Inflation = Nominal Growth – Real Growth

At Full Stack Economics Alan Cole puts the inflation debate in the simplest possible terms: inflation is the difference between the nominal growth and real growth. We have a pretty good idea of the shape of the nominal recovery. Now the hard question: what’s the shape of the real recovery?

The next question is simple: how well can our real economy produce the things people want? We have two problems. The obvious problem is that COVID-related inconveniences have made people less efficient at their jobs. A subtler problem is that COVID-19 made consumer demand less predictable. For example, producers were surprised at the beginning of the pandemic when more people wanted goods delivered, and fewer people wanted in-person services, for reasons of safety or convenience.

Compounding the problem, a lot of people suddenly wanted big durable goods, like at-home exercise bikes, for their homes. But it’s not clear if this increased spending will continue in the future. As our friend Joseph Politano of Apricitas notes in his most recent post, “durable goods are, well, durable,” so once that demand is sated it could easily reverse.

In short, the combination of workplace inefficiency and unexpected shifts in demand has resulted in less total production, contributing to inflation from the supply side, or “real” side, of the “inflation equals nominal minus real” equation.

which is a succinct statement of why I’ve been harping that policy should be focused on increasing production.

He then turns to pondering what will happen regarding inflation. If incomes rise slowly and moderately, we may well have “transitory inflation”. Transitory can either be “happy” or “sad”:

The happy transitory scenario is where we defeat COVID-19’s major inconveniences and get a V-shaped recovery in the real economy. This would mean that scarce items like autos rebound to full production, the efficiencies of the pre-COVID era return, and plentiful production races to return prices back towards normal levels.

In these circumstances, we could see incomes rising strongly even as inflation falls below 2 percent. The price level forms an upside-down V, rising sharply and then declining in the recovery. We might even get a bit of deflation that “makes up” for the bad inflation we suffered earlier. While deflation is an ominous sign if it signals the start of a recession, falling prices produced by rising productivity can be a healthy sign.

In the sad transitory scenario, on the other hand, many COVID inconveniences stay with us forever. This creates unpredictable problems and slows down production, producing an L-shaped recovery. We eventually learn workarounds, but we won’t be as rich as we would have been in a world without the virus. In this scenario, the price level forms an upside-down L, so prices rise sharply and stay at those elevated levels without any “make-up” years of low inflation.

I’m concerned that legislators will perseverate on the pump-priming measures they’ve been using for decades without paying any attention to production and that the Federal Reserve will delay their remediating action which, in general, works against that fiscal policy.

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Why Indeed?

At Spiked Matt Ridley has a post asking why scientists “suppressed” the lab leak theory for SARS-CoV-2:

In December 2019 there was an outbreak in China of a novel bat-borne SARS-like coronavirus a few miles from the world’s leading laboratory for collecting, studying and manipulating novel bat-borne SARS-like coronaviruses. We were assured by leading scientists in China, the US and the UK that this really was a coincidence, even when the nine closest relatives of the new virus turned up in the freezer of the laboratory in question, at the Wuhan Institute of Virology.

Now we know what those leading scientists really thought. Emails exchanged between them after a conference call on 1 February 2020, and only now forced into the public domain by Republicans in the US Congress, show that they not only thought the virus might have leaked from a lab, but they also went much further in private. They thought the genome sequence of the new virus showed a strong likelihood of having been deliberately manipulated or accidentally mutated in the lab. Yet later they drafted an article for a scientific journal arguing that the suggestion not just of a manipulated virus, but even of an accidental spill, could be confidently dismissed and was a crackpot conspiracy theory.

Following a discussion of the skepticism that a virus with the particular characteristcs of SARS-CoV-2 could have arisen naturally, he gets to the meat of the post:

The emails unveiled this week reveal no good scientific reason at all for why these leading virologists changed their minds and became deniers rather than believers in even the remote possibility of a lab leak, all in just a few days in February 2020. No new data, no new arguments. But they do very clearly reveal a blatant political reason for the volte-face. Speculating about a lab leak, said Ron Fouchier, a Dutch researcher, might ‘do unnecessary harm to science in general and science in China in particular’. Francis Collins was pithier, worrying about ‘doing great potential harm to science and international harmony’. Contradicting Donald Trump, protecting science’s reputation at all costs and keeping in with those who dole out large grants are pretty strong incentives to change one’s mind.

All of this ties in with a post I’ve been working on. Different professionals have different ethical obligations. Making the needs of your profession your highest goal is not an ethical stance.

I don’t know how SARS-CoV-2 arose. That it emerged due to a leak from the Wuhan Institute of Virology is plausible. That is emerged naturally is plausible, too. It would be a lot more plausible if a related virus with the distinctive characteristic of SARS-CoV-2 were to be found. Maybe it will in time.

