Learning From Past Fights wiþ Inflation
Brad DeLong & Ray Suarez talk on Ray's "Shifting Ground" podcast about the current and past fights with inflation: "You really don't complain about leaving rubber on the road when you rejoin the...
Brad DeLong & Ray Suarez: Learning From Past Fights With Inflation <https://overcast.fm/+TYi3Mv01k>: ‘Economist Brad DeLong was feeling optimistic in February 2022, because inflation truly did appear transitory. Weeks later, Russian President Vladimir Putin launched the invasion of Ukraine, sending price shocks through the global economy. The latest numbers indicate inflation is slowing, but people around the world are still feeling the sting. While the US has it better than most, no one is immune from the global economic slump. So what does inflation mean for our pocketbooks, and for our mental health? Ray Suarez speaks with DeLong about why a little bit of inflation may be good for the economy, but also signals to service-sector and middle class workers that the system isn’t working for them…
Highlights:
Ray Suarez: This is On Shifting Ground. I'm Ray Suarez. Inflation can be scary. When it's out of control, it burns through family wealth, creates panic buying, and can destroy trust in currency…. Brad DeLong, welcome to On Shifting Ground…
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Brad DeLong: The question has always been whether the right analogy… for the [current] inflation… was the decade-long seige of the 1970s, or… much more like what happened in 1951… the Korean War… and… inflation as the economy settled into a new configuration… and things then returned to normal without the Federal Reserve having to do much more than lift a finger to raise interest rates…. The right action to deal with… inflation… depend[s] on whether the right analogy is the 1970s or the 1951… episode…. This last set of numbers… say[s]… this looks more like… 1951, than… the 1970s…
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Brad DeLong: As French politician Valeriy Giscard d’Estaing said back in the 1960s… that the world economy runs on dollars is an exorbitant privilege that America has and an exorbitant privilege that we take great advantage of…
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Brad DeLong: What put pressure on American business to offshore and export jobs on a large scale was Ronald Reagan's—the polite way to call it his “confusion”—saying “I'm going to balance the budget, I'm going to increase military spending… to fight the Cold War… plus… cut taxes for the rich. By a lot.” And that simply did not add up…. [So] US interest rates went much higher than other countries’ interest rates back in the 1980s. As a result, the value of the dollar went way up. And… [so] the market sent every American manufacturing business in the Midwest and elsewhere a big blinking red-light signal saying SHUTDOWN! SHUTDOWN! SHUTDOWN! YOU ARE UNPROFITABLE!… That the…Reagan administration mishandled the balance between taxes and spending… did not focus on the long-term supply side health of the American economy, in the right way, was what started the wave of deindustrialization of the American Midwest in the 1980s…
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Brad DeLong: In the 1990 when America got its… fiscal house in order… we were a very powerful exporter of high technology, goods as well as services…. During that time of very low unemployment and low inflation, the United States economy was firing on all possible cylinders…. The big financial crisis of 2007 and the depression of 2008-2010, after which… unemployment… stays painfully high for most of a decade… [with] extremely… low rates of…inflation…. By 2021, people had forgotten that there… was such a thing as inflation…. [Inflation] is painful…. You thought that you had a bargain with the economy, in which you had your income, and… could go out and buy the things you expected to buy at the prices you expected to pay…. This year… prices 9% higher than… a year ago…. The system has betrayed you… offered you a bargain, and then… did not keep… it. So you are going to be angry…
Brad DeLong: Coming out of that plague depression, we wanted to get everyone back to work… in very much a new economic configuration… with more goods production… fewer people working in retail stores… more in… logistics…. We were trying to rejoin the highway at speed. And so we left a bunch of rubber…. [That was] the inflation of 2021…. The right reaction to that was to… shrug your shoulders and say… you really don't complain about leaving rubber on the road when you rejoin the highway at speed. But then in February of 2022, Vladimir Putin's Muscovy attacks Ukraine. Oil and grain markets are disrupted…. There was the threat of Europe freezing and of Nigeria and Egypt starving…. To the reopening inflation we… had [added] this Ukraine war inflation…. You really want to hunker down and try to economize where you can, because the inflation does reflect… that a… a large chunk of the world's economy is no longer working, because… people who would be shipping things out of Ukraine are instead hiding from… killer robots. And [we] hope that this inflationary pattern does not become a self-perpetuating spiral like it did in the 1970s…
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Brad DeLong: I will be looking closely at wages in the services sector…. Surces of inflation so far have been… the Ukraine war supply-shock of grain and energy… the bottlenecks of… supply chains during the Great Reopening… rapidly rising wages in expanding sectors… goods production and wholesale delivery…. Then the general great mass of services-sector employment [and wages]…. The first three sources of inflationary pressure are now ebbing away…. The economy has managed to get workers into the sectors that needed to expand…. What's left is… people working in the services sector annoyed… feeling able to demand… big wage increases next year to make up for the fact that inflation was high this year…
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Brad DeLong: Thank you very, very much for… [this] wonderful show that you're running, [and] for inviting me on.
Ray Suarez: You've been listening to On Shifting Ground, produced in partnership with KQED with funding from listeners like you. If you want to support the program by becoming a member or by making a donation of any size please go to <http://worldaffairs.org/donate>…. Thanks for listening
Another note on inflation. As much as inflation destroys the value of paper assets, it also destroys the impact of paper debt. Once an equilibrium is reached, only present day labor keeps pace with inflation. Daniel Amerman, CFA, wrote quite a bit on this phenomenon in his early material.
One thing that aided Ronald Reagan and his economic policy was the collapse of the oil price to less than $25/barrel. Big oil continued drilling and exploring, paradoxically, during that era. The potential effect was to hasten the collapse the Soviet economy by damaging their #1 export product. Another driver of inflation during 2006 was the worry about Peak Oil, of course, which never occurred.