Completely agree. It seems to me that a downside of the push to lean operation is that resuming production, at a global scale, becomes a lot more complicated.
For example, because you store a smaller inventory of inputs, you must rely on your suppliers to provide you the inputs you need, in the quantities needed, as your production curve ramps up again.
But because your suppliers also store a smaller inventory of outputs, these suppliers have less inputs to provide you. And they have the same problems you have, with respect to their own suppliers.
And at each stage of the supply chain, the money for buying new inputs comes from the sale of whatever residual outputs remain unsold. So people are going to be very careful about scaling production so they don't run out of money.
Ramping up a global supply chain seems to be at least as delicate an exercise in matching supply and demand as restoring a power grid following widespread blackouts.
And it is going to take time. And during that time, suppliers will always prioritize those most willing to pay (particularly since their own suppliers are doing the same thing to them). Which means that inflation will be baked into the resumption of production.
When the supply chain is up and running and stable, a supplier might be willing to sell products to consumers at barely above marginal cost. Right now? Hell no.
There are times where inflation is a failure of policy, here it seems to me like it's mostly stuff you can't do much about. It's covid, China's zero-covid policy, and Russia's war. At a pretty fundamental level the US can't do anything about any of those.
I genuinely think there's a healthy dose of price gouging as well, though.
Why would any of those factors respond to a rise in interest rates? How would raising interest rates lead to a decrease in inflation in this context? Am I right that this is, "Do something! This is something! Let's do it!" territory?
Basically, yeah. In economist speak, they're worried about inflation expectations becoming "unanchored", leading to/exacerbating a wage/price spiral. So even though the rate rises won't address the proximate causes of our present inflation, they feel they have to do them to prevent it getting worse.
And, also, hammers and nails. The Fed can influence aggregate demand, so that's what it does.
Sometimes it seems that what they are worried about is rising wages regardless of prices.
IANAE but I can see an argument that, whatever the actual cause of this lot of inflation, raising interest rates will help reduce it.
If you raise interest rates you slow consumption, because money becomes more expensive. I might buy a new car if I could borrow at 2%, but not if I have to borrow at 10%. So higher interest rates lower demand.
And if inflation is happening because exogenous factors (as in 2) are lowering supply, and then I do something that lowers demand to match, then inflation should stop happening. It might be preferable to do things that increase supply to match demand, but that may not be practically possible right now.
Here's the thing. I don't want to lower my consumption. I like my consumption.
If you raise interest rates you slow consumption, because money becomes more expensive. I might buy a new car if I could borrow at 2%, but not if I have to borrow at 10%. So higher interest rates lower demand.
You slow consumption of items that require loans. Not of clothes or rent or whatever.
People borrow to purchase housing and clothing. Mostly the former, I hope.
7: yes! But if you see your job as "keeping inflation under control" then you may consider it necessary to hurt Moby, and all the other little Mobies, in order to do so, if you can't see any other way of doing it.
8: well, in that example, I suppose if I have to spend more money repaying my car loan I'll have less money to spend on clothes - aggregate demand will touch everything eventually. And even if clothes demand remains untouched, if car demand falls then overall inflation will fall - it's always the case that overall inflation is a single figure that covers a load of different prices rising or even falling at very different rates.
But really someone who's an economist of some sort should say more.
10.1: That's why I'm still upset that we didn't hang any bankers in 2008.
If you're in the UK a big chunk of the rental property market is buy-to-let landlords with floating-rate mortgages, so if rates go up they'll try to raise rent too, and if they can't fill the property then they'll sell it.
We're still using our 2003 floating rate mortgage.
"Those factors" don't directly respond to a rise in interest rates. But as you say, the rise in interest rates makes money more expensive to borrow. That's going to affect consumers somewhat (or it would if there were houses or cars to buy), but it's also going to affect businesses that are deciding e.g., whether it makes sense to put in a new ski lift (what our local resort did with its pandemicbucks) or start a new building project. All the *businesses* around here exploded with the free PPP loans -- and that demand drives up costs for all the materials, etc.
