Is Inflation "Non-Transitory"?
& BRIEFLY NOTED: For 2021-12-17 Fr
WE HAVE a very nice reframing of the current mindset of the Federal Reserve by the extremely smart Robert Armstrong and Ethan Wu of the Financial Times:
The Federal Reserve currently anticipates that their medium-run inflation target can be restored with an increase in interest rates of only 250 basis points over the next three years.
The first thing to say is that—if the Federal Reserve is correct—that low a level of interest rates at their peak means that we will once again hit the zero lower bound on interest rates if and win another negative demand shock hits the economy. That means, above all, that the long-run inflation target is too low to maintain macroeconomic balance. The Federal Reserve should already have thought about this and take an action to raise the inflation target.
The second thing to say is that the overwhelming bulk of the inflation we are right now seeing must be transitory if such a small increase in interest rates will be sufficient to return the economy to its 2 1/2% per year long-run inflation target. This is, as I say over and over again, not a 1970s like inflationary spiral—not melting the engine—but rather leaving rubber on the road as you rejoin the highway traffic at speed. Rejoining the highway traffic at speed is a good thing to do. Leaving rubber on the road is a necessary consequence of doing that. It’s stupid to complain about it.
The third thing to say is that restoring an economy to full employment while undertaking a massive structural shift in an economy with sticky downward wages (and some prices) has always, in our experience, been accompanied by a transitory burst of inflation. You have to incentivize movement into the sectors that need to expand by creating price differentials vis-a-vis the contracting sectors. And with their wages (and some of their prices) downward-sticky, that is a transitory burst of inflation. It is the post World War II demobilization and the Korean war era mobilization from the Cold War that should serve as are examples, if indeed there are any examples that are relevant. Those who look at the US post-Korean War experience and try to generalize from that are, I think, barking up the wrong tree:
Robert Armstrong & Ethan Wu: The Fed Still Thinks Inflation Is Transitory: ‘The most surprising thing in the Fed’s sedate December meeting was the news… that monetary policy committee members project three interest rate increases next year, rather than the two that consensus had called for. Even this spooked no one…. The Fed is acknowledging short rates will need to rise somewhat to hedge against persistent inflation. That is evident in the 2022 and 2023 dots. But the median forecast for rates in 2024 nudged up only a bit, from 1.75 percent to just over 2 percent. The longer-run dots have stayed the same…. The committee thinks, with a high level of unanimity, that a short raising cycle, topping out at 2.5 percent, will ensure that inflation is transitory…. Above target inflation will last about a year. Everybody, say it together now: transitory! The Fed retired the word, but it still thinks the same way…. The bond market wholeheartedly agrees with the Fed’s attitude…
David Card, Joshua Angrist, & Guido Imbens: 2021 Prize in Economic Sciences <https:// www.youtube.com/watch?v=DV4IjRfjTs0>:
Very Briefly Noted:
Akito Tanaka, Cheng Ting-Fang & Lauly Li: Chipmakers’ Nightmare: Will Shortages Give Way to a Supply Glut?: ‘Expansion plans raise fears of another boom-to-bust cycle within the industry… <https://asia.nikkei.com/Spotlight/Supply-Chain/Chipmakers-nightmare-Will-shortages-give-way-to-a-supply-glut>
Patricia Callahan & al.: The Great Inheritors: How Three Families Shielded Their Fortunes From Taxes for Generations: ‘The Scripps, Mellon and Mars families are living proof of the triumph of tax avoidance and the durability of dynastic fortunes: Their combined wealth today is pegged by Forbes at $114 billion… <https://www.propublica.org/article/the-great-inheritors-how-three-families-shielded-their-fortunes-from-taxes-for-generations#1198068>
Michael Brendan Dougherty: Capitol Riot Happened Because Trump Lied: ’The Capitol riot happened because President Donald Trump simply lied, and lied, and lied.… LINK: <https://www.nationalreview.com/2021/12/gone-too-far/>
Edward Luce: The US System Is No Match for Donald Trump: ‘Absence of consequences for the Capitol riots makes it likelier that democracy will be subverted again… <https://www.ft.com/content/85ff09bc-eb08-4d99-b7d5-57e07b191dd1>
Melissa Dell <https://dell-research-harvard.github.io/>
Muge Cevik <https://twitter.com/mugecevik>
John Burn-Murdoch <https://twitter.com/jburnmurdoch>
Azeem Azhar: How Quantum Computing Will Change Everything (with Chad Rigetti)<https://hbr.org/podcast/2021/12/how-quantum-computing-will-change-everything-with-chad-rigetti>
Chris Rugaber: ’Fed Chair Powell wanted to see a bigger recovery in labor force participation before accelerating tightening, but in the past six weeks or so his patience ran out:…
Adam Ozimek: ’My view… has been that the debate around wider labor slack was not sufficiently addressed by the embrace of A[verage ]I[nflation ]T[argeting]. We are living through the consequences of that right now…
Melissa Dell: About This Knowledge Base: ‘Information and references compiled for the PhD course: Unleashing Novel Data at Scale (spring 2021). Developing this new course became a major pandemic project, born from the observation that many important social science questions remain unanswered, in substantial part because the data required to examine them has traditionally been inaccessible. Sometimes data may be inaccessible because it is trapped in hard copy document scans or other types of image data; other times, information can be scattered throughout vast reams of text. Recent advances in deep learning offer enormous potential to convert such raw information into computable data at scale…