From a legal standpoint I think that there should be multiple class action lawsuits against Chinese individuals and institutions claiming harm due to COVID-19. That would provide the Chinese authorities with a healthy motivation for being more forthcoming than they have been to date.

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The Stranglehold

The editors of Bloomberg react to the situation with the Chicago Public Schools:

Although a strike by the Chicago Teachers Union thankfully ended this week, the damage has been done. The unlawful walkout exposed an indifference not just to science but to the emotional and academic well-being of more than 340,000 schoolchildren. It also showed why President Joe Biden and other Democratic leaders need to break the grip of teachers unions over the country’s public schools — or risk irreversible damage to the students who can afford it least.

Not to mention the political harm done to the coalition that has buoyed Chicago’s Democratic Party for years. They continue:

The refusal of Chicago’s teachers to show up to classrooms had forced the city to close all public schools for four days, until a deal was reached on Monday. Union leaders had demanded that the district revert to virtual learning until Jan. 18, and to close all schools again if Covid cases didn’t subside. Mayor Lori Lightfoot had offered to meet some union demands, but rightly refused to bend on calls for schools to shut down altogether if Covid cases exceeded a certain benchmark, pointing out that kids were safer in schools than out of them. Although full details won’t be known until the union’s full membership votes on the deal later this week, early reports suggest the mayor has agreed to set metrics that would trigger a return to remote learning for individual schools.

The agreement reached seemed prudent to me. Setting metrics and limiting shutdowns to individual schools rather than districtwide is something that should have been done long ago. And, as I have pointed out since the start of the pandemic, the CPS serves multiple constituencies of which the teachers are one. The editors are worried that any metrics will prove problematic:

If true, this could prove unwise. Given the transmissibility of the omicron variant, it’s inevitable that Covid cases will rise as schools reopen. But the health risk the variant poses to children is far outweighed by the proven cognitive and emotional harm caused by remote learning. Nor would a lack of tests justify systemwide closures. Even if tests are unavailable for all students, the risks of in-person learning can be diminished through vaccination, grouping students in social pods, and requiring masks indoors. Under the guise of promoting the safety of students, union leaders had demanded working conditions that far exceed what’s necessary for them to do their jobs safely.

Lightfoot had warned that teachers who didn’t return to the classroom would be docked pay and face possible termination. The city also filed a legal complaint against the union for illegal labor practices. Biden should’ve stood unequivocally with the mayor in this dispute — and with Chicago’s students, who’ve already suffered far too many interruptions in recent years due to labor disputes.

Many including me wondered if Mayor Lightfoot would actually make good on her threats. Luckily for her she has been spared from being forced to do so. The editors turn to the national implications:

In the short term, Biden’s influence is largely limited to the bully pulpit. He can, however, do more to prevent unions in other districts from attempting to follow the CTU’s lead. At a minimum, federal education funds should be conditioned on how well school districts maintain in-person instruction — something Congress failed to do in last year’s $1.9 trillion Covid relief bill.

Over the longer term, curbing the power of teachers unions will require deeper reforms. The administration should push states to offer alternative forms of teacher certification, which would broaden the teaching labor pool and bring new talent into the profession. Districts should be encouraged to tie teachers’ pay to their performance — including how much time they spend in the classroom — rather than seniority.

Weak tea in my view. At the very least public employees’ unions should be banned from making political contributions, whether to candidates, parties, or causes. The status quo is an inherently corrupt arrangement in which tax dollars are being recycled into political contributions.

I completely support the right of teachers to organize and have labor representation. But that representation should not extend to being political actors.

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Which Is More Democratic?

Here’s another question in this question-filled day. Are uniform regulation of voting and central administration of elections more or less democratic than having them regulated and administered by the states?

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License for Perpetual Alarmism?

In his most recent New York Times column Ross Douthat tries to throw some cold water on the talk about civil war:

Thus we are told that some kind of major democratic breakdown is likely “absent some radical development” (as Beauchamp puts it); that we are already “suspended between democracy and autocracy” (as Remnick writes); that “the United States is coming to an end” and the only question “is how,” to quote the beginning of Stephen Marche’s new book, “The Next Civil War.” But then it turns out that the most obvious danger is an extremely contingent one, involving a cascade of events in 2024 — a very specific sort of election outcome, followed by a series of very high-risk, unusual radical choices by state legislators and Republican senators and the Supreme Court — that are worth worrying about but not at all the likeliest scenario, let alone one that’s somehow structurally inevitable.

Similarly, we are first told that “civil war” is coming, but then it turns out that the term is being used to mean something other than an actual war, that the relevant analogies are periods of political violence like the Irish Troubles or Italy’s “Years of Lead.” And then if you question whether we’re destined to reach even that point, you may be informed that actually the civil war is practically here already — because, Marche writes, “the definition of civil strife starts at twenty-five deaths within a year,” and acts of anti-government violence killed more people than that annually in the later 2010s.

