Yves here. Mark Blyth is such a treat. How can you not be a fan of the man who coined “The Hamptons are not a defensible position”?
Even though he’s not always right, he’s so incisive and has such a strong point of view that his occasional questionable notions serve as fodder for thought. And I suspect he’ll be proven correct on his topic today, the inflation bugaboo.
By Paul Jay. Originally published at TheAnalysis.news
Hi, I’m Paul Jay. Welcome to theAnalysis.news. Please don’t forget there’s a donate button at the top of the website. There’s a subscribe button on YouTube, share buttons all over the place, and the more you share, the more we grow. And we’ll be back in a second with Mark Blyth.
Is inflation a thing of the past, or as former Treasury secretary for Bill Clinton, and economic adviser to Barack Obama, Larry Summers wrote in an op-ed for The Washington Post in February that Biden’s “stimulus might cause, quote, inflationary pressures of a kind we’ve not seen in a generation with consequences for the value of the dollar and financial stability.”
In March, he repeated his warning that, quote, “The risks resemble those seen in the 1970s. The idea that inflation can suddenly spike to worrying highs is just plain wrong” he told Bloomberg TV. He added, “lifting taxes on wealthy Americans and corporations could double the spending risks”.
Olivier Blanchard, former chief economist at the IMF, agreed with Summers on Twitter writing that the Biden package could “overheat the economy so badly as to be counterproductive.” At a recent Munk Debate, the issue was described as following “20 trillion dollars of government stimulus in countries around the world. Interest rates so low there’s no incentive to save, and more than half a billion vaccinated consumers ready to pull out their wallets and kick off the roaring 20s of the 21st century. Some experts believe that a surge in inflation, such as we haven’t seen since the 1970s, is in the cards. Inflation bulls argue that the post-pandemic recovery is just one of the many trends converging to create rising prices for years to come.”
Other economists are saying the specter of a long-term rise in inflation is just that, a fiction in our imaginations. Now joining us for his take on the issue is Mark Blyth.
Mark is a political economist at Brown University. He researches the causes of stability and change in the economy, and as he says, why people continue to believe stupid economic ideas despite buckets of evidence to the contrary, and every time I introduce him, I going to keep saying that because I like it. So, Mark, thanks for joining us.
It’s always a pleasure.
And is the idea that inflation is about to come roaring back one of the stupid ideas that you’re talking about?
I hope that it is, but I’m going to go with Larry on this one. He says it’s about one third chance that it’s going to do this. I’d probably give it about one in ten, so it’s not impossible. So, let’s unpack why we’re going to see this.
Can you generate inflation? Yeah. I mean, dead easy. Imagine your Turkey. Why not be a kind of Turkish pseudo dictator? Why not fire the head of your central bank in an economy that’s basically dependent on other people valuing your assets and giving you money through capital flows? And then why don’t you fire the central bank head and put in charge your brother-in-law? I think it was his brother-in-law. And then insist that low interest rates cure inflation. And then watch as the value of your currency, the lira collapses, which means all the stuff you import is massively expensive, which means that people will pay more, and the general level of all prices will go up, which is an inflation. So, can you generate an inflation in the modern world? Sure, yeah. Easy. Just be an idiot, right? Now, does this apply to the United States? No. That’s where it gets entirely different.
So, a couple of things to think about (first). So, you mentioned that huge number of 20 trillion dollars. Well, that’s more or less about two thirds of what we threw into the global economy after the global financial crisis, and inflation singularly failed to show up. All those people in 2010 screaming about inflation and China dumping bonds and all that. Totally wrong. Completely wrong. No central bank that’s got a brass nameplate worth a damn has managed to hit its inflation target of two percent in over a decade. All that would imply that there is a huge amount of what we call ‘slack’ in the economy. (Also) think about the fact that we’ve had, since the 1990s, across the OECD, by any measure, full employment. That is to say, most people who want a job can actually find one, and at the same time, despite that, there has been almost no price pressure coming from wages, pushing on into prices, to push up inflation.
So rather than the so-called vertical Phillips curve, which most of modern macro is based upon, whereby there’s a kind of speed bump for the economy, and if the government spends money, it can’t push this curve out, all it can do is push it up in terms of prices. What we seem to actually have is one whereby you can have a constant level of inflation, which is very low, and any amount of unemployment you want from 2 percent to 12 percent, depending on where you look and in which time-period. All of which suggests that at least for big developed, open, globalized economies, where you’ve destroyed trade unions, busted up national product cartels, globally integrated your markets, and added 600 million people to the global labor supply, you just can’t generate inflation very easily.
