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Ohio leaders are wrapping up a busy 2022, which saw policymakers address several big issues.

That includes the rise of inflation.

We look back at the issue of inflation with a debate between two experts on the subject.

It's all this week on the state of Ohio and welcome to the state of Ohio.

I'm Andy Chow, sitting in for Karen Kasler.

The pain of inflation caused a wide ranging impact from businesses to individuals in Ohio.

Over the year, the cost of materials and the fuel to ship them hit the supply chain and caused a ripple effect in the national and state economy.

The rate of inflation has started to cool since the summer months, with other markets also showing signs of slowing down, such as the housing market.

Earlier this year, I sat down with two experts on the matter.

Ray Hedman, vice president of policy for the Buckeye Institute and Gamow Bear Video State Policy Fellow for Policy Matters, Ohio.

So we're talking about the issue of inflation and the impact that it's had on people all around Ohio.

So, Ray, let's start with you.

What impacts have you seen when it comes to the rate of inflation in the country and here in Ohio?

Well, right now we're starting to see people cutting back a little bit on what they're purchasing.

People are purchasing a little bit less and gas, things that have gotten more expensive.

Consumers are shifting away from.

So instead of maybe sitting there saying, we're going to go out, fill the car up with gas, now we're looking at maybe taking some public transportation that came out the numbers.

What's happening is people are finding that their paychecks and dollars are not going as far as it used to be.

So people are substituting cheaper goods, cheaper brands in an attempt to kind of continue to live the lifestyle they've grown accustomed to.

Yeah, same kind of thing.

I mean, you know, since the since the child tax credit ran out in the most recent polls I've seen is somewhere near 50% of families are struggling to feed themselves their kids.

You know, one thing that I was reading recently is that people are buying smaller portions of things like half gallon of milk instead of a full gallon.

Yeah.

And the gassing is critical.

Oh, also rent.

Rent is incredibly high right now.

But the gas thing is is really impressive.

I mean, I don't know about you, but I've actually seen a lot of people stuck on the that the road because they ran out of gas, probably because they didn't fill their tank all the way.

And I know that have been cutting down on how much I fill my gas tank when when the time comes to go to the pump.

So if people are.

Changing their habits because of how much things cost right now, what does that do to the future of inflation?

Does that mean that costs will come down if people start changing their habits?

And what is the impact of people who change their spending habits?

We'll go to Gamow first.

Sure.

Yeah.

You know, it will definitely change in changing behavior.

We'll have a, you know, press down the the inflationary the inflationary pressure, for sure.

I think that, you know, we'll get into this, hopefully in this conversation.

But I think that the the issues that the underlying issues here in this in this inflation situation or one much deeper than that.

So at this point, it's, you know, things can get worse if we don't do something about it, too.

Right.

Yeah.

So basically what's happening is, you know, what economists call a drop in demand and that'll help limit the price increases that we see if people are buying less stuff.

Things are going to not the prices are not going to go up as much.

What I think, though, the other problem is it's come a little bit like whack a mole and that prices in different areas may continue to elevate.

So, for example, you mentioned, you know, shelter and housing.

Housing is about a third of our basket of inflation.

And those prices are going to continue to rise.

And so even as people are maybe buying generic brand goods or, you know, they're selling out their tanks less or shifting to fewer eggs and milk, if housing prices continue to rise, that's going to continue to exasperate the problems of inflation.

So let's back go ahead.

You raised right here another way that you see what he's talking about is that recently we've seen an uptick in the inflationary pressures reaching services in other types of sectors that are not directly dependent on those input goods, those supply chains that are held back.

So when you see when you see that inflation when you see inflation in services, what that's telling you is that, you know, the inflation is cycling through the economy and pressuring other sectors of the economy.

Right.

So let's back up here and take a look at how did we get here to begin with?

How did we get to where we are right now with inflation and the problem that we're dealing with right now, Guillermo.

Sure.

You know, in my analysis, this this situation is can be traced back several decades.

We have what I would what I would argue would be are the main things to consider are a trend towards increasing corporate consolidation, as well as increasing financialization of the economy, both of which work together to to reduce the flexibility and the physical capital stock of the country.

So what I mean by that is increasingly and you can see this in many different sectors, hopefully we'll talk about gas a little bit.

Increasingly, what you've seen is a low capital investment ratio for most of these companies, meaning they're investing less in, for example, rigs or housing construction or, you know, now we're seeing some some investment in semiconductors, manufacturing, that kind of stuff for for decades, that wasn't the case.

So as we invest less in in physical capital, in the capacity to produce, we're more susceptible to stocks like what we've had recently.

