Jun 6, 2022Liked by Noah Smith

This is a bit off-topic to the current article, but is there any chance you'd do a similar writeup of what the Russia sanctions are meant to be achieving economically? At first we were told to stop buying oil and gas to starve Russia of money, and the ruble would crash. Now, it seems that the import sanctions are causing foreign reserves to pile up needlessly, with Russia having nothing to spend them on, but also that they will run out of reserves to prop up the ruble – and if it's the case that foreign currency can't be spent, does it matter that much whether oil and gas are embargoed.

I understand the general contours of the strategy – we don't want them to have money OR places to spend it, and we especially want to cut them off from parts needed for advanced manufacturing, which is what import controls do – but it would be good to hear from an economist how all these elements interact and what we should be seeing if they're working or aren't.

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Jun 6, 2022Liked by Noah Smith

Too bad the child tax credit will be a victim of this as well.

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What’s the best piece you recommend to understand how much of inflation is supply chain costs vs monetary policy?

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Trying to attribute all current inflation to one cause is insane.

1. Yes, it's likely CARES+ARP had their own contributions.

2. Don't forget the tax rate and bracket changes from 2018.

3. Reduced energy use during the pandemic, and the post pandemic shock.

4. Energy market impacts from Ukraine-Russia. Remember that February 24th is not the appropriate date to assess these, as impacts started before the actual invasion (and then only got worse from there)

5. Supply shocks of other types, paired with post-pandemic demand shocks.

6. The overstocking of inventory post-pandemic, as the type of demands shifted, and business comfort with the risk of maintaining minimal inventory was disrupted by pandemic, supply issues, and general uncertainty.

Those last two are vastly under-researched from what I've seen. I'd suggest looking into those as a cause.

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If you want to look at "a relationship between inflation and disposable income," why would you call it a (modified) Phillips curve? It's something else entirely, isn't it? Is it just because they employ a similar algebraic method?

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People spent a decade yelling about how Obama hadn't done enough stimulus after the Great Recession. Now they'll spend a decade yelling about how Biden did too much. Fighting the last war, and all that. Thanks for the write-up!

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Jun 6, 2022·edited Jun 6, 2022

The behavior of the "economy" is way too complicated for any broad predictions to be anything more than guesswork. The moment some model works for something, there are foundational, structural shifts and a million little things happen, many of them never even identified. To try and understand all of economics and politics and group psychology, etc etc. is to grasp for god-like omisicience.

Proof of this Tolstoyian view is the variety of contradictory explanations churned out by economists.

In narrow circumstances, sure, we can see causes and effects, but hindsight is really the best anyone can do, and it is indeed 50/50.

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Is it really that hard to ground macroeconomics on actual microeconomic facts?

I mean, aren't we in the era of big data and high performance computing? We have data for wages, consumer spending, energy costs, corporate profits, international trade flows, government spending, etc.

Theoretical mathematics that are little more than sophisticated correlations have the whole field unable to answer even the most basic questions about minimum wages, inflation, employment and housing.

This is just the latest evidence of a broken field of knowledge. If economics can't provide replicability, predictability and causality then it should just accept what it really is: "ex post facto economicist history".

I wonder if your use of the Phillips curve allusion is meant to be ironic given how useless it has proven to be.

Disciplines that use microeconomics like marketing constantly use consumer behavior in much more productive ways than macroeconomics.

Consumers paid off their debts, were weary of losing their jobs and were staying home for a while. Then things started changing.

If Democrats give up on their policy goals because of inflation it will be the Reagan 80s all over again. This is what we are already seeing in Congress.

Yes there should be a lot more national production (including training workers in the services sector) but that narrative will not fly either if Democrats don't attack the kind of market fundamentalism that relies on basically unproven theories meant to kneecap the left.

The public is ready to vote against trickle down because the evidence has been overwhelming, but it is not yet ready to completely back a bigger government role in the economy unless Democrats make the case that capitalism has inherent flaws in fixing supply and demand during situations of external and assymmetric shocks.

The private sector is too slow during war, famine and pestilence. A further issue is that globalization makes supply chains too complicated in a way that endangers the national interest. The European Union is a good example of how to address these discussions.

