A week ago WaPo ran an Opinion piece by conservative Henry Olsen. He said the cause of inflation is normal people having money. You see, President Biden has been giving them money as Covid relief, the Child Tax Credit, and stimulus checks. Once they had it, these people bought some things. (Joe Manchin, honorary Republican Senator, speculated that West Virginians were just buying drugs). But Olsen revealed that, even worse, many of them were also saving money! A West Virginia woman interviewed recently during a podcast said she hardly knew how to express how important the money has been for her family. They are able to save some of it so they, “Didn’t have to live paycheck-to-paycheck now.” And for the first time in their lives they were able to buy 4 new tires for their car all at one time! However, like Zack, Mr. Olsen had some bad news for them. He said that this kind of thing HAS. TO. STOP!
I'm not familiar with Manchin's speculation and if that's his full thoughts on the matter it's clearly an overly narrow focus. But it's worth pointing out that in the 12 months ending March 2020 the CDC says there were 965 drug overdose deaths in WV. In the 12 months ending March 2021 that same stat rose to 1,558. Nationally the jump was from 70,000 to 100,000. It's fair to be concerned by that rise, as no one seems to no what caused it exactly, it's only fallen slightly on a monthly basis, and progressive left explanations are just as hand-wavy, if not even a bit more so, than right-wing partisan explanations.
I think the discussion of what’s happening to AD needs a closer look than just “what’s the current stance of fiscal and monetary policy? Loose? AD must be rising then”. A key component of AD is private sector borrowing from banks.
Sometimes (2008) you have an impaired banking system that won’t lend, and households/businesses (frightened by recession and with weak balance sheets) that won’t borrow… you can cut interest rates to zero and do a bucket load of QE, net bank lending will remain negative and the impact of these monetary policy moves on AD will be limited. That leaves fiscal policy / government spending as the only game in town. The 2008 fiscal stimulus was insufficient and the economy stagnated.
In other circumstances (2021?), household balance sheets are strong and corporate profitability is high because of muscular gov bailouts early on. Loose monetary policy spurs demand for housing and mortgage lending accelerates - this results in a more rapid increase in the money supply and then rising spending across the economy. Eventually we hit supply constraints, and inflation rises.
I'd offer that the standard macroeconomic models, in my understanding, are classic continuum differential equation models in time. But "expectations" are really due to time-offset factors, and as Noah knows delay differential equations are typically difficult to solve, and more so as the time difference gets longer. In other words the math being used here is not correct for the problem of inflation high enough to invalidate non-delayed models. In other words if you invoke "expectations" you can't use single time-continuous models.
Just because DDE's are often difficult to solve symbolically does not mean that they don't often resolve to relatively simple equations. Not to mention that they _all_ are easily solved numerically and some are easily solved symbolically.
You didn't mention the biggest supply shock which is the supply of plague free local services. Only a very poor substitute is available, one where we are forced to risk people's health when consuming.
> "At what point do these price increases stop simply being a drag on wages"
You should distinguish supply side inflation which are a "drag on wages" from demand side inflation caused from central banks which are prices rising _because_ aggregate income is rising.
Yeah even with demand side, wages might be rising unequally, the poorest people first which means suddenly the middle class has to compete with the poor for goods. Since the middle class has more stable jobs that they don't negotiate as often as the poor, there might be a lag on the upward effect on their wages but overall central bank easing, all else equal, is upward push on real wages, especially of the poorest, until "menu costs" start hitting (all else not being equal makes this confusing).
I shudder to think what would have happened if the covid shock had been paired with under-stimulative central banks like in the aftermath of the 2008 crisis. The disaster would have made the 2010s look like the good years since the initial shock was much bigger. I acknowledge that central banks now seem to be overdoing it, however.
The risk of actually getting into hyper-inflation is why I've always felt that the "mint the coin" move, as retaliation against GOP debt-ceiling shenanigans, should be kept on the table, but understood as incredibly dangerous, and _always_ paired with, "We'd be happy to pass a law that abolishes both infinite seignorage and the debt ceiling."
Interesting read - i liked the juxtaposition of US and EZ inflation. Greater demand boost in US seems like a plausible explanation. One small correction: Laurence Boone is a woman.
Being in the middle of Steve Keen’s book, “The New Economics: a Manifesto” I knew that he had anticipated the Great Recession and that he is a “non-orthodox” economist. Noah writes that basic macroeconomics is Keynesian macroeconomics, but there is a lot of Neoclassical economics in this post. Some examples: there is praise for Bernanke and QE, liberal use of supply/demand curves, and reference to the natural rate of unemployment which MMT criticizes because, for one reason, it leaves out the goal of full employment.
It would have been instructive to include views on inflation from Keen’s new economics and MMT.
Demand shift from services to goods is playing a big role. See Mattthew Klein on “The Overshoot”. Different packaging and distribution channels also even for the same products if consumed at home or at an office/restaurant
Occam’s Razor would suggest that handing out checks to people is a pretty good way to create inflation
It would, but that didn't happen in the Great Recession, and that's a big mystery.
A week ago WaPo ran an Opinion piece by conservative Henry Olsen. He said the cause of inflation is normal people having money. You see, President Biden has been giving them money as Covid relief, the Child Tax Credit, and stimulus checks. Once they had it, these people bought some things. (Joe Manchin, honorary Republican Senator, speculated that West Virginians were just buying drugs). But Olsen revealed that, even worse, many of them were also saving money! A West Virginia woman interviewed recently during a podcast said she hardly knew how to express how important the money has been for her family. They are able to save some of it so they, “Didn’t have to live paycheck-to-paycheck now.” And for the first time in their lives they were able to buy 4 new tires for their car all at one time! However, like Zack, Mr. Olsen had some bad news for them. He said that this kind of thing HAS. TO. STOP!