The pandemic was a world historic adverse shock, and we don't have the capacity, the flexibility to respond to that shock in any kind of meaningful way.

The long term, I think there's obviously a concern that are we seeing sectors remain competitive.

But when you start seeing people shrink and businesses shrink, that can create some long term problems.

But I think the real direct cause what we're seeing right now in inflation is from the shock of the pandemic, which has reduced the supply of goods available across the world.

So if you take a look at kind of international trade systems where goods have been delayed coming from everywhere, from China to Europe.

And so as a consequence, you know, basically when you have more goods oh, sorry, fear of goods being produced, you're going to see prices going up because people want to pay more.

Then I think you need to combine that with some of our federal policies here in the United States, which were extraordinarily generous under both President Trump and President Biden.

So that drove up what we're calling the demand side, where people had a lot more money that they're able to go out and buy these goods.

So you had two factors, both pushing inflation.

One is fewer goods were being produced and transported around the world.

And then the second thing is people had a lot more money coming in for the first several years, for first several months of the pandemic, driving up household income.

So you had more money chasing fewer goods.

And then I think, you know, the Federal Reserve Board kept money very loose.

And so a lot of, you know, the bigger businesses, you know, credit and everything was able to expand.

So those three factors all have contributed in a very, very short period of time.

The inflation, obviously, we agree on on several points.

I think the biggest point of disagreement, which is to be expected, is, you know, we we have seen it is true, we have we saw an increase in demand, especially, you know, once the the closures started coming down.

But but at this point, you know, the inflation is hitting us hardest right now.

And at this point, you know, people's discretionary funds have disappeared.

And we're seeing sky high credit card, you know, historic levels of credit card debt.

And the fact is that, like.

Yeah, that I agree that that is a factor, the increased demand.

But any in any case, the generosity of that, the impact, the proximate relationship between the generosity of the of the stimulus bills and the current situation is how it was captured by the financial sector and not by not how much it reached our wallets at this point.

And and, you know, in fact, the economic policy Institute did an analysis of that of the the increase and trying to find the nonfinancial sectors breaking down the nonfinancial sectors, price increases.

And they found that 54% of price increases in the past in the since 2000, from 2022 to 2021, quarter four were 54% were accounted for by corporate profits and 38% by non labor costs and only 8% by labor input cost.

So it doesn't go quite to the question of the demand.

But my point here is that we're I believe that this is a major supply, supply driven inflationary shock.

Yeah, I think, you know, if supply is what we're seeing is definitely had a major role.

I think the concern that we've seen a side note demand has driven up the spike in goods and we're now starting to see the inflation leap from the goods to the service sector.

And so I think, you know, under underlying this remains the fact that a lot of households, you know, you take a look at research by Brookings, others that are lost, a lot of households actually had income go up during the pandemic because the United States had one of the largest bailout packages of any country.

That's one of the reasons the United States core inflation outstripped Europe inflation during the first several years, the pandemic and obviously before the Ukraine invasion.

But I think, you know, Gamow and I are in agreement that a lot of what we're seeing and I think the part of hopefully the way out is to increase the supply of a lot of these goods and labor supply to services that can help bring down inflation in the future.

So let's talk about gas prices.

That's the thing on a lot of people's minds.

Of course, it's having an impact on a lot of people.

First of all, when we talk about inflation and and then we look at the price at the pump, do those correlate is one because of the other?

Are we seeing inflation?

Are we seeing gas prices higher because of inflation?

Right.

Yeah.

You know, it's kind of a chicken and egg.

I mean, you know, energy prices is about 8% of the goods basket.

And so, you know, when gasoline is going up, that's going to drive up the overall prices, inflation.

You know, a lot of times, you know, energy and food are so volatile because they go up and down so much, we try to strip those out.

We're looking at the underlying inflation measures.

But I think at this point, you know, the higher price of gas has become a real contributor and kind of outstripping its role in the CPI basket of goods, because gas is an input now to what so many businesses need.

When gas starts getting too expensive, you know what you're going to see is anybody that's relying on transportation, i.e.

basically every business that sells goods to target, to grocery stores, to Wal-Mart, that's going to be driving up their cost of putting those goods on the shelf because they're going to be had to paying so much more to transport those goods, you know, to their end point a destination.

And that's one of the reasons we saw corporate profits fall in the last quarter, is because the cost to a lot of these companies of putting goods on the shelf has increased due to the price of gas.

And now, again, that's going to be an ongoing concern because energy prices is an intermediate good.

It's used to make so many other goods that people use.

You know, and so you think about a lot of people just think about gas as taking their car, you know, getting to school, getting to work, you know, getting to the gym.

It's a lot more than that because so many businesses rely on goods to complete their work product or to be able to deliver their service to the consumer.

