(This continues “fiscal tidbits.” The post got too long for substack. Tidbits are turning into a banquet.) Supply shocks? Where did the 2021-2023 inflation come from? Leaving aside silliness such as “greed,” “monopoly,” “price-gouging,” and “shrinkflation,” the serious debate is between “supply shocks” and “relative demand shocks” (more goods, less services) vs. fiscal excess. As blog readers will know,
Hi John, one question: When you talk about NK models featuring MV=PY and hence supply shock being accommodated by money supply increase, I wonder if more important was change in velocity? E.g. the 2022 inflation surge in Europe following the invasion was met with increase in interest rates and slowdown in money growth, while velocity increased. (Obviously one could argue that it was the strong money supply growth previously was the cause of the inflation; I am just wondering about the role of velocity here).
If I understand your arguments correctly, you claim that the recent inflation was caused mainly by government intervention. You dismissed greedinflation as silliness. Given that high inflation also occurred in countries with small or no government stimulus, your conclusions are either wrong, or you should be able to explain inflation in those countries.
Hello! Just wondering which countries you are referring to. I suspect those countries still probably had a significant jump in their money supply. Is this correct?
Thank you for this but I disagree. Inflation in 2021-23 resulted from our government putting $6 trillion in unearned spending power in the hands of consumers when there were not nearly enough products on the shelves at current prices and supply lines were broken. It was inevitable that prices would rise to clear the market. First, shortages, then inflation. Workers struggled to keep up, but remember that they already got $6 trillion in free money. (Why everyone has ignored the breathtaking fraud and waste is a mystery to me.) See
Disagreements are good. However, please note that people lost jobs during COVID pandemic. The purpose of the stimulus was to replace lost earnings. If I lose my job paying, e.g. $5000 a month, and get $5000 from the government, my spending will not increase. One major problem with John's theory is that he will not be able (he has not even tried) to explain sharp increases in corporate profits (some tripled) during the pandemic.
I am not saying that COVID payments weren't necessarily the right thing to do. I'm just saying they were way overdone and inherently inflationary. To use your example, If you lose your job and your $5,000 income is offset with a government payment, your nominal spending power will be the same, but the economy will still lose $5,000 in production (assuming your pay reflected your marginal product.). I was flabbergasted that economists could not see this at the time. In 2020, US real GDP dropped 3.5% while real personal disposable income ROSE 4%. Except much of that income was not really real, and would need to be inflated away.
I don't want to be a distraction in the middle of your debate, but I have to disagree with your sentiment that "workers lost jobs during COVID."
Workers gave up jobs and utilized robust government assistance or they stayed and were given huge raises due to the lack of supply of good labor.
My experience is anecdotal, but supported by many other business owners: in January of 2021 when things were finally coming back to life, I needed to hire and I couldn't find people. I would post a job and get about 20 responses/applications, and then 5 might call back after being contacted. Of the 5, 3 would accept the job, and maybe 1 would show up for the onsite interview. It was crazy, until one applicant gave away the game -- they were only meeting the requirement for unemployment to be "looking for a job and get an interview" to receive benefits. They would show the proof and then go back to receiving both state and federally subsidized unemployment, which actually made them more money than when they worked! This went on until the feds stopped subsidizing unemployment.
During this entire time, the Fed was befuddled as to why inflation was persisting. It was "transitory" because they envisioned that the labor markets would correct. Well, they didn't (which is another topic).
My point is that the price of products needed to rapidly incorporate heavily increased wages to meet the demand at the time (which was ferocious). This wasn't "greedflation" but a natural response to both overheated labor markets and an overheated demand situation. When I did find people, I had to raise the hourly wage by 40% to 60% over pre-pandemic rates just to get people, and not event the best people. Combined with the government subsidies and I easily met the demand. Most everyone else I knew in the business world was responding to and doing the same thing.
Greedflation certainly played a significant role. Those dang workers kept greedily demanding higher incomes rather than sacrificing for the common good.
