The deepest anxieties of inflationary hawks


After rising consumer prices in the first quarter of the year, commentators already wringing their hands on inflation have now doubled their stance. But the economic arguments used to justify such fears simply do not stand up to scrutiny.

June 7, 2021 | James K. Galbraith

In a recent comment by The Washington PostFormer US Treasury Secretary Lawrence H. Summers said that “the consumer price index rose at an annual rate of 7.5%” in the first quarter of 2021. I have not been able to reproduce this figure from the Bureau of Labor Statistics website CPI-U, which reports a year-over-year increase (April 2020 to April 2021) of 4.2%, mostly due to a strong rebound from 49.6 % of gasoline prices after their pandemic crash. If we exclude food and energy prices, last year’s inflation rate is only 3%.

“Inflationary pressures are mounting due to the increased demand created by the $ 2 trillion and more in savings that Americans accumulated during the pandemic; large-scale Federal Reserve debt purchases, as well as the Fed’s forecast of virtually zero interest rates through 2024; about US $ 3 trillion in fiscal stimulus measures passed by Congress; and soaring stock and real estate prices.

It’s a strange logic, starting with the conjecture that savings cause inflation. John Maynard Keynes argued the opposite: excess savings are withdrawn from demand, causing unemployment. And Summers’ own neoclassical school normally considers high savings to be a good thing, because it supports low interest rates and leads to more business investment. As far as I know, no economist has ever suggested that saving, as such, causes inflation.

Likewise, while it is true that when the Fed buys unwanted private debt, mainly from banks, sellers obtain liquidity, protecting them from losses they might otherwise have suffered, this protection has no direct connection. with their lending habits. As economist Hyman Minsky has pointed out, banks grant loans when they have creditworthy customers. They do not lend their reserves and do not need reserves to lend.

Next is the claim that the Fed’s forecast for future low interest rates are inflationary. In fact, the Fed’s interest rate forecast hinges on its inflation forecast, and its current stance is that it expects price pressures to be transient, and will respond by raising rates if this turns out to be false. If the Fed had agreed with Summers on future inflation, it would have said so in its inflation forecast; forecasting interest rates does not have an independent role.

Summers then referred to the US $ 3 trillion in fiscal stimulus already enacted. But some US $ 2 trillion is stored in private savings at the moment, so this point is redundant with the first. Finally, he mentions “the soaring stock and real estate prices”. Yet we did not hear such warnings from him in the late 1990s, when he was Secretary of the Treasury during a massive stock market boom. And rightly so: the boom did not cause inflation to increase.

What is really at work here? Summers may be simply trying to revive the old concept of the Phillips curve, that as unemployment falls, wages – and therefore prices – rise. But if this model ever existed, it disappeared 50 years ago, and even the slowest economists largely abandoned the Phillips curve in the mid-1990s. Since then, almost every new job in the United States has been created in the service sectors, where “tight” labor markets have little effect on wages and none on consumer prices.

What’s more, today’s US labor markets aren’t even close to tight. The employment-to-population ratio is still at least four percentage points lower than it was a year ago, and it appears to be flattening after a sharp rebound. This means that there are still around five million people who worked in 2019 but are not working today. The reasons are unknown. Maybe the employers did not want them back or the jobs offered are not very good. Maybe they’ll come back later – this year or beyond – when the buffer provided by all those savings runs low.

So what is it that drives Summers’ fear of inflation? When an economist of his stature makes such specious claims, one can only wonder if he has something else on his mind.

Of course, there are real price risks. One of the main ones is financial speculation – in oil, metals, timber for building houses, etc. It is not uncommon for financial players to increase their prices by withdrawing these products from the market at the start of a boom. (The Chinese know this and duly suppress the hoarding of copper and other metals.)

Another risk would emerge if the Fed followed the advice of the inflation hawks. For most businesses, interest is a cost like any other, and an increase in that cost would, in part, be passed on to consumer prices. Interestingly, Summers doesn’t mention any of these, which could be mitigated by tight regulation of the financial sector – and, of course, not raising interest rates.

But deeper concerns may lurk beneath the surface of Summers’ essay. One concerns those $ 2 trillion in savings. Thanks to out-of-pocket payments and the extension of unemployment insurance, a good chunk of that went to working-class households – the first big change for many of these families in decades. Having a little extra cash might make them less likely to borrow – and therefore less dependent on banks. Workers might even demand higher wages, creating the “labor shortage” Summers talks about (at least temporarily). More generally, when people have a little financial cushion, they are more difficult to manage.

A second source of concern can be spotted in Summers’ call for “clear statements that the United States wants a strong dollar.” It is the secret anguish of men who have hard money, a lot of insecurity who fear that their position on the world totem pole is not entirely secure. Maybe they are right. Today’s dollar-centric world reflects the power alignments of the period between the end of World War II and the end of the Cold War in 1989. American power has since eroded, opening up the possibility that the world monetary system could one day change.

It might not happen anytime soon. But if and when the time comes, it will stem from decades of decline, better strategies pursued elsewhere, the self-inflicted wounds of the Reagan, Clinton and Bush eras, the sacrifice of America’s industrial base in the 1980s, the fragility of the world order that emerged in the 1990s, and the military excess of the 2000s. Against all of this, a few “clear statements” won’t mean much.

James K. Galbraith is Professor of Government and Chair in Government / Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin. From 1993 to 1997, he was chief technical advisor for macroeconomic reform to the State Planning Commission of China.

Copyright: Project union


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