Many are tying the Democrat losses in the election to high inflation in recent years. There's some truth to that, but it's complicated and it's crucial to take the right lessons.
Detailed and well discussed as usual, but your brief mention of profiteering: " There are also fundamental questions about whether a pandemic, war, or other disaster is a time for profiteering. Thoughtful use of temporary taxes on extraordinary profits could be another tool to slow inflation." overlooks a very important contribution to supply side inflation which could be responsive to real domestic federal policies. Supply chain consolidation, oligopolies and near monopolies in the food chain, gasoline, health care, and some housing. That corporate power (developed over years of federal policy laxity) was able to maintain high prices and increase rents/profitability without government restraint surely contributed to high prices and voters' dissatisfaction.
Good, tangential point, about consolidation in many industries strengthening supply side forces. In this case, I think having more competitors would have done little to stem inflation for several reasons. 1. Supply & labor shortages were real - sporadic & mostly temporary - but real. More competition wouldn't change that. 2. Theory says companies could use price competition to increase market share. But that is not an option in a shortage when suppliers are already producing everything they can.
The company I work for is most expensive & lowest volume in a small industry. We still doubled profit margins using supply chain as an excuse
There is one very important cause of the public's attitude on inflation that gets missed: most people confuse high prices such as we saw in the pandemic with rising prices which is inflation and monetary in nature. Neither the White House nor the Fed is responsible for the price of eggs, but Americans blame both parties. Also missing from tbe current conversation is that prices in tbe U. S. have stopped rising quickly but in other nations key prices have fallen. Why not here?
@Claudia Sham. Excellent points on Inflation. You provided the data behind what I was suspecting. I love the idea of tool kits to deal with problems in the short term. Related to supply chain, we could have used the COVID disruption as opportunity to help shift some manufacturing dependency from China to more friendly countries in Africa, South America and South east Asia.
Additionally I think the DOJ's anti-trust Dept was not doing enough. I am a big fan of Lina Khan but just that the issues started since the Dept got defanged after the DOJ vs. Microsoft case. If. you recall there was a huge shortage of Baby formula and it was traced to just 2-3 companies controlling the entire market.
We need to break these oligopolies to help curb inflation.
We also saw increased prices by companies that later either bought back shares or increased dividend. Although it is not clear what framework can prevent it while still maintain a free market economy, ultimately the best tool is good enough free market competition.
Thank you very much for this, hope it becomes influential. Isn't part of the problem that for too many, and by no means only right wing media as Tomasky writes, the problem was inflation was too high AND unemployment was too low. The lobby for a strong labor market and the accompanying, almost social democratic economic policies of the Biden administration regarding union rights and anti-trust is simply not sufficient in the face of concerted opposition very effectively using the inflation cudgel to discredit progressive economic policy.
Also in Europe we could witness how the tools of the ECB are very limited concerning the fight of inflation. Lowering of inflation was mainly a political act as we had to get new energy sources (especially in Germany) to bring inflation down. Now our high inflation rates are hurting the economy as investments are still decreasing this year and our (Germany's, but also all of Europe's) economy needs to be modernised quickly.
The discussion in the article is great but one would be remiss, as a labour economist, to not mention the simplistic assessment of wage gains being done here. The author asserts --- ' supporting large wage gains, especially among low-wage workers' ; '...by boosting the good news of high wage growth'.
The fact is that inflation hits different populations differently, and once accounting for that, the picture is a lot less rosier than the assessment of the author.
Another important issue is the way the largest component of CPI is measured - housing. The use of OER instead of house prices systematically understates the actual inflation in housing costs experienced by households. Furthermore, the cost of borrowing is also excluded from the CPI calculations. Accounting for both these factors leads to significant upward revisions in the level of inflation actually experienced by consumers, e.g. this paper by Summers et al. (2024) which uses pre-1983 housing methods calculates it as roughly double the level calculated by the BLS. https://www.nber.org/papers/w32163
Accounting for these two factors creates a very different picture of how consumers experienced the current bout of inflation. And would hardly find a claim of 'large wage gains' (in real terms) slightly exaggerated by aggregate statistics.
