Data tell the truth. It is now clear–the results of the midterm elections have revealed the American voters’ collective rationality and decisions. AAEA has written several articles, and based on data to project what will happen with the voters choice–and it did. The results show that the American people have chosen democracy against an experiment to change the current formed of government to a totalitarian system experimented by thirst-for-power, and an ego-centric nuisance. The voters know that they are better-off for sure under a circumstance to pay a little higher price at the grocery stores, but still keep their job compared to a worse situation of getting fired by employers. Congrats America!!

Needless to say that corporations are pressured by the Wall Street to make positive ROI. Therefore, most, if not all US corporations have relocated their production to the third-world countries. Especially, in the Southeast Asia region. This outsourcing production, not only embraced by labor-intensive industry, such as shoes companies, but also by other industries. Starting in the 1980’s, and based on core-competency hypothesis, the US and corporations from developed countries justified their production relocation to the so-called cheap-labor countries. This strategy was seen very logical because the investors from the home countries have to finance the fixed assets related to manufacturing facilities such as machineries, land and above all have to deal with the home-country labor regulations. Often, this so-called join-venture are welcomed and enjoy the tax-holidays for years.

As the home countries developed their economy, and more economics opportunities were opened, more and more workers have alternative choices and start realizing their bargaining power. Therefore, after 40 years, labor are no longer cheap as it was in the past. As labor cost increases, not only that it causes higher production cost, but also lower the bottom line. Therefore, to meet the Wall Street’s expectation, corporations were forced to increase their selling price in the US market which finally causes inflationary condition to the economy. Folks needs to remember that they have enjoyed the cheap-price because the developing countries workers have absorbed those price increases in their own-hand. Without them, the US inflation could have happened many years ago. Forty years in the making is just awfully long period, where they–the workers from developing countries such as in the Philippines, Laos, Bangladesh, India, Vietnam or Indonesia and others have to shoulder price increases in the US consumers market.

We have discussed the probable reasons why the negative impacts of labor shortages have gotten more problematic recently. In many years, the US corporations have relocated their production capacities to countries with low labor cost. As results, one can easily finds household stuff made in other countries, rather than the US. While this move is justifiable from the profit maximization according to the new-classical point of view– it is actually a delayed of inflation to occur in the US. The problem of inflation should have happened a decade ago or longer, but it got absorbed by other countries, for example in the Southeast Asia. The population in these countries are the real heroes who have shouldered the US consumers from paying higher prices. This past summer, AAEA did a simple on-the-ground survey of product origins. It was not a shocking to find, aside from the produce, more than 90 % stuff were sold at one of the national chains are made in China. Though, the economic analyses show that labor shortages are the culprits of why the US cannot increase its national product in a fastest rate, it is obvious that the industry sector has chosen a short-cut to achieve the Wall Street’s expectation by relocating their production outside the country. These strategies are fine in the short-run, but proved to be costly in the long-run, as it is shown now.

So, when the developing countries make progress in their economy, so do their bargaining power. They will ask more for their own labor, or there will be no output produced. As labor are more expensive overseas, then corporation simply passed those extra cost to their end-consumers in the US market.

Well, hopefully the two isles see the lights, and the reasons why inflation is skyrocketed, and why the border is broken. No need to bus people to NYC. Accommodate them to rise long-horn cattle, or to grow strawberries, or whatever that produce something counted to add into the GDP.

Any policy maker could, in theory push the aggregate demand down toward D1 by shifting the supply curve from S1 to S2. By doing so, more goods and services can be produced–shifting the national output from Q2 to Q3. The question that one might ask is that, why can’t the US pursue this obvious path? Well, as one has learned, again from Econ 101, it all depends on the availability of factor of productions (resources), such as, among other factors, are labor, land, capital, technology, entrepreneurship, etc.

Since the current labor in the US is finite, it will take time, efforts and money to prepare workers up to a point that they are ready to participate. This labor shortages in no doubt affect the US ability to produce output at Q3 level. So, should Uncle Sam wait until the labor becomes available, or manage what is available currently? Based on recent publication from the US Census Bureau, it is pretty obvious that the country has experienced a steady population growth declining, which accelerated starting in 2020. The impacts of labor shortages are obvious, so does the price that the Americans have to pay at the grocery stores.

Perhaps, and AAEA hopes, that these analyses help both the opponents and proponents of immigration debate to understand these complex issues. The inflation-employment analyses need to be tied to the input market. If the public policy restricts the movement of labor that is coming to this country, surely S2 cannot be shifted fast enough to keep up with the growth in demand. As results, inflation is going up.

The old saying exclaimed “it takes two to tango”. One cannot expect to pay a happy meal price for Osetra Caviar, at Atelier Crenn in San Francisco, California. Always remember–the cause and effect.

If one ever noticed-when the breaking news was reported on the recent ruling from the S.Court, the DOW dipped about sixty point. From a little over 400 gains to around 340 points. It kept going down, before it moved-up again at the end of the market close. Data cannot lie–the dipped can be interpreted as a collection of preferences.

The DOW movements are the rationale reactions toward the ruling. Any news leaning towards the other side will be reflected by a lower DOW. The market is a collection of rational players who try to anticipate “something” such that they can benefit out of it or to protect their own interests, portfolios or investments. This small signal again strengthens what we have mentioned in our previous BLOG. Americans are not ready, or ever ready to move away from the system that the Founding Fathers have established many years ago since the Independent Day; with something that is leaning toward a totalitarian system.

