Inflation continues to figure prominently in the news. Rightly so. It has the effect of taxation because it reduces expense money.
“Inflation is taxation without legislation” - Milton Friedman.
He was an American economist who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history, and stabilization policy.
Inflation continues to figure prominently in the news. Rightly so. It has the effect of taxation because it reduces expense money.
It is useful to look at it in a broader context. Amid this increase in prices, President Rodrigo Duterte recently acknowledged that “the Philippine economy is in “bad shape” because of the COVID-19 pandemic.
But he assures that “the government is doing its best to keep things afloat.”
To quantify how bad things are in the economy, he pointed out that the country is losing P2 billion per day because of the pandemic. “We are sinking deeper and deeper,” he said.
A time-tested solution in such a situation is to increase government spending both in volume and pacing because consumer spending is down due to widespread unemployment and slack in exports.
The Department of Budget and Management accelerated spending by releasing P2.63 trillion in January, representing 58.3 percent of this year’s P4.51-trillion appropriation.
The government has to fight the economic downturn on many fronts, not only on the budget side. All hands should be on deck on this.
Some economists believe that the Philippines is at risk of "stagflation" in a recession if inflation remains at 4 percent, above targets, for the whole year.
Stagflation will occur if inflation is high amid slow economic growth and a steadily high unemployment rate. This rate is now at 8.7 percent compared to 5 percent pre-pandemic
“High inflation and high unemployment can be devastating for lower-income households that spend a high share of their limited and uncertain income on basic food items,” Moody’s Analytics’ chief Asia-Pacific economist Steven Cochrane said.
Once stagflation starts, it is almost unstoppable. When economic growth is slow or a recession hits, the Bank Sentral ng Pilipinas (BSP) can change monetary policy to encourage spending and stimulate the economy.
However, in a period of stagflation, pushing down interest rates to boost spending will increase inflation, making matters worse. Instead, stagflation demands a much more long-term approach to reforming fiscal policies.
The solution to stagflation was identified in the 1970s by Robert A. Mundell, the same person who identified the problem in the first place.
His answer was simple: reduce tax rates for companies and individuals to increase their immediate buying power while restricting money's availability to borrow.
The two automatically create a higher demand for the currency available, making it more valuable with tighter supply and breaking inflation simultaneously.
However, last month the BSP viewed the current upswing in inflation as "transitory" and said it was "the least of our worries." That view could change soon.
True enough, the Monetary Board, led by Governor Benjamin Diokno, kept the overnight borrowing rate at a record low of 2%, at the middle of overnight deposit and lending facilities at 1.5% and 2.5%.
Meantime, the Employers Confederation of the Philippines (ECOP) contends that the economy cannot bear it anymore. Large companies are beginning to downsize or close.
ECOP believes that the 10,000 deaths due to the coronavirus pandemic are a small number compared to those who die from hunger. Also, the crime rate can increase due to job losses.
With the Presidential elections happening next year, surely inflation, maybe even stagflation, will be an issue.
It seems a better strategy to recognize the problem now so next year’s protagonists can state their positions and show their actual color.
The electorate could look at what the contenders would do in these difficult times and determine whether or not to reward them with their votes. Or will they still remember?
Here is another catching quotation on the subject of inflation. It is one that poses a challenge to the government:
By a continuing process of inflation, the government can confiscate, secretly and unobserved, an essential part of their citizens' wealth - John Maynard Keynes.
He was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and governments' economic policies.