Inflation, Distortion, and Institutions in the United States and India

Instability and inflation in commodity prices, with energy being a prime example, have both economic and political considerations in developed and developing countries. In this paper we will look at some causes, responses, interventions, and consequences of recent changes by comparing the United States of America with the Republic of India.

Oil, natural gas, wind, solar, hydro, nuclear, and coal power are used to produce electricity, heating, and to power transportation. Because of this central position of energy being necessary for other producer and consumer activities it effects most, if not all, other prices. Therefore, price controls in this area are high leverage across the economy and distortions cause significant secondary, tertiary, and further consequences. This importance means that it's of heavy political interest by politicians and the public, effecting private companies, public organizations and agencies, and a third sector that is mixed between the two. This interest also means that there are welfare manipulations for both the general public and corporations.

The extent to which the state should be involved and does get involved is a function of public opinion and the dynamics of the political system. State interventions can be charted as the functions of the state being either minimal, intermediate, or activist, crossed with a goal of addressing market failure or improving equity (World Bank, 1997, pg 27) Whether manipulating or controlling the supply or demand, to whatever extent, it's important to understand that complex societal communication and resource allocation is being distorted. Prices are signals and incentives. Sowell points out the impossibility of efficiently centralizing this function, "In the absence of compelling price signals and the threat of financial losses to the producers that they convey, inefficiency and waste in the Soviet Union could continue until such time as each particular instance of waste reached proportions big enough and blatant enough to attract the attention of central planners in Moscow, who were preoccupied with thousands of other decisions." (Sowell, 2015, pg 47) These distortions are impossible to fully predict, as Bastiat pointed out, "The entire difference between a bad and a good economist is apparent here. A bad one relies on the visible effect while the good one takes account both of the effects one can see and of those one must foresee." (Bastiat, 1850)

In August of 2022 the U.S. passed a 274 page law referred to as the Inflation Reduction Act. (U.S. Congress, 2022) This demonstrates the political importance of inflation in the U.S. at this time. It has been promoted as paying down the national debt, increasing energy production and manufacturing, reducing carbon emissions, lowering drug prices, extending health care welfare, and calls for more laws to be passed concerning permitting. (Senate Democrats, 2022) Over the last few years the United States reduced the amount of production through massive lockdown and house arrest programs, while also putting trillions of dollars in stimulus bailout money into the market. As is to be expected, inflation has seen an increase. This puts the U.S. in a difficult position, for "The cure for inflation is simple to state but hard to implement. Just as an excessive increase in the quantity of money is the one and only important cause of inflation, so a reduction in the rate of monetary growth is the one and only cure for inflation. ... Once the inflationary disease is in an advanced state, the cure takes a long time and has painful side effects." (Friedman and Friedman, 1980, pg 270)

After the 2020 election the Biden administration dramatically cut oil production in the U.S. as he had politically campaigned to do. Production has slowly started to recover. (Energy Information Administration, 2022) This has occurred within a larger series of problems. "The world is facing a global energy crisis of unprecedented depth and complexity." (International Energy Agency, 2022, pg 33) This is due to several things, the most important being the international drive to limit energy production for environmental reasons discouraging investment over several years and government lockdowns. Both the United States and India are making moves toward renewable energy, which could continue to drive private investment away from the industry leading to further energy shortages, and toward more government control over the resource allocation in the industries also leading to energy shortages. For the international agencies, India's plan to be net zero on emissions by 2070 is key to their goals. (International Energy Agency, 2022, pg 63-69)

This energy crisis results in a cost of living crisis. (International Monetary Fund, 2022) These effects ripple through society. "The price of oil influences as much as 64% of food price movements." (Neufeld, 2022) In such a crisis people cry out for someone to do something, the government steps in to help, so save the day to garner public praise or at least to avoid ridicule, they help by taking more control which distorts markets and creates more dependency while being guided by special interests who are able to apply the most attention and contact to the necessary people and organizations to influence the policies and procedures.

