Understanding Our Current Price-Level Surge
& BRIEFLY NOTED: For 2021-12-22 We
First:
As I have said, I have a very good—nearly Turing-class—Larry Summers mental emulation model running on my wetware. It is, in fact, so good that sometimes I wonder: Has it not achieved sentience on its own? Has it not taken me over, and turned the rest of me into its meat-puppet?
But, as I have also said, I simply cannot track how Larry got to his conclusion that, right now, it is effectively 1976: that rather than focusing on achieving rapid and complete recovery and leaving problems of containing inflation expectations to the future, the Federal Reserve needs to focus RIGHT NOW on controlling inflation and IMMEDIATELY scotch expectations of an inflationary spiral, lest it get itself into a situation like 1979 three years down the road.
David Glasner agrees with my failure-to-track:
David Glasner: Sic Transit Inflatio Mundi: ‘The mismatch between the growth of demand and the growth of supply has been manifested in rising inflation. If the bottleneck theory of inflation is true, then the short-term growth potential of the economy is greater than the 2% rate posited by Summers. As bottlenecks are removed and workers that withdrew from the labor force during the pandemic are re-employed, the economy could easily grow faster than Summers is willing to acknowledge. Summers simply assumes, but doesn’t demonstrate, his conclusion. “This all suggests that policy will need to restrain demand to restore price stability.” No, it does not suggest that at all. It only suggests the possibility that demand may have to be restrained to keep prices stable. Recent inflation may have been a delayed response to an expansive monetary policy designed to prevent a contraction of demand during the pandemic. A temporary increase in inflation does not necessarily call for an immediate contractionary response. It’s too early to tell with confidence whether preventing future inflation requires, as Summers asserts, monetary policy to be tightened immediately. That option shouldn’t be taken off the table, but the Fed clearly hasn’t done so…
LINK: <https://uneasymoney.com/2021/12/19/sic-transit-inflatio-mundi/>
In the 1970s, it was called a "wage-price spiral" for good reason. I do not—yet—see the workers whose actions at the margin drive events willing to go to the mat for nominal-wage increases next year to make up for inflation this year. I do not see—yet—the gearing of next year's expected inflation to this year's actual inf that we would need to see for it to be 1976. Instead, it still looks to me much more like the post World War II and Korean War era recovery and structural readjustment discrete upward jumps in the price level.
There are also the "rubber, meet road" issues: the principal of prioritizing full employment and full recovery first, and rearranging the financial deck chairs later, would suggest that our current inflation is exactly what we want to see. Indeed, it is what we need to see in our economy, in which wages and prices are sticky downward to a considerable extent.
And then there are the deeper "secular stagnation” issues: when you keep hitting the zero-lower-bound on interest rates, either your inflation target is too low or your fiscal todd policy is too tight—probably both.
Plus: the bond market does not see the Federal Reserve as in any sense being on the wrong path.
But in my mind the overwhelming consideration is what it has been since 2008: risk asymmetry. If the Fed errs in the direction of excessive easing, it does have the power to repair the situation through tightening. If the Fed errs is in the direction of excessive tightening, it is then powerless when it recognizes its mistake.
Failing to realize how much this risk asymmetry ought to shape policy is a mistake that people keep making, and making, and making—from my perspective, at least.
