Some experts say we need a recession to bring high inflation down. That's incorrect. Their model of the economy and views on what's causing inflation risk making a bad situation much worse.
One thing I think is missing from the mainstream media that you've addressed here is supply issues. I think a lot of the more mainstream news sources for economic news fail to highlight the supply issue.
Instead, they focus on the Fed. To be fair, since the financial crisis and through the pandemic this has largely been true. However, now we are facing a different reality where supply is the issue not demand. Still, many of the experts and pundits seem to feel the Fed can somehow fix this with rates. Instead, I think the solutions here will need to come from Congress, the President, and business. As you've stated, the Fed can't increase supply, it can only stimulate/dampen demand--but if the demand is for non-discretionary goods like energy and food and there is a shortage of supply for these items, well we have a problem the Fed can't fix alone.
Jul 21, 2022·edited Jul 21, 2022Liked by Claudia Sahm
Thank you, Claudia, for this article. It answered some of my questions about the recent causes of inflation. The analysis of the Phillips Curve is interesting and I can see why it's so important to get it right.
Claudia: Nice article! You are nipping at the edges of the real issue in this debate and it is rare to see it acknowledged by economists...kudos!
Economics is a study of human behavior, not of really crappy attempts to measure things like wages, prices, and value like a physicist would mass. There are reasons why behavioral psychologists have won so many Nobel awards in Econ.
Economics has even bigger issues trying to measure changes over time as there are only so many bodies one can measure at once (referencing the 3-body problem). "Given all other things equal" is a lot like saying "this is largely irrelevant to the real world".
If one wants to predict the future of a market, it is the change in attitudes of people who own businesses, invest, save, work, or make purchases that make the difference. The Fed knows it's best tools are verbal jawboning, not interest rates or deposit decisions.
The other driver in this, as you also hint towards, is politics. The Fed is a political entity and claims of Fed Reserve independence is a real Laffer!!!
"raise taxes on the rich". a facile answer which means little. Do we increase payroll taxes on the rich people, as in those earning w2 income over 100k. Or on billionaires who will be able to avoid most of the increase over time. In the end the democrats plans are foolish because it will just penalize their version of the rich, anyone who makes 200k and over.
So another way to view this manufactured recession is as a cudgel to eviscerate the modicum of working class power that has been circumstantially revived domestically from the ashes of the New Deal. When we say a recession is "medicine that's worse than the disease", I think we should be conscious to ask ourselves "worse than the disease" for whom exactly? Cui bono? Who benefits?
If we look historically, we can see the heart and soul of labor power, a socially reinforced class consciousness, effectively poisoned at its root by Taft-Hartley and the red scare(s) with the final metaphorical nail in its coffin hammered in by the Volcker shock, the historical antecedent to the fed's response to inflation today. In other words, I would suggest that everything you're absolutely correct in highlighting is in fact very much the point. Because as illuminated in this general historical continuity and only further supported in its more granular details, to Wall Street and its backers, the solution to any price inflation is to reduce wages and public social spending aka austerity (seen globally enforced in the "structural adjustment" programs of the IMF/World Bank which create states of debt peonage and resource/labor capture for private US financial/corporate capital). The orthodox way to do this being to push the economy into recession in order to reduce hiring, and as the "reserve army of the unemployed" grows in its numbers, this will oblige labor to compete for jobs that pay less and less as the economy slows, as you've highlighted. Importantly though, this only increases the consolidation of political power to further serve the material interests of the capitalist class, particularly of finance capital (or as that Marx guy appropriately called it, "fictitious capital") made at the zero-sum expense of the working class.
This is class-war doctrine and it is the prime directive of neoliberal economics. It is the tunnel vision of corporate managers and the demonic arcons of the US empire ensuring we all perpetually serve their insatiable narrow short-term benefit, in the long term with compounding contradictions like runaway ecological crises ("externalities" to put on the neoclassical/neoliberal econ ideological blindfold), further consolidation of this money power of corporate/finance capital, etc. entrenching us ever closer past a threshold where collective escape velocity can no longer be reached and toward an inescapable singularity of "the common ruin of the contending classes" with its receding horizon of possibility or really any imaginable future at all.
