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Burgess COMMENTARY Peter Burgess | ||
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https://www.nytimes.com/2021/06/21/opinion/inflation-economy-biden-fed.html
and Original article: Inflation-paper-Gordon-Nordhaus_Schultze-1975 The Week Inflation Panic Died June 21, 2021 Remember when everyone was panicking about inflation, warning ominously about 1970s-type stagflation? OK, many people are still saying such things, some because that’s what they always say, some because that’s what they say when there’s a Democratic president, some because they’re extrapolating from the big price increases that took place in the first five months of this year. But for those paying closer attention to the flow of new information, inflation panic is, you know, so last week. Seriously, both recent data and recent statements from the Federal Reserve have, well, deflated the case for a sustained outbreak of inflation. For that case has always depended on asserting that the Fed is either intellectually or morally deficient (or both). That is, to panic over inflation, you had to believe either that the Fed’s model of how inflation works is all wrong or that the Fed would lack the political courage to cool off the economy if it were to become dangerously overheated. Both beliefs have now lost most of whatever credibility they may have had. Let’s start with the theory of inflation. Since the 1970s, and especially since a seminal 1975 paper by Robert Gordon, many economists have tried to distinguish between transitory fluctuations in the inflation rate driven by temporary factors and an underlying “core” inflation rate that is much more stable — but also hard to bring down if it gets uncomfortably high. The idea is that policy should largely ignore transitory inflation, which is easy come, easy go, and worry only if core inflation looks as if it’s getting too high (or too low). Since 2004 the Fed has routinely published an estimate of core inflation that it derives by excluding changes in food and energy prices, which are notoriously volatile, and has used that measure to fend off demands that it tighten monetary policy in the face of inflation it considers temporary — notably in 2010-11, when prices of oil and other commodities were rising and Republicans were accusing the Fed of risking “currency debasement.” The Fed was, of course, right: Inflation soon subsided. And the distinction between transitory and underlying inflation — a distinction that, judging from my inbox, generates an extraordinary amount of hatred from some Wall Street types — has, in fact, been a huge practical success, helping the Fed to keep calm and carry on in the face of both inflation and deflation scares. The Fed has been arguing that recent price rises are similarly transitory. True, they’re not coming from food and energy so much as from pandemic-related disruptions that caused surging prices of used cars, lumber and other nontraditional sources of inflation. But the Fed’s view has been that this episode, like the inflation blip of 2010-11, will soon be over. And it’s now looking as if the Fed was right. Lumber prices have plunged in recent weeks. Prices of industrial metals like copper are coming down. Prices of used cars are still very high, but their surge has stalled and they may have peaked. Core inflation wins again. What about the alternative inflation story? It goes like this: The Biden administration’s American Rescue Plan has pumped a huge amount of purchasing power into the economy, while affluent households, which built up large savings during the pandemic, are now ready to go on a spending spree. As a result, critics warn, there will be a classic case of too much money chasing too few goods, leading to a big rise not just in volatile prices but in underlying inflation, too. To buy into this story, however, you have to claim not just that the coming boom will be truly huge — even bigger than most private forecasters expect — but also that the Fed, which is fully capable of reining in a runaway boom, will stand idly by while inflation gets out of hand. Last week, however, statements from the Fed’s open market committee — the group that sets monetary policy — made such claims less plausible. Reading such statements is often an exercise in Kremlinology — the Fed didn’t announce any actual policy changes, so it’s all about trying to identify changes in tone that give clues about the future. But Fed watchers considered the new releases hawkish, signaling increased willingness to step on the brakes if the economy really is exceeding its speed limit. For what it’s worth, I don’t think tapping the brakes will be required. But by suggesting that it will act if necessary, the Fed has largely undercut whatever case there was for worrying about a return to the 1970s. So what was all that about? Monetary doomsayers have been wrong again and again since the early 1980s, when Milton Friedman kept predicting an inflation resurgence that never arrived. Why the eagerness to party like it’s 1979? To be fair, government support for the economy is much stronger now than it was during the Obama years, so it makes more sense