Kojo A. Quartey
Basic supply and demand tells us that suppliers/sellers want to get the highest price for their products and buyers want to pay the lowest possible price.
If buyers really want a product, especially a necessities like gasoline, they will pay a higher price for it. In this case, the supplier/seller can effectively take advantage of or take advantage of the buyer. In these inflationary times, we’re seeing this in pharmaceutical companies, dare I say gasoline companies and many other suppliers.
Yes folks, suppliers are increasing their profit margins at the expense of many of our consumers. For example, in August 2022, Exxon Mobil reported a profit of $17.9 billion, the highest quarterly profit reported by any oil company in history. Chevron reported $11.6 billion, Shell reported $11.47 billion, and BP reported $8.45 billion. energycommerce.house.gov/newsroom/press-releases/
Now comes the policy. Just recently, I heard on the news that the federal government is adjusting tax rates to increase Social Security benefits and lower taxes. At the same time, the Federal Reserve has raised interest rates, while several states are cutting gas and income taxes.
“While these policies are designed to help Americans weather the fastest inflation rate in 40 years, economists warn that, paradoxically, tax cuts could intensify,” said Michael Rapperport of The New York Times. The problem legislators are trying to address. By putting more money in people’s pockets, policymakers could further stimulate already rampant consumer demand, driving up prices across the country.”
The real problem is that policymakers are more concerned with short-term politics than long-term economics. Yes, there are political considerations behind these economic policies.
“I think all these tax cuts in the states are fueling inflation,” said Harvard economist Jason Furman. “The problem is there’s too much money in the states and localities.”
In order to provide a proper analysis of tax and interest rate cuts, it is important to understand that there are basically two kinds of policies – expansionary, to grow the economy, and contractionary, to slow the economy, while reducing inflation.
A tax cut is an example of an expansionary policy because it puts more money in people’s hands, they spend it, and it increases demand. Even if they choose to keep it, businesses now have more money to borrow and spend. The more you spend, the more likely it is that prices will rise (inflation). This is the problem we are facing now.
As COVID devastated the country, the economy began to contract or slow down. To correct this, the federal government stimulated the economy through various expansionary measures. Billions of dollars in stimulus money went to states, cities and individuals. In fact, the federal government is very generous. Now that states are flush with cash, don’t know what to do with it, and try to ease residents’ inflation with tax cuts, it’s just putting more money in residents’ hands. Again, folks, more money in people’s hands means more spending and higher prices, as consumers are being looted by suppliers/sellers who want to get them off their flush of cash. So, which policies are not conducive to inflation?
- State and federal tax cuts.
- Student debt relief, which gives debtors more money to spend.
- Increase social security benefits.
Likewise, expansionary policies only fuel inflation. Tighter policies like the Fed raising interest rates are supposed to make money harder to come by, causing people to spend less, which in turn drives prices down.
The problem is that austerity causes the economy to do this, to contract, which is a recession. So, while I’m not in favor of rate hikes, I’m also not in favor of high prices. The policies of the Federal Reserve, the federal government and state governments are all so contradictory that they may not help to ease inflation and could very well lead to a recession. Having more money in your hands may be good for you, but not good for inflation.
Kojo Quartey is the principal and economist at Monroe County Community College.he may be[email protected].