Group items tagged

As inflation has plummeted while unemployment remains low, the president’s allies see not just a strong run of economic data but a new model for policymakers — proof of what is possible if the government is willing to be aggressive in fighting downturns.

Summers is the most prominent expert who disagrees. He blasted the administration’s $1.9 trillion 2021 stimulus law, the American Rescue Plan, for exacerbating inflation, arguing through 2022 that the U.S. economy would probably need a spike in unemployment for price hikes to fully abate and accusing President Biden’s team of the “least responsible” macroeconomic policy in 40 years. Biden’s economic policies had overstimulated the economy, Summers said on cable TV, in op-eds and in interviews, as well as in private talks. And he maintained it would almost certainly take a major slowdown — and millions of lost jobs — for inflation to return to the Federal Reserve’s 2 percent target.

Biden last year instinctively rejected the notion pushed by Summers that taming inflation would require policies that would throw millions of people out of work, according to five people familiar with the president’s private remarks

it’s not clear to me that economists who had predicted that getting inflation under control — it’s down a lot, although not all the way — would require years of very high unemployment are engaging in a similar reckoning. They should. In particular, they should ask themselves whether inflation pessimism was in part caused by a form of bias that has had negative effects on a lot of economic policymaking — not partisan bias, but the urge to sound serious by calling for hard choices and sacrifice.

let me talk about what went wrong with so many recent economic predictions.

mainstream predictions about inflation and unemployment made late last year — economic projections by the Federal Reserve and by professional forecasters surveyed by the Philadelphia Fed. Perhaps surprisingly, both more or less correctly predicted the inflation decline we’re actually seeing.

The Brookings Papers on Economic Activity, a conference held twice a year, is America’s premier forum for relating academic research to “the most urgent economic challenges of the day.” The lead presentation at the September 2022 conference was a paper by Laurence Ball, Daniel Leigh and Prachi Mishra on inflation. And its conclusions were dismal. Harvard’s Jason Furman, one of the assigned discussants, wrote an opinion piece calling it “the scariest economics paper of 2022,” suggesting that to get inflation down to 2 percent “we may need to tolerate unemployment of 6.5 percent for two years.”

My question instead is why so many economists got the inflation outlook so wrong.

Unemployment is still near a 50-year low, yet here’s what happened to the Federal Reserve’s preferred measure of underlying inflation, the personal consumption expenditures deflator excluding food and energy (try saying that five times fast):

In both cases, heavy federal spending (on the war in Vietnam and Great Society programs in the 1960s, on the response to Covid in 2020 and 2021) added to demand. And shocks to global energy and food prices in the 1970s made the inflation problem significantly worse, just as they are doing now.

In contrast, efforts by the current Fed chairman, Jerome Powell, and his colleagues to bring down inflation enjoy considerable support from both the White House and Congress, at least so far. As a result, the Fed today has the independence it needs to make policy decisions based solely on the economic data and in the longer-run interests of the economy, not on short-term political considerations.

a key difference from the ’60s and ’70s is that the Fed’s views on both the sources of inflation and its own responsibility to control the pace of price increases have changed markedly. Burns, who presided over most of the 1970s inflation, had a cost-push theory of inflation. He believed that inflation was caused primarily by large companies and trade unions, which used their market power to push up prices and wages even in a slow economy. He thought the Fed had little ability to counteract these forces, and as an alternative to raising interest rates, he helped persuade Nixon to set wage and price controls in 1971, which proved a spectacular failure.

In most histories of how Americans became so polarized, the Great Inflation of the 1970s is given short shrift

Inflation was as pivotal a factor in our national crackup as Vietnam and Watergate

nflation changed how Americans thought about their economic relationships to their fellow citizens — which is to say, inflation and its associated economic traumas changed who we were as a people.

The government hasn’t embraced MMT. But important elements of it are now accepted by much of the economic and financial establishment, with major implications for how the economy is run.

The most important claim of MMT is that a government need never default on debt issued in its own currency. The lesson of 2020 was that MMT is right.

“We got five or six trillion dollars of spending and tax cuts without anyone worrying about payfors, so that was a good thing,” says L. Randall Wray, an economics professor at Bard College in New York and a leading MMT academic. “In January [2020], MMT was a crazy idea, and then in March, it was, OK, we’re going to adopt MMT.”

Some big-name economists argue that the economy will soon overheat because of the Biden administration’s $1.9 trillion pandemic relief and other spending measures.

It turns out that the two sides — the overheating worriers and those who think those concerns are misplaced — agree on many points. They have common ground on what a bad outcome might look like, and agree that it will take some time to know whether a problematic form of inflation is really taking root. The differences are in how likely they consider it to happen.

