“And that’s the catch. In an era of strong wage growth, surging inflation, and record demand for workers, we’re still seeing an unexpectedly slow rate of workers returning to the labor market. The best and fastest solution to the problem would be to rapidly expand immigration opportunities, which have been severely curtailed by pandemic-era policies.
During the pandemic, pundits put forth three main arguments on why people weren’t returning to work: aversion to being exposed to COVID-19, insufficient child care, and overly generous relief programs. These considerations should be in the rearview mirror by now. With readily available vaccines and boosters, the risk of COVID-19 infection for the typical worker has been minimized. Most schools resumed in-person classes by last fall, primary school children have had access to vaccines since November 2021, and schooling interruptions from COVID-19 variants have faded away. Meanwhile, nearly all pandemic relief programs that would reduce a worker’s need for a paycheck have expired.
But there’s still a marginal case for each of these explanations. Around 2.7 percent of the U.S. population (up to 7 million potential workers) is immunocompromised. Because they face a higher risk of severe illness from contracting COVID-19, that threat may still inhibit them (or their household members) from reentering the workforce. Similarly, children under the age of 4 still can’t receive COVID-19 vaccines—causing some parents to keep their children away from group child care services. It’s quite possible that there is a bit of a chicken-and-egg problem, where the reduced supply of workers limits the amount of child care a nursery school can provide, thus making it harder for parents to take on a job.
And some pandemic relief programs remain in effect, which may, at the very least, be indirectly reducing the labor supply. The federal Emergency Rental Assistance (ERA) program still has almost $20 billion out of an initial $46.5 billion to spend. Applicants can receive up to 18 months of rental assistance, including payments for previous and future housing costs. Recipients can also reapply for additional assistance. March data from the Treasury Department show that the program distributed $2.2 billion to anywhere from 305,000 to 514,000 households. Assuming that no household was double dipping in the two rounds of the ERA program, this averages out to a $4,200 payment per household.
Similarly, the number of borrowers seeking loan repayment relief has significantly increased since the onset of the pandemic: The proportion of federal student loan borrowers opting for loan forbearance grew from under 10 percent to over 50 percent in 2020 and has remained there since.
Both rental assistance and loan forbearance would diminish the pressure a worker would feel to return to work, but there hasn’t yet been an estimate of these programs’ effect on labor supply. Perhaps in response to such concerns, the governors of Nebraska and Arkansas have declined most future ERA funding.
However, the larger contributors to the dramatically reduced labor supply are likely the increase in people retiring and the decrease in immigration.”
“When California passed a massive boost in its minimum wage six years ago so that it would eventually reach $15 an hour, the law included a component that tied the minimum to inflation levels. If inflation starts getting too high, the law forces a mandatory increase in the minimum wage.
This week, Gov. Gavin Newsom’s budget director, Keely Martin Bosler, announced that the massive inflation America is seeing is going to force the minimum wage in the state to automatically increase to $15.50 next January. The law requires this automatic adjustment if the inflation rate grows past 7 percent. The Los Angeles Times reports that it’s possible that the minimum wage might rise by another 50 cents if inflation continues.
Bosler, of course, sees only the positive here, saying it will help poor families pay for the higher food prices we’re all enduring: “They have a huge impact to those families that are living off of those lower wages and their ability to cover the cost of goods.””
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“ising wages during this time frame is natural, but it’s also worth noting that California’s unemployment rate continues to be higher than the national average, sitting at 4.9 percent. Just four states and Washington, D.C., have a higher unemployment rate. According to data from California’s Employment Development Department, almost every county in California has higher unemployment rates than the average, and some are running more than twice the national average. Two counties—Colusa and Imperial—have double-digit unemployment rates.
At the same time, businesses have also been hit hard by inflation, and those that operate on tight margins (retail stores, restaurants, and pretty much every small business) are going to have new struggles. Combined, inflation and a higher minimum wage will make it difficult for these businesses to take on new employees and keep the ones they already have.”