Hi John, one question: When you talk about NK models featuring MV=PY and hence supply shock being accommodated by money supply increase, I wonder if more important was change in velocity? E.g. the 2022 inflation surge in Europe following the invasion was met with increase in interest rates and slowdown in money growth, while velocity increased. (Obviously one could argue that it was the strong money supply growth previously was the cause of the inflation; I am just wondering about the role of velocity here).
If I understand your arguments correctly, you claim that the recent inflation was caused mainly by government intervention. You dismissed greedinflation as silliness. Given that high inflation also occurred in countries with small or no government stimulus, your conclusions are either wrong, or you should be able to explain inflation in those countries.
Hello! Just wondering which countries you are referring to. I suspect those countries still probably had a significant jump in their money supply. Is this correct?
One example is Poland. Government intervention was substantially smaller than in the US, but inflation was higher. There is a good paper on the causes of inflation here: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi5o5n28IWGAxX8FBAIHZ3lC_84MhAWegQIBxAB&url=https%3A%2F%2Fscholarworks.umass.edu%2Fcgi%2Fviewcontent.cgi%3Farticle%3D1348%26context%3Decon_workingpaper&usg=AOvVaw0CWLeMr9-x5HXtdSU9xYY3&opi=89978449
Thank you for this but I disagree. Inflation in 2021-23 resulted from our government putting $6 trillion in unearned spending power in the hands of consumers when there were not nearly enough products on the shelves at current prices and supply lines were broken. It was inevitable that prices would rise to clear the market. First, shortages, then inflation. Workers struggled to keep up, but remember that they already got $6 trillion in free money. (Why everyone has ignored the breathtaking fraud and waste is a mystery to me.) See
https://charles72f.substack.com/p/aint-nothin-but-a-party
Disagreements are good. However, please note that people lost jobs during COVID pandemic. The purpose of the stimulus was to replace lost earnings. If I lose my job paying, e.g. $5000 a month, and get $5000 from the government, my spending will not increase. One major problem with John's theory is that he will not be able (he has not even tried) to explain sharp increases in corporate profits (some tripled) during the pandemic.
I am not saying that COVID payments weren't necessarily the right thing to do. I'm just saying they were way overdone and inherently inflationary. To use your example, If you lose your job and your $5,000 income is offset with a government payment, your nominal spending power will be the same, but the economy will still lose $5,000 in production (assuming your pay reflected your marginal product.). I was flabbergasted that economists could not see this at the time. In 2020, US real GDP dropped 3.5% while real personal disposable income ROSE 4%. Except much of that income was not really real, and would need to be inflated away.
I don't want to be a distraction in the middle of your debate, but I have to disagree with your sentiment that "workers lost jobs during COVID."
Workers gave up jobs and utilized robust government assistance or they stayed and were given huge raises due to the lack of supply of good labor.
My experience is anecdotal, but supported by many other business owners: in January of 2021 when things were finally coming back to life, I needed to hire and I couldn't find people. I would post a job and get about 20 responses/applications, and then 5 might call back after being contacted. Of the 5, 3 would accept the job, and maybe 1 would show up for the onsite interview. It was crazy, until one applicant gave away the game -- they were only meeting the requirement for unemployment to be "looking for a job and get an interview" to receive benefits. They would show the proof and then go back to receiving both state and federally subsidized unemployment, which actually made them more money than when they worked! This went on until the feds stopped subsidizing unemployment.
During this entire time, the Fed was befuddled as to why inflation was persisting. It was "transitory" because they envisioned that the labor markets would correct. Well, they didn't (which is another topic).
My point is that the price of products needed to rapidly incorporate heavily increased wages to meet the demand at the time (which was ferocious). This wasn't "greedflation" but a natural response to both overheated labor markets and an overheated demand situation. When I did find people, I had to raise the hourly wage by 40% to 60% over pre-pandemic rates just to get people, and not event the best people. Combined with the government subsidies and I easily met the demand. Most everyone else I knew in the business world was responding to and doing the same thing.
The government provided the money for it all.
For the benefit of casual readers.
IPCA is the benchmark inflation index observed by the Central Bank of Brazil.
Greedflation certainly played a significant role. Those dang workers kept greedily demanding higher incomes rather than sacrificing for the common good.