What if we’re thinking about inflation all wrong?
newyorker.com
newyorker.com
Huge stimulus programs over the past five years absolutely overcooked the economy and fueled high inflation. Fiscal policy, hands bound by the rise of populism, is doing nothing to help, while central banks, free from the constraints of worrying about electability, are using the only tool they have to try stop the bleeding.
The solution, of course, is to tighten fiscal policy in the way of reducing spending or increasing taxes. But that's political suicide.
It costs 13% of all federal spending just to keep the plates spinning. I don't know if there's a way to dig out of those kinds of figures.
The primary driver of inflation is record-breaking corporate profits, not stimulii or wages.
Where are you getting this information? Raises are not keeping up with inflation. A few thousand in stimulus dollars years ago is not driving anything. PPP money didn't increase wages.
A few thousand dollars 2-3 years ago?
> Businesses
Payments that, at most, kept wages the same?
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People need to stop using "people are getting free money and that's raising inflation" excuse. Prices are rising and people are going into their savings or credit to keep spending. That's it.
More plausible to me is the idea that stimulus — printing new money by fiat — resulted in more cash in circulation. Corporations are like organisms that have evolved to capture and eat cash. They fed on the surplus cash, and their waistlines show it afterwards.
Meanwhile those of us with savings accounts pay the price when inflation reduces the buying power of the cash we had diligently set aside for future use.
Or you could just change your spending habits.
I guess you can blame me for not micromanaging every dollar I spend? But if I'm sitting in a drive thru grabbing a burger and fries and notice it's $5 more than it used to be, I'm probably still gonna buy the burger and fries. And I probably will still go grab one occasionally when I want it. Because saving $5 every so often isn't gonna really affect an activity that makes up a microscopic amount of my expenses (I've got fast food including coffee at 2.5% last I reviewed my data.)
But regardless I think what I'm describing is a real bit of human behavior at scale - and isn't that just economics at the end of the day?
$5 is $5... every penny counts.
Generally the way I suspect it goes is
1. Draw from savings to buy essential goods.
2. Slowly load whatever you can't afford on your credit cards.
3. Get new credit cards before you start missing payments.
4. Load more on your cards.
5. Have nowhere else to go so start taking payday loans.
6. Run out of money.
Which is in stark contrast to pre-2000s recessions where access to credit was far more limited.
As it is currently, if you've had a credit card, it is incredibly easy to get more and you can get an incredibly large amount of accessible credit. The average american has around 30k USD in available credit (10k for 18-22 and 20k for 23-38 but 30k overall) with only around 5k or less of that utilized on average. That's a lot of money that companies can draw on before consumers pockets are truly empty.
https://www.bankrate.com/finance/credit-cards/what-is-the-av...
Did corporations suddenly become greedy in 2021? No, they were always so.
You can see the details of P&G's financial specs here [1]. Everything has been relatively flat to declining and those are in nominal terms, or in other words - before inflation is factored in. After inflation, they're taking a pretty serious beating.
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Inflation is most easily understood by considering that money, in our current system, doesn't really have any meaning or intrinsic value. It's just numbers, and so the price of everything is simply set relative to the amount of money in circulation, and more precisely by the monetary velocity [2] or how often money is changing hands. If everybody was given a trillion dollars, it doesn't mean everybody's suddenly rich - it just means suddenly a Big Mac's going to cost tens of millions of dollars, and a new TV's going to set you back billions. You end up with the exact same relative values for things, but the values are bigger - because there's more money in circulation.
[1] - https://www.macrotrends.net/stocks/charts/PG/procter-gamble/...
Record corporate profits are the key indicator here.
If I get charged more interest, I simply charge more in wages/profit to cover it. Which I can do because there is a tight labour market/product market.
Some things, people just have to buy. Can't stop buying food, paying rent, paying for your car, etc.
American economy has been putting the squeeze on these things for decades. Now we're going even lower on Maslow's hierarchy to food. Americans will keep paying though, there is no political energy or power in the population anymore.
Look at social media, if there's a narrative that's unflattering someone will create a large number of bots and shout it down in a way that distorts reflected appraisal signals. You see the same on here with anything that mentions certain keywords like China, central planning, socialism, etc.
