(upbeat music) - Hello and welcome to "The Journal", I'm Steve Kendall.

When it comes to the US economy, two elements seem to be at the top of the news cycle, inflation and the ability of businesses to find enough employees.

Joining us to talk about the economy and what's going on with our economy is Dr. Peter G. VanderHart, professor and chair of the Department of Economics at Bowling Green State University.

Dr. VanderHart, thanks for being with us here on "Journal".

- Well, thank you.

Thanks for inviting me.

- Yeah, now inflation is something that we haven't seen to the extent that we're seeing it right now.

Kind of give us inflation 101, what is inflation in the classic sense?

And then we can talk more about how this inflation cycle looks or doesn't look like other ones we've had.

So what is inflation in classic definition in economics?

- Sure, the classic definition of inflation is usually related to the consumer price index, that's the main thing that gets the headlines.

And that's a basket of goods designed to be sort of the average components that a urban family of four is the classic version of it, how much that basket of goods costs.

And so it's composed of rental and other housing, medical care and food and lots of things in there.

And that index increases over time generally, and lately it's been increasing, that cost of that basket has been increasing faster than it has been before.

And so historically for a long time, 20, 30 years inflation was modest two or 3%.

And lately it's been more like seven or 8%.

And so that's why people are upset, I would say.

- Yeah.

'Cause those of us who are probably old enough to remember this goes back to President Ford, and inflation was a problem in the mid '70s and the late '70s, but it's been probably that long since we really seen any cycle like this.

Now when we see inflation do what it's doing right now, what typically are the causes?

Historically what causes that cost of living index that you kind of described, why are we suddenly seeing what used to be maybe a two or 3% annual increased inflation suddenly become seven or 8%?

- Yeah, well the classic phrase to describe the cause of inflation is that it's too much money chasing too few goods.

- [Steve Kendall] Okay.

- And so back in the '70s, the central bank, the federal reserve, tried to have a policy where they increase the money supply to stimulate the economy.

And that does work in the short run.

- [Steve Kendall] Right.

- But in the long run, if you stimulate too much, you get inflation.

This time is a little bit different, policy wise.

I think it has something to do with the fiscal policy, all the stimulus checks going out to everyone and also the aftermath of the financial crisis.

Those two things, I think, provide the too much money part of it.

And then supply chain issues, whether it's cargo ships off the coast of California or domestic producers not being able to find laborers that caused the too few goods facet of the inflation.

And so it is a little bit different than from the '70s that you and I remember, that was more general, all prices were increasing approximately the same rate.

And now it seems a little more concentrated in certain areas.

So it's still inflation, but it's different this time.

- Yeah.

Now, what are some of the areas this time that are kind of sort of outliers compared to just being a general inflationary cycle across all goods, what are the things that are really driving this then?

- Yeah.

The thing that consumers see the most because you drive by it every day is gasoline prices.

- [Steve Kendall] Right.

- And those are up substantially over the last year.

And pretty much all energy prices have gone up, especially fossil fuel prices, also, and this is more of a supply chain issue, new cars, and then it trickled into used cars.

- [Steve Kendall] Hmm, right.

- And so a lot of things that people experienced every day, gasoline and maybe not every day do you buy a car, but typically that's a regular expense.

- [Steve Kendall] Right.

- But then if you look at things like medical care and prescription drugs and airfare, pretty much all kinds of services, haircuts, insurance, those have remained quite modest.

Those price increases have been the more typical 2%.

- Yeah, because in years past we always talked about medical costs were moving way above the typical inflationary cost of living cycle percentage wise, is a large part of this simply, I know you mentioned the fact that we've got a lot of money chasing too few goods basically, and this is probably the result of some of the fallout from the pandemic, because that shut down a lot of things in the supply chain and people within the supply chain.

That's part of why we're seeing some of this as well?

- Yeah.

My sense is that it's the combination of the stimulus checks.

It doesn't really create money, but it does make that money accessible to widespread, to consumers.

But then also certain industries are affected more dramatically by the pandemic and they just don't work as well.

Meat packing is an example.

You have to stand close to each other and shout over machinery.

And that is not a great thing to do during a pandemic.

- [Steve Kendall] Right.

Yeah.

- And just more generally, I think a lot of optional workers sat on the sidelines because of the stimulus checks and because they were scared of the pandemic, and with the stimulus they could sort of take an extended break.

And if you look at labor force participation, it's down two or 3% from the pre pandemic, which doesn't sound like a lot, but if you think about all the workers in the United States, 2% of them is quite substantial.

And so that gives us the too few goods part of the equation.