One Video:
Michael le Page: Mini-Brains: Clumps of Human Brain Cells in a Dish Can Learn to Play Pong Faster than an AI: ‘Hundreds of thousands of… cells… responding to pulses of electricity… can improve their performance more quickly than an AI can: “We think it’s fair to call them cyborg brains,” says Brett Kagan, chief scientific officer of Cortical Labs, who leads the research. Many teams around the world have been studying networks of neurons in dishes, often growing them into brain-like organoids. But this is the first time that mini-brains have been found to perform goal-directed tasks, says Kagan… <https://www.newscientist.com/article/2301500-human-brain-cells-in-a-dish-learn-to-play-pong-faster-than-an-ai/#Echobox=1640058631> <https://www.youtube. com/watch?v=9ksLuRoEq6A>
One Picture:
Very Briefly Noted:
Guardian Staff & Agencies: Crowd Boos Trump After He Reveals He Took Covid Booster: ‘Trump once again claimed credit for producing the vaccine, saying vaccine wariness was ‘playing into the hands’ of his opponents…. The former president made the disclosure on Sunday night during the final stop of The History Tour, a live interview show he has been doing with the former Fox News host Bill O’Reilly…. “We got a vaccine done,” he said, telling supporters that wariness of the vaccine was “playing into the hands” of his opponents. “Don’t take it away from ourselves. You’re playing right into their hands when you sort of like, ‘oh the vaccine’… no mandates, but take credit”…. Trump had told the Wall Street Journal in a September interview that he “probably“ wouldn’t get a booster shot… <https://www.theguardian.com/us-news/2021/dec/20/trump-covid-19-booster-shot-crowd-boos>
CDC: Risk for COVID–19 Infection, Hospitalization, & Death by Age Group<https://www.cdc.gov/coronavirus/2019-ncov/covid-data/investigations-discovery/hospitalization-death-by-age.html>
Jonathan Portes: Marking Myself to Market: My Forecasts for 2021, Evaluated: ‘While I did expect inflation to rise with reopening, because of (as noted in my answers above) pent-up demand and labour market and product market bottlenecks, I didn’t think it would rise so far so fast. But I still think that (barring further major shocks) it’s likely to fall back quite fast in the second half of next year… <https://ukandeu.ac.uk/marking-myself-to-market-my-forecasts-for-2021-evaluated/>
Noah Smith: Why the CTC Is so Important: ‘It’s more than a welfare program: It’s the future of welfare… LINK:
Matthew Zeitlin: Personnel Isn’t Policy, Policy Is Personnel: ‘It wasn’t Larry Summers who allegedly told Romer that monetary policy had “shot its wad,” or tried to explain high unemployment with reference to bank tellers and ATMs. It was Barack Obama…
Paragraphs:
Dani Rodrik & Stefanie Stantcheva: Fixing Capitalism’s Good Jobs Problem: ‘Conventional welfare state policies that centre on education, training, progressive taxation, and social insurance are inadequate to address labour market polarization, which is capitalism’s most pressing inclusion challenge at present. We propose a strategy aimed directly at the productive sphere of the economy and targeting an increase in the supply of ‘good jobs’. The main elements of this strategy are: (i) active labour market policies linked to employers; (ii) industrial and regional policies directly targeting the creation of good jobs; (iii) innovation policies that incentivize labour-friendly technologies; (iv) international economic policies that facilitate the maintenance of high domestic labour/social standards. These elements are connected both by their objective—expanding the number of good jobs—and by a new approach to regulation that is collaborative and iterative rather than top- down and prescriptive. We emphasize the importance of new institutional arrangements that enable strategic long-term information exchange and cooperation between governments and firms…
LINK: <https://scholar.harvard.edu/files/stantcheva/files/fixing_capitalisms_good_jobs_problem.pdf>
Joe Conason: Why Do Republicans Keep Killing Their Own?: ‘As the omicron variant threatens to inflict yet more suffering and death, it is maddening to realize how easily this next wave of the coronavirus could have been avoided or certainly mitigated if only more Americans had been fully vaccinated…. The campaign by right-wing Republican leaders, in both politics and media, to herd their sheeplike followers into a suicidal rejection of vaccines… is a crusade rife with contradictions at every level. As president, Donald Trump was responsible for financing the “Operation Warp Speed” effort to bring forth vaccines as rapidly as possible and could even claim some credit for its success. As soon as they became available, prominent conservatives such as Rupert Murdoch, the superannuated Fox News boss, went abroad to get vaccinated as soon as possible…. The bloody consequences of their demagoguery are starkly illustrated in real statistics as well as charts and graphs…. The unanswered question of why the Republicans have so eagerly adopted the anti-vaccine ideology once confined to a sideshow of barking crazies and grifters. Why are they fighting to ban vaccine mandates—even for health care and nursing home workers? Why are they promising to protect and even reward workers who refuse vaccination? Why are they forcing schools to abandon masking, vaccination, and other protective measures? Why, as we surpass the morbid milestone of 800,000 dead, are they doing everything in their power to ensure that we will have to bury many more?…
