Max Sawicky on the inflation panic
When the history of the 2020s is written, the current inflation panic could very well rival the “but her emails” canard surrounding Hillary Clinton in 2016: The impacts on U.S. politics have been profound, and decidedly negative from any progressive standpoint.
I have to admit that I previously understated the persistence of the price increases that started showing up last fall. As Yogi Berra is credited with saying, “Prediction is hard, especially about the future.” Still, the fact remains that the most popular explanations for inflation reflect malign political-economic motivations.
First and foremost, we hear that inflation is due to excessive economic stimulus, especially from the eternal enemies of economic stimulus. Hence the outsized political role of Sen. Joe Manchin (D‑W.V.) — the self-styled economic genius who constantly worries about inflation — and the endless nattering of budget hawks. According to this outlook, the federal government (under Trump as well as Biden) gave people too much money, and, as everybody knows, inflation is the result of “too many dollars chasing too few goods.” As usual, what “everybody knows” serves as an inadequate guide.
The dollars chasing goods are reflected in what economists call consumption expenditures. If there are too many dollars, so to speak, then consumption spending would outrun the normal growth of GDP. As economist Dean Baker notes, this has not been the case during the ongoing panic, either in the United States nor in the nations of the European Union, where inflation has been similarly elevated.
Another pandemic effect cited by Baker is the shift within consumer spending from services to goods: less travel and eating out, more staycations and ordering in. Here again, goods producers can adjust, but that takes some time.
This takes us from the demand side — consumer spending — to the supply side. Here the problems are obvious. The pandemic disrupted “supply chains,” i.e. the transactions among firms within industries.
As Josh Bivens of the Economic Policy Institute notes, if one producer is temporarily sidelined, or otherwise forced to cut back production, this provides opportunities for competitors that are not as hampered to jump in with price increases. This dynamic is not a matter of the long-running growth of monopolies, in tech or elsewhere, but a case of temporary market disruptions. Pandemic lockdowns in China — the world’s manufacturing colossus — have been significant, resulting in downstream impacts.
The bottom line, as Bivens shows, is that profits have increased rapidly, while labor costs have not. The profit increase reflects the ability of firms to exploit kinks in the supply chain. Most of these price increases have gone to profits, not to labor.
As Bivens writes, “The historically high profit margins in the economic recovery from the pandemic sit very uneasily with explanations of recent inflation based purely on macroeconomic overheating.”
Sawicky goes on to point out that this is a function of capitalism and normally would work itself out. But because of the war in Ukraine which is affecting gas prices and grain production, it’s taking longer. These are complicated issues that are difficult to fit on a bumper sticker and anyway, the explanations don’t do much to help people who are reeling from sticker shock. He says that low income people should be given some help to get through this period.
But also:
Bivens suggests an excess profits tax as one remedy. Another would be increased benefits in programs such as the Supplemental Nutrition Assistance Program (a.k.a. ‘food stamps’) and unemployment insurance to alleviate inflation effects on lower income families. The federal government could also do something about the high prices of prescription drugs. The impact on overall inflation itself for these remedies is dubious, but it would help if the Democrats showed they were doing something. The most important likely remedy is time, but in politics those who stand back and wait are in for a shellacking.
I’m one of the ignorant people who doesn’t understand all the economic ins and outs and that explanation certainly speaks to me. I expect it would make sense to a lot of people.
Sawicky writes that the economy is doing very well otherwise, with wage growth being especially phenomenal. And he wonders why we aren’t hearing more about that? I agree. I read something (can’t find it right now) about how people are freely quitting jobs they hate or because they aren’t making progress in their careers to move to new ones. This hasn’t happened in decades. It’s a big deal, especially to young people who have everything togain by being able to be flexible and mobile in their employment.
As Sawicky says, the media paints an unrelentingly gloomy picture of the economy and it’s affecting everyone’s mood.
He takes on the Democratic messaging and he’s sadly right about this:
On the policy front, we have two problems. One is a further indication of misfeasance from the Biden administration, in the form of new blather about the success of deficit reduction. It’s one thing to be blocked from worthwhile reforms like Build Back Better by a couple of intransigent Democratic senators. It’s another to celebrate the results.
This is very much a replay of the Obama 2010 playbook, when his administration failed to cobble together a congressional majority to support its initiatives, failed to note the shortcomings of what had been enacted, and failed to talk about what should have been done instead. Then, in the 2010 midterms, the Democrats, as Obama said, got “shellacked” and lost their majorities in Congress.
Bringing employment back to nearly its pre-pandemic level in a year’s time was a great achievement, but we can do better. Employment should keep up with population growth — and that means 2022 population, not 2020 population.
The other policy issue is the posture of the Federal Reserve, using the hammer it has while defining everything as a nail. By pushing up interest rates in pursuit of inflation reduction, the Fed will end up pushing down employment and GDP growth, while possibly worsening supply-chain difficulties.
This past Thursday, the Commerce Department announced that GDP in the first quarter of this year had declined by 1.4 percent on an annual basis. It’s not news that the stock market has also taken a dive this year, especially this past month, which further retards consumer spending. People feel, and are, less rich — and they spend less as a result.
Even the European Central Bank has pointed out the gap between the incoming Fed bombardment and the problem it is held to address:
“Higher interest rates won’t solve the imbalance between supply and demand, energy prices and base effects that are currently pushing up prices: they won’t make more shipping containers available or boost the supplies of semiconductors and fuel.”
The pandemic relief has been a huge success. Supply-chain disruptions cannot be attributed to the White House, nor repaired by the Fed’s jack-up of interest rates. The economy’s inflation problem is being misdiagnosed and mistreated. All this adds up to a terrible political situation in the run-up to the midterm elections that puts our entire democracy at risk.
Oy… why can’t we ever learn?
Click over to read the whole thing. it’s worth it.