What aren’t we doing to fix inflation?
https://www.vox.com/the-goods/2022/10/31/23428781/inflation-federal-reserve-gas-prices-congress-biden
Tag: economy
The messy true story of the last time we beat inflation
“The monetary tightening inaugurated by Volcker was one part of an entire deflationary policy repertoire that also included union-busting and the creation of a global supply chain to hold down the costs of labor, components, and commodities.”
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“The Fed might be able to choke off credit to slow investment and job creation, but it can’t create the real-world political, legal, and logistical systems that in the past have kept prices down even amid economic growth.
To truly tame prices, we can’t just turn off the money hose. We have to plan for more concrete long-term solutions to a lack of labor, commodities, and goods.”
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“Volcker’s shock and central bank independence happened at the same time as Ronald Reagan’s anti-union effort; the emergence of New Democrats like Jimmy Carter and Bill Clinton, who were less sympathetic to organized labor than their New Deal and Great Society forebears; and the collapse of union membership across almost every sector of the economy except government. Volcker and his central banker colleagues were keenly aware of the importance of union power to increasing wages: The minutes of Fed meetings show that these policymakers fixated on the ability of unions to set wages even after many academic economists had moved on from the subject.”
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” Just as Volcker’s rate hikes coincided with a bipartisan anti-union push, so the rise of central banks paralleled the acceleration of globalization and the creation of a world-spanning super-efficient “just in time” supply chain. New logistics infrastructure, trade deals, and methods of inventory management allowed firms to get cheap commodities and components from the other side of the world astonishingly quickly. Globalization also reinforced the attack on unions, since it allowed businesses to move factories to countries with weaker labor laws, humbling labor leaders of industrialized economies. After the 1980s, and especially after the fall of the Soviet Union, markets began to integrate many formerly communist countries with large, well-educated — but poorly paid — workforces and ample natural resources. The creation of global supply chains depended in large part on a relatively calm geopolitical scene, with no serious confrontations between “great powers,” who generally seemed to be on the same page regarding globalization.”
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“It’s this model of globalization that is currently breaking down, leading to volatile rising prices. As anyone who has ordered a piece of furniture in the last two years can tell you, “just in time” has become a thing of the past. Instead of speedy manufacturing getting imported from any nation on earth, now we import their supply chain bottlenecks, as, say, plumbing component manufacturers in China hamstrung by that country’s “zero-Covid” policy hold up house completions in the United States.
While supply chain bottlenecks were widely predicted to ease in 2022, geopolitics got in the way. The Russian invasion of Ukraine and subsequent economic retaliation rocked global energy supplies, a particularly troubling economic disruption since energy is a vital component of nearly every product, and further poisoned relations between wealthy Western countries and Russia’s key ally, China, where so much of the stuff Americans buy is made. Instead of getting more cheap electronics from China, the world’s second-largest economy, the US is sanctioning the chip industry there.
If the Federal Reserve is largely removed from the internal dynamics of the labor market, it has even less to do with foreign policy and geo-strategic maneuvering.”
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“We don’t want policymakers to make the mistake of fighting the last war. If we leave inflation up to the central bankers rather than continuing the push for coordinated investments in cost-saving renewable energy and dense housing, or policies that reverse the shrinkage of the labor supply since the pandemic, we won’t so much beat inflation as resign ourselves to a poorer, less-resilient future.”
Biden’s New Industrial Policy Will Fail, Just Like Industrial Policy Always Fails
“When it was passed, the law provided subsidies for the construction of a domestic shipping industry, while imposing various employment rules and other shipping regulations. It has been amended in the century since, but it continues to prohibit foreign-flagged ships from traveling between U.S. ports, and many of its wage and labor regulations are still in effect, making it beloved, almost obsessively, by unions.
In at least one way, the Jones Act has served at least part of its intended purpose: It has benefited the domestic shipping industry by shielding it from foreign competition. But it has done so at considerable expense to everyone else.
By restricting and regulating shipping at America’s ports, the Jones Act considerably raises the costs of transporting goods, which in turn raises prices on everything from food to electronics to textiles. In good economic times, the Jones Act is a cost borne by the majority to bolster the fortunes of a few. In periods of global economic instability and high inflation, the Jones Act makes supply chain problems worse and drives prices even higher. On a daily basis, it is a force for impoverishment. ”
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“Just about any time one finds a politician taking credit for specific business decisions by specific companies, one ought to be skeptical, worried, or both. In this case, the proximate cause of much of Biden’s factory-jobