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Tag Archives: Inflation

It’s a Global Problem — They’d Make It Worse

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I’m avoiding polls and speculation about the upcoming midterm election and don’t see political advertisements, but political news and commentary does get through. Today, Paul Krugman discussed the state of the economy and pointed out that Republican politicians don’t have a plan to address what they say is the country’s biggest problem (since the climate crisis isn’t real, women shouldn’t have equal rights and democracy is overrated):

Few things I’ve written in recent years have generated as much hate mail as a relatively low-key, somewhat nerdy newsletter I put out just before the release of data on gross domestic product for the second quarter of 2022. In that newsletter I explained why, despite a lot of misinformation in the news media, a recession is not defined as two quarters of declining G.D.P. and the first half of 2022 was unlikely to meet the actual, multidimensional criteria used by the committee that determines whether a recession has started.

The reason for the hate mail was, of course, that Republicans were eager to declare a “Biden recession” and falsely accused the administration of a double standard when it said that we were not, in fact, in a recession.

Well, Thursday’s advance G.D.P. report for the third quarter of 2022 showed why a recession call based on two quarters of somewhat bizarre data would have been all wrong. Economic growth has rebounded, back up to 2.6 percent at an annual rate — putting G.D.P. back in line with strong employment growth, which has continued throughout the year. Do you really want to say that we were in a recession from January through June but have miraculously recovered?

… Suffice it to say, we weren’t in a recession earlier this year and aren’t in a recession now, although we could find ourselves in one in the future as delayed effects of rising interest rates kick in.

Politically, however, it may not matter much, because Republicans have largely given up on the recession story. Instead, their economic attacks, in both debates and campaign ads, have been focused overwhelmingly on inflation, especially gas prices.

It therefore seems worth pointing out that the Republican Party doesn’t have a plan to fight inflation. Actually, it doesn’t have any coherent economic plan at all. But to the extent that Republicans have laid out what they will try to do if they win the midterms, their policies would make inflation worse, not better.

When pressed about how, exactly, they would reduce inflation, Republicans often fall back on some version of “Gas was only $2 a gallon when Trump left office!” So let’s talk about that comparison.

First, it’s remarkable how the right has reimagined January 2021 as a golden moment for America. At the time, about 20,000 Americans were dying from Covid every week; there were still nine million fewer jobs than there had been before the pandemic. Indeed, the still-depressed state of major economies, including that of the United States, was the main reason world oil prices were unusually low, which in turn was the main reason gas was cheap.

A better comparison would be with 2019, the year before the pandemic, when gas averaged $2.60 a gallon. Bear in mind that average wages have risen about 15 percent over the past three years, so gas would be as affordable now as it was in 2019 if its current average price were $2.99. As of Wednesday, it was $3.75. So yes, gas has become less affordable, but not by nearly as much as Republicans claim.

And despite Republican rhetoric, Biden administration policies have had little impact on gas prices, which have been driven by events affecting world markets — notably Russia’s invasion of Ukraine — and to some extent by bottlenecks in refining, which grew worse for several weeks starting in mid-September but have eased again.

So what is the Republican plan to bring gas prices down? There isn’t one.

What about inflation more generally? You can make the case that large deficit spending early in the Biden presidency fed inflation (although it had little effect on the most politically salient prices, for energy and food, which have soared around the world).

If you’re worried about the inflationary impact of budget deficits, however, you should know that almost the only concrete economic policy idea we’re hearing from Republicans is that they want to extend the Trump tax cuts, which would … substantially increase the deficit.

It’s true that many Republicans adhere to an economic ideology that doesn’t see deficits caused by tax cuts as a problem, either because they believe — in the teeth of all the evidence — that tax cuts somehow pay for themselves, or because they believe that government spending, not deficits per se, is what causes problems.

But if you believe that cutting taxes without any plausible plan for offsetting spending cuts isn’t a problem even in a time of inflation, markets beg to disagree. Look at what happened to the pound and British interest rates after Liz Truss, the quickly deposed prime minister, announced an economic plan that, broadly speaking, looks a lot like what Republicans are proposing here. (There’s more to it than that, but still.)

