Not everyone needs more money to pay for basics. Spending money might stimulate the economy more than increasing an executive bonus. It is also not just money - but loans and credit, things that keep businesses open in pandemics and allow for taxation and employment only if kept open. That is why governments should have spent during Covid. But not without limit, on pork barrels or indefinitely.
It is several times more expensive - not to mention infinitely more susceptible to fraud - to run means testing than it is to hand out the same amount to everyone. That’s why governments try hard not to do means testing, especially during times of crises when getting money out the door is crucial.
A similar argument applies to spending money on “pork barrel” projects. Everybody thinks that money that goes to anybody but them is a pork barrel project. No society that I know of has ever managed to avoid what some people consider wasteful spending.
These are basically gripes against “them” rather than serious critiques of how real world governments operate. We would all like money to go only to “worthy” projects and the “correct” people. What will actually happen 100% of the time is that spending will take place in the trillions and everybody hopes that only a small percentage of it is utterly wasted. And that percentage is still being used to stimulate the economy.
You’re not wrong, but that doesn’t make all spending equally useful. And spending on infrastructure is historically useful because it provides added benefits. Spending on, say, a slightly fancier stadium with a few more boxes than an adequate one you already have might be less beneficial.
What a society spends its money on matters in difficult times. Some spending causes productivity and income gains and some much less so.
That’s not infrastructure spending, though. Even if a government contributes funds it’s at most tourism. Here’s a summary of what actually was in the infrastructure bill.
Please detail what percentage of that spending is not worthy.
I think it makes sense for the US government to emphasize infrastructure especially when parts of it is bad or unsafe. I think both parties largely agree on this. Not sure why you think I have a problem with infrastructure spending.
I see. Apologies for mis-reading that.
I’ll just say, then, that I don’t remotely agree with @Sam_Stone that monetary policy started to be “loose” from 2007.
The problem with the way the modern Fed works is that it can take actions that are almost completely worthless, yet give the appearance of drastic change. Or it can take actions that fundamentally alter the future monetary regime, yet give the appearance almost no change whatever.
It’s a dynamic problem, and our data is static photographs. It’s like taking a live-action movie of a mystery movie, and turning it into a collection of jigsaw puzzles of still pictures of different moments. Having enough pieces to visualize a single moment – even supposing such an effort were successful – doesn’t necessarily tell us what the next moment should look like. The movie has red herrings, dead ends. People fill in their blanks based on prior beliefs and impressions.
This doesn’t just mess up understanding among the public.
I see other macroeconomists struggle with this. A weird thing about algebra is that you can crank out all the correct operations, and still not actually grasp what the equations are attempting to describe. I would say that an outright majority of macroeconomists haven’t fully internalized how issues like the “perfect thermostat” non-correlation must be considered when doing statistical analysis of policy influence on the economy.
Well, my study has been monetary policy and recessions so I can’t claim deep familiarity with those inflation papers.
But I don’t believe his “reams of studies”.
I mean, I know of a literature investigating allocative costs of expected inflation, including from famously “conservative” economists such as Lucas. (These models tend to be based on Walrasian equilibria, cash-in-advance constraints.) And yes, this particular literature – if this is what he is referring to, as seems likely – suggests relatively low allocative costs from relatively high inflation, if it’s anticipated inflation.
But once you start adding monetary search frictions into models (which is still an abstraction of exchange but nevertheless more realistic than a Walrasian auctioneer) you can get costs that are at least an order of magnitude higher. And that’s just direct allocative costs, it doesn’t count issues where people can make an outright loss on their investments in real terms, and then get taxed on top of that for their trouble. I would guess investment/tax distortions are higher, potentially significantly higher, than direct allocative costs by themselves
And all of this is still “expected” inflation.
But higher inflation rates are likely to have more variable outcomes, where we would have to start adding the costs of unexpected deviations from the abnormally high inflation rate, and then people’s worry about deviations from a high rate of inflation.
I think we should have steady growth in nominal spending of 5% or so a year, and that policy will keep inflation within reasonably low bounds while allowing markets with sticky prices to clear.
I would repeat here that a brief uptick of inflation is not “the problem”.
Really, I think the Econ 102 aggregate supply/aggregate demand diagram cuts to the heart of what’s happening right now.
We have had a massive adverse supply shock. The AS curve has shifted in. And so prices are higher. But trying to push prices down right now (pushing AD inward) isn’t going to solve any problems. It will just compound the real production issues.
AS-AD is a frosh graph. It isn’t sexy.
