Where Does Inflation Come From?

[walkitout]

Earlier this month, I wrote about where deflation comes from (https://walkitout.dreamwidth.org/1901322.html), as part of a diatribe against an Unnamed Because Awful book about the demographic sweet spot and inflation and so forth. I said deflation comes from chips, the chip shortage comes from delaying making additional production of chips (not NOW, recent historically) in order to avoid the damaging effects of deflation, and it’ll take 3 years to resolve during which time we will have some inflation but it won’t be structural.

The Fed (chair and many members) have been extremely persistent in saying, it’s fine, it’s fine, we’re not raising rates, we know that to get to our target rate we will have to overshoot, we’re paying attention, we see no indication of structural inflation. And yet, markets keep freaking out — and then calming down. Part of the freaking out process is when Economists Say Things, and a lot of Economists Saying Things basically amounts to, OMG there is SO much DEMAND out there! We’d better discourage this / definitely don’t make more! I’m not linking to any of these articles Because Awful.

Let’s sort through some possible frames for thinking about the size and scope and even the details of the American Rescue Plan or the proposed infrastructure bill: during war, we restructure our economy rapidly and produce damaging inflation because we have to win, and we can’t wait; when people are dying, we must act boldly, because the costs of inaction are far greater than any action we can contemplate; when a major demographic change is occurring, there will be significant impact on the economy, no matter what action we take or decide not to take. All of these frames point in the same direction. I will also note that the voices which successfully urged a moderate response to the Great Recession then turned around and said, gosh, why is this recovery taking so long?

Pandemic. Boomers moving out of big houses. With Kids moving into big(ger) living spaces. Reconfiguring cities to return them to historical norms (people live, work and play within them) vs. Bizarro World of our Lifetime (live in suburbs, work and play in cities, drive an hour plus a day going back and forth). Climate Change. Getting rid of paper.

Everyone knew that this was going to be difficult. Some people thought they could pretend it didn’t have to happen. (Roughly the same type if not the exact same people who urged moderation in response to the Great Recession.) Well, it’s happening. The quicker we build up the capacity to produce the necessary goods and services of our near-ish future, the quicker we can go back to worrying about deflation, and not enough demand. Stalling on infrastructure will not _worsen_ inflation. [ETA: That sentence was backwards!] Speedily Doing Infrastructure will not _worsen_ inflation. Upgrading infrastructure is the only way to avoid inflation grinding away at us for a decade or two, instead of 3 years.

And if we _don’t_ take bold action, Do All The Things, At The Same Time, everything we fear will come from doing all the things will happen worse, and all the people who urged the moderation we opted for will be puzzled why things are not getting better.

(Also, we’ve all seen how stalling on Climate Change has been going.)

Comments

[jinasphinx]

I remember you telling me years ago that there was a problem with U.S. economists, and this past year, I've certainly seen it. I have been appalled by their opining about what the FDA should do (Tyler Cowen) and what schools should do (Emily Oster), as well as their inability to value caregiving labor (all of them).

I cannot tell you how sadly gratifying your comment is

[walkitout]

I mean, I looooooovvvveeee people telling me, hey, I remembered this thing you said, and you know, I think you might be onto something.

But also, I am sooooooo sad that this is a Thing that we are Still Living With. Especially the total inability to value caregiving.