4% CPI is only ~ 1.7 percentage points higher than the Fed's PCR target and merits cautious praise for a pretty skillful recovery from its late 2021 delay. Cautious because it may have already gone too fast, too far with FF increases. TIPS traders, at least think so.
I think these points are all very well said and not said enough.
In my econ coursework, I was always taught that, broadly, inflation hurts those that rely on passive income (aka "rentiers" in some contexts). We've been keen to reveal the intense income and wealth disparity in our society, and inflation seems like a good enough storm to reverse some of this trend. This has created some really frustrating observations about the discourse around the subject.
When I look at the conversations with this in mind, I find a large group arguing completely in bad faith about the harms and terrible consequences for people that have either inflation-indexed income or market-based active income. At the same time, I see a much more reasonable group take those concerns at face value instead of pushing back against it. I'm seeing in real-time a deeply flawed and misguided narrative forming that will force us into making similar mistakes decades in the future.
I always associate inflation with black hole Hawking radiation. Matter and energy can vanish into a black hole and never escape, just as money can fall into the hands of the wealthy who never spend it on goods and services. Hawking radiation provides a mechanism for matter to leave a black hole. According to Hawking's theorem, all black holes will eventually evaporate. Inflation similarly provides a mechanism for returning money to the goods and services economy by decreasing the value of money based assets.
I suppose this association comes from my experience of inflation as a positive in the 1970s along with Hawking's theory being proposed that decade. The 1980s clinched it with its tax cuts and successful squelching of inflation leading to a productivity slow down and declining standard of living for those engaged in the goods and services economy.
I think more serious economists should start looking at the question of how a higher inflation target would interact with wealth inequality and its rate of change.
A lot of models assume that a higher-but-still-stable level of inflation would just completely get absorbed by adjustments in various rates such that it would all come out in the wash. But I'm not at all convinced that's entirely true; I suspect that if we targeted, say, 3.5%, instead of 2%, it would to some degree function as a wealth tax, transferring net worth from asset-hoarders to debtors over time. Basically I don't think the system of interest rates _perfectly_ accounts for long-run inflation. (Just at the level of an intuition from the existing sparse data, we know wealth inequality was not growing so fast in the high-growth, high-inflation era of the '50s-'60s. We just had much higher tolerance for a higher inflation rate, as long as growth was well distributed along with it. Even when Reagan declared "morning in America", after Volcker brought inflation down, the actual inflation rate was higher than the current rate that has many financial writers throwing hissy fits.)
And there isn't (or at least shouldn't be) anything particularly sacrosanct about the 2% target. We have that because it was a random number that the New Zealand Central Bank pulled out of the air, as a compromise between targeting stability / zero inflation, and folks who were arguing for a somewhat higher target. If we now think inflation targeting is Good, Actually, then maybe we should revisit the question of whether the folks who first proposed it were right that the target should be a bit higher.
(Though actually, I also would love to see us consider changing what we target -- say, aim for NGDP growth of 5%, and then be indifferent to whether that's 2% inflation and 3% real growth, or 3.5% inflation and 1.5% real growth, or whatever else.)
There is definitely a discussion to be had about the issue. But right now may not be the best time to introduce a new higher inflation target, for everyone will scream that the Fed has lowered the bar and essentially given up. Not a good thing as financial markets (and everyone else that indexes to long-term inflation e.g. pensions, minimum wage contracts etc.) will have to deal with one more thing while the plate is already full.
Yeah, I agree that's fair. Given the importance of credibility in the Fed's power to shape market behavior (even with the "credible promise to be irresponsible" concept), I think it's probably correct that we're stuck trying to get back to the 2% target before we can start discussing a major change in strategy.
We (the Fed) should _derive_ the optimal target rate of inflation from a model that incorporates the distribution of expected shocks, the heterogenous flexibility of prices, and any constraints on settings of policy instruments, e.g. a zero lower bound of ST interest rates. That would give an _average inflation target_ -- AIT. The same model would also imply _flexibility_ when shocks were greater than expected giving them a FIAT.
In this scheme, the objective to be optimized would be real income and I expect that there would be a one-for-one correspondence between a FIAT and a FA-NGDP-T.
I like that metaphor. It can be extended further. When we invest, there is no information inherently being conferred. In fact, that's sort of the problem with investment, we never know if it's good or not until consumption happens. Consumption is that information piece, the numbers you put into the calculator, while investment is more like the actual action of calculating (an algorithm really).
In this metaphor, what we'd want to create is a big, wonderfully bright star. We need enough concentration of mass to keep all the matter around it centered and together, otherwise everything is scattered and dormant. However, if too much mass is concentrated, we end up with a "black hole" situation where matter and the information it contains is destroyed.
In this context, inflation would increase how much information/energy is outside of that mass. Too much inflation/information and not enough centered mass/calculation power and you get stagflation, too much info for the market to solve. Too little inflation/information and a "black hole" situation and it's likely you're multiplying by 0 in a lot of places (aka losing information).
That's intriguing. One problem with supply side economics is that it ignores consumption so investments are made without important information. I've often wondered why supply side economics expects businesses to invest when consumers don't have money to spend. Supply side economics just makes an "it is in the nature of businesses to invest" argument that was outdated in the days of Aristotle.
.... outdated since the days of the Neanderthals, I'd say. Not that I was around then, Lol! The supply side economics, as is commonly understood, has been more of a cover for giving tax cuts to businesses and upper income groups so that they may "create jobs" for the rest by investing and spending. We have so much evidence against it that even some of the proponents may have stopped looking at it. Now only the hacks insist on it.
I agree about bad teaching. A key lacuna is examination of the microeconomics of inflation as a facilitator, or not, of equilibrium relative prices. In my concept, at least, a certain amount of inflation permits relative prices to change when some nominal prices cannot adjust downward. But too much can force prices that cannot adjust upward out of equilibrium and make discovery of equilibrium relative prices more difficult.
What is an example of something that cannot increase in price but already has a price? I'm aware some prices are stickier than others, but not to the point where new price discovery is impossible (or impossibly expensive).
Well, I agree everything's a continuum so can cannot is not literally correct, but I had in mind that fixed rate mortgages don't work efficiently at higher rates of inflation. But I'll accept that excess inflation does not cause martkets just not to clear in the way that low inflation does.
Yep! Brad you need to speak louder than usual to make people see this. As more workers enter this labor market -- and there are a lot more people than is commonly acknowledged -- that hot-wage-growth issue should be able to take care of itself. Brad, your supply-demand "Parrot" from many years ago needs to be brought out for policymakers. If they think wage growth is a problem, then they should encourage as many workers as possible to enter the labor market. Improve the efficiency of the job-matching portals, if they can. Not rationing. Not decrying job openings. Powell has mentioned those job openings often. Hoping that the Fed will let this transition from the COVID recession run its course in the good way. This has been a very good economy for workers. Why aren't more people saying this and louder?
Your question invites a lot of cynical speculation. :)
My only tiny concern is that brining up supply side reforms in the context of inflation seems to let the Fed off the hook for carrying out _its_ mandate,
Someone should post a 60-year chart of another Conference Board series "Labor Market Differential" that asks consumers whether jobs are easy to find net of those who say that jobs are difficult to find. It is up there, close to the high achieved in the late 1990s. The Z-score on that series has been between 1.75-2.0 standard deviation above the mean over the past year or so, the highest range in the history of that series since Feb 1967.
I don't think MattY would disagree with your analysis here, it's just a matter of emphasis. He's written in several places about his frustration with people refusing to see that it made sense to err on the side of over-stimulating, and that our current problems are much better problems to have than the long recession of the 2010s. Obviously it would've been even better if we'd had a crystal ball that had let us predict how to get just the right amount of stimulus to end up with a strong labor market and less inflation, but unless the whiners have such a crystal ball on offer, they really should go stuff it.
I agree that in the ranges we have seen, too little inflation is worse than too much. My ongoing beef with Matt is that (in the ranges we have seen and if the Fed has an inflation or NGDP target) fiscal "stimulus" does not stimulate. The Fed, not Obama is to blame for 2008-2020 unemployment and the Fed, not Biden, get credit for the current labor market.
I pretty strongly disagree with that take -- the Fed was trying to provide accommodative monetary policy in the Obama years, but in the absence of adequate fiscal policy they ended up, as the saying goes, "pushing on a string". Even if it _had_ worked, they would've had the Cantillon problem -- bankers and other financial elites would've been able to skim off the flow of stimulus, aggravating inequality even further. (One reason I would like to see postal banking and a UBI is that we could then give the Fed a range or rate at which they're allowed to tweak the UBI, effectively doing "helicopter drops" -- so we can bypass the banking system and do fiscal policy in a more rational, counter-cyclical way.)
I also think it's pretty clear that the rapid snap back to full employment has happened in large part through demand pull, with people spending down savings they have available from the pandemic CARES Act stimulus, and with strong business spending due to anticipated investments under the IRA. (It is perhaps mildly ironic that the Inflation Reduction Act is probably raising short term inflation, even while the investments in energy and transportation probably will lower it at least a bit in the long run.)
I suspect that the Fed, in pursuit of maintaining their credibility, may end up slightly overshooting the perfect soft-landing scenario and we may get a mild V-shaped recession as a result -- the question is what the timing is on that. If it comes either soon enough that the recovery is well under way before election day, or the strong job market continues past the election, that's probably fine, and I'd even say there's some merit to the argument that they need to maintain that credibility. If they manage to cause Trump to be re-elected though, that may be an epochal catastrophe. And I hate that one of our major parties has become so truly anti-democratic that one has to consider this kind of political question in regards to what ought to be a technocratic question.
I'm glad to see someone take issue with this. Untill challenged one never knows how good and argument is.
Although I cannot prove the counterfactual, I think that announcing that the Fed was going to buy enough long term bonds or foreign exchange or "whatever it takes" to get inflation temporarily above and then keep it on target would have worked. TIPS traders expected under target inflation for most of the lost decade + Of course how much it would have taken depends on many things like federal deficits and even where the spending goes. But the Fed get the last word on inflation.
This is not to say that the 2009 ARRA was not useful and it should probably have been larger as "relief." When interest rates are super low an many resources have market prices that exceed marginal costs a government that spends according to an NPV>0 rule will increase spending.
The Cantillon effect is interesting but how important is it in practice? In a way it's easier to see on the disinflationary side as residential construction and home sales are hit.
To me current TIPS below target and 5-year expectations below 10-year expectations say these traders expect recession. I think the Fed should accept (have accepted) a slower return to target in order to avoid recession. We will see.
Regarding Cantillon, I think Matt Stoller's take on this ( https://mattstoller.substack.com/p/the-cantillon-effect-why-wall-street ) is fairly compelling. We see waves of mergers during down economies, when there's cheap financing. Investment bankers are looking for something to do with the gusher of cash they're getting from the Fed's bond purchases, and from the fact that they can borrow at-or-near-zero. The market power created by consolidation then alters the balance between labor and capital income. A company that can create a choke-point in an industry can use various tactics to capture more of the surplus in its value chain. Basically the low-interest environment the Fed creates is being allowed to increase the amount of economic rents being extracted, which puts a drag on how much actual stuff the economy can provide to the general populous of consumers, i.e. it lowers total factor productivity and real growth.
Stoller has his blind spots and biases, but I think it's worth reading some of his pieces about specific examples of private equity roll-ups, and how they juiced up profits while degrading products and services, by working to prevent anyone from providing something better. A couple good ones:
Also, some of the mergers they engineer end up being total losers, but the bankers themselves never lose -- if the company goes bust, the bankers walk away with a fat paycheck, while retirees lose their pensions, workers lose stable employment, and vendors and customers lose an important relationship. We have repeatedly seen companies that were basically stable -- not growing, maybe even shrinking slowly, but still-profitable -- get cannibalized by PE loading them up with debt and taking a big "special dividend" payout. We ought to have a mechanism to claw back the money from the PE firms in cases where they drive a buy-out target into bankruptcy. (This kind of cannibalization of productive capacity is also a channel by which PE is lowering the trajectory of the average person's real income.)