Representatives already spend most of their time beholden to their donors after passing through the money filter, they may have sworn an oath but the most common form of incompetency is doing nothing, and worse if they're hopelessly corrupt.
https://www.ons.gov.uk/businessindustryandtrade/retailindust...
So, what is on one hand necessary and inelastic can also be a luxury.
Even things called 'staples' are flexible, you won't die of malnutrition if you don't eat eggs.
Which is exactly my point: either a rival corporation would be able to get market share via undercutting, or price increases are not actually that sensitive to consumer to begin with.
This lack of real choice is hidden behind a plethora of brands all owned by the same large corporations.
And it turns out when there are like 4 large corporations that are responsible for almost everything produced in a market it's really easy to do de facto price fixing (in the sense that they [usually] aren't officially talking to each other but have unspoken ongoing gentleman's agreements) allowing all parties to get a nice share of the price gouging with no party triggering a race to the bottom.
If you're going to ignore the obvious problems with massive consolidation in areas like supermarket chains and virtually everything sold in those chains or the massive problems with consolidated telecomm/ISP companies and the de facto regional monopolies they carve up then I don't think you are arguing in good faith.
Kimberly-Clark, Proctor & Gamble, Edgewell, and Energizer comprise like 90% of the pads and tampons you'll find on the shelves in an American grocery or discount store.
The largest shareholders of all of the above are the same: Vanguard, BlackRock, and State Street. Combined, they make up ~25% ownership of all of them.
Alternatively: firearms
For a while, Cerberus Capital Management owned approximately a majority of US firearms companies by production, including: Remington, Barnes Bullets, Bushmaster, DPMS, Advanced Armament, Marlin Firearms, H & R Firearms, Para USA, The Parker Gun, Dakota Arms, Tapco, and Storm Lake Barrels. All of the above were acquired by Cerberus from 2006-2009.
All of the above were folded into "Freedom Group". That was later rebranded as "Remington Outdoor Company", then sold piecemeal three years later (in 2020).
As a CEO, why would sharing 25% of shareholders with another corporation stop you from exploiting their weakness, increasing your market share, increasing your stock price and in the end, increasing your bonus? You're a publicly traded corporation, your contract is public, your bonus mechanic is public, these 25% don't have any other means of control over you.
Having them as a shareholder in common just means they are in the same index and has no impact on potential collusion.
It's a great question. Usually that competition is what I would expect, but I wonder if there are really the proper incentives in place for competing corporations to compete. I've speculated about this a few times in the past, but corporations ultimately are accountable to their shareholders. And it's increasingly common for their shareholders to also own shares of all their competitors, which is the whole idea of buying an index.
What keeps prices under control in any market is that somebody with supply capacity loses out and doesn't use that supply capacity - because the price achievable doesn't make it worth using that supply capacity.
That's the issue we have at present. There is insufficient spare supply capacity available to be brought online if prices go up. The solution is shifting consumption to investment, but at present the short term view is seen as more lucrative than the long term one.
We have record GDP. We also have record amounts of M2. If there were NOT record amounts of profit i'd be considered. Looking at absolute profit not charted against other metrics is embarrassingly stupid. Maybe profits are driving inflation to some degree, but saying 'record corporate profits are a key indicator' is just wrong.
I am open minded to the notion that corporate profits indicate the direction of "pain flows" in this economy dominated by inflation concerns.
The first question I would ask is: are current corporate profits breaking records in real terms, or just nominal terms ?
I don't know the answer to that.
It would be disappointing, intellectually, to learn that corporate profits are simply up in absolute, nominal dollars ...
... but I've been disappointed before.
Chicken's come home to roost, and the pandemic happened after the Velocity of Money for the M2 had already dropped to nothing. Giving money to people and paying for their education was a last ditch effort after bank lending stopped in Oct/Nov 2019. The charts are all there for those that watch them.
