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#15240000
I Was Wrong About Inflation

Paul Krugman, The New York Times, July 21, 2022


In early 2021 there was an intense debate among economists about the likely consequences of the American Rescue Plan, the $1.9 trillion package enacted by a new Democratic president and a (barely) Democratic Congress. Some warned that the package would be dangerously inflationary; others were fairly relaxed. I was Team Relaxed. As it turned out, of course, that was a very bad call.

But what, exactly, did I get wrong? Both the initial debate and the way things have played out were more complicated than I suspect most people realize.

You see, this wasn’t a debate between opposing economic ideologies. Just about all the prominent players, from Larry Summers to Dean Baker, were Keynesian economists, with more or less center-left political leanings. And we all had similar views, at least in a qualitative sense, about how economic policy works. Everyone in the debate agreed that deficit spending would stimulate demand; everyone agreed that a stronger economy with a lower unemployment rate would, other things equal, have a higher inflation rate.

What we had instead was an argument about magnitudes. The rescue plan was huge in dollar terms, and as Team Inflation warned, if it had a normal-size “multiplier” (the increase in gross domestic product caused by a dollar of additional government spending) it would lead to a highly overheated economy — that is, to a temporary surge in employment and gross domestic product far above their sustainable levels, and hence high inflation.

Those of us on Team Relaxed argued, however, that the structure of the plan would lead to a much smaller surge in G.D.P. than the headline number would suggest. A big piece of the plan was one-time checks to taxpayers, which we argued would be largely saved rather than spent; another big piece was aid to state and local governments, which we thought would be spent only gradually, over several years.

We also argued that if there were a temporary overshoot on G.D.P. and employment it wouldn’t sharply increase inflation, because historical experience suggested that the relationship between employment and inflation was fairly flat — that is, that it would take a lot of overheating to produce a big inflation surge.

So here’s the odd thing: The multiplier on the rescue plan does, in fact, seem to have been relatively low. A lot of consumers saved those checks; state and local government spending rose by less than one percent of G.D.P. Employment is still below its prepandemic level, and real G.D.P., while it has recovered to roughly its prepandemic trend, hasn’t shot above it.

Yet inflation soared anyway. Why?

Much, although not all, of the inflation surge seems to reflect disruptions associated with the pandemic. Fear of infection and changes in the way we live caused big shifts in the mix of spending: People spent less money on services and more on goods, leading to shortages of shipping containers, overstressed port capacity, and so on. These disruptions help explain why inflation rose in many countries, not just in the United States.

But while inflation was confined mainly to a relatively narrow part of the economy at first, consistent with the disruption story, it has gotten broader. And many indicators, like the number of unfilled job openings, seem to show an economy running hotter than numbers like G.D.P. or the unemployment rate suggest. Some combination of factors — early retirements, reduced immigration, lack of child care — seems to have reduced the economy’s productive capacity compared with the previous trend.

Even so, historical experience wouldn’t have led us to expect this much inflation from overheating. So something was wrong with my model of inflation — again, a model shared by many others, including those who were right to worry in early 2021. I know it sounds lame to say that Team Inflation was right for the wrong reasons, but it’s also arguably true.

One possibility is that historical experience was misleading because until recently the economy was almost always running a bit cold — producing less than it could — and inflation didn’t depend much on exactly how cold it was. Maybe in a hot economy the relationship between G.D.P. and inflation gets a lot steeper.

Also, disruptions associated with adjusting to the pandemic and its aftermath may still be playing a large role. And of course both Russia’s invasion of Ukraine and China’s lockdown of major cities have added a whole new level of disruption.

Looking ahead, the economy is currently cooling off — the decline in first quarter G.D.P. was probably a quirk, but overall growth seems to be running below trend. And private sector economists I talk to mostly believe that inflation either has already peaked or will peak soon. So things may seem less puzzling a few months from now.