Which is all to say, as usual, the actual choice for humanity, should we choose to reconcile with reality in any way shape or form at some point, is just as Rosa Luxemburg put it during the uprisings in 1918 Germany that led to the establishment of Weimar, essentially recapitulating a liberal capitalist state merely kicking out the Kaiser, before of course being executed by the freikorps paramilitary (later becoming the SS, shocker) at the behest of Ebert's ostensibly "social democratic" SPD and only resonating more firmly its essential truth as time marches on:
Great post. This aligns with thoughts I've had about the Phillips Curve. I'm not qualified for the discussion, but I like to follow as best I can, thank you for this.
I am also curious the extent to which you think the spike in the M2 growth rate in 2020 contributed to inflation. As I read the charts, the growth rate itself was back to normal already by the end of 1Q 2021. I know there are varying opinions regarding how central M2 growth rates are to inflation, and am curious.
One nit. Was that your highlighting in the quote about the effects of the great recession and various workers? The disproportionate affect of unemployment on men Is not highlighted. If it had been women, would it have been highlighted.
Excellent piece. I’m sympathetic to the idea it is both the fiscal push of pandemic relief and the breadth of supply chain problems, now personified by wage-push inflation. I suspect it is the latter that really troubles the Fed’s governors and it activates a political willingness to raise interest rates disproportionately. The next question is will it actually achieve its purpose, i.e., reduce pressure to increase wages?
I think you suffer from recency bias. your last memory of a recession was the GFC which was devastating because it was rooted in a financial crisis. not all recessions are that bad (2000 post dot-com as an example). you don't have a memory of high inflation judging by your picture (nothing wrong with this, I don't either) so you are guessing. at the extreme, inflation brings down countries (Sri Lanka right now). also, the situation is inherently way more complex than inflation or recession, choose your evil. Could you even have high inflation w/o a recession? Could a recession trigger even higher levels of inflation? also, how much of this is global vs domestic and therefore out of our policy makers' hands? this debate is oversimplifying the macro situation into some sort of illusion of choice between two outcomes.
Christopher Waller, a Fed Governor, writes: I anticipate a decline in inflation will come as actual and anticipated hikes by the FOMC cool demand for products and labor, which will help demand and supply come into a better balance.
Claudia, what does this mean? What is measurement for "balanced"?
One thing I think is missing from the mainstream media that you've addressed here is supply issues. I think a lot of the more mainstream news sources for economic news fail to highlight the supply issue.
Instead, they focus on the Fed. To be fair, since the financial crisis and through the pandemic this has largely been true. However, now we are facing a different reality where supply is the issue not demand. Still, many of the experts and pundits seem to feel the Fed can somehow fix this with rates. Instead, I think the solutions here will need to come from Congress, the President, and business. As you've stated, the Fed can't increase supply, it can only stimulate/dampen demand--but if the demand is for non-discretionary goods like energy and food and there is a shortage of supply for these items, well we have a problem the Fed can't fix alone.
Thank you, Claudia, for this article. It answered some of my questions about the recent causes of inflation. The analysis of the Phillips Curve is interesting and I can see why it's so important to get it right.
Claudia: Nice article! You are nipping at the edges of the real issue in this debate and it is rare to see it acknowledged by economists...kudos!
Economics is a study of human behavior, not of really crappy attempts to measure things like wages, prices, and value like a physicist would mass. There are reasons why behavioral psychologists have won so many Nobel awards in Econ.
Economics has even bigger issues trying to measure changes over time as there are only so many bodies one can measure at once (referencing the 3-body problem). "Given all other things equal" is a lot like saying "this is largely irrelevant to the real world".
If one wants to predict the future of a market, it is the change in attitudes of people who own businesses, invest, save, work, or make purchases that make the difference. The Fed knows it's best tools are verbal jawboning, not interest rates or deposit decisions.
The other driver in this, as you also hint towards, is politics. The Fed is a political entity and claims of Fed Reserve independence is a real Laffer!!!
"No, it’s the wrong model, and inflation is primarily supply."
Supply of what, exactly? If you say "money," then yes, it is the Fed's problem to fix.
"raise taxes on the rich". a facile answer which means little. Do we increase payroll taxes on the rich people, as in those earning w2 income over 100k. Or on billionaires who will be able to avoid most of the increase over time. In the end the democrats plans are foolish because it will just penalize their version of the rich, anyone who makes 200k and over.
