Yves here. I am grateful that Barkley Rosser has volunteered for the unpleasant but necessary task of debunking Larry Summers’ inflation scaremongering. And Rosser adopts a suitably jaundiced tone in doing so.
By Barkley Rosser, Professor of Economics at James Madison University in Harrisonburg, Virginia. Originally published at EconoSpeak
But somehow becomes vaguer about exactly how this is going to happen and show up, but he wants the Fed to stop it in its track, goshdarnit. This is in a column appearing in the Washington Post, May 25, “The inflation risk is real.”
Well, he does start out by saying that the economic recovery from the pandemic is a good thing, as is of course the the receeding of the pandemic itself, with the US doing well compared to “other industrial countries.” The fiscal and monetary policies supporting this have so far been a good thing, blah blah blah. But now we must change course, especially the Fed, which Summers is still ticked off about not being appointed Chair of instead of Janet Yellen back when (both of his parents worked for the Philadelphia Fed, so, obviously he should have been put in charge of it, goshdarnit, quite aside from having Paul Samuelson and Kenneth Arrow as uncles!). It is not just ongoing easy monetary and fiscal policies involved here, but the “pentup demand” now roaring out that supposedly is going to race against supply responses for some long time into the future.
Oh, he does have some evidence. Indeed the rate of inflation has risen and to a level, 7.5% annual rate in the first quarter, and can quote various others who agree with him that inflation is in danger of getting seriously out of control, such as Warren Buffett, and can quote Jason Furman (who briefly co-blogged with some of us back on the old Maxspeak) that the fiscal stimulus is “too big for the moment.”
This all supposedly means that the Fed needs to step forward by “explicitly recognizing that that overheating and, not excessive slack, is the predominant near-term risk for the economy.” Furthermore, “policies toward workers should be aimed at the labor shortage that is our current reality” by ending extra unemployment benefits in September. Oh, while he is worried about too much fiscal stimulus, he nevertheless does recognize that expanding infrastructure would help expand future supply capability, so he does reasonably argue states should not use federal aid to cut taxes.
Getting back to the Fed, regarding which Summers thinks “Tightening is likely to be necessary,” it must be noted that the Fed from the beginning of the year, if not earlier (along with Treasury Secretary Yellen) has forecast an increase in the rate of inflation this year. It must be admitted that indeed the most recent price spike exceeds what was forecast, so this is the opening for Summers and those who agree with him to argue that inflation is indeed a real risk that calls for a change of policy, or at least of rhetoric in preparation to change policy. And this could happen, but how likely is it?
Here is where Summers seems to fall down. The people at the Fed, led as near as I can tell by the astute Jim Bullard, have argued that nearly all price increases we would see are temporary surges associated with pandemic-induced supply chain problems, with the global shipping issue at the top of the list with its now tripling of costs. A sign of this is the most dramatic price increases one hears about, such as for copper, have been overwhelmingly among raw materials and commodities rather than final consumer goods, although there certainly has been some passthrough for many of those. But even with those, some appear to have perhaps stopped rising, notably that headline maker, gasoline prices, which seem to have stopped rising after the freakout following the Colonial Pipeline shutdown that set off people waiting in lines a la 1979 (and getting on Fox News screaming about hyperinflation and blaming it on Biden).
Summers actually has very little to say specifically to offset the argument that most of this recent spike in prices most dramatically of inputs is not going to continue for all that much longer. He grants that some of this is “transitory,” but then invokes unspelled-out “variety of factors” that will keep demand rising faster than supply so that they “impact…inflation expectations on purchasing behavior.” The only specific sector he mentions is housing, where he says that rising housing prices have not shown up in official inflation data. He also claims that such expectations are showing up in interest rate changes, even though over on Econbrowser Menzie Chinn argues that if one accounts for liquidity and term premia, changes in 5-note and TIPS rates show basically no increase in inflation expectations at the 5-year time horizon, those still sitting at about 1.7%, still below the Fed’s target inflation rate.