For example, if you're a retailer selling pretty much anything now, your costs are up significantly across various different streams: your rent is up, your utilities bills are up, your logistics costs are up, the wholesale price of the products you stock is up... you have no choice but to increase your prices to stay afloat. That drives a spiral because now not only are your prices higher, you also have to raise your staff's wages because they can no longer afford to buy the products you sell, pushing you to increase your prices, and so on.
Now, you are a contributor to inflation through no fault of your own, despite the key increases in cost coming from, ultimately, rising fuel costs impacting across the whole supply chain.
I agree that record corporate profits are a key indicator (although probably this should be considered in context of inflation also, rather than just the raw dollar amounts).
What I think is novel now is that there’s a lot more cash available to pay these higher prices.
Record profits are the result, not the cause.
> What I think is novel now...
Not novel. Just the return and normalization of usury.
Here's a brief recap, beginning with South Dakota's Gov. Bill Janklow dismantling of consumer protections from financial predators in the late '70s:
A Short History of Financial Deregulation in the United States [2009] https://www.cepr.net/documents/publications/dereg-timeline-2...
(Just the first useful hit I found. There are many, many such analyses. The worsening financialization of household debt has continued almost uninterrupted.)
Elsethread, u/Red_Leaves_Flyy notes some of the additional current co-factors. https://news.ycombinator.com/item?id=36237547
Perhaps one of these days I'll ignore personal morals and join the party, since there doesn't really seem to be a visible downside :(.
Then compare that to what Elizabeth Holmes did, and tell me you don't wish she got a much harsher sentence.
There's a lesson there. To join the party, don't ignore your personal morals. Just bend them to grift the right people.
For one thing, if wages increased as fast as prices, it would actually be a good thing. It would make it easier to make your fixed-rate mortgage payment. It would allow increased construction to bring down real housing prices without bringing down nominal housing prices and causing millions to go underwater. It would devalue your debts, and the national debt.
But a lot of influential people don't want those things. Banks would make less money in real terms because people would have less real debt. Housing speculators wouldn't get their returns. And wages are sticky, so once they go up, it's hard to get people to take a pay cut even after the supply chain issues that were contributing to higher prices abate.
So now the policy is to suppress "inflation" -- which is to say, nominal wage growth.
Inflation is prices going up. Prices go up when somebody selling something realises there are insufficient competitors and they can mark up pretty much as they please and still clear their inventory.
The solution is more competitors, which requires fiscal policy to move people from producing for consumption to producing for investment. Because the market won't do it on its own. It's too busy making a killing.
The problem the West has, that the Chinese don't have, is we have developed a visceral dislike of politically selected investment. Those extracting rents from supply constrained markets love that of course.
The price of the belief that investment can only be private is that the Chinese will ultimately win out.
This generally sounds reasonable.
It implies, that there are some (unnecessary) bottlenecks somewhere in the production chain of highly requested goods that can be alleviated by shifting workforce and capital from somewhere else, where there's overproduction or superfluous capacity to where the bottlenecks are. The allocation of resources isn't optimal. Right?
So which are these obvious misallocations of resources/workforce that ought to be corrected by suitable fiscal policy in your opinion?
Who's to say inflation is even a bad thing, anyway? Argentina's had "hyperinflation" over and over again, and it's not exactly Weimar Germany. All the debt in the economy can never be repaid. Debt vastly exceeds the money supply. What is money, anyway? It's just another form of debt. Dollars and treasury bills are completely interchangeable. In a world that runs on debt, devaluing debt (aka inflation) is a good thing for everyone except the nested-yacht rich (up to a point).
These paltry stimulus programs largely went to pad oligarchs' bank accounts through PPP fraud. This doesn't contribute to prices at the grocery store, at all. It did jack up the price of crypto ponzi schemes, and made a bird app worth a meme number for a brief moment in time. That's about it. Giving money to the rich does not stimulate the economy whatsoever. They just hoard it and blow it on nonsense until it vanishes into thin air, from whence it came. They can't spend all that money on goods and services in ten lifetimes.
Supply shocks, trade wars, excess corporate profits, and a staggering lack of antitrust enforcement are playing far more of a role with inflation than those $1200 checks.