- Yeah.

Now, when we come back, I'd like to talk a little bit more about government policy and how things have over the years, how governments started, you talked about the fact that the effort usually is to put money in the economy to stimulate the economy.

We obviously had a lot of money go into the economy, both to individuals and to governments for that matter, government jurisdiction.

So when we come back, let's talk a little about government policy and of course we'll probably wanna touch on the fed a little bit.

You mentioned them a little bit earlier too, 'cause they're talking about doing something with their policies, with regard to interest rates and things like that.

So we'll be back in just a moment.

We're talking about the economy with Dr. Peter VanderHart of the department of economics at Bowling Green State University back in just a moment.

Thank you for staying with us on "The Journal".

Our guest is Dr. Peter VanderHart, the professor and chair of the department of economics at Bowling Green State University in the Schmidhorst College of Business.

We talked a little bit in the first segment about government policy and stimulus by the government.

And obviously because of COVID, we've had several government programs that have pumped money into the economy for individuals, families, and also government jurisdictions.

And that's put a lot of money into the economy.

Is that kind of some of the background for this as well?

Because all of that money's out there and people are trying to purchase services, buy goods, governments wanna pave roads.

They want to do this with that money.

Is that also driving why we're seeing this inflation cycle as well?

- Yes, I think so.

The package of stimulus projects that were undertaken was completely appropriate.

This unprecedented pandemic really made it better for people to just sort of hunker down and get through it.

And government responding to that and providing income for those people was a very good response.

The problem is undoing that response when the pandemic, it's not gone, but it's come down quite a bit.

The aftermath of all that stimulus means that people get used to being on the sidelines and having money.

And I think that's unwinding now.

And as it unwound, you get demand pressures on goods, and so there's always a delay with government programs and the effects.

And so ceasing those programs perhaps didn't come as quickly as it should.

And so the stimulus may not have been needed for some period of time.

And that aftermath may have contributed to the inflation problem.

- Yeah, and as you mentioned too, in the other segment that you did have a lot of people leaving the workforce for a number of reasons, first of all, businesses were ramped back and closed in some cases, which then of course delivered kind of a blow to the supply chain a lot of ways.

And then you have money coming in, now and people want goods but because of that disruption, as you said earlier, too many dollars chasing too few goods, and that's sort of what we have now, traditionally over the last, I don't know how many years, interest rates have been generally pretty low.

And now I see as one of the...

I guess the fed is looking at maybe boosting interest rates to slow this inflationary cycle a little bit.

Am I correct on that?

Or is that too simple a model that I've just described?

- No, that's quite right.

And getting back to history in the early '80s, they really aggressively raised interest rates to something like 20% in the short run.

And that's the primary way that the fed combats inflation, and so that's why you see Jerome Powell and the other members of the fed sort of tipping their hand a little bit and saying, "hey, we're going to start raising interest rates.

"Don't get too excited.

A lot of the effect of policy for the federal reserve is providing guidance about what you're going to do in the future, and then following through on that, that can really affect expectations, which is probably three quarters of the game of controlling inflation, is to get people's expectations in line with what you're going to do.

And they try, but I think it might be out of the bag at this point that people are sort of thinking that the inflation is going to be high for a while.

And once they start thinking that, then it's almost a self-fulfilling prophecy.

- [Steve Kendall] Yeah.

- But you're right.

The primary way to control inflation is restricting the money supply.

And the most effective way to do that by the federal reserve is to raise short term interest rates.

That cools off the economy, especially parts of the economy that are related to borrowing.

So capital expenditure and consumer debt.

And once those get tapped down, then the thinking goes, prices will not increase as fast.

We'll be back to the targeted two or 3%.

- Yeah.

And, and one of the things that you've noticed too, at least maybe I'm trying to remember now, several, it's probably been more than several months ago, the housing market, when the pandemic sort of relaxed a little bit suddenly houses it seems if you put them on the market, they sold that afternoon.

Now interest rates were really low.

So if in rates are boosted up by the fed, one of those areas that you mentioned that might be affected would probably be, you said capital expense, but if someone went to look at a house, suddenly the interest rate they thought was maybe gonna be 2.75, let's say now is 3.5 because of the increase in interest rate.

So that as you said, will cool the economy, that part of the economy, which may or may not be a good thing, I guess.

- Yeah, that's right.

I think housing is an interesting sector to look at because first of all, interest rates were historically low, the nominal rates near zero.

So mortgage rates, I think were below three at one point.

- [Steve Kendall] Yeah.

- And that's unprecedented, I think.