The bottom line is that while the G.O.P.’s election strategy is all about blaming the Biden administration for inflation, the Republican Party doesn’t actually have any plan to reduce inflation. To the extent it has an economic plan at all, it would make inflation worse.

Unquote.

I’ll add that inflation is a global problem (it’s higher in Europe than in the Us) and oil companies are making tremendous profits with gas prices this high. What would a Republican Congress do to restrain oil company profiteering? The question answers itself.

The Dumbest Timeline

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When did we stumble into the dumbest timeline? Maybe we did it in 1914 when the European powers blundered into a devastating world war. Maybe it was in 1964 when Barry Goldwater accepted the Republican nomination for president while claiming that “extremism in defense of liberty is no vice”. Or maybe it wasn’t until 2016 when a demagogic con man eked out a victory in the Electoral College. Regardless of when we got here, there’s strong evidence that that’s where (or when) we are. Jonathan Chait of New York Magazine offers two pieces of evidence:

First, the demise of Biden’s social policy agenda:

The most depressing thing about the demise of the Biden administration’s social-policy agenda — other than the demise itself, of course — is the atmosphere of sheer economic illiteracy that surrounded it. Critics of the measure, ultimately including Joe Manchin, made arguments against it that were not so much misguided as lacking any elemental grasp of the basic principles involved (“not even wrong”).

The main argument used against Biden’s plan was that it would worsen inflation, with conservatives scolding Biden for ignoring the sage insights of Larry Summers. To take just one example, pundit Marc Thiessen wrote that Biden signed an economic stimulus in March 2021 “despite warnings from even liberal economists, such as former Treasury secretary Lawrence H. Summers…. But instead of trying to tamp down the flames, Biden keeps trying to pour gasoline on the inferno, with more spending and more free money from Washington.” The tone of this column, like many of the right-wing polemics, is one of incredulous condescension: Biden is such a blithering idiot that he is ignoring the obvious conclusion and instead digging holes and pouring gasoline or whatever.

Whatever the case against Build Back Better, this was not it. The American Rescue Plan did contribute to inflation; its purpose was to stimulate demand by injecting deficit-financed spending into the economy. Build Back Better had a different purpose: to address social needs over a long period of time and finance that spending through taxation.

Spending financed by new taxes is not inflationary. That is why Summers himself endorsed Build Back Better. Yet [reactionaries] spent the better part of a year citing Summers as the authority on why Biden’s long-term plans would cause inflation, oblivious to the fact that any economist, very much including Summers, would say otherwise.

In deference to public concerns about inflation, Manchin ultimately reshaped the last version of the bill as an anti-inflationary measure. The plan would have raised $1 trillion in new revenue (or reduced spending) and used half the proceeds for deficit reduction. This would not have had a large effect on inflation, but there is no question that … it would place downward pressure on prices.

[Republicans] simply refused to acknowledge this aspect of the plan at all. In the end, even Manchin himself abandoned his own plan, which was designed in part to reduce inflation, on account of inflation, which is like deciding not to cut greenhouse-gas emissions because it’s too hot.

… When the 9.1% inflation number was released, Manchin [supposedly] said to Schumer, “Why can’t we wait a month to see if the numbers come down? How do you pour $1 trillion on that tempo with inflation?

Remember, $1 trillion is not the size of the spending in the bill; $1 trillion is the size of the revenue. That’s the pay-for aspect of the bill Manchin insisted on maintaining in order to fight inflation. The $1 trillion would not be poured onto economic growth. It would be poured out of economic growth.

In the end, Biden’s attempt to enact permanent social change died in an atmosphere in which the most ignorant fallacies carried the day.

Next, incoherence and derangement on gay marriage:

In 2004, the Republican Party was united in anger at the idea that judges would seize the issue of gay marriage from its rightful place in the legislative arena…..“The only question is whether the constitutional status of marriage will be determined by unelected judges or the American people,” claimed the Alliance for Marriage.

[Republicans] may finally get their wish. The matter of gay marriage is finally coming for a vote before what they have always insisted is its rightful venue: Congress. And yet, far from expressing gratitude that Congress is finally exerting its sacred Article III powers, conservatives are angry that elected officials are now meddling in business properly settled by the courts…..The old danger of activist judges has passed, and now conservative principle requires the party to take a stand against activist … legislators.

