Archive for March 2022


100% of excessive inflation is due to bad monetary policy


This shouldn’t even be debatable. I don’t know of any respectable theory (monetarist, Keynesian, Austrian, etc.) where this is not true.

And yet according to this recent Vox article, economists have no idea what is causing the current bout of excessive inflation:

Among economists and experts, there’s no strict consensus about what exactly is to blame. There are certain factors widely agreed upon that we’ve been hearing about for months: supply chain woes, rising oil prices, shifting consumer demands. These concerns have hardly subsided. But there are other arenas where there’s more disagreement, such as the role government stimulus has played in increasing prices, and the possibility that corporate greed is an important factor. . . .

Whichever economist or expert or policymaker you ask to explain the current inflation story to you is going to tell you something slightly different. I asked a bunch of economists over the past couple of weeks what was causing inflation and how to fix it. Most kind of laughed for a second before launching into their cases, acknowledging the full answer is, to a certain extent, ¯\_(ツ)_/¯.

The Fed’s job is to insure an appropriate level of demand. On occasion, it may be appropriate for inflation to exceed 2% for a period of time due to supply issues. But that’s no excuse for excessive growth in nominal spending. When inflation is higher than it should be for demand side reasons, it is always 100% due to bad monetary policy.

And now Vox tells us that economists are now talking about “corporate greed”? Seriously?

And just who are these so-called “economists”? According to Vox they are “progressives”:

Many progressive economists and politicians are beginning to argue that it’s corporate consolidation that’s making inflation worse.

Wait, I thought it was right-wingers who were the creationists, global warming deniers, the anti-vaxxers? I thought the left believed we should “trust the science”? Since when did progressive economists become the left wing version of QAnon?

Ezra Klein has a must read interview of Larry Summers. One of Ezra’s questions is interesting. No, “interesting” isn’t quite right, it’s the single most revealing question I’ve ever seen from a reporter in my entire life.

EZRA KLEIN: So I know you’re a hard-nosed economist who looks at the numbers here. But I want to locate, I think, the emotional and to some degree even political frustration of this conversation, because a lot of the dynamics you’re talking about that then get framed as excess demand, there are things that feel just, that many of us have wanted for a long time. More hiring, wage increases, particularly at the bottom end, stimulus checks for people who have had a lot of bad years and didn’t have a lot of cushion behind them, child tax credit for families that could really use that.

And so there are a lot of policies that came together — I mean, there was a reason the Biden administration wanted to run the economy hot. There was a long period when it didn’t just feel, the economic data showed, that expansions were not reaching people on the margins. And it felt, finally, like we were reaching people on the margins. We were putting a lot of firepower to do that. But even in this terrible time, this horrifying pandemic, we were giving people who needed it quite a bit of help.

And then for that to then turn into this horrifying inflation problem, which is now eating back those wage increases, potentially going to require much sharper action from the Fed— I recognize the world doesn’t have to please me, but it is maddening. And I think one of the hard questions, before we even get into Ukraine and China— I think one of the hard questions is, does it have to be this way? Did it have to be this way? Is there some way for this to end without the people we were finally helping suffering?

If anyone wants to know how we got in this mess, it’s right there in Klein’s question. Kudos to Ezra Klein for being willing to reconsider his views when new information comes in. But the passionate desire to “run the economy hot” in a misguided belief it would help workers is precisely how we got into this mess. Jay Powell and all the other the run the economy hot people wanted it to be true that the 1960s never happened. (Recall how Powell cited 1965 as a successful soft landing!) But the 1960s did happen, and could happen again if the Fed doesn’t wake up.

Klein asks Summers about the nonsensical claims that inflation is caused by corporate greed, and Summers has this to say:

So I think it’s, frankly, ridiculous to take businesses saying on a earnings call that they have pricing power as some kind of evidence of perfidy. I just don’t think that is supported by any serious understanding of how the business process works.

And by the way, another way of looking at this is, again, to look at what’s happening to wages. Wage inflation is as pronounced a phenomenon as price inflation. And we don’t think workers have huge pricing power. Or another way to look at this is as relations in terms of what Amazon is paying its suppliers or what Walmart is paying its suppliers. Surely if there’s market power in the relationship between Walmart and its suppliers or between Amazon and its suppliers, the power is on the side of Amazon and Walmart. And they’re paying much higher prices to their suppliers.