And if you think about it if inflation is 7%, but you're only paying 3% on your mortgage, that's effectively a negative real rate.

- Right.

- Right, you're borrowing money and then paying it back with inflated money.

And so that's a very good deal.

And that combined with the fact that people were spending more time at home, like I am in my basement doing a TV interview.

I think the demand for the houses really spiked and not surprisingly that showed up in the prices pretty quickly.

- Right.

Yeah, because it seemed as if within like a few weeks people caught on, oh, I can actually ask more for my house.

Things were turning over so quickly, it was interesting.

And I know that people who are trying to get in before the fed now, or before interest rates do creep back up are trying to get mortgages in the books and locked down before that increase takes place.

Yeah, and it's interesting when you talk about the fact you're paying back money with inflated dollars, so it's for the buyer or the person who's paying back the mortgage, it's a good deal at, at this point anyway.

- [Peter VanderHart] That's right.

- One of the things when we come back and I don't want to inject politics in this, but of course I've seen political ads and this is more workforce related, but I've seen some candidates saying immigrants are coming to take your jobs at a time when it seems if we don't have enough people to fill the jobs that we have.

So when we come back, let's talk about some other government policies that also may or may not impact our economy, or at least the people's perception of how they impact our economy.

Back in just a moment with Dr. Peter VanderHart of Bowling Green State University on "The Journal".

Dr. VanderHart, thank you for again, being with us here on "The Journal", we're talking about the economy.

One of the things I see, and I know you don't wanna politicize this, but I see candidates for us talking about immigration and how immigrants will come to take your jobs, which I find a little bit ironic given that we have jobs that are going for the asking, how much does immigration policy affect various parts of our economy?

And I know that tech for a while, they still continue to bring people from other countries who are qualified for tech jobs that we can't fill in this country.

So talk a little briefly about immigration and it's part of this grand scheme of our economy.

- Yeah, I think the issues of immigration are, like you said, overly politicized I believe.

There are jobs that go unfilled with domestic applicants and to the extent that those can be filled by qualified immigrants, I think immigration's a good thing.

In fact, if we didn't have immigration, the population of the US would be shrinking.

- [Steve Kendall] Right.

- Right now.

And I think a certain amount of immigration, the right kind of immigration, if you will, is a tremendous benefit to an economy.

You can get some skills that you perhaps didn't develop yourself, and that can strengthen the production side of the economy.

I don't think anybody advocates for illegal immigration, - [Steve Kendall] Sure.

- where probably those people work under the table.

They're not really part of the main economy.

There's an issue about those jobs being unfilled too, but that's probably not the kind of immigration that is most helpful to an economy.

- [Steve Kendall] Right.

- So I'll leave it at that.

- And we've talked earlier too about the fact that because we have a lot of job openings, people have become more selective about going back to work, or if they currently have a position they're much more able to move to what they believe is going to be a better job or a better set of working conditions or a better balance of life, that sort of thing.

So do we think we'll ever shake that back out?

I mean, is this sort of what we're gonna be in now?

I mean, I know there's no way to put predict, is this like something that's gonna keep going for years before we get back to what we used to call normal, if there ever was such, normal was always what was going on at the moment, but this is a different twist than we've seen before, historically.

- Yeah, and I would say that labor economists, many labor economists like the new situation, it really gives workers more power to demand higher wages, which is a good thing.

Because that translates into higher incomes for workers, but also better working conditions.

- Right.

- Safety and other rewarding things about a job that are not per se, the pay.

I would guess that the labor market will return to something like it was previously as the supply chain issues shake out as the aftermath of the stimulus goes away.

I would think that most jobs would return to, I don't wanna call it normal, but What it was previously.

- Right.

- It has given an opportunity for people to consider what they get out of a job.

And so to that extent, it might permanent, maybe permanent isn't the right word, but for a while, change the way people think about work.

And I don't think that's necessarily a bad thing.

Thinking about what you get out of your occupation is probably being mindful about that stuff, is probably a good thing for society.

- Right.

Because I know anecdotally, I've heard people say I've worked in a service job and they they've examined that and said, this isn't really what I wanna be doing for the next five years, where maybe before this, they would not have thought that way about it, but they're saying, well, maybe I don't have to do this for the next five years.

Maybe there's something better out there and I can make that move now because people are looking for employees.

So you're right, it hasn't powered the labor force in an interesting way.

Talking about labor force and labor needs, obviously the state of Ohio has attracted this huge investment by Intel, down in Central Ohio, $2 billion of state money or various packages of government money going as part of the incentive package for that, that will attract or will provide a lot of jobs, both in the construction stage, but then once that Intel facility, and it's a massive facility, probably gonna be one of the largest chip manufacturing facilities in the world, if not the largest.

