How Did They Get Inflation So Wrong?
Yes, the stimulus was too big. But that’s not the main reason prices are through the roof.
"Last week, Treasury Secretary Janet Yellen did something unusual for a Washington policy maker: She admitted that she’d made a mistake. In an interview with CNN’s Wolf Blitzer about the U.S.’s persistently high inflation rate, Yellen said, of her predictions last year that prices would stay under control, “I was wrong then about the path that inflation would take.”
That she was. In March 2021, when inflation hawks were arguing that the Biden administration’s $1.9 trillion stimulus plan was going to overheat the economy, Yellen called the risk of inflation “small” and “manageable,” and a couple of months later said, “I don’t anticipate that inflation is going to be a problem.”
She wasn’t alone. For much of 2021, Federal Reserve Chair Jerome Powell said that he thought inflation would be “transitory,” and even as inflation rose above 6 percent, the Fed kept interest rates near zero. (Its first interest-rate hike was not until March 2022.)
Along the way, that thing Yellen thought was not going to be a problem became a huge one—not least, politically.
Indeed, with today’s news that inflation in May was 8.6 percent (previously at 8.3 percent), it is arguably the biggest problem that the Biden administration faces—high prices are overshadowing pretty much everything else about the U.S. economy.
> The unemployment rate is a mere 3.6 percent, and last week, the Labor Department announced that the U.S. had added another 390,000 jobs in May.
> But all anyone wants to talk about is that average gas prices are now nearing $5 a gallon.
Yellen and Powell have, predictably, faced a barrage of criticism over their failure to keep inflation under control. When Yellen testified before Congress this week, Republican lawmakers practically lined up to say “I told you so.”
But amid the recriminations, surprisingly little attention has been paid to a couple of important questions:
Why did policy makers get it wrong? And what can we learn from their mistakes?
The simple answer to that first question is that the Biden administration and the Fed were, in some sense, fighting the last war—that being, in this case, the Great Recession of 2008–09. After the steep economic downturn over those two years, the U.S. economy grew at a very slow clip. From 2009 to 2016, GDP growth averaged about 2 percent a year. Unemployment, which reached nearly 11 percent in October 2009, was still above 7 percent four years later, while median wages rose only slowly.
In concrete terms, this meant that tens of millions of Americans had a miserable five years or more. And this happened even though policy makers had done quite a lot (or so it seemed then) to get the economy back on track. Democrats had passed a $787 billion stimulus plan, which at the time was the biggest such package ever enacted. And the Fed, under Ben Bernanke, had slashed interest rates to near zero and kept them there, while also trying to inject more money into the economy by buying up a wide range of assets in what was called QE Quantitative Easing.
These measures did keep the Great Recession from becoming another Great Depression, but it wasn’t until 2016 that the economy really took off.
On top of all this, downplaying the risk of inflation was easy because previous prophecies of doom had all turned out wrong.
> The 2009 stimulus and the Fed’s relatively loose monetary policy had inflation hawks insisting that “high-grade monetary heroin” was being injected into the system, which was likely to ignite “out-of-control inflation.”
> In 2010, with unemployment near 10 percent, a group of 23 economists, hedge-fund managers, and academics wrote an open letter to Bernanke, arguing that Quantitative Easing risked “currency debasement and inflation” and should be discontinued.
[ ] At this point, the contention that the stimulus package was bigger than it needed to be—or at least, could have been better directed—seems inarguable, but equally true is that it probably accounts for only a fraction of the current inflation rate. Europe, after all, did far less in the way of fiscal stimulus than the U.S., yet inflation within the European Union is now about as high.
Some of that inflation may be imported from the U.S., thanks to higher American demand for goods. But much of it reflects factors that were hard, if not impossible, to foresee in early 2021. These include the persistence of supply-chain problems due to the continuation of the pandemic, and the war in Ukraine.
[ ] Of course, in a political sense, none of that really matters. Biden can talk about all the people who have jobs who otherwise would still be on the dole, and about all the workers at the lower end of the job ladder who have seen the sharpest increases in wages over the beginning of 2021, but that message can’t compete with the anxiety and anger induced by high prices. What policy makers got most wrong may, in the end, prove to be not the risk of inflation but, rather, how miserable we’d feel about the inflation itself."
