The Washington Post reports that the US economy could very well grow like gangbusters this year:
Factories are humming and consumers are spending again, signs that the United States could emerge from the current health crisis with its strongest growth in decades. Goldman Sachs expects the economy to expand this year at an annual rate of 7 percent, the fastest pace since President Ronald Reagan proclaimed “morning again in America” in 1984.
....Not for 75 years, since American G.I.s were battling two totalitarian empires, has the economy been boosted simultaneously by so much deficit spending and so much easy money. The economy will enjoy additional support this year from consumers, who have more than $1.6 trillion in excess savings, thanks in part to last year’s stimulus checks, according to Bank of America.
Some people are worried about all this stimulus producing inflation, and maybe it will. But one of the best indicators of inflation expectations is the 5-Year/5-Year Forward rate, and it seems to be pretty untroubled right now:
Inflation expectations recovered from their pandemic lows in early 2020, but are still at about 2%—well below the rate of the entire period from 2003-2014.
For years, many of us who lived through the '70s have been urging our boomer colleagues to stop being traumatized by the inflation of those years. The inflation of the '70s truly was damaging, but a big reason is that the financial system of the era was designed on the assumption of low inflation rates. When inflation rose, we had to apply all sorts of Rube Goldberg hacks to keep people from literally making negative returns on their money. But those days are long gone. Deregulation of the financial system produced inflation indexing almost everywhere, which means that even if inflation rises it doesn't produce the kind of trauma that it did 40 years ago.
In the meantime, the aging of the US population, along with increasing globalization, puts steady downward pressure on inflation. The lesson here is simple: If inflation becomes unanchored for a significant period of time, then we should start pulling back. But there's no need to pull back every time expectations rise a few tenths of a point. Let's give the economy room to run and see what happens. The best outcome is that GDP booms, wages rise, and even the long-term unemployed start getting back into the workforce.
And the worst case? Inflation starts to grow too fast and the Fed has to raise interest rates. That's not good, but it's hardly the worst thing in the world. It's not a fear that we should let rule our lives.
Gerald Ford lost because of inflation -- & only because of inflation. (He had done nothing else to merit Americans's upset*.) & Republicans will never let another Republican lose a presidency because of out of control Democrat inflation triggered by warmongering Democrat creeps leading landwars in Asia & trying to provide health insurance to more (undeserving) people.
*No one in 1974-76 knew what a scoundrel John Paul Stevens would turn out to be.
Who are you channeling today?
Someone who forgot that Ford pardoned Nixon.
By the logic of our era, Nixon did nothing worthy of a pardon.
Watergate? More like Witchhunt.
Nixon was a snowflake - couldn't stomach a single impeachment, let alone two.
“worst case? Inflation starts to grow too fast and the Fed has to raise interest rates”
Or, we throttle demand with an increase in progressivity of income taxes, or a wealth tax, or a financial-transactions tax. Use fiscal policy for a change; and let the wealthy bear the burden for a change. Through the pandemic, the greatest burden has been born by some of the lowest-paid workers in the economy, in food service and hospitality industries, and service workers at entertainment venues.
Those sound like some good ideas.
One person's good idea is another person's idea that will never make it through the senate...
No actually they're shit ideas, simplistic and structurally inappropriate to inflation response.
A stronger tax on very high incomes and wealth taxes may have things going for them, but as inflation responses are just like proposing a fork to unscrew a too tight nut. Wrong tools, and simple minded Lefty Lefty sloganeering doesn't make them right.
Right. What ideas do you propose?
Bootstraps.
Insightful critiques help me sharpen my thinking, actually. Too bad you just provided insults.
Well said. Recently I listened to a year-or-two old interview Ezra Klein did with Jason Furman (economist of the inflation is bad school) and Stephanie Kelton (economist of the ler-er-rip school) and Ezra was desperately trying to get them to disagree. I'm not an economist but as I understand it, Kelton was saying, hey it's okay if inflation goes up somewhat, and Furman was saying, even in your outlook inflation won't go up because the Fed will act (increase rates) to keep inflation down. I came away from the interview feeling like there really wasn't much of a debate or a disagreement.