Thanks for this exchange. You are heling me clarify my views if only to myself. :)
Yes, if the federal deficit does not increase during a recession, then monetary policy has to be more stimulative than if it does and some of the things you mention could work out. [This is still, i think sort of a metaphorical Cotillion effect as it works thought asset prices not relative prices of goods.]
But my argument is not against deficits in recessions per se. Rember that if the government is operation on a NPV rule, the fall in interest rates and difference between price and marginal cost will lead to more spending passing the NPV test. The response will appear to be Keynesian "stimulus." My argument is that the Fed will, if it has an outcome target, set its policy instruments taking account of the federal deficit. It will be the Fed not the deficit that determines employment and inflation. Fiscal policy should be the sum of good taxing and spending decisions, not by trying to achieve a deficit of a certain size based on macroeconomic grounds.
Basically it was observable in the data, that, at the very least, the Fed's intervention in the market for Treasuries was not moving the private sector interest rates with the kind of efficacy we'd expect in normal times.
Subsequent to that, we got rounds of Quantitative Easing, i.e. direct purchases in the non-Treasury bond markets. And that also was not hugely effective. But this is what the "New Old Keynesians" said would happen, if the fundamentals of the economy are recessionary. You can go back to Krugman's analysis of Japan's lost decade. The IS-LM model suggests that if the natural rate of interest -- the rate that reconciles aggregate supply and demand, the market for savings and investment, and the relationship between desired liquidity and money supply -- is below zero, monetary policy loses traction. If it has any effect at all, the effect is at least greatly reduced.
The fact that the Liquidity Trap is a thing that can happen is, IMHO, a good reason to want to develop some kind of technocratic fiscal policy. One idea would be "helicopter drops" via postal bank accounts (which you can also think of as an adjustable UBI).
Another concept is the "infrastructure bank" -- so, Congress maintains a prioritized list of infrastructure projects. They can add things to the list and shuffle the order. But the technocrats at the IB say when they actually release funds to start projects, and do so partly based on rates of interest, and the employment situation in the construction sector, with an eye to maintaining full-but-not-inflationary employment. (You'd generally want to see wages track productivity for the sector.)
"Pushing on a sting goes back a lot farther. I'm sure I heard it in grad school in the '60's. The omnescient GPT tells me:
One of the earliest documented uses of the phrase in print was in a 1935 editorial in The Economist, which used the expression to describe the ineffectiveness of monetary policy in stimulating economic growth during the Great Depression.
But my contention is that the Fed was not pushing on the string hard enough :) and explaining that it would keep pushing harder and harder until inflation got and stayed above what would come to be called its Flexible Average Inflation Target. Of course, the federal and state government were probably not spending up to the amounts needed to get NPV down to zero, either.
Oh, yeah, I'm sure the metaphor is older than that, I just know I picked it up from Krugman's writing. I'm more of a tech guy than econ, but I got interested in econ by way of reading Krugman in Slate in the '90s (when I was in college -- so sounds like I'm a full generation younger than you), and then following his wonky posts various places over the years, and eventually did an MBA and studied a bunch more econ and finance. I TA'd for an econ prof at my MBA program for a couple years.
As we said in the 80s, the real problem with inflation is that eventually someone will do something stupid to ends it.
Especially pushing the economy into recession.
4% CPI is only ~ 1.7 percentage points higher than the Fed's PCR target and merits cautious praise for a pretty skillful recovery from its late 2021 delay. Cautious because it may have already gone too fast, too far with FF increases. TIPS traders, at least think so.
I think these points are all very well said and not said enough.
