Since we seem to be relitigating Joe Biden's ARP stimulus and whether it caused inflation, I want to show you my theory of the case. It will be familiar to most of you.
Apologies for the complicated chart. What it shows is that the first phase of inflation started shortly after the pandemic and was the result of supply shortages plus the $2.2 trillion CARES Act, which kept demand steady. It peaked about 15 months later (red dots). This is a shorter interval than usual because this wasn't a normal monetary inflation, which takes a while to work through the system. It was an external shock, which has an impact fairly quickly.
That took us up to about 8% inflation, and then CRRSA and ARP kicked in.¹ They pushed inflation up to 10% and extended the inflationary period by half a year or so (blue dots).
This is why I say the inflationary surge was almost entirely a result of the pandemic plus CARES. That was responsible for about six points of inflation. CRRSA+ARP was perhaps responsible for another two points for a couple of quarters. This means the (allegedly) excessive size of ARP was responsible for at most one point of extra inflation.
How bad was that? That's a matter of opinion. If inflation had peaked around 8-9% and subsided two quarters earlier, how much difference would that have made? That's genuinely hard to say, but my gut feeling is it would have been fairly minimal.
¹CRRSA is the $900 billion pandemic bill passed a month before Biden took office.
OK, I think this is bullshit because it was a worldwide phenomenon. This inflation was almost entirely a supply side phenomenon. Americans can believe how much influence their government has, smaller governments obviously have hardly any influence. America has delusions of grandeur. Over and over again.
Yes, needs a chart with maybe a line for UK, a line for EU, another for all OECD countries etc., plus maybe an analysis of what similar programs were enacted in other countries. In today's global economy just info on the US is nowhere near enough to draw any conclusions from.
An EU publication might be of interest. The title is “Are inflation dynamics different in the euro area and the United States?”
Pretty much every other country also engaged in stimulus, to a greater or lesser degree. It would be extremely implausible to think that such a large stimulus didn't contribute. You can create charts and graphs until your fingers hurt, but without a counter-example it's all but impossible to determine how much was due to stimulus spending with any real authority.
It is a bit of a difficult argument to prove because Covid was a massive negative shock to demand (especially for restaurants, bars and entertainment venues). So there were both positive AND negative demand shocks. But Kevin said there was basically no change in demand (total, but with structural changes).
Covid was a negative shock to demand for services. It was a positive shock for goods.
Drum is not arguing "contributed to" though
So I guess the lesson is if there's ever another global pandemic that tanks the economy, tell people they just have to ride out a year or two of unemployment and massive economic contraction because otherwise their Big Macs might get expensive. Roger that.
Yes exactly, we have now run an experiment on the effects of dealing with transitory inflation just about perfectly for a never-before-seen soft landing with low unemployment, and the result was that voters hated it, so this is unlikely to happen again in most of the world.
Don’t worry. I doubt we’ll be electing any intelligent decent people again for the foreseeable future. The populace has decided it prefers stupid and evil people to tell them lots of lies while campaigning and then ignore them for 4 years. Future hopeful politicians will fill that desire.
People complain that politicians lie to them then elected a compulsive pathological liar. Go figure.
New rule: anybody who complains about inflation has to return their covid check.
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+1
I think this is right, and my corroboration is Germany.
The Germans didn't do hardly any fiscal stimulus after the initial pandemic-related stuff. Their inflation peaked around six percent in 2022 and then subsided rapidly. (They also had next to nonexistent GDP growth and unemployment is running around six percent.)
This has helped the SPD not one bit politically, as they are being blamed for both inflation AND a sluggish recovery.
Damned if you and damned if you don't.
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I think the biggest problem here is that we can't really answer the question, "what would have happened without CARES and ARP?". My opinion is that it would have been bad, very bad. Most economic models say it would be bad, very bad. Most economists say it would be bad, very bad. Frankly, most politicians understand that it would be bad, very bad.
However, that's some expert from far away telling you that things "would have been bad", and that invites skepticism. It's easy to doubt, or ignore in favor of the bad thing that's in front of you.