How is that going to affect the labor economy in Ohio?

Because we won't probably be able to fill all of those Intel jobs with Ohioans, correct?

So we're hoping or assuming people will come in from outside the state to some degree.

- That's right.

Excuse me.

I gather that Intel has partnered with OSU and Columbus State to sort of develop the local workforce, which is a good thing.

It's a good thing if they can hire people that are from the area, but I don't think they're going to restrict their employee search to just people from Ohio.

If someone from Arkansas applies and they're the best candidate and are willing to move, if they need to move, then they'll accept them.

And so I think it'll be a combination of homegrown employees and especially the more skilled ones probably will be imported if you will, from other states, maybe other countries.

- Yeah, and in the state of Ohio, and as we talked about the fact that the labor force is becoming more mobile and more eager, or at least more adjusted to moving, the assumption would be, I guess, too, that you're gonna pull jobs from people who are working in similar fields in Ohio might be attracted to go work at the Intel facility, which then creates a job opening in Columbus or Toledo or Cincinnati or Athens or wherever they might currently be.

So I guess in a way that will in some ways could grow the state's population.

You talked about immigration being the reason why the United States continues to grow in population versus the people that are already here.

So in a way maybe Ohio will gain some population back because of that, more people will be coming here to fill positions.

And obviously Intel is a high tech, the kind of economy, the kind of facility that we've always wanted to get to supplement the current industries we have.

So how will that be handled in terms of moving people from other positions, if I'm living here and I said, you know what, I wouldn't mind living in Lincoln County and working for Intel.

So I'm leaving my job in Toledo to do that.

It then puts pressure on those local economies, like Toledo, to fill the position.

So that's a challenge probably as well.

- It does, but I don't think it's going to be dramatic.

I don't want to quite describe it as anecdotal, but when you leave your job to go to Lincoln County, that's an opportunity for somebody else who says, Hey, Bowling Green's hiring.

And I don't wanna dismiss 3000 jobs, but it is a relatively small number compared to the statewide employment.

- [Steve Kendall] Okay.

- Or the national employment.

So it is a positive effect, but the effects will be diffused enough that I don't think there's going to be a huge shortage or a huge disruption all at once.

It'll be noticeable, but our economy's very flexible.

And I think it will adapt to those changes.

And mostly for the good, I would say.

- Yeah.

So there won't be this, as you used to say, that large sucking sound going down to Columbus of all your tax dollars or whatever.

So, okay.

And just as we've got just a moment or two here, if I'm an individual and I look at an inflation, is there anything I should or shouldn't do to help it level itself off?

Or I just ride through this and do what I need to do, just live my life and it will all eventually level itself back out or is there something I should look at as an individual say, well, maybe I shouldn't spend that money right now, or maybe I should spend that money.

Is there anything like that, that you can get so micro that it makes any difference in that regard?

- I don't think so.

- [Steve Kendall] Okay.

- I wouldn't advise anyone to.

- [Steve Kendall] To try and yeah.

- Try to do their duty to fight inflation.

If you think back to you mentioned Gerald Ford and the whip inflation now.

- [Steve Kendall] Whip inflation now.

- Yeah, that didn't work at all.

Right?

- [Steve Kendall] Okay.

- Individuals, first of all, they're just gonna do what they want and chiding them to sort of help fight inflation, I don't think is a very effective policy.

- [Steve Kendall] Okay.

- I think ultimately the federal reserve will get a handle on this, whether they're just guiding expectations or actually raising interest rates substantially.

And there's a debate about whether it's transitory or permanent.

And I think economists think of transitory as longer lasting than most people.

- [Steve Kendall] Individuals.

- We think of it in terms of maybe multiple years and ordinary consumers think, well, it's more than a month.

So it's not transitory.

But I would say in a couple of years, that'll settle down and it won't require individuals to make a conscious effort - [Steve Kendall] Decisions like that.

- To fight inflation.

- Okay.

Well, we'll leave it there.

And maybe in a couple of months, three months or so, we'll have you come back and we'll see what's changed in that terrain with regard to the economy.

- If you play the old tapes, I might look bad.

- Okay.

No, no, no way.

Appreciate it.

Dr. Peter VanderHart, the professor and chair of the department of economics at Bowling Green State University.

Thank you again.

You can check us out at wbgu.org.

And of course you can watch us every Thursday night at 8:00 o'clock on WBGU PBS.

We will see you again next time.

Good night and good luck.

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