My assessment is not simplistic. Arin Dube and others have carefully documented the compression of real wages. The wage gains (off a low base) at the bottom were substantial. Of course, not all workers benefit the same. The big gains came to job switchers. Also, the Summers et al analysis is questionable. The PCE inflation series is consistent over time. There is no need to construct a new series. Overfitting ex post is a real issue in such exercises.
I think the continued disconnect is between the way economists define inflation, the rate of change of average price changes, and the way pretty much everybody else in the world defines inflation, the price level. the fact that the price level was substantially lower during Trump's first administration, just 4 years ago, was easily remembered by the voting public, and Biden and Harris were blamed for that outcome.
Beyond that, pumping $4+ trillion into the economy that was already recovering strongly from the Covid shutdowns simply goosed demand dramatically, and drove prices much higher. then the Fed and administration kept saying it was transitory, until it wasn't, so lost credibility in their messaging.
This is not to say there aren't better ways to do things, but I would argue Trump's messaging was far superior because the nuances of the difference between price level and rate of inflation are not a soundbite problem to address.
After tax corporate profits rose from 2 trillion per year to 3 trillion per year during Covid. How does this fit into the picture. When I entered the job market in 1970 we had an average of 8% inflation for the next 10 years. This current inflation lasted about 18 months and people are freaking out. The reality is that 50 years ago the bottom 90% controlled 37% of the wealth today the number is in the low 20's. The excess corporate profits and the increased wealth inequality caused the sense that no one cared. I am sure Donald Trump and his friends have this all figured out.
I would agree, we must begin to learn the right lessons here about inflation and monetary policy going forward. Many people including economists and politicians both Republican and Democrat have solely blamed it on the stimulus and that is simply wrong. Inflation was complicated and frustrating for sure but mostly supply driven. I personally felt that the Biden administration were too slow to call out corporate profiteering and let the fed jack up rates, adding to the uneasiness of Americans as well. Further, I commend you Claudia for calling out those who still believe in the nonsense Phillips Curve which doesn't play out in reality but mainly the US economy didn't need a recession or high unemployment to lower inflation.
At the end of the day, the messaging Dems put out on the economy being strong because of GDP while at the same time bragging about the stock market was simply not good enough and unfortunately with Trump back in the office his concept of tariffs and outlandish tax cuts for the rich will likely make inflation more of a pain in the neck.
Milton Friedman is the source of "Inflation is always and everywhere a monetary problem, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
And people continue to believe the plausible fantasies that Friedman's economics promotes. His manifesto "Free to Choose" is not only still in print, it has a page full of videos translations, and other promotional material on its Amazon page. The rebuttal--"Not So Free to Choose" by Friedman's student Elton Rayack--is out of print, and roughly seven times as expensive to buy. Could big money be behind this state of affairs? Friedman's economics certainly favor the plutocrats.
Here's an excerpt from the shareholder profits section of Rayack's book: "The shareholder value theory ... failed even on its own narrow terms: making money. The proponents of shareholder value and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance declined. "
Friedman's economics also influenced those replacing the Chilean government in 1973 when the CIA helped install human rights abuser General Pinochet as the Chilean leader and overthrew the elected Allende government. Friedman's "Chicago Boys" were the top economic advisors to Pinochet, and any economist who disagreed was exiled or assassinated. Apparently winning the argument about what's legitimate economics justifies even killing! ("Both the National Commission on Political Imprisonment and Torture [Valech Report] and the Commission of Truth and Reconciliation [Rettig Report] approximate that there were around 30,000 victims of human rights abuses in Chile, with 40,018 tortured and 2,279 executed. ")
"Commenting on developments in Chile, the conservative British journal The Economist observed, 'Chile, under the stern eye of President Pinochet, has provided laboratory conditions for a prolonged experiment by Mr. Milton Friedman's disciples...Chile is another economic disaster. The 'Chicago boys' have gone grey watching their achievements...slowly wasting away.'" - p.70 of Rayack's book.
"Contrary to Friedman's claim that Chile's free-market experiment is an economic miracle, the overwhelming evidence indicates that the experiment has been an economic disaster. In eight of the nine years under the Chicago model, the unemployment rate was in the double-digit range, three to four times greater than the average of annual employment rates in the decade prior to the takeover by the junta, and in 1982 and 1983 soared to well over 20 percent. Throughout most of those nine years, real wages were significantly less than what they were in 1970 and in 1983 they fell below the 1970 level by 13 percent.
