In February 2024, the New York Times columnist Paul Krugman lamented how “the hand-wringing over Biden’s age has overshadowed the real stakes in the 2024 election.”
Paul Krugman reassured readers, “As anyone who has recently spent time with Biden (and I have) can tell you, he is in full possession of his faculties—completely lucid and with excellent grasp of detail.”
There is some risk of inflation, depending on how the Fed tries to solve the Covid19 aftereffects. While you use fiscal policy history, I use monetary policy history.
This debate on the Biden plan is going in the direction of the important economics subject of the DURATION of the inflationary impact of public deficits.
This article addresses it using history, what is valid, but it also deserves analysis from 2 other perspectives :
> the mechanical and quantitative propagation of deficits on prices levels, without any action of the FED and
> the same, with the FED acting to manage the process.
I present here my very simple analysis about the 1st perspective I presented above. It only considers the proportion GPD <=> Amount of Money, that I consider the main force on the Deficits > Inflation theme (even admitting that expectations have impact and are self-fulfilling).
So, considering only the proportion GPD <=> Amount of Money, deficits increase prices only while they are happening and increasing the amount of money. This means that :
> Transitory deficits due to a transitory plan only cause transitory inflation
> Lasting deficits due to an structural imbalance in the public finances cause lasting inflation.
As simple as that. This simplicity, if competently communicated, helps to manage expectations.
"History is the great laboratory of economics" ...
"The problem, however, is how to select these examples."
The 2nd assertion indeed means that history is not properly a laboratory, which allow CONTROLLED experiments.
This contradiction is far from annul the great merits of this article. Indeed, this article is exemplary on the need of great care when searching historical lessons, in order to avoid bad lessons and getting only the good ones.
This also brings to mind how prone to errors historical arguments are, mainly when taken with little care, that are their most common use, as some comments below exemplify.
One thing I was taught at the old blog was to think for yourself and not to parrot others. The Boskin commission changed the way we measured inflation. So I’m not sure if it’s relevant to look at historical data.
My fear is that a brief spike in inflation (say, 5% or above) will be much more damaging politically than economically, especially if it peaks in 2022 before the mid-terms. Republicans would undoubtedly use it to discredit the ARP ("failed stimulus') and argue that the economy is spinning out of control under Democratic stewardship. I'm still traumatized by Nov. 4, 1980.
The 70's are a bad analogy because the inflation at that time was primarily triggered (and ended) by the grain and oil price spikes, not by excess money in the hands of consumers (no, wages were not increasing at an excessive rate). Insofar as the ARP distributes a large amount of money immediately to consumers, the closest analogy is not wars themselves, but what happened after WW II when rationing ended in 1946 and people got to spend their huge wartime savings on scarce consumer goods. There was inflation then, but it subsided without change in interest rates.
But if the danger is longer-term spending in a Green New Deal why isn't the analogy Japan in the 90's? Japan spent an enormous amount on infrastructure and other projects, running up debt/GDP eventually over 230% and there was no hint of inflation or "overheating". Economists don't know as much as they think they do about the effects of fiscal stimulus (or monetary policy either for that matter).
By the way nobody seems to be considering the likelihood of another recession caused by financial collapse. Are stock prices going to keep going up forever? Basically the market has already priced in a huge boom.
One of the moderating issues not mentioned here is the presence of more perfect price knowledge. With the internet ability to compare pricing nearly worldwide, and more open trade, inflation (at least goods inflation) should be held down. I am not sure that wages will be affected one way or the other. That is a question for the future.
It's not quite right that "nobody is willing to try out potentially disastrous policies". Brazil's president Dilma Rousseff did, twice: once in her 1st mandate, overspending in low-return projects during a time of full employment, thus pushing inflation up; and then again in her 2nd mandate, with strict austerity which led to recession, lower government revenues, and failure to control public deficit.
This is a tiny detail in this article, but even about this detail you are wrong: obviously, that Dilma's policies resulted in disaster does not mean that she was willing this result.
A big theme of this article is the importance of, in each specific case, to select a proper historical comparison. Also about this you are wrong: Dilma's failures hasn't any resemblance with the ARP.
Yes, it's tiny detail. But what a remarkable double experiment.
She didn't want the bad results, but her government was willing to run the risk of the bad effects that would be the consequences of standard economic theory. And in each case theory proved right. Does she get a Nobel prize?
