What Goes Up, Will Go Down (Eventually)

Someone on Twitter said news people are covering inflation — a global post-pandemic phenomenon, not a Biden one — as if it’s 6,000%, not 6%, and we’re all pushing wheelbarrows of cash to the grocery store. On economic matters, I appreciate the views of Paul Krugman (Ph.D. Massachusetts Institute of Technology; currently Distinguished Professor of Economics, Graduate Center of the City University of New York):

Back in July the White House’s Council of Economic Advisers posted a thoughtful article to its blog titled, “Historical Parallels to Today’s Inflationary Episode.” The article looked at six surges in inflation since World War II and argued persuasively that current events don’t look anything like the 1970s. Instead, the closest parallel to 2021’s inflation is the first of these surges, the price spike from 1946 to 1948.

Wednesday’s consumer price report was ugly; inflation is running considerably hotter than many people, myself included, expected. But nothing about it contradicted C.E.A.’s analysis — on the contrary, the similarity to early postwar inflation looks stronger than ever. What we’re experiencing now is a lot more like 1947 than like 1979.

And here’s what you need to know about that 1946-48 inflation spike: It was a one-time event, not the start of a protracted wage-price spiral. And the biggest mistake policymakers made in response to that inflation surge was failing to appreciate its transitory nature: They were still fighting inflation even as inflation was ceasing to be a problem, and in so doing helped bring on the recession of 1948-49.

About Wednesday’s price report: It looked very much like the classic story of inflation resulting from an overheated economy, in which too much money is chasing too few goods. Earlier this year the rise in prices had a narrow base, being driven largely by food, energy, used cars and services like air travel that were rebounding from the pandemic. That’s less true now: It looks as if demand is outstripping supply across much of the economy.

One caveat to this story is that overall demand in the United States actually doesn’t look all that high; real gross domestic product, which is equal to real spending on U.S.-produced goods and services, is still about 2 percent below what we would have expected the economy’s capacity to be if the pandemic hadn’t happened. But demand has been skewed, with consumers buying fewer services but more goods than before, putting a strain on ports, trucking, warehouses and more. These supply-chain issues have been exacerbated by the global shortage of semiconductor chips, together with the Great Resignation — the reluctance of many workers to return to their old jobs. So we’re having an inflation spurt.

On the plus side, jobs have rarely been this plentiful for those who want them. And contrary to the cliché, current inflation isn’t falling most heavily on the poor: Wage increases have been especially rapid for the lowest-paid workers.

So what can 1946-48 teach us about inflation in 2021? Then as now there was a surge in consumer spending, as families rushed to buy the goods that had been unavailable in wartime. Then as now it took time for the economy to adjust to a big shift in demand — in the 1940s, the shift from military to civilian needs. Then as now the result was inflation, which in 1947 topped out at almost 20 percent. Nor was this inflation restricted to food and energy; wage growth in manufacturing, which was much more representative of the economy as a whole in 1947 than it is now, peaked at 22 percent.

But the inflation didn’t last. It didn’t end immediately: Prices kept rising rapidly for well over a year. Over the course of 1948, however, inflation plunged, and by 1949 it had turned into brief deflation.

What, then, does history teach us about the current inflation spike? One lesson is that brief episodes of overheating don’t necessarily lead to 1970s-type stagflation — 1946-48 didn’t cause long-term inflation, and neither did the other episodes that most resemble where we are now, World War I and the Korean War. And we really should have some patience: Given what happened in the 1940s, pronouncements that inflation can’t be transitory because it has persisted for a number of months are just silly.

Oh, and for what it’s worth, the bond market is in effect predicting a temporary bump in inflation, not a permanent rise. Yields on inflation-protected bonds maturing over the next couple of years are strongly negative, implying that investors expect rapid price rises in the near term. But longer-term market expectations of inflation have remained stable.

Another lesson, which is extremely relevant right now (hello, Senator Manchin), is that an inflation spurt is no reason to cancel long-term investment plans. The inflation surge of the 1940s was followed by an epic period of public investment in America’s future, which included the construction of the Interstate Highway System. That investment didn’t reignite inflation — if anything, by improving America’s logistics, it probably helped keep inflation down. The same can be said of the Biden administration’s spending proposals, which would do little to boost short-term demand and would help long-term supply.