So are there market power problems in the American economy? Yes. Is it a good idea to attack those problems? Yes. Is it fine if we use the motivation provided by inflation to do some of that? Yes. Does it make any sense at all to blame inflation on market power? No. That’s not serious economic reasoning and the judgments and forecasts of those who engage in that reasoning should be taken less seriously as a consequence.

The interview is quite long and worth reading in its entirety. Summers makes many of the points I’ve been making, and he recognized the inflation problem well before I did.

At one point the discussion turns to what the Biden administration could do to slow inflation. Summers points out that they could do a few things at the margin, but their actual policy has been almost the exact opposite, to reduce aggregate supply and make the problem worse:

LARRY SUMMERS: Mostly the tools are pretty limited. And the tools that there are, are tools that the Biden administration has so far been very reluctant to adopt. If we reduce tariffs, that would make more goods available at lower prices and perhaps reduce the Consumer Price Index by 1 percent or more. But their rhetoric has gone the other way on tariffs.

If we decided to do public procurement as inexpensively as possible, that would reduce prices of a whole set of things the government buys and increase competitive pressure. But we’ve instead indicated a desire to shift from buying cheap to buying America and buying in ways that protect certain key constituencies.

These policies would not reduce aggregate demand, but by boosting aggregate supply they would make the “appropriate” inflation overshoot of 2% smaller than otherwise (from a dual mandate perspective.)

If we could just stop talking about inflation and focus on NGDP growth then all of these concepts would be so much easier to explain. The language of macroeconomics is such a complete mess.

PS. Here’s what else Biden could do. He could “promote” Powell to Treasury secretary and replace him with Yellen or Summers. In 1979, G. William Miller was promoted to Treasury secretary, and replaced with Volcker.

Sadly, Tyler Cowen is likely correct

Tyler Cowen has a new post entitled:

Who gains and loses status from the war in Ukraine?

Among the names mentioned is former president Obama, who famously dismissed Mitt Romney’s warnings about Putin back in 2012. (BTW, over the past decade has any American politician been right about more things than Mitt Romney?)

One name conspicuously missing from Tyler’s post is Donald Trump. At first glance that might seem like an oversight. Even as Putin brutalizes Ukraine, Trump’s embrace of the murderous dictator becomes ever tighter:

But Tyler did not ask who should lose status, he asked who would lose status. Trump’s reputation among rational people is already at rock bottom, and his unseemly love affair with Putin can’t make it any worse. As for his supporters, Trump once claimed that he could shoot someone in the middle of Times Square and his supporters would stick with him. So Tyler is right not to single out Trump as one of the people who will lose status over the Ukraine war.

PS. I really envy the Trumpistas, who can tell the truth without all the tiresome complaints that they suffer from TDS. Here’s Peter Navarro, accurately describing Donald Trump:

Please, no more “tedious” accusations (pun intended), I’m just reporting what Navarro said.

“the Fed intends . . .”

This Bloomberg story is pretty discouraging:

The Fed needs to slow an economy that is “clearly overheated” as it comes out of the pandemic, said Krugman, a City University of New York professor.

Inflation — which is already at a 40-year high and more than three times the Fed’s 2% target — looks set to accelerate again as supply disruptions from the Ukraine war boost food and energy prices. The labor market is, in the words of Powell, “extremely tight,” with 1.7-plus job openings for every unemployed person.

To try to take the edge off demand, the Fed intends to raise interest rates “expeditiously” to more normal levels and is prepared to push them into “restrictive” territory if necessary to achieve price stability, Powell told a conference of economists on March 21.

Paul Krugman is not normally viewed as a hawk, and even he believes that policy is too expansionary. But what really caught my eye is the term “intends”. Instead of intending to do something about the problem, why isn’t the Fed doing something right now? Indeed why haven’t they been tightening since it became clear the economy was overheating?

The quarter point rise in the Fed’s target rate at the last meeting didn’t even keep up with the rise in the equilibrium rate of interest. Money is getting easier. And why has Powell stopped talking about maintaining an average inflation rate of 2%? What happened to that big new policy initiative?

Milton Friedman and Anna Schwartz wrote a very long history of monetary policy in the US. Allan Meltzer wrote a very long history of the Federal Reserve. Want a Cliff’s Notes version of the two books? How’s this for a summary:

Once again, the Fed was behind the curve.

The whole purpose of FAIT was to prevent this sort of major overshoot. It’s a pity they abandoned the policy.

PS. Michael Darda directed me to a SF Fed study that suggests the current high inflation is due to . . . you guessed it . . . fiscal policy. No mention of monetary offset.

And so we’ve come full circle and are right back in the intellectual milieu of the late 1960s.

Milton Friedman is rolling over in his grave.

A weird omission

The Financial Times has a story on the recent depreciation of the Japanese yen. Here’s the intro:

The yen dropped to a seven-year low on Monday as the Bank of Japan bucked the global trend for tighter monetary policy, stoking speculation that the central bank could intervene to prop up the currency for the first time since 1998.

The currency dropped more than 2 per cent against the dollar to reach ¥125, prompting traders to forecast further drops. It has fallen more than 7 per cent against the dollar so far this month, making this the worst month for the Japanese currency since 2016.

And how did that “propping up” in 1998 work out for Japan?

After reading this I figuratively smacked my lips in anticipation of what would come next. I thought, “I can’t wait until they describe the negative affects of yen depreciation, the reasons why the BOJ might feel the need to prop up their currency. This will make a great blog post.”

Alas, the explanation never came. Hence this crappy blog post.

The FT is a very high quality newspaper. High quality newspapers do not publish incomplete stories. When they say a government is considering doing X, they also explain why the government might feel a need to do X. Why might the BOJ be worried about yen depreciation? Inquiring minds wish to know.

Of course you and I both know that there is absolutely no reason at all for the BOJ to be worried about yen depreciation. But I wanted them to at least offer some sort of pathetic explanation, so that I could mock it. No such luck.

Instead, the article ends with a paragraph explaining why yen depreciation would actually be good for Japan:

Kuroda repeated on Friday last week his assertion that the weak yen was still “generally positive” for the Japanese economy, with the yen’s tumble boosting the shares of Japanese exporters.

Left unchecked, yen depreciation would boost Japanese exports and also boost Japanese inflation up a bit closer to their 2% target. Someone must do something to stop this from happening!

Articles of interest

1. So it seems that Clarance Thomas’s wife is one of those QAnon nuts. The NYT claims that she was at the January 6 rally and encouraged Trump officials to stop an elected President from taking office:

In the weeks between the 2020 presidential election and the Jan. 6 attack on the Capitol, Virginia Thomas, the wife of Supreme Court Justice Clarence Thomas, sent a barrage of text messages imploring President Donald J. Trump’s chief of staff to take steps to overturn the vote, according to a person with knowledge of the texts.

In one message sent in the days after the election, she urged the chief of staff, Mark Meadows, to “release the Kraken and save us from the left taking America down,” invoking a slogan popular on the right that refers to a web of conspiracy theories that Trump supporters believed would overturn the election.

In another, she wrote: “I can’t see Americans swallowing the obvious fraud. Just going with one more thing with no frickin consequences.” She added: “We just cave to people wanting Biden to be anointed? Many of us can’t continue the GOP charade.”

When Congress tried to investigate the January 6 coup attempt, all Supreme Court members but one said that the Trump administration had to turn over records of its role in the fiasco. Can you guess who dissented?

The committee obtained 29 texts between Ms. Thomas and Mr. Meadows — 28 exchanged between Nov. 4 and Nov. 24, and one written on Jan. 10. The text messages, most of which were written by Ms. Thomas, represent the first evidence that she was directly advising the White House as it sought to overturn the election. In fact, in her efforts to keep Mr. Trump in power, Ms. Thomas effectively toggled between like-minded members of the executive and legislative branches, even as her husband, who sits atop the judiciary branch that is supposed to serve as a check on the other branches of government, heard election-related cases.

Justice Thomas has been Mr. Trump’s most stalwart defender on the court. In February 2021, he wrote a dissent after the majority declined to hear a case filed by Pennsylvania Republicans that sought to disqualify certain mail-in ballots. And this past January, he was the only justice who voted against allowing the release of records from the Trump White House related to the Jan. 6 attack.

Wait, Thomas didn’t recuse himself from a case that his wife was deeply involved in? Judges have been impeached for far less serious infractions. Read the whole thing.