"The record on economic growth is equally deplorable. In the decade of the 1970s, while Latin America's (19 countries) per capita gross domestic product increased by 40 percent, Chile's rose by a mere 8 percent. By 1982, Chile's per capita GDP, as a result of a severe depression, was actually 5 percent lower than it was in 1970." (Ibid p. 72)
The Chilean economy has lagged behind other South American countries' economies too...so just on scientific grounds, Friedman is baloney. His theories don't match reality. If you're curious about this, read "Not So Free To Choose." After you read it, you'll understand why I say Friedman was lying *all* the time in his theories.
Another excellent column. Thanks for writing it. As always, I posted it at Bluesky, with emphasis on the table on the election effects this year of pandemic-boosted inflation in the developed countries.
Another good point from Dr. Sahm is calling out President Trump's baseless attack on the Bureau of Labor Statistics. Senator Rubio, soon to be Secretary of State, also tweeted that the job numbers are "fake".
We don't need better tools to fight inflation. It is not the job of (unelected) monetary authorities to counter massively excessive fiscal stimulus, enacted by our elected representatives. What we need is fiscal responsibility. We will get this - eventually. What remains to be seen is the circumstances. If the Fed had taken upon itself the task of countering fiscal stimulus, we would have naturally, effectively, had less stimulus. What do you think would have been the result? Less inflation for sure. But what could have happened to Fed independence? There's a good chance it would have, deservedly, been lost. Fiscal policy is not the job of the Fed. For very good reasons. The Fed needs to stay in its lane if we are to continue to benefit from its independence.
Detailed and well discussed as usual, but your brief mention of profiteering: " There are also fundamental questions about whether a pandemic, war, or other disaster is a time for profiteering. Thoughtful use of temporary taxes on extraordinary profits could be another tool to slow inflation." overlooks a very important contribution to supply side inflation which could be responsive to real domestic federal policies. Supply chain consolidation, oligopolies and near monopolies in the food chain, gasoline, health care, and some housing. That corporate power (developed over years of federal policy laxity) was able to maintain high prices and increase rents/profitability without government restraint surely contributed to high prices and voters' dissatisfaction.
Good, tangential point, about consolidation in many industries strengthening supply side forces. In this case, I think having more competitors would have done little to stem inflation for several reasons. 1. Supply & labor shortages were real - sporadic & mostly temporary - but real. More competition wouldn't change that. 2. Theory says companies could use price competition to increase market share. But that is not an option in a shortage when suppliers are already producing everything they can.
The company I work for is most expensive & lowest volume in a small industry. We still doubled profit margins using supply chain as an excuse
There is one very important cause of the public's attitude on inflation that gets missed: most people confuse high prices such as we saw in the pandemic with rising prices which is inflation and monetary in nature. Neither the White House nor the Fed is responsible for the price of eggs, but Americans blame both parties. Also missing from tbe current conversation is that prices in tbe U. S. have stopped rising quickly but in other nations key prices have fallen. Why not here?
@Claudia Sham. Excellent points on Inflation. You provided the data behind what I was suspecting. I love the idea of tool kits to deal with problems in the short term. Related to supply chain, we could have used the COVID disruption as opportunity to help shift some manufacturing dependency from China to more friendly countries in Africa, South America and South east Asia.
Additionally I think the DOJ's anti-trust Dept was not doing enough. I am a big fan of Lina Khan but just that the issues started since the Dept got defanged after the DOJ vs. Microsoft case. If. you recall there was a huge shortage of Baby formula and it was traced to just 2-3 companies controlling the entire market.
We need to break these oligopolies to help curb inflation.
We also saw increased prices by companies that later either bought back shares or increased dividend. Although it is not clear what framework can prevent it while still maintain a free market economy, ultimately the best tool is good enough free market competition.
Thank you very much for this, hope it becomes influential. Isn't part of the problem that for too many, and by no means only right wing media as Tomasky writes, the problem was inflation was too high AND unemployment was too low. The lobby for a strong labor market and the accompanying, almost social democratic economic policies of the Biden administration regarding union rights and anti-trust is simply not sufficient in the face of concerted opposition very effectively using the inflation cudgel to discredit progressive economic policy.
It's the Economy and Working Class Issues Stupid:)
Also in Europe we could witness how the tools of the ECB are very limited concerning the fight of inflation. Lowering of inflation was mainly a political act as we had to get new energy sources (especially in Germany) to bring inflation down. Now our high inflation rates are hurting the economy as investments are still decreasing this year and our (Germany's, but also all of Europe's) economy needs to be modernised quickly.
The discussion in the article is great but one would be remiss, as a labour economist, to not mention the simplistic assessment of wage gains being done here. The author asserts --- ' supporting large wage gains, especially among low-wage workers' ; '...by boosting the good news of high wage growth'.
Part of the problem is in simplistic measurements that people tend to make when they compare income changes to CPI changes. Both Shantcheva and Cavallo discuss this in detail here - https://www.nytimes.com/2024/10/28/business/economy/inflation-wages-pay-salaries.html
The fact is that inflation hits different populations differently, and once accounting for that, the picture is a lot less rosier than the assessment of the author.
Another important issue is the way the largest component of CPI is measured - housing. The use of OER instead of house prices systematically understates the actual inflation in housing costs experienced by households. Furthermore, the cost of borrowing is also excluded from the CPI calculations. Accounting for both these factors leads to significant upward revisions in the level of inflation actually experienced by consumers, e.g. this paper by Summers et al. (2024) which uses pre-1983 housing methods calculates it as roughly double the level calculated by the BLS. https://www.nber.org/papers/w32163
Accounting for these two factors creates a very different picture of how consumers experienced the current bout of inflation. And would hardly find a claim of 'large wage gains' (in real terms) slightly exaggerated by aggregate statistics.
My assessment is not simplistic. Arin Dube and others have carefully documented the compression of real wages. The wage gains (off a low base) at the bottom were substantial. Of course, not all workers benefit the same. The big gains came to job switchers. Also, the Summers et al analysis is questionable. The PCE inflation series is consistent over time. There is no need to construct a new series. Overfitting ex post is a real issue in such exercises.
I think the continued disconnect is between the way economists define inflation, the rate of change of average price changes, and the way pretty much everybody else in the world defines inflation, the price level. the fact that the price level was substantially lower during Trump's first administration, just 4 years ago, was easily remembered by the voting public, and Biden and Harris were blamed for that outcome.
Beyond that, pumping $4+ trillion into the economy that was already recovering strongly from the Covid shutdowns simply goosed demand dramatically, and drove prices much higher. then the Fed and administration kept saying it was transitory, until it wasn't, so lost credibility in their messaging.
This is not to say there aren't better ways to do things, but I would argue Trump's messaging was far superior because the nuances of the difference between price level and rate of inflation are not a soundbite problem to address.
After tax corporate profits rose from 2 trillion per year to 3 trillion per year during Covid. How does this fit into the picture. When I entered the job market in 1970 we had an average of 8% inflation for the next 10 years. This current inflation lasted about 18 months and people are freaking out. The reality is that 50 years ago the bottom 90% controlled 37% of the wealth today the number is in the low 20's. The excess corporate profits and the increased wealth inequality caused the sense that no one cared. I am sure Donald Trump and his friends have this all figured out.
The green transition is costing too much .
I ask a simple question : why are we doing this ?
The planet.
I would agree, we must begin to learn the right lessons here about inflation and monetary policy going forward. Many people including economists and politicians both Republican and Democrat have solely blamed it on the stimulus and that is simply wrong. Inflation was complicated and frustrating for sure but mostly supply driven. I personally felt that the Biden administration were too slow to call out corporate profiteering and let the fed jack up rates, adding to the uneasiness of Americans as well. Further, I commend you Claudia for calling out those who still believe in the nonsense Phillips Curve which doesn't play out in reality but mainly the US economy didn't need a recession or high unemployment to lower inflation.
At the end of the day, the messaging Dems put out on the economy being strong because of GDP while at the same time bragging about the stock market was simply not good enough and unfortunately with Trump back in the office his concept of tariffs and outlandish tax cuts for the rich will likely make inflation more of a pain in the neck.
The voters lost confidence in the government over "gain of function research."
They felt lied to and manipulated. Printing too much money was part of the cover up.
That lead to inflation. The final slap in the face was to tell the voters inflation was the
fault of the corporations they worked for.
Milton Friedman is the source of "Inflation is always and everywhere a monetary problem, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
And people continue to believe the plausible fantasies that Friedman's economics promotes. His manifesto "Free to Choose" is not only still in print, it has a page full of videos translations, and other promotional material on its Amazon page. The rebuttal--"Not So Free to Choose" by Friedman's student Elton Rayack--is out of print, and roughly seven times as expensive to buy. Could big money be behind this state of affairs? Friedman's economics certainly favor the plutocrats.
Here's an excerpt from the shareholder profits section of Rayack's book: "The shareholder value theory ... failed even on its own narrow terms: making money. The proponents of shareholder value and stock-based executive compensation hoped that their theories would focus executives on improving the real performance of their companies and thus increasing shareholder value over time. Yet, precisely the opposite occurred. In the period of shareholder capitalism since 1976, executive compensation has exploded while corporate performance declined. "
Friedman's economics also influenced those replacing the Chilean government in 1973 when the CIA helped install human rights abuser General Pinochet as the Chilean leader and overthrew the elected Allende government. Friedman's "Chicago Boys" were the top economic advisors to Pinochet, and any economist who disagreed was exiled or assassinated. Apparently winning the argument about what's legitimate economics justifies even killing! ("Both the National Commission on Political Imprisonment and Torture [Valech Report] and the Commission of Truth and Reconciliation [Rettig Report] approximate that there were around 30,000 victims of human rights abuses in Chile, with 40,018 tortured and 2,279 executed. ")
"Commenting on developments in Chile, the conservative British journal The Economist observed, 'Chile, under the stern eye of President Pinochet, has provided laboratory conditions for a prolonged experiment by Mr. Milton Friedman's disciples...Chile is another economic disaster. The 'Chicago boys' have gone grey watching their achievements...slowly wasting away.'" - p.70 of Rayack's book.
"Contrary to Friedman's claim that Chile's free-market experiment is an economic miracle, the overwhelming evidence indicates that the experiment has been an economic disaster. In eight of the nine years under the Chicago model, the unemployment rate was in the double-digit range, three to four times greater than the average of annual employment rates in the decade prior to the takeover by the junta, and in 1982 and 1983 soared to well over 20 percent. Throughout most of those nine years, real wages were significantly less than what they were in 1970 and in 1983 they fell below the 1970 level by 13 percent.
"The record on economic growth is equally deplorable. In the decade of the 1970s, while Latin America's (19 countries) per capita gross domestic product increased by 40 percent, Chile's rose by a mere 8 percent. By 1982, Chile's per capita GDP, as a result of a severe depression, was actually 5 percent lower than it was in 1970." (Ibid p. 72)
The Chilean economy has lagged behind other South American countries' economies too...so just on scientific grounds, Friedman is baloney. His theories don't match reality. If you're curious about this, read "Not So Free To Choose." After you read it, you'll understand why I say Friedman was lying *all* the time in his theories.
Another excellent column. Thanks for writing it. As always, I posted it at Bluesky, with emphasis on the table on the election effects this year of pandemic-boosted inflation in the developed countries.
Another good point from Dr. Sahm is calling out President Trump's baseless attack on the Bureau of Labor Statistics. Senator Rubio, soon to be Secretary of State, also tweeted that the job numbers are "fake".
You know what is funny, once Trump gets into office and job figures are great, we are never stop hearing about it
We don't need better tools to fight inflation. It is not the job of (unelected) monetary authorities to counter massively excessive fiscal stimulus, enacted by our elected representatives. What we need is fiscal responsibility. We will get this - eventually. What remains to be seen is the circumstances. If the Fed had taken upon itself the task of countering fiscal stimulus, we would have naturally, effectively, had less stimulus. What do you think would have been the result? Less inflation for sure. But what could have happened to Fed independence? There's a good chance it would have, deservedly, been lost. Fiscal policy is not the job of the Fed. For very good reasons. The Fed needs to stay in its lane if we are to continue to benefit from its independence.
How was fiscal responsibility going to fix the supply chains?