Out of the BRIC nations of Brazil, Russia, India, and China we've only seen China live up to the expectations of large growth and development. It appears that India has the potential to achieve significant growth and development over the next decade, which makes them an important country to analyze, and especially so for the U.S. as India has a large secondary English speaking population. In 2022 they too have undertaken plans to deal with inflation. This includes 26 billion to help with rates on fuel. (Sundaram et al, 2022) Even more is being given to people in cash transfers to help with the price of food and as electricity subsidies. (Kumar and Devasia, 2022)

A key difference between public and private institutions is the ability to fail. It is commonly understood that startup companies have a very high failure percentage. On the other hand, government agencies and departments may change their name, but they rarely go away once formed. There is no obvious way to introduce this selective feedback mechanism into governmental organizations, even though people have talked about it and tried. The reverse can happen. By making it so that a private organization cannot fail the corrective mechanism of the market can be taken away even if the organization is so-called private. This is done in two popular ways. One is bailouts and corporate welfare as we're seeing with the large government funding of companies in the energy markets, taking from the general public through taxes and inflation and giving to companies. The other is to limit competition by giving out some form of government monopoly, implementing licensing, or creating any form of barrier that limits entry into the market. There are of course various problems and there is public pressure to do something, which means increasing regulations, controls, and oversight. The net result being that the private organization operates much like a public entity, with the factioning and various other negatives that go with political organizations as well. These structures can be emergent, or planned as in a public-private partnership.

Developing countries are by definition changing quickly. "The developmental state is typically driven by an urgent need to promote economic growth and to industrialize, in order to 'catch up' or to protect or promote itself, either economically or militarily or both, in a world or regional context of threat or competition, and to win legitimacy by delivering steady improvement in the material and social well-being of its citizens." (Leftwich, 2000) This makes the possibility for either good or bad, whether emergent or planned, difficult to predict.

Certain important institutions are fundamental to how these organizations may develop, and will highly influence whether India will continue to see growth or if it will flounder. For instance, there are continually emerging philosophies proposing that the best path forward is to have people in political positions that aren't selfish and don't work with their own best interest and values in mind. (Chang, 2002) This doesn't work, these people continually have their scheme thwarted by the realities of human nature. This can be strongly contrasted with the foundations of the United States wherein James Madison talks in Federalist 51 about having a structure where ambition checks ambition.

For sustainable development there ironically must be a tolerance for disorder, so that solutions may emerge from the creativity of individuals working within a market coordinated by price signals and self-beneficial incentives. This is Adam Smith's concept of the invisible hand. Advances eliminate other businesses and sometimes entire industries, this is Joseph Schumpeter's concept of creative destruction. Therefore, the governmental institutions must protect individuals from usurping these mechanisms so that the elite are not protected from competition, but so that the right of the non-elites to invent, create, and produce are protected from infringement by private threat and coercion or the use of government regulations to create barriers to entry through legitimized organizations. (Acemoglu and Robinson, 2013) This is why small government is important. It must be large enough to protect property rights from threat, coercion, theft, and destruction, and yet not large enough that these same things are done by the elites, who by definition capture control of the regulating organizations, to protect their own interests at the expense of other individuals and the society as a whole. This is an important balance.

Different types of progression are often proposed in going from an undeveloped nation to a developed one, often associated with an increase in welfare programs. One version proposes nine elements of a welfare state regime: capitalist meaning division of labor between owners and non-owners, coordination through price signals, and technological advancement in pursuit of profit; class relations on the division of ownership; livelihoods primarily through a formal labor market; working classes politically mobilize to negotiate with ownership; an independent government bounded by capital and open to general participation; state institutions are formed for social intervention to go along with the market and family structures; the welfare mix makes labor less of a commodity; the welfare regime stabilizes itself; social policy is intentional. (Wood and Gough, 2006) The problem becomes that the growth of the government for these social institutions leads to departments and agencies that become heavily influenced by people seeking to capture markets through government rather than market means, and an elite forms that now uses the institutions put in place under the auspices of removing oppression to oppress. The cure is not only worse than the disease, the cure makes the disease worse in a vicious cycle of public opinion supporting more government intervention to correct issues that are either non-correctable because of the nature of reality and human nature, or are caused by intervention in the first place. Therefore, the means through which developed nations became developed are eroded, and growth and advancement are slowed, in a similar fashion but in a different context to undeveloped nations that don't have the institutions to protect individual property rights for the general public in the first place and thus never start to grow.

To the extent this occurs or does not in a myriad of complex ways is a primary factor in the growth and development of a country. With both the United States and India taking measures to extend welfare both to the general populace to placate concerns to garner popular political support, and to corporations for financial political support, it seems likely that economic growth in both countries will slow, all other things being equal (which they are not). These have far-ranging consequences across time. If people come to believe that the government should, could, and would pay them to stay at home and participate in leisure activities as opposed to working, then you will get significantly less work, less production, less wealth, and the decline of the society. If people in business come to believe that the government should, could, and would pay for their business to continue to exist whether it makes a profit or not, as long as they are able to attain the correct political connections and influence, then they will study and work to attain political skills rather than the ability to run an organization that matches a product with the desires of the individuals in the market, leading to fewer satisfied needs and wants in the society and increasing poverty, along with the creation of a legally and politically protected elite class and less freedom and opportunity for the lower classes.