So yes, that was an ugly inflation report, and we hope that future reports will look better. But people making knee-jerk comparisons with the 1970s and screaming about stagflation are looking at the wrong history. When you look at the right history, it tells you not to panic.

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What news people should be extremely worried about is the Republican Party’s attack on democracy and majority rule (but that wouldn’t be “balanced”).

Will the Future Be Electric?

Should anybody be optimistic about the climate crisis? Noted environmentalist Bill McKibben reviews a new book, Electrify: An Optimist’s Playbook for Our Clean Energy Future by Saul Griffith, an engineer and inventor. The title of the review is “The Future Is Electric”. Here’s McKibben’s summary of Griffith’s playbook: 

Electrification is to climate change as the vaccine is to Covid-19—perhaps not a total solution, but an essential one. [Griffith] begins by pointing out that in the United States, combustion of fossil fuels accounts for 75 percent of our contribution to climate change, with agriculture accounting for much of the rest. . . . The US uses about 101 quadrillion BTUs (or “quads”) of energy a year. . . .

Our homes use about a fifth of all energy [or 20 quads]; half of that is for heating and cooling, and another quarter for heating water. “The pride of the suburbs, the single-family detached home, dominates energy use, with large apartments in a distant second place,” Griffith writes.

The industrial sector uses more energy—about 30 quads—but a surprisingly large percentage of that is spent “finding, mining, and refining fossil fuels.” A much smaller amount is spent running the data centers that store most of the Internet’s data . . .

Transportation uses even larger amounts of energy [40 quads?] —and for all the focus on air travel, passenger cars and trucks use ten times as much.

The commercial sector—everything from office buildings and schools to the “cold chain” that keeps our perishables from perishing—accounts for the rest of our energy use [10 quads?].

If we are to cut emissions in half this decade—an imperative—we’ve got to cut fossil fuel use in big chunks, not small ones. For Griffith, this means leaving behind “1970s thinking” about efficiency: don’t waste time telling people to turn down the thermostat a degree or two, or buy somewhat smaller cars, or drive less. Such measures, he says, can slow the growth rate of our energy consumption, but “you can’t ‘efficiency’ your way to zero”:

Let’s stop imagining that we can buy enough sustainably harvested fish, use enough public transportation, and purchase enough stainless steel water bottles to improve the climate situation. Let’s release ourselves from purchasing paralysis and constant guilt at every small decision we make so that we can make the big decisions well.

“A lot of Americans,” he insists, “won’t agree to anything if they believe it will make them uncomfortable or take away their stuff,” so instead you have to let them keep that stuff, just powered by technology that does less damage.

By “big decisions” he means mandates for electric vehicles (EVs), which could save 15 percent of our energy use. Or electrifying the heat used in houses and buildings: the electric heat pump is the EV of the basement and would cut total energy use 5 to 7 percent if implemented nationwide. LED lighting gets us another 1 or 2 percent. Because electricity is so much more efficient than combustion, totally electrifying our country would cut primary energy use about in half. (And simply not having to find, mine, and refine fossil fuels would reduce energy use by 11 percent.)

Of course, replacing all those gas-powered pickups and oil-fired furnaces with electric vehicles and appliances would mean dramatically increasing the amount of electricity we need to produce overall—in fact, we’d have to more than triple it. We’ve already dammed most of the rivers that can produce hydropower (about 7 percent of our current electric supply); if we’re going to replace coal and natural gas and simultaneously ramp up our supply of electricity, we have three main options: solar, wind, and nuclear power, and according to Griffith “solar and wind will do the heavy lifting.”

That’s primarily because renewable energy sources have become so inexpensive over the past decade. They are now the cheapest ways to generate power, an advantage that will grow as we install more panels and turbines. (By contrast, the price of fossil fuel can only grow: we’ve already dug up all the coal and oil that’s cheap to get at.) According to Griffith’s math, nuclear power is more expensive than renewables, and new plants “take decades to plan and build,” decades we don’t have.

It’s a mistake to shut down existing nuclear plants that are running safely—or as safely as current technology allows—and it’s possible that new designs now on the drawing board will produce smaller, cheaper reactors that eat waste instead of producing it. But for the most part Griffith sides with Mark Jacobson, the environmental engineering professor at Stanford whose team showed a decade ago that the future lay with cheap renewables, an estimation that, though highly controversial at the time, has been borne out by the steady fall in the price of solar and wind power, as well as by the increasing efficiency of batteries to store it.

