Wednesday, December 19, 2018

Canlas: The economic system and inflation

Golden Age

AT THE inception of the Train Law, fellow elderlies exhibited grudging curiosity about that thief in the night called inflation -- a phenomenon associated with economics as a science. They wanted to know its origin as they are unwilling victims of that predator.

My hesitation, at first, to appease the group’s interest was due to my limited academic exposure which does not extend beyond my baccalaureate in economics. But a sense of duty compelled me to share the knowledge still lingering in my fading memory. After all, one need not be an economic expert to know that inflation is at the heart of our current affliction. For it is evident to our ordinary citizens that it is inflation that reduced their capacity to buy -- inflation which pushes that poor deeper into poverty and those modest fixed-income groups closer to becoming poor; inflation which triggered companies’ sales slumps and lay-offs; and inflation which brought our general economic decline.

We ignore the simple truth that the heightened growth of government spending, particularly in infrastructures, requires corresponding reduction in consumers’ purchasing power, regardless of whether the government spending is financed by taxes, borrowing or creating new money. The inflationary effect of a decline in buying power is readily felt when increase in excise taxes of oil and petroleum products are imposed. It is also believed that economic mismanagement, corruption and political dynasty are contributory factors to inflation.

Anyway, inflation refers to a decline in the value of money which translates in a general increase in the prices of commodities and services. The reason for this is that a relatively stable supply of goods and services is being ‘chased’ by an increase in supply of money. Further increases in spending, particularly huge government spending, can lead to further inflation. When this economic disequilibrium happens, industries raise their prices because their costs, e.g., raw materials, capital, labor, etc., are going up. In turn labor asks for higher wages to offset the increase in cost of living.

If inflation remains uncontrolled for a longer period, prices can rise out of proportion to real values that aggravate the existing poverty. Government attempts to reign in the impact of inflation through monetary and fiscal policies by varying interest rates to regulate money supply. Another approach is the use of political pressure to compel industries and labor groups to act in public interest. But these anti-inflation mechanisms are not sure-fire formula to contain the impoverishing effects of rising prices short of corresponding increase of wages which is not forthcoming.

It is noteworthy that the goal of any economic system is to promote standard of living and the widest range of choice among goods and services, jobs and lifestyles. The prime duty of the political departments is to ensure that such socio-economic end can continue to thrive.

Yet, experience shows that such universal goal of any economic system is not easily attained on a sustainable basis. Over the past decades, we have witnessed economies of the world, including highly industrialized countries, somehow battered by inflation which at times degenerate into recession that follows disruption of the social order.

And so, in furtherance of the curiosity of my peers, may I re-echo the sentiment that the impending passage of Train II will certainly stoke the current state of inflation and bring greater hardships to our ordinary folks, like the low-end pensioners of their kind.


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