Now, we’re running, depending on how much actually passes, a two to five trillion-dollar experiment on which theory of inflation is right. This one, or is it this one? That’s basically what we’re doing just now. Larry’s given it one in three that it’s his one. I’d give it one in ten his one’s right. Now, if I may just go on just for a seconds longer. This is where the politics of this gets interesting.
Most people don’t understand what inflation is. You get all this stuff talked by economists and central bankers about inflation and expectations and all that, but you go out and survey people and they have no idea what the damn thing is. Think about the fact that most people talk about house price inflation. There is no such thing as house price inflation. Inflation is a general rise in the level of all prices. A sustained rise in the level of prices. The fact that house prices in Toronto have gone up is because Canada stopped building public housing in the 1980s and turned it into an asset class and let the 10 percent top earners buy it all and swap it with each other. That is singularly not an inflation.
So, what’s going to happen coming out of Covid is there will be a big pickup in spending, a pickup in employment. I think it’s (going to be) less than people expect because the people with the money are not going to go out and spend it because they have all they want already. There are only so many Sub-Zero fridges you can buy. Meanwhile, the bottom 60 percent of the income distribution are too busy paying back debt from the past year to go on a spending spree, but there definitely will be a pickup. Now, does that mean that there’s going to be what we used to call bottlenecks? Yeah, because basically firms run down inventory because they’re in the middle of a bloody recession. Does it mean that there are going to be supply chain problems? Yes, we see this with computer chips. So, what’s going to happen is that computer chips are going to go up in price. So, lots of individual things are going to go up in price, and what’s going to happen is people are going to go “there’s the inflation, there’s that terrible inflation,” and it’s not. It’s just basically short-term factors that will dissipate after 18 months.
That is my bet. For Larry to be right what would have to be true? That we would have to have the institutions, agreements, labor markets and product markets of the 1970s. We don’t. So, I just don’t actually see what the generator of inflation would be. We are not Turkey dependent on capital imports for our survival with a currency that’s falling off a cliff. That is entirely different. That import mechanism, which is the way that most countries these days get a bit of inflation. That simply doesn’t apply in the U.S. So, with my money on it, if I had to bet, it’s one in 10 Larry’s right, rather one in 3.
The other point he raises, and we talked a little bit about this in a previous interview, but let’s revisit it, is that the size of the American debt, even if it isn’t inflationary at some point, creates some kind of crisis of confidence in the dollar being the reserve currency of the world, and so this big infrastructure spending is a problem because of that. That’s part of, I believe, one of his arguments.
The way political economists look at the financial plumbing, I think, is different to the way that macro economists do. We see it rather differently. The first thing is, what’s your alternative to the dollar unless you’re basically going to go all-in on gold or bitcoin? And good luck with those. If we go into a crushing recession and our bond market collapses, don’t think that Europe’s going to be a safe haven given that they’ve got half the US growth rate. And we could talk about what Europe’s got going on post-pandemic because it’s not that good.
So what’s your alternative (to the Dollar)? Buy yen? No, not really. You’re going to buy Chinese assets? Well, good luck, and given the way that their country is being run at the moment, if you ever want to take your capital out. I’m not sure that’s going to work for you, even if you could. So you’re kind of stuck with it.
Mechanically there’s another problem. All of the countries that make surpluses in the world make surpluses because we run deficits. One has to balance the other. So, when you’re a Chinese firm selling to the United States, which is probably an American firm in China with Chinese subcontractors selling to the United States, what happens is they get paid in dollars. When they receive those dollars in China, they don’t let them into the domestic banking system. They sterilize them and they turn them into the local currency, which is why China has all these (dollar) reserves. That’s their national savings. Would you like to burn your reserves in a giant pile? Well, one way to do that would be to dump American debt, which would be equivalent to burning your national savings. If you’re a firm, what do you do? Well, you basically have to use dollars for your invoicing. You have to use dollars for your purchasing, and you keep accumulating dollars, which you hand back to your central bank, which then hands you the domestic currency. The central bank then has a problem because it’s got a liability – (foreign) cash rather than an asset. So, what’s the easiest asset to buy? Buy another 10-year Treasury bill, rinse and repeat, rinse and repeat.
So, if we were to actually have that type of crisis of confidence, the people who would actually suffer would be the Germans and the Chinese, because their export-driven models only makes sense in terms of the deficits that we run. Think of it as kind of monetarily assured destruction because the plumbing works this way. I just don’t see how you can have that crisis of confidence because you’ve got nowhere else to take your confidence.
