We have had very strong recovery, with robust job creation. Inflation is problematic, but it's problematic world-wide, which suggests the problem isn't the creation of any one politician or party *in America*. And wage growth—especially at the lower end—has been good, too, which has limited the erosion in real wages.
And yes, as others have pointed out, federal borrowing has been declining. (Oh, and daily Covid deaths are down 96% since Trump left office.)
On the whole America has improved a lot since Biden became president.
As you can tell from the following comment, the right-wing folks aren't interested in facts, only in pursuing their ideology, just like far-left folks.
And exactly how deregulating the economy would reduce inflation?
Also, I think you conservatives are missing the point on deregulation. Most of those business strangling, stupid messy regulation are actually city and state regulations. That's why for example, Texas is doing much better than California, they banned unnecessary regulations in their constitution.
Serious question, How does federal government is supposed to tell California or New York to stuff it without making laws that effect Texas?
"rather deficits paid for via money printing will almost certainly do that" - specifically, *monetizing* a deficit, i.e. paying for your own bonds with your own dollars, does that. And the mechanism is not "oh boy there are more dollars in the economy: you need to know where the dollars are going. If no workers are getting those dollars, if they all go to the rich, you get inflation in luxuries and assets instead of in groceries.
Too bad people have this silly belief that there is only "one" inflation. Again, undergrad econ teaches people boneheadedly wrong things.
Two ways to allocate a limited resource, by price or by rationing. (And rationing usually ends up with black or gray market and become price anyway). Whether corporations were greedy (which they are) or altruistic, if you don’t have enough good to provide everyone, you have to keep increasing prices until you do.
That was intentional. When you do that, you get a bunch of headlines about how so many people want your product that you're cleaned out and there's this secondary market forming. What's lost in early-stage profits is made up severalfold in that free advertising.
It's interesting, and I think it just underscores that we don't know how the macroeconomy really works, and there are lots of things out there that are more complicated than simple models would suggest.
Krugman actually hangs out with central bankers and policy economists, so he knows about things like expectations. And his Nobel work proved he also knows that the real world is monopolistic. The "simple models" you've been using are basically 19th-century philosophy. Of course they're wrong!
I remember joking about what happens when you bring SF style housing political debates to food. "Stop allowing only market rate food to be sold, only *affordable* food allowed". Of course, followed by debates about who is allowed to access the "affordable" food.
Didn't think it would become real... but we're most of the way to "baby formula, but for whomst"
I think any kind of corporate tax will curb demand, which will act against inflation while slowing growth. It wouldn't be too different from rate hikes.
Thanks a bunch for clarifying the issue. So my non-expert takeaway would be that
* there is real scarcity now in some entrants of the supply chain, AND
* market power matters also matters:
- those in the supply chain that are in position to reflect cost of inputs into their sales, and a bit more, actually benefit from the instability ; and
- those that don't have market power can't reflect their higher costs into higher pay/profit.
So increase in entrants costs just gives market power/weakness a chance to express itself. Sort of accelerating existing trends.
Good summary. Another aspect of your latter point is the effect of inflation on household budgets leading to changes in the components of demand. People still buy gasoline (maybe drive a little less), but they buy fewer fancy desserts at the bakery and fewer fancy coffee drinks at the drive through, eat out less and dispense with other things (holding on to their cars longer). So market power has to do with what you're selling, not your dominance in your market niche. If you're the only bakery in a small town (my favorite is in Turner, Oregon), your monopoly status doesn't matter much if your customers aren't showing up or they're buying fewer cinnamon rolls.
Warren is a good example of "you either die the hero or live to become the villain." She went from "proud capitalist" with some great ideas on combating rentiers and corruption to someone who proposes economically illiterate plans and spouts the latest idiotic leftist rhetoric.
That's a nice thought, but her "proud capitalist" rhetoric was always a sham. She used that phrase as part of a justification for raising tax rates to pay for lefty priorities.
Her big issue prior to election was "medical bankruptcy", and she worked with others to generate a series of studies purporting to show that "medical issues" were behind most personal bankruptcies, but she and her co-authors were careful, in their public statements, to hide the fact that their own studies showed that "medical issues" were mostly about loss of income, not about medical bills.
She's always been about proposing economically illiterate plans to implement idiotic leftist rhetoric.