But it packs a lot of insight into a small space. Inflation isn’t “the problem” right now. The problem is the secondary supply effects from the pandemic. Inflation is the messenger of that, not the cause. (Mostly. I think it’s probably slightly high right now, but not unreasonably so.) Trying to solve the inflation, as if it were the real issue, would make the real issue worse right now.
Keep nominal spending stable, on a stable long-run path, and the inflation will drop again as the supply issues eventually sort themselves out.
It’s difficult for people to distinguish between market signals, and the underlying situation.
This is why there’s so much consternation about prices, instead of production. The prices are signalling a problem of underlying production, at least at the moment.
Our interaction with the world is almost entirely based on these surface-level market signals, rather than their underlying cause which are hidden from us. If there’s less total stuff, then stuff costs more. Simple enough. But people’s interaction isn’t with the “total amount of stuff available” or something abstract like that. People interact with prices: they see stuff costing more, and focus on the “price” as the ultimate source of scarcity when it’s not right now. We’re looking at a significant adverse supply shock.
The opposite error is also common. Prices are higher? Then put a cap on prices to fix it. Magic wand thinking. Just wave the magic wand and it stops the price increases. Childish, but common enough.
People are in some legitimate pain right now. But focusing on the inflation is a shoot-the-messenger approach. Historically popular, but ill advised. The pain is coming from the underlying situation.
I don’t often agree with Octopus, but I think that “vote buying” used in the context of policies/programs/pork etc. proffered to attract voters to a candidate is common enough.
How, or even can, the underlying situation be addressed in the short or medium term? Seems like the answer to that is a qualified no since at least from what I understand, the supply chain issue has a lot of moving parts and a lot of things that would need to be addressed…in multiple points of its operation, in multiple sectors of the economy and in multiple countries.
Yeah, I think you’ve pointed out both of the knee-jerk (or maybe populist) reactions likely to (in fact, that are being discussed in the various political circles) be proposed. Yikes.
It’s a simple answer really. If you want goods and services there has to be incentives to produce said goods and services. Money isn’t wealth. Money facilitates trade. So pumping money into an economy in order to facilitate trade that has issues with production is going to hurt folks who have no realistic means of earning sufficient money. Such as old retired folks living off of savings.
Therefore, policy should be focused on incentivizing productivity. And not productivity as measured in dollars or any other currency. Productivity should be measured as a list of what is actually being produced.
The inflation that is going on clearly has multiple causes. The economy has had a number of large shocks applied to it, and like all complex adaptive systems it is re-adjusting in ways that are unpredictable. Monetary inflation is certainly part of it, especially the multi-trillion ‘helicopter drop’ Covid money that flowed under Trump and Biden. But it’s clearly not the whole story, and it’s not clear to anyone, including economists, just how much.
We still don’t really kmow why so many people are not returning to the work force. We haven’t figured out all the sectoral shifts due to changing preferences and capacities. We don’t understand the factors going into the supply chain disruptions, as there are probably a million reasons, specific to various industries. We don’t understand yet how work-from-home is affecting productivity, worker happiness, innovation and orher key metrics. We haven’t separated out the effect of unvaxxed layoffs from othef employment issues. We haven’t quantified how much the rise in energy prices is affecting cost-push inflation.
Economists will be studying this era for eecades. There are a lot of ‘natural experiments’ going on right now that will be interesting to observe over time. And anyone who says they know exactly what is going on now is lying or suffering from Dunning-Kreuger.
@Hellestal: I’m curious as to what effect you think would happen if you basically printed several trillion dollars and distributed it directly to the people. Would you agree that, all else being equal this would be an inflationary move?
I get why previous rounds of QE were not inflationary (or were just inflationary enough to prevent deflation): That money went directly to banks to shore up their reserves, and it didn’t really move. You can see that in falling velocity when those injections were made. But sending the money directly to people to spend should be much more inflationary - do you agree with that?
One last questiin for you: The Fed just announced that it is tapering its bond buying to zero by March. If the government wants to borrow a trillion dollars, just where will that money come from if the Fed is no longer buying tens of billions in bonds per month?
Are there enough private and government investors out there willing to buy those bonds at under- 2% interest rates? Or will yields have to go through the roof to attract enough buyers? Is the Fed going to lose control,of interest rates if bonds have to sell on an open market?
Here’s an article featuring a prominent economist who appears less than 100% enthusiastic about the OP’s thesis: El-Erian says ‘transitory’ was the ‘worst inflation call in the history’ of the Fed
… the Fed must quickly, starting this week, regain control of the inflation narrative and regain its own credibility. Otherwise, it will become a driver of higher inflation expectations that feed onto themselves.
He adds that he does not think the Fed will do what’s necessary to “regain control of the inflation narrative”.
