Will Prices Increase Once Businesses Reopen?

It is hard to say with any certainty, though my best guess would be no in the short run and probably in the long-run. In the short-run, say, five to 18 months, the aggregated price level will likely experience very little inflation. The long run, however, might be a different story, especially with healthcare.

Price levels should increase with the massive increase in the money supply (liquidity) and government spending. The reason that happens is that these mechanisms mainly increase the demand for goods and services. By printing money, the money ends up in wallets, and these folks now feel as if they have “extra” money to spend on things.

Though this works on paper, it’s harder to see play out in real life. It all comes down to whether individuals and firms will see these new dollars as “extra” or if they decide to save or pay off debts instead. So, it all depends on the “velocity” of money, or how quickly money exchanges in the economy. After the Financial Crisis of 2008/09, we didn’t see an uptick, despite all this liquidity in the marketplace. Granted, the Great Recession was the result of a credit crisis, not a liquidity crisis, like it was during the Great Depression. Nonetheless, banks were afraid to lend, and people were afraid to spend. 

The same thing might happen this time around. Just because businesses begin to reopen, doesn’t mean that people will all of a sudden flock to the stores and go back to spending as usual. It is starting to look like there will be a prolonged return to normality, which may take several years for us to figure out the “new” normal. There’s been extensive discussion of the “shape” of the recovery going from U-shaped, to V-shaped, to W-shaped, and now to the Nike “swoosh” shape.

So, when thinking about whether or not prices will increase, we have to analyze what has been happening on both the demand side and the supply side of different industries. 

Technology – decreasing now, decreasing later

The technology sector is poised to be able to make huge gains from this crisis. For one, we have seen many of the tech companies see windfall profits as we have transitioned to online and remote work. These industries can undoubtedly increase their prices, and we would pay them. However, these firms have low marginal costs. That is, any pricing over $1 is profitable for many established tech companies. 

Though these companies can increase their prices, it makes more sense to try and retain all of the new customers they have recently acquired.  

Automobiles – decreasing now, increasing later

Cars and trucks are a good indicator of what’s to come. New cars, used cars, rentals, everything is down to record lows. Demand has decreased substantially. Moreover, “plans to purchases a vehicle in the next five months declined 34% in April.” There is also an excess supply of used cars. So prices for automobiles have seen a substantial decrease. When businesses begin to reopen, we may see some folks racing to their nearest dealership to take advantage of the deals. These consumers will likely reduce the excess supply and increase prices, but not any higher than they were pre-COVID.

In fact, due to COVID perhaps restructuring the labor force a little bit, there may be an ample supply of unemployed workers looking for jobs, which may push wages down, and thus, allow for cars to sell at a lower price. Since it costs less to make cars, we can charge less to sell them.

Energy – decreasing now, increasing later

On the other hand, we are experiencing meager prices for oil and gas. With such low prices, this may increase the demand for cars, particularly trucks and SUVs. It all depends on how long we have the supply glut. 

As airlines pick back up and we start driving to work and all over the place, we’ll likely see the prices rebound. But, as mentioned, this will be a slow process, especially since a good part of the oil price decline has been a supply glut that was unrelated to the COVID-19 pandemic.

Food – Increasing now, decreasing later

Food supply chains have seen an enormous disruption, namely those that deal with both grocery stores and restaurants. Meatpacking firms have experienced a detrimental blow due to COVID infections, reducing the supply, and pushing prices up. Moreover, packaging requirements make it hard to merely direct food that was to be sent to restaurants over to grocery stores. As a result, beef prices are at record highs. Chicken is still relatively steady but pushing for higher prices. Eggs have seen a considerable price increase. Pork has also seen a rise. 

Furthermore, the demand for foods that don’t go to restaurants has increased substantially. Think macaroni and cheese, frozen foods, canned goods, and snacks (I’ve been buying way more Oreos as a result of the lockdowns). These foods are experiencing an increase in prices now but may see a reduction as people start going back to work.