INSERT FROM RELATED CONTENT ON THIS BLOG
The world is on fire. Irrational exuberance in markets is over. Billions of dollars are wiped-out in seconds. Stockholders are selling out of markets and nobody knows where the money is going [well maybe some people know].To say things are "in turmoil" or "uncertain" begs the question and is to say the least.
Global wars and "revolutions" whether declared or not, are taking place both on the ground and in currency markets, with both people and capital running fast to get out of the way of trouble and seeking "safe havens" - but where?
There's a big blow-out, with a lot of blow-back: prevailing winds are hot and cold at the same time.
The Global Post report starts out like this: "A fresh blast of cold air swept across global financial and commodity markets on Wednesday [blogger note: six days ago] raising fears that the world economy could be heading toward a recession — one perhaps even bigger than the last one."
09 April 2022
GLOBALIZATION THE GREAT ILLUSION
Globalization Is Over. The Global Culture Wars Have Begun.
(Image Credit...Tim Lahan)
"I’m from a fortunate generation. I can remember a time — about a quarter-century ago — when the world seemed to be coming together. The great Cold War contest between communism and capitalism appeared to be over. Democracy was still spreading. Nations were becoming more economically interdependent. The internet seemed ready to foster worldwide communications. It seemed as if there would be a global convergence around a set of universal values — freedom, equality, personal dignity, pluralism, human rights.
We called this process of convergence globalization. It was, first of all, an economic and a technological process — about growing trade and investment between nations and the spread of technologies that put, say, Wikipedia instantly at our fingertips. But globalization was also a political, social and moral process. . .
THE "HAPPY-TALK" FALLACY:
In the 1990s, the British sociologist Anthony Giddens argued that globalization is “a shift in our very life circumstances. It is the way we now live.” It involved “the intensification of worldwide social relations.” Globalization was about the integration of worldviews, products, ideas and culture.
This fit in with an academic theory that had been floating around called Modernization Theory. The idea was that as nations developed, they would become more like us in the West — the ones who had already modernized.
In the wider public conversation, it was sometimes assumed that nations all around the world would admire the success of the Western democracies and seek to imitate us. It was sometimes assumed that as people “modernized,” they would become more bourgeois, consumerist, peaceful — just like us. It was sometimes assumed that as societies modernized, they’d become more secular, just as in Europe and parts of the United States. They’d be more driven by the desire to make money than to conquer others. They’d be more driven by the desire to settle down into suburban homes than by the fanatical ideologies or the sort of hunger for prestige and conquest that had doomed humanity to centuries of war.
This was an optimistic vision of how history would evolve, a vision of progress and convergence. Unfortunately, this vision does not describe the world we live in today. The world is not converging anymore; it’s diverging. The process of globalization has slowed and, in some cases, even kicked into reverse. Russia’s invasion of Ukraine highlights these trends. While Ukraine’s brave fight against authoritarian aggression is an inspiration in the West, much of the world remains unmoved, even sympathetic to Vladimir Putin.
> The Economist reports that between 2008 and 2019, world trade, relative to global G.D.P., fell by about five percentage points. There has been a slew of new tariffs and other barriers to trade. Immigration flows have slowed. Global flows of long-term investment fell by half between 2016 and 2019. The causes of this deglobalization are broad and deep. The 2008 financial crisis delegitimized global capitalism for many people. China has apparently demonstrated that mercantilism can be an effective economic strategy. All manner of antiglobalization movements have arisen: those of the Brexiteers, xenophobic nationalists, Trumpian populists, the antiglobalist left.
There’s just a lot more global conflict than there was in that brief holiday from history in the ’90s. . .
As John Micklethwait and Adrian Wooldridge wrote in a superb essay for Bloomberg, “geopolitics is definitively moving against globalization — toward a world dominated by two or three great trading blocs.” This broader context, and especially the invasion of Ukraine, “is burying most of the basic assumptions that have underlain business thinking about the world for the past 40 years.”
Sure, globalization as flows of trade will continue. But globalization as the driving logic of world affairs — that seems to be over. Economic rivalries have now merged with political, moral and other rivalries into one global contest for dominance. Globalization has been replaced by something that looks a lot like global culture war. . .
[. ] I’ve lost confidence in our ability to predict where history is headed and in the idea that as nations “modernize” they develop along some predictable line. I guess it’s time to open our minds up to the possibility that the future may be very different from anything we expected..."
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