Griffith devotes more attention to batteries than almost any other topic in this book, and that’s wise: people’s fear of the “intermittency” of renewables (the fact that the sun goes down and the wind can drop) remains a major stumbling block to conceiving of a clean-energy future. Contrary to these fears, each month brings new advances in battery technology. The Wall Street Journal recently reported on the super-cheap batteries being developed that use iron instead of pricey lithium and can store energy for days at a time, making them workhorses for utilities, which will need them to replace backup plants that run on natural gas.

Griffith is good at analogies: we’d need the equivalent of 60 billion batteries a year roughly the size of the AAs in your flashlight. That sounds like a lot, but actually it’s “similar to the 90 billion bullets manufactured globally today. We need batteries, not bullets.”

This renewable economy, as Griffith demonstrates, will save money, both for the nation as a whole and for households—and that’s before any calculation of how much runaway global warming would cost. Already the lifetime costs of an electric vehicle are lower than those of gas-powered cars: Consumer Reports estimates they’ll save the average driver $6,000 to $10,000 over the life of a vehicle. Though they cost a little more up front, at least for now, the difference could be overcome with a reasonably small subsidy. And since most people buy a new car every six to seven years, the transition should be relatively smooth, which is why in August President Biden and the Big Three automakers announced their plans for 40 to 50 percent of new sales to be electric by 2030.

That’s still not fast enough—as Griffith makes clear, we’re already at the point where we need every new replacement of any equipment to be electric—but it’s likely to happen much quicker with cars than anything else. A gas furnace lasts twice as long as a car, for instance. And putting solar panels on your roof remains an expensive initial investment, partly because of regulations and paperwork. (Griffith notes that in his native Australia such “soft costs” are less than half of what they are in the US.)

Happily, he provides the formula for success. The federal government needs to do for home and business energy retrofits in this decade what Freddie Mac and Fannie Mae did for homeownership in the last century, except this time accessible to all applicants, not just white ones: provide government-backed mortgages that make it affordable for everyone to acquire this money-saving and hence wealth-building capacity, and in the process jump-start an economy that would create vast numbers of good jobs. “A mortgage is really a time machine that lets you have the tomorrow you want, today,” Griffith writes. “We want a clean energy future and a livable planet, so let’s borrow the money.”

In short, Griffith has drawn a road map for what seems like the only serious chance at rapid progress. His plan won’t please everyone: he has no patience at all with NIMBY opposition to wind turbines and transmission lines. But I don’t think anyone else has quite so credibly laid out a realistic plan for swift action in the face of an existential crisis.

Where We’re Heading

Ronald Reagan. They called him “the Great Communicator”, but he was a horrible president. When he was seeking a second term in 1984, one of his campaign ads began with the phrase: “It’s morning again in America”.

The idea was that after four years of his leadership, the US was in good shape again. The head of the Federal Reserve, Paul Volcker (a Democrat), had killed the high inflation of the late 70s by raising interest rates to stratospheric levels. And Republicans had juiced the economy by going on a tax-cutting and spending spree based on the ludicrous theory that massive tax cuts would pay for themselves (a doctrine famously labeled “Voodoo Economics” by a future, less dangerous Republican president).

But a poll taken two months ago showed only 29% of country think the US is on the right track.

Well, Democrats and the new media need to get the word out. Biden should reuse that famous phrase: “It’s morning again in America”.

In less than 10 months, the Democrats have have cut child poverty in half, added more than 5 million jobs, managed the most ambitious vaccine rollout in the nation’s history, and passed a $1.2 trillion investment in the water, roads, bridges and broadband. (The broadband provisions of the infrastructure bill will help some of the most conservative parts of America — rural areas that struggle with unreliable, expensive connectivity.)

1.44 million vaccinations were administered yesterday. 70% of adults are fully vaccinated.

Pfizer says its anti-viral pill reduces the risk of death or hospitalization by 89% in people who take it within three days of symptoms starting.

