Buenos Aires, Argentina May 28, 2008

Frequently I ask my macroeconomics students: “Why is it so bad to have an inflationary economy”? I can assure you that the answers I get are quite varied, at times even funny. In my opinion, if I had to choose two reasons why inflation is bad for an economy I would have to say, unquestionably, that first – it generates negative effects for an economy’s growth because it increases uncertainty for investment. Second, and possibly more important, inflation has an aggressive nature in that it adversely affects the poor – for in times of high inflation they often cannot afford the things they need.

Inflation tends to hit the poor people the hardest because they have fewer mechanisms in place protecting them against its effects. Also, due to inflationary pressures occurring in the region the effect on the poor is even greater because the increase in the cost of living typically affects essential items such as food and energy.

In the past, Latin American countries typically resorted to increasing interest rates in inflationary times. Also a very basic and widely known policy used to cool down the economy is to remove inflationary pressures on prices through lowering the aggregate demand.

But are these kinds of policies really useful when it comes to controlling inflation? I have already commented in past articles in my opinion that if inflation is caused by internal factors, then the policies that are most effective at controlling this inflation must be internal as well. But if the reason for price increases is external to the economy, then implementing more restrictive monetary policies tends to do very little to assist. Recently in Latin America, we have found instances of the effects of both internal and external pressures (i.e. domestic demand is strong while at the same time “imported inflation” is creating the most damage).

So the operative question is what can governments do when facing the impossibility of applying a restrictive monetary policy to effectively control inflation rates? One alternative could be the implementation of policies following the lead of other countries in the region, such as Mexico.

Currently, the Mexican government is implementing policies to fight the increases in basic food items. Instead of setting up price controls, a policy that ends up creating the opposite effect, Mexico is eliminating the importation duty on these items and creating a situation where the levels of supply are increased.

In keeping with this method, Mexico has decided to eliminate import tariffs on several food items such as corn, wheat, rice, and soy paste. This way, it fights inflation directly at its origin and at the same time it protects the population of the poor. This policy is complemented by a farmer support policy to increase production (a $1.9 billion package has been adopted to finance farm machinery), the elimination of tax on fertilizer and manure, and stronger aid to disadvantaged families.

Speaking about this policy, Calderón, Mexico’s president, noted: “In order to alleviate the effect of this international phenomenon in our country and to insure that it does not spread and effect those that are less fortunate, my government will implement several policies, starting today, to supplement the income of families in the face of the current international food price increases.”

These measures must be stressed because they are the ones that are most likely to have the greatest effect on containing external inflation without creating distortions in the economy. The significance of this policy is that it promotes the additional production of domestic food supplies, which in turn will decrease the dependency on external food supplies, which currently are experiencing great volatility in prices.

But maybe these are not the only benefits created by these types of measures to fight the causes of inflation…. Are there, in fact, any additional benefits to this type of economic policy?

In relation to this question, I believe that in this way, easing the monetary policy through much lower interest rate increases will benefit economic activity. And the final cost of the support for agricultural production and the elimination of import tariffs will be offset by the creation of a stronger level of economic activity.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: Imported inflation is generating the greatest damage in Latin America, even when domestic demand remains strong. When it comes to economic policy, México is doing the opposite of some populist Latin American governments. Send your comments to me at: paola@latinforme.com

“In the mid 50’s through the early ’60’s we could go to a DOUBLE feature with all the trimmings for 25 cents a head. Today that would not even pay the tax” John

That was cheap. Just 15 minutes work at the 1956 minimum wage of $1.00. That was probably the Saturday kids’ matinee, which cost as little as 10 cents in many cities back then. I doubt there is any bargain like this to be had today outside a public library (and you can’t buy popcorn).

As I mentioned briefly, Mexico is one of the countries that has had real food crises recently. Here’s what Jim E, says: of the situation:

“We live in Mexico full time and it is easy to see the problem down here. The only saving grace here is the availability of fresh foods in the mercados and farmers markets. Each time we return to the US we are shocked by the prices of everything.”

Fresh food is often more expensive than canned food here in the United States except for a few farmers markets. One way to beat the price of some food is to grow your own. But Doug sees problems with that:

“Most fruits and veggies sold these days are altered in the labs so that the seeds of the fruit do not replicate if planted. If you look at the seeds available to purchase, most say hybrid… obviously if the answer to the rising food prices are that lawns will turn into gardens again, where do you buy good seeds that are natural so you don’t have to keep buying new seeds all the time?