Anyway, I really like your suggestion that the answer is to raise taxes on the wealthy. Heck, call it a trickle down tax increase. We'll raise taxes, the economy will be healthier and all will benefit, including the rich.
Ken-
What demand? The wealthy 1% who's wealth Liz Warren wants to tax do NOT influence demand all that much. They may have one or two homes, 3 or 4 cars but they spend fractionally more per person on sundry goods.
Their wealth comes from paper purchases - stocks bonds etc
How does THAT affect demand?
This is one of the reasons I don't like a flat tax. Guys like Limbaugh, and Boortz proposed it and pushed it but they capped the sales tax on things that cost over $250K like boats and homes. Why? To favor the wealthy.
I favor a Tobin tax on financial instrument purchases as part of a wealth tax. I kinda like the flat tax but I see no reason to set a limit on the upper end of purchases
Studies on propensity-to-spend by income have shown varying results; but most are directed at predicting the effect of tax cuts or stimulus payments. We cannot assume that the effect of a tax increase is symmetric.
Three mechanisms: 1) Direct reduction in demand. Even if ‘propensity-to-disconsume’ is less among the wealthy, it’s a percentage of a larger base; 2) Wealth effect on spending; 3) Housing supply is restricted by siting, zoning and other regulations, and ‘inventory turns’ are low; even a small number of nth-home purchases, n>1, drives real property prices up. As property is a factor of production for virtually all goods and services, it drives a general increase in prices.
Inflation like that in the 70's is not something to fear, but that is because the inflation of that time was caused by commodity shocks, that is grain and oil prices, not any of the things that Kevin ignorantly talks about. The inflation during that time was absolutely not controlled by the Fed, which raised interest rates for years to record levels without preventing inflation. Inflation came to an end in late 1974 and early 1980 because oil price quite rising at those times. If you believe contrary to evidence that the Fed did control inflation it was only at the cost of severe recessions, with unemployment up to 10.6%, which was a post-Depression high until 2020. What is to be learned from actual economic history is that the Fed does not know how to control inflation - certainly not without harm - and should not try to do so if it does kick up. Raising interest rates will not prevent people from spending the excess savings that they may have from the checks and unemployment bonuses.
The possible partial analogy for the near future is the ending of WW II rationing in 1946, not the 70's. There was inflation then, but there were massive savings and all sorts of consumer goods had been in short supply or unavailable for years. The inflation subsided with no interest-rate raises.
The end of WWII spending meant factories in US shifted back to peace time production and had a market for their output. Now, fewer consumer goods are made in the US. Depending on sector, few if any are made in the US.
There was a holiday movie about a corporate raider trying to close down a business in rural Vermont--but the person sent to close it down fell in love and saved the business instead. It was an old mill town--but as the show hinted it, the manufacturing was outsourced. The business was about a dozen or so people who did the design and marketing. In the scene where the CEO got off the phone with their suppliers, it wasn't about getting supplies to make the final product, it was about getting the final product.
Our economy has changed quite a bit, and the pandemic has hastened some changes. I'm not sure what that means. What I can say is that the same supply chain problems we had going into the social distancing will show up again when we come out. The winter storms may also play havoc with some commodity prices. Some crops and livestock were lost.
I'm sure whatever happens, Biden will be blamed for it all.
We are likely to see some transitory inflation, that's true. But it's also a very temporary phenomenon.
No shit. A guy in Texas just got a residential electric bill for $17,000.
The people with these bills had been allowed, by the Texas legislature, to gamble on being unshielded from market price swings.
Most Texans, AFAICT, are on regular "retail" electricty supply plans, where this sort of thing doesn't happen.