Lastly, raising taxes on oligarchs is pretty much the most popular position in the country, according to polling. Raising taxes is not political suicide at all, provided they're the right kind of taxes. Polls also repeatedly find that Bernie Sanders is the most popular politician in the country. Unfortunately, public opinion has been scientifically proven to have no effect on policy in the USA. This is not a democracy. It's a fascist police state.
Some of us actually do read and educate ourselves despite increasingly hostile literature that strays from facts into non-credible opinion.
Credibility has never been more important, and books that have stood the test of time are often more credible than 90% of the garbage out there.
On a broader topic, a lot of economic theories amount to wishful thinking. You can make an impressive case for almost any crazy idea, and even come up with a model that works, and which you say matches current conditions. Economists portray what they do as very rigorous and scientific, but the reality is that a lot of the time they're mounting an argument for what they believe, not doing science. It's hard for a lay person to tell the difference a lot of the time.
It's worth a listen, I found it interesting.
> Weber particularly admires the enforcement mechanism: any ships that purchase Russian oil above the G-7-mandated price will not be eligible for insurance. “That’s exactly the right principle,” she told me. “You don’t create some global board of price regulation, which will be guaranteed to fail. You work with the existing market infrastructure.”
There's certainly a lot of peril this way if market based price control mechanisms get overused, but there's also a lot of peril in trying to cool inflation by just decimating the economy and curtailing investment.
It depends on the price elasticity of the good. In the example given, that of chips and the cars that depend on them, people were demonstrably willing to pay the premium. In this instance price hikes are a useful mechanism for allocating limited supply to the areas where it's most valued. That this mechanism happens to drive high margins is uncomfortable, but vindictiveness isn't a good basis for policy.
My problem with this article as a whole is that it presents this toolkit as a novel approach to fighting inflation as such, when, if it's applicable at all, it's only been shown to be so in the unusual case of inflation driven mostly by massive supply shocks, e.g. Covid and WWII.
Money is impacted by human choice and human psychology. You can't neatly separate it from human behavior and impulses like greed.
It's grounded in history and historic success and the details make more sense to me than the less nuanced usual explanations that seem rooted in a damned if you do, damned if you don't mentality.
/not an economist
All I know is while I can appreciate it, I'm so woefully inadequate to conceive a solution or even mitigation it's hilarious.
If you look at holistically at the number of working hours a middle class family required to run a household: own a house, car, pay utilities, food and have a quality of life : those hours are far higher . You now have two full time workers with lower quality of life.
Some technology and conveniences have concealed that but it's easy if you look at major expenses like housing, food, quality apparel, child care, education, healthcare.
If you don't believe me, look at census records from 50s-70s and see what professions lived in high class neighborhoods like Palo Alto, Berkeley , West Los Angeles, SF etc. You will see plumbers, carpenters, factory workers living in neighborhoods that are now occupied by 90th percentile incomes.
True inflation is # of hours working vs quality of life and assets earned. That figure is far higher than claimed CPI
- inflation is not informative about X
- X is what matters
- therefore we shall call X "inflation"
Food and apparel (of any quality) are cheaper in real-terms on the time-scales you are talking about. This is an important distinction because while you can substitute beans & rice for meat and patch-up your old clothing, you can't just not have a roof over your head.
Is there a worse indictment for a person?
At least there’s room to improve from the legacy left by the previous decision makers…
I think the question is whether you can actually still do anything that would make it worse, seems like a tough challenge.
* Price control only works so far. It's possible to price control an industry into ruin. There is a real risk when using these policies.
* How does employing this tool differ compared to other levers we have. Raising corporate taxes. Enhancing price gouging policies. Nationalizing critical industries.
* Who controls the price control lever, what is there mission, and how are they held politically accountable. This seems like the type of thing that needs more separation from the election cycle like the Fed or Supreme Court than the average law or executive order.
* Do we trust the controller of the price control lever? What does success look like? What does failure look like?
* Are we concerned that reducing private profits will reduce private investment? As bad as the chip shortage was, look at all the investments into fabrication that followed.
The laws for building new homes haven't changed much in a few decades. The houses being built are a result of equilibrium with profit and secured funding. Every single action you have proposed creates no new homes.