Progress:

  • January 2021: Unemployment rate is 6.3%.
  • February 2021: Nonpartisan Congressional Budget Office projects we will get to 4.6% unemployment by the end of 2023.
  • March 2021: Democrats pass the American Rescue Plan with ZERO REPUBLICAN VOTES.
  • October 2021: Economy reaches 4.6% unemployment two years ahead of schedule, declining more this year than any other year on record.

The initial August jobs number of 235,000 started a wave of economic panic in the press. It was actually 483,000. September’s 194,000, which signaled malaise, has been revised to 312,000.

531,000 jobs were added in October, beating all expectations. Leisure and hospitality gained 164,000 jobs, as restaurants continued to staff up amid the decrease in coronavirus cases. Professional and business services added 100,000 jobs, manufacturing added 60,000, construction 44,000, health care 37,000, and transportation and warehousing 54,000. . . .

The US has now added 5.5 million jobs since President Biden took office. Approximately 80% of the jobs lost during the pandemic have been recovered. The labor market is recovering much faster than it did after the 2008 recession.

The number of Americans applying for unemployment benefits fell to a new pandemic low.

Average wages are up $2 an hour. Wages for production workers are up 5.8% and 12.4% for restaurant workers.

Home values are up. Family debt is down. The S&P 500 is up 23% since Biden took office, 32% since he was elected (we’re still waiting for the crash the previous president predicted).

In October, consumer confidence, “the engine of the U.S. economy”, rose after months of decline. Consumers were also the most optimistic since 2000 about their own prospects to find jobs. 

It’s true, the average price of gasoline has gone up. It always goes up and down, given the price of oil and how much people drive. It was almost $5.00 a gallon in 2008 (when a Republican was president) and $4.00 in 2014. It’s around $3.40 today.

fotw1199Since we’re coming out of a pandemic-infused recession, problems should be expected.

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What’s next?

Democrats, again with ZERO REPUBLICAN VOTES, will pass parts of Biden’s “Build Back Better” social policy bill, fulfilling some of the promises he ran on in 2020 (not because  Alexandra Ocasio-Cortez has hypnotized him).

Biden describes it in two sentences, “The build back better framework lowers your bills for health care, child care, prescription drugs, and preschool. And families get a tax cut.”

Paul Krugman used one sentence: “Tax the rich, help America’s children”.

Democrats may — may — finally be about to agree on a revenue and spending plan. It will clearly be smaller than President Biden’s original proposal, and much smaller than what progressives wanted. It will, however, be infinitely bigger than what Republicans would have done, because if the G.O.P. controlled Congress, we would be doing nothing at all to invest in America’s future.

But what will the plan do? Far too much reporting has focused mainly on the headline spending number — $3.5 trillion, no, $1.5 trillion, whatever — without saying much about the policies this spending would support. . . 

So let me propose a one-liner: Tax the rich, help America’s children. This gets at much of what the legislation is likely to do: Reporting suggests that the final bill will include taxes on billionaires’ incomes and minimum taxes for corporations, along with a number of child-oriented programs. And action on climate change can, reasonably, be considered another way of helping future generations.

Republicans will, of course, denounce whatever Democrats come out with. But there are three things you should know about both taxing the rich and helping children: They’re very good ideas from an economic point of view. They’re extremely popular. And they’re very much in the American tradition.

I hope what comes soon after that is an all-out push to convince two or three misguided Democratic senators to reform the filibuster in order to protect voting rights, because, all around the country, Republicans are doing whatever they can to insure minority, right-wing rule.

Biden and his team are restoring reasonable regulations for business and trying to address the climate crisis. They’re reuniting immigrant families instead of tearing them apart. They had the guts to finally end our longest, stupidest war. They’re getting respect around the world, not losing it. They want women to control their bodies. They believe it should be easy for Americans to vote. 

Maybe him and other Democrats know what they’re doing. Maybe more of us will figure that out.

“Largely Inevitable As Economies Try To Restart After Epic Disruptions”

Now that the US is recovering from the pandemic, demand has outstripped supply in some parts of the economy, resulting in inflation. This shouldn’t be a surprise. Something else that shouldn’t be a surprise is that Republicans blame Biden, as if any of them would do better.