“But such allegedly cheap talk has become very expensive… Even if it rousing anti-corporate sentiment were good for Democrats’ electoral prospects (which I highly doubt), it pushes Democrats’ governance toward questionable policies.”
Even without explicit price controls, hoarding of resources by consumers is facilitated by the fact that sentiment alone generally prevents merchants from raising prices of goods to reflect a sharp increase in demand, resulting in an inefficient allocation of available resources (see the toilet paper crisis of 2020, hurricane preparation, etc.). Profits also provide incentive for new entrants or incumbents to invest in meeting the supply shortfall that cause high prices. For these and many other reasons, price controls are bad economic policy.
I voted for Warren in the Democratic primary because her ideas were firmly rooted in economic theory and research, or at least I perceived them to be then. This is obviously bad policy to anyone who understands economics better than Trump does – which is to say, at all. And these are the same populist rhetorical devices that comprise Trump’s entire political playbook, which supporters of Warren almost certainly detest about Trumpism and the MAGA movement.
Whether or not progressives actually believe their rhetoric on this subject is immaterial. I believe the political cost of advancing such horrible policy will be more immediate than Noah suggests. I, at least, already know I won’t vote for Warren again. I'm sure others now see her as the villain, too.
Good explanation of price controls and their likely effects. One item that I think deserves comment: the FRED chart on corporate profits would seem to indicate that evil corporations have found ways to manipulate the economy to extract greater profits over the last 20 years, at the expense of workers and consumers. This may be true, but this statistic is driven mainly by something entirely different: the increase in the number of S Corporations.
Brief explanation: "S Corporations" are allowed by Subchapter S of the Internal Revenue Code. The requirements to qualify as an S Corporation mean that nearly all S Corporations are small businesses, with fewer than 100 employees, and small numbers of shareholders (often only one). The advantage of S Corporations is that they are exempt from federal corporate income taxes, and from state income taxes in most states. Instead, their profits are passed directly to owners' income, and the owners pay personal income tax on the business profits - this eliminates the "double taxation" of corporate profits.
From 2000 to 2017, the number of S Corporations increased from 2.9 million to 4.7 million, an increase of 62%. During the same time, the profits of the S Corporations increased from $199B to $578B, an increase of 191%. Profits of non-S Corporations (nearly all conventional "C" Corporations) increased from $788B to $1,078B an increase of 37%. All figures are nominal dollars, and pre-tax. See https://www.bea.gov/system/files/2021-05/prototype-nipa-estimates-of-profits-for-s-corporations.pdf, table 1 on page 12. During the same period, US nominal GDP increased from $10,252B to $19,543B, an increase of 91%.
So, "corporate profits" before tax actually decreased as a percent of GDP from 9.6% to 8.5% of GDP, but non-S Corporation profits decreased from 7.7% of GDP to 5.5% of GDP. These figures don't match the FRED chart Noah showed, which also claims to be based on BEA data - I don't know enough about this data to know whether the difference is all due to "IVA and CCAdj" as indicated on the FRED chart, or whether there's a more fundamental difference. (It's also odd that FRED's chart shows after-tax profits higher than the BEA paper's pre-tax profits.) My point is that growth in "corporate profits" is mostly due to increase in "S Corp" profits, which is mostly due to the increase in the number of "S" corporations. It is not possible to know for sure, but this probably reflects mostly a change from sole proprietorships and partnerships to "S" corporation structure, not a redistribution of profits within the economy.
Noah, firms' percentage profit margins aren't even mentioned here until the third to last paragraph! A key piece of evidence for opportunistic price-gouging, really surprised you don't include it in your explanations. Corp profits/GDP seems much less pertinent.
Hi Noah. What do you think of price controls on healthcare services and pharmaceuticals? It seems to me this is part of how Western Europe keeps healthcare costs lower than in the U.S.
'If you think inflation is being caused by a negative supply shock, then the “greedflation” story just doesn’t make sense at all. ' You're assuming that we have homogenous markets (e.g. "all goods come from China"), no expectations, and no such thing as price elasticity - basically your explanation is all the things in first-year econ that are proven wrong by grad school. In fact you can still have "greedflation" when people hear of isolated pockets of inflation (trucking costs, oil, Chinese-made house construction materials) and extrapolate that into an expectation that peaches grown 1 state away will cost 50% more. Retailers have been exploiting this to jack up prices on things that have seen no supply shock. It'd be nice to look at the details of retail inventories to see if they're screwing themselves right now.