Oh, he also invokes “Higher minimum wages, strengthening unions, increased employee benefits and strengthened regulations” as further exacerbating this inflationary surge, even though he says these “are all desrable.” But Congress failed to raise the minimum wage, and while Biden may be the most pro-union president since FDR and Truman, union membership remains very low and not expanding, as the vote on organizing at Amazon in Alabama shows. He really does not have much in the way of how the recent price hikes will keep on going up or even accelerate, rather then slow down or stop or even go back down in some cases for many of these inputs like copper and oil.
Obviously none of us know for sure on this, and indeed reports have it that the Fed is keeping a close eye on the price increases with rumblings even from Yellen that if inflation actually does stick or accelerate they will act to offset it. But from what I see, it remains that the vast majority of these price increases are likely to slow or even reverse as the supply bottlenecks gradually get loosened as the year proceeds. Summers seems to be mostly just waving his hands that they will continue, and the Bullard-Fed view that they will ease still looks to me to far more likely. But in the meantime, Summers gets to get a lot of attention, even if he is not Fed Chair.
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When I saw Summers’s WaPo column two days ago, I checked out the comments section. There were over 200 comments at that point, the overwhelming majority of them quite scathing.
WaPo comments are the other extreme of breitbart news , not a good place for truth seeking
Truth is in the eye of the beholder … you might inform yourself about critical bias.
Very much a net positive that he does not have any role in this administration. Just cannot stand Summers.
Listened to a podcast yesterday by Steve Keen about this issue. He said he more often disagrees with the Fed on many things but agrees with them on the issue of inflation and that it is transitory. It is his prediction that the inflation we’re seeing from the supply shock caused by the pandemic will not result in sustained inflation but will increase prices that will cause a fall in aggregate demand and cause deflation.
Somebody should ask these Masters of The Universe – even if they are right, “inflation” in what and why?
Food prices go up…. in 101 they tell us that it’s supply and demand. OK, so people didn’t have enough food before apparently. Why would that be, they never seem to address. People drive more so gas goes up– because jobs are spread out all over h-e-double-toothpicks because of the Roadbuilders that never seem to stop, like reverse termites.
And somehow housing goes up, despite a nation of “empty homes”
https://www.self.inc/info/empty-homes/#:~:text=2018%20-%20States%20with%20highest%20ratio%20of%20homeless,of%20110%20empty%20homes%20per%201%20homeless%20person
Summers increasingly looking like the Obama crew member that’s most hysterical about protecting his legacy. He’s seen the court intrigue about how Biden’s stimulus is justified because Obama’s stimulus was too small.
If the risk of [wild] inflation is real, then I say we must cut severely where cutting will have the biggest impact: unproductive spending. And that means starting the cutting with military spending. What’s the estimated percentage of discretionary spending on that – 50% of the Federal budget? And what’s the estimate if you throw in spending on ancillary “intelligence” services that are supposed to keep us safe from enemies [against whom Congress has not declared war]?
But pardon me if I don’t hold my breath in waiting to see the likes of Larry beating the drums for this strategy to rein in spending. And so this country will continue to have military bases in places that, “anonymous sources” speaking to the NY Times will tell us, pose such grave threats to American national security. Like Africa.
The ability of Summer’s to fail upward is astounding to anyone who looks at his record objectively.
And it says a lot about how American Society actually works.
After the Harvard debacle when it was revealed that Larry Summers was both an overt misogynist and incompetent enough to have lost $1000,000,000 of Harvard’s endowment in a bull market you might think he’d exhibit a little humility and might face some adverse consequences.
How many of the rich and powerful have broken laws with impunity over the last decade or demonstrated incompetence of historic proportions and been lauded for their failures?
America is transitioning from high trust society to a low trust society and we are just beginning to pay the price, Summers is but one symptom of a general malaise.