So it's not the case that the solution has to result from the same factors that triggered the problem.
Housing prices are off about 25% locally (one of the hotter markets in the country during the pandemic), so it's working somewhat.
@4.3 The Fed needs a refresher on controllability.
7 You can die of consumption, Moby.
4, 5: Yes. There are some regional Fed economists (and maybe even presidents) who are on the record as having expected runaway inflation for like dozens of years. I don't know why those people still have jobs. (Or maybe I do, but I don't want to feel quite that cynical today.)
One company's worker shortage is another Federal Reserve Board member's full employment, at least if that member remembers half of the Fed's statutory dual mandate. (I am a great joy at parties; don't forget to ask me about Article 109j of the Maastricht Treaty.)
11: Dans ce pays-ci, il est bon de tuer de temps en temps un banquier pour decourager les autres.
OP: Windfall profit tax on fossil fuel companies, something swingeing on corporate profits that stem from price gouging, tenant rights and rent protections with penalties that include confiscation of properties. And a pony.
You are of course right. But the main job of the Fed has been to stop wage increases since Greenspan. Heck in this case the wage increases actually pretty much stopped already I'm pretty sure it's very important to them to make sure those wage increases that happened in the recent past were punished.
If it makes you feel better, I'll probably still get a nice bonus this year.
16: (Coughs on handkerchief leaving a small dot of blood)
Right, I was talking to a realtor friend two days ago. She has one listing right now: no one wants to sell, and no one wants to buy, with interest rates up. The pandemic/Red wave of cash buyers from better economies seems to have abated for now. We're forecast to have a colder and wetter than average winter, which should be good news on the in-migrants from Texas and California front.
They're still building new housing, as previously contracted, at basically the capacity of the construction industry. Maybe they run out of projects in a year? But things change in the winter anyway -- I often meet people in the construction industry up at the ski hill enjoying a several months slowdown.
To the extent that inflation is driven by fossil fuel costs, we should be shoveling money at renewable energy projects with pitchforks, and to the extent that high interest rates are interfering with that development (making the projects or their materials more expensive) we should be shoveling money at mitigating that too. We shouldn't be causing a recession in the electric vehicle business, but instead recognize that over the longer term getting as far out of the oil business as we reasonably can helps avoid inflation next time and the time after that.
The government should be paying people to dig holes with pitchforks and stack hay with shovels.
or dig deep holes and drop money down it from helicopters.
Presumably, just the demographics of a really big generation retiring while my small and modest generation is in its peak earning years means things are going to keep inflating on average.
It seems like everyone here is much more willing to assume good faith on the part of economists and the Fed than I am, apart from Roger the cabin boy. Economists are generally conservative and on the side of landlords and bosses. They don't like to see such a low unemployment rate, because it gives workers too much power. They want to push wages down and drive people out of work. Larry Summers has been quite explicit about all of this on Twitter. Plus, it will hurt the electoral chances of Democrats, which for most economists is a plus.
Oh, not just Roger the cabin boy but also Moby in 5.
Housing construction costs are so inflated through a ton of dysfunctionalities that the industry is dependent on easy credit, so when rates increase, housing starts decrease, if not immediately. If we could build at European costs per home ($150-300k), it would be less jumpy, plus the public and nonprofit sectors could keep using the productive capacity so a ton of skilled workers don't retire for lack of work.
Plus, it will hurt the electoral chances of Democrats, which for most economists is a plus.
Fed interest rate policy is predictable from macroeconomic numbers - in other words, it approximates what a non-partisan "sensible" economist would do if she were only trying to control inflation - in all years except for election years in which an incumbent president is seeking re-election. In years in which a Republican president is seeking re-election, the Fed will lower rates. In years in which a Democratic president is seeking re-election, it will raise rates.