If I understand it correctly, the majority of American government debt is held by Americans, so it’s actually really the wealth is still inside the United States. I saw a number, this was done three or four years ago, maybe, but I think it was Brookings Institute, that assets after liabilities in private hands in the United States is something like 98 trillion dollars. So I don’t get where this crisis of confidence is going to come any time soon.
Basically, if your economy grows faster (than the rest of the world because you are) the technological leader, your stock markets grows faster than the others. If you’re an international investor, you want access to that. (That ends) only if there were actual real deep economic problems (for the US), like, for example, China invents fusion energy and gives it free to the world. That would definitely screw up Texas. But short of that, it’s hard to see exactly what would be these game-changers that would result in this.
And of course, this is where the Bitcoin people come in. It’s all about crypto, and nobody has any faith in the dollar, and all this sort of stuff. Well, I don’t see why we have faith in something (like that instead . I think it was just last week. There wasn’t much reporting on this, I don’t know if you caught this, but there were some twenty-nine-year-old dude ran a crypto exchange. I can’t remember where it was. Maybe somewhere like Turkey. But basically he had two billion in crypto and he just walked off with the cash. You don’t walk off with the Fed, but you could walk off with a crypto exchange.
So until those problems are basically sorted out, the notion that we can all jump into a digital currency, which at the end of the day, to buy anything, you need to turn back into a physical currency because you don’t buy your coffee with crypto, we’re back to that (old) problem. How do you get out of the dollar? That structural feature is incredibly important.
So there’s some critique of the Biden infrastructure plan and some of the other stimulus, coming from the left, because, one, the left more or less agrees with what you said about inflation, and the critique is that it’s actually not big enough, and let me add to that. I’m kind of a little bit surprised, maybe not anymore, but Wall Street on the whole, not Larry Summers and a few others, but most of them actually seem quite in support of the Biden plan. You don’t hear a lot of screaming about inflation from Wall Street. Maybe from the Republicans, but not from listening to Bloomberg Radio.
You don’t even hear a lot of screaming about corporate taxes, which is fascinating, right? You’d think they’d be up in arms about this? I actually spoke to a business audience recently about this, and I kind of did an informal survey and I said, “why are you guys not up in arms about this?” And someone that was on the call said, “well, you know, the Warren Buffet line about you find out who’s swimming naked when the tide goes out? What if a lot of firms that we think are great firms are just really good at tax optimization? What if those profits are really just contingent on that? That would be really nice to know this because then we could stop investing in them and invest in better stuff that actually does things.”
And pick up the pieces of what’s left of them for a penny if they have to go down.
Absolutely. Just one thought that we’ll circle back, to the left does not think it’s big enough, etc. Well, yes, of course they wouldn’t, and this is one of those things whereby you kind of have to check yourself.
I give the inflation problem a one in ten. But what I’m really dispassionately trying to do is to look at this as just a problem. My political preferences lie on the side of ‘the state should do more.’ They lie on the side of ‘I think we should have higher real wages.’ They lay on the side that says that ‘populism is something that can be fixed if the bottom 60 percent actually had some kind of growth.’ So, therefore, I like programs that do that. Psychologically, I am predisposed therefore to discount inflation. I’m totally discounting that because that’s my priors and I’m really deeply trying to check this.
In this debate, it’s always worth bearing in mind, no one’s doing that. The Republicans and the right are absolutely going to be hell bent on inflation, not because they necessarily really believe in (inevitable) inflation, (but) because it’s a useful way to stop things happening. And then for the left to turn around and say, well, it isn’t big enough, (is because you might as well play double or quits because, you know, you’ve got Biden and that’s the best that’s going to get. So there’s a way in which when we really are trying to figure out these things, we kind of have to check our partisan preferences because they basically multiply the errors in our thinking, I think.
Now, earlier you said that one of the main factors why inflation is structurally low now, I don’t know if you said exactly those words.
I would say that yes.
Is the weakness of the unions, the weakness of workers in virtually all countries, but particularly in the U.S., because it matters so much. That organizing of workers is just, they’re so unable to raise their wages over decades of essentially wages that barely keep up with inflation and don’t grow in any way, certainly not in any relationship to the way productivity has grown. So we as progressives, well, we want workers to get better organized. We want stronger unions. We want higher wages, but we want it without inflation.
