Noah Smith & Brad DeLong: Record the Podcast You Would Like to Hear!; Aspirationally-Weekly; Aspirationally Less than 60 Minutes: 1. Macro Policy Guiding Principle: prioritize full employment—make Say’s Law true in practice even though it is false in theory… 2. Macro Policy Guiding Principle: move the economy as fast as possible to what its long-term optimal structural configuration should be... 3. Macro Policy Guiding Principle: Guiding principles (1) and (2) overrides desirability of immediate price stability… 4. We still have lots of room to run before we can say that the post-Volcker Fed has failed to meet its inflation target in an average-outcomes sense… 5. Time to panic about inflation will be when the bond market gets worried about it—but right now the bond market is very much “Fed has got this”… 6. Yet the political economy of the thing is overwhelmingly relevant: inflation that gets Biden booted from office would be very bad… 7. Even prolonged inflation may help—in that there is a lot of structural reform we need to do, and this may help us get it done… 8. Hexapodia!
What is your theory of mind regarding the person who answered Shiller's question with "it's simple: raise prices, get less for your money"? Here is mine: that person was thinking of a partial equilibrium in which prices rise but everything else stays the same. Shiller remarked that the difference between an economist and a normal human was that the economist thinks in terms of sticky upward prices, as indeed you and Noah did, and is taking for granted that wages will rise too, after a lag.
But in political terms, there is another important difference. The Fed does not have a way of inducing disinflation while leaving all else unchanged; it can reduce inflation only by the Procrustean means of shrinking the economy to fit. This is also something that every economist takes for granted, but it is not universally understood outside the profession. You alluded to this cost too obliquely, in my opinion; it should be front and centre.
If Shiller had asked "are you willing to lose your job or your business for the sake of bringing down inflation", what do you reckon the answer would have been then? Dulce et decorum est pro numus mori?
This is my objection to your characterization of inflation as "a political problem": it is the fallacy of the unexamined counterfactual. Inducing a recession will also be a political problem! Not every hand has a winning line of play and as the late great Terence Reese once remarked about playing rubber bridge for money, every undertrick costs money, so you have to concentrate on minimizing your losses even when you know you can't make the contract.
I get that you know all this, but I am here to tell you that this knowledge was not communicated by your discussion.
Late comment, but I had a chance to listen today. I suggest an introduction of the name of the podcast and the speakers, as in my car there was no way to read the notes, and I wasn’t sure who was who for quite a while. Much as I enjoy a good fire upon the deep ref, the introduction was a little obscure too and I thought I might have missed the beginning. Also some audio compression distortion on the remote party.
But I enjoyed the discussion. I largely agree that economically this inflation is basically fine. It will stimulate production and by exposing the risk-adjusted-costs of long supply chains it will encourage reconsideration of offshoring. More production and a more stable system of production are both good.
Politically it’s terrible. Even for those in the lowest deciles whose real wages are increasing, because all people ascribe rising wages to their own effort and virtue, and rising prices to other people’s greed and incompetence. And particularly for low-income people (but also for everyone) they’re always aspiring to make more to afford things they currently cannot, and so even if they are in real terms getting closer to buying a house or a new car, it feels very unfair that the price of the latter keeps increasing even if their wages are growing faster.
Middle class people have a different problem which is that active wage negotiation typically requires promotions or job changes, and both of those things are a huge pain in the ass. Price stability means you can just take the going rate, which can be set by the smaller number of people willing to switch jobs. Short of mass resignations professional employers are quite happy to juice their margins and reward those employees they think are deserving by quietly letting salaries stagnate. Everyone knows this and so sadness ensues.
What is your theory of mind regarding the person who answered Shiller's question with "it's simple: raise prices, get less for your money"? Here is mine: that person was thinking of a partial equilibrium in which prices rise but everything else stays the same. Shiller remarked that the difference between an economist and a normal human was that the economist thinks in terms of sticky upward prices, as indeed you and Noah did, and is taking for granted that wages will rise too, after a lag.
But in political terms, there is another important difference. The Fed does not have a way of inducing disinflation while leaving all else unchanged; it can reduce inflation only by the Procrustean means of shrinking the economy to fit. This is also something that every economist takes for granted, but it is not universally understood outside the profession. You alluded to this cost too obliquely, in my opinion; it should be front and centre.
If Shiller had asked "are you willing to lose your job or your business for the sake of bringing down inflation", what do you reckon the answer would have been then? Dulce et decorum est pro numus mori?
This is my objection to your characterization of inflation as "a political problem": it is the fallacy of the unexamined counterfactual. Inducing a recession will also be a political problem! Not every hand has a winning line of play and as the late great Terence Reese once remarked about playing rubber bridge for money, every undertrick costs money, so you have to concentrate on minimizing your losses even when you know you can't make the contract.
I get that you know all this, but I am here to tell you that this knowledge was not communicated by your discussion.
Late comment, but I had a chance to listen today. I suggest an introduction of the name of the podcast and the speakers, as in my car there was no way to read the notes, and I wasn’t sure who was who for quite a while. Much as I enjoy a good fire upon the deep ref, the introduction was a little obscure too and I thought I might have missed the beginning. Also some audio compression distortion on the remote party.
But I enjoyed the discussion. I largely agree that economically this inflation is basically fine. It will stimulate production and by exposing the risk-adjusted-costs of long supply chains it will encourage reconsideration of offshoring. More production and a more stable system of production are both good.
Politically it’s terrible. Even for those in the lowest deciles whose real wages are increasing, because all people ascribe rising wages to their own effort and virtue, and rising prices to other people’s greed and incompetence. And particularly for low-income people (but also for everyone) they’re always aspiring to make more to afford things they currently cannot, and so even if they are in real terms getting closer to buying a house or a new car, it feels very unfair that the price of the latter keeps increasing even if their wages are growing faster.
Middle class people have a different problem which is that active wage negotiation typically requires promotions or job changes, and both of those things are a huge pain in the ass. Price stability means you can just take the going rate, which can be set by the smaller number of people willing to switch jobs. Short of mass resignations professional employers are quite happy to juice their margins and reward those employees they think are deserving by quietly letting salaries stagnate. Everyone knows this and so sadness ensues.