(It’s been a bit of a slog coming out of covid, but I’m back, baby!)
Jon Schwarz, in the Intercept, points me to this study by Joseph Stiglitz, the Nobel Prize winner and former chief economist of the World Bank, and Ira Regmi, about the likely causes of inflation these past eighteen months. I’m going to come back to that study below. But let me start with a potted narrative of how we’ve been discussing inflation since, for the first time since the 1980s, it became a significant feature of our economic landscape in 2021. An overriding question has been whether the phenomenon was transitory, or anchored in longer term phenomena. Liberal economists, like Paul Krugman and Dean Baker, were sanguine that inflation was transitory, a product of factors like supply chain disruptions induced by the pandemic. As the world reopened in 2021, this camp’s expectation was that those factors would resolve themselves and inflation would subside relatively quickly. Others, like former Clinton Treasury Secretary Lawrence Summers, were warning that it was wrong to dismiss inflation so breezily because it would be a serious problem if it persisted.
Importantly, Summers argued that liberals *wanted* to see inflation as transitory because they didn’t want to acknowledge that their policy preferences, including the large spending bills the United States passed in 2020 and then in 2021, might be a chief cause of said inflation. Summers, for his part, believed that the trillions the United States spent to bolster Americans’ household finances during the peak of Covid disruptions in 2020 and 2021, were an important source of inflation. This was especially relevant to debates over the nearly two trillion dollar spending package Democrats passed on party line votes at the beginning of the Biden presidency in 2021, and which included child tax credits and other Democratic spending priorities.
At the heart of this debate, leaving aside technical and long-difficult to answer questions about the behavior of the macroeconomy, is whether we can have our cake and eat it, too. Mainstream economics tends to use scientific and dispassionate language that obscures the ethical and moral tradeoffs at the heart of all of our debates about fiscal policy.
The liberals were sanguine about inflation through 2021 because, they pointed out, so-called inflation hawks have been crying wolf for decades about significant inflation being just around the corner, with no actual sign of it in sight. Indeed, liberals have argued, the Fed’s two percent inflation target is itself too restrictive, too biased against the interests of ordinary American workers. And regardless, we’ve rarely been over that line since the 1990s and frequently been under it. So, when more significant and sustained price increases set in across the economy last year, the Krugmans of the world were confident that it was a passing fancy. But then it persisted into 2022 and, indeed, we experienced the highest price increases since the last very serious round of inflation, in the early 1980s. This led members of “team transitory,” as they often referred to themselves, to admit that they might have been wrong. Janet Yellen, the former Chair of the Federal Reserve, now Treasury Secretary, and herself an early card carrying member of team transitory, told Congress in July that she’d been too dismissive of concerns over inflation and that it was a serious problem that policymakers had to tackle.
So, by this spring, inflation had arguably become the number one *political* issue in the United States, a focus of constant news coverage and seen as a likely source of what was expected to be a wipeout for Democrats in the upcoming midterm elections. And to be clear, it was a serious problem. As the sources of support from the 2020-21 government spending bills, including to extend and fortify unemployment benefits and through the PPP program began to expire, households began spending down savings they’d accumulated in the previous two years. And they were doing so while watching gas prices skyrocket past five dollars a gallon in much of the country this spring, with similar spikes in prices at the grocery store. So, it was a perfect storm for persistent worries and dire forecasts about what inflation was doing to household balance sheets.
That’s a *long* way of saying that we have, since 2021, had our most significant inflation episode in decades and that a confluence of pressures and dynamics made it very unlikely that key decision-makers would resist pressure - even if they wanted to - to do something drastic about it. And the crude tool the Fed relies on to deal with this phenomenon is to raise interest rates in order to slow economic activity which should, in turn, bring down the overall price level, eventually.
It’s also a long setup to say that all of this is highly unfortunate, because just as many members of team transitory have been second-guessing themselves, the evidence now is that they may have been right all along. And those increased interest rates, whose effects lag by several months - which means they cannot explain now ebbing inflation - will bite in a significant way in 2023, perhaps inducing a recession which will disproportionately affect workers at the lower end of the US wage scale. As Sitglitz and Regni put it, the cure of high interest rates will have been worse than the disease.
The Stiglitz paper provides detailed evidence that the main sources of the price have been supply side disruptions driven by the pandemic, many of which have now been resolved, the Russian invasion and its impact on food and fuel costs and opportunistic price setting by corporations. Far down the list of contributing factors to inflation, according to Stiglitz and Regmi, were the spending bills. In sum, it was supply side shocks, not demand side profligacy, that appear to have been the key drivers of inflation.
Of course, other economists will study this issue and come to different conclusions. But, as Schwarz argues, the biases among our elite decision-makers militate against striking a fairer balance between the interests of workers and those of finance. One consequence of that is to leap to using a crude tool like dramatically increasing increasing interest rates in a short time period, because of the relative value the Fed places on financial stability vs. the consequences for wage earners. Schwarz pointedly makes this case:
Faithful consumers of America’s elite media — TV news, the New York Times, the Washington Post — generally get the impression that everyone in the U.S. is on the same team. While we may disagree on how to get there, we all share the same economic goals: a fast-growing economy with low unemployment and a thriving middle class, one whose members keep doing better than their parents.
This is absolutely false. The people at America’s commanding heights do not want this at all. And if you look at it from their perspective, that’s easy to understand. Low unemployment means an unruly workforce with the leverage and confidence to unionize. Rising wages for employees means less money for employers. The higher inflation that tends to accompany a high-demand economy of mass affluence is effectively a massive transfer of wealth from creditors to debtors. …
One needn’t think of this in conspiratorial terms, in the sense that a cabal of financiers knowingly screws over ordinary people while lying about their motivations for doing so. They may genuinely believe that their vision of economic “stability” requires certain tradeoffs that happen to consistently benefit some interests at the expense of others. And the folks that make these decisions do tend to have an underlying wariness, if not open hostility to organized labor interests, a bias with profound implications for the nature of American economic policy. We’ll leave for another time the contention that the United States could spend on social support without limitation, because we can print more money without consequence. This is the position of advocates of Modern Monetary Theory, and its best known proponent, Stephanie Kelton. None of the economists I’ve mentioned openly embraces that position. But they all believe that American fiscal policy should strike a different balance than it does between concerns over deficits, fiscal “prudence” and economic stability (as they conceive it), on the one hand, and the well-being of the typical American wage earner on the other.
Indeed, as Stiglitz and Regmi say, as well as the economists David Autor and Anne McGrew, in a forthcoming paper, among the clearest economic beneficiaries of the pandemic and related government spending these past two years, were frontline service workers (a point Baker has also emphasized). That cohort, among the lowest paid workers in our economy, saw real income gains since 2020, adjusting for inflation. Stiglitz, Regni, Autor and McGrew conclude that the increases in their wages were neither a major driver of inflation nor likely to last. But because of the way the Fed sets its priorities, the fact that interest rate hikes are likely to disproportionately adversely effect this already precarious cohort is just the price that has to be paid to return to “normal.”
Steve (and Tom),
The leftwing Marxist Bloomberg News reports that after-tax corporate profits have been breaking records in 2022. There's no question what you describe has been a significant factor in the squeeze regular folks have been experiencing.
Some writers have also suggested that big oil kept gasoline prices inflated prior to the November midterm elections to help GOP candidates. Since prices fell so quickly after the election, perhaps this was the case.