Your proposed change is to devalue all existing homes further, incentivizing people to not own and leave the state, while allowing the state to price people out of their existing assets by forcing an increase in higher property taxes every single year that is based upon the entire amount of the loan, rather than any equity they might have.
This is no less than state mandated stealing from who you perceive to be rich (homeowners), while creating no new homes; because homeowners aside from developers do not build homes.
Do you know what happened in San Fran areas where they created and enforced the rental boards? Property values dropped, rentals dropped, everyone with options didn't invest in the area, business left, no jobs available, police couldn't be funded, and people regularly get killed as crime increases.
Do you even know how much the price of real estate fluctuates over longer periods of time? Some years it increases, other years it stays the same or decreases. That additional property tax is based upon appraisals that don't happen regularly, and the percentage increases every single year.
For a regular home, it already increases each year by at least 7,000 dollars in property taxes. If you have a well paying job of say 50,0000, roughly 32,000 goes to food right now, more if you are not single; and if they got the funding for a house they wouldn't be able to pay property taxes in less than 3 years at existing rates, regardless of the equity they had since its about appraised asset value. Increasing that further and the economics say the asset class is no longer an investment but a negative cash-flow cost.
Honestly I don't get where you people seem to come up with these things being a good idea. Did you do any research before you actually proposed something to see if it was viable?
Or is this just mindless indoctrination speaking?
Not exactly true; the local ADU ordinance was added 2015-2017 (207(c)(4) https://codelibrary.amlegal.com/codes/san_francisco/latest/s...), and the state added an ADU law in 2016 (https://leginfo.legislature.ca.gov/faces/codes_displaySectio....). And San Francisco has just passed the state-mandated Housing Element which promises to upzone more in the next 3 years (https://sfplanning.s3.amazonaws.com/archives/sfhousingelemen...). Moreover, I would support a virtuous cycle of incentivizing development and further upzoning.
> This is no less than state mandated stealing from who you perceive to be rich (homeowners), while creating no new homes; because homeowners aside from developers do not build homes.
That is a norm that can and should change. In a housing shortage, everyone and their mom should be figuring out how to add square footage to their house. All departments of the government should be oriented toward encouraging small homeowners to accommodate more residents.
> Do you know what happened in San Fran areas where they created and enforced the rental boards? Property values dropped, rentals dropped, everyone with options didn't invest in the area, business left, no jobs available, police couldn't be funded, and people regularly get killed as crime increases.
Huh? That sounds nothing like the present day. Property values are still near all time highs, particularly on single-family houses. Violent crime rates are near all time lows (although they could be better).
> For a regular home, it already increases each year by at least 7,000 dollars in property taxes
No, Proposition 13 (which I oppose) caps the tax rate to 1% and caps increases to min(CPI, 2%) per year. For the property tax to increase by $7000 in one year, your property would have to be worth at least 7000 / 0.02 * 100 = $35 million. Your numbers make no sense.
> roughly 32,000 goes to food right now
Again you’re off by about an order of magnitude.
In a national demographic sure, in the areas where these things were being tested locally, look at Oakland or Richmond and compare those property gains over the last housing cycle. They are at an all time high, but what was the percentage of gain compared to other areas that didn't suffer from those rental boards where if you do a remodel you have to first offer it back to the previous tenant at the same rent (with no allowance for CPI increases or improvements)?
Tax Caps guarantee the collector must charge the maximum increase allowed every year regardless.
People are being priced out of their homes because they are being taxed on the property value, not their equity.
Your math is way off. I know people who live there who pay almost 20,000 in property taxes on their properties, and these certainly are not million dollar homes.
Hardly surprising when it's from a smug rag like the New Yorker. Those writers/editors live in a bubble.
I'm not for or against either side, but I was put off by your comment.
https://www.stlouisfed.org/on-the-economy/2016/november/neo-...
It appears that the relationship between interest rates and inflation is still an open question in economics, which is kind of fascinating, because it's like trying to drive a moving car when the relationship between the speedometer and the brake pedal is still being debated by experts.