In any case, the whole experience has been a lesson in humility. Nobody will believe this, but in the aftermath of the 2008 crisis standard economic models performed pretty well, and I felt comfortable applying those models in 2021. But in retrospect I should have realized that, in the face of the new world created by Covid-19, that kind of extrapolation wasn’t a safe bet.

https://www.nytimes.com/2022/07/21/opin ... ation.html?
#15240010
Well, it's no wonder it was going to miss the inflation target. It's not just because of the supply chain disruptions Krugman mentioned, but also because of the uncertainty about future lockdowns - which were dependent on vaccine effectiveness to deal with future mutations of the virus (itself inherently unpredictable).

I think the stimulus was a reasonable call at the time, but it's clearly time to pull the brakes now and to deal with the deficit.
Last edited by wat0n on 24 Jul 2022 19:22, edited 1 time in total.
#15240023
BlutoSays wrote:

Looking ahead, the economy is currently cooling off — the decline in first quarter G.D.P. was probably a quirk, but overall growth seems to be running below trend. And private sector economists I talk to mostly believe that inflation either has already peaked or will peak soon. So things may seem less puzzling a few months from now.



Which is why I think we need to be cautious about raising the interest rate.

If it turns out we're kicking the economy in the nuts, that's going to be tough to fix, way things are right now.
#15240027
You'll find very different economic numbers at https://www.shadowstats.com

One of the first steps needed is to stop the push for unrealistic and cooked economic numbers by the government. The way the government measures numbers is politically "convenient", but not realistic.

It's been that way for decades. They fiddle and change definitions and measurements constantly to fit pre-canned narratives, and that's not right. That invites serial disasters.
#15240036
late wrote:Which is why I think we need to be cautious about raising the interest rate.

If it turns out we're kicking the economy in the nuts, that's going to be tough to fix, way things are right now.


How much of that slowdown is due to supply-side issues?

Furthermore, what the Fed wants to avoid is higher long-run inflation due to higher expected inflation. It needs to show it's serious about curbing inflation.

GDP will recover regardless.
#15240231
BlutoSays wrote:One possibility is that historical experience was misleading because until recently the economy was almost always running a bit cold — producing less than it could — and inflation didn’t depend much on exactly how cold it was. Maybe in a hot economy the relationship between G.D.P. and inflation gets a lot steeper.

This is not the case. Several studies have looked at the economy and found that, after adjusting for inflation, the overall economy is actually just a little down from where it was before. So it is not "running hot".

wat0n wrote:How much of that slowdown is due to supply-side issues?

That is a fair point, but like I brought up before in another discussion, if it was really all caused by temporary disruptions in the supply chain then prices should eventually drop back down to what they were before.

We all know that is unlikely to happen.
#15240437
Puffer Fish wrote:This is not the case. Several studies have looked at the economy and found that, after adjusting for inflation, the overall economy is actually just a little down from where it was before. So it is not "running hot".


That is a fair point, but like I brought up before in another discussion, if it was really all caused by temporary disruptions in the supply chain then prices should eventually drop back down to what they were before.

We all know that is unlikely to happen.


Here we agree. Here you seem to be able to see that many corps and OPEC have monopoly pricing power. When it comes to believing the slight increases by the Fed in interest rates will control inflation, you can't seem to see the effect of many corps having monopoly pricing power. I wish you could see both effects.

.
#15240487
BlutoSays wrote:Image

The fact that people have nothing to say to each other doesn’t mean that they stop talking. :lol:
#15240489
BlutoSays wrote:I Was Wrong About Inflation

Paul Krugman, The New York Times, July 21, 2022


In early 2021 there was an intense debate among economists about the likely consequences of the American Rescue Plan, the $1.9 trillion package enacted by a new Democratic president and a (barely) Democratic Congress. Some warned that the package would be dangerously inflationary; others were fairly relaxed. I was Team Relaxed. As it turned out, of course, that was a very bad call.

But what, exactly, did I get wrong? Both the initial debate and the way things have played out were more complicated than I suspect most people realize.

