Sunday, February 21, 2016

Cost-Push Inflation: When The 1% Bid Everything Up

Once again, the New York Post has come up with a pleasant surprise, i.e., a departure from praising everything associated with those at the top of the heap.  This article by Diane Francis, describing in detail the ability of foreign investors to stash illicit cash in U.S. real estate anonymously through shell companies, provides some insights into how insidiously and ruthlessly inflation works in an economy where the majority of the money is not controlled by a majority of the people.

There are basically two types of inflation:  cost-push inflation, and demand-pull inflation.  The latter is what most of us have been talking about over the past several decades:  the tendency, in a consumer society, for consumption to increase to the point at which the prices of various goods and services are bid up higher than the ability of most consumers to pay for them, directly or indirectly.

Demand-pull inflation is what the U.S. and much of the Western world experienced in the 1970s, as consumers demanded more and more goods and services that depended in one way or another on petroleum.  On the other hand, now that we have finally heeded Jimmy Carter's advice and turned to alternatives, demand-pull inflation has largely vanished.

On the other hand, it has been replaced, in the age of the 1%, by cost-push inflation that stems from the bidding-up of the price for resources by people desperate to promote their social or political status.  This is especially the case in New York City, where foreign investors have been pouring money into real estate for decades and slowly but surely sent the price for even the smallest apartment through the proverbial roof.

Let me illustrate the problem by way of a personal example.  When I moved to New York in 1979 to take a federal civil-service job, I was able to live on a starting salary of just over $10,000 a year in an apartment that cost about $195.00 per month.

Today, the starting salary would be about $36,000 per year, but the rent would be somewhere around $1400 per month, an increase of almost 700%.   It would literally not be possible for me to take the same job today without a roommate.  And, while that would not be the worst arrangement in the world, it does illustrate the extent to which real estate values  in the Big Apple have skyrocketed.

And, in this century, the problem has gotten even worse, as foreign investment flees less stable nations and comes into American cities.  As Ms. Francis' article attests, some of this money comes from some of the most unsavory sources, making New York, and other cities in America, unwitting and unwilling nests for "dirty money."

At the same time, that "dirty money," combined with the trickle-up economics of the past 35 years, have created a real estate climate in which people with average incomes find it almost impossible to pay for a decent place to live.  In the case of New York, this is having a devastating effect on arts institutions, a major player in the city's tourist economy.

It's good, as Ms. Francis points out, that the federal government is cracking down on the shell-company loophole.  But, for the purpose of controlling cost-push inflation overall, it would be better if, somehow, we could find our way back to being a society in which the majority of the people controlled a majority of its money.  Without a major rethinking of economy policy in a progressive direction, we aren't going to find our way back there soon.

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