So so I'll give you just a super brief history about why we're here.

So then we had the fracking boom, right?

2010 to 2014.

You know, tons of money into exploration production all over the state, all over that well here in Ohio, but all over the country.

And what happens in 2015, 2016, right.

Was that OPEC changed their strategy.

They flooded the market with oil, the prices dropped off a cliff.

And all that investment that that people put into the fracking industry, just you know, a lot of people were left broke.

And so then 2017 to 2020, somewhat of an increase right.

But then again, pandemic shock and then again, Ukraine shocks.

So what we've seen is a series of shocks that have that have affected, again, what I was saying earlier today that the the physical capital invested in these sectors.

So what you see is, is the oil sector has reduced their sensitivity to price to price fluctuations.

Prices have gone up and the oil sector isn't investing directly like they used to because because of the volatility of the market.

So and so what happened, you know, once the once the pandemic, once it was clear that gas prices were coming up after the 2020 decline, you started seeing investor calls and in conferences for the oil for oil companies, the oil sector, the investors in the the that the manager the investors of the financial sector basically begging the managers of the oil companies to do what know to discipline capital, to discipline their investment, to hold back on investment and to capture more profits by keeping the oil in the ground.

So they're holding back on the on investing and building new rigs because they see this as a means of capturing profit, buying back stocks, increasing the value of what they hold and benefiting the stockholders rather than the American populace at home as well.

So, Guillermo, what we're seeing right now with the higher gas prices, what do you think that means for Ohio when it comes to its future energy policies?

Does this send any signal that Ohio needs to diversify in any way to look at other energy resources?

Absolutely.

You know, this I mean, the problem here, of course, is that the volatility itself doesn't help.

The volatility isn't a good symbol, a signal, economic signal to investors.

So actually, I don't think in of itself it's going to lead to some kind of diversification of energy sources.

The answer is, obviously, yes, we need to diversify for decades we've been trying.

People have been arguing.

I mean, this is decades old, right?

That we know that we need to go into renewable energy sources, all those kinds of things.

But it's not going to happen just by market signals.

We have to we have to make it happen as a society, right?

Yeah.

I think what we need is a policy of, you know, energy abundant.

So diversifying is fine.

I think what we really need is just more, you know, a more of different types, everything from solar, you know, to new killer to obviously to fossil fuels and industry.

You know, Gamow talked about fracking.

I mean, fracking was a great boom because it made Ohio Industries a lot more competitive around the world because all of a sudden one of our main inputs declined in price.

So, you know, I think if you look at it from a business perspective, from an oil company or other types of major energy production, you know, they want to take a look at the long run and, you know, and try to escape a little bit of the volatility cycle.

And so I think, you know, we need to make sure that we're putting in place as policies that can encourage long run investment and not restrict, you know, basically people who want to produce an energy plant, you know, not telling them they can't do it.

When it comes to inflation and gas prices, there's obviously a lot of finger pointing and it becomes political when it really comes down to the economic issue of inflation and of gas prices.

Is it a political issue?

Is it something that politicians can fix or is it bigger than that?

I'll let Guillermo go first on that.

Sure.

Yeah.

I think this is clearly political.

I think that part of the problem is depending too much on the markets with this situation, you know, we can we can approach it.

It added from a whole lot of sectors.

I mean, part of it has to do with our foreign dependance on oil.

And, you know, the steps that we've taken against Russia, against Saudi Arabia, Venezuela, I don't you know, those are political decisions.

But how do we bring on more production to get more supply?

You know, companies are forward looking.

And so making big expansion decisions that are costly to recoup is going to require, you know, some thinking that I'm saying there's going to be a long term horizon.

The tension, I think, in the dichotomy of government's position is, yes, he says we need more production now.

But the same standpoint we need to transition away from some of these fossil fuel companies.

If you're an investor, you know, in you're hearing that comes from the government that may not it that's definitely not going to encourage you to invest long term if you think that the government may come in and cancel some your leases or claw back your production in the future.

So I think that's a political concern.

What will we see in the next six months?

Are we going to see things start to taper off or do we see this continuing?

Well, you know, if I can predict a future like that, I'd be doing a lot of been out of the stock market entirely.

So I think, you know, what you're going to see is I think the actions of the Federal Reserve Board are going to be keen to short term, you know, how much are they going to be raising rates that'll basically put some downward pressure hopefully on prices.

I think, you know, we've learned our lesson a little bit on acting aggressively when you're starting to see inflation numbers, just dig, I think what to look for in the next 2 to 3 months is going to be inflation month over month.

And is inflation shifting more from goods to services showing up in wages?