to worry about inflation this time around. But the vehemence of the inflation rhetoric has been wildly disproportionate to the actual risks — and those risks now seem even smaller than they did a few weeks ago. More on the inflation debate Opinion | Mike Konczal and J.W. Mason How to Have a Roaring 2020s (Without Wild Inflation) June 15, 2021 Opinion | William D. Cohan The Fed Cannot Control Its Easy-Money Monster June 15, 2021 Opinion | Paul Krugman What Do Used Car Prices Say About Biden’s Agenda? May 13, 2021 The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com. Follow The New York Times Opinion section on Facebook, Twitter (@NYTopinion) and Instagram. Paul Krugman has been an Opinion columnist since 2000 and is also a Distinguished Professor at the City University of New York Graduate Center. He won the 2008 Nobel Memorial Prize in Economic Sciences for his work on international trade and economic geography. @PaulKrugman A version of this article appears in print on June 22, 2021, Section A, Page 18 of the New York edition with the headline: The Week Inflation Panic Died. -------------------------------------------------- Allan Tannenbaum/Getty Images Author Headshot By Paul Krugman NYT Opinion Columnist Leisure suits went out of fashion more than 40 years ago. High inflation stopped being a problem only a few years later. Yet while you rarely see warnings about the imminent return of disco style, hardly a year goes by without dire predictions that ’70s-type stagflation is coming back. Today’s column is about how the case for fearing runaway inflation has collapsed over the past few weeks. But I didn’t have space to talk about why such fears have received widespread publicity, even though they were always on very shaky ground. Of course, one reason people are talking about inflation is that some prices have shot up in the past few months. But I don’t have the sense that inflation worriers are really arguing that soaring prices of used cars and lumber are harbingers of a return to double-digit inflation. Instead, they’re treating the background of price hikes as a kind of Greek chorus to reinforce their claim that we’re repeating the mistakes of the 1970s. The question is why invoking the specter of the 1970s evokes such terror. Not that the ’70s were a good time economically. The great post World War II boom ended circa 1973, introducing a long period of sluggish gains and often declines in median income. But the ’70s don’t stand out as worse in that respect than several other periods. Real income growth under Jimmy Carter was better than it was under George Bush the elder; the Gerald Ford and Carter era as a whole was better than the reign of George Bush the younger. And none of the economic travails of the period matched the suffering of the 2008 financial crisis and its aftermath. True, there was that inflation, although incomes by and large kept up. Still, by the numbers, it’s hard to see why we still scare children by telling them that if they’re bad, they’ll end up back in the 1970s. What’s all that about? Part of the answer is that the economic troubles of the ’70s came along with other bad news. Crime was still on the rise; inner cities were decaying; we lost the war in Vietnam. These were pretty much entirely separate stories both from one another and from the economic malaise, but they tend to merge in historical memory. But here’s the thing about historical memory: It tends to be selective, and what gets remembered often reflects elite agendas. To take an infinitely more important subject than mere economics, how many white Americans were ever taught about the 1921 Tulsa massacre? I know I wasn’t. And so it is with economic history. You very rarely hear about the bleak economic mood of the early 1990s, a time of falling incomes, deindustrialization and widespread fear that the United States was losing out to foreign competitors. Somehow that episode got dropped from the curriculum even though Bill Clinton got elected by campaigning against the Bush economy. But harping on the troubles of the 1970s serves a political purpose. To this day, I keep reading declarations that Carter-era stagflation is an object lesson in the terrible things that happen if taxes and spending are too high. There’s actually no evidence that big government had anything to do with the economic problems of the time; soaring oil prices caused by wars and revolutions in the Middle East were probably the biggest factor, plus irresponsible monetary policy (undertaken in part to help Richard Nixon win re-election). Still, the legend of ’70s stagflation as the market’s way of punishing America for being too liberal lives on; for influential forces in our political discourse, it remains a story too good to check. The relevance to our current discourse is obvious. Democrats with a progressive agenda have taken control of the White House and, barely, Congress. Of course, there are widespread declarations that we’re about to relive (cue scary music) the … 1970s. Well, I’m not scared. Unless there’s a real possibility of a return to disco-era fashion, which would be terrifying. Quick Hits
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