In my econ coursework, I was always taught that, broadly, inflation hurts those that rely on passive income (aka "rentiers" in some contexts). We've been keen to reveal the intense income and wealth disparity in our society, and inflation seems like a good enough storm to reverse some of this trend. This has created some really frustrating observations about the discourse around the subject.
When I look at the conversations with this in mind, I find a large group arguing completely in bad faith about the harms and terrible consequences for people that have either inflation-indexed income or market-based active income. At the same time, I see a much more reasonable group take those concerns at face value instead of pushing back against it. I'm seeing in real-time a deeply flawed and misguided narrative forming that will force us into making similar mistakes decades in the future.
I always associate inflation with black hole Hawking radiation. Matter and energy can vanish into a black hole and never escape, just as money can fall into the hands of the wealthy who never spend it on goods and services. Hawking radiation provides a mechanism for matter to leave a black hole. According to Hawking's theorem, all black holes will eventually evaporate. Inflation similarly provides a mechanism for returning money to the goods and services economy by decreasing the value of money based assets.
I suppose this association comes from my experience of inflation as a positive in the 1970s along with Hawking's theory being proposed that decade. The 1980s clinched it with its tax cuts and successful squelching of inflation leading to a productivity slow down and declining standard of living for those engaged in the goods and services economy.
I think more serious economists should start looking at the question of how a higher inflation target would interact with wealth inequality and its rate of change.
A lot of models assume that a higher-but-still-stable level of inflation would just completely get absorbed by adjustments in various rates such that it would all come out in the wash. But I'm not at all convinced that's entirely true; I suspect that if we targeted, say, 3.5%, instead of 2%, it would to some degree function as a wealth tax, transferring net worth from asset-hoarders to debtors over time. Basically I don't think the system of interest rates _perfectly_ accounts for long-run inflation. (Just at the level of an intuition from the existing sparse data, we know wealth inequality was not growing so fast in the high-growth, high-inflation era of the '50s-'60s. We just had much higher tolerance for a higher inflation rate, as long as growth was well distributed along with it. Even when Reagan declared "morning in America", after Volcker brought inflation down, the actual inflation rate was higher than the current rate that has many financial writers throwing hissy fits.)
And there isn't (or at least shouldn't be) anything particularly sacrosanct about the 2% target. We have that because it was a random number that the New Zealand Central Bank pulled out of the air, as a compromise between targeting stability / zero inflation, and folks who were arguing for a somewhat higher target. If we now think inflation targeting is Good, Actually, then maybe we should revisit the question of whether the folks who first proposed it were right that the target should be a bit higher.
(Though actually, I also would love to see us consider changing what we target -- say, aim for NGDP growth of 5%, and then be indifferent to whether that's 2% inflation and 3% real growth, or 3.5% inflation and 1.5% real growth, or whatever else.)
There is definitely a discussion to be had about the issue. But right now may not be the best time to introduce a new higher inflation target, for everyone will scream that the Fed has lowered the bar and essentially given up. Not a good thing as financial markets (and everyone else that indexes to long-term inflation e.g. pensions, minimum wage contracts etc.) will have to deal with one more thing while the plate is already full.
Yeah, I agree that's fair. Given the importance of credibility in the Fed's power to shape market behavior (even with the "credible promise to be irresponsible" concept), I think it's probably correct that we're stuck trying to get back to the 2% target before we can start discussing a major change in strategy.
We (the Fed) should _derive_ the optimal target rate of inflation from a model that incorporates the distribution of expected shocks, the heterogenous flexibility of prices, and any constraints on settings of policy instruments, e.g. a zero lower bound of ST interest rates. That would give an _average inflation target_ -- AIT. The same model would also imply _flexibility_ when shocks were greater than expected giving them a FIAT.
In this scheme, the objective to be optimized would be real income and I expect that there would be a one-for-one correspondence between a FIAT and a FA-NGDP-T.
I like that metaphor. It can be extended further. When we invest, there is no information inherently being conferred. In fact, that's sort of the problem with investment, we never know if it's good or not until consumption happens. Consumption is that information piece, the numbers you put into the calculator, while investment is more like the actual action of calculating (an algorithm really).