"In summary, the Federal Reserve is a conditional inflation hawk - it cares about inflation, but only when the President is a Democrat".
(Arel-Bundock in J. Econ. Pol, 2013: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2213144)
It seems like everyone here is much more willing to assume good faith on the part of economists and the Fed than I am
For myself, I don't necessarily assume the Fed is making the correct choice, but I am feeling humble in my judgement because my own predictions of what would happen in 2021-22 has been wrong. I had thought there would be less inflation (and that, in general, people would continue to save more of the money that had accumulated during the pandemic). It's easy to come up with reasons that would explain that (the persistence of COVID and the war in Ukraine) but I don't trust that my mental model is all that reliable at this specific moment.
So I'm sympathetic to something like this which says that inflation is, (a) tricky and (b) there are discontinuities in how people behave.
You can square a lot of this by saying that households are rationally inattentive toward inflation, have a supply-driven view of the world, rely on good-bad heuristics, and tend to overestimate inflation due to negativity bias. Rational inattentiveness simply means that, with limited attention to devote to any one topic, many households do not focus on inflation when it is relatively low--forming rough estimates based on personal experiences instead of carefully-crafted forecasts driven by painstaking research. The good-bad heuristic simply means that many households tend to presume that positive/negative developments will lead to improvement/deterioration across a variety of economic indicators--hence why the election of preferred candidates will have good effects (lowering both inflation and unemployment) and raising interest rates will have bad effects (raising both inflation and unemployment). The supply-driven view means households perceive shocks as being caused by supply issues and driving further supply issues; for example, rising gas prices are usually perceived by consumers as a negative sign even though strong demand or weak supply could be driving the price change. Finally, negativity bias leads people to be systemically pessimistic in their expectations and forecast higher inflation than professionals--hence why consumers, in aggregate, have never forecasted real income increases in the history of the University of Michigan survey despite decades of real wage growth.
However, when inflation is high (as today) consumers clearly respond--paying more attention to inflation, revising their inflation expectations upward, and updating their economic outlook. The main next question should be how, if at all, do rising household inflation expectations causally increase inflation?
There are many ways this could happen theoretically--households with higher inflation expectations might demand higher wages or (in countries/eras with stronger collective bargaining) push for robust cost-of-living adjustments. They might make financial decisions like investing in physical assets, saving in another currency, or purchasing inflation hedges. While these, and others, are plausible causal mechanisms for inflation expectations to increase inflation, most of the literature focuses on intertemporal substitution--especially of durables. For example, if consumers have higher inflation expectations they could plausibly rush to buy cars, fridges, or homes before prices or real interest rates go up--thereby increasing demand and contributing to the very inflation they feared. This was a core part of the dynamic in the 1970s--consumers expected prices to increase and so were more willing to bid up goods, especially durables.
This is my progressive plan to control inflation, and it's outside of the Fed's purview. Talking to a friend of mine who is an Economist at the Fed I told him it was outside the Fed's purview, and he jokingly said that everything was within the Fed's purview until I said "Fiscal Policy".
And he had to agree.
Here goes: Drastically increase marginal tax rates on upper income earners so that they consume less. Also, use those funds to socialize certain services that are too expensive for most individuals to cover and should not be included in labor costs (daycare and health insurance). I grant you that it's not possible. He did say that there are a lot of people (and I think he meant economists) who would agree with me.
I also support energy investment to lower fuel costs. Around here we desperately need more housing as well.
Here goes: Drastically increase marginal tax rates on upper income earners so that they consume less. Also, use those funds to socialize certain services that are too expensive for most individuals to cover and should not be included in labor costs (daycare and health insurance). I grant you that it's not possible. He did say that there are a lot of people (and I think he meant economists) who would agree with me.
I would agree with that, though I would rather see modest increases on upper income taxes, and significant shifts to decreases the tax preferences for capital gains rather than income* and have a functional estate tax. Both of those are difficult politically, unfortunately.