The overheating worriers, who include prominent Clinton-era policymakers and many conservatives, believe there is a more substantial chance that one of two more pessimistic scenarios will come true. As vast federal spending keeps coursing through the economy, they fear that high inflation will come to be seen as the new normal and that behavior will adjust accordingly.

The same inflationary forces that pushed these prices higher have also pushed wages to be 22 percent higher than on the eve of the pandemic. Official statistics show that the stuff that a typical American buys now costs 20 percent more over the same period. Some prices rose a little more, some a little less, but they all roughly rose in parallel.

It follows that the typical worker can now afford two percent more stuff. That doesn’t sound like a lot, but it’s a faster rate of improvement than the average rate of real wage growth over the past few decades.

many folks feel that they’re falling behind, even when a careful analysis of the numbers suggests they’re not.

By traditional measures, the economy is strong. Inflation has slowed significantly. Wages are increasing. Unemployment is near a half-century low. Job satisfaction is up.

Yet Americans don’t necessarily see it that way. In the recent New York Times/Siena College poll of voters in six swing states, eight in 10 said the economy was fair or poor. Just 2 percent said it was excellent. Majorities of every group of Americans — across gender, race, age, education, geography, income and party — had an unfavorable view.

To make the disconnect even more confusing, people are not acting the way they do when they believe the economy is bad. They are spending, vacationing and job-switching the way they do when they believe it’s good.

Recorded by the European Space Agency’s Planck satellite, the image is a heat map of the cosmos as it appeared only 370,000 years after the Big Bang, showing space speckled with faint spots from which galaxies would grow over billions of years.

is in stunning agreement with the general view of the universe that has emerged over the past 20 years, of a cosmos dominated by mysterious dark energy that seems to be pushing space apart and the almost-as-mysterious dark matter that is pulling galaxies together. It also shows a universe that seems to have endured an explosive burp known as inflation, which was the dynamite in the Big Bang.

“The extraordinary quality of Planck’s portrait of the infant universe allows us to peel back its layers to the very foundations, revealing that our blueprint of the cosmos is far from complete.”

After the 2008 financial crisis plunged America into a deep recession, both the new Obama administration and the Federal Reserve tried to stimulate the economy, spending hundreds of billions on a variety of programs while buying trillions in bonds. There is now consensus among economists that these efforts were helpful, but it’s also widely believed that they were inadequate (as some of us strenuously argued at the time).

Reflecting this expectation, companies will mark prices up relative to what they would have been if they didn’t expect future inflation — and by so doing, will feed the very inflation they fear. In other words, once expectations of sustained inflation are embedded in the economy, inflation becomes self-perpetuating — and bringing it down can be extremely difficult. That’s what makes stagflation — inflation despite high unemployment — possible.

If they aren’t — and my bet is that they won’t be — then the lesson of 2010-2011 will remain: Don’t panic.Now as then there are people eager to denounce government attempts to help the economy. And it’s certainly possible that the American Rescue Plan will turn out, in retrospect, to have been too much of a good thing. But don’t let the usual suspects seize on a few months’ inflation data as evidence of looming disaster.

The closely watched 5-year 5-year forward inflation swap rate for the euro area rose above 1.35% Tuesday, the highest in over a year. It continued to hover near that level Wednesday. The metric shows an average expectation for price increases over five years.

Forecasts for higher prices are playing out in the bond market. Germany’s 10-year break-even rate, or the difference in yield between its benchmark bond and a price level-linked bond, climbed above 1% for the first time since February.

The headline inflation rate stood at minus 0.3% in November, at which level it is expected to remain December.

In the euro zone annual inflation hit 3.4% in September, the highest rate in over a decade. Some economists worry that the world economy is entering a period of “stagflation”—weak growth and high inflation—reminiscent of the 1970s.Off the ChartsTaking you behind the scenes of our data journalismDirectly to your inbox every weekSign up

A recent paper by Dennis Bonam and Andra Smadu, two economists at the Dutch central bank, looks at the effect of pandemics on inflation and concludes that they typically lead to lower, not higher, price pressures.

Using data going back to the 14th century, covering six European countries and 19 pandemics, the authors find that such events have historically caused inflation to fall for more than a decade, on average, yielding an inflation rate about ​​0.6 percentage points lower than if the pandemic had not occurred.

By the early ’90s, so long as one had the good sense to major in the humanities — all bets were off in the STEM fields — it was nearly impossible to get a final grade below a B-minus at an elite college.

