Provoked by an interview with Simon Jarvis of the London Economist...: I confess that I really, really do not understand the fear of “stagflation” right now, The short-lived Korean War-era bottleneck inflation seems to be the most apposite historical model. Rejoining the highway at speed leaves rubber on the road. What we are seeing now is rubber left on the road. And that is expected, and desirable.
I agree that our current high rate of inflation is transitory. There was a major shift in consumption patterns, largely from services to goods. I know a lot of affluent people who have cut down their travel, for both business and leisure, in a big way, and started spending more money on things rather than services. The weird thing is that I noticed this trend starting back in 2018, well before COVID, so the epidemic only accelerated an ongoing trend.
I think that inflation in the 1970s was similar, except that the driver was more powerful - the baby boom with its demand for education, housing, automobiles and just about everything else. The big difference was that labor was much more powerful back then, so it was possible for workers' wages to cover rising prices. Nowadays, labor may be able to get a better deal for a while, but structurally, inflation will stop when capital says it "stop'. Personally, I expect our next economic marvel to be rising unemployment combined with rising job openings. There are good sound reasons this is likely, and I'm sure someone will come up a catchy phrase for it, maybe the Great Mismatch as if mismatching has anything to do with it.
That brings me to a statement that jumped out at me in your essay: "A configuration in which unemployment is rising and factories are being idled and yet people are still expecting and counting on there being more money in the economy next year and so raising their prices and bargaining for higher wages ..." I can't figure out what expectations have to do with it. Surely, it is about ability, not expectation. Why would a worker not try for higher wages even if he or she expected the economy to tank in the near future? Why would a business not charge higher prices if they found it profitable no matter what they expected for the economy?
The main reason not to try for higher wages or higher prices is the expectation that one might not get them and the risk that attempting to do so might be counterproductive. When the market is competitive, it is hard to get a higher wage or a higher price whether the market is booming or not. Look at how long it took for wages to start rising after the 2007 crash. For over a decade, everyone was expecting a booming economy and getting it, but wages were stagnant because the labor market is competitive. Meanwhile, big businesses were getting higher prices, revenues and profits because the business market is not competitive. In the 1970s, we had a price spiral because both labor and business had limited competition. It's more lopsided today.
I agree that our current high rate of inflation is transitory. There was a major shift in consumption patterns, largely from services to goods. I know a lot of affluent people who have cut down their travel, for both business and leisure, in a big way, and started spending more money on things rather than services. The weird thing is that I noticed this trend starting back in 2018, well before COVID, so the epidemic only accelerated an ongoing trend.
I think that inflation in the 1970s was similar, except that the driver was more powerful - the baby boom with its demand for education, housing, automobiles and just about everything else. The big difference was that labor was much more powerful back then, so it was possible for workers' wages to cover rising prices. Nowadays, labor may be able to get a better deal for a while, but structurally, inflation will stop when capital says it "stop'. Personally, I expect our next economic marvel to be rising unemployment combined with rising job openings. There are good sound reasons this is likely, and I'm sure someone will come up a catchy phrase for it, maybe the Great Mismatch as if mismatching has anything to do with it.
That brings me to a statement that jumped out at me in your essay: "A configuration in which unemployment is rising and factories are being idled and yet people are still expecting and counting on there being more money in the economy next year and so raising their prices and bargaining for higher wages ..." I can't figure out what expectations have to do with it. Surely, it is about ability, not expectation. Why would a worker not try for higher wages even if he or she expected the economy to tank in the near future? Why would a business not charge higher prices if they found it profitable no matter what they expected for the economy?
The main reason not to try for higher wages or higher prices is the expectation that one might not get them and the risk that attempting to do so might be counterproductive. When the market is competitive, it is hard to get a higher wage or a higher price whether the market is booming or not. Look at how long it took for wages to start rising after the 2007 crash. For over a decade, everyone was expecting a booming economy and getting it, but wages were stagnant because the labor market is competitive. Meanwhile, big businesses were getting higher prices, revenues and profits because the business market is not competitive. In the 1970s, we had a price spiral because both labor and business had limited competition. It's more lopsided today.
Another distinguished recruit for Team Transitory! I'm down. When do we order tshirts?