“Writing in The Wall Street Journal, the president outlined three policy choices to deal with an inflation caused, he seems to believe, largely by pandemic-related supply-chain obstructions and intensified by the war in Ukraine. His plan is simple: Continue to trust that one of the main architects of our current inflation, Federal Reserve Chairman Jerome Powell, will raise interest rates fast and high enough to tame inflation without crashing the economy, dispense more subsidies and tax credits, and let the deficit melt away—by some miracle—without cutting spending.
Absent from the piece is any acknowledgement of what readers of this column know all too well: that inflation was fueled by Biden’s own reckless spending policies, especially the $1.9 trillion American Rescue Plan passed in March 2021. Half a dozen or so studies have shown that fiscal policies implemented during COVID-19 are a main culprit behind today’s inflation. Biden also fails to mention the Fed’s overly accommodating monetary policy and its current slow response to inflation.
In other words, the president’s argument is amazing for its tone-deafness, inconsistent thinking, and sheer economic ignorance.”
“According to the U.S. Census Bureau’s supplemental poverty measure, the stimulus payments moved 11.7 million people out of poverty in 2020 — a drop in the poverty rate from 11.8 to 9.1 percent. And the 2021 poverty rate was estimated to fall even further to 7.7 percent, per a July 2021 report from the Urban Institute. We don’t know yet whether this came to fruition, but Laura Wheaton, a senior fellow at the Urban Institute and one of the analysts behind the 2021 numbers, told us that it was clear from their analysis that the stimulus checks were driving a dramatic decline in poverty.
More broadly, the stimulus checks also cushioned workers during one of the worst economic crises in modern history, which likely helped the economy bounce back in record time. In April 2020, when Americans were receiving the first round of checks — up to $1,200 with the CARES Act — the unemployment rate was at a disastrous 14.7 percent. But two years later, it’s almost returned to its pre-pandemic levels, with many job openings. “I hope we don’t forget how awesome it was that we supported people so well, and that we recovered as quickly as we did,” said Tara Sinclair, a professor of economics at George Washington University.
However, there is also evidence that the stimulus, especially the last round, likely stoked higher and higher prices for the very people it was intended to help. Though global supply chain issues (and, more recently, the war in Ukraine) have been significant drivers of inflation, the divergence between U.S. and European inflation suggests there’s more to it than that. In fact, a recent analysis from researchers at the Federal Reserve Bank of San Francisco found that the stimulus may have raised U.S. inflation by about 3 percentage points by the end of 2021.”
“Inflation is a general rise in the cost of goods and services. It can occur for two reasons: an increase in the supply of money relative to the supply of goods or an increase in demand for goods relative to supply. While not all price increases are evidence of inflation—prices also fluctuate based on supply and demand—a sustained increase in prices across the board is evidence that one of these phenomena is at play.”
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“Biden’s big spending bills weren’t enacted immediately. The ARP wasn’t signed until March 2021, and much of its spending occurred over several months. Likewise, the Infrastructure Investment and Jobs Act—another commonly cited source of inflationary pressure—didn’t pass until last November, and its spending won’t peak until 2026. Plus, a study by the Chicago Federal Reserve found that the ARP alone can only partly explain recent inflation.
Those findings shouldn’t be a surprise, because significant spending was underway before Biden ever made it to the Oval Office. Even before the Coronavirus Aid, Relief, and Economic Security (CARES) Act—the most expensive bill signed by Donald Trump—the federal government was spending unprecedented amounts due to COVID-19. This act included cash payments to most Americans, housing assistance, boosted unemployment checks, and a pause on student loan repayments, which was recently extended by Biden. These actions may have been necessary at the time, but such policies began under Trump and are contributing to inflationary pressures now.
Putting the pandemic aside, Trump spent extravagantly, spending more in four years than President Barack Obama did in eight. While Biden may be fanning the flames of inflation, Trump collected the kindling and lit the match.