In this metaphor, what we'd want to create is a big, wonderfully bright star. We need enough concentration of mass to keep all the matter around it centered and together, otherwise everything is scattered and dormant. However, if too much mass is concentrated, we end up with a "black hole" situation where matter and the information it contains is destroyed.
In this context, inflation would increase how much information/energy is outside of that mass. Too much inflation/information and not enough centered mass/calculation power and you get stagflation, too much info for the market to solve. Too little inflation/information and a "black hole" situation and it's likely you're multiplying by 0 in a lot of places (aka losing information).
That's intriguing. One problem with supply side economics is that it ignores consumption so investments are made without important information. I've often wondered why supply side economics expects businesses to invest when consumers don't have money to spend. Supply side economics just makes an "it is in the nature of businesses to invest" argument that was outdated in the days of Aristotle.
.... outdated since the days of the Neanderthals, I'd say. Not that I was around then, Lol! The supply side economics, as is commonly understood, has been more of a cover for giving tax cuts to businesses and upper income groups so that they may "create jobs" for the rest by investing and spending. We have so much evidence against it that even some of the proponents may have stopped looking at it. Now only the hacks insist on it.
Remember that the role of the Fed is to make Say's Law true in practice even though it does not work in theory.
I agree about bad teaching. A key lacuna is examination of the microeconomics of inflation as a facilitator, or not, of equilibrium relative prices. In my concept, at least, a certain amount of inflation permits relative prices to change when some nominal prices cannot adjust downward. But too much can force prices that cannot adjust upward out of equilibrium and make discovery of equilibrium relative prices more difficult.
What is an example of something that cannot increase in price but already has a price? I'm aware some prices are stickier than others, but not to the point where new price discovery is impossible (or impossibly expensive).
Well, I agree everything's a continuum so can cannot is not literally correct, but I had in mind that fixed rate mortgages don't work efficiently at higher rates of inflation. But I'll accept that excess inflation does not cause martkets just not to clear in the way that low inflation does.
Yep! Brad you need to speak louder than usual to make people see this. As more workers enter this labor market -- and there are a lot more people than is commonly acknowledged -- that hot-wage-growth issue should be able to take care of itself. Brad, your supply-demand "Parrot" from many years ago needs to be brought out for policymakers. If they think wage growth is a problem, then they should encourage as many workers as possible to enter the labor market. Improve the efficiency of the job-matching portals, if they can. Not rationing. Not decrying job openings. Powell has mentioned those job openings often. Hoping that the Fed will let this transition from the COVID recession run its course in the good way. This has been a very good economy for workers. Why aren't more people saying this and louder?
Your question invites a lot of cynical speculation. :)
My only tiny concern is that brining up supply side reforms in the context of inflation seems to let the Fed off the hook for carrying out _its_ mandate,
Someone should post a 60-year chart of another Conference Board series "Labor Market Differential" that asks consumers whether jobs are easy to find net of those who say that jobs are difficult to find. It is up there, close to the high achieved in the late 1990s. The Z-score on that series has been between 1.75-2.0 standard deviation above the mean over the past year or so, the highest range in the history of that series since Feb 1967.
I don't think MattY would disagree with your analysis here, it's just a matter of emphasis. He's written in several places about his frustration with people refusing to see that it made sense to err on the side of over-stimulating, and that our current problems are much better problems to have than the long recession of the 2010s. Obviously it would've been even better if we'd had a crystal ball that had let us predict how to get just the right amount of stimulus to end up with a strong labor market and less inflation, but unless the whiners have such a crystal ball on offer, they really should go stuff it.
I agree that in the ranges we have seen, too little inflation is worse than too much. My ongoing beef with Matt is that (in the ranges we have seen and if the Fed has an inflation or NGDP target) fiscal "stimulus" does not stimulate. The Fed, not Obama is to blame for 2008-2020 unemployment and the Fed, not Biden, get credit for the current labor market.
