![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
m_d_hEconomists on the Left, that is, the set of professional economists who allow Left-wing politics to control their conclusions, have been lining up on the opinion pages to denounce the warnings from the Right and the Center that all this COVID relief spending will spark higher inflation.
Their arguments don't have much in the way of economics behind them. They're using a bag of rhetorical tricks instead. Saying stuff like:
"This isn't the 1970s." As though inflation could only ever happen during that decade, and now inflation can never happen again.
"Inflation expectations are currently low." As though inflation could only ever happen when everybody expects it to.
"Inflation has been low for decades." As though inflation has some sort of historical inertia.
"People warned of inflation during the last recession and it didn't happen." As though warnings of inflation must always be wrong, because they were wrong last time.
-----
Right now we're pumping WW2 levels of stimulus into the economy, with trillions more on the way. So the only relevant time period for comparison from the past is WW2. And WW2 produced a bunch of inflation. It didn't matter that the 1940s were not the 1970s. It didn't matter that prior to the 1940s inflation expectations were low. It didn't matter that the 1930s had been known for deflation instead of inflation. What mattered is that the money supply and federal spending increased enormously during WW2 the same way they are increasing now.
The famous (or infamous) monetarist economist Milton Friedman proclaimed that inflation is always and everywhere a monetary phenomenon. You print more money, you get more inflation. He was wrong! Because there's another important factor to inflation: the velocity of money. If you print more money, but that money is spent more slowly, then you don't get inflation. If you print less money, but that money is spent more quickly, then you don't get inflation. But if you print more money, and that money is spent more quickly, then you get inflation. That's what happened during the 1970s. It's also what happened during the 1940s.
I don't know that we're going to get higher inflation during the 2020s, but the velocity of money has been held down by this pandemic, and will probably spring back as more people are vaccinated and we approach herd immunity. The combination of faster spending and the WW2-size increase in the money supply could easily fuel inflation like we haven't seen since the 1970s. This isn't "scaremongering" because I'm not scared of inflation and I don't think you should be either. But I think people should be prepared for higher inflation, instead of thinking it can never happen again because "this isn't the 1970s."
And it's not just COVID relief. After they pass this extra $1.9 trillion in COVID relief (on top of the $5 trillion or so while Trump was President), Democrats want to spend yet another $2 trillion on Biden's infrastructure plan.
I'm not saying we shouldn't spend trillions on COVID relief and infrastructure. But I think people should be prepared for what can happen when we spend this kind of money. Higher inflation, higher interest rates, and higher taxes. I think we should be prepared to PAY for what we want, instead of thinking we can have all those trillions of dollars of spending without consequence.
-----
Right-wing economists say things like "tax cuts pay for themselves via higher economic growth" -- when they clearly don't.
Left-wing economists say things like "our spending plans will not result in higher inflation, higher interest rates, or higher taxes" -- when most of the time they do.
Centrist economists who study history and reality would say -- both tax cuts and higher spending typically result in higher inflation and higher interest rates; unless you balance the tax cuts with spending cuts, or balance the higher spending with higher taxes. But we've had this unusual period over the past 20 years when interest rates and inflation have both been low in the US, even as federal deficits have ballooned. This unusual period has resulted from an unprecedented global savings glut, as many previously "third world" countries have quickly caught up with the Industrial Age and then the Computer Age by following mercantilist trade policies, and as the Baby Boom that followed WW2 has resulted in a demographic bulge of upper-middle class people saving for retirement, and as the destruction of private sector labor unions has resulted in vaulting economic inequality.
But there are still limits to this global savings glut, it is yet possible for demand to exceed supply, and this current WW2-style federal spending and debt binge could yet turn the global savings glut into a global debt glut.
-----
There's a persistent lie about the 1970s, perhaps you've heard the lie: "stagflation". It is often said about the 1970s that it was a period of both stagnant economic growth, and higher inflation: stagflation. But this is not true, and never was. Economic growth was high during the 1970s, higher than it has been during any decade since. Yes, there was also higher inflation, but it's a lie to call it stagflation. Livings standards increased during the 1970s, at a pace we haven't seen since.
We probably need a period of higher inflation, because it would mean we've kicked into a higher pace of economic growth -- a higher pace that is necessary if we are to transform our economy into a less-polluting, but higher-productivity 21st Century cornucopia. If you want a Green New Deal, if you want Medicare for All, if you want free higher education, if you want better mass transit, better child care options, more affordable housing, then you need a dramatic transformation of this economy that replaces the global savings glut and speculative financial bubbles with productivity growth, social change, and technological evolution. That means you also need higher inflation, higher interest rates, and higher taxes.
Instead of a world that is saving for retirement and then preparing for burial, we need a world that is investing in its youth and building a 21st Century infrastructure. Instead of a world that obsesses about stock prices and real estate values, we need a world that obsesses about education, protecting the environment, and increasing productivity. If inflation above 2% is part of this better world, I'm not going to be upset, and I don't think you should be either.