The best natural experiments are when one exogenous event happens, with everything else remaining roughly the same.
But Covid has forced a lot of simultaneous changes. This makes “causal identification” even harder than usual.
And identification can pretty much always be argued, even in simpler cases. This is what makes so many data discussions unproductive in the social sciences. In the standard framework – unfortunately – acceptance of a causal statistical argument first requires acceptance of the underlying assumptions that underpin that causal statistical argument.
But the underlying assumptions are exactly where people disagree.
Absolutely. All else equal, that would be inflationary.
But the problem with macro is that “all else equal” part. A central bank is essentially always doing something, even if it doesn’t look like it’s doing anything.
I don’t know.
But here’s the 10-year yield: 1.47 as I write this.
The entire world knows that the Fed has announced its expectation of multiple rate increases next year. The world knows that new bond purchases will stop.
Now, supposing that there really is a dearth of buyers for future US government borrowing at current rates… that would mean a sharp increase in rates, which is to say, a sharp drop in bond prices. People who are holding current bonds, right now, would take that on the chin. They would lose big.
Are they worried?
By which I mean, in aggregate, representing the market as a whole: Are these bond holders in general worried that they will see a sharp drop in the value of the bonds they’re currently holding? No. No, they are not worried about that.
Obviously, markets can be wrong.
I’m not writing this to say that there is an absolute guarantee that rates won’t spike. But in general, unless I have very strong reason to think otherwise, I’m going to defer to market “forecasts” as a useful starting point.
The market forecast will, of course, change when the information changes. But… that’s exactly what we want. If the market changes its mind, I’m very likely going to change my mind also.
A lot of criticism about “science” from yokels is that scientists change their mind about stuff, so how can science possibly be trusted? And it’s like… yes. Scientists do sometimes change their mind – maybe not even often enough – and it’s precisely because they are willing to change their mind that they’re worth listening to.
Sources of information that eventually update in a sensible direction based on new information are worth listening to. Not blindly following (there’s been some Covidiocy, for example, sometimes even among “experts”), but worthy of attention.
I don’t actually need to know where those bond purchasers will come from to see that the general expectation is, at present, that they will be there.
“Losing control” of interest rates can mean different things.
One possible interpretation of that is that the Wicksellian “natural rate” of interest (which is a theoretical construct, but a strong one) creeps above the current actual rate. And so, because the interest rate is too low compared to the natural rate, things get a little too hot. And because things get a little too hot, the “natural rate” starts rising even further.
And so the Fed increases the rate… but too late. The gap between the natural rate and the actual rate is even larger than it was before, because the theoretical natural rate is increasing faster than the Fed responds. And so the Fed is always playing a game of catch-up, but never aggressively enough and so is always behind, and this continues until inflation – and nominal interest rates – are above 10%.
I think that’s one fair interpretation of the possibility of “losing control” of the rate.
But here is the 5-year breakeven.
And here is the 10-year breakeven.
This is the difference in yield between inflation-protected bonds and the typical (inflation-vulnerable) bonds. This gives a very rough market “forecast” of expected inflation. Fairly sedate right now, even out ten years. A little high? Yes. But not exhorbitantly so.
Is it possible that the Fed will react too slowly? Is it possible that they will always be a step behind until inflation jumps to double digits? Well sure. When so much power is invested in the hands of a few people on a committee, it’s always possible that those few people will fuck up. We live in uncertain times right now, an unprecedented situation, which makes fuck-ups somewhat more likely than usual.
But that’s not the general expectation right now.
I think they’re about a point behind the curve. Maybe a half-point. They’ve just revised their future inflation forecast upward, which is not a great sign. Such upward estimates are often followed by further upward estimates, which naturally calls into question the mechanism by which they claim to be “forecasting”: it’s a biased forecast that only updates in one direction.
Nevertheless, market expectations are not shifting that much. Yet.
If we start to see stronger market signals, and they don’t react properly, well then, that would suck.
But we’re not there yet. Inflation consternation strikes me as premature.
There are, of course, plenty of other possible sources of consternation in the world, for those who are interested in searching them out.
Has anyone answered this yet?
I am a big fan of using market signals, and normally the fact that long term interest is relatively low would be a very convincing signal that interest rates and inflation will remain low.
But isn’t it possible that the market is reacting more to Fed expectations than to market fundamentals? In other words, they could simply be betting that either the fed won’t or can’t raise interest rates much, rather than betting on where the natural rate actually is.
But if inflation goes up, how could the fed keep rates low? Wouldn’t that expose them to arbitrage risks? If I can borrow at 2% but inflation is 6%, I could borrow money, put it in something inflation protected then later pay back the loan with inflated dollars and guarantee a profit.
