The editors of the New York Times admit that President Biden is failing their version of the “Big Mac test”:
In a late December tweet, Mr. Biden quoted with evident approval an assessment that he had compiled “the strongest first-year economic track record of any president in the last 50 years.†The Treasury secretary, Janet Yellen, said Friday, “By most traditional metrics, the pace of our current recovery has exceeded even the most optimistic expectations.â€
Most Americans don’t share the administration’s sunny view of its economic record, and it is little mystery why: The average worker’s paycheck doesn’t buy as many hamburgers as it did last year. (Using hamburgers to measure inflation is a twist on The Economist magazine’s Big Mac Index, which tracks the price of the classic hamburger in different currencies.) The government’s Consumer Price Index rose by 7 percent in 2021, the biggest jump since 1982. Mr. Biden’s approval rating remains low, and poll after poll finds that Americans are not pleased with his handling of the economy. Nearly two-thirds say the administration is insufficiently focused on inflation, according to a recent CBS News poll. There are similar numbers in other recent polls.
Nonetheless they believe he made the right choice:
The discomforting truth is that the United States last year faced a choice between a protracted period of economic pain and an economic recovery whose benefits are temporarily attenuated by high inflation. Mr. Biden made the right choice. But it came at a real price — economically, for the nation, and politically, for him.
That’s a good example of the tertium non datur fallacy or the false dilemma fallacy. Only two alternatives are provided: either inflation or a slow recovery. But there are other alternatives (that’s what makes it a fallacy) and one of them is to reduce imports and increase domestic production. When you borrow, i.e. “print money” or in our case issue ourselves credit to spend more you have several alternatives:
- Import more
- Produce more
- Inflation
That is the tautology not an alternative between inflation and slow growth. “Production” in this case is measured in tons of steel, bushels of wheat, barrels of oil, and so on that are produced. For the last 40 years we have chosen to import more. I believe it’s time to take the other alternative. Re-industrializing will be harder than de-industrializing was and it can’t be done instantaneously.
Those I have referred to as “folk Keynesians” or “folk MMT-ers” don’t understand this but real Keynesians and real modern monetary theorists do.
Let’s give a single example. If you increase healthcare spending without increasing the amount of healthcare produced, it will raise the cost of healthcare, i.e. it will “inflate”. You can increase the supply of healthcare by reducing the amount of slack time for healthcare workers, i.e. the amount of time they’re not working, by making them more productive, or by increasing the number of healthcare workers (doctors, nurses, and technicians). Healthcare workers don’t have a lot of slack time at this point. Physicians are more likely to report that they’re overworked rather than they’ve got a lot of spare time on their hands. If you cap the number of doctors, that limits your choices to increasing productivity. That is very difficult to accomplish.
How would you increase production and decrease imports quickly? I dont think that can be done. As you probably know there are some major semiconductor plants being planned and built int he US. It will take 2-3 years for those come on line. Research continues in the US as IBM has developed a prototype for the first 3 nanometer chip.
Its a fallacy in the long term but not so much in the short term. As an example, much better than your health care one, all of those items tied up in shipping coming from China? Why didnt we just make them ourselves over the last 6 months?
Steve
“The discomforting truth is that the United States last year faced a choice between a protracted period of economic pain and an economic recovery whose benefits are temporarily attenuated by high inflation.”
Actually I think they are saying, implicitly, is that the contractionary move in the aggregate demand curve required to offset the contraction in the aggregate supply curve for price stability to be the was not worth it. Supply chain issues would clean up –> inflation was therefore advertised as transitory. (I would note that there were 104 ships off the coast of CA in November. I saw the other day that there are 106 in mid-Jan. )
In your example if health care expenditures increased and customer took them, they could not purchase x, y or z, and prices would fall there. That’s not inflation. Admittedly, increases in the prices of a very broad basket of consumer goods looks like inflation, but its not. The prices of some goods would have to fall. Pity the producers of those. Lastly, increase in domestic supply takes time. It should be done as a general and long term strategy, but it takes time. And the labor force quits, giving us the faux unemployment rate, will take time to rectify.
What is missing here is a key driver of demand: money supply. (The other being productivity) The Fed balance sheet has grown what, some 5-6 times in the last decade? Pumping money directly into the economy with government checks and making cheap credit available for time financed purchases.