Their arguments don't have much in the way of economics behind them. They're using a bag of rhetorical tricks instead. Saying stuff like:
"This isn't the 1970s." As though inflation could only ever happen during that decade, and now inflation can never happen again.
"Inflation expectations are currently low." As though inflation could only ever happen when everybody expects it to.
"Inflation has been low for decades." As though inflation has some sort of historical inertia.
"People warned of inflation during the last recession and it didn't happen." As though warnings of inflation must always be wrong, because they were wrong last time.
-----
Right now we're pumping WW2 levels of stimulus into the economy, with trillions more on the way. So the only relevant time period for comparison from the past is WW2. And WW2 produced a bunch of inflation. It didn't matter that the 1940s were not the 1970s. It didn't matter that prior to the 1940s inflation expectations were low. It didn't matter that the 1930s had been known for deflation instead of inflation. What mattered is that the money supply and federal spending increased enormously during WW2 the same way they are increasing now.
The famous (or infamous) monetarist economist Milton Friedman proclaimed that inflation is always and everywhere a monetary phenomenon. You print more money, you get more inflation. He was wrong! Because there's another important factor to inflation: the velocity of money. If you print more money, but that money is spent more slowly, then you don't get inflation. If you print less money, but that money is spent more quickly, then you don't get inflation. But if you print more money, and that money is spent more quickly, then you get inflation. That's what happened during the 1970s. It's also what happened during the 1940s.
I don't know that we're going to get higher inflation during the 2020s, but the velocity of money has been held down by this pandemic, and will probably spring back as more people are vaccinated and we approach herd immunity. The combination of faster spending and the WW2-size increase in the money supply could easily fuel inflation like we haven't seen since the 1970s. This isn't "scaremongering" because I'm not scared of inflation and I don't think you should be either. But I think people should be prepared for higher inflation, instead of thinking it can never happen again because "this isn't the 1970s."
And it's not just COVID relief. After they pass this extra $1.9 trillion in COVID relief (on top of the $5 trillion or so while Trump was President), Democrats want to spend yet another $2 trillion on Biden's infrastructure plan.
I'm not saying we shouldn't spend trillions on COVID relief and infrastructure. But I think people should be prepared for what can happen when we spend this kind of money. Higher inflation, higher interest rates, and higher taxes. I think we should be prepared to PAY for what we want, instead of thinking we can have all those trillions of dollars of spending without consequence.
-----
Right-wing economists say things like "tax cuts pay for themselves via higher economic growth" -- when they clearly don't.
Left-wing economists say things like "our spending plans will not result in higher inflation, higher interest rates, or higher taxes" -- when most of the time they do.
Centrist economists who study history and reality would say -- both tax cuts and higher spending typically result in higher inflation and higher interest rates; unless you balance the tax cuts with spending cuts, or balance the higher spending with higher taxes. But we've had this unusual period over the past 20 years when interest rates and inflation have both been low in the US, even as federal deficits have ballooned. This unusual period has resulted from an unprecedented global savings glut, as many previously "third world" countries have quickly caught up with the Industrial Age and then the Computer Age by following mercantilist trade policies, and as the Baby Boom that followed WW2 has resulted in a demographic bulge of upper-middle class people saving for retirement, and as the destruction of private sector labor unions has resulted in vaulting economic inequality.
But there are still limits to this global savings glut, it is yet possible for demand to exceed supply, and this current WW2-style federal spending and debt binge could yet turn the global savings glut into a global debt glut.
-----
There's a persistent lie about the 1970s, perhaps you've heard the lie: "stagflation". It is often said about the 1970s that it was a period of both stagnant economic growth, and higher inflation: stagflation. But this is not true, and never was. Economic growth was high during the 1970s, higher than it has been during any decade since. Yes, there was also higher inflation, but it's a lie to call it stagflation. Livings standards increased during the 1970s, at a pace we haven't seen since.
We probably need a period of higher inflation, because it would mean we've kicked into a higher pace of economic growth -- a higher pace that is necessary if we are to transform our economy into a less-polluting, but higher-productivity 21st Century cornucopia. If you want a Green New Deal, if you want Medicare for All, if you want free higher education, if you want better mass transit, better child care options, more affordable housing, then you need a dramatic transformation of this economy that replaces the global savings glut and speculative financial bubbles with productivity growth, social change, and technological evolution. That means you also need higher inflation, higher interest rates, and higher taxes.
Instead of a world that is saving for retirement and then preparing for burial, we need a world that is investing in its youth and building a 21st Century infrastructure. Instead of a world that obsesses about stock prices and real estate values, we need a world that obsesses about education, protecting the environment, and increasing productivity. If inflation above 2% is part of this better world, I'm not going to be upset, and I don't think you should be either.