The free market system, when left alone, will always reach a balance. Individual markets end up with a fair price where business is willing and able to produce the same quantity that consumers are willing and able to purchase. Although the majority is generally happy with the outcomes, often the federal government is not.
Sometimes the government thinks the price of a product is too high and not enough of the product is being produced and bought. So, it offers to have the taxpayers pay part of the consumers’ price. An example would be giving rebates to purchasers of electric cars. The government hopes that the lower price to consumers will result in more consumer purchases.
The rebates also encourage business to produce more. This imbalance in the market distorts the true market price and results in too much being produced and not enough being purchased mostly because the consumers don’t want them.
Sometimes the government thinks that the price of a product is too low. Such is the case with the price, or wage, paid for the use of unskilled labor. Usually, the market wage is much lower than the government would like. So, they legislate a minimum wage.
This results in a reduction in the number of jobs available and increases the unemployment rate. Historically the unemployment rate for teenagers and other unskilled workers is two or three times the national average, meaning there is an imbalance in that labor market.
Today, because of labor shortages, the market wage is above the minimum wage, so there is no impact from raising the minimum wage. In the future, when the labor shortage problem corrects and states raise the minimum wage further, the imbalance will be seen.
Current government monetary and fiscal policies are also creating an imbalance. The Biden administration continues to over-stimulate the economy by running huge government spending deficits. Even after the prior administration spent $3 trillion to stimulate the economy after the COVID shutdown, Biden continued to run massive deficits.
By the end of Biden’s four years in office, he will have accumulated more than $8 trillion of new debt which is the most by any president ever.
This over-stimulation has created massive excess demand and market imbalances, which have resulted in much higher prices for nearly all goods. Since January 2021, when Biden took office, consumer prices have risen by nearly 20%.
At the same time, government monetary policy is trying to reduce excess demand by slowing the rate of growth in the money supply and raising interest rates. The hope is to take enough excess demand out of the economy to reduce inflation.
This has upset markets and is causing imbalances as business is forced to pay more for, not only for labor and material, but also for money.
While the Biden administration is pleased that the annual inflation rate has fallen from the peak of 9.1%, the current level is more than twice the rate seen at the end of 2020, just prior to Biden taking office.
It is no wonder that economic imbalances have created the position we are in today. While most believe that the annual inflation rate will continue to fall, the economic imbalances will make that difficult.
The imbalance in labor markets created by the huge wage increases workers received this year will keep inflation from falling further. Many of the organized labor contracts run for up to four years, meaning the imbalance will continue well into the future. That means the inflation rate is not likely to fall further.
The imbalance created by monetary and fiscal policy working in opposite directions will likely cause slower growth in the economy and could lead to recession. For the last year and a half, most economists have been saying a recession is coming. Massive increases in government spending have delayed the recession.
Now that the public debt exceeds $34 million, there will be pressure to finally reduce government spending and bring the federal government budget closer to balance.
To ensure long-term economic growth with stable prices, balance must be brought back to individual markets and to overall government economic policy.
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