The economist Paul Krugman summarizes the situation in his newsletter

It’s been a troubled few months on the economic front. Inflation has soared to a 28-year high. Supermarket shelves are bare, and gas stations closed. Good luck if you’re having problems with your home heating system: Replacing your boiler, which normally takes 48 hours, now takes two or three months. President Biden really is messing up, isn’t he?

Oh, wait. That inflation record was set not in America but in Germany. Stories about food and gasoline shortages are coming from Britain. The boiler replacement crisis seems to be hitting France especially hard.

And one major driver of recent inflation, in America and everywhere else, has been a spike in energy prices — prices that are set in world markets, on which any one country, even the United States, has limited influence. D____ T____ has been claiming that if he were president, gas would be below $2 a gallon [in fact, America would be an earthly paradise, just like when he left office]. How exactly does he imagine he could achieve that, when oil is traded globally and America accounts for only about a fifth of the world’s oil consumption? [Answer: he doesn’t imagine how he’d achieve it, but he thinks doing it would make him look good, and that’s enough reason to say he’d do it].

In other words, the problems that have been crimping recovery from the pandemic recession seem, by and large, to be global rather than local. That’s not to say that national policies are playing no role. For example, Britain’s woes are partly the result of a shortage of truck drivers, which in turn has a lot to do with the exodus of foreign workers after Brexit. But the fact that everyone seems to be having similar problems tells us that policy is playing less of a role than many people seem to think. And it does raise the question of what, if anything, the United States should be doing differently. . . .

Many observers have been drawing parallels with the stagflation of the 1970s. But so far, at least, what we’re experiencing doesn’t look much like that. Most economies have been growing, not shrinking; unemployment has been falling, not rising. While there have been some supply disruptions — Chinese ports have suffered closures as a result of Covid outbreaks, in March a fire at a Japanese factory that supplies many of the semiconductor chips used in cars around the world hit auto production, and so on — these disruptions aren’t the main story.

Probably the best parallel is not with 1974 or 1979 but with the Korean War, when inflation spiked, hitting almost 10 percent at an annual rate, because supply couldn’t keep up with surging demand.

Is demand really all that high? Real final sales (purchases for consumption or investment) in the United States hit a record high but are roughly back to the prepandemic trend. However, the composition of demand has changed. During the worst of the pandemic, people were unable or unwilling to consume services like restaurant meals, and they compensated by buying more stuff — consumer durables like cars, household appliances and electronics. At their peak, purchases of durable goods were an astonishing 34 percent above prepandemic levels; they’ve come down some but are still very high. Something similar seems to have happened around the world.

Meanwhile, supply has been constrained not just by clogged ports and chip shortages but also by the Great Resignation, the apparent reluctance of many workers to return to their old jobs. Like inflation and shortages of goods, this is an international phenomenon. Reports from Britain, in particular, sound remarkably like those from the United States: Large numbers of workers, especially older workers, appear to have chosen to stay at home and perhaps retire early after having been forced off their jobs by Covid-19.

. . . What could or should U.S. policymakers be doing differently? As I’ve already suggested, energy prices are largely out of U.S. control.

A few months ago, there were widespread claims that enhanced unemployment benefits were discouraging workers from accepting jobs. Many states rushed to cancel these benefits even before they expired at a national level in early September. But there has been no visible positive effect on labor supply.

Should current shortages inspire caution about Democratic spending plans? No. At this point, the Build Back Better agenda, if it happens at all, will amount to only about 0.6 percent of G.D.P. over the next decade, largely paid for by tax increases. It won’t be a significant inflationary force . . .

Other things might help. I’ve argued in the past that vaccine mandates, by making Americans feel safer about going to work and buying services rather than goods, could play a role in unclogging supply chains.

What’s left? If inflation really starts to look as if it’s getting embedded in the economy, the Federal Reserve should head it off by tightening policy, eventually by raising interest rates. . .

The most important point, however, may be not to overreact to current events. The fact that shortages and inflation are happening around the world is actually an indication that national policies aren’t the main cause of the problems. They are, instead, largely inevitable as economies try to restart after the epic disruptions caused by Covid-19. It will take time to sort things out — more time than most people, myself included, expected. . . .