Congress is voting to codify same-sex marriage because the Supreme Court’s decision overturning Roe v. Wade undercut the main legal theory that supported other unenumerated rights, including marriage equality….

It wasn’t long ago that opposition to gay marriage held pride of place atop the ideals of the right-wing firmament, second only to the strategic genius of the Bush administration’s “global war on terror” strategy. Conservatives thundered daily against the horrific terrors that would ensue if gay people were permitted to wed each other….

After their heroic stand at the gates of civilization failed, essentially none of the things conservatives warned would happen actually transpired. The cycle of failed prophecy is a familiar one for American conservatism. Every new social or economic reform, from the abolition of child labor to the establishment of Social Security to Obamacare, brings hysterical predictions of collapse that eventually give way to silent acceptance without any stage of reconsidering the failed mental model that produced the erroneous fears in the first place.

At the moment, the case against gay marriage has reached an awkward phase. Marriage equality has enough broad acceptance (around 70 percent support) that the party doesn’t wish to emphasize the issue. But the minority in opposition forms a large enough portion of their base that few Republicans wish to renounce their old stance completely.

Hence the incentive to declare the matter an improper subject for public debate. Unable to take a stand either in favor or against the marriage-equality bill, Republicans are instead directing their arguments … against the Democrats for bringing it up at all….

Finally, an exchange on Twitter between a right-wing blogger and a history professor:

Blogger: Remember when they spent years telling us to panic over the hole in the ozone layer and then suddenly just stopped talking about it and nobody ever mentioned the ozone layer again? This was also back during the time when they scared school children into believing “acid rain” was a real and urgent threat.

Professor: The ozone hole and acid rain. Two things that were LITERALLY fixed by science-led, globally-coordinated, long-term, concrete international action. It’s like being held hostage by the world’s stupidest serial-killer.

I Suppose This Is a Hobby

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I retired almost thirteen years ago and have rarely thought about getting a job, even a part-time job, since. But it appears I’ve settled on a hobby, without really intending to. This blog has been part of it for twelve years. Another part is a philosophical “book” about perspective (or points of view) I’ve been “working on” for almost ten years. The other part is lots and lots of comments I’ve spread around the internet.

Many of these comments have been deposited at an interesting site called Three Quarks Daily. It’s mainly an aggregator. They link to articles of intellectual interest at other sites. They also have a Monday Magazine, which features original content.

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The site is free, although a “one-time donation” or “small monthly payment” makes advertisements disappear. Most of us don’t need more to read on the internet or elsewhere, but I highly recommend 3 Quarks Daily.

What led me to writing this post is that I spent part of last night and most of this afternoon responding to four articles at 3 Quarks (which is more than average output for me).

The first was a response to a Guardian article called “The Federal Reserve Says Its Remedies For Inflation ‘Will Cause Pain’, But To Whom?”. At 3 Quarks, I merely quoted some of Sen. Elizabeth Warren’s recent dialogue with the Fed Chairman, Jerome Powell:

Warren asked Powell if Fed rate increases will lower gas prices, which have hit record highs this month. “I would not think so,” Powell said.

Warren asked if grocery prices will go down because of the Fed’s war on inflation. “I wouldn’t say so, no,” Powell said.

“Rate hikes won’t make Putin turn his tanks around and leave Ukraine,” Warren said, adding that they won’t break up corporate monopolies or stop Covid-19.

“Inflation is like an illness and the medicine needs to be tailored to the specific problem, otherwise you could make things a lot worse,” Warren said. ” … the Fed can slow demand by getting a lot of people fired and making families poorer.”

The Massachusetts Democrat urged Powell to proceed cautiously with further rate hikes.: “You know what’s worse than high inflation and low unemployment? It’s high inflation with a recession and millions of people out of work”.

Next was a response to an article at Aeon called “Armchair science: Thought experiments played a crucial role in the history of science. But do they tell us anything about the real world?”

I disagreed with one of the philosophers quoted in the article, James Robert Brown of the University of Toronto. He said he was extremely impressed with Galileo’s thoughts regarding falling objects. 