I pretty strongly disagree with that take -- the Fed was trying to provide accommodative monetary policy in the Obama years, but in the absence of adequate fiscal policy they ended up, as the saying goes, "pushing on a string". Even if it _had_ worked, they would've had the Cantillon problem -- bankers and other financial elites would've been able to skim off the flow of stimulus, aggravating inequality even further. (One reason I would like to see postal banking and a UBI is that we could then give the Fed a range or rate at which they're allowed to tweak the UBI, effectively doing "helicopter drops" -- so we can bypass the banking system and do fiscal policy in a more rational, counter-cyclical way.)
I also think it's pretty clear that the rapid snap back to full employment has happened in large part through demand pull, with people spending down savings they have available from the pandemic CARES Act stimulus, and with strong business spending due to anticipated investments under the IRA. (It is perhaps mildly ironic that the Inflation Reduction Act is probably raising short term inflation, even while the investments in energy and transportation probably will lower it at least a bit in the long run.)
I suspect that the Fed, in pursuit of maintaining their credibility, may end up slightly overshooting the perfect soft-landing scenario and we may get a mild V-shaped recession as a result -- the question is what the timing is on that. If it comes either soon enough that the recovery is well under way before election day, or the strong job market continues past the election, that's probably fine, and I'd even say there's some merit to the argument that they need to maintain that credibility. If they manage to cause Trump to be re-elected though, that may be an epochal catastrophe. And I hate that one of our major parties has become so truly anti-democratic that one has to consider this kind of political question in regards to what ought to be a technocratic question.
I'm glad to see someone take issue with this. Untill challenged one never knows how good and argument is.
Although I cannot prove the counterfactual, I think that announcing that the Fed was going to buy enough long term bonds or foreign exchange or "whatever it takes" to get inflation temporarily above and then keep it on target would have worked. TIPS traders expected under target inflation for most of the lost decade + Of course how much it would have taken depends on many things like federal deficits and even where the spending goes. But the Fed get the last word on inflation.
This is not to say that the 2009 ARRA was not useful and it should probably have been larger as "relief." When interest rates are super low an many resources have market prices that exceed marginal costs a government that spends according to an NPV>0 rule will increase spending.
The Cantillon effect is interesting but how important is it in practice? In a way it's easier to see on the disinflationary side as residential construction and home sales are hit.
To me current TIPS below target and 5-year expectations below 10-year expectations say these traders expect recession. I think the Fed should accept (have accepted) a slower return to target in order to avoid recession. We will see.
Regarding Cantillon, I think Matt Stoller's take on this ( https://mattstoller.substack.com/p/the-cantillon-effect-why-wall-street ) is fairly compelling. We see waves of mergers during down economies, when there's cheap financing. Investment bankers are looking for something to do with the gusher of cash they're getting from the Fed's bond purchases, and from the fact that they can borrow at-or-near-zero. The market power created by consolidation then alters the balance between labor and capital income. A company that can create a choke-point in an industry can use various tactics to capture more of the surplus in its value chain. Basically the low-interest environment the Fed creates is being allowed to increase the amount of economic rents being extracted, which puts a drag on how much actual stuff the economy can provide to the general populous of consumers, i.e. it lowers total factor productivity and real growth.
Stoller has his blind spots and biases, but I think it's worth reading some of his pieces about specific examples of private equity roll-ups, and how they juiced up profits while degrading products and services, by working to prevent anyone from providing something better. A couple good ones:
https://mattstoller.substack.com/p/antitrust-and-the-fall-of-a-cheerleading
https://mattstoller.substack.com/p/how-to-get-rich-sabotaging-nuclear
Also, some of the mergers they engineer end up being total losers, but the bankers themselves never lose -- if the company goes bust, the bankers walk away with a fat paycheck, while retirees lose their pensions, workers lose stable employment, and vendors and customers lose an important relationship. We have repeatedly seen companies that were basically stable -- not growing, maybe even shrinking slowly, but still-profitable -- get cannibalized by PE loading them up with debt and taking a big "special dividend" payout. We ought to have a mechanism to claw back the money from the PE firms in cases where they drive a buy-out target into bankruptcy. (This kind of cannibalization of productive capacity is also a channel by which PE is lowering the trajectory of the average person's real income.)