As the meat processing plants begin to recoup their labor force, the supply of processed meat will increase again and push prices down. Importantly, as schools reopen, this will help soften the food glut we are now experiencing, especially at lower prices. Hopefully, some of the regulatory barriers that have softened to allow the supply chain to redirect food to grocery stores will help. 

Something that may come out of this COVID crisis might be investments in further automating the food processing system. So, this will likely also reduce prices. 

Education – I dunno

Universities are suffering severe losses in tuition revenue. Usually, recessions cause the demand for a college education to increase. Moreover, easy access to tuition assistance in the form of subsidized and unsubsidized loans flame that demand. On top of that, as all levels of government allocate more funds toward unemployment and COVID relief, this will reduce public funds that are allocated toward education, thus pushing tuition prices up even more.

However, this time it might be different. If universities have to transition to more online classes, enrollments will decline. We already see it. People go to college, not only to get a degree but for the college experience. How long will it take to get fans back into the Doak football stadium? With such low enrollments, the rate of tuition growth will likely slow down if it doesn’t go negative. 

Moreover, with the transition to online learning, how many firms will be happy with certifications that are obtained outside of the traditional university setting? 

Healthcare – increasing now, increasing later

I can’t see any reason healthcare costs will decrease. COVID-19 has not only hurt the healthcare system, but it has also caused other treatments to be delayed. This “pent-up” demand will unleash and push health care prices through the roof. Because of the lockdowns and the halting of “elective” procedures, health care consumers have delayed prescriptions, treatments, and other health care services. This will cause health care issues down the line and will flood the system again. 

We will likely see this play out most tangibly in our insurance premiums in the coming year. 

Housing – decrease now, decrease later, and maybe increase after a while

Housing prices are predicted to fall a few percentage points in 2020 and will probably not increase until the end of 2021. Lower prices and friendly interest rates are a boon to buyers. But, buyers have experienced a tremendous loss in income. Perhaps, many homeowners have attempted to refinance their homes at lower interest rates. Granted due to COVID lockdowns, the refinancing process has been a hassle for many. But, once businesses start reopening, we’ll see these refinances happen quite rapidly. The uptick in refinances will put upward pressure on interest rates which should slow down housing sales even further.

In sum

Indeed, a reopening of businesses may increase the demand for those goods and services that were temporarily shut down. However, depending on the gravity of the loss of income, the demand increase for these “nonessentials” may not be enough to increase prices. Prices should stay relatively low relative to pre-COVID levels and will likely increase at the tail end of the swoosh. 

I’d Rather Have a Stuffy Nose

If you know Spanish, watch the video: https://www.facebook.com/watch/?v=873589819731339

The woman in the video and still image above, Lola, provides a moving soliloquy regarding the ongoing pandemic. She opens with the realization that “common sense” is not as common as we think. She goes on to say that those who have common sense are worthy of admiration because it’s so hard to find these days. 

Her sarcastic tone is about the absurd claims being made by Cubans on the island regarding the COVID-19 pandemic. They will make claims like, “Your president (Donald Trump) is setting up dump trucks outside all of the hospitals because so many people are have died. Your health system can’t handle all the sick and dying!” Solicitously, these folks ask, “Are you doing OK in those grim conditions?”

Uh, what?

Yes, we are in a health crisis. Many people are dying. There are a ton of old and sick people not only in the US but in the whole world. We’re in a scary situation. 

However, the concern over the well-being of friends and family members in the US amid the crisis is misplaced. Despite the health care system’s current state of over-capacity, it beats out Cuba’s system by much more than a longshot. The health crisis of the US emerged quickly and is most likely short-lived. Hospitals are immaculately clean, have staff who are well-trained, and are, during normal times, filled with the resources necessary to address virtually any health issue effectively.

Besides, folks in the US have the capacity to actually assist the health system. We have easy-access to masks, hand sanitizer, and a multitude of goods necessary to combat the pandemic and overcome the lockdowns with ease.

Not in Cuba. 

Cubans are stuffed in a multi-generational household because nobody has the means to buy a house of their own. Your home is also falling apart because there are no tools or supplies to repair anything. If you are one of the lucky few to have a car, it’s at least 40 years old, and there’s no gasoline to fill it up. Going to a grocery store is out of the question as there are none. Before, during, and after the crisis, you will continue to wait in line for your scant ration of essentials each month. 