When inflation hit 17% in Canada and interest rates went to 21%, our province ‘protected’ homeowners from interest by capping it at something like 12-13%. The result was a lot of people buying homes that were going up 20% per year with loans at 12%. It turned into a big wealth transfer to mortgage holders. If rates are held artificially low while inflation rises, we should see a whole lot of that behaviour, shouldn’t we?
My problem in understanding what might hapoen is that neither seems to work. How high can interest rates go before the government is bankrupted by carrying costs on the debt? At 100% of GDP in debt, each point of interest raises debt service by 1% of GDP when the debt rolls over.
37% of the debt is currently in instruments that roll over in less than a year. Another 35% is in 3-5 year maturity instruments. The government is very exposed to interest rate hikes.
The price of the 10-year bond has to incorporate a decade of expected inflation losses.
If the Fed kept rates low even if the economy were over-heating – if it kept the short-term instrument rate below the “natural rate” for an extended period – we’d see more than a blip of inflation. The result would be persistently higher inflation rate that would eat a large chunk of principal of the long bond before it was repaid.
If that were generally expected, the price of the long bond would plummet (its rate would spike). Meaning, the price would already be slipping right now, if this were the general expectation. But it’s not.
There’s no way for the Fed to influence the price of the 10-year in the same way it does the short-term rate, because the inflation penalty is too high over that long a time period. They wouldn’t be able to support the long bond with direct purchases, if it came to that, because that would be direct monetization of the debt: the inflationary impact would swamp any increased demand from direct purchases. In that kind of crazy scenario, they’d have to buy all of it in order to “support” the price of the long bond. But that kind of story is the end of the USD as it currently exists.
But the 10-year bond is stable. The 10-year breakeven is stable. The USD is doing fine on the foreign exchange markets right now, for example against the pound sterling and the euro.
As much as I dislike DSGE models in general, this is the one thing they get absolutely right: all of these markets are inter-connected.
Whatever story we tell about future inflation has to make all of the pieces fit together, not just some of them.
They couldn’t.
If inflation goes up persistently – not just as a blip – then rates will go up, too. No choice in the matter, outside of hyperinflation-world.
Mortgage holders are banks.
It seems like you mean mortgage borrowers here, the homeowners.
If the rates were capped, then those loan offers must have quickly vanished.
No-one knows.
One thing to note here, though, is “bankruptcy” is a bit of a slippery idea for a sovereign debt issuer who borrows in their own currency. If a country has to repay debts in somebody else’s currency, well that’s a binary situation: either you can afford to gather enough of the foreign currency to pay the debt, or you can’t.
What the US would do instead is just eat away a large chunk of the value of the dollar in a relatively short amount of time, and so “re-pay” its debts in that way.
But no-one really knows what the result of that would be, either, if it were done on massive scale.
Shit, never mind. I’m using the SDMB app and it’s not the greatest at some things (like reminding me I’m posting to an older thread).
This is a long but thoughtful article on inflation; one of its main points is inflation–how we define it, construct it as a problem, and propose to deal with it–is primarily a political problem, informed by the particular interests of particular groups. Thus it is shaped by those with more political power, rather than any objective analysis. I’m shocked, shocked to discover that the rich usually define the problem in ways that blame workers and exact austerity.
My thinking may be hopelessly old fashioned, but:
Traditionally, non-rich Americans kept their money in bank accounts that had interest rates rather close to inflation.
Now, savings interest rates are, depending on the bank, around 1 percent, with inflation at around 8 percent.
If you take away 7 percent of someone’s retirement savings, that would seem to be a bit of a menace.
If wages, prices, and risk-free interest rates were all going up the same — no menace.
But if it’s uneven, there’s the menace.
I know this bout of inflation is international. Is the failure of savings rates to keep up international, or is that just the U.S.?
P.S. Is financial repression, rather than inflation per se, the menace?
This is quite true, probably at least 50 years out of date.
The coming of pensions, retirement funds, 401Ks, CDs, and other investment devices long ago made saving accounts close to the worst form of stashing away their money.
According to Here’s Where Americans Are Storing Most of Their Wealth, only 18% store the majority of their wealth or money in savings accounts. The median transaction account balance, details this other site, is only $5,300, as of 2019.
Most average Americans have wealth directly or indirectly in the stock market. Over the long haul, stocks return more than inflation. We’re in a bear market right now, which is not reassuring, but bear markets occur about every five years since WWII. How long this one will last and how bad it will get nobody knows.
Nevertheless, the amount of money in and the interest rate of savings accounts are an irrelevant tiny slice of the overall financial picture in the modern era.