Corporate profit margins are doubling? There's no way to call this anything but Greedflation. How can you say raising prices does not increase inflation?
Technically it's only inflation if it can be maintained. If they have to back off 6 months from now because they're flooded with excess inventory because consumers' incomes are hard-limited and so they have no extra money to spend, then it's really just another type of transitory supply shock.
Noah, terrific report, thank you! I had a thought, does the answer really rely on the bargaining power of capital/retirees versus the bargaining power of consumers/labor? Why does capital seem to me to be able to preserve their returns and consumers/labor do not? Does their stock of wealth (relative to income) give them an advantage in bargaining over consumers/labour's presumably smaller stock of wealth relative to income. Briefly, why does the latter group take the hit (Inflation) rather than reduced returns to capital?
Would love comments from you and the group! Thanks!
A recession will likely start by 2023, so it's even worse - you're going to have Trump win in 2024, unless Biden manages to do the impossible (win an election while incumbent during a recession).
Is anyone left in Washington who wants to fight inflation by reducing deficits and deregulating the economy?
Well, we did reduce deficits in recent months. A lot.
Stated another way: Biden was awesomely irresponsible in 2021 and is now just being merely irresponsible. Not a real answer to the question.
Tell us Noah, what is the CBO projection for deficit over the next 10 years?
***Biden was awesomely irresponsible.****
Seems wrong.
We have had very strong recovery, with robust job creation. Inflation is problematic, but it's problematic world-wide, which suggests the problem isn't the creation of any one politician or party *in America*. And wage growth—especially at the lower end—has been good, too, which has limited the erosion in real wages.
And yes, as others have pointed out, federal borrowing has been declining. (Oh, and daily Covid deaths are down 96% since Trump left office.)
On the whole America has improved a lot since Biden became president.
"Awesomely irresponsible" apparently means "trying to help ordinary people," right? Ad don't forget the republicans voted for the relief acts too.
So your argument is that the republicans are just as bad as Biden?
OK, I can accept that!
As you can tell from the following comment, the right-wing folks aren't interested in facts, only in pursuing their ideology, just like far-left folks.
And exactly how deregulating the economy would reduce inflation?
Also, I think you conservatives are missing the point on deregulation. Most of those business strangling, stupid messy regulation are actually city and state regulations. That's why for example, Texas is doing much better than California, they banned unnecessary regulations in their constitution.
Serious question, How does federal government is supposed to tell California or New York to stuff it without making laws that effect Texas?
> reducing deficits
lol
> and deregulating the economy
double lol
We're just trying to constrain the damage these days.
"rather deficits paid for via money printing will almost certainly do that" - specifically, *monetizing* a deficit, i.e. paying for your own bonds with your own dollars, does that. And the mechanism is not "oh boy there are more dollars in the economy: you need to know where the dollars are going. If no workers are getting those dollars, if they all go to the rich, you get inflation in luxuries and assets instead of in groceries.
Too bad people have this silly belief that there is only "one" inflation. Again, undergrad econ teaches people boneheadedly wrong things.
Two ways to allocate a limited resource, by price or by rationing. (And rationing usually ends up with black or gray market and become price anyway). Whether corporations were greedy (which they are) or altruistic, if you don’t have enough good to provide everyone, you have to keep increasing prices until you do.
For a good example of what happens with rationing in real life, see the launch of PS5 or Nvidia's video card sales in 2020...
That was intentional. When you do that, you get a bunch of headlines about how so many people want your product that you're cleaned out and there's this secondary market forming. What's lost in early-stage profits is made up severalfold in that free advertising.
Making people stand in line for a good reduces the price of a good!!
Also, what do you think of Krugman's thread on this? In particular, that it's plausible that companies feel more free to raise prices because everybody else is doing it too? https://twitter.com/paulkrugman/status/1525838267916091395?t=CLlZww1O18oN6arfR2LP2w&s=19
It's interesting, and I think it just underscores that we don't know how the macroeconomy really works, and there are lots of things out there that are more complicated than simple models would suggest.
