Occam's Razor

Yeah, prices have gone way up. I do notice inflation, but it’s mostly at the grocery store. I’m still getting my mind around paying $8.99 for a pound of premium ground beef. Perhaps it’s hitting us the most in our exploding cat food costs. Because one cat has lost most of her teeth, she needs wet food. Good and nutritious wet food is expensive. I’d guess a can of her chow is up about 25% compared to a year ago.

But that’s about the extent that I notice it. You’d think I’d notice it at the gas pump, which I do. It’s just that aside from driving to travel, I fill up about four times a year. Also, my wife has a fully electric car, so we’re using less gasoline than we used to. Her old car got about 22 mpg. All this is possible because we’re retired, we can afford to buy new cars for cash and, since the pandemic, we don’t travel much. So effectively our gas costs have gone down.

We’re sheltered in other ways. For example, I have a pension that’s fully indexed for inflation. Social Security, which I receive, sort of is too. And we own our house. No mortgage to worry about, so no rent increases either. Our biggest rising housing expense is actually our property tax. We’ve crossed the $10,000/year mark, which seems surreal to me. But we’re living in Massachusetts, not known for skimping on social services. But we save in taxes in other ways. As an ex-federal employee, they don’t tax the value of my pension, so that’s about $4000/year saved right there.

What made all this possible is, frankly, a well-paying career with a very generous pension, being relatively well sheltered by various forms of insurance, a booming real estate market in the Washington D.C. area and not more than a little white privilege. Also, we stopped after one child. It helped to be a bit of a spendthrift. This comes from being a child of child of the Great Depression.

We still make money in retirement. I consult part time from the convenience of my home. Since I’m a geek and web developer, I can supplement my income safely and remotely. It doesn’t usually feel like a hassle because it’s work I enjoy and it’s generally less than full time. It’s all extra money to spend as I want. Without this work, most likely I’d be struggling to enjoy retired life. Most retirees find they want to keep working in some form in retirement. It gives some purpose to your life and staves off the boredom.

But also we have solar panels. They paid for themselves about eighteen months ago. Since then we make money off them. Our state allow companies to buy credit for our clean energy so they don’t have to get greener. Just last month we got a $2000 annual check because we went solar. We’ve expect about $10,000 more of this income before our program ends. But since we’ve been generating most of our own energy, we aren’t buying much of it from the grid at about $.24/kwh. Electricity is very expensive around here.

You probably aren’t as fortunate as we are. So I’m guessing $5/gallon gas hits you like a gut punch. If I were a renter, finding my rent shooting up twenty five percent a year would too. It’s likely your wages aren’t keeping up with your expenses. So I have no doubt that your life is pretty scary right now. You generally have no choice but to pay $5/gallon for gas, because you’re still paying off your car loan. Getting a pricey electric car, even with the tax incentives, likely isn’t an option to reduce your inflation. Basically you are giving gobs more money to those who need it the least, like big oil companies. With little competition, of course they’ll take you to the cleaners.

The Federal Reserve’s “solution” to inflation is to increase interest rates. If you want to buy a house to control expenses, well, it’s less likely you can buy one with a 5% mortgage rate, so you’re stuck with huge rent increases instead. The same is true if you need a new car loan. Hopefully the Fed can contain inflation before you lose your job. And you can bet that interest rate increases will minimally impact rich people. To the extent we are rich, our major problem is that our investments have lost value. It’s likely a temporary condition.

Which is why a bill up for a Senate vote, the Inflation Reduction Act, is a big deal if it can actually get enacted. It’s actually well named, just not a quick solution to inflation. But it does start to give consumers the tools to actually control inflation. Expanding credits for clean energy products, like electric cars and efficient heat pumps, allow those who opt for them to not only create a healthier environment but control their cost of living. My wife got a $7500 tax credit on her Nissan Leaf, which reduced its actual cost to about $24,000. Since it doesn’t use gas, it’s affected only by electricity prices, which tend to be regulated and less costly than converting gasoline into energy. And since most of our electricity is generated by our solar panels, she drives largely for free.

The Federal Reserve’s idea of cutting inflation is to reduce demand by raising interest rates, which generally means a lot of working people get stiffed. A smarter way to cut inflation is to reduce the cost of volatile expenses through real competition and making it easier to afford new inflation-resistant products.

Shifting from gas to electric cars reduces the demand for gas, which should lower its price while also reducing the cost of transportation in general, in the long run. The electricity to run it should be much less expensive than gas. Without an engine, there are fewer repair expenses. Electric vehicle owners typically pay half the repair costs of those car owners with gas engines.

The bill is a significant attempt to fix the real causes of inflation. We create inflation by continuing to do things the way we’ve always done them. In a sense, the faster something’s cost inflates, the less it fits into our changing world.

Impoverishing people indirectly through higher interest rates is a stupid way to reduce inflation. But absent laws like the Inflation Reduction Act, it’s largely a problem for the Federal Reserve, which has few other tools. But systematically enacting smart laws like this one gets at the root of the problem, and is unlikely to throw people out in the street too. With luck it will also be big part of a real solution to address climate change. Inflation won’t be a problem if we are all extinct.