Macroeconomics is waking up and not a moment too soon. Olivier Blanchard, a prominent macroeconomist, has started an important conversation about the power dynamics behind inflations and solutions.
Perhaps a minor quibble, perhaps not so minor: re: Point 5, as creator of U.S dollars, there is no need for the Federal government to impose new taxes to finance subsidies aimed at reducing prices of key commodities, and the government doing so in no way burdens future generations.
"Unfortunately, this requires more trust than can be hoped for and does not happen."
The "Spirit" most lacking in the USA now is TRUST. Remedial policies by elected officials would be wonderful. In their absence the Fed is the only game in town.
(Really in the year past Biden had a bit of extraordinary and unanticipated luck that totally eluded Obama.) Elected officials have either (1) Totally been captured by corporate desires, or (2) been totally swept up by (juvenile) diversionary culture issues, or (3) thrown off the bus as actual, practical governmental interventions are derided as "socialist" or "communist." No wonder there is little trust in government. How will this vicious cycle be broken?
"Outrageously, we leave fighting inflation to the Fed alone. An unelected, unaccountable group decides who wins and loses. Seriously??"
The Fed is, by design, an aristocratic institution inimical to labour. That this "unelected, unaccountable group decides who wins and loses" is no accident -- it's doing the dirty work of capital at the expense of labour. Every. Single. Time.
This is great (Blanchard's is worth reading but not as clear). The monopoly stuff matters and I also think the creation of software (currently used by corporate landlords) that allows landlords to get near real-time info on rent increases may be important in this discussion.
I disagree. Blanchard's views are worth considering. He is also one of the few macroeconomists who publicly reversed course on one of his beliefs. Specifically he pushed the IMF away from austerity. It was too late, but it mattered and has affect policy advice now.
Different perspectives add to our understanding, but this is not what students get from our mainstream economics schools. Sadly, much of the public discourse is led by media commentators and politicians with a unit of undergrad macro in their comms or political science degrees - and that is where the monoculture of mainstream economics schools insidiously reinforces the status quo.
The conversation has changed, and for the better, but there is still a long way to go. We need to reform our economics schools to allow more diversity of thought (and people…). It's time to stop pretending to study the economy as it is, and start designing the future economy as it should be.
Could you please explain how the inflation that has ravaged my homeland Zimbabwe since the mid-2000s results from “… firms, workers, [my addition: consumers, shareholders,] and taxpayers. It stops only when the various players are forced to accept the outcome.” Isn’t it more appropriate to say that Zimbabwe’s crazy hyper inflation resulted from Mugabe’s socialist government printing increasingly worthless money like mad in order to pay soldiers, veterans, and government employees? When those trillions of worthless Zim dollars got in the hands of the general public, boom, we had inflation. What on earth did firms, workers, and taxpayers (that’s a joke) have to do with it? Thanks and Happy New Year.
Hyper-inflation is an extreme case and it's clear that the Mugabe's government destroyed your homeland. He had the power and abused it. Olivier did not say who wins.
Keep in mind that, in large part, Zimbabwe’s hyperinflation was caused by the dual blows of Mugabe taking farms from experienced farmers and giving them to former soldiers who’d fought with him but lacked farming experience, coupled with a destructive drought. These combined to cripple the country’s agricultural capacity. The increase in the money supply was likely a response to increased food prices rather than the cause.
understood but Mugabe's government and other dictators are particularly bad at good policy. in another, better governed country it would have been much worse.
Ok…but which entity in society causes the severe disturbance you point to? I submit that 99% of the time the entity responsible for the severe disturbance is….government. Whether Mugabe seizing white-owned farms and business, or Hugo Chavez in VZ, or the Allied govts imposing impossible conditions on Weimar Germany post WWI, the party most responsible is….government. Again, not firms, workers, consumers, taxpayers, etc.
Blanchard is spouting utter nonsense. CPI/PCE inflation is driven by the real value of the dollar, for which the CRB Index is a "good enough" indicator. The Fed has the power to target and stabilize the CRB Index and thereby hold PCE inflation within a narrow range centered on 2.0% no matter what anyone else does.