Krugman actually hangs out with central bankers and policy economists, so he knows about things like expectations. And his Nobel work proved he also knows that the real world is monopolistic. The "simple models" you've been using are basically 19th-century philosophy. Of course they're wrong!
I remember joking about what happens when you bring SF style housing political debates to food. "Stop allowing only market rate food to be sold, only *affordable* food allowed". Of course, followed by debates about who is allowed to access the "affordable" food.
Didn't think it would become real... but we're most of the way to "baby formula, but for whomst"
What do you think of the windfall tax idea? Do you agree with Rampell that it would reduce output?
I think any kind of corporate tax will curb demand, which will act against inflation while slowing growth. It wouldn't be too different from rate hikes.
If they're politically popular, then it sounds like a not-so-bad idea?
Thanks a bunch for clarifying the issue. So my non-expert takeaway would be that
* there is real scarcity now in some entrants of the supply chain, AND
* market power matters also matters:
- those in the supply chain that are in position to reflect cost of inputs into their sales, and a bit more, actually benefit from the instability ; and
- those that don't have market power can't reflect their higher costs into higher pay/profit.
So increase in entrants costs just gives market power/weakness a chance to express itself. Sort of accelerating existing trends.
Hope I got this right.
That could be true!
Good summary. Another aspect of your latter point is the effect of inflation on household budgets leading to changes in the components of demand. People still buy gasoline (maybe drive a little less), but they buy fewer fancy desserts at the bakery and fewer fancy coffee drinks at the drive through, eat out less and dispense with other things (holding on to their cars longer). So market power has to do with what you're selling, not your dominance in your market niche. If you're the only bakery in a small town (my favorite is in Turner, Oregon), your monopoly status doesn't matter much if your customers aren't showing up or they're buying fewer cinnamon rolls.
Warren is a good example of "you either die the hero or live to become the villain." She went from "proud capitalist" with some great ideas on combating rentiers and corruption to someone who proposes economically illiterate plans and spouts the latest idiotic leftist rhetoric.
That's a nice thought, but her "proud capitalist" rhetoric was always a sham. She used that phrase as part of a justification for raising tax rates to pay for lefty priorities.
Her big issue prior to election was "medical bankruptcy", and she worked with others to generate a series of studies purporting to show that "medical issues" were behind most personal bankruptcies, but she and her co-authors were careful, in their public statements, to hide the fact that their own studies showed that "medical issues" were mostly about loss of income, not about medical bills.
She's always been about proposing economically illiterate plans to implement idiotic leftist rhetoric.
“But such allegedly cheap talk has become very expensive… Even if it rousing anti-corporate sentiment were good for Democrats’ electoral prospects (which I highly doubt), it pushes Democrats’ governance toward questionable policies.”
Even without explicit price controls, hoarding of resources by consumers is facilitated by the fact that sentiment alone generally prevents merchants from raising prices of goods to reflect a sharp increase in demand, resulting in an inefficient allocation of available resources (see the toilet paper crisis of 2020, hurricane preparation, etc.). Profits also provide incentive for new entrants or incumbents to invest in meeting the supply shortfall that cause high prices. For these and many other reasons, price controls are bad economic policy.
I voted for Warren in the Democratic primary because her ideas were firmly rooted in economic theory and research, or at least I perceived them to be then. This is obviously bad policy to anyone who understands economics better than Trump does – which is to say, at all. And these are the same populist rhetorical devices that comprise Trump’s entire political playbook, which supporters of Warren almost certainly detest about Trumpism and the MAGA movement.
Whether or not progressives actually believe their rhetoric on this subject is immaterial. I believe the political cost of advancing such horrible policy will be more immediate than Noah suggests. I, at least, already know I won’t vote for Warren again. I'm sure others now see her as the villain, too.
Good explanation of price controls and their likely effects. One item that I think deserves comment: the FRED chart on corporate profits would seem to indicate that evil corporations have found ways to manipulate the economy to extract greater profits over the last 20 years, at the expense of workers and consumers. This may be true, but this statistic is driven mainly by something entirely different: the increase in the number of S Corporations.
Brief explanation: "S Corporations" are allowed by Subchapter S of the Internal Revenue Code. The requirements to qualify as an S Corporation mean that nearly all S Corporations are small businesses, with fewer than 100 employees, and small numbers of shareholders (often only one). The advantage of S Corporations is that they are exempt from federal corporate income taxes, and from state income taxes in most states. Instead, their profits are passed directly to owners' income, and the owners pay personal income tax on the business profits - this eliminates the "double taxation" of corporate profits.