And it’s a question of how much room you have to do that. I mean, essentially, if you quintuple the money supply, eventually prices will have to rise…but that depends upon the velocity of money which has actually been collapsing. So maybe you’d have to do it 10 times. There’s interesting research out of London, which I saw a couple of weeks ago, that basically says you really can’t correlate inflation with increases in the money supply. It’s just not true. It’s not the money that’s doing it. It’s the expectations. That then begs the question, well, who’s actually paying attention if we all don’t really understand what inflation is? So I tend to think of this as basically a kind of a physical process.
It’s very easy to understand if your currency goes down by 50 percent and you’re heavily dependent on imports. You’re import (prices) go up. All the prices in the shops are going to go up. That’s a mechanism that I can clearly identify that will generate rising prices. If you have big unions, if you have kind of cartel-like vertically integrated firms that control the national market, if you have COLA contracts. If you have labor able to do what we used to call leapfrogging wage claims against other unions, if this is all institutionally and legally protected, I can see how that generates inflation, that is a mechanism I can point to. That doesn’t exist just now.
Let’s unpack this for a minute. The sort of fundamental theoretical assumption on this is based is some kind of ‘marginal productivity theory of wages.’ In a perfectly free market with free exchange, in which we don’t live, what would happen is you would hire me up to the point that my marginal product is basically paying off for you, and once it produces zero profits, that’s kind of where my wages end. I’m paid up to the point that my marginal product is useful to the firm. This is not really a useful way of thinking about it because if you’re the employer and I’m the worker, and I walk up to you and say, hey, my marginal productivity is seven, so how about you pay me seven bucks? You just say, shut up or I’ll fire you and get someone else.
Now, the way that we used to deal with this was a kind of ‘higher than your outside option,’ on wages. The way we used to think about this was “why would you pay somebody ten bucks at McDonald’s?” Because then you might actually get them to and flip the burgers because they’re outside option is probably seven bucks, and if you pay them seven bucks, they just won’t show up. So we used to have to pay workers a bit more. So that was, in a sense, (workers) claiming (a bit of the surplus) from productivity.
But now what we’ve done, Suresh Naidu the economist was talking about this the other day, is we have all these technologies for surveilling workers (instead of paying them more). So now what we can do is take that difference between seven and ten and just pocket it because we can actually pay workers at your outside option, because I monitor everything you do, and if you don’t do exactly what I say I’ll fire you, and get somebody else for seven bucks. So all the mechanisms for the sharing of sharing productivity, unions, technology, now lies in the hands of employers. It’s all going against labor. So (as a result) we have this fiction that somehow when the economy grows, our productivity goes up, and workers share in that. Again, what’s the mechanism? Once you take out unions and once you weaponize the ability of employers to extract surplus through mechanisms like technology, franchising, all the rest of it, then it just tilts the playing field so much that we just don’t see any increase in wages. (Now) let’s bring this back to inflation.
Unless you see systematic (and sustained) increases in the real wage that increases costs for firms to the point that they need to push on prices, I just don’t see the mechanism for generating inflation. It just isn’t there. And we’ve underpaid the bottom 60 percent of the U.S. labor market so long it would take a hell of a lot of wage inflation to get there, with or without unions.
Yeah, what’s that number, that if the minimum wage was adjusted for inflation and it was what the minimum wage was, what, 30 years ago, the minimum wage would be somewhere between 25 and 30 bucks, and that wasn’t causing raging inflation.
And there is that RAND study from November 2020 that was adeninely entitled, ‘Trends in Income 1979 to 2020,’ and they calculated, and I think this is the number, but even if I’m off, the order of magnitude is there, that transfers, because of tax and regulatory changes, from the 90th percentile of the distribution to the 10 percentile, totalled something in the order of $34 trillion. That’s how much was vacuumed up and practically nothing trickled down. So when you consider that as a mechanism of extraction, why are worrying about inflation (from wages)?
The best story on inflation is actually Charles Goodhart’s book that came out last year. We got a long period of low inflation because of global supply chains, and because of demographic trends. It’s a combination of global supply chains, Chinese labor, and demographics all coming together to basically push down labor costs, and that’s why you get this long period of deflation, which leads to rising profits and zero inflation. A perfectly reasonable way of explaining it. And his point is that, well, that’s coming to an end. The demographics are shifting, or shrinking. We’re going back to more closed economies. You’re going to create this inflation problem again.
OK, what’s the timeline on that? About 20 years?
A few years ago, we were told we had 12 years to fix the climate problem or we’re in deep shit. If we have to face the climate problem versus single to double-digit inflation, I’m left wondering what is the real problem here?
All right, thanks for joining us, Mark.
It’s been a pleasure as always.
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