Actually, that’s a piece of cake. Glad I can answer something so easily. The simplest way to find seeds for vegetables that you can plant, harvest and gather the seeds to plant another year is at Burpee’s. Order a catalog or go online (www.burpees.com). You will find what you are looking for in the “heirloom” category. Another source is Victory Seeds, which specializes in heirloom, open-pollinated seeds (www.victoryseeds.com).

About those hybrids, though, it’s not all evil. Ironically, W. Atlee Burpee himself introduced the first hybrid tomato, back in 1934. Some recent hybrids are meant for commercial growers who want quantity and good shipping—those awful things we get in the grocery store. But many hybrids were developed for better taste or disease resistance.

Andy and I like growing some of our own vegetables and herbs every year. Even when we lived in a narrow city home with no back yard to speak of, we rented a city garden plot. It’s taste that drives us, and some of our favorites are hybrids. Nothing beats fresh Silver Queen corn. I’m also partial to my Early Girl tomatoes. But I also like to can or freeze the nicely acidic non-hybrid Rutgers for sauces and soups. (Bet you never guessed I was such a homebody.)

But it was Steve C. who had the best list of how things had changed in terms of prices and earning power”

“I like your comparisons, but I’ve had a different set of prices I’ve used over the years… personal memories. For instance, when I was 17 years (1968) I went to work in the cotton mill after school, minimum wages were 1.60. At that time, I could go to the world-renowned (really) Lexington Barbecue (Lexington, NC) and get 2 barbecue sandwiches, fries and a coke for a dollar. Candy bars were a nickel; the early 16 oz cokes were 10c in the machines (and you got to bring back the bottle for 2c, lowering the actual cost to 8c). Cigarettes were 20c a pack, and my heart’s dream– a brand new Mustang– was 1800-2400 depending on whether and how much it was “loaded” … radio, power steering, automatic transmission all were extras then, even whitewalls!!. Gas was 25 cents or less.

“ So, from my memory, you could get for your hour’s work at minimum wages your choice of… 32 candy bars, 20 cokes, 8 packs of smokes, 1.6 good lunches, gas…6.4 gallons, and it would take 1500 hrs (37.5 forty hour weeks) for the top of the line fully loaded mustang. Ok, today at 75c, 32 candy bars are $24… 20 cokes at $1.29 are $25.80… 8 packs of smokes at $4.50 are 36 bucks, 6.4 gallons of gas are $23.36 and that same 1.6 lunches would be $10. And a car that’s as hot as the mustang was in 1968, fully loaded would be at least 20k.

“Comparing what you could get minimum wages then and now (1.60:5.85, or 1:3.66) and extrapolate you find:
candy bars 6.5 hrs
cokes 7 hrs
smokes 9.8 hours
lunch 2.7 hrs
gas 6.4 hrs
Mustang… 5464 hrs…or 3.64 as much

“From that perspective, it would take anywhere from 2.7x as many hours (lunch) to 9.8 (cigarettes) to buy the same stuff you could in 1968. So, with your comparison of 3 3/4 hrs for your basket then and 5.5 now, that’s only 1.47 ratio, whereas the “memory” average is 7. My memory is pretty selective, but real goods, nonetheless. I included car, gas…you need them to get to the store. Cigarettes were a staple in the 60’s too.”

Good job.

Both my market basket and Steve’s “selective personal memory,” only include part of the problem with living costs today.

As Lee S. would add,

“… how do the minimum wage earners get to the market? Unless they are within walking distance, there is another factor to consider, gas! I think by the time all the ripple effects of the rising prices of oil shake out we will all be paying a lot more to put that basket of food on our tables.”

Other costs have raised the pressure on us, too. My car insurance costs more on a monthly basis now than my car payments came to 20 years ago. My first mortgage payment on an admittedly tiny Florida home was $54.10 a month. That won’t get you a night at the Red Roof Inn these days.

Then there are the small luxuries that I don’t begrudge anyone, even the poor. Like watching television sometimes. In 1956, you bought a television, you bought an antenna and that was the sum total of your expenses. After that, you could see anything that was on. Today, the good stuff’s on cable—even the Disney channel. We all got Mickey Mouse Club and Disneyland for free.

Officially, inflation has added 3-4% a year to our living costs. Unofficially, we know it’s much higher. Thanks for chipping in with your own observations.

Lynn

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