Suppose we connect the two objects [a musket-ball and a heavier cannonball] with a short, stiff rod. One could argue that the lighter musket-ball acts as a brake on the heavier cannonball, slowing its fall. Then again, one could also argue that the composite body, whose weight is equal to the sum of the two original bodies, must fall faster than either body alone. This is obviously a contradiction. The only solution, Galileo says, is that all bodies fall at the same rate, independent of their weight.

“I fell out of my chair when I heard it,” Brown said. ‘”It was the most wonderful intellectual experience perhaps of my entire life.” Brown went on to become a leading authority on thought experiments.

At Three Quarks Daily, I expressed skepticism, concluding that Galileo’s thought experiments didn’t prove anything except that it was worth getting empirical evidence on the question (trying it out) before reaching a conclusion.

Number 3 concerned an original article at Three Quarks written by Thomas R. Wells, a “British academic philosopher living in the Netherlands”. He called his article “We Should Fix Climate Change, But We Should Not Regret It”.

Mr. Wells argues that the climate crisis began with the Industrial Revolution, but we shouldn’t regret the Industrial Revolution because of what it’s led to. I’m not sure any sane environmentalists actually regret the Industrial Revolution. I left the fifth comment:

We can agree the Industrial Revolution was a good thing, while also noting that climate change [is] the result of regrettable choices we made along the way, not by starting the Industrial Revolution, but by ignoring our effect on the climate, even though scientists discovered that effect decades ago.

We could have made this a “vastly better world for most people” without making it a vastly worse world for so many other living things. Not exactly coining a phrase, but other living things matter.

Finally, another Three Quarks contributor, Mike Bendzela, who I believe teaches in the English department at the University of South Maine, published an article today called “Abort All Thought That Life Begins”. He argues that there is no such thing as the “beginning of life”. Life has always developed as a gradual process without any particular beginning (its ending isn’t always clear either).

As you might expect, this article has elicited a variety of comments (they’re still landing). I responded to another reader this way:

Justice Blackmun, who wrote the Roe v Wade opinion, shared an internal memo with the other justices before the majority decision was published. He wrote “You will observe that I have concluded that the end of the first trimester is critical. This is arbitrary, but perhaps any other selected point, such as quickening or viability, is equally arbitrary.” [https://en.wikipedia.org/wi…]

… I believe the author … is making the point that any decision regarding a moment when there is “conversion from not human to human” is somewhat (or totally) arbitrary. I’d say the transition from “not human enough” to “human enough” is a matter of convention.

That’s how the five Republicans and two Democrats on the Court ruled in 1973 — they came to a nuanced agreement based on trimesters and viability. It was a reasonable compromise that worked well enough for 50 years, until the Court was corruptly (after Senatorial hypocrisy and lies told to the Judiciary committee) taken over by ideologues.

I see that the person I responded to has now responded to me. Once more unto the breach…

I’ve never read all of Roe v. Wade or the dissents, and I know some lawyers and scholars who oppose forced births (women who get pregnant being compelled by the state to eventually give birth) disagree with the Roe majority’s legal reasoning.

However, as others have pointed out, the 9th Amendment to the Constitution says: “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people”. Even though the Constitution doesn’t mention a right to privacy, or pregnancy or abortion for that matter, I agree with Tim Quick above that we all have certain fundamental rights, including the ones he mentioned that justify women and their doctors sometimes ending a pregnancy without interference from the government.

If topics like these interest you, I recommend Three Quarks Daily. You don’t have to read the comments.

What Does It Sound Like When You Hear Inflation Rose 8% in May?

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The Consumer Price Index picked up by 8.6 percent, as price increases climbed at the fastest pace in more than 40 years (New York Times).

If you don’t think about it too hard, it sounds like prices rose 8.6% in May. But that’s not true.

The Department of Labor’s Consumer Price Index actually rose 1.0% in May. The 8.6% increase refers to the fact that the index was 8.6% higher than a year ago.

Would it be too hard for news people to write headlines that clearly conveyed what happened? No, but it wouldn’t sound as “newsworthy” (i.e. interesting) to say prices rose 1.0% in May or that they rose 8.6% in the past year.