Melissa Dell: Economics 1342: The History of Economic Growth: ’This course examines the history of economic growth, beginning with the divergence between human ancestors and other primates and continuing through the end of the 20th century. Topics covered include the Neolithic Revolution; economic growth in ancient societies; the origins of modern economic growth; theories and evidence about the institutional, geographic, and cultural determinants of growth; the East Asian Miracle; the middle income trap; the political economy of growth; growth and inequality; and theories and evidence about the persistence of poverty in the world’s poorest regions…
Robert Wright: Tribalism Among Nations: ‘Even as people like [Robert] Jervis have shed more and more light on how cognitive distortions lead to war, we continue to indulge the distortions…. As Jervis characterized the security dilemm… “When states seek the ability to defend themselves, they get too much and too little—too much because they gain the ability to carry out aggression; too little because others, being menaced, will increase their own arms and so reduce the first state’s security.”… The spiral of escalation… can unfold even if all actors are seeing the world clearly…. But it turns out the world’s political actors tend not to see the world clearly—and some common misperceptions can intensify this spiral. In particular: nations often see the defensively motivated actions of other nations as offensive in intent…
Eric Topol: Why Paxlovid is a Just-in-Time Breakthrough: ‘Good news—this is it…. Paxlovid, a small molecule that is orally active, was specifically designed to tackle SARS-CoV–2…. It binds to the virus’s main protease (Mpro)…. Inhibiting Mpro is a choke point for the virus, making it unable to replicate…. It’s going to be a blister pack for 5-days. Twice a day: Two 150 mg tablets of Paxlovid, and One 100 mg of Ritonavir. That’s right. Paxlovid isn’t given alone. It is accompanied by low dose Ritonavir, another viral protease inhibitor used for HIV, but being used here to increase the blood levels of Paxlovid without any antiviral effect itself. This works through a cytochrome (3A4) that is in common with the metabolism of many frequently used drugs such as statins and certain blood thinners, so a temporary 5-day off such drugs, or adjustment of their doses may be appropriate or necessary…. Paxlovid is a breakthrough, and I don’t use that term lightly. It not only provides a new layer of defense, but a unique one that is not dependent on our immune system and not affected by Omicron or other variants…. We need it out there in large quantities ASAP…
Rachael Bedard: ’I’m getting a lot of texts and questions about what to do rn about holiday plans…. It’s really important to me at this point to be with my loved ones and to celebrate things. It’s important to me to minimize risk of COVID, but I’m assuming exposure is likely over the next few weeks and I’m not operating in a way that will completely eradicate that risk; I think for my family, we can’t do that without completely canceling any indoor gathering, and we aren’t going to do that…. The risk of serious illness or long COVID as present but low for the people I’m personally responsible for, given those circumstances. So practically… I’m socializing in homes and spaces that require vaccines…. For a gathering over 2 families at a time, I’m asking people to rapid-test immediately prior…. We are reconsidering spending a few days away in a place where we’d likely be eating indoors around people who aren’t vaxxed—I suspect we won’t go, but we have a few days to decide…. You do not necessarily have to lock down. You have to be thoughtful and careful… doing your part to flatten the curve and to be a good neighbor…
My friend Brink Lindsey tweets:
Brink Lindsey: ‘[Max Singer’s] book Passage to a Human World had a big impact on me, but I don't think I've ever seen anyone refer to it until now…
Let me join in his puzzlement.
My friend Max’s 1989 Passage to a Human World: The Dynamics of Creating Global Wealth (New Brunswick, NJ: Transaction) <https://archive.org/details/passagetohumanwo00sing_0> and 2011 History of the Future: The Shape of the World to Come Is Visible Toda_ (Plymouth, U.K.: Lexington Books) <https://github.com/braddelong/public-files/blob/master/readings/book-singer-history-of-the-future.pdf> are both very interesting books, well worth reading (if vastly more optimistic about the human future than I feel myself to be, these days at least).
So why is Max so undercited, at least in the circles that I—and Brink—frequent?
Inflation is inherent to fiat currencies. Mammonites, as a matter of faith, insist that real money is deflationary; if it's not deflationary, it can't be money. (Which is why the crypto bros are just like goldbugs; different means, but the same axiom.)
This will always generate distress that inflation -- any inflation whatsoever -- exists. It isn't a rational response. Trying to reason people out of it is not notably productive.
I am still on Team Transitory. We're looking at food supply chains and seeing things that I just don't think will be an issue latter part of next year. 2019-2021, we went from eating over half our food away from home to eating over half our food at home. We also had big ships that could move bulk ag products around the world all of a sudden had to start moving Pelotons. 2021-2022, you don't just flip a switch and watch it run back(for?)ward again. Though the logistics are known, there is enough uncertainty around omicron, that processors, distributors and warehouses don't want to be caught running full steam ahead only to have to flip the switch a second, third, fourth time. Here is a simple little example. When you are eating half your food away from home, (most) restaurants and institutions don't want shelled eggs. When you are eating at home, foodies don't want buckets of liquid eggs. In 2020, you couldn't just put the liquid back in the shell, seal it up, and put it on the shelf (there weren't even enough egg containers). The engineering on going back to what you did in 2019, is known, but you don't want to get caught making the wrong decision if omicron shuts things down again.