Its a worrying sign when the level of debate in this country is reduced exclusively to angry ad hominem attacks. I havent seen anyone debunking Summer’s arguments and many well known economists seem to agree with him.
“If an opinion contrary to your own makes you angry, that is a sign that you are subconsciously aware of having no good reason for thinking as you do” Bertrand Russell
Bill Mitchell debunked him a few months ago –
http://bilbo.economicoutlook.net/blog/?p=46612
…’many well known economists seem to agree with him’ – that’s the problem.
From Bill’s conclusions:
“The consequences of pushing spending a little more than is necessary is some price pressures, which are less destructive than unemployment and can be easily dealt with”
I think we can all agree that Bill’s analysis is wrong, there is a worrying shortage of workers right now and “some price pressures” is more like huge price pressures.
I will talk a bit about europe now. You see the exact same narrative in europe that you find in the US. That due to all the extra money in the economy that there should be rampant inflation.
There is a reported shortage of workers. There is also a small rise in unemployment, but nothing like what happened during the eurozone crisis.
Inflation is barely over 0% and economies in recession. Yes some prices have gone up, particularly energy. Food price inflation increased at the start of 2020, but have since gone back down. Whereas price rises for services or non-energy industry stayed and remained low.
The professional scaremongers, particularly those from Germany, have been found out. We should just stop listening to them when they right “Angst vor der Hyperinflation”. Predictions of 50% inflation are complete fantasy.
And I presume that predictions of 1000% for US, is also completely bonkers and done purely for clickbaiting.
It has been a staple on this site that worker shortages tend to miraculously disappear as soon as someone starts offering decent pay. Maybe that’s the case here.
A couple of recent regional Fed studies suggest that Summers may not be entirely wrong, at least in the medium term:
https://www.stlouisfed.org/on-the-economy/2021/april/inflation-making-comeback
https://takeonpayments.frbatlanta.org/research/publications/policy-hub/2021/05/17/04-wwii-and-today–monetary-parallels
Yes, those oracular Fed studies have such a sterling record when it comes to predicting future performance….
Right twice a day, sort of.
If smarminess constitutes debunking then the good professor has done a top job of putting Larry in his place, so well done Barkley! Personally, I felt there was very little debunking going on, or perhaps none. The good professor’s observation that the prices of “some [commodities] appear to have perhaps stopped rising” and his view that “it remains that the vast majority of these price increases are likely to slow or even reverse as the supply bottlenecks gradually get loosened as the year proceeds” sound like wishful thinking and fall well short of a debunk. Where, pray tell, is the supply bottleneck for Dr Copper and if there is one, why will it reverse?
We have before us the greatest ponzi scheme the world has ever known and supply bottlenecks are a side-show. The main culprits are interest rate manipulation, accumulated debt and now the coup de grace, never ending money printing. There will be plenty of talk of “tapering” and reassurances that a small interest rate tweak in the distant future will sort out any inflation bogey that may unexpectedly leap out of the bag, but the sad reality is that tapering is now out of the question because it is no longer possible to fund budget deficits through tax and conventional borrowing. If the Fed is brave enough to try, it will surely lead to a market meltdown and will promptly be reversed, and then some, to repair the damage.
And it’s all downhill from there.
I second this one. Clear, short, complete and accurate.
For me, the remaining big question is “what comes next?”.
Arcturus suggested the possibility of alternating bouts of inflation followed by deflation.
The deflation would be caused by rate increases and/or widespread debt defaults such as the 2008 real estate crash and Great Financial Crisis.
If this oscillation between the forces is done skillfully, that might be the winding road out of the mess we’re in.
And if it’s not done skillfully, or something sudden and big happens, then one or the other of the competing forces (inflation and deflation) may get an unobstructed run.
It seems like we need to be prepared for either condition. They can – and are – happening at the same time.
In the article above does it say what Larry Summers inflation prediction is?