What makes this especially annoying is that this is how the government announced the latest inflation news:

The Consumer Price Index for All Urban Consumers (CPI-U) increased 1.0 percent in May on a seasonally adjusted basis after rising 0.3 percent in April, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.6 percent before seasonal adjustment.

The increase was broad-based, with the indexes for shelter, gasoline, and food being the largest contributors. After declining in April, the energy index rose 3.9 percent over the month with the gasoline index rising 4.1 percent and the other major component indexes also increasing. The food index rose 1.2 percent in May as the food at home index increased 1.4 percent.

The index for all items less food and energy rose 0.6 percent in May, the same increase as in April. While almost all major components increased over the month, the largest contributors were the indexes for shelter, airline fares, used cars and trucks, and new vehicles.

It’s so much easier to simply say, as the Wall Street Journal did:

Inflation Reaches 8.6% in May

Back to the New York Times for an explanation, not a headline:

In the short term, high inflation can be the result of a hot economy — one in which people have a lot of surplus cash or are accessing a lot of credit and want to spend. If consumers are buying goods and services eagerly enough, businesses may raise prices because they lack adequate supply. Or companies may choose to charge more because they realize they can raise prices and improve their profits without losing customers.

But inflation can — and often does — rise and fall based on developments that have little to do with economic conditions. Limited oil production can make gas expensive. Supply chain problems can keep goods in short supply, pushing up prices.

The inflationary burst America has experienced this year has been driven partly by quirks and partly by demand.

On the quirk side, the coronavirus has caused factories to shut down and has clogged shipping routes, helping to limit the supply of cars and couches and pushing prices higher. Airfares and rates for hotel rooms have rebounded after dropping in the depths of the pandemic. Gas prices have also contributed to heady gains recently.

For those who think gas prices are all Biden’s fault, a word from the Deputy Director of the National Economic Council:

A big reason gas prices are up is because companies cut refinery capacity in 2020 under the last administration [you know who’s]. US refinery capacity went down by 800,000 barrels per day. Refiners are now making bigger [profits by] raising prices at the pump.

The second big reason gas prices are up is Putin’s actions in Ukraine and the global response raising oil prices. Pump prices are up more than $1.60 since then. Our response had the backing of Republicans…

At any rate, here is US oil production in thousands of barrels starting in 2020, a year before Biden took office (there is no Biden “War on Oil”):

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And back to the Times:

But it is also the case that consumers, who collectively built up big savings thanks to months in lockdown and repeated government stimulus checks, are spending robustly and their demand is driving part of inflation. They are continuing to buy even as costs … rise, and they are shouldering increases in rent and home prices. The indefatigable shopping is helping to keep price increases brisk….

Officials say they do not yet see evidence that rapid inflation is turning into a permanent feature of the economic landscape, even as prices rise very quickly.

But nobody knows for sure. One thing I do know is that the Republicans who are blaming Democrats for high inflation have no plan to address it, and cutting taxes for the rich and corporations (their standard, well, only policy idea) would make inflation worse.

In case you’re really interesting, here are the monthly price increase for the past 13 months, which, by my arithmetic, add up to more than 8%:

MAY ’21 +0.7%   JUNE +0.9%   JULY +0.5%      AUG. +0.3%        SEPT. +0.4%              OCT. +0.9%        NOV. +0.7%    DEC. +0.6%     JAN. ’22 +0.6%    FEB. +0.8%          MARCH +1.2%   APRIL +0.3%   MAY +1.0%

I bet June will be lower.

Professor Krugman Says This Isn’t Ordinary Inflation

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Paul Krugman is Distinguished Professor of Economics at the Graduate Center of the City University of New York and a columnist for The New York Times. He knows what he’s talking about but admits mistakes (this is from his Times newsletter):

Back in 2010 a group of conservative academics, economists and money managers signed an open letter warning that the efforts of the Federal Reserve to support the economy would be dangerously inflationary. But the inflation never came. So four years later, Bloomberg reached out to as many of the signatories as it could, to ask what happened.

Not one was willing to admit having been wrong.

I don’t want to be like those guys. So I’m currently spending a fair bit of time trying to understand why my relaxed view of inflation early last year has been refuted by events. What I want to do today is share where I am now on that topic and what my current take says about future policy.