In the US, we can take $50 to the store and buy whatever we need or–wait for it–want. Gasp! Plenty of stores are open during a pandemic with people buying more toilet paper than they need and all the food they could possibly hoard in their modern refrigerators. Not to mention, Amazon and the many other online retailers that will deliver virtually any product we need to our doorstep. 

Allow us, citizens of developed countries, to take the punch on this one. We are doing alright during this crisis. But how about Cubans? 

Hospitals in Cuba would not even come close to passing a regulatory audit performed by the Department of Health and Human Services, let alone during a pandemic. Cuban hospitals are short of countless resources. Well-trained doctors are limited continuously in their ability to treat patients because of the conditions of their clinics. Cuba is not a great place to live, as evidenced by the swaths of people escaping by any means available. 

For more than 60 years, Cubans have been enduring a crisis. Many of them are oblivious to this reality due to the stringent control the government has over the Cuban media. But, many of them stubbornly perpetuate Cuban propaganda, knowing otherwise. 

I witnessed this bizarreness when I met extended family members visiting from Cuba. They matter-of-factly say to me, “Oh, well I don’t have to buy a house, like you guys. My government provides a house for me,” and other ridiculous claims. They’ll be amazed when walking into a grocery store, visiting Disney World, or hopping into a nice car to go anywhere, and still speak of Castro as if he was a god. 

They exalt the ideology and glorify the very leaders that have kept them in this relative misery for decades. And, this is what brings the woman to tears. Not only are Cubans thoroughly brainwashed, but they are also afraid to say, “We were wrong. This life does suck. Socialism doesn’t work.”

However, this behavior is not all that surprising. The cost of speaking out against the government in Cuba is still very high. Whenever a Cuban dissident makes a little noise, they disappear. The exchange of ideas is not allowed, especially if those ideas are in any way a threat to socialism. 

This post is a message of gratitude toward the political and economic institutions of the US. And, a reminder that “common sense” is not as common as we believe. It’s not only a rarity in Cuba where it is actively suppressed but increasingly uncommon among Americans, where free-speech is a pillar of the society. 

The COVID-19 pandemic is being used as a weapon to push the US closer to the Cuban way of life. The current health crisis is “proof” that our healthcare system requires some drastic reform. Folks are calling for the immediate adoption of socialist policies like “Covidcare for All,” a public job security program, and universal basic income. Moreover, “tax the wealthy!” of their “excess profits” that are to be arbitrarily decided by the state. 

If we desire for poverty to be eradicated, and standards of living to increase for everyone, policies that move us closer to socialism are not the way to go. This was common sense, even if we skipped out on political economy 101. Our parents knew it. The Chinese know it, for crying out loud! 

But, it seems like we have forgotten.  So, as a reminder, take Lola’s words to heart: “If in the US you come down with a stuffy nose, in Cuba, you’re getting pneumonia.” 

James Buchanan: Surprisingly, Politicians Are Humans

With a simple discussion on how stuff gets done in the political arena, it is easy to understand why it’s so hard to achieve the intended outcomes of that “stuff.” Everything is riddled with side-deals, loopholes, and compromises that detract or cause larger problems than the one(s) they are trying to solve.

James Buchanan: Surprisingly, Politicians Are Humans

With a simple discussion on how stuff gets done in the political arena, it is easy to understand why it’s so hard to achieve the intended outcomes of that “stuff.” Everything is riddled with side-deals, loopholes, and compromises that detract or cause larger problems than the one(s) they are trying to solve.

Economic Prescription: The Health Savings Account

While Republicans in Congress duke it out over how to repeal and replace Obamacare, we can take matters into our own hands by making use of a hidden gem: the health savings account.

The Next Wave of Tech Disruption

A third wave of economic transformation is nearly here, according to a new report by the Kauffman Foundation.

Kicking off with a pep talk from Steve Case, AOL co-founder and author of the Third Wave, who outlines the growth and entrepreneurship that will revolutionize a millennial-led economy.