LINK: <https://www.nationalmemo.com/amp/republican-anti-vax-campaign-2656068237
Ed Yong: Important Pandemic Reads, Omicron Edition: ‘Omicron didn’t much shift the way I weighed my personal risk…. If I got the virus on my birthday, I’d expect to be knocked down for a time but okay by Christmas—and I’d expect the same to be true for everyone who was meant to come…. [But] Omicron is spreading so rapidly that if someone got infected at my party, my decision to host it could easily affect people who don’t know me, and who had no say in the risks that I unwittingly imposed upon them. Omicron is unlikely to land me in the hospital, but it could send my guests’ grandparents or parents to one…. I feel that the medical system in this country is at a tipping point—a fragile vase balanced so precariously on an edge that even a fly could knock it over. Omicron is a bullet. It’s one that we can each choose whether to fire…. The infectious nature of a virus means that a tiny bad decision can cause exponential harm, but also that a tiny wise decision can do exponential good…
LINK: <https://www.balloon-juice.com/2021/12/20/important-pandemic-reads-omicron-edition/>
Laurie Penny: The Actual War on Christmas: ‘Yes, we all need to stay indoors and cancel our plans. Omicron is madly contagious. In London, hospitals are struggling to operate because so many of their staff are suddenly sick themselves. Omicron is so catching that in one 600-person club in Sydney, after one infected person attended, 200 people came down with it. Either its one hell of a variant or that’s one hell of a club. That’s what’s coming, and the people who were heroes last time will do their best to be heroes again, but our infrastructure is exhausted…
LINK:
Rajiv Sethi: Notes on a Remarkable Finding from Finland: ‘A paper by Ursina Schaede and Ville Mankki… a fascinating empirical finding…. A change in the manner in which their teachers were selected…. The admissions process has a first stage based largely on scores on a high school matriculation exam, followed by a second stage…. For a number of years, acceptance into the second stage was based on a quota, ensuring that at least 40 percent of students making it through the first stage of evaluation were male…. The first post-quota cohort thus graduated in 1994. The paper examines the causal effects of this change on the long run outcomes for students…. Students differentially exposed to the quota-constrained cohorts of teachers ended up with better educational attainment and labor force participation at age 25…. The evidence “is consistent with male quota teachers contributing positive qualities to the school environment that are not sufficiently captured by the selection criterion in absence of the quota.”… It is not that the quota teachers proved effective because they were male. It is that the distributions of important characteristics (unmeasured by scores) were not identical across male and female applicant pools. The quota was picking up individuals with these characteristics by proxy. It is the characteristics that mattered for students, not the gender of the teacher…
LINK:
I am aware that American inflation is somewhat sui generis at the moment, but Canadian interest rates, inflation rates, and central bank actions do tend to track those of our large neighour to the south.
The Bank of Canada targets CPI inflation. The point target is 2% but the target control range is 1%-3%. Its preferred inflation indicators are trimmed CPI, median CPI, and "common" CPI (i.e. the inflation rate of the factor in a 1-factor model.) This page explains the BoC's targets and also has a useful historical graph of the four inflation measures: https://www.bankofcanada.ca/rates/indicators/key-variables/key-inflation-indicators-and-the-target-range/.
Examining the graph, you can see that November CPI came in at ~4.7%, trimmed at 3.4%, median at 2.8%, and common at 2%. I would note that:
1) 2 of 3 of the BoC's indicators are within their target control range.
2) The variance of CPI is in fact much greater than the key indicators.
3) Trimmed CPI, which is an average, is higher than the median.
4) The common factor CPI is lowest of all.
The Bank really only has one policy instrument to change inflation, interest rates. (Canadian banks have no reserve requirements.) One-and-a-half if you want to count term-structure operations. Since less than half of the headline CPI can be explained by a single factor, that suggests that it will be relatively insensitive to changes in the policy instrument - they'll have to change a lot to move inflation a little. All of this argues for caution on the part of the bank, in my view.
The Joe Consaon piece addresses something that I have wondered about. Why are Republicans engaged in what could be called an autogenocide of their favored demographics. At this point the future of American democracy may depend on COVID killing more Republican true believers than the number of votes Republican legislatures can suppress among Democratic favoring demographics.