There certainly is inflation at the moment. Is it a question of it continuing at this higher level or dropping back to the 2-3%?
And possibly underlying the discussion: fear of a shift in power balance with China, and fear of Trump.
In 2019-early 2020, Summers toyed around with supporting more accommodating policy,
but found no takers among the presidential candidates, and is now reverting to mean.
Poor Larry. Once an insider, he now finds himself an outsider.
(The original reporting is paywalled at the NYT.)
Contrary to popular myth, every inflation in history has been caused by shortages, usually shortages of energy (oil, mostly) or food.
No inflation ever has been caused by government spending.
In fact, federal spending can cure inflations if the spending purchases the scarce goods from abroad or funds the creation of the scarce goods. That is how prewar Germany cured its notorious inflation while building the greatest war machine the world ever had known.
By definition, ‘inflation’ is caused by an increase in the fiat money supply.
I think the definition of inflation is prices rising. The cause of that can definitely by money supply increasing but it can also be other reasons e.g.“cost-push inflation”.
https://www.imf.org/external/pubs/ft/fandd/basics/30-inflation.htm
Every inflation in history has been caused by shortages, usually shortages of energy (oil, mostly) or food.
No inflation ever has been caused by government spending.
In fact, federal spending can cure inflations if the spending purchases the scarce goods from abroad or funds the creation of the scarce goods. That is how prewar Germany cured its notorious inflation while building the greatest war machine the world ever had known.
Agreed on the productive govt spending point.
I thought Germany beat its post ww1 hyperinflation by stopping the money expansion and creating a second currency (Rentenmark).
It then started borrowing again to fund the war expansion later.
https://www.bundesbank.de/en/tasks/topics/inflation-lessons-learnt-from-history-666006
Larry seems as pathetic as he is annoying. I sometimes wonder if he doesn’t volunteer to say “inflation is coming!” because nobody else wants to say it but somehow it is required to just say it so we can vent our fear of it. And Larry knows nobody likes him and he doesn’t care. I’d just make these observations: the EU is worried it hasn’t got enough destitute immigrants to fire up its anticipated manufacturing… since its own fears of inflation have been sedated by a generous ECB – and none too soon. Dear old England and the rest of the UK are definitely planning on expanding the pound – we can deduce this because they aren’t discussing it. India with its obscene over-population is on a razor’s edge of inflation in one direction and deflation to the other. China is even encouraging more babies. Biden has opened the borders. The reason for all this unease is demographics. Populations everywhere are in decline. Not enough young people coming up to take care of all the old people. Tsk tsk. Certainly not enough consumers to keep the old capitalist paradigm from collapsing. So when idiots like Larry start talking about curbing Fed and government spending they are stuck in yesterday’s panic over the value of the dollar without realizing that it is an entirely different world. To throttle the money supply as Larry says we should would really mess with the “economy” in devastating and unsustainable ways. Cutting money to the economy (especially now that the Fed is going around Larry’s beloved banking system) would trickle down to the poorest and most vulnerable and to the environment and cause harm beyond belief in a time when sustainability is absolutely required. But Larry cannot see past his own dirty fingernails and all those grubby dollar bills he is so anxious to protect. Disgusting. Somebody please give Larry a clean handkerchief.
The supplemental unemployment benefit should be terminated immediately. ‘ Help wanted’ signs are everywhere, but employers cannot compete against a government which prints money for slackers.
Biggest slackers are those that fail to deploy their financial capital in a socially productive way after being made whole and then some after the GFC …
Why do some endlessly finger the blame on those with no agency …
tating and unsustainable ways. Cutting money to the economy (especially now that the Fed is going around Larry’s beloved banking system) would trickle down to the poorest and most vulnerable and to the environment and cause harm beyond belief in a time when sustainability is absolutely required. But Larry cannot see past his own dirty fingernails and all those grubby dollar bills he is so anxious to protect. Disgusting. Somebody please give Larr
I’m of more than two minds here. First of all, a basic rule that has never yet been broken is that Summers is always wrong about everything, always.