According to a 2012 study, the average college GPA, which in the 1930s was a C-plus, had risen to a B at public universities and a B-plus at private schools. At Duke, Pomona and Harvard, D’s and F’s combine for just 2 percent of all grades

Some blame students’ consumer mentality, a few see a correlation with small class sizes (departments with falling enrollments want to keep students happy), and many cite a general loss of rigor in a touchy-feely age. 

proponents insisted that funneling $1.9 trillion to American households and businesses wouldn’t unshackle a long-vanquished monster: inflation.

nflation prospects increasingly influenced political commentary and Wall Street trading.

Jamie Dimon, chief executive of JPMorgan Chase, is among those tracking the inflation threat. “There’s a very good chance you’re going to have a gangbuster economy for the rest of this year and easily into 2022, and the question is: Does that overheat everything?” he said in an interview with Bloomberg Television last week.

During Mr. Trump’s time in office, it has become clear that the United States economy can surpass what technocrats once thought were its limits: Specifically, the jobless rate can fall lower and government budget deficits can run higher than was once widely believed without setting off an inflationary spiral.

Before the pandemic took hold, the jobless rate was below 4 percent, inflation was low, and wages were rising at a steady clip, especially for low and middle earners. The inflation-adjusted income of the median American household rose 9 percent from 2016 to 2019.

The higher interest rates from unfunded tax cuts that had been forecast did not materialize; the C.B.O. in spring 2018 had expected the 10-year Treasury bond yield to average 3.5 percent in 2019. In fact, it averaged a mere 2.1 percent, making federal borrowing more manageable.

The more I covered Biden, the more I came to feel affection and respect for him. Then, as now, he could be a tough boss, occasionally angry and hard on his staff. But throughout his life, Biden has usually been on the side of the underdog. I’ve rarely met a politician so rooted in the unpretentious middle-class ethos of the neighborhood he grew up in. He has a seemingly instinctive ability to bond with those who are hurting.

He has his faults — the tendency to talk too much, the chip on his shoulder about those who think they are smarter than he is, the gaffes, that episode of plagiarism and the moments of confusion — but I’ve always thought: Give me a leader who identifies with those who feel looked down upon. Give me a leader whose moral compass generally sends him in the right direction.

But I’ve also come to fear and loathe Donald Trump. I cannot fathom what damage that increasingly deranged man might do to this country if given a second term. And the fact is that as the polls and the mood of the electorate stand today, Trump has a decent chance of beating Biden in November of next year and regaining power in 2025.

Over the week of March 16, markets experienced an enormous shock to what investors refer to as liquidity, a catchall term for the cost of quickly converting an asset into cash.

Mr. Powell bluntly directed his colleagues to move as fast as possible.

They devised unparalleled emergency-lending backstops to stem an incipient financial panic that threatened to exacerbate the unfolding economic and public-health emergencies.

Here’s Furman:There’s what economists think people should think about inflation—and what people actually think about inflation are different. . . .Inflation has big winners and losers. So surprise inflation helps debtors and hurts creditors. And there are probably tens of millions of people in our economy who have benefited from inflation. Maybe it’s a business that was able to raise prices more. Maybe a worker who was able to get a bigger raise. Maybe it’s someone whose mortgage is now worth 10 percent less.But there are not tens of millions of people who think they’ve benefited from inflation. In fact, I’m not sure there are tens of people who think they’ve benefited from inflation.And so it has these winners and losers. The losers are very aware of their losses. The winners are completely oblivious to their gains.So then as a policymaker, do you want to sort of make people happy? Or do you want to sort of do what you think is in their economic and financial interests? And that to me is not obvious.

Oh it’s obvious to me. The People are the problem.But they’re a persistent problem and until the AIs replace us, The People aren’t going away. So given this constraint, I’m not sure that an optimal solution is ever going to be politically possible in American democracy. The country is too fractured. Our political institutions too compromised.

so if you work from the assumption that we’re going to shoot wide of the mark in one direction or the other, I’d still rather be on the Trump-Biden side of having done too much, and dealing with our attendant problems than the Bush-Obama side of having done too little.

WASHINGTON — Presidents who find themselves digging out of recessions have long heeded the warnings of inflation-obsessed economists, who fear that acting aggressively to stimulate a struggling economy will bring a return of the monstrous price increases that plagued the nation in the 1970s.

After years of dire inflation predictions that failed to pan out, the people who run fiscal and monetary policy in Washington have decided the risk of “overheating” the economy is much lower than the risk of failing to heat it up enough.

“But we face a huge economic challenge here and tremendous suffering in the country. We have got to address that. That’s the biggest risk.”