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Collin C's avatar

As a non-economist statistician (in training), I've really been appreciating your real-time and extremely uncertainty-conscious coverage of these trends. Makes me wish a bit that I was doing macro right now!

However, I don't quite follow the logic about price controls here. If one set off a feedback loop of rising price expectations (e.g. with a nasty but convincing rumor) without changing the amount of goods which are demanded or which can be produced in the economy, it seems to me that short-circuiting the feedback loop by inserting a temporary but strict price control would do exactly the thing you want (stop the expectation feedback loop).

As long as you don't set the price level below their levels prior to the inflationary spiral, I don't see why this would lead to emptying store shelves (again assuming that the real levels of aggregate supply and demand are unchanged).

I can see why this kind of collapse would happen if aggregate demand were actually increasing (relative to aggregate supply). But isn't the "demand rising while supply struggles to catch up" scenario exactly the transitory scenario in which we're not so concerned anyway? So I don't understand why one couldn't say that either we have a transitory supply bottleneck, in which case we can just wait, or we have an expectation contagion which we can control with price controls?

I understand that in reality we probably have some mix of the two and some care should be taken in selecting a level for price controls that isn't too far from whatever equilibrium we would reach at the end of the transitory supply constraints, but that seems like an empirical problem, not a conceptual one. Anyway, as I said, I'm learning all this stuff as I go, so I'm really just curious to see what I might be missing here.

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Benoit Essiambre's avatar

>after you adjust for inflation it turns out that real wages are going down. That’s not good, and economists ought to be thinking much more about why nominal wages can’t seem to keep up when inflation spikes.

I mean, I don't know if this generalizes, but in this case specifically, how can you not blame the covid 19 crisis which reduced global output as things were less efficiently produced under covid restrictions?

Isn't it normal, when there is less to buy, that prices should rise a little?

Isn't it the best case scenario, for central banks to let prices adjust upwards a bit (and real wages adjust downwards a bit, fixing the problem of nominal rigidities) instead of wage stickiness resulting in chaotic rifts in the labor market where, yeah, some might have kept a few percentage more of real wages but many others' wages would have dropped to zero as they succumbed to unemployment.

The global pie was shrunken by covid, a slight adjustment in real prices, is probably the smoothest way for the smaller pie to get distributed. Keeping employers starved for labor is the best way to speed up the recovery.

Real unexpected supply constraints should cause a bit of inflation, even when central banks are not over-printing. In such an broad crisis, the best we might be able to do is to work on solving those production inefficiencies. We should not have central banks throw a monkey wrench in the labor markets to prevent temporary price adjustments that should be happening given the very real circumstances. Prices can rise, and real wages can drop, even under insufficient monetary aggregate demand, if the problems are physically real, not just nominal.

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