? Not really. The problem is that not the people can take advantage of an inflation-induced wage increase. Younger people, with fewer commitments are able to job hop to a better employer or prepare to negotiate for a pay raise. Meanwhile, other people don't have the bandwidth to do so or are retired and depend of fix income, but they still need to face the costs of inflation, and these are also the people who are the most vulnerable.
So in the end, all we can do is raise interest rates.
Also, Australia doesn't really have a choice, because the US is set on raising interest rates, so any country that doesn't follow will have their currency severely devalued.