The Real Roots of Inflation - Brief Article - Column

Chief Executive, The, May, 2001 by Joe Queenan

Not long ago, the Wall Street Journal profiled a Massachusetts barber who had just raised the price of a haircut from $10 to $11 because of staggering losses he had sustained in the stock market. William Flynn, whose exploits had been chronicled in a March 2000 Journal article when NASDAQ was at its peak, once boasted of a technology-laden portfolio that was worth $835,000. But after the recent tech stock bloodbath, Flynn's portfolio had slipped in value to around $250,000. Bruised and battered, Flynn saw no recourse but to raise the price of a haircut.

Were William Flynn the only barber to have lost $600,000 in the stock market, we would have no cause for alarm. But he's not. At present, there are approximately 2.5 million barbers in this country, of whom roughly 60 percent own stock, either directly or through mutual funds, and they too have taken fearsome beatings. The upshot: All across the country, barbers will soon begin raising their prices, some by as much as 25 percent.

From the amateur economist's perspective, this development is very disturbing indeed. It suggests that an unexpected inflationary component has now insinuated itself into the consensual econometric models devised by theoreticians, inasmuch as barbers such as Flynn are now imposing what is essentially a "punitive" tax on their customers to compensate for their own misfortunes. There is no reason for the increase other than the desire to recoup their losses.

Now, assuming that Flynn can cut a head of hair in 15 minutes, trimming 32 pates in an eight-hour day, he will glean an additional $160 a week, or $8,000 a year, from his price hike. Since he has already lost $585,000 on Wall Street, it would take him 72 years to earn back the money, without even allowing for inflation.

Clearly numbers are not his strong point. His entirely arbitrary, ineffectual price increase is what economists refer to as a "retributional tax," in that it serves only to make his customers feel as badly as he does. Since many other barbers are also contemplating price hikes to compensate for their investing misfortunes, the rippling, inflationary effect on the U.S. economy could be devastating.

Here's why: As soon as a barber who's been annihilated by the NAS DAQ meltdown decides to raise his prices, cab drivers with margin calls to meet are likely to do the same. Next, short order cooks who waited too long to dump eToys will start raising the price of mozzarella sticks. This, in turn, will affect bus drivers, telephone repairmen, and file clerks who put far too much cash into Amazon.com. Before you know it, everyone will start feeling the pinch, as inflation spreads like wildfire through the economy, bringing rack and ruin to a financial system that is already prostrate.

Or so the conventional wisdom goes. But this tale of woe has a silver lining. By arbitrarily raising his prices, Flynn has offered his competitors an opportunity to do the same-even though not all of them got hosed in the recent bloodbath. They're now in a position to hold the line on prices, luring customers away from the Flynns of the world and driving them out of business.

In the past few years, a national grassroots movement has sprung up uniting consumers who are tired of high haircut prices. James McNulty, a Madison, WI, high school teacher, speaks for many when he says: "Why should I have to fork over $11 for a haircut that would have cost me a week ago just because my barber held on to JDS Uniphase too long?"

McNulty now operates Clipjob.org, which maintains a database listing all licensed barbers, their prices, and the current value of their portfolios, marked to market. By visiting this site, consumers can obtain the addresses of barbers whose conservative investment policies have enabled them to hold their prices down. In theory, the pricing pressure exerted on the Flynns of the world could force them to lower their prices. Similar databases monitoring the investment policies and current rates of cab drivers, short-order cooks, and bootblacks are rapidly gaining in popularity.

The happy conclusion is that the stock market meltdown of the past year need not necessarily trigger an epidemic of spiraling inflation. Every day, high-flying barbers are learning that the general public won't be held accountable for their cupidity and foolhardiness. This is yet more proof that the American economy is the most exquisitely calibrated instrument ever devised by the mind of man.

Joe Queenan's column appears monthly.

Write him at jqueenan@chiefexecutive.net.