That kind of claim strikes me as a ridiculous abuse of language. The United States is a vast empire of more than 330 million people in which at any given time some handful of unhinged people will be committing deadly crimes. And we are also a country with a long history of sporadic armed conflict — mob violence, labor violence, terrorism and riots — interwoven with the normal operation of our politics. If your definition of civil war implies that we are always just a few mass shootings or violent protests away from the brink, then you don’t have a definition at all: You just have a license for perpetual alarmism.

I’m not quite as dismissive as Mr. Douthat but I think the media and pundits are looking in the wrong direction. In Chicago alone there were nearly 850 homicides, 251 in just four neighborhoods (Garfield Park, Englewood, Austin, North Lawndale). 846 homicides places it on the order of the Falklands War. That is obviously “civil strife” by any reasonable definition but deeming it so or taking action to end the carnage are both taboo.

And I’m not at all dismissive of the breaching of the Capitol although I think that terming it an “insurrection” is reasonably considered, in Mr. Douthat’s words, a “license for perpetual alarmism”. For some it was undoubtedly an insurrection, for others defending the Constitution, and for still others it was a demonstration that got out of hand.

The question then becomes what to do about it? My answer, as usual, is lower the stakes. If you’re intent on changing the system radically, start with your hometown or your home state.

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Questions About the Pandemic

Today I am filled with questions about the COVID-19 pandemic. Let’s start with this report from the Associated Press by Maria Cheng and Carla K. Johnson, speculating about a possible peak in the number of COVID-19 cases in the U. S. within the next week:

Scientists are seeing signals that COVID-19′s alarming omicron wave may have peaked in Britain and is about to do the same in the U.S., at which point cases may start dropping off dramatically.

The reason: The variant has proved so wildly contagious that it may already be running out of people to infect, just a month and a half after it was first detected in South Africa.

“It’s going to come down as fast as it went up,” said Ali Mokdad, a professor of health metrics sciences at the University of Washington in Seattle.

Also in a round-up of articles about COVID-19 at Outside the Beltway Steven L. Taylor posts a very interesting graph of COVID-19 deaths for vaccinated and unvaccinated people (sampled from an article at SFGate). I recommend you click on over to take a look at the graph. Unfortunately, the legend is clipped off: the graph illustrates deaths in California.

Now my questions.

Will our experience parallel the United Kingdom and South Africa’s?

Our vaccination rate is roughly the same as the UK’s and our population is slightly younger although not as young as that of South Africa. We have some demographic similarities with each but also some differences. It’s presently summer in South Africa but winter in the United Kingdom.

Is California’s experience with vaccinations typical of the rest of the country?

California’s circumstances may well be unique. There are many, many differences in demographics, climate, and general health between California and Illinois, just to take an example with which I’m familiar.

Is there empirical evidence supporting the utility of an “additional” vaccination against COVID-19?

“Additional” vaccination is the terminology presently being used for a fourth vaccination. Third vaccination: booster. Fourth vaccination: additional. The CDC guidance presently recommends an additional vaccination for individuals who are severely or moderately immunocompromised, e.g. have blood cancer or some other depressing condition. Is there empirical evidence to support that? Or is it a guesstimate? If there’s no empirical evidence of additional benefit it would be an important finding.

I’m sure I could come up with other questions but that’s enough for right now.

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Temporizing

At the Center for Security Policy Peter Pry argues for a dramatic shift in U. S. foreign policy:

Washington must at least temporarily suspend its righteous fixation on “international law” and “international norms” to speak the only language that Russia and China understand—“might makes right.” The U.S. needs time to rebuild its nuclear, military, technological, and economic strength, and to find competent political-military leadership, so that, if necessary, we can win World War III.

Goodbye United Nations, welcome Metternich.

If you’re wondering who Metternich is, his name has become closely associated with “balance of power” geostrategy.

And if Dr. Pry’s advice sounds familiar, that might be because it’s closely aligned with what I’ve been promoting here for, well, decades. I suspect his advice will fall on deaf ears which will result either in U. S. foreign policy becoming a laughing stock or, worse, leading us into a nuclear war which we lose.

Consider this question:

How many millions will the U.S be willing to sacrifice for the sovereignty of nations that most Americans cannot find on a map?

I see it as another way of asking the question I have been posing: is it in the U. S. interest? It focuses unswervingly on cost-benefit analysis. I suspect that political leadership in Washington and New York would give different answers than people living in Omaha. They shouldn’t. A decapitating strike would undoubtedly target Washington and New York. I’d go for Los Angeles, too (media headquarters along with NY and DC).

