At Project Syndicate in providing his view of present inflation, Joseph Stiglitz largely echoes Alan Blinder’s views to which I linked earlier. Much of the piece consists of apologetics for the policy response that has taken place over the two years. These are good points:
The pandemic did expose a lack of economic resilience. “Just-in-time†inventory systems work well as long as there is no systemic problem. But if A is needed to produce B, and B is needed to produce C, and so on, it is easy to see how even a small disruption can have outsize consequences.
Similarly, a market economy tends not to adapt so well to big changes like a near-complete shutdown followed by a restart.
but, sadly, he does not provide any guidance on either subject. It takes him a while to get around to his “balanced response”:
A large across-the-board increase in interest rates is a cure worse than the disease. We should not attack a supply-side problem by lowering demand and increasing unemployment. That might dampen inflation if it is taken far enough, but it will also ruin people’s lives.
What we need instead are targeted structural and fiscal policies aimed at unblocking supply bottlenecks and helping people confront today’s realities. For example, food stamps for the needy should be indexed to the price of food, and energy (fuel) subsidies to the price of energy. Beyond that, a one-time “inflation adjustment†tax cut for lower- and middle-income households would help them through the post-pandemic transition. It could be financed by taxing the monopoly rents of the oil, technology, pharmaceutical, and other corporate giants that made a killing from the crisis.
I gather that he continues to belong to “Team Transitory”.
” “Just-in-time†inventory systems work well as long as there is no systemic problem. But if A is needed to produce B, and B is needed to produce C, and so on, it is easy to see how even a small disruption can have outsize consequences.
Similarly, a market economy tends not to adapt so well to big changes like a near-complete shutdown followed by a restart. ”
This is what one might expect from an academic, arguing for more redundancy as if an economy was being penciled into a textbook. It fails to acknowledge that competitors will compete to the fullest extent, eliminating that cost increasing redundancy because………………….consumers will choose lower prices and put you out of business if you don’t. You simply cannot design for those rare events, unless you shut down foreign competitors. And that means, most prominently, China. Good luck with that with this administration.
“We should not attack a supply-side problem by lowering demand and increasing unemployment. That might dampen inflation if it is taken far enough, but it will also ruin people’s lives.”
Bullshit. Inflation hurts me, and Mr Stiglitz, but it does not ruin my life or his. It does ruin the lives of the fixed income retiree, or the bottom 50%. Mr Stiglitz should be hung in the public square for such callousness.
His last paragraph is the usual academic/leftist BS. Government causes the problem, then gives us a Rube Goldberg solution designed to perpetuate the problem. Why do people listen to these idiots?
Inflation increased by 0.6% month over month in Jan. By definition to have inflation at the Fed projection of 2.6% (which is still over its long term target) for the remainder of 2022 must be less then 2%.
(i.e. Fed Projections are still way way off the map).
I will give a real reason why the Fed is constrained in raising rates. The Federal Governments debt’s average maturity is 65 months and the average rate is 1.75%. The market rate on 5 year treasuries is 1.92%. If the Federal Reserve raises interest rates from where it is now, the Federal Government will be paying significantly more in interest to rollover existing debt and to issue new debt.
If the Fed doesn’t monetize the increased cost, they must be covered by fiscal means — either raising revenue, cutting spending or most likely both. There is the option of issuing debt to pay interest but that would be… ill advised. I can imagine the reactions of Republicans and Democrats if they were told they need to pass tax hikes and spending cuts.
Yes, I noticed that, too. And I’ve pointed your additional point out many times, particularly in the context of “issuing debt to pay interest”. My concern is that’s where we’re heading.
Perhaps you remember my post pleading not to make me live through a pandemic AND hyperinflation?
Well, hyperinflation is a risk, but its not an imminent one.
I have read previous posts (from 10 years ago?) here about hyperinflation. They are correct that hyperinflation requires more then high debt to gdp ratio; it has a psychological component that requires massive loss of trust in government, usually participated by losing a major war.
One could argue the pandemic and the government response fits that psychological component required for hyperinflation; but given the pandemic is improving (and it is slowly); I don’t believe its a good fit (yet).
By the way. Congress has unusual influence over monetary policy right now.
I count 5 of the 7 Federal Reserve board positions are up for confirmation currently. If the Senate collectively wants to send a message — they can choose to reject all 5 nominees.