Sometimes I Think This Country Is Too Stupid To Survive — Part 2

Part 1 dealt with one ridiculous aspect of the story: how the $3.5 trillion everybody is talking about ignores the taxes and cost savings that would approach $3.5 trillion and offset the spending. Paul Waldman of The Washington Post is disgusted with another aspect (“Our Budget Debates Are Insane”):

One of Congress’s main jobs — perhaps its most important — is to decide how to spend the government’s money. And there’s quite a lot of it; in 2022 we’ll be spending around $6 trillion.

Yet the way we talk about budgets in Washington is misconceived, misleading and often downright mad.

Everything wrong with how we think of spending money can be seen in the current negotiations over the social infrastructure bill Democrats hope to pass through reconciliation. But to put this in its proper context, let’s consider another, much bigger bill.

On Thursday, by a vote of 316 to 113, the House passed the National Defense Authorization Act, which will fund our military operations to the tune of $768 billion in the coming year. The nay votes were mostly conservative Republicans and liberal Democrats, presumably dissenting for opposite reasons.

If you’ve been following the reconciliation debate — in which people have been absolutely obsessed with the supposedly terrifying number of $3.5 trillion [Note: which ignores the taxes and cost savings that would pay for it!!!] — you might have thought the defense bill would produce enormous breast-beating about out-of-control spending and debt. After all, that $3.5 trillion is over 10 years, or $350 billion a year, less than half of what we’re going to spend on the military.

But that’s not what happened. . . . 

There were no painful negotiations, no ultimatums, no desperate threats. President Biden did not have to beg and plead to secure anyone’s vote. And you sure didn’t see centrist members of Congress expressing deep concern about its size, claiming it was irresponsible to add so much to the national debt — although we’ll easily be spending $8 or $9 trillion on the military over the same 10-year period.

Yet all that has happened on the social infrastructure bill. The bill’s final spending total — whatever it turns out to be — has been imbued with a bizarre talismanic power, as though it represents something meaningful above and beyond what it’s actually buying.

Consider Sen. Joe Manchin III’s (D-W.Va.) description of a White House meeting President Biden held with centrists to try to work out what’s holding back their support:

“He just basically said find a number you’re comfortable with,” Manchin said, adding that Biden’s message was to “please just work on it. Give me a number”.” Manchin told reporters that he didn’t give Biden a number . . . 

. . . Not only do the centrists not know their preferred number, they don’t seem to have many real opinions about what should actually be in the bill. They may object to an item here or there if you press them, but clearly their perspective starts from the conviction that $3.5 trillion is too big; they’ll fill in the details later.

But that’s completely backward. To negotiate a bill such as this is, you ought to begin by deciding what you want to do, then figure out how much it will cost.

It’s not that cost is completely irrelevant, or that there are some things we’d like to do but won’t because they’re too expensive. But we have plenty of money to work with, and the defense bill proves it.

If we decided the reconciliation bill’s paid family leave and universal pre-K and free community college and aggressive moves to promote clean energy were as important as all the guns and bombs and planes and ships in the defense bill, we’d treat it in the same way, by just buying everything without worrying about the price, because we think it’s worthwhile.

This isn’t the first time Democrats have convinced themselves that there was something magical about a particular budget number: In 2009, during internal debates about the American Recovery and Reinvestment Act and the Affordable Care Act, Obama White House advisers decided that crossing the threshold of a trillion dollars for either bill would make support melt away. As Michael Grunwald put it, “A trillion was a psychological Rubicon.”

The trillion dollar number became like “Candyman” — intone the word too many times and a monster would come to destroy you. Voters would recoil in disgust, lawmakers would cower in terror and the bill would die. So they reduced the size of the recovery bill, even knowing it was too small to give the economy the boost it needed.

Today, the centrists seem to believe that $3.5 trillion — if you’re spending it on Americans’ actual needs . . .  — will have the same effect [on public opinion?] as $1 trillion did in 2009.

But you know who doesn’t care about numbers? Republicans. When they want to pass a gigantic tax cut for the wealthy and corporations, they just do it, no matter what it costs.

You know who else doesn’t care? The public. They don’t have strong feelings about whether the [spending side of the] social infrastructure bill should add up to $3.5 trillion or $2.5 trillion (here’s a poll showing that changing the dollar figure has no effect on opinion). They’re more interested in what government is doing for them.

Which is exactly as it should be. If only [all of the] Democrats in Washington had enough sense to see things the same way.