Keep Will Rogers’s advice in mind. Diplomacy is the art of saying “nice doggie” while you’re looking around for a rock.

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Declaring Vindication

At UnHerd Thomas Fazi and Toby Green declare vindication:

In view of this, it seems obvious that the focused protection approach championed by the Great Barrington Declaration (GBD) — based on “allow[ing] those who are at minimal risk of death to live their lives normally to build up immunity to the virus through natural infection, while better protecting those who are at highest risk” — was the right course of action. It would have avoided inflicting needless pain on workers, women and children through repeated lockdowns, while arguably saving countless lives, by focusing first and foremost on the elderly and especially on nursing homes.

Naturally, the way in which this worked would have been very different in different settings. While in richer countries the resources and infrastructure were certainly available to direct policy in this way, in poorer countries with high Covid mortality and weak healthcare systems — such as Latin America, India and South Africa — the capacity of governments to offer focused protection was limited. Nevertheless, funds could have been used for this purpose, rather than to fund schemes such as contact tracing, which the WHO had specifically disbarred in all circumstances as a pandemic response in its aforementioned 2019 report.

Instead, countries such as Argentina, Colombia, Peru and South Africa have faced the catastrophe of both severe Covid restrictions and high Covid mortality. What has followed is the destruction of the livelihoods and access to food of tens of millions of citizens; a recent report showed that after almost two years, Covid restrictions have completely shattered the world’s informal economies, with 40% of domestic workers, street vendors and waste pickers still earning less than 75% of their pre-Covid earnings.

Unfortunately, their preferred political strategy, framing restrictions in terms of solidarity, was and remains impossible. If anything the politicization of the pandemic is increasing, with those who refuse vaccination being mocked for it and those who make mistaken or misinformed statements castigated as “liars”. My view, that the stakes must be lowered, will never be popular as long as politics is seen as a path to wealth and power.

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What Do You Mean “We”?

Right now we’re being deluged by TV spots by Illinois Gov. Pritzker’s re-election campaign. I find them droll in the extreme. Here’s the transcript:

You keep your word in Decatur, pay your bills in Bloomington, save for your kid’s future in Homewood. And the same is true in Peoria, Joliet, and all over Illinois.

Our government should act that way, too. But for years in Illinois, they left bills unpaid, ruined our credit, and racked up over $1 billion in interest penalties.

As governor, I was determined to help fix the financial mess. Now, Illinois is keeping its promises by passing real balanced budgets.

We’re cutting costs, paying bills on time, and paying down our debt, saving taxpayers hundreds of millions of dollars. And our credit rating has been upgraded for the first time in 20 years.

We’re on the right track, and I’ll work every single day to keep it that way. Because you deserve nothing less than a state that works as hard as you do.

Here’s what I find amusing: what does he mean by “they” in the passage “they left bills unpaid, ruined our credit, and racked up over $1 billion in interest penalties”? How many of “them” are still in office? Yeah, I know. Those that aren’t doing time or have been issued pardons.

Does he support “them”?

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Misunderstanding the Appeal of America

I think that the views expressed in Walter Russell Mead’s most recent Wall Street Journal on how China, Russia, and others view President Biden’s foreign policy:

Last week Russian troops fanned out across Kazakhstan; the Myanmar junta sentenced Aung San Suu Kyi to four more years in prison; and China transferred a senior official from Xinjiang to lead the People’s Liberation Army’s garrison in Hong Kong. Two things are clear. First, America’s geopolitical adversaries aren’t impressed by the Biden administration. Second, the administration’s attempts to make a priority of human rights and democracy have so far failed to reverse or even to slow the retreat of democracy around the world.

The Biden administration’s political fragility at home is partly to blame. But adversaries are watching more than American domestic politics; they see incoherence in American policy. The administration has signaled that balancing China in the Indo-Pacific, the promotion of democracy and climate policy are its overriding foreign-policy priorities. Our adversaries—and some of our friends—think that these goals can’t be pursued successfully at the same time. They conclude that American policy focused on incompatible objectives will ultimately fail.

miss something fundamental.

U. S. military power and diplomatic policy are both downstream from American economic strength. They are dependent on it. For us to have a “coherent” diplomatic policy as he puts it or for us to maintain and renew our military strength we must reindustrialize. Regardless of what some Americans seem to think people in other countries don’t aspire to American values. They want prosperity.

That’s the reason that people from practically every country in the world but particularly from Central and South America are willing to pay human smugglers enormous sums (by their standards) to bring them here. Note that’s not a problem that Russia, China, or Iran has.

For us to maintain the caliber of military we need to defend ourselves or have a foreign policy that anybody pays any attention to, we must rebuild our economic strength. We can’t maintain either of those as China’s biggest customer.

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