I think we are stuck with inflation for the foreseeable future, which is 1-2 years in economics. Productivity and building new capacity takes time, even if we have the will. Does Joe Biden look like a guy who will take on the Chinese? I don’t think so. And lastly, as measured the same way it was 5 years ago inflation is at least 10%. Another 18-mos to two years of that and peoples purchasing power will have dropped 10%-15% over a two – three year period. Not good.
I look out over the horizon and I see waves of chickens marching towards their roosts.
“Why didnt we just make them ourselves over the last 6 months?”
You answered your question in your first paragraph. You need capital, labor, construction, training………. Even a simple warehouse can take a year. A real live factory is 2 years. And just adding production lines in an existing factory is 6mos – 1 yr. And who is going to lay out potential white elephant investments without assurances that China etc won’t undercut US producers.
I heard Joe Biden calling people racists for not wanting to change voting laws that are already more voter friendly than his home state. And firing people who wouldn’t wear a stupid a mask. I must have missed the part about his commitment to US production of goods and services. Doesn’t exactly give one confidence.
https://www.zerohedge.com/geopolitical/chinas-censors-ban-hollywood-films-beijing-builds-its-own-movie-empire
Maybe Joe will send Hunter to fix this. He knows the Chinese. I hear he’s a BSD in Chinese private equity.
There was also the option is to administratively force consumption to go down (I.e. rationing). Or do that through market forces like a VAT.
That was what was done in WWII (another period of extreme increase in money supply and government borrowing).
Indeed; lockdowns were an accidental form of rationing.
The biggest issue for the immediate future is what I pointed out a few days ago. Consumption must come down for investment to go up, assuming production is static in the short term and imports cannot be increased.
“You answered your question in your first paragraph. ”
That was more for Dave who seemed to be implying that we could do this in the short term. I agree with you that it takes time. That is setting aside the question of whether or not they made the right choice, I just dont see that Dave’s option was really possible. Even in the longer term as you point out I think a lot of people will be hesitant since what happens when China/shipping is back to normal?
Steve
Companies like Verizon and AT&T are using 5G (or what passes for it here) to increase the entertainment value of their networks.
China, which already has 70% of all the installed 5G base stations (the true Huawei ones), is combining 5G with AI in their factories the greatly increase their efficiency. David Goldman (Spengler) calls it the Fourth Industrial Revolution. So China’s lead over the rest of the world in manufacturing is going to increase substantially, and it will be impossible to rebuild American or European manufacturing.
The ongoing 50 year decline in working class incomes is continuing, as both political parties continue class warfare against workers. Trump, as bad a President as he was, intuitively understood the need to stop the class war, and the opportunity to regenerate the Republican Party as a populist, working class, middle class party. The Republicans chose to throw that opportunity away.
We are already well into the Chinese Century. The eclipse of the West will continue.
I’m going to have to write a post about this.
Two years ago “it takes time” was a perfectly good answer but we’re two years into the pandemic. “It takes time” is insufficient to explain the deficiency now. You’ve got to add factors that add up to bad management: bad assumptions and what my old business partner used to call “druthers”, i.e. preferences. They don’t want to produce more. They want companies that are light on overhead and capital investment and heavy on stock value.
What do I make of Intel’s announcement about a new mega-chip foundry in Ohio? When will it start producing chips? They say five years. Nowadays that’s the equivalent of saying “never”. It goes a long way towards explaining Intel’s decline. They’re mired in the past.
I swear if Tom Edison, John Rockefeller, Andrew Carnegie, Henry Ford, Leland Stanford, Cornelius Vanderbilt and others like them had the same attitude as today’s bunch we’d still be a mostly agrarian country.
@Dave Schuler
… Tom Edison, John Rockefeller, Andrew Carnegie, Henry Ford, Leland Stanford, Cornelius Vanderbilt and others like them …
What they have in common is hard money. With hard money, you must produce to increase stock value. Because hard money is real, a hard money is mostly a zero sum economy.
Fractional reserve lending cannot create gold coins, and credit is strictly paper. Basically, you cannot create more gold coins without more gold, and anything purchased with gold coins decreases the amount of gold coins you own.
I do think you have something there but it’s not just because they’re in the 19th/early 20th century. Ray Kroc fits into that category, too.