* What I would really like to see, would get complicated quickly, but higher taxes on capital gains above some baseline -- say inflation + 3%. So if you own a house (or stock investment) that grows with the general increase in the economy the capital gains taxes are relatively low, but if you invest in something that sees rapid returns the tax rate is much higher.
35 cont'd.
Though, FWIW, I'm not sure that's a fiscal policy that would, decrease inflation. In general redistribution of economic power from wealthy to poorer people will increase consumer spending.
Didn't some guy at the Fed recently say that he wanted to increase unemployment?
32: In theory, countering people with that strategy is why I didn't buy a car this year. The alternative is that I'm lazy and cheap.
This was someone other than Summers, someone currently sitting on the board.
Oh. Probably but I don't recall it exactly.
Speaking of economists trying to do harm to national economies a time of crisis:
https://twitter.com/rochowanski/status/1584266065164791808
We need to hang a few consultants, but not me.
This isn't super-material, but I just want to emphasize this: the primary lever of raising interest rates is housing. All of the other stuff--business investment, private consumption, shifting investment portfolios--is marginal relative to residential construction, which is highly responsive to interest rates--but on a significant lag.
So this fall's interest rate increases will reduce housing starts next summer, which will spread unemployment through the housing construction industry, which will drive down wages directly and indirectly next winter. That is mostly what we're talking about, and you can see how far away any direct effects are. Which is why it's sheer madness that the Fed is being as aggressive as it is.
AFAICT, while HG is right about all of the other factors raising inflation, it's *also* the case that we've been at something like full employment*, which is almost definitionally supposed to increase inflation at least some. The NAIRU concept has taken a beating of late, but you don't have to be eager to create a reserve army of the unemployed to worry that high contingent inflation plus full employment is a recipe for inflation that won't return to normal on its own.
BUT--and this is where I get back to the madness--there's also no reason to think that this is a Volcker moment, where the Fed needs to go crazy to inflict a recession ASAP. Inflation isn't accelerating, various markets are settling down (eg sales of existing houses per Cala), the Long Beach shipping backup is resolved, etc. So, sure, raise rates a little because the economy clearly doesn't need the boost from ultra-low rates. Signal that you're ready to raise them more, so nobody gets complacent. But to just mindlessly raise them 3/4% at a time regardless of what the data say... it's just sheer bloody-mindedness. And yeah, motivated on some level by malign intent.
*a nebulous term, but I want to be clear: headline unemployment rates are the lowest ever recorded. Workforce participation has still not fully recovered, but it's more or less on trend with a secular decline that's been happening for decades. Public employment is dramatically below previous rates, while private employment has more or less fully recovered to 2019 levels, which were at the peak of a long expansion
35 and 36: wealth tax might be good policy, but to reduce aggregate demand now, I think you would need to make it so that upper income people had considerably less income.
I personally favor taxing ordinary income and capital gains at the same rate. If you want to have a one-time exemption for primary residence sold after she 65 or something, then fine.
46: we desperately need housing and housing costs are contributing to inflation. But if builders can't finance new construction, we won't get it. Vicious circle.
35 and 36: wealth tax might be good policy, but to reduce aggregate demand now, I think you would need to make it so that upper income people had considerably less income.
I personally favor taxing ordinary income and capital gains at the same rate. If you want to have a one-time exemption for primary residence sold after she 65 or something, then fine.
46: we desperately need housing and housing costs are contributing to inflation. But if builders can't finance new construction, we won't get it. Vicious circle.
I'm seeing reports of a lawsuit against landlords for collusion. That would help, if true and successful.
I saw on Twitter yesterday that Katie Porter says that half of the rise in prices in the past couple years is price gouging. If that's the case, windfall taxes (and the expectation of enforcement of windfall taxes) would help a great deal.
Gavin Newsom has proposed windfall taxes on oil and gas companies here in California and he might actually win me over with that shit.