Not that Democratic policies would have been better. They pushed for more generous “enhanced unemployment,” flooding states with cash, and near-permanent stimulus payments to parents. While only some of their ideas were enacted, the cash distributed didn’t disappear, and neither did additional spending by many blue-state governors.
And while the 2020 election happened alongside increasing prices, an expansion of the money supply occurred long beforehand. This is important because one cannot understand inflation without considering the Federal Reserve. No president controls interest rates or dollars in circulation: Jerome Powell and the Federal Open Market Committee do. And Powell admitted last year that they got inflation completely wrong.
The Federal Reserve isn’t the only central bank at fault. Just as worldwide governments spent generously on pandemic relief, the threat of recession made central banks across the world hesitant to raise interest rates in response to rising prices. The European Central Bank has kept rates consistent since early 2016. Meanwhile, the United Kingdom raised rates to where they were pre-pandemic, but like the Federal Reserve, the Brits lowered interest rates during the last two years.
Cheap credit might be appropriate when economies face unexpected shocks, but it becomes a problem once demand roars back. But even if central bankers and other policymakers weren’t following each other’s lead, there’s further reason to expect inflation to be spiking now.
Inflation in the Eurozone sits at 7.5 percent, and price levels in the United Kingdom look similar. To an extent, these phenomena occur independent of the U.S.—it’s ridiculous to suggest Biden’s inauguration sparked inflation nearly 3,600 miles away. But just as Russia’s war can impact the price of gas and wheat, the United States, too, can export inflation across the globe in an interconnected economy.
Breakeven inflation is now the highest it’s been in the 21st century, but blaming any one person or policy only captures part of the economic picture. In reality, many actions—some recent and some dating back five years—primed the pump and escalated a worldwide run-up in prices.
Just as no one person caused our current predicament, it’s unlikely any one person can solve it. Inflation will only abate when the pandemic ends, central banks roll back easy money policies, the private sector increases production, the supply chain stabilizes, and, yes, governments finally undertake more responsible levels of spending.”
“Over the course of the pandemic, the Treasury Department issued roughly $6 trillion, $2.7 trillion of which was monetized by the Federal Reserve. Americans were sent $5.1 trillion through various programs, including individual checks and unemployment bonuses. Overall federal debt has since risen by about $6 trillion.
This response assumes the 2020 recession was sparked by a demand shock leading to a fall in aggregate demand, rather than the strangling of aggregate supply caused by the pandemic and lockdowns. Under these circumstances, sending people and companies money was never likely to impact output. Instead, it greatly inflated demand for the durable goods still being produced.
Even by the Keynesian economic standards that prompt this sort of fiscal response, COVID-19 relief was larger than any “output gap”—the difference between what the economy is producing and the most it could produce. In March 2020, the gap was $2.3 trillion, and that year alone, the government spent $3 trillion through several relief bills.
In March 2021, Democrats passed the over-the-top $1.9 trillion American Rescue Plan. At the time, the projected output gap was $700 billion through 2023—the period when most of the spending would take place. As such, the bill was two or three times too big, especially considering the economy was mostly reopened and growing, with unemployment dropping fast from 14.8 percent the year before to 6 percent.”
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“Today, several new studies confirm that this bout of inflation is rooted in demand, not supply. That’s not to say supply-chain chokepoints, originally resulting from the global shutdown imposed by governments and a sudden shift away from services toward goods, played no role.
However, we wouldn’t have such large-scale supply-chain problems without the shutdowns followed by the aforementioned government-fueled increase in demand for durable goods. According to Robert Koopman at the World Trade Organization, artificially inflated demand accounted for as much as two-thirds of supply shortages.
Second, global supply chains are, obviously, global. If inflation were truly the product of supply-chain issues, we would witness roughly the same rates of inflation throughout the industrialized world. But we don’t. Most industrialized countries have lower levels of inflation than the United States. These other countries also implemented significantly lower amounts of COVID-19 spending.”