OTOH, a walk down the aisle at Home Despot will definitely show you big time inflation. And not just lumber (tho the inflation there is totally insane, a TubaFur that was $2.75 is now over $10. That’s some inflation! And recently Doomberg ran an article saying that the lumber industry wasn’t interested in opening new mills. I guess they believe that the long term demand won’t be there. And as Arcturus points out, what is going to relieve the shortage of Dr Copper?
But the other long term trend that is now showing up is that the long term decay in manufactured product prices (from the China wage arbitrage), and that is now reversing. The Yuan is no longer underpriced, Chinese wages are rising, and working age population there is decreasing.
So the decades long trend of being able to buy decent quality tools for less and less $$ every year is over. New lumber mills aren’t opening up. American lithium mines aren’t being opened. Grocery products are being short-filled instead of price-rised.
I’m afraid this time Ol Larry might be correct. And you know nothing is going to stop asset price inflation, or health care inflation. So if health care, housing, and groceries are all going up, and Home Depot is not going down, I guess you could pretty well make a call for broad based inflation.
I have a 100 trillion Zimbabwe Dollar note. There was also the great Hungarian inflation of 1946, where they ended up with a 1 quadrillion Pengo note – 1,000,000,000,000,000. I believe it was caused by a shortage of potato chips.
And yes, all of these inflations were transitory, so not to worry.
The official rate of inflation has lost meaning except as a political tool. I worry less about inflation than I worry about the cost of renting or buying a house, the cost of food, clothing. electricity, gasoline, medicine, medical car, education for my children, the cost of telephone service, Internet service, and car repairs. With the possible exception of the costs for some food items I expect to see prices increase for all these things I have come to regard as basic goods and services. The US economy has become what Michael Hudson terms a Rentier Economy. I would add further qualifications — that the US economy has become a highly consolidated monopolistic and monopsonistic economy, organized into long extremely narrow supply lines originating outside the US, and characterized by extremely limited inventories all along the supply chains. This economy resides in a world slowly running out of resources. With this view of the US economy I am unsure how to understand the concepts of slack, or shortage, or supply and demand, or stimulus.
I am getting 8 to 9% price increases from all my suppliers. Don’t know if that means I’ll get another 8% next month or in three years, I just know that it is happening now.
I don’t believe Larry Summers, but I do believe Steve Keen.
Oh, sarcasm is the easiest way to debate nowadays.
In the face of supply shortages, runnign trillions in fiscal deficit, mega trillions in monetary stimulus, and 120B in monthly purchases in the face of 10% jump in core inflation is a good thing?
And as to the temporary part, will the companies reduce prices next year? Or my 10% pay cut is something i have to accept as a compulsory handout to rent collectors?
Don’t make shit up. You are asking to have your commenting privileges revoked. I should not have to waste time debunking your tripe.
Core CPI increased 3% April 2020 to April 2021: https://www.cnbc.com/2021/05/12/consumer-price-index-april-2021.html
And did you miss that economists have been suggesting that inflation of 2% to 4%, as opposed to the post-Volcker preference for zero, which they take as 0 to 2%, might be better for the economy and in particular workers? An economy running a bit hotter gives workers more bargaining power.
https://www.nytimes.com/2021/05/12/business/inflation-consumer-price-index-april.html
“On a monthly basis, inflation rose by 0.8 percent. A narrower measure of prices, which strips out food and energy costs that can be volatile, rose 0.9 percent — its biggest monthly increase since April 1982.”
who cares what economists say? They’re all consultants anyway. They will say what the man writing the check wants them to say,
The whole drama with inflation is driven by the top wealth bracket and they have zero dramas passing on the effects of bad policies and investment decisions everyone below.
Its a power dynamic that proceeds monetary functionality.