I always thought I was "normal people" until today!
No one who comments on the internet is "normal people". Particularly on specialized blogs.
I'm not familiar with Manchin's speculation and if that's his full thoughts on the matter it's clearly an overly narrow focus. But it's worth pointing out that in the 12 months ending March 2020 the CDC says there were 965 drug overdose deaths in WV. In the 12 months ending March 2021 that same stat rose to 1,558. Nationally the jump was from 70,000 to 100,000. It's fair to be concerned by that rise, as no one seems to no what caused it exactly, it's only fallen slightly on a monthly basis, and progressive left explanations are just as hand-wavy, if not even a bit more so, than right-wing partisan explanations.
https://www.cdc.gov/nchs/nvss/vsrr/drug-overdose-data.htm
I think the discussion of what’s happening to AD needs a closer look than just “what’s the current stance of fiscal and monetary policy? Loose? AD must be rising then”. A key component of AD is private sector borrowing from banks.
Sometimes (2008) you have an impaired banking system that won’t lend, and households/businesses (frightened by recession and with weak balance sheets) that won’t borrow… you can cut interest rates to zero and do a bucket load of QE, net bank lending will remain negative and the impact of these monetary policy moves on AD will be limited. That leaves fiscal policy / government spending as the only game in town. The 2008 fiscal stimulus was insufficient and the economy stagnated.
In other circumstances (2021?), household balance sheets are strong and corporate profitability is high because of muscular gov bailouts early on. Loose monetary policy spurs demand for housing and mortgage lending accelerates - this results in a more rapid increase in the money supply and then rising spending across the economy. Eventually we hit supply constraints, and inflation rises.
Yes I think that's the basic story here.
I'd offer that the standard macroeconomic models, in my understanding, are classic continuum differential equation models in time. But "expectations" are really due to time-offset factors, and as Noah knows delay differential equations are typically difficult to solve, and more so as the time difference gets longer. In other words the math being used here is not correct for the problem of inflation high enough to invalidate non-delayed models. In other words if you invoke "expectations" you can't use single time-continuous models.
Perhaps...
Just because DDE's are often difficult to solve symbolically does not mean that they don't often resolve to relatively simple equations. Not to mention that they _all_ are easily solved numerically and some are easily solved symbolically.
You didn't mention the biggest supply shock which is the supply of plague free local services. Only a very poor substitute is available, one where we are forced to risk people's health when consuming.
> "At what point do these price increases stop simply being a drag on wages"
You should distinguish supply side inflation which are a "drag on wages" from demand side inflation caused from central banks which are prices rising _because_ aggregate income is rising.
Yeah even with demand side, wages might be rising unequally, the poorest people first which means suddenly the middle class has to compete with the poor for goods. Since the middle class has more stable jobs that they don't negotiate as often as the poor, there might be a lag on the upward effect on their wages but overall central bank easing, all else equal, is upward push on real wages, especially of the poorest, until "menu costs" start hitting (all else not being equal makes this confusing).
I shudder to think what would have happened if the covid shock had been paired with under-stimulative central banks like in the aftermath of the 2008 crisis. The disaster would have made the 2010s look like the good years since the initial shock was much bigger. I acknowledge that central banks now seem to be overdoing it, however.
But that shock has now mostly worked itself out (Omicron willing), and inflation is still rising.
The risk of actually getting into hyper-inflation is why I've always felt that the "mint the coin" move, as retaliation against GOP debt-ceiling shenanigans, should be kept on the table, but understood as incredibly dangerous, and _always_ paired with, "We'd be happy to pass a law that abolishes both infinite seignorage and the debt ceiling."
Interesting read - i liked the juxtaposition of US and EZ inflation. Greater demand boost in US seems like a plausible explanation. One small correction: Laurence Boone is a woman.
Is Japan still considered kind of a mess by macro-economists?
If so what would be the best next step?
Do you think Biden should have nominated Nakamura to the Fed? I would love to see a post where you compare her to other nominees.
Being in the middle of Steve Keen’s book, “The New Economics: a Manifesto” I knew that he had anticipated the Great Recession and that he is a “non-orthodox” economist. Noah writes that basic macroeconomics is Keynesian macroeconomics, but there is a lot of Neoclassical economics in this post. Some examples: there is praise for Bernanke and QE, liberal use of supply/demand curves, and reference to the natural rate of unemployment which MMT criticizes because, for one reason, it leaves out the goal of full employment.
It would have been instructive to include views on inflation from Keen’s new economics and MMT.
Time for some policy experiments!
Universal Basic Income, but with the values of monthly checks inversely tired to inflation
Demand shift from services to goods is playing a big role. See Mattthew Klein on “The Overshoot”. Different packaging and distribution channels also even for the same products if consumed at home or at an office/restaurant
Yes, sure, but notice that service consumption remains relatively robust even as goods consumption increases.
OK this is totally unrelated to this post, but what language/script is that, below the "Stop! Go home!"
At first glance I was thinking Korean, but I changed my mind... I'm thinking maybe one of the Indic scripts?
I thought it was Hangul, but not sure!
Image search results it's Korean for "Children's Day." So Hangul seems likely, pending confirmation by someone who actually knows Korean.
It is Hangul 어린이날, which means Children's Day. Also corroborating is the date 5/5 to its left, which is the date of Children's Day in Korea.