Last spring the debate was focused on the American Rescue Plan, the Biden administration’s large spending package. A number of economists, including Larry Summers, Olivier Blanchard and Jason Furman, warned that it would overstimulate the economy — that output and employment would soar to levels that would create a lot of inflationary pressure.

Those of us on the other side argued that the risks of excess spending were much less than they warned — that large parts of the Biden package, like aid to state and local governments, would end up being disbursed gradually over time and therefore not have that much of an inflationary impact. To use the jargon, I argued that the [American Rescue Plan] would have a low “multiplier” [The multiplier effect measures the impact that a change in investment will have on final economic output, so that a low multiplier means less inflation.]

So here’s the funny thing: The multiplier does indeed seem to have been low. The economy has expanded fast, but it started in a deep hole and at this point is still if anything a bit below its pre-pandemic trend.

Here, for example, is real gross domestic product:

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The Congressional Budget Office regularly publishes projections of “potential” G.D.P. — the level of output consistent with stable inflation. So far the official numbers through the third quarter of 2021, extended by private estimates of growth in the fourth quarter, still put us slightly below what we thought the economy’s potential was going to be.

Here’s another number, the employment rate of prime-age adults, which has generally been a good indicator of the state of the labor market (probably better than the unemployment rate):

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We’ve seen a strong recovery in employment, but we’re still significantly below pre-pandemic levels.

The point is that if you had told me a year ago that this is what current output and employment numbers would be, I wouldn’t have predicted soaring inflation. To put it another way, my expectations of a relatively muted effect of government outlays on demand were more or less vindicated. But of course my expectations of moderate inflation weren’t. So what happened?

Part of the answer lies in supply-chain issues. Overall demand hasn’t grown all that fast, but fear of face-to-face interactions has skewed demand away from services toward goods, overstraining shipping and in some cases manufacturing capacity. These issues account for a lot of recent inflation, but in a way they don’t worry me too much: The private sector has huge incentives to get stuff moving, so sooner or later supply-chain issues will fade away.

However, it’s not just the supply chain; it’s obvious that we’re now experiencing widespread labor shortages even though employment is still below its prepandemic level.

I mentioned that the employed percentage of prime-age adults has generally been a good indicator of the state of the labor market. Another good indicator is the rate at which workers are quitting their jobs: Quits are high when people believe that new jobs are easy to find. Normally these two measures move in tandem; but something has changed.

Here’s a scatter plot of the prime-age employment rate against the quit rate since 2001; the blue dots represent the pre-pandemic era, the red dots the era since early 2020:

[Krugman has a diagram that I totally fail to understand, so you’ll have to imagine it.]

You can see [or imagine] the close relationship between the two measures [the prime-age employment rate and quit rate] before 2020. Since then, however, the relationship seems to have shifted, so a labor market that seems only OK judging by the employment rate looks extremely tight judging by the number of people who are quitting. And wages are rising rapidly, which suggests that quits are telling the real story.

What we’re seeing, of course, is the Great Resignation — which is also, to an important extent, a Great Retirement. A recent blog post from the International Monetary Fund shows that there has been a surge in the number of older Americans (and Britons) choosing not to be in the labor force. . . . 

Now, a labor market in which jobs are easy to find and workers can bargain for higher wages is a good thing. But the fact that labor markets are so tight even though employment and real G.D.P. are below pre-pandemic projections suggests that we can’t rely on those projections to assess the economy’s productive capacity. For whatever reason or reasons — presumably linked to Covid-19 — the U.S. economy apparently can’t sustainably produce as much as we expected [and scarcity means rising prices].

And that in turn tells us that it’s time for policymakers to pivot away from stimulus — in particular, that the Federal Reserve is right to be planning to raise interest rates in the months ahead. As I read the data, it doesn’t call for drastic action: The Fed should be taking its foot off the gas pedal, not slamming on the brakes. But that’s a story for another day.

For now, the moral is that because of Covid-19, we can’t assess where we are simply by comparing our situation with the pre-pandemic trend [i.e. the normal state of affairs]. . . . 

Unquote.

In other words, inflation, a global phenomenon, not one restricted to the US, is principally an effect of economies adjusting to a fading pandemic, another global phenomenon, which is not business (or economics) as usual. 

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