Yves here. Some things can’t be said often enough. In this case, the topic is what caused the inflation that is still stinging many Americans. It’s become a favorite hobbyhorse that the admittedly hefty Biden stimulus is the perp. But a more carefully look show that that idea is, to quote the wags, “Neat, plausible, and wrong.”
The initial driver was Covid supply chain shocks. That’s why there were very big increases in some items like lumber, meat and eggs (there due to chicken culls) and not others (gasoline). But then, as Tom Ferguson and Servaas Storm explain, the further impetus was elite spending. Remember the much decried “greedflation” where some companies put through price increases simply because they could, as opposed to due to rises in labor and materials costs? Those excess profits went into the pocket of capitalists.
Another factor not addressed here: Even if statisticians maintain that inflation has moderated (even before getting to the fact that the items they measure may not correspond well enough with the what middle and lower income Americans buy regularly), their time horizon is Wall Street’s and the Fed’s: months, a quarter, at most a year. The inflation increases were so large in categories that many consumers find essential that the fact that the rate of increase has dropped a lot still leaves them at a durable new high level compared to a few years back.
By Thomas Ferguson, Research Director of the Institute for New Economic Thinking, Professor Emeritus, University of Massachusetts, Boston; and Servaas Storm, Senior Lecturer of Economics, Delft University of Technology. Originally published at the Institute for New Economic Thinking website
It must be the Wall Street Journal’s DNA. Nothing else easily explains why the normally careful Nick Timiraos would focus so much of his account of “How the Democrats Blew It on Inflation” on the hoary argument that the “Biden Stimulus” somehow triggered worldwide inflation back in 2021.
The argument never made much sense, since, as numerous studies have documented, supply-side factors drove the biggest part of the inflation and it hit virtually everybody, regardless of their stimulus policies. This is shown in Figure 1, which presents the consumer price inflation rates during 2021-2024 in the U.S., the Euro Area, Great Britain, and Canada. It can be seen that all countries went through a very similar inflation experience, with consumer price inflation in the Eurozone and the U.K. peaking at even higher levels than in the U.S.
Figure 2 presents the structural government budget deficits (as a percentage of potential GDP) of these four countries during 2021-2024. It is evident that the U.S. government ran much larger structural budget deficits than governments in the Euro Area, the U.K., and especially Canada. Despite these substantial differences in the fiscal policy stance, the consumer price inflation experience has been remarkably similar across the countries (Figure 1). This just shows that the inflation was largely driven by supply-side factors, as numerous studies including the study by Bernanke and Blanchard (2024) for 11 economies have shown.
Figure 1: Consumer Price Inflation in the U.S., the Euro Area, the U.K. and Canada (Annualized monthly inflation rates; January 2021-September 2024)
Source: FRED database.
Figure 2: Structural Government Budget Deficits in the U.S., the Euro Area, the U.K. and Canada (as a percentage of potential GDP)
Source: IMF World Economic Outlook database (October 2024).
We are far from the only people making these arguments, but we found the Journal’s blithe resuscitation of this almost prehistoric line particularly jarring. Back in early 2023, we traced very carefully how federal spending flowed into the economy, using a variety of data. It quickly became obvious that most of the stimulus money was long out the door when most of the supply shock inflation hit. As we summarized: “the key data series—stimulus spending and inflation—move dramatically out of phase. While the first ebbs quickly, the second persistently surges.”
Besides climate change, war, and the other shocks that everybody but the Journal now seems to recognize, we identified another cause of inflation that the Biden administration never tried to deal with: the vast increase in spending coming from the rich. As we have documented in two subsequent studies, the firehose of affluent consumption continues to drive inflation, especially in services.[1]
There is nothing mysterious about the source of this spending: Mostly it arises from the vast, historically unprecedented (in peacetime) increase in the wealth of upper-income groups produced by the Federal Reserve’s quantitative easing program.
What’s bizarre though, is, that both of these arguments find support in recent research even by the Federal Reserve.[2]It’s simply silly for the Journal to keep preaching the gospel according to Joe Manchin as if there is no counter-evidence. And Democrats and everyone interested in serious election postmortems need to get their facts straight if their deliberations are to be anything but pure vanity projections.
Notes
[1] Ferguson and Storm, “Trump vs. Biden: The Macroeconomics of the Second Coming”; Good Policy or Good Luck? Why Inflation Fell Without a Recession.
[2] Cf. Thomas Ferguson,”INET Research and the 2024 Election;”; S.H. Hoke, L. Feler, and J. Chylak, “A Better Way of Understanding the US Consumer: Decomposing Retail Spending by Household Income.”
As a budget living renter, it infuriates me how blithely the media talks about inflation in the last four years as somehow better. I can tell you it absolutely isn’t. Rent increased by 3 to 4 percent annually under Trump; it’s been about 7 percent per year under Biden, but it’s actually more than that, because services that used to be included in rent, like water, trash, maintenance, etc. are now just tacked on to the bill, and then on top of that they charge you a service fee for the privilege of being billed for these things. Many places even charge fees just to pay your rent.
Food: I’m a budget food shopper. In a pinch, not that long ago, I used to be able to eat a fairly nutritious diet for, literally, like 20 dollars a week. That same diet now is 80. The gap between the budget/sale items and the regular stuff has diminished considerably. Also sales are less common, as well as less good. It used to be you could get enough calories for your family, if you didn’t have time to cook, from a fast food or pizza place, if you took advantage of deals, for a few dollars per person. Those deals are gone, and fast food is so expensive now, you might as well just order from a real restaurant. Effectively, this means that a huge source of prepared food, relied upon by damn near everyone in the working class, just doesn’t exist anymore. This means we have to prepare everything we eat, or watch our monthly spending cash disappear because we needed 3 meals in a month we simply couldn’t prepare for ourselves.
Medical care: If you’re working class, you can’t afford it, period. Even if you do everything right, it doesn’t matter. Deductible is more than your annual disposable income. Basic tests will have you living out of your car. For those of us without kids, the approach is basically “if we die, we die; life sucks anyway” But if you have kids you absolutely must fork over about a third of your income for the sole purpose of avoiding catastrophe (remember insurance in these plans doesn’t pay for your normal expenses, because deductibles). It’s worse than that though, because insurance will absolutely fight you, hospitals will absolutely try to scam you, and even, in many cases, your doctor will be personally running scams. If you are a deferential-to-authority, HS educated working class person, you will lose whatever fights you have the energy to pick.
School fees. If you live in a rich area, your school is well funded. If you don’t, public school now costs a lot of money. Fees alone can run you 3 to 4 figures to send one kid to school. School lunch is expensive, and god forbid your kid wants to do an extracurricular or go on a field trip.
Getting literally anything fixed. That’s all I have to say about that.
Everything sucks and breaks. Most of the clothes I wore as a kid had been previously worn by 2-4 children. I don’t think my mom paid for a single article of clothing. This was a common practice. Not anymore. Cheap clothes simply don’t last. And it’s not just clothes, crap is just always breaking, and there is no other option then to replace it with the even crappier and more expensive replacement.
And people are supposed to be happy that HD tvs and PCs are cheaper than ever?
To clarify, regarding insurance costs, I count both employee and employer contributions as direct deductions from wages.
Did we ban the terms “stagflation” or “sticky inflation”?
Did we ban the terms “too expensive” or “too costly”?
I ask because it seems like PMC and the Investment Class simply decided that not saying certain words would allow the public to ignore the problem. Which is a bold strategy….to say the least.