Inflation, politics, and policy
Between the Russian invasion of Ukraine and COVID outbreaks in China, it certainly seems likely that supply shortfalls and upward pressure on prices will continue. This raises difficult questions about politics and economic policy.
On the political side of the ledger, I think that President Biden’s strategy should be predicated on continued inflation; if inflation subsides people will be happy and he will benefit politically no matter what he does or says now. He can take some actions to rein in inflation, and recommend others to Congress and the states, but it’s doubtful these will have much visible impact. So it seems to me that he should state that the war and our sanctions on Russia will lead to global shortages and push prices up, at least for a time, and he should tell Americans that when they pay more for gas, they are making a sacrifice for the people of Ukraine, a contribution to the war effort. If hardship is likely, try to let people feel good about it by framing it as a sacrifice for a larger cause they believe in. So far President Biden has rejected this approach in favor of optimistic talk that will open him up to attack if inflation continues, and that will not help him much if inflation subsides. I really don’t get it.
Macro policy is way over my pay grade, but with that very important caveat it’s not obvious to me that the Fed should tighten. As many have pointed out, fiscal policy is set to become contractionary, real interest rates are not as low as they seem, and wages are rising more slowly than prices, all of which will help to bring demand and supply into better alignment. So modest tightening by the Fed seems fine, but I don’t see the need for a sharp increase in rates. And another question, why is it taken for granted that the current bout of inflation will lead to a recession (e.g., by Summers here)? Is the assumption that the Fed will eventually over-react, or that a recession will in fact be needed to restore price stability, or what? Why can’t rising real interests rates, falling real wages and relaxation of supply constraints lead to a moderation of inflation with continued growth and full-ish employment? Of course this may not happen, but what is the theory that suggests a sharp rise in interests rates will lead to a better outcome? Is it a political theory or an economic theory?
Excellent. Thanks.
Eric:
Krugman; “But while overheating is a problem, we shouldn’t let it overshadow the good things that have happened.”
Krugman stops short in detailing the good things which have happened.
Finally, we had a government which reacted to a national catastrophe similar in impact as Wall Street in 2007/8 blowing up the economy with their gambling. Main Street paid for Financial Engineering, CDS, naked CDS, tranched MBS all with pennies on the dollar in backup. We had a President in office offering up a plan which under-estimated what was necessary to save the economy. To make matters worse, Congress blocked much of the package offered up threatening filibusters.
“We should have a simple test: Will the yet-unwritten, reportedly trillion-dollar spending bill really create jobs and grow the economy — or will it simply create more government spending, more bureaucrats and deeper deficits?” McConnell
And Boehner was of similar vein.
The package being ~$800 billion and far too small to accommodate what happened which was deeper than the pandemic.
Contrast 2008 with what took place after January 6th 2020 and the attempt to overthrow the nation. In turn we have a President today, who was a VP in 2008 who lived through it, offering up programs far greater than the meager one offered up in 2008 and opposed by McConnell and Republicans. How many years did it take to get the economy back to a semblance of order? Participation Rate remained lower.
Is Biden’s packaged what has caused inflationary issues in 2022?
It is a part of it and without the stimulus, we would have spent years getting the economy back. Dems need to tout what could have been if Repubs had their way. 2008 reactions by them was a lesson in what not to do.
Today’s issue are mostly contrived. Lead times for supply are the result of a failure to plan and limiting capacity. Then there are those who believe a longer lead time will fix the problem.
The semiconductor issue is a rerun of 2008 which I lived through. Businesses (especially automotive) canceled orders, suppliers canceled their chip mfg orders (key phobs, passenger door mechanisms, auto computers, diagnostics, etc.), and the chip makers (not labor intensive) stopped making wafers to be fabricated.
Automotive took advantage and jacked up prices for new and used. How does higher prices fix a supply chain problem? It doesn’t because it has to be solved internally.
Why does Joe Biden have to tell the west coast ports to add more shifts to offload ships and on to chassis or trains?
Has business gotten stupider? It is a perfect storm for rent taking and increased prices. And the Fed is going to fix this, how?
With increased interest rates to whack the population to stymie buying. This will impact minorities more so than white America. Demand will recede to match capacity on goods outside of food and oil.
Opinion | How High Inflation Will Come Down – The New York Times (nytimes.com)
Republicans Warn Against Overspending on Stimulus – WSJ
edited 3/30
Run,
I’d position that given the decline in international travel and an acceleration in domestic travel, there is a large restructuring of expenditures and that might be a root cause of some of the inflation issues.
We had a benefit this past weekend for a gentleman in the community and we made limited auction items to raffle, auction, etc. That we donated the product to. I went on the hunt for pint glasses because everyone likes a frost pint. Retail – $4 a glass. Went to a wholesale channel and got $1.37 a glass. This is what we have been seeing in the cattle market last year where producer prices are flat but Packers and retailers are through the roof. A solid 25% of the economy is enjoying 100% of the inflation upswing. It just feels like 2006/7 all over again where the banks are laughing all the way to the…bank and the general public doesn’t understand the craft work that just robbed them out of a house and their children out of a vibrant future.
This time, corporate America is robbing families of the excess in wage gains due to historically low employment slack.
Well, they had to figure out some way to get back the extra wages they have been paying.
MS
Yes, on the second half of your comment. And Powell admires Voelker. It is an easy battle with knights versus the peasants. The consolidation in the packers has led to higher prices. This is something Obama attempted to fix also and botched it. That old post of mine on Malheur was mostly about what you described. Even in the last two years, the packers forced labor into unsafe conditions involving Covid.
Also, small lot cattle raising is pretty much gone unless you are a boutique supplier. Large lot processing is what is left who can take a hit on pricing through volume.
Funny use of the word, “extra”.
Hi Jack
What gets me is that raising interest rates does nothing to make housing more available or more affordable for most people. One of the few things we can say pretty confidently about what higher interest rates do is that they depress new home construction. So they act to decrease future supply as well as decreasing demand for existing homes. And cause a lot of unemployment in the construction industry.
Raising interest rates is a really poor tool to use when we are primarily faced with problems of supply rather than demand. I would admit Larry Summers was a genius if in December 2020 he predicted the Delta wave and OPEC and the Omicron wave and the Ukraine war were all going to add to our supply side difficulties and would push prices higher. But his objection was primarily that there would be excess demand rather than more limited supply.