There are similar debates when it comes to employment. Is a high level of employment inflationary? The established wisdom of the Phillips curve is that it is, because low unemployment leads to high labour bargaining power which leads to wages rising faster than productivity, which results in inflation. But there are many economists wondering if it's not the other way around, because people are employed to produce in-demand goods, while unemployed people don't produce goods but still need to eat. These unresolved questions create questions around the inflationary impacts of eg. a jobs guarantee (https://en.wikipedia.org/wiki/Job_guarantee) relative to a universal basic income (https://en.wikipedia.org/wiki/Universal_basic_income) have some economists arguing for and others against. There is no widespread consensus about the outcomes of such policies.
Thanks. I have never understood why a zero sum interest would lower inflation. Or why fewer employed poatoe farmers would make potaties cheaper. And people talk about it like it was obvious but can never explain.
Many of the things mentioned in the article, specifically causes of inflation, are talked about by other economists. This tells me your idea that “anyone with some background in basic economics” are all in agreement (with you) is wrong.
Feel free to share a proper criticism, there is a decent amount you could discuss from the causes of inflation to her potential solutions. That would make for a more interesting discussion than hand-waving the entire article as “pure trash”, which I don't think is a fair description of the article even if you disagree with Weber.
Price controls are inflexible, they inevitably lead to shortages, and shortages have a short leap to causing death when its strategic goods like food. There is no way around this, its as fundamental as rational pricing is to the economic calculation problem.
Worse, its top down thinking which focuses on central planning, without even touching on all the failures that occur in such systems and ignores who actually sets prices in a distributed economy, ignoring how the more accurate calculation for inflation says its much worse than 10%, and tries to sprinkle faerie dust to make it seem like you've had it all wrong and these aren't the droids your looking for. Magical thinking at its best, and completely lacks basis because it rests on flawed assumptions.
Producers set the prices they sell their physical goods for, if they cannot do that they stop producing. It is that simple.
The first level of producers pays attention to the balance sheets between the fed and the large banks that are and have been being ballooned for the past few years now because that inflation that accumulates eventually is dropped on the economy without warning and they cannot take a loss and continue to produce. As those goes up so to does the prices to accommodate the difference in value of the underlying currency.
These are simple simple things, it amazes me how so uneducated the so called experts who have degrees in that field actually are.
Here's a shocker, this happens every single time in history where the government doesn't want people to know its inflation or where it allowed debasing the currency. By how much, you obviously don't know.
Additionally, and I'm going to say this slowly. Inflation is a lagging indicator, and the metrics you are using were changed to make it look like it was better than it actually is and the Fed didn't hike rates as high as they should have when they could; also Basel III makes banks less responsive to changes in interest rates so you get a magnificent perfect storm, you've already seen some bank failures. Next will effectively be nationalization but under another name because all the other banks went out of business that could absorb the losses.
You say look at corporate profits, in inflation of course profits are going to go up, just like taxes will go up, initially. Inflation doesn't hit the entire economy all at once. It starts at the first level producers, and then makes its way up in cascading price changes. Companies who's impacts aren't as reliant on physical goods are the last to increase and those who want to stay in business must raise the prices accordingly its simple mechanics, and companies who offer products with narrow proft margins must do this pre-emptively. Initially it shows profits, and then it levels out as inflation slows, or increases as inflation increases. Its out of your hands because the fed has the money printer and has been printing ever increasing amounts of money since 2010 to give the illusion our economy was doing well (under the name Quantitative Easing).
This is all very very basic. Ray Dalio wrote a series called Big Debt Crises, I suggest you look at the case studies for hyper-inflation events. We are on-track except the Fed made a monetary policy f'up and didn't pull a Volcker while also creating new problems with Basel.
Initially after the pandemic we had demand pull because our supply chains broke down, and now we are starting to see cost-push inflation, and the bubble on the ledger waiting to unwind is several trillion. We haven't seen nothing yet, and you are supporting actions that will lead to shortages, which leads to food insecurity which leads to unrest and death from starvation.
Absolutely amazing, and that' not even touching on the problems with central planning of which there are many.