Yes, what Griddy was offering probably should have been illegal or something close to it. But the resulting bills are not typical of what happened in Texas, at least not from the reports I've managed to read so far.
It kinda worries me that I agree...
In the 1970s, the price of oil quadrupled and we were dependent on oil imports. That's what caused the inflation. Government spending had nothing to do with it. That didn't stop Regan from demagoguing the issue in 1980.
Here's a fun fact: when Carter left office, the national debt, as a percent of GNP, was at its lowest level since the end of WWII. Then Reagan came and proved that deficits don't matter.
I still think it's bullshit Jimmy Carter is the only president to serve a full term but not get a Supremes appointment under his belt.
Zachary Taylor & Wm. Henry Harrison can't hold Mr. Peanut's jock.
(Meanwhile, the Accidental Vice President & Accidental President Gerald Ford got one. At least his came back to bite the GOP in the ass.)
Is Pence the new Quayle?
Hell, we could see a Quayle-Pence faceoff in 2024 GOP presidential primary: Danny Boy is only 74, meaning he'll be a year older than Biden was in 2020, as old as Bernie was, & a year younger than Bloombito was.
W.H. Harrison did a lot of damage to the image of old dudes when he died 31 days after his inauguration. Joe Biden accomplished a lot more in his first 31 days than that piker ever did, and on Day 32 shows no sign of slowing down anytime soon. Old dudes rule again. Way to go, Joe.
But Biden played Mario Kart. (Once.)
Really, that's worse than however many golf outings El Jefe made in his first month as president.
Exactly. I've heard Navarro and other boneheads claim that 70s stagflation "proved Keynes wrong." But Keynes was writing in the midst of a recession caused by demand collapse, not one caused by a supply shock. He would have easily predicted that a fourfold increase in a primary industrial input would cause prices to rise, and then cause a number of economic activities to become unprofitable, causing unemployment. Ergo, stagflation.
Government spending in the 60's definitely helped spur inflation via excessive growth. By the 70's though, the inflation was heavily built on shortages via that growth despite real government spending flattening.
Err ... you might want to read up on Bretton-Woods. Start here:
https://en.wikipedia.org/wiki/Bretton_Woods_system
Why is it that people feel perfectly free to opine that on matters that are so historically contingent without, you know, reading any actual history is beyond me.
In addition to what Kevin has written, I'd like to point out the country's prime age labor force participation rate is pretty pathetic:
https://data.oecd.org/emp/labour-force-participation-rate.htm
We're behind most high income countries and we're fully twelve points (78 v. 90) behind Sweden. That implies a lot of slack in the economy.
"Deregulation of the financial system produced inflation indexing almost everywhere"
Like where? The minimum wage?
I'd say that wages in general were de facto inflation adjusted in the seventies. Today they are not. Unions have lost that power.
I am not sure what this quote even means.
That you can buy TIPS bonds with all that spare cash you’ve been wondering where to invest?
Outside the post-war era, the unions never had that power at all. Artifacts of the great depression they were. By the 70's excessive growth and money creation in the 60's(partially brought on by lagging WWII debt) made unions unpopular coupled with wildcat strikes against the union chief's wishes.
Because racism trumped worker solidarity.
Better for a white tradesman to hate negroes with his white boss than to negotiate an equal wage for white & nonwhite tradesmen.
Unions were "unpopular" with Republican politicians and corporations (same thing) because it was the only method regular folks had to organize against the plutocracy. They were not unpopular with workers who were getting decent pay, retirement guarantees and safer working conditions. They've been systematically decimated by "right to work" laws and government restrictions on organizing and recruiting.
Oh dear lord. You're making it up as you go along, aren't you?
Goldman Sachs expects the economy to expand this year at an annual rate of 7 percent...
Be very wary of economic forecasts from anybody.