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“Today, all prices are rising, including wages (though for now at a lower rate), and the inflation is persistent. This is because of overblown fiscal and monetary policies. Tackling the problem requires strong Fed actions and significant fiscal restraint by Congress. Short of both, inflation will persist for much longer, inflicting disproportionate harm on the most economically vulnerable.
This also means that the recent calls to offset inflation with subsidies for gas, housing, child care, and more will require borrowed money. Since fiscal largesse is the source of the problem, and since these efforts make the affected markets more inefficient, the approach raises the risk of a great stagnation spiral.”
“Inflation is at a 40-year high in the United States and accelerating around the globe. The situation may very well get worse before it gets better, as Russia’s war on Ukraine stands to exacerbate price pressures, as does a new round of lockdowns in China due to Covid-19.
Among economists and experts, there’s no strict consensus about what exactly is to blame. There are certain factors widely agreed upon that we’ve been hearing about for months: supply chain woes, rising oil prices, shifting consumer demands. These concerns have hardly subsided. But there are other arenas where there’s more disagreement, such as the role government stimulus has played in increasing prices, and the possibility that corporate greed is an important factor.
There’s also no clear agreement on what the solution is. The Federal Reserve is starting to make moves to try to tamp down inflation, but it’s going to take time for that to have an impact. It’s still uncertain how aggressive the Fed will be or what risks those fixes could pose for the broader economy. The White House is trying to combat price increases, but there’s not really a ton it can do.
“They’re actually doing the right thing, they just don’t have many tools,” said Jason Furman, a Harvard economist and former adviser to President Barack Obama. He said one thing they can do and are doing is to be “realistic in leveling with people” that of course they don’t like inflation, and this isn’t a problem that will solve itself overnight.
While a lot is unknown, one thing seems pretty clear to most: Much of this is the result of factors that have been brewing for quite some time; some back to the start of the pandemic, many even longer. As for when it will be over, we’re likely to be in this situation for a while.”
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“As much as many people say that they feel bad about the economy right now, the economy is actually pretty decent. Unemployment is relatively low, many people still have quite a bit of money to spend, and the recovery, in a lot of ways, looks pretty solid. But again, therein lies part of the problem: People have money to spend, but not so many places to spend it. “There are multiple things that are happening all at once right now. The pandemic is still going on, we still have supply chain bottlenecks around the globe, parts of the economy are getting up to speed,” Amarnath said.”
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“Expectations play a role here — when everybody thinks inflation is happening, then businesses start charging more and workers start charging more money to compensate, which makes the whole thing worse.
“Once you have inflation, there’s some self-perpetuation of it,” Furman said. “There’s some passthrough of wages to prices, and some passthrough of prices to wages. Inflation expectations matter.””
“Partisans in the inflation battle frequently fail to acknowledge that their stories are not mutually exclusive. If public policy boosts demand while production bottlenecks hamper supply, there is no question about what happens to prices—up they go. Digging further into the debate provides additional reasons to eschew confident assertions.
Orthodox economic theory says fiscal and monetary stimulus can increase total spending, or what economists call aggregate demand. We’ve certainly had lots of both. The American Rescue Plan Act, signed into law by President Joe Biden on March 11, 2021, had a top-line figure of $1.9 trillion. Expansionary fiscal policy, meaning increased government spending to boost output and employment, requires deficit spending, because financing outlays with taxes blunts the effects on aggregate demand.
At the same time, the Fed’s balance sheet has surged. Total assets held by the central bank grew from roughly $4 trillion in early 2020 to $8.9 trillion as of late January. Driven by these asset purchases, the M2 money supply—cash, checking accounts, and “near monies,” such as savings accounts and money market mutual funds—grew from $15.5 trillion in early 2020 to more than $21.6 trillion today. So Americans definitely have more money to spend.
It is also true that fiscal and monetary expansion don’t boost supply of the goods people might want to buy with that money. Widespread COVID-prevention policies threw a wrench into the economy’s gears. Transportation gridlocks on sea, on land, and in the air make production and distribution harder. Major inputs, such as semiconductors, are frustratingly scarce. There are also frictions in labor markets, such as recently boosted unemployment benefits and union disputes over vaccine mandates. The combined effect is rising prices, independent from demand considerations.
