Larry Summers has been wrong in every one of his predictions over the recent unpleasantness. I have to hope he’s wrong that the correlation with the 70s continues. Why did inflation increase in the early 1970s? The Vietnam War. Is another war in our future? Certainly possible. Likely? No. Are we already neck-deep in one? Also no.
Without mentioning this historic truth, the presentation is no more than lying with statistics.
That’s the first time I’ve heard the Vietnam War used as an excuse for 70’s inflation, outside of its effect on the deficit. If that’s what you meant then sure, Vietnam had an effect. But not because of a war, but because of deficit financing of the war.
The usual assigned causes of the stagflation of the 70’s are large deficits used to fund the Great Society programs and the growing military, interest rates held too low, the Arab oil embargo, and the collapse of Bretton Woods. Vietnam was only a factor insomuch as it contributed to the large deficits of the time, but government spending in general and low interest rates were the main culprits.
Larry’s chart just shows that in the past at least, rapid declines in inflation could be followed by rapid increases, indicating we may not be out of the woods yet. But this economy is not the same as the 1970’s, so maybe it won’t. But back then, inflation wasn’t brought under control until Volcker allowed interest rates to go to 21%. That can’t happen again, because the world is awash in debt in ways it wasn’t then, and raising interest rates that high would kill the economy and usher in a depression.
As I said, we’ve been flown into a coffin corner. Now we have to hope we can careful get ourselves out of it, because disaster awaits if we screw it up, while many of the tools we would use to do that such as interest rates are now severely constrained.
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So massive new taxes on the ‘rich’ would net you… half of the interest on the debt? In exchange for killing the capitalization that makes the tech sector work?
Seriously, most rich people do not have cash lying around. Their money is from capital gains and investments. If you want to get that money, they have to liquidate their investments to pay.
There’s a reason why Europe is stagnating and deindustrializing. Let’s not be Europe.
Here’s an interesting tidbit I just came across. It’s from an investment advisor newsletter, but the punchline is not their own (possibly self-serving) work.
How so?
The only similarity they have at all is that there is a spike where inflation went up and then came down a relatively short time later. The width of the spike isn’t the same, the amplitude isn’t the same and the characteristics of previous years before the spike aren’t the same. I can look at the graph and say that there was another point in history where inflation came back after it appeared to go down, but I would in no way say that they are eerily similar.
I heard once that the outcomes of complex systems are notoriously hard to predict… But I guess maybe people just weren’t looking hard enough for lines that went up and down in a somewhat maybe similar manner?
Yeah, yeah- “trickle down”. Proven never to work. So, buying 100 million dollar yachts is “creating capitalization”?
What nations dont have a large national debt?
Yes, the line “guns and butter” covered the growth of both domestic and military spending. The Great Society was a breakthrough; the war was a waste of every dollar. The oil embargo hit us when we were already down.
We went through the waste of a trillion - or two - a couple of decades ago, before that chart starts, under Bush II. And the banking community went through a breakdown under Bush II. Yet the economy not only recovered but boomed. Until Covid. That required another influx of money. The aftermath is that the economy not only recovered but boomed. A comparison with other countries worldwide shows that by most measures America is doing better. (The Economist says so and it’s pissed about it because it’s still trying to revere conservative economics.)
Deficits should not be ignored, any more than any other large expenditures. Prioritizing deficits above all others by fiat fails to recognize the exigencies of the times. Nor do they correlate with or predict the overall economy. (As a percentage of GDP, U.S. federal deficits rose only slightly during Summers’ period of 1966-1983. 2019 had a lower percentage than 1983.)
As I insist, the country is awash in money, although it is distributed almost historically unequally. Spending money is very low on the list of possible ways to screw up the economy.
Trickle down doesn’t work? I know this is a standard belief on the left, but I dispute it. We don’t have to debate it, but it should be noted that many people, including many economists, disagree with you. As does reality, IMO. If trickle down doesn’t work, how is the average person so much wealthier today? How did all those people in the third world get lifted outnof poverty? How come poverty increases under socialism/communism and goes down when countries adopt capitalism?
We don’t even agree on the definition of terms.
I’m very familiar with the term. I also know that it’s now used as a general replacement for ‘supply side economics’. Originally pejorative, it’s now taken to describe a system whereby if you set conditions for producers to thrive, the results will trickle down to everyone. Especially in a situation where producers are being choked by regulations and taxes.
The pejorative is that it’ll be just a ‘trickle’. And it’s true that wealth of the wealthiest increases faster than the wealth of the poor in such a situation. But the key thing is that they both do better.
I would rather live in a society where everyone is getting richer even if the gap between rich and poor is growing, than in a society where we are all getting poorer or stagnating together.