51: Noah Smith is skeptical that the price gouging explanation is a useful way to think about it: https://noahpinion.substack.com/p/greedflation-gouging-and-price-controls
47/48: I think the policy is a good idea, but as a way to address inflation it's inefficient. Your plan is to reduce consumption by taxing the people for whom there is the weakest connection between income and consumption.
53: look it would reallocate where resources are spent. Look, if you put an 80% marginal rate on all income above $500,000 for a couple $250 k for an individual and 95% on income above 2 mil annually, , money available for higher end real estate would go down, and building more house that are affordable rather than fewer really expensive ones would be the way to make money.
I didn't say that it's politically feasible, but that's the mechanism.
Also, right now healthcare and day care has to priced in to labor costs. I know a medical student with one kid only but no family who dropped out of the labor market. Day care is $25k per year. Her salary would be max $40k. Gas, insurance etc, and she's not making money by working. Her boyfriend has a higher salary. Raise her wage to compensate for day care costs and the marginal cost of her labor is too high. Socialize daycare through universal provision.
-Based on some googling, it looks like substantially more economists are Democrats than Republicans, though this is less true than for other equally highly educated people.
-I don't get the price gouging claim. Were CEOs not greedy 5 years ago?
-Seems to me the most likely cause of recent inflation (not listed in OP) is the sharp increase in the money supply starting in 2020. See 10y view of the chart here: https://tradingeconomics.com/united-states/currency-in-circulation-bil-of-$-m-nsa-fed-data.html
I heard that Democrats are all social--actually, communist, no, full communist now. Nevertheless, there are many heterodox conservative communist Democrats, especially with the Republican party having vacated prime real estate in reality.
money available for higher end real estate would go down, and building more house that are affordable rather than fewer really expensive ones would be the way to make money.
That would without doubt be a good thing to do, but it would not do much to address inflation. If we assume that current inflation is the result of supply-side shocks which we can't do much about, then we have to address it by reducing aggregate demand.
Your policy would, if successful, encourage builders to build and sell lots of small houses, rather than a few huge houses, because the market for huge houses would have collapsed to the point where they wouldn't be able to make their money back. Good! But it hasn't done much if anything to reduce aggregate demand because builders are still building and selling houses, so it won't do anything to touch inflation, not even in a year's time. If you want to do something about inflation, you need to stop builders wanting to build houses at all.
55.2: IANAE but the price gouging being *part* of the story does fit my priors, which are that decades of little to no antitrust enforcement and other "business friendly" policies are leading us to a place where anticompetitive strategies work in more and more businesses, with long and unpredictable lags as the power moves into the system and the businesses experiment with what they can get away.
57: Bot if you shift more resources into building houses and away from other things. Housing prices are going up as are rents. The rent that home owners would pay to live in their homes is included in inflation numbers. Increasing the supply of housing would lower the price. Maybe some of the people working in landscaping could switch over to construction.
58 - It's not price gouging in the classic sense, but the recent ProPublica story on RealPage absolutely suggests that one of the things driving the surge in rental properties is something that normal people would call "price gouging", with quotes like "Machines quickly learn the only way to win is to push prices above competitive levels" and "The net effect of driving revenue and pushing people out was $10 million in income." (If you said that one of the things going on is that landlords are learning to price apartment rentals like airline seats that would sound like a joke, but that's literally the case.)
58: Someone on twitter linked to a video of some company (maybe RealPage) doing their annual conference/training on leasing strategies. It was kind of nauseating.
The ProPublica article reads almost like paid marketing for RealPage. "But by RealPage's own admission, its algorithm is helping drive rents higher." Gee how did you get them to admit such a damning fact. As I recall ProPublica ran similar bogus exposes of Cambridge Analytica which was only too happy to "admit" what evil election-swinging geniuses they were.
Like overall inflation, rent increases can be explained by a simple supply/demand story -- population growing much quicker than #available units -- that does not require a mysterious ever-growing nefariousness index. Airline seat prices have gone down a ton meanwhile so that seems like a weird comparison.