The current climate of instability in prices with high inflation is dangerous for both the developed economy and political environment of the United States and the developing nation of India. Energy production being important for consumption, production, and other commodities means that there are multiple levels of consequences. The central governments of both countries responding to this with programs that give out money through subsidies, bailouts, and welfare is a dangerous practice for the long term outlook because it distorts the communication necessary for the markets to function and corrupts the institutions and beliefs necessary for a society to develop and flourish. It can be hoped that these measures will be limited enough to allow the inherent resilience and resourcefulness of the people in the U.S. and India to weather the damage caused by the situation and responses and to emerge once again in a state of growth and advancement.

Reference List

Acemoglu D & JA Robinson (2013) Why Nations Fail: The Origins of Power, Prosperity and Poverty. London: Profile Books.

Bastiat, Frederic (1850) What is Seen and What is Not Seen, or Political Economy in One Lesson.

Chang H-J (2002) ‘Breaking the mould: an institutionalist political economy alternative to the neo-liberal theory of the market and the state’. Cambridge Journal of Economics. 26 (5), 539–59.

Energy Information Administration (2022) Petroleum and Other Liquids, U.S. Field Production of Crude Oil. Accessed on 27 November 2022 at https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrfpus2&f=m

Friedman, Milton and Friedman, Rose (1980) Free to Choose, A Personal Statement. New York, New York, USA: Harcourt Brace Jovanovich, Inc.

Hague R, M Harrop & J McCormick (2016) Comparative Government and Politics: An Introduction. 10th Edition. London: Palgrave.

Hughes O (2003) Public Management and Administration: An Introduction. 3rd Edition. Basingstoke UK: Palgrave Macmillan.

International Energy Agency (2022) World Energy Outlook 2022. Revised version November 2022.

International Monetary Fund (2022) World Economic Outlook, Countering the Cost-of-Living Crisis. October 2022.

Kumar, Manoj and Devasia, Jose (2022) Indian states step up relief measures for households battling inflation. 13 September 2022. Reuters. Accessed on 27 November 2022 at https://www.reuters.com/world/india/indian-states-step-up-relief-measures-households-battling-inflation-2022-09-13/

Leftwich A (2000) ‘Developmental states: Bringing politics back in’. States of Development: On the Primacy of Politics in Development. Cambridge UK: Polity Press. pp. 152–70.

Leftwich A (2008) ‘Developmental states, effective states and poverty reduction: The primacy of politics’. Developmental States, Effective States and Poverty Reduction: The Primacy of Politics. Geneva, Switzerland: United Nations Research Institute for Social Development.

Neufeld, Dorothy (2022) Inflation: How are rising food and energy prices affecting the economy? 7 September 2022 by Visual Capitalist and World Economic Forum. Accessed on 27 November 2022 at https://www.weforum.org/agenda/2022/09/inflation-rising-food-energy-prices-economy

Ranson S & J Stewart (1994) Management for the Public Domain. Basingstoke UK: Macmillan.

Senate Democrats (2022) Summary: The Inflation Reduction Act of 2022. Accessed on 27 November 2022 at https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf

Sowell, Thomas (2015) Basic Economics, A Common Sense Guide to the Economy. 5th Edition. New York, New York, USA: Basic Books, Perseus Books Group.

Sundaram, Karthikeyan; Sircar, Subhadip; Mazumdar, Ronojoy (2022) India Unveils $26 Billion Inflation Plan, Risks Higher Borrowing. 22 May 2022. Bloomberg. Accessed on 27 November 2022 at https://www.bloomberg.com/news/articles/2022-05-23/india-steps-up-inflation-fight-with-26-billion-fiscal-package?leadSource=uverify%20wall

U.S. Congress (2022) H.R.5376 Inflation Reduction Act Public Law 117-169, 16 August 2022.

Wood G & I Gough (2006) ‘A comparative welfare regime approach to global social policy’. World Development, 34 (10), 1696–1712.

World Bank (1997) World Development Report 1997. Washington DC: World Bank.

________________________________________________

Find more at JeffThinks.com or JeffreyAlexanderMartin.com