Wrong again. What you name "strict austerity" in her 2nd mandate was not chosen by her; it was imposed by the Congress and the strict 'Lei de Responsabilidade Fiscal' (Fiscal Responsibility Law), that she did everything she could to avoid. And she did so much that this was precisely the formal reason for her impeachment.
Not all, but I am Brazillian and I know what I said. By the way, there weren't the so great difference in public spending between the 1st and 2nd Dilma mandates you suppose. The 'Lei de Responsabilidade Fiscal' was approved in 2000, in the FHC mandate, before Dilma and before Lula, and both had to govern under its restrictions.
If prices are going up in a modern economy, it is primarily because wages are also going up, and that's what happened during the "high inflation" period of the 60s and 70s. What brought that to a screeching halt was oil crisis and Paul Volker and union busting. Remember that no matter what the GOP says, inflation is almost always good for people with net debt and people at the bottom and even the middle class are almost all in debt.
If prices go up because of wage increases and consequent consumer demand, which is the default dogma of most economists (the Phillips curve and the NAIRU), then wage earners are not necessarily the losers. Since 1973 inflation has been low but wages barely kept up, instead of increasing more rapidly as they did before then. Is that a good situation?
I imagine wage increases haven't keep up since the 1970s because of Healthcare.
From like forever to 1988, the US spent 8% of GDP on Healthcare. Just like every nation. But, in the mid 80s, Reagan and leading CEOs wanted to take that low cost affordable system and force non-value added insurance onto people. Employers out negotiated labor unions by granting ephemeral job security for increasing Healthcare cost sharing. And demolished solid (mostly) pensions.
The consequences of this Reaganism is that US Healthcare grew to 20% of GDP. Oh.. all the modern national Healthcare systems.... still spend 9% of GDP.
So, America overpays 2x for lower outcomes. We as a nation waste $2.1 Trillion a year. A good portion ia paid by depresses wages as the non value added costs are absorbed..by people .
Very interesting! However, I would like to see more posts about buildings and food.
You are speaking in tongues...
In February 2024, the New York Times columnist Paul Krugman lamented how “the hand-wringing over Biden’s age has overshadowed the real stakes in the 2024 election.”
Paul Krugman reassured readers, “As anyone who has recently spent time with Biden (and I have) can tell you, he is in full possession of his faculties—completely lucid and with excellent grasp of detail.”
More articles please! I'll pay!
There is some risk of inflation, depending on how the Fed tries to solve the Covid19 aftereffects. While you use fiscal policy history, I use monetary policy history.
https://marcusnunes.substack.com/p/inflation-mongering-is-back
This debate on the Biden plan is going in the direction of the important economics subject of the DURATION of the inflationary impact of public deficits.
This article addresses it using history, what is valid, but it also deserves analysis from 2 other perspectives :
> the mechanical and quantitative propagation of deficits on prices levels, without any action of the FED and
> the same, with the FED acting to manage the process.
I present here my very simple analysis about the 1st perspective I presented above. It only considers the proportion GPD <=> Amount of Money, that I consider the main force on the Deficits > Inflation theme (even admitting that expectations have impact and are self-fulfilling).
So, considering only the proportion GPD <=> Amount of Money, deficits increase prices only while they are happening and increasing the amount of money. This means that :
> Transitory deficits due to a transitory plan only cause transitory inflation
> Lasting deficits due to an structural imbalance in the public finances cause lasting inflation.
As simple as that. This simplicity, if competently communicated, helps to manage expectations.
Comments are welcome.
yes, the question is how long and how fast it will be
"History is the great laboratory of economics" ...
"The problem, however, is how to select these examples."
The 2nd assertion indeed means that history is not properly a laboratory, which allow CONTROLLED experiments.
This contradiction is far from annul the great merits of this article. Indeed, this article is exemplary on the need of great care when searching historical lessons, in order to avoid bad lessons and getting only the good ones.
This also brings to mind how prone to errors historical arguments are, mainly when taken with little care, that are their most common use, as some comments below exemplify.
One thing I was taught at the old blog was to think for yourself and not to parrot others. The Boskin commission changed the way we measured inflation. So I’m not sure if it’s relevant to look at historical data.
My fear is that a brief spike in inflation (say, 5% or above) will be much more damaging politically than economically, especially if it peaks in 2022 before the mid-terms. Republicans would undoubtedly use it to discredit the ARP ("failed stimulus') and argue that the economy is spinning out of control under Democratic stewardship. I'm still traumatized by Nov. 4, 1980.