A good example of why is this chart here:
https://twitter.com/Claudia_Sahm/status/1361306199208185858?s=20
CBO's estimate of potential output in 2005 projected growth of 30%+ by 2014. We are still below that estimate in 2021. Every revision of potential output is lower. The history of this century's CBO projections is for continuously lower expectations.
The takeaway is that we have far more slack in the economy than anyone knows. Measures like the unemployment rate are not reliable indicators of potential as they may have been in the past.
Null and void. The economy is rebounding sharply now and lagging government data catching up will only confirm what we know: big credit inflation has begun.
The "Far more slack" is pure mumbling. Nope it doesn't. As the economy normalizes by the spring, that slack will be destroyed quickly.
YrY inflation will likely hit upwards to 4% by the summer, before falling back.
You've given no indication that you know what you're talking about -- quite the contrary. So why should anyone believe you when you don't give an argument, evidence, or indeed any sign that you know economic history?
The economy is rebounding and we might (or might not) see a temporary short-term hike in inflation. But it’s still likely to be relatively low over the next few years. The slack will take years to tighten even if we do the right things.
Economics, the dismal science. Seems like only yesterday they were worried Americans weren't saving enough. Now after getting a few hundred bucks a week for less than a year, economists are referring to "excess savings."
Abandoned Snowflake,
https://mobile.twitter.com/joshtpm/status/1363545036181434371
I am not as concerned by the debt as I am about the argument for it.
We have become too lax and our thinking has become one of "everything is OK".
I read yesterday where the debt service is still low.
The economist is of course correct, as a function of our GDP debt service is :relatively low.
But think of it this way. If we had continued to pay down debt as Eisenhower was doing where would we be now? The arguments of starve the beast would be moot.
We could easily pay for M4A, free college for all and probably a UBI
We have gone from what can we afford to pay versus what can we afford to borrow?
I keep thinking we have a bifurcated economy where million-dollar condos are juxtaposed with Neo Hoovervilles all around the country.
Is there pent-up demand? IDK. I see the people who suffered under COVID-19 as having to clear out accumulated debt; meanwhile, people who haven't suffered much have already rebounded on spending.
Err ... you might want to read up on Bretton-Woods. Start here:
https://en.wikipedia.org/wiki/Bretton_Woods_system
Why is it that people feel perfectly free to opine that on matters that are so historically contingent without, you know, reading any actual history is beyond me.
Wikipedia:
“On 15 August 1971, the United States unilaterally terminated convertibility of the US dollar to gold, effectively bringing the Bretton Woods system to an end”
Breton Woods is literally history. What’s your point, exactly?
Read my comment below. This is reply to some fellow named styling himself Midgard. Which you would have known if you had actually been following the comments, but you've apparently got your knickers in a twist over something else I said earlier. This is not a good way to convince me you have any competence on this subject, in case you were wondering.
No, I was actually asking seriously, I didn’t understand the connection. Midgard is mostly babble, but it is true that inflation rose a few points in the late 60’s, before the oil shock; this is generally attributed to LBJ’s Vietnam-era ‘guns and butter’ policy. How did Bretton Woods figure in? Wasn’t that about stabilizing exchange rates?
Well, it was also about enriching our own bankers but close enough. The problem was that while US going of the gold standard was seen as a good thing for us there were those who did not think it was a good thing for them. To give an extremely condensed account: In particular, the OPEC signatories were outraged that outstanding debts had been unilaterally renegotiated and redenominated, as they saw it. Their response was the stuff of history ...
The whole saga makes for fascinating reading, if you're up for that sort of thing. It's also yet another marker for what we now regard as rather primitive thinking was only common sense less than half a century ago. A floating currency, whoda thunk?
As I said, the edit features don't work as well as I would like. I should have included at least one link:
https://www.independent.org/pdf/tir/tir_09_4_2_hammes.pdf
Just the first thing I saw, but even so, it's way better than the 'book report' I gave in a college econ class back in '80 or 81.
The editing features on this platform leave much to be desired.
I agree!
Two thumbs up!