So we compare to a hypothetical, not a reality. Which puts doing the right thing at a disadvantage. I think the CARES and ARP were the right thing, even if they caused some inflation. Not doing them would have been much worse.
I think this gets it exactly right. All these arguments presuppose that there is some Goldilocks amount of stimulus that would have kept the economy going without sparking some inflation. I see no evidence to support that view. Given a choice, which would you rather have: years of higher than normal unemployment or a couple of years of modestly higher inflation (with wages keeping pace so there is no real loss of purchasing power)? Also note that we were going to get some inflation anyway due to supply chain problems. Without the stimulus, would wages have kept up with this level of inflation?
Years of high unemployment is lost production. You can never get it back.
“Given a choice, which would you rather have: years of higher than normal unemployment or a couple of years of modestly higher inflation…?”
Evidently, for most people, the answer is: years of higher unemployment. After all, unemployment sucks but if the unemployment leopard doesn’t eat your job/face specifically, then it’s highly likely you’ll come out better if prices don’t ever rise either. Far too many Americans don’t care what happens, as long as it only happens to Those People Over There, and so will prefer “all the harm falls on a small number of people” (unemployment) vs “a little bit of harm falls on everybody” (inflation). Americans are too self centered to ever embrace Solidarity arguments. (This of course does not bode well for the next pandemic or world war or other huge crisis requiring any self sacrifice.)
I don't think this is accurate. There's a massive availability bias. There was inflation right in front of us. We didn't like it. We have no idea what it would be like if we did other things, so there is no real fair comparison.
This isn't like, "I tried the spaghetti, and I tried the pizza, and I like the pizza better" There was no side-by-side comparison, it isn't possible.
I don't think there's any question that:
too much stimulus = inflation
too little stimulus = slow recovery.
If you doubt the second proposition, take a look at the recovery during the Obama years. Too little stimulus.
My point was that there's no evidence that there is a Goldilocks level of stimulus. As Austin says, the choice for most people is just a question of if YOUR face is being eaten. But this is short-sighted because sluggish recovery hurts everyone, even those who didn't lose their jobs. People are always short-sighted (if you doubt that, look at the response to climate change), but politicians are supposed to be leaders and take into account what's best for everyone.
Yup. Inflation hurt everyone to some degree. Can't have a shared hardship!
What it says to me, that people seriously need to look outside their own country much more often. Governments are not all powerful.
This means there is next to no incentive for politicians to do anything to help people in a pandemic or similar global shock, which sounds about right to me. At best, the voters won’t reward you for it, and at worst, they’ll run you out of office. Better to just hunker down and hope the crisis doesn’t become global or catastrophic.
It makes one wonder what the point of interest rates are. In a macro sense, they are about capital reallocation, but in a micro sense, the effects, like many other government action, are economically unpredictable.
Interest rates are not a government action. At least not in most of the world. In a macro sense, they have nothing to do with capital reallocation. I'm sorry, but empirically, that is nonsense. What they do has more to do with changing demand and exchange rates than with capital allocation.
I don’t know how else one explains the market reacting to interest rates except calling it capital reallocation. The Feds cut rates, investors pour into the market, they raise rates, investors flock ways from equities to the bond market- almost like clock work. What else would you call it but capital reallocation.
Who knows, but several neutral to liberal leaning academic folks do not agree with Kevin.
https://mitsloan.mit.edu/ideas-made-to-matter/federal-spending-was-responsible-2022-spike-inflation-research-shows
https://www.vox.com/23036340/biden-american-rescue-plan-inflation
https://www.riaintel.com/article/2aucrzsa72lr93ypli4g0/the-big-question/economist-jason-furman-explains-how-inflation-snuck-up-on-us-and-whats-ahead-in-2022
Given the timing of the Ukraine invasion and the random selection of 15 months as a yardstick, it's hard to glean too much from this chart.
"...CRRSA+ARP was perhaps responsible for another two points for a couple of quarters...."
Looks to me more like 2-3 points for 4 quarters. The red dot would have been the peak and two quarters later the rate would have been near or below 6%. Instead it rose to above 8% for three quarters and was near 8% for a fourth.