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This seems like an incomplete analysis of the pros and cons of the American Rescue Plan. Up until recently, it seemed like GDP growth was all that mattered, and any policy that improved growth was a good thing. But recently, even though GDP is growing at a decades-high rate, we only hear about the decades-high inflation rate (maybe they are related?). All we hear is that inflation is hurting workers and consumers. But what have been the effects of inflation on businesses?

GDP grew by about 12% in nominal terms last year. Some of that went to employees, but apparently not enough to outweigh inflation. So where did all the money from increased prices go? I have been reading a lot about high profits and high profit margins, so it seems that the supply-side made out quite well from the American Rescue Plan, with benefits easily outstripping inflation for businesses.

So is that how it works? If a Republican economic plan increases GDP growth and profits, they get political credit and rewards, even if the typical worker sees no benefits. But if a Democratic economic plan increases GDP growth, it doesn't matter. Before we deem the American Rescue plan a mistake, we should at least be clear about all the effects, and judge both parties using the same standards.

I agree that inflation is an issue. It might lead to a wage-price spiral and stagflation. It might also lead to a profit-cost spiral, where businesses raise prices by more than the increase in costs in order to maintain profit margins. The inflation debate needs to expand beyond a narrow focus on how inflation affects the poor to a larger discussion of how inflation affects the distribution of income between rich and poor.

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The Fed Govt. should have simply paid** essential bills (estimated) for locked down (non-essential) workers , as well as businesses closed by the pandemic, during the pandemic. Then no-one would have gone backwards or starved.

** by changing the digits in the bank accounts of the affected workers and businesses., hence no increase in govt. debt., and no increase in money supply. which might later cause inflation

So that now any inflation would obviously ALL be due to supply (and war) blockages, plus sick-worker issues....and the idea of the Fed. increasing interest rates to deal with supply problems would obviously be idiotic.

See how inadequate NAIRU neoliberalism is, especially in a pandemic? That's why Summers and orthodox economists like him were/are not worth listening to.


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What we learned is that Larry Summers wanted less spending in 2009 (which he got) and he was wrong and that he wanted less spending in 2021 (which he didn't get) and he was right.

Bottom line: Larry Summers is as perspicacious as a flipped coin.

My other bottom line: we will always spend too little or too much in the face of these types of economic crises and the answer will become pretty clear in the aftermath. But never before or during. All you can do is place your bets on whether you think excess unemployment or excess inflation is worse.

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One thing missing here is the impact inflation has on debt. Additionally, housing appreciation and the dip into savings we saw that followed to spur additional spending. My theory is that the stimulus was equal to the loss in GDP from Covid, but Covid limited the things we could spend on therefore creating inflation on those things, i.e. durable goods. That, coupled with supply issues are the main reasons for inflation. The fiscal stimulus was poorly designed, but not a bad idea.

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Inflation is a worldwide phenomenon—its highly unlikely that the ARP caused the inflation in Europe too.

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Predicting the economy is more calculated guessing than accurate forecasting.

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An addition to inflation may be shift in product demand. The supply chain aligned to deal with "At Home", then moved to "Ignore COVID". Fuel that with extra cash. Retailers had a hard time planning out SKUs that would be in demand. Leading to overstock in some things, shortages in others.

We may also be seeing further influence of TFP gains in TMT, but limited gains in other sectors (Baumol’s cost disease). There are only so many goods the increase of TFP and money supply can buy. Perhaps we are seeing a disproportionate consumption of lesser productivity services - leading to inflation in those services since they are at productivity limits.

In general, to much cash in the system leads to moral hazard that sends odd signals into the supply chain. Leading to bullwhips. Larry Summers is particularly tuned into the flows and dashpots in the economy. When Washington develops a brilliant plan, and Summers demurs, I tend to listen to Summers.

While I am not fully onboard with "Supply Side Progressivism" (Has not solved the coordination problem), it is "Time to Build". Venture Capital is currently a $700B asset class, concentrated in SF. If it were more like a 4T asset class and active in every state of the union, we would see a much higher level of innovation, in every sector. Innovation is ultimately a deflationary and equalizing force.

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Want a well run country, better deal with supply side to even as country does well, doesn't get eaten up by bloated industry, land rents, cartels etc

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