So a little memory from, I think, the start of 2021. I recall hearing there was shortages of cream cheese. I shrugged, got a bagel with butter instead. But shortages shouldn't exist in the pure market model. If for some reason cream cheese runs short (either due to demand or supply issues), the price should just go up. The bagel shop should always have cream cheese, they may charge $5 more for it, but they will have it.
Blanchard, then, is saying here's where the power conflict starts. The bagel shop is opting not to just raise the price. I'm opting to instead just substitute butter. While this state of peace will last for a bit, sooner or later sparks will fly. The shop will demand I pay more, I will be confronted with that and decide do I fight back or demand my employer pays me more in exchange. Much like a single punch at a sporting event can quickly grow into a full blown riot, the action begins.
But before this point, suppose the gov't is smart and notices that there are some import quotas on cream cheese. By relaxing those, cream cheese can flow to the bagel shop (making them and me happy) but since the price doesn't go down, domestic cream cheese makers aren't too upset. This, though, requires a very smart government and a bit of luck that an easy fix just happens to be in the place where the first sparks are going off.
A more marco-monetarist view may say this is a bit like using sandbags to hold back a flooding river. Yes in theory if you had enough sandbags and put them just right you could hold off even a 100 foot cresting river but the reality is anything beyond a temporary barrier to hold off the surge is going to fail since the water will find some gap left and start pushing into it.
Too much money floating around will mean even if the cream cheese shortage is promptly fixed by a supply side policy that makes sense, that will only be a tiny boost to aggregate supply. The water (too much money) will soon find other places to start forcing its way in and unless there are massive, quick, reforms that can start a production boom almost immediately (such as in China in the 80's and 90's), you're going to throw in the towel and turn to the hammer of the central bank.
I have disagree with Olivier several times. That said, I always consider his views. He, not I, has the ability to change the mainstream thinking. In that spirit, his thread is extremely important.
Perhaps a minor quibble, perhaps not so minor: re: Point 5, as creator of U.S dollars, there is no need for the Federal government to impose new taxes to finance subsidies aimed at reducing prices of key commodities, and the government doing so in no way burdens future generations.
"Unfortunately, this requires more trust than can be hoped for and does not happen."
The "Spirit" most lacking in the USA now is TRUST. Remedial policies by elected officials would be wonderful. In their absence the Fed is the only game in town.
(Really in the year past Biden had a bit of extraordinary and unanticipated luck that totally eluded Obama.) Elected officials have either (1) Totally been captured by corporate desires, or (2) been totally swept up by (juvenile) diversionary culture issues, or (3) thrown off the bus as actual, practical governmental interventions are derided as "socialist" or "communist." No wonder there is little trust in government. How will this vicious cycle be broken?
"Outrageously, we leave fighting inflation to the Fed alone. An unelected, unaccountable group decides who wins and loses. Seriously??"
The Fed is, by design, an aristocratic institution inimical to labour. That this "unelected, unaccountable group decides who wins and loses" is no accident -- it's doing the dirty work of capital at the expense of labour. Every. Single. Time.
This is great (Blanchard's is worth reading but not as clear). The monopoly stuff matters and I also think the creation of software (currently used by corporate landlords) that allows landlords to get near real-time info on rent increases may be important in this discussion.
I disagree. Blanchard's views are worth considering. He is also one of the few macroeconomists who publicly reversed course on one of his beliefs. Specifically he pushed the IMF away from austerity. It was too late, but it mattered and has affect policy advice now.
Excellent work Claudia and much appreciated. Good accompanying dialogue as well. I’m still optimistic.
For a different perspective on inflation, I quite like this from Blair Fix: https://economicsfromthetopdown.com/2022/12/15/inflation-everywhere-and-always-differential/
Different perspectives add to our understanding, but this is not what students get from our mainstream economics schools. Sadly, much of the public discourse is led by media commentators and politicians with a unit of undergrad macro in their comms or political science degrees - and that is where the monoculture of mainstream economics schools insidiously reinforces the status quo.
The conversation has changed, and for the better, but there is still a long way to go. We need to reform our economics schools to allow more diversity of thought (and people…). It's time to stop pretending to study the economy as it is, and start designing the future economy as it should be.