So another way to view this manufactured recession is as a cudgel to eviscerate the modicum of working class power that has been circumstantially revived domestically from the ashes of the New Deal. When we say a recession is "medicine that's worse than the disease", I think we should be conscious to ask ourselves "worse than the disease" for whom exactly? Cui bono? Who benefits?
If we look historically, we can see the heart and soul of labor power, a socially reinforced class consciousness, effectively poisoned at its root by Taft-Hartley and the red scare(s) with the final metaphorical nail in its coffin hammered in by the Volcker shock, the historical antecedent to the fed's response to inflation today. In other words, I would suggest that everything you're absolutely correct in highlighting is in fact very much the point. Because as illuminated in this general historical continuity and only further supported in its more granular details, to Wall Street and its backers, the solution to any price inflation is to reduce wages and public social spending aka austerity (seen globally enforced in the "structural adjustment" programs of the IMF/World Bank which create states of debt peonage and resource/labor capture for private US financial/corporate capital). The orthodox way to do this being to push the economy into recession in order to reduce hiring, and as the "reserve army of the unemployed" grows in its numbers, this will oblige labor to compete for jobs that pay less and less as the economy slows, as you've highlighted. Importantly though, this only increases the consolidation of political power to further serve the material interests of the capitalist class, particularly of finance capital (or as that Marx guy appropriately called it, "fictitious capital") made at the zero-sum expense of the working class.
This is class-war doctrine and it is the prime directive of neoliberal economics. It is the tunnel vision of corporate managers and the demonic arcons of the US empire ensuring we all perpetually serve their insatiable narrow short-term benefit, in the long term with compounding contradictions like runaway ecological crises ("externalities" to put on the neoclassical/neoliberal econ ideological blindfold), further consolidation of this money power of corporate/finance capital, etc. entrenching us ever closer past a threshold where collective escape velocity can no longer be reached and toward an inescapable singularity of "the common ruin of the contending classes" with its receding horizon of possibility or really any imaginable future at all.
Which is all to say, as usual, the actual choice for humanity, should we choose to reconcile with reality in any way shape or form at some point, is just as Rosa Luxemburg put it during the uprisings in 1918 Germany that led to the establishment of Weimar, essentially recapitulating a liberal capitalist state merely kicking out the Kaiser, before of course being executed by the freikorps paramilitary (later becoming the SS, shocker) at the behest of Ebert's ostensibly "social democratic" SPD and only resonating more firmly its essential truth as time marches on:
socialism or [continued] barbarism.
Great post. This aligns with thoughts I've had about the Phillips Curve. I'm not qualified for the discussion, but I like to follow as best I can, thank you for this.
I am also curious the extent to which you think the spike in the M2 growth rate in 2020 contributed to inflation. As I read the charts, the growth rate itself was back to normal already by the end of 1Q 2021. I know there are varying opinions regarding how central M2 growth rates are to inflation, and am curious.
Good article. Keep them coming.
One nit. Was that your highlighting in the quote about the effects of the great recession and various workers? The disproportionate affect of unemployment on men Is not highlighted. If it had been women, would it have been highlighted.
Excellent piece. I’m sympathetic to the idea it is both the fiscal push of pandemic relief and the breadth of supply chain problems, now personified by wage-push inflation. I suspect it is the latter that really troubles the Fed’s governors and it activates a political willingness to raise interest rates disproportionately. The next question is will it actually achieve its purpose, i.e., reduce pressure to increase wages?
I think you suffer from recency bias. your last memory of a recession was the GFC which was devastating because it was rooted in a financial crisis. not all recessions are that bad (2000 post dot-com as an example). you don't have a memory of high inflation judging by your picture (nothing wrong with this, I don't either) so you are guessing. at the extreme, inflation brings down countries (Sri Lanka right now). also, the situation is inherently way more complex than inflation or recession, choose your evil. Could you even have high inflation w/o a recession? Could a recession trigger even higher levels of inflation? also, how much of this is global vs domestic and therefore out of our policy makers' hands? this debate is oversimplifying the macro situation into some sort of illusion of choice between two outcomes.
Christopher Waller, a Fed Governor, writes: I anticipate a decline in inflation will come as actual and anticipated hikes by the FOMC cool demand for products and labor, which will help demand and supply come into a better balance.
Claudia, what does this mean? What is measurement for "balanced"?
What is an example of this from past history?