Released on Friday before the long Memorial Day weekend, the Biden Administration hoped that any smoke emanating from the 2022 budget fire would easily dissipate by Tuesday, when everyone returns. However, the uproar has been fairly furious and many who worry about serious things like massive debt and inflation just can’t let it go. Some Americans have already noticed subtle changes. Golfers, for example, don’t usually bother to count their balls at the driving range – but they had a surprise this weekend. “I’d like a medium size bucket,” said the golfer. “That will be $11” said the starter. “The bucket looks smaller than last year,” said the golfer. “It is” replied the starter “we held the price, but you’re getting fewer balls.”
Disappointed, the golfer proceeded to hit all the golf balls from his (smaller) medium size bucket and grumbled to his friend about having a reduced workout. Heading home, the golfer stopped by the farm-stand next to the driving range.
“I’d like a bunch of radishes” said the golfer. “Sure thing” said the farmer, pulling radishes off the shelf. “Those radishes look plump” said the golfer “but the bunch appears smaller than last year.” The farmer smiled and added, “Inflation has hit the farm stand.” Nobody really knows how many radishes are in a bunch (or how many golf balls are in a bucket) but, as the cost goes up, the available units go down. In retail, it’s called – marketing in the time of inflation.
President Biden released his $6 trillion 2022 budget proposal on Friday, and fiscal conservatives were shocked (but not surprised). Progressives, on the other hand, felt the administration wasn’t asking for enough. At the same time, everyone who has ever done a budget knows that you ask for more – and settle for less. But, to thoughtful observers, this budget has some serious data points of concern. The N.Y. Times reports that the US would be at the highest planned level of spending (as a percent of the economy) since World War 11 and the deficits would run above $1.3 trillion for the next 10 years. The N.Y. Post reports that spending next year would exceed $45,000 per household and that the National Debt would exceed $44 trillion in ten years – or $300,000 per household.
In fairness, the $6 trillion budget includes the “proposed” $2.3 trillion Infrastructure under the American Jobs Plan (AJP) and the $1.8 trillion for the American family plan (AFP) and $1.5 trillion of discretionary spending. All of this is on top of the $1.9 trillion that we already spent for the American Rescue Plan (ARP).
Larry Summers (Harvard economist, Democrat, and former Clinton Treasury Secretary) continues to call out the concern that all this spending will spark undue inflation in America. “We are printing money, we are creating government bonds, we are borrowing on unprecedented scales,” he said. In addition, Warren Buffet added: “We are seeing very substantial inflation,” and Senator Mitch McConnell (R-KY) put out: “We just got the most dramatic monthly inflation report in decades.”
Part of the problem is that both the Fed and the Biden Administration are standing tall in front of all the inflation warnings, and they will either be right or wrong. If they are wrong, the mid-term election is over and the Democrats will lose the house. If they are right, it will be a huge win for the Democrats. The Fed has continued to use 2% inflation as their standard, and has hinted that it could rise above 2% for a short period of time while the economy bounces back. Treasury Secretary Yellen said that “it is going to be a bumpy ride.”
Economists tend to look at two separate indexes to gauge inflation. The first bad news came from the Labor Department’s Consumer Price Index (CPI) which rose 4.2% in April. The Department of Commerce also issued their Personal Consumption Expenditure Index (PCE) which rose 3.1% in April, and that is the index is more closely followed by the Fed. Bottom line, both increases were not good, and the administration is encouraging everyone to give the economy more time to settle down. A Biden official told CNN that officials “do not see signs of persistent dislocation or long-term inflation.” Many in retail, however, just see prices going up – with little chance they will back-slide. In retail jargon, as prices go up, sales go down, and jobs get lost.
The bottom line is that wages and employment need to keep pace with inflation, or we end up in a huge pickle. If that doesn’t happen, interest rates will need to rise to tamp inflation down, or we will spiral into a decline. Larry Summers, to his credit, keeps pointing all this out by saying; ‘We’re taking substantial risks on the inflation side.” It can be presumed that Mr. Summers feels that the Biden Administration is pushing too hard and too fast – to pass what they can, while they can – at the same time they are taking risk while outwardly expressing a sea of calm.
It’s summertime (literally) and Americans have already noticed big-ticket items are rising in price. Just try to buy a house, rent a car, or purchase a new appliance, and you will catch the drift. There are other increases as well – in the price of gasoline, home furnishings, or fashion clothing where the impact is equally felt. But, with all these increases in front of us, when the subject turns to “hot dogs” that’s where Americans draw the line. Reuters reports that the price of an average hot dog is already up 11% (with no additional comment on the mustard, relish, or sauerkraut).
As we edge closer to July 4th – eyes turn to Nathan’s Famous International Annual Hot Dog Eating Contest which takes place this year in Maimonides Park – not far from the Original Nathan’s Famous location at Surf and Stillwell Avenue in Coney Island. Joey ‘Jaws’ Chestnut has won the contest 13 times and last year gained the men’s title once again.
The contest reportedly started back in 1916 when Jim Mullen ate 13 hot dogs at the Original Nathan’s Famous location. Back in 1916, the price of a hot dog in Coney Island was $.05 and today it is typically priced at $4.75. Using an inflation calculator, the $.05 from 1916 would equate to about $.77 today. For those who enjoy math trivia, it would have cost Nathans $57.75 to feed Joey Chestnut the same 75 hot dogs in 1916 – but it costs $356.25 to do it today. Clearly prices have gone up!
Truth be told, Larry Summers worries that big federal spending will have a disproportionate effect on inflation. A few days ago, he said: “We used to have a Fed that reassured people that it would prevent inflation. Now we have a Fed that reassures people that it won’t worry about inflation until it’s staggeringly self-evident.” He also said that: “The Fed’s idea used to be that it removed the punch bowl before the party got good. Now, the Fed’s doctrine is that it will only remove the punch bowl after it sees some people staggering around drunk.”
Inflation and big budgets are a problem that can be contained and even controlled. The issue is wages, employment, and inbound revenue (taxes) need to keep pace – because it’s easier to fix the situation if properly anticipated, and harder to correct it after it happens. Understanding golf balls and radishes helps explain inflation, but hot dogs are really the last straw. The dialogue is about over-spending and devaluing our purchasing power to the point where you finally realize that you are spending more and getting less – or just spending more for the same thing. This is all true, of course, except if you are Joey ‘Jaws’ Chestnut – who received $10,000 for downing 75 hot dogs in 10 minutes in the height of the pandemic! In Joey’s case, he got much more than he paid for.