Could you please explain how the inflation that has ravaged my homeland Zimbabwe since the mid-2000s results from “… firms, workers, [my addition: consumers, shareholders,] and taxpayers. It stops only when the various players are forced to accept the outcome.” Isn’t it more appropriate to say that Zimbabwe’s crazy hyper inflation resulted from Mugabe’s socialist government printing increasingly worthless money like mad in order to pay soldiers, veterans, and government employees? When those trillions of worthless Zim dollars got in the hands of the general public, boom, we had inflation. What on earth did firms, workers, and taxpayers (that’s a joke) have to do with it? Thanks and Happy New Year.
Hyper-inflation is an extreme case and it's clear that the Mugabe's government destroyed your homeland. He had the power and abused it. Olivier did not say who wins.
Right. Mugabe. Not firms, workers, or taxpayers.
Keep in mind that, in large part, Zimbabwe’s hyperinflation was caused by the dual blows of Mugabe taking farms from experienced farmers and giving them to former soldiers who’d fought with him but lacked farming experience, coupled with a destructive drought. These combined to cripple the country’s agricultural capacity. The increase in the money supply was likely a response to increased food prices rather than the cause.
understood but Mugabe's government and other dictators are particularly bad at good policy. in another, better governed country it would have been much worse.
Ok…but which entity in society causes the severe disturbance you point to? I submit that 99% of the time the entity responsible for the severe disturbance is….government. Whether Mugabe seizing white-owned farms and business, or Hugo Chavez in VZ, or the Allied govts imposing impossible conditions on Weimar Germany post WWI, the party most responsible is….government. Again, not firms, workers, consumers, taxpayers, etc.
General questions: have you found the comment moderating tools better in substack than other platforms? Is chat moderation different?
as the author, I have full control of moderation, very good!
Glad it is a safe space for you to contribute your knowledge. Your ideas are much appreciated!
Blanchard is spouting utter nonsense. CPI/PCE inflation is driven by the real value of the dollar, for which the CRB Index is a "good enough" indicator. The Fed has the power to target and stabilize the CRB Index and thereby hold PCE inflation within a narrow range centered on 2.0% no matter what anyone else does.
So a little memory from, I think, the start of 2021. I recall hearing there was shortages of cream cheese. I shrugged, got a bagel with butter instead. But shortages shouldn't exist in the pure market model. If for some reason cream cheese runs short (either due to demand or supply issues), the price should just go up. The bagel shop should always have cream cheese, they may charge $5 more for it, but they will have it.
Blanchard, then, is saying here's where the power conflict starts. The bagel shop is opting not to just raise the price. I'm opting to instead just substitute butter. While this state of peace will last for a bit, sooner or later sparks will fly. The shop will demand I pay more, I will be confronted with that and decide do I fight back or demand my employer pays me more in exchange. Much like a single punch at a sporting event can quickly grow into a full blown riot, the action begins.
But before this point, suppose the gov't is smart and notices that there are some import quotas on cream cheese. By relaxing those, cream cheese can flow to the bagel shop (making them and me happy) but since the price doesn't go down, domestic cream cheese makers aren't too upset. This, though, requires a very smart government and a bit of luck that an easy fix just happens to be in the place where the first sparks are going off.
A more marco-monetarist view may say this is a bit like using sandbags to hold back a flooding river. Yes in theory if you had enough sandbags and put them just right you could hold off even a 100 foot cresting river but the reality is anything beyond a temporary barrier to hold off the surge is going to fail since the water will find some gap left and start pushing into it.
Too much money floating around will mean even if the cream cheese shortage is promptly fixed by a supply side policy that makes sense, that will only be a tiny boost to aggregate supply. The water (too much money) will soon find other places to start forcing its way in and unless there are massive, quick, reforms that can start a production boom almost immediately (such as in China in the 80's and 90's), you're going to throw in the towel and turn to the hammer of the central bank.
All this discussion in Twitter reminds me of the work of the distinguished argentine economist Julio HG Olivera on structural inflation
I have disagree with Olivier several times. That said, I always consider his views. He, not I, has the ability to change the mainstream thinking. In that spirit, his thread is extremely important.