Experiments to change the current system to something else is costly, and may have unimaginable effects. Therefore, people do not need to change the system of government because they could see what has happened in countries under the totalitarian system. Experimentations in a lab, are good to find new drugs to cure diseases for lab experiments can be repeated with less costly. However, changing the current system into something else other than democracy will have unimaginable consequences, and above all it is a one-way ticket. Once you burned the bridge down, you cannot rebuild it. For example, if one bites a hot Thai chilly, she or he surely will experience sense of burning on his or her tongue. Unless one likes hot Thai food, ordering level 5 will surely make one sweats, or even stomach ache or diarrhea.

There are two choices when one is speaking about unemployment versus Inflation. (1). One can have to pay lower price, but unemployed due to labor market contractions; or (2). Have a job, though pay higher prices.

The Americans have spoken, days before the polls are closed. They would rather to have a job, rather than being unemployed. The logic is simple, having a job will likely enable one to pay the bills. On the other hand, zero income due to unemployed will shut the door to be able to pay the bills–it does not matter how small the amount is. This is the choice of survival. Living under higher prices situation may not be the best options but it is surely a second best, especially for families with young kids, where mom or dad has to work on several jobs to keep the bread and butter on the table. Voters have used their rationale who they think will help them to keep their jobs, and their family intact. Voters have seen who helped them to cancel their unfairly charged student loans. Voters have seen who provided them with the vaccines during the pandemic-while the other side denied that Covid-19 even existed. Congrats America! You have made up your mind, based on facts-not myths.

Judging from the Wall Street–where the DOW goes green in the past 2 trading days (10/21 and 10/24, at 9:22am) can be seen as the verdict. For whatever reason, it seems that the FED yields, or realizes the less than perfect decision that it has made in the past several weeks was not going too well. That reflects the danger of basically relied on economic mathematical simulation model without further thinking the repercussions of a policy change. The model has been developed under certain past circumstances, but fail to accommodate the dynamics that are happening in the global market, as well as in the domestic market–such as the shrinkage of the water level in the Mississippi river due to climate change. It seems simple–but think what is going to happen if the grains transportation system through the river is disrupted? Surely, it will affect the bread retail prices at the stores, or it affects the feeds used by chicken, beef or hog operators through out the nation in the input market. Hopefully in the FED’s future model, it will add the climate change equation, in addition to oil and other macro economic equations. However, the residual term magnitude will never go to zero–it does not matter how small the epsilon is.

What happens in the (stock) market can be used as a proxy of FED’s future policy on interest rate. The market has anticipated that the FED will (or has) push (pushed) the breaks, at least for now. These results can also be used to predict the midterm outcomes, days before the polls closed.

Frequent, if not 24 hours, the US media continually reporting how the inflation becomes a hot topic, and perhaps most likely to be the decision point of American voters. After watching a law grad student who was interviewed (with vague answers/ideas about inflation), by one of the networks, AAEA is motivated to shed the light on such issue. AAEA will help the voters to understand the problem in a simple graph, yet complicated enough for one that has not had economic 101 to comprehend what is presenting in this BLOG. Please look at the Figure 1 below.

Historically, the FED has set the interest rate pretty low to encourage consumers to borrow, and buy stuff, especially during the pandemic–which is justifiable. The results of such a policy were to move aggregate demand curve or line from D1 to D2, where D1 is the aggregate demand in absent of FED’s policy. Without market intervention, the general price is denoted by P1. After the FED’s intervention–that cause aggregate demand to increase as well as the general price from P1 to P2. This general increase, or known as inflation becomes the talking points of folks in the campaign trails. Unfortunately, most voters are illiterate about the causes-and-effects, such that they are badly manipulated. So, read our honest BLOG, and listen less to the ones that only have interest on your votes, and not on your well-being. So, the FED is trying to control the inflation, by increasing interest rate. However, the effects of this policy are:

1. Higher interest rate meant to lower the aggregate demand for goods and services across the industry. Fortunately, Americans are able to cope with the price increase.
2. Weaker demand for goods and services will cause the industry sector to suffer for over-production and increase operational cost due to inventory accumulation.
3. Consequently of point#2 is that demand for labor will drop, and the end-results will be increasing UNEMPLOYMENT.

How can one keep the inflation under control without causing increase UNEMPLOYMENT. This can be done as expressed in Figure – 1 above by shifting the Supply line from S1 to S2. Yes, this is in theory, and in reality how can the industry sector has the incentives to invest, and expand its output from Q1 to Q3. This requires a team work from people with different colors in the society. One color alone won’t solve the American problem. Hopefully, the law makers will understand Figure-1 above, and start to work as a team.

When people have a job; they HAVE THE PURCHASING POWER–THOUGH WEAKER. But, if people are unemployed, and no income, they cannot afford to buy stuff, but have to rely more heavily on the government’s program. The Wall Street knows exactly this is the case–in that the FED cannot use the old strategies, wisdoms and rely on the old mathematical economic and simulation models 🙂 to deal with the new world economy without destroying the whole house (Read: US economy as a whole–by increasing interest rate). As results, the DOW increased by 748.97 points on Friday–October 21, 2022. America, it is your choice to make on November 8, 2022. Either to go unemployed & rely on food stamps OR employed & able to pay stuff at a higher price.