A supply-and-demand double whammy could explain inflation. But both stories have problems.
On the demand side, all that stimulus might not be as expansionary as it appears. “We know from experience that budget deficits, by themselves, are not very inflationary,” writes Scott Sumner, the doyen of the market monetarist school, in his new book The Money Illusion (University of Chicago Press). Sumner cites the absence of major inflation during the Reagan and Obama administrations, both of which presided over growing budget deficits.
Nor was money especially loose during the early stages of the pandemic. As the money supply ballooned, the velocity of money—its average rate of turnover—cratered. People held on to that extra money. According to data from the Federal Reserve Bank of St. Louis, money demand increased by 22.5 percent from the fourth quarter of 2019 to the first quarter of 2020. Velocity remained depressed as the money supply continued growing. Since supply outpaced demand, monetary conditions did loosen. But Fed policy did not open the liquidity floodgates, as many initially supposed.
As for the supply of goods, congested production and slowed distribution clearly are making inflation worse. But this explanation is prone to just-so stories. Supply conditions vary greatly by sector. Aggregate data, constructed to get a fuller picture, is not as clean on the supply side as on the demand side.
We also have to consider politics. Behind the inflexible insistence that supply problems matter most lies a possibly partisan reluctance to indict policy makers and technocrats.
The doves are down, but they are not out for the count. Market inflation expectations peaked in mid-November. As of January, bond traders forecast 2.8 percent per year for the next five years, meaning they are not convinced runaway inflation is our destiny. “Predictions are hard, especially about the future,” a wise man once said. Much will depend on how fast supply constraints loosen and Fed policy tightens.”
“At the time I wrote my July 2021 piece, “Don’t worry about inflation,” a prescient copy editor noted that this headline might look bad if I was wrong and inflation got increasingly worse. I responded that I stood by it, and if I was wrong, I would write a groveling follow-up piece.
So here we are.”
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“I unfairly dismissed the most boring, Econ 101 explanation for why inflation happens: that there was too much money sloshing around for the amount of stuff the economy was able to produce — meaning the price of that stuff went up.”
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“Past stimulus checks during non-pandemic episodes have been disproportionately spent on durable goods, rather than services, suggesting that the stimulus checks might have accelerated this phenomenon just as the virus did. And because prices of goods tend to be less “sticky” than prices of services (meaning they tend to rise and fall more easily), this especially contributed to inflation.
This surge in spending led to big, well-publicized shortages in certain areas, most famously cars, as demand for durable goods outstripped the economy’s ability to produce them (sick workers limiting production was a factor, too, if a smaller one). That provoked localized price spikes on a few goods. And because oil producers slowed production in expectation of a big post-Covid recession, they too struggled to keep up with demand, so gas prices rose — which Putin’s invasion of Ukraine only worsened.
For a while, many commentators thought you could wave off inflation fears by saying it was just limited in a few sectors. But at this point, an “inflation in a few places” theory doesn’t really fly.
Some goods, like oil and cars, have specific narratives like a chip shortage or low drilling that could explain inflation. But as Bloomberg’s John Authers has detailed, inflation is still rising even if you exclude those goods. The Dallas Fed’s “trimmed mean” inflation measure, which purposely removes “outliers” where prices are rising extremely fast or extremely slow from the data, started to shoot up recently, too.”
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“Due to a combination of rapidly growing wages through all of 2021, plus trillions in government fiscal support, there has just been too much money around combined with insufficient goods and services to spend it on.
That’s led to not just inflation but accelerating inflation, as wage increases contribute to price increases and higher expectations of future inflation contribute to higher immediate inflation. That’s why you’ve started to see inflation in categories beyond just gas and cars. It’s a situation similar to what NAIRU would predict, except I would argue it’s not really about low unemployment.”