The dangers of the heavy economy

Some economics textbooks defined their subject as “science of scarcityz”.

Some may still do it.

Actually, it’s completely wrong:

Some of the more useful economics tell people they don’t have to settle for less; for example, that we must not accept the recessions as a matter of fact, that we can and must fight them with an expansionary monetary and fiscal policy.

For example, it is not possible to maintain a welfare system like the Danish one without tax rates like the Danish ones.

But accepting the need to make tough decisions can become something of a trap.

You might think that everyone is always looking for easy answers, but that’s not really how it works:

In some professional contexts he gains a reputation for appearing down to earth and tough. (I can’t help but think of the foreign policy “realists” who argued that Ukraine had no chance of repelling a Russian invasion.)

As a result, some economists and economic commentators seem to cheer positively on prescribing hard and cheap medicine (for other people, of course); After the 2008 crisis, the US economy suffered greatly at the hands of Very serious people who moralized about debt in the face of consistently high unemployment.

On the other hand, I have been surprised for a long time that people are still being considered Paul Volkerarchitect of the painful US disinflation of the 1980s, as the most eminent central banker of all time.

Eminent, yes: Volcker was brave and also an admirable human being. But we shouldn’t give the same credit to Ben Bernanke AND Mario Draghiwho can boast of having saved the world financial system and the euro respectively?

Are their achievements devalued because they avoided pain instead of inflicting it?

However, trying to be stubborn can also cause political and public relations problems.

Many economists, even among progressives, use wage growth as an important indicator of inflation. “below” (although this is a slippery notion).

However, one must be careful not to suggest – as Andrew Bailey, the governor of the Bank of England has done – that greedy workers are the villains behind inflation.

Which brings me to the furore created by the quiet claims of Huw Pill, chief economist at the Bank of England (what’s wrong with the BOE?), that UK inflation – which here has been higher than inflation – reflects a general lack of will by workers and others to “accept the fact that they are worse off”.

Ruin

But clumsiness aside, was Pill’s diagnosis correct?

The answer, I would argue, is that there was some truth to his analysis, but at least for America, much of it was wrong – and I suspect this is true for Britain as well.

Where Pill got it right was to describe inflation as a game of “pass the pack”:

Everyone tries to get ahead by raising prices, but since everyone does the same thing, on average, the profits from rising prices of the things being sold are offset by the higher prices of the things being bought and sold.

So the cumulative effect of individual agents’ efforts to profit at the expense of others is inflation, which hurts everyone.

A few months ago I wrote about the theory of inflation in a soccer game, where everyone stands up to get a better view, resulting in nobody’s vision improving but everyone being less comfortable.

It still seems correct to me.

What’s more objectionable about Pill’s story is that he attributes this zero-sum race for the position to an attempt to stave off an inevitable decline in real income, caused in large part by rising energy prices.

While he was careful to include both corporate price increases and wage demands in his analysis, this is basically the classic story of the wage-price spiral.

In this story, workers see their cost of living rise, for example, due to rising energy prices, and demand wage increases to compensate for these losses, but companies raise their prices to reflect rising costs of work and so on.

He International Monetary Fund analyzed data from several countries and found no evidence that wage-price spirals are developing.

And I haven’t seen evidence of this in the US either.

Wage growth has accelerated, but appears to have been driven primarily by the demand for workers in a very tight labor market.

Indeed, wage growth has slowed from its peak (although it remains unsustainably high) as indicators of labor market stickiness, such as the rate of layoffs, have declined.

In any case, in the United States we have seen something akin to what Lael Brainard, the former Fed deputy chairman and now chief economist in the Biden administration, calls a “price spiral“, where some companies raise prices more than they raise costs.

At least in part, companies may have believed they could get a price increase.

c.2023 The New York Times Society