History suggests that policies relying on “trickle-down economics” are destined to fail, and yet the idea, for some, still persists. David Hope explains why tax cuts for top earners only benefit the rich and why the issue is so controversial to discuss…In research first published as a working paper in 2020, David Hope and Julian Limberg, of LSE’s International Inequalities Institute and King’s College London, analysed the economic effects of major tax cuts for the rich across five decades in 18 wealthy nations. …Their conclusion: the rich got richer and there was no meaningful effect on unemployment or economic growth… No evidence that tax cuts for the wealthy will generate economic growth”…In 2017, when Donald Trump was introducing the Tax Cuts and Jobs Act, he claimed to the American people that this would be rocket fuel for the US economy. We don’t find any evidence in our study across 18 advanced economies over 50 years of that being true.”
A huge study of 20 years of global wealth demolishes the myth of ‘trickle-down’ and shows the rich are taking most of the gains for themselves… The 2022 World Inequality Report demolishes the myth that tax cuts for the rich will trickle down… The data serves as a complete rebuke of the trickle-down economic theory, which posits that cutting taxes on the rich will “trickle down” to those below, with the cuts eventually benefiting everyone. In America, trickle-down was exemplified by President Ronald Reagan’s tax slashes. It’s a theory that persists today, even though most research has shown that 50 years of tax cuts benefits the wealthy and worsens inequality.
That reminds me of that article about total debt starting to go up in the early 1980s:
I would argue that we did the right thing to get through the pandemic. We threw a lot of money into the economy, via multiple stimulus packages that both parties supported at one time or another. And it worked pretty good. We had a short, transitory, bout of inflation that was mostly related to supply shocks. But we’ve come out of it with inflation back down to the Fed’s target, unemployment very low by historic standards, strong job creation, and wages growing faster than inflation recently. GDP growth is good.
So, the borrowing hasn’t hurt us YET. It’s helped. And I do not think the Biden administration is worse than the Trump administration. I think Biden inherited a mess, and tried to help with stimulus and laying the groundwork for green and infrastructure investment, and his scorecard has been successful on the economic front.
We are not in any fiscal emergency at all. Our debt load & ability to service the debt isn’t going to sink us anytime soon. But going forward, we’ll have to tighten our belt with tax increases and spending cuts. The problem is that it’s hard for politicians to get elected or re-elected on that. I do think there needs to be a tax increase perhaps to lengthen the lifespan of the SS trust fund, and a partial reversal of the Trump tax cuts. On the spending front, probably cuts with medicare spending (Biden’s IRA will help some with that) will help with that. Continued GDP growth should help though. We’re not in a situation where we need anything drastic.
I think Krugman has mostly been right. There has been a lot of debt hysterics over the last few decades. But there has been no debt crash, related to the US government debt. No debt spiral. No hyperinflation. Nothing at all like what the debt -worriers have predicted.
And Krugman argued, correctly, that misplaced debt/deficits concerns caused the Obama administration to pivot too quickly away from stimulus and it hamstrung the recovery from the 2008 financial crash.
And I have read recently that one reason that inflation was high - and is still as high as it is … is due to corporations keeping prices high in order to maximize profits, which they are raking in.
The Economic Policy Institute is a left-wing propaganda outlet. About as believable as the Heritage Foundation. Almost a third of their funding comes from labor unions.
One of the ways you can tell the article is being misleading is that they compare a segment of under two years (2020-21) to a period of 40 years. Gee, you think conditions might be different between 1979 and 2019? Entire industries have risen and fallen in that time.
Another way you can tell they’re being misleading is the Y axis on figure B.
Fine. Lefty propaganda. Dismiss the entire concept.
However, the amount to which corporate profits drive inflation is not merely a horrible Marxist pipe-dream. Reputable economists actually do discuss the degree to which this drives and maintains inflation.
The Bank of Canada is not a lefty propaganda outfit:
British think tanks the Institute For Public Policy Research and Common Wealth said in a report Thursday that big firms made inflation “peak higher and remain more persistent,” particularly within the oil and gas, food production and commodities sectors.
Clearly neither of you knows how “internet” works.
This is massively not the 70’s. That’s when we had stagflation, high inflation and high unemployment, and inflation was persistent to the point where Volcker had to break it in the 80’s. In the 70’s, expectations of high persistent inflation became embedded, and caused a wage-price spiral.
The post-pandemic experience is very different. The most analogous situation was the years coming out of WW2, when the economy had to re-set after we won the war. There was a burst of inflation when all the soldiers came home and our military/industrial was able to de-escalate, and it then subsided without much hassle after a couple of years. What we’re seeing today is more like the post-WW2 inflation than anything from the 70’s. Summers should know better. I think he’s been unwilling to admit that he got it wrong on the soft landing that was recently achieved.
https://www.barrons.com/articles/federal-reserve-inflation-fight-history-51647960603