I actually have a friend who writes for ProPublica and we've had many debates about whether the role of the press is to inform readers about the world or to draw attention to abuses of power. I think most journalists define it the second way but the first definition seems nobler to me.
If only there were much of a difference.
62 - And yet the story makes it clear that a significant part of the value proposition is that RealPage serves as a cutout, allowing MFR landlords to share their pricing strategies with their erstwhile competitors and collude accordingly, and that several of RealPage's competitors were concerned about the antitrust implications and designed their software differently.
Yeah, it sure sounds like collusion to me.
63 is a great way of getting at some of the disfunction in a lot of journalism. A lot of journalists think that you can only do a good job if you're somehow pulling out some secret truth from your sources, and most of the time that just means you've misunderstood something not that something nefarious is going on.
The nefarious stuff is really obvious is the thing.
It's obvious, and it's repetitive. Journalists hate obvious and repetitive causes of problems. Also obvious and repetitive solutions to problems.
64 and 69 get it exactly.
But I would love, super solid in-depth reporting on how public services worked, not in an expose way, but like - what should we do to improve public transit? Should we build more trains or rely on buses, etc.?
And now, I have to focus for a bit, so if I post again before 2pm, tell me that I need to stop procrastinating.
I think the key stat to remember that Propublica reported is 33% rent increases in the area they selected in buildings without RealPage, 42% with. So it can be both, collusion can be one significant factor driving up rents worth cracking down on, while constrained supply is a larger factor grinding on regardless.
That's true. And there's also ways to collude that don't appear so obvious to reporters.
68-69: yes. The poisonous legacy of Watergate - "it's not the crime, it's the coverup". Pointing out coverups doesn't involve you having to take a moral stance on whether crime is bad - and journalists shouldn't have to take a moral stance on things, it's bad for their objectivity. All you have to do is point out "look, he said X but in fact not-X".
So you can commit any crimes you like as long as you don't lie about them, basically. It's OK as long as you just come right out and admit it.
"But Mr TrumpAunt Martha, how can I trust you? There are thirteen bodies in the cellar and you admit you murdered them!" "Well, yes, dear, of course. But you don't think I'd stoop to telling a fib."
Haven't read the comments yet, but chiming in to say that whenever I have to ask myself, "What's the progressive response to this economic issue?" I go to CEPR.
On inflation, Dean Baker says that it's not nearly as big of a deal in the US as people are making it out to be: https://cepr.net/inflation-inflation-inflation-and-social-security/
On inflation, Dean Baker says that it's not nearly as big of a deal in the US as people are making it out to be: https://cepr.net/inflation-inflation-inflation-and-social-security/
But that presents a false dichotomy; I can believe both that most people are not "devastated" by inflation and that it has real negative effects, that people are annoyed by it, and that it is appropriately a significant political issue.
In general I think inflation isn't the worst thing, and I wouldn't mind if forces that are causing inflation are also generating positive effects, but I'm not sure that's still true. As this points out we're in an odd economic situation: https://www.apricitas.io/p/the-new-economic-picture
More than that, however, the economic picture is just abnormal. Take Okun's Law--the idea that there is a correlation between real output growth and job growth. Without getting too much into the empirics or causal debates around it, suffice to say that the two unsurprisingly tend to move together--when GDP growth is positive there tends to be more hiring and when GDP growth is negative there tends to be less. The last two quarters are a historical rarity for having extremely strong job growth alongside strongly negative GDP growth.
76.last and 55.2 are both effects enhanced by China's declining export volume of cheap consumer and industrial goods. Separately and also pulling in the same direction, China has real internal economic problems with the housing crash there.
I had to do some driving for work yesterday, and was struck, listening to the radio, about how economic news was presented. If the official policy is to create a slowdown, then news about things slowing down should be presented as success, not as failure.
According to the news I just saw, the U.S. economy is back to growth. I think it's because I ordered a new recliner from the furniture mines of North Carolina.