You see, this wasn’t a debate between opposing economic ideologies. Just about all the prominent players, from Larry Summers to Dean Baker, were Keynesian economists, with more or less center-left political leanings. And we all had similar views, at least in a qualitative sense, about how economic policy works. Everyone in the debate agreed that deficit spending would stimulate demand; everyone agreed that a stronger economy with a lower unemployment rate would, other things equal, have a higher inflation rate.

What we had instead was an argument about magnitudes. The rescue plan was huge in dollar terms, and as Team Inflation warned, if it had a normal-size “multiplier” (the increase in gross domestic product caused by a dollar of additional government spending) it would lead to a highly overheated economy — that is, to a temporary surge in employment and gross domestic product far above their sustainable levels, and hence high inflation.

Those of us on Team Relaxed argued, however, that the structure of the plan would lead to a much smaller surge in G.D.P. than the headline number would suggest. A big piece of the plan was one-time checks to taxpayers, which we argued would be largely saved rather than spent; another big piece was aid to state and local governments, which we thought would be spent only gradually, over several years.

We also argued that if there were a temporary overshoot on G.D.P. and employment it wouldn’t sharply increase inflation, because historical experience suggested that the relationship between employment and inflation was fairly flat — that is, that it would take a lot of overheating to produce a big inflation surge.

So here’s the odd thing: The multiplier on the rescue plan does, in fact, seem to have been relatively low. A lot of consumers saved those checks; state and local government spending rose by less than one percent of G.D.P. Employment is still below its prepandemic level, and real G.D.P., while it has recovered to roughly its prepandemic trend, hasn’t shot above it.

Yet inflation soared anyway. Why?

Much, although not all, of the inflation surge seems to reflect disruptions associated with the pandemic. Fear of infection and changes in the way we live caused big shifts in the mix of spending: People spent less money on services and more on goods, leading to shortages of shipping containers, overstressed port capacity, and so on. These disruptions help explain why inflation rose in many countries, not just in the United States.

But while inflation was confined mainly to a relatively narrow part of the economy at first, consistent with the disruption story, it has gotten broader. And many indicators, like the number of unfilled job openings, seem to show an economy running hotter than numbers like G.D.P. or the unemployment rate suggest. Some combination of factors — early retirements, reduced immigration, lack of child care — seems to have reduced the economy’s productive capacity compared with the previous trend.

Even so, historical experience wouldn’t have led us to expect this much inflation from overheating. So something was wrong with my model of inflation — again, a model shared by many others, including those who were right to worry in early 2021. I know it sounds lame to say that Team Inflation was right for the wrong reasons, but it’s also arguably true.

One possibility is that historical experience was misleading because until recently the economy was almost always running a bit cold — producing less than it could — and inflation didn’t depend much on exactly how cold it was. Maybe in a hot economy the relationship between G.D.P. and inflation gets a lot steeper.

Also, disruptions associated with adjusting to the pandemic and its aftermath may still be playing a large role. And of course both Russia’s invasion of Ukraine and China’s lockdown of major cities have added a whole new level of disruption.

Looking ahead, the economy is currently cooling off — the decline in first quarter G.D.P. was probably a quirk, but overall growth seems to be running below trend. And private sector economists I talk to mostly believe that inflation either has already peaked or will peak soon. So things may seem less puzzling a few months from now.

In any case, the whole experience has been a lesson in humility. Nobody will believe this, but in the aftermath of the 2008 crisis standard economic models performed pretty well, and I felt comfortable applying those models in 2021. But in retrospect I should have realized that, in the face of the new world created by Covid-19, that kind of extrapolation wasn’t a safe bet.

https://www.nytimes.com/2022/07/21/opin ... ation.html?


There is indeed a consensus nowadays that the assistance package from the start of Covid went too far especially in the US. It should have been stopped earlier. Green deal would have made things worse.
#15240649
JohnRawls wrote:There is indeed a consensus nowadays that the assistance package from the start of Covid went too far especially in the US. It should have been stopped earlier. Green deal would have made things worse.