They may cause the Fed to continue to raise rates faster, which will drive down consumer spending and, you know, really starting to threaten the overall health of the economy.

So, yeah, it's definitely not optimistic about the next the next few months.

You know, the Fed is meeting this week.

Originally, the expectations were that they would raise interest rates by half a percent.

People are talking about a full 100 basis points right now.

You know, at you know, those sound like pretty abstract numbers.

But just the math is such that if if the interest rates go up a couple of percentage points, you're your 30 year mortgage doubles in price.

We're talking a huge impact on people and people's capacity to to have money to pay the things that we need.

I think that I'm not optimistic in part because there is a predominance of this idea that the only response that we have is this heavy handed Fed, blunt instrument kind of response.

But the only the only encouragement, perhaps, is that Democrats know how dire the things are going to be in November if they don't do something about it.

So perhaps that will encourage some kind of courageous action in things like we've been talking about in terms of ensuring long term investment in key sectors, but also antitrust regulation and making sure that that corporate corporations can't capture, you know, 50% of the inflation, the inflationary value.

Ohio is officially launching legal sports gambling on the first of the year.

The state's new gaming industry will begin.

That means people in Ohio can place their bets on mobile devices and at in-person facilities.

It's been a long road to get to this point.

State lawmakers began drafting legislation to legalize sports betting in 2018 after the U.S. Supreme Court issued a ruling to strike down a federal law that prohibited states from allowing the practice, while other states like Pennsylvania and West Virginia were ready to put a system in place.

Ohio's spent a few years debating the issue of sports betting and the framework of the industry.

At the end of 2021, lawmakers reached an agreement that carved out specific industries that would qualify for different licenses.

There are now 23 entities that have been approved to host mobile sports betting.

That includes Ohio's professional sports teams like the Cleveland Browns, Cavaliers and Guardians, the Cincinnati Bengals and Reds and the Columbus Blue Jackets and Crew.

Then there are more than 20 facilities that have applied to host in-person sports gambling, including the casinos, the professional sports teams and the Pro Football Hall of Fame.

Our staff has done a phenomenal job of getting all of those suitability investigations completed.

And then for the last couple of months, our staff has been really focused on making sure that all of the entities that want to operate in this industry are in compliance with all of the rules and regulations.

Our team is even out now doing some final equipment testing and verification, systems verification, those kinds of things for the folks that do plan on launching on January 1st.

It's been all hands on deck across all of our divisions.

We're really proud of the fact we have a great team at the Casino Control Commission, but we have still been doing our regular I don't want to call it our day job, but our regular work for overseeing casino gaming and fantasy contests and skill based amusement machines.

So all of that ongoing work has been happening in addition to the tremendous amount of work that's been happening for sports gaming.

And so even though it launches on January 1st, our work doesn't stop there.

It really is just sort of the beginning, because once everybody gets going, then we have to make sure that they are continuing to operate within the bounds of our rules and the law.

The Commission was required to pass a number of rules covering a whole host of areas, but ones that are going to be really important for patrons are things like operators making sure that only those that are over 21 are allowed to to place bets that wagers are actually being placed inside the state of Ohio.

So there's for the online and the mobile folks, there's a lot of geofencing and geolocation type of services that they're going to need to obtain and make sure that they're checking before allowing wagers to be placed and then just making sure that the industry is operating in compliance with a lot of the best practices.

You know, house rules, consumer protections.

We've put a lot of information out about advertising in those kinds of things, as well as making sure that all of our operators are posting, you know, responsible gambling messaging and having the proper procedures in place for those folks that may want to, you know, not partake in sports gaming.

That the commission does, of course, encourage those to who want to participate, to do so responsibly.

And we'll remind everybody that there are plenty of resources out there that are available for people that are interested in, you know, what responsible gaming looks like.

I would refer you to pause before you play, get set before you bet.

Or the responsible gambling helpline for Ohio.

For those that want some additional resources or more information about what that looks like.

That's it for us this week for my colleagues at the Statehouse News Bureau.

Thanks for watching.

Please check us out at state news, dawg.

You can follow the show.

Karen Kasler, Joe Ingles and me on Facebook and Twitter.

And happy New Year.

Be sure to join us next time for the state of Ohio.

Support for the statewide broadcast of the state of Ohio.

Comes from medical mutual, providing more than 1.4 million Ohioans peace of mind with a selection of health insurance plans online at med mutual dot com slash Ohio by the law offices of Porter Wright, Morris and Arthur LLP now with eight locations across the country, Porter Wright is a legal partner with a new perspective to the business community.

More at Porter Wright dot com and from the Ohio Education Association representing 124,000 members who work to inspire their students to think creatively and experience the joy of learning online.

At OHEA.org.