The 70's are a bad analogy because the inflation at that time was primarily triggered (and ended) by the grain and oil price spikes, not by excess money in the hands of consumers (no, wages were not increasing at an excessive rate). Insofar as the ARP distributes a large amount of money immediately to consumers, the closest analogy is not wars themselves, but what happened after WW II when rationing ended in 1946 and people got to spend their huge wartime savings on scarce consumer goods. There was inflation then, but it subsided without change in interest rates.
But if the danger is longer-term spending in a Green New Deal why isn't the analogy Japan in the 90's? Japan spent an enormous amount on infrastructure and other projects, running up debt/GDP eventually over 230% and there was no hint of inflation or "overheating". Economists don't know as much as they think they do about the effects of fiscal stimulus (or monetary policy either for that matter).
By the way nobody seems to be considering the likelihood of another recession caused by financial collapse. Are stock prices going to keep going up forever? Basically the market has already priced in a huge boom.
One of the moderating issues not mentioned here is the presence of more perfect price knowledge. With the internet ability to compare pricing nearly worldwide, and more open trade, inflation (at least goods inflation) should be held down. I am not sure that wages will be affected one way or the other. That is a question for the future.
It's not quite right that "nobody is willing to try out potentially disastrous policies". Brazil's president Dilma Rousseff did, twice: once in her 1st mandate, overspending in low-return projects during a time of full employment, thus pushing inflation up; and then again in her 2nd mandate, with strict austerity which led to recession, lower government revenues, and failure to control public deficit.
This is a tiny detail in this article, but even about this detail you are wrong: obviously, that Dilma's policies resulted in disaster does not mean that she was willing this result.
A big theme of this article is the importance of, in each specific case, to select a proper historical comparison. Also about this you are wrong: Dilma's failures hasn't any resemblance with the ARP.
Yes, it's tiny detail. But what a remarkable double experiment.
She didn't want the bad results, but her government was willing to run the risk of the bad effects that would be the consequences of standard economic theory. And in each case theory proved right. Does she get a Nobel prize?
Wrong again. What you name "strict austerity" in her 2nd mandate was not chosen by her; it was imposed by the Congress and the strict 'Lei de Responsabilidade Fiscal' (Fiscal Responsibility Law), that she did everything she could to avoid. And she did so much that this was precisely the formal reason for her impeachment.
I'm sure you know best, you know it all.
Not all, but I am Brazillian and I know what I said. By the way, there weren't the so great difference in public spending between the 1st and 2nd Dilma mandates you suppose. The 'Lei de Responsabilidade Fiscal' was approved in 2000, in the FHC mandate, before Dilma and before Lula, and both had to govern under its restrictions.
Voće é de qual parte do Brasil? Eu morei em BH por dois anos.
A doubling of prices (a la Civil War and WW1) will KILL the already struggling middle class! Your argument just turned me against the ARP!
If prices are going up in a modern economy, it is primarily because wages are also going up, and that's what happened during the "high inflation" period of the 60s and 70s. What brought that to a screeching halt was oil crisis and Paul Volker and union busting. Remember that no matter what the GOP says, inflation is almost always good for people with net debt and people at the bottom and even the middle class are almost all in debt.
https://en.wikipedia.org/wiki/Real_wages#/media/File:United_States_real_wages_(red,_in_constant_2017_dollars).png
Is there really a precedent in a modern advanced economy with run away inflation?
If prices go up because of wage increases and consequent consumer demand, which is the default dogma of most economists (the Phillips curve and the NAIRU), then wage earners are not necessarily the losers. Since 1973 inflation has been low but wages barely kept up, instead of increasing more rapidly as they did before then. Is that a good situation?
I imagine wage increases haven't keep up since the 1970s because of Healthcare.
From like forever to 1988, the US spent 8% of GDP on Healthcare. Just like every nation. But, in the mid 80s, Reagan and leading CEOs wanted to take that low cost affordable system and force non-value added insurance onto people. Employers out negotiated labor unions by granting ephemeral job security for increasing Healthcare cost sharing. And demolished solid (mostly) pensions.
The consequences of this Reaganism is that US Healthcare grew to 20% of GDP. Oh.. all the modern national Healthcare systems.... still spend 9% of GDP.
So, America overpays 2x for lower outcomes. We as a nation waste $2.1 Trillion a year. A good portion ia paid by depresses wages as the non value added costs are absorbed..by people .