From 2000 to 2017, the number of S Corporations increased from 2.9 million to 4.7 million, an increase of 62%. During the same time, the profits of the S Corporations increased from $199B to $578B, an increase of 191%. Profits of non-S Corporations (nearly all conventional "C" Corporations) increased from $788B to $1,078B an increase of 37%. All figures are nominal dollars, and pre-tax. See https://www.bea.gov/system/files/2021-05/prototype-nipa-estimates-of-profits-for-s-corporations.pdf, table 1 on page 12. During the same period, US nominal GDP increased from $10,252B to $19,543B, an increase of 91%.
So, "corporate profits" before tax actually decreased as a percent of GDP from 9.6% to 8.5% of GDP, but non-S Corporation profits decreased from 7.7% of GDP to 5.5% of GDP. These figures don't match the FRED chart Noah showed, which also claims to be based on BEA data - I don't know enough about this data to know whether the difference is all due to "IVA and CCAdj" as indicated on the FRED chart, or whether there's a more fundamental difference. (It's also odd that FRED's chart shows after-tax profits higher than the BEA paper's pre-tax profits.) My point is that growth in "corporate profits" is mostly due to increase in "S Corp" profits, which is mostly due to the increase in the number of "S" corporations. It is not possible to know for sure, but this probably reflects mostly a change from sole proprietorships and partnerships to "S" corporation structure, not a redistribution of profits within the economy.
Noah, firms' percentage profit margins aren't even mentioned here until the third to last paragraph! A key piece of evidence for opportunistic price-gouging, really surprised you don't include it in your explanations. Corp profits/GDP seems much less pertinent.
Hi Noah. What do you think of price controls on healthcare services and pharmaceuticals? It seems to me this is part of how Western Europe keeps healthcare costs lower than in the U.S.
Why not raise the personal income tax? It’s at historically low levels and likely contributing to inflation by inducing demand.
Realize it’s not popular, but if there was ever the time, this would be it.
One way to raise tax revenue without bumping up rates is to reduce available deductions.
'If you think inflation is being caused by a negative supply shock, then the “greedflation” story just doesn’t make sense at all. ' You're assuming that we have homogenous markets (e.g. "all goods come from China"), no expectations, and no such thing as price elasticity - basically your explanation is all the things in first-year econ that are proven wrong by grad school. In fact you can still have "greedflation" when people hear of isolated pockets of inflation (trucking costs, oil, Chinese-made house construction materials) and extrapolate that into an expectation that peaches grown 1 state away will cost 50% more. Retailers have been exploiting this to jack up prices on things that have seen no supply shock. It'd be nice to look at the details of retail inventories to see if they're screwing themselves right now.
Corporate profit margins are doubling? There's no way to call this anything but Greedflation. How can you say raising prices does not increase inflation?
Raising prices IS Inflation.
Technically it's only inflation if it can be maintained. If they have to back off 6 months from now because they're flooded with excess inventory because consumers' incomes are hard-limited and so they have no extra money to spend, then it's really just another type of transitory supply shock.
Noah, terrific report, thank you! I had a thought, does the answer really rely on the bargaining power of capital/retirees versus the bargaining power of consumers/labor? Why does capital seem to me to be able to preserve their returns and consumers/labor do not? Does their stock of wealth (relative to income) give them an advantage in bargaining over consumers/labour's presumably smaller stock of wealth relative to income. Briefly, why does the latter group take the hit (Inflation) rather than reduced returns to capital?
Would love comments from you and the group! Thanks!
John
Yes, it's all really about power. Galbraith knew this and so did the New Institutionalists. That's why they're not taught at university.
Just great. What I get out of your post is that there’s nothing the Democrats can do except hand the government over to the Republicans in the fall.
A recession will likely start by 2023, so it's even worse - you're going to have Trump win in 2024, unless Biden manages to do the impossible (win an election while incumbent during a recession).
Great post! Always love it when graphs are included. I just want to disagree on the “nobody really believes it”:
https://twitter.com/SenSanders/status/1525162536454303744
I don’t think he could have said it more clearly.