2. Is it just me, or do you also find it hilarious that Trump’s top aides were themselves engaged in voter fraud?

On her one-stop application, provided this week by the North Carolina Board of Elections to The Fact Checker, Debra Meadows certified that she had resided at a 14-by-62-foot mountaintop mobile home for at least 30 days — even though she did not live there. At the top of the form is a notice that “fraudulently or falsely completing this form” is a Class I felony.

This form is the latest in a string of revelations concerning the former chief of staff — who echoed President Donald Trump’s false claims of election fraud in 2020 — and his wife. The New Yorker first reported that Mark and Debra Meadows submitted voter registration forms that listed as their home a mobile home with a rusted metal roof that sold for $105,000 in 2021, even though they had never lived there. North Carolina officials announced last week that Mark Meadows is under investigation for potential voter fraud.

3. Bloomberg reports:

China aims to greatly expand its wind and solar power capacity over the next several years through massive projects in the nation’s deserts, according to an industry publication.

A first batch of renewable-energy projects in the interior that was announced late last year will account for 97 gigawatts — enough power to run Mexico. A second batch of projects targeting 455 gigawatts of clean energy by 2030 will be located mainly in the deserts of northern China, such as Gobi and Inner Mongolia, SolarBe reported Saturday, citing an unreported recent notice from the National Development & Reform Commission and National Energy Administration. 

This seems kind of incredible. Does anyone know if it’s true? (I’m skeptical.)

4. The Economist reports:

So what do India’s 5,000 elected state and national legislators do, if they spend so little time legislating? Many are dedicated to serving their constituents. But many appear more devoted to winning back what they spent getting voted in, and more. According to the Association for Democratic Reforms, a research group, a record 43% of MPs who won seats in the 2019 general election had been charged with a crime, with 29% booked for grave offences such as rape and murder. This represented a 109% increase on the cohort of ten years earlier.

Crime seems to pay: analysis shows that a candidate with a criminal record is three times more likely to win than one without. Similarly, one with declared assets of more than 50m rupees ($670,000) is six times more likely to succeed than one with less. Term after term, compulsory declarations of assets reveal suspiciously huge rises in the wealth of incumbents.

Yikes. Now I feel a bit better about the US.

5. From the Cato Institute:

An Abbott spokesperson, Renae Eze, confirmed private businesses still have the option of mandating vaccines for their workers, saying, “Private businesses don’t need government running their business.”
— Texas Tribune, August 25, 2021

Texas Gov. Greg Abbott on Monday issued another executive order cracking down on COVID-19 vaccine mandates—this time banning any entity in Texas, including private businesses, from requiring vaccinations for employees or customers.
— Texas Tribune, October 11, 2021

6. The following is from a 2017 Reason article:

One of the surreal twists of the past year in American politics has been the rapid realignment in attitudes toward Russia. Democrats, many of whom believe that Russian interference was key to Donald Trump’s unexpected victory last November, are now the ones sounding the alarm about the Russian threat. Meanwhile, quite a few Republicans—previously the keepers of the anti-Kremlin Cold War flame—have taken to praising President Vladimir Putin as a strong leader and Moscow as an ally against radical Islam. A CNN/ORC poll in late April found that 56 percent of Republicans see Russia as either “friendly” or “an ally,” up from 14 percent in 2014. Over the same period, Putin’s favorable rating from Republicans in the Economist/YouGov poll went from 10 percent to a startling 37 percent.

So which party had a better understanding of Vladimir Putin?

7. On a lighter note, The Economist has an obit for the last full-blooded member of the Yaghan people, the tribe that lived in Tierra del Fuego. This made me smile:

For her first nine years she had spoken nothing but Yaghan. It was a vast language, catalogued by Thomas Bridges in the 19th century at 32,400 words. Many offered a tiny snapshot of Yaghan life: ilan tashata for the fierce winter storm from the south, carrying snow, which blew on the night she was born; tuock-olla for the act of hiring a man to carve bone to make spearheads. Some were extraordinarily concise, or caught nuances other languages did not even attempt: mamihlapinatapai meant “a look between two people, each of whom expects the other to do something that they both want but neither dares to start”. Her own favourite words were two of the simplest: januja, the Moon, and lamp, the Sun.