https://www.nytimes.com/2021/02/19/business/private-equity-dividend-loans.html
Thanks for this exchange. You are heling me clarify my views if only to myself. :)
Yes, if the federal deficit does not increase during a recession, then monetary policy has to be more stimulative than if it does and some of the things you mention could work out. [This is still, i think sort of a metaphorical Cotillion effect as it works thought asset prices not relative prices of goods.]
But my argument is not against deficits in recessions per se. Rember that if the government is operation on a NPV rule, the fall in interest rates and difference between price and marginal cost will lead to more spending passing the NPV test. The response will appear to be Keynesian "stimulus." My argument is that the Fed will, if it has an outcome target, set its policy instruments taking account of the federal deficit. It will be the Fed not the deficit that determines employment and inflation. Fiscal policy should be the sum of good taxing and spending decisions, not by trying to achieve a deficit of a certain size based on macroeconomic grounds.
I picked up the "pushing on a string" metaphor from Krugman.
https://archive.nytimes.com/krugman.blogs.nytimes.com/2008/11/21/pushing-on-a-string-2/
Basically it was observable in the data, that, at the very least, the Fed's intervention in the market for Treasuries was not moving the private sector interest rates with the kind of efficacy we'd expect in normal times.
Subsequent to that, we got rounds of Quantitative Easing, i.e. direct purchases in the non-Treasury bond markets. And that also was not hugely effective. But this is what the "New Old Keynesians" said would happen, if the fundamentals of the economy are recessionary. You can go back to Krugman's analysis of Japan's lost decade. The IS-LM model suggests that if the natural rate of interest -- the rate that reconciles aggregate supply and demand, the market for savings and investment, and the relationship between desired liquidity and money supply -- is below zero, monetary policy loses traction. If it has any effect at all, the effect is at least greatly reduced.
This came out in 1999:
https://web.mit.edu/krugman/www/trioshrt.html
Basically his entire analysis of monetary policy in here was borne out by the US experience in the late aughts.
PS: In case the concept of New Old Keynesians is unfamiliar to anyone: https://crookedtimber.org/2014/01/22/new-old-keynesianism/
The fact that the Liquidity Trap is a thing that can happen is, IMHO, a good reason to want to develop some kind of technocratic fiscal policy. One idea would be "helicopter drops" via postal bank accounts (which you can also think of as an adjustable UBI).
Another concept is the "infrastructure bank" -- so, Congress maintains a prioritized list of infrastructure projects. They can add things to the list and shuffle the order. But the technocrats at the IB say when they actually release funds to start projects, and do so partly based on rates of interest, and the employment situation in the construction sector, with an eye to maintaining full-but-not-inflationary employment. (You'd generally want to see wages track productivity for the sector.)
"Pushing on a sting goes back a lot farther. I'm sure I heard it in grad school in the '60's. The omnescient GPT tells me:
One of the earliest documented uses of the phrase in print was in a 1935 editorial in The Economist, which used the expression to describe the ineffectiveness of monetary policy in stimulating economic growth during the Great Depression.
But my contention is that the Fed was not pushing on the string hard enough :) and explaining that it would keep pushing harder and harder until inflation got and stayed above what would come to be called its Flexible Average Inflation Target. Of course, the federal and state government were probably not spending up to the amounts needed to get NPV down to zero, either.
Oh, yeah, I'm sure the metaphor is older than that, I just know I picked it up from Krugman's writing. I'm more of a tech guy than econ, but I got interested in econ by way of reading Krugman in Slate in the '90s (when I was in college -- so sounds like I'm a full generation younger than you), and then following his wonky posts various places over the years, and eventually did an MBA and studied a bunch more econ and finance. I TA'd for an econ prof at my MBA program for a couple years.
What specifically is objectionable about this post?