When I wrote this column for the New York Times in early April 2021, I encouraged the Biden administration to think differently about how to respond to any unexpected pop in inflation. Inflation wasn’t a raging problem at the time, but some economists
Thank you, I still don’t understand how inflation caused by supplychain bottlenecks resulting from covid and energy prices rising because of the Ukraine war can be reduced by raising rates? The world container index is on a strong downward trend now as some of the covid caused pent up demand has worked itself through the system. Energy prices are also going down although still high. Food prices are declining but not in shops yet. Many raw material prices such as steel , iron ore, lumber are on strong downward trends. Is the interest raise policy focused on avoiding labour to ask for a higher salary ?
Also, the unemployment that is induced will only very slowly decrease demand. The poor still have to eat -- and they don't buy many cars. The pain hits the bottom of the economic participants first and these people do not have much consumption to cut back on. Meanwhile people in the suburbs are still going to be bidding up the prices of travel, appliances, and cars in a supply constrained economy.
Larry is so distracted by the abstract orthodoxies of neo-classical macro that he probably is not capable of conceiving how a 50% discount/rebate policy at the point of retail sale would end private banking's problematic paradigm of Debt Only, mathematically end inflation forever, immediately double everyone's purchasing power and so permanently enable the kind of fiscal deficits MMT only hopes could be possible. JUST DO THE MATH and realize that retail sale is the optimal point in the entire economic process to implement a macro-economic effect.
The other point to bear in mind is that interest rate increases not only penalise borrowers, but also benefit savers. There's a quasi-fiscal effect for pensioners, or any other cohort that benefits from rising rates because they derive more interest income. So the monetary channel becomes a very diffuse mechanism to dampen demand and reduce inflationary pressures. It's like using a sledge hammer, rather than a scalpel to do an operation. Fiscal policy is a much more effective inflation-fighting tool.
It is fascinating how a flawed economic theory continues to perist in academia and in the political sphere. How many "Larry Summers" are churned out every year from universities and business schools? What Stephanie says makes perfect sense but it meets too many minds which has been programmed in a wrong way ...
Every member of Congress should reread (or, sadly, "read") Stephanie's brilliant April 2021 NYTIMES column. In about 1,000 words--I didn't count them--she lays out the argument beautifully as to just how wrongheaded it is for Congress to ask: "How will we pay for it?" It's actually a trick question to which there is only one possible correct answer, as obvious as it is sensible. "With money."
I distinctly remember Ms. Kelton joining the Democratic Party (and Federal Reserve) chorus that inflation was solely due to supply chain disruptions and COVID recovery.
While I agree Summers' solution is garbage, it does not follow that the policies that led to this inflation are therefore not garbage.
As a person who understands the actual mechanisms that generate inflation, It must be difficult for you to watch our country again undertake the financial-economic analog of a medieval physician “bleeding” a patient in order to cure her. Unfortunately, it will take at least another Fed-induced depression to open orthodox financial-economic eyes and minds to consider the possibility that tweaking official interest rates alone is not a magic solution to manage inflation. That it is, in fact, a dangerous misunderstanding. Unfortunately for the anti-regulation anti-government mainstream, the inconvenient reality is that only active management and regulation of the economy can manage inflation. But that is “socialism” and “socialiam” is bad, bad, bad… It’s hard not to despair.
Thank you, I still don’t understand how inflation caused by supplychain bottlenecks resulting from covid and energy prices rising because of the Ukraine war can be reduced by raising rates? The world container index is on a strong downward trend now as some of the covid caused pent up demand has worked itself through the system. Energy prices are also going down although still high. Food prices are declining but not in shops yet. Many raw material prices such as steel , iron ore, lumber are on strong downward trends. Is the interest raise policy focused on avoiding labour to ask for a higher salary ?
Also, the unemployment that is induced will only very slowly decrease demand. The poor still have to eat -- and they don't buy many cars. The pain hits the bottom of the economic participants first and these people do not have much consumption to cut back on. Meanwhile people in the suburbs are still going to be bidding up the prices of travel, appliances, and cars in a supply constrained economy.
"Bad" is a matter of perspective. Everything looks fine to capital.
You never want to go "full Larry"
Good post. I like the phrase about Summers … “by rhetorical design.”
Larry is so distracted by the abstract orthodoxies of neo-classical macro that he probably is not capable of conceiving how a 50% discount/rebate policy at the point of retail sale would end private banking's problematic paradigm of Debt Only, mathematically end inflation forever, immediately double everyone's purchasing power and so permanently enable the kind of fiscal deficits MMT only hopes could be possible. JUST DO THE MATH and realize that retail sale is the optimal point in the entire economic process to implement a macro-economic effect.
The other point to bear in mind is that interest rate increases not only penalise borrowers, but also benefit savers. There's a quasi-fiscal effect for pensioners, or any other cohort that benefits from rising rates because they derive more interest income. So the monetary channel becomes a very diffuse mechanism to dampen demand and reduce inflationary pressures. It's like using a sledge hammer, rather than a scalpel to do an operation. Fiscal policy is a much more effective inflation-fighting tool.
I think it, the rate hike appetite, is a "proxy" inflation lowering justification when the REAL appetite is
keeping wages low, avoiding strikes and stopping union organization. It was obvious when the Fed
Head declared with aggressive seriousness early on that wages had to come down. Thank you for
your clarity and detailed history.
Same sadly applies here in the UK. Exacerbated by the effects of Brexit isolationism.
You're right and Summers is wrong. If only you could get this administration to listen.
It is fascinating how a flawed economic theory continues to perist in academia and in the political sphere. How many "Larry Summers" are churned out every year from universities and business schools? What Stephanie says makes perfect sense but it meets too many minds which has been programmed in a wrong way ...
Every member of Congress should reread (or, sadly, "read") Stephanie's brilliant April 2021 NYTIMES column. In about 1,000 words--I didn't count them--she lays out the argument beautifully as to just how wrongheaded it is for Congress to ask: "How will we pay for it?" It's actually a trick question to which there is only one possible correct answer, as obvious as it is sensible. "With money."
I distinctly remember Ms. Kelton joining the Democratic Party (and Federal Reserve) chorus that inflation was solely due to supply chain disruptions and COVID recovery.
While I agree Summers' solution is garbage, it does not follow that the policies that led to this inflation are therefore not garbage.
"Large cost" means that the Leisure Class doesn't suffer.
As a person who understands the actual mechanisms that generate inflation, It must be difficult for you to watch our country again undertake the financial-economic analog of a medieval physician “bleeding” a patient in order to cure her. Unfortunately, it will take at least another Fed-induced depression to open orthodox financial-economic eyes and minds to consider the possibility that tweaking official interest rates alone is not a magic solution to manage inflation. That it is, in fact, a dangerous misunderstanding. Unfortunately for the anti-regulation anti-government mainstream, the inconvenient reality is that only active management and regulation of the economy can manage inflation. But that is “socialism” and “socialiam” is bad, bad, bad… It’s hard not to despair.
Ms. Kelton is absolutely correct.