However, that is a consensus among mainstream economists that all use a deeply flawed theory that starts with axioms and other assumptions and proves its conclusions deductively. However, because many of their assumptions are false and in deductive logic false assumptions are forbidden, it follows that most of their conclusions (that they claim have been proven) only have been proven to be true in their fantasy economy that has a huge amount of competition between thousands of players selling every different thing and service, and other differences from reality. But, in the US many corps have functional monopolies in what they sell, as does OPEC with oil.

So, their consensus is useless, just like the consensus in 2007 and2008 was that there was no recession in sight. Boy, did they get that prediction wrong.

I assert that the rich don't want the mass of Americans to be better off. They have proven with their fantasy system that the best economy for everyone is one where the rich don't care at all totally don't care about the damage done to the unemployed workers that a recession will create. And, this is why the consensus is as you said it is.

.
#15240698
Steve_American wrote:However, that is a consensus among mainstream economists that all use a deeply flawed theory that starts with axioms and other assumptions and proves its conclusions deductively. However, because many of their assumptions are false and in deductive logic false assumptions are forbidden, it follows that most of their conclusions (that they claim have been proven) only have been proven to be true in their fantasy economy that has a huge amount of competition between thousands of players selling every different thing and service, and other differences from reality. But, in the US many corps have functional monopolies in what they sell, as does OPEC with oil.

So, their consensus is useless, just like the consensus in 2007 and2008 was that there was no recession in sight. Boy, did they get that prediction wrong.

I assert that the rich don't want the mass of Americans to be better off. They have proven with their fantasy system that the best economy for everyone is one where the rich don't care at all totally don't care about the damage done to the unemployed workers that a recession will create. And, this is why the consensus is as you said it is.

.


Mainstream policies are mainstream because they work, well most of the time. MMT is not exactly non-mainstream nowadays also so....

As a matter of fact, you can't be not noticing the inflation large chunk of it is that packages from all over the world not only the US. Yes, the current instability contributed to it for gas prices or oil prices for example but that is only like 25-75% of that inflation depending on the place. US is on the low side of that contribution while Europe depending on the country is on the bigger side.
#15240700
Rugoz wrote:Statistical models fail to predict things happening due to a once in a lifetime event. Suprise!


Yep, and whose key results depend a lot on lockdowns that are not being caused by economic reasons and which by extension economists can't be expected to know how to model.
#15240704
You never have perfect information.

Based on the information we had, at the time, we did the right thing. It was a lot like the early days of the Great Depression, failure to respond would have been catastrophic.

I'd also like to point out that, since 1980, Republicans have given the rich 50 TRILLION dollars, at the expense of everyone else.

Which is becoming catastrophic...
#15240705
Puffer Fish wrote:That is a fair point, but like I brought up before in another discussion, if it was really all caused by temporary disruptions in the supply chain then prices should eventually drop back down to what they were before.


Part of the reasons things aren't going back to before is because it's bad business for that to be so. The risk of exporting your supply chain to low cost labor markets has been realized finally. Many firms have dialed back piling into low cost labor markets, hence prices have to go up and stay up.

Especially given that corporations would never-ever sacrifice their wonderfully fat profit margins to keep prices low. They will always take what they can take.
#15240711
Rancid wrote:
Part of the reasons things aren't going back to before is because it's bad business for that to be so. The risk of exporting your supply chain to low cost labor markets has been realized finally. Many firms have dialed back piling into low cost labor markets, hence prices have to go up and stay up.

Especially given that corporations would never-ever sacrifice their wonderfully fat profit margins to keep prices low. They will always take what they can take.



Zeihan has a good point here.

We're in a perfect storm, with war, disease and demography turning the global economy every which way but loose.
#15240731
Basic things economists have known for many, many decades:

-When you dump historic amounts of stimulus cash into an economy you will cause inflation and heat up an economy.

-When you push up interest rates quickly you will cool an economy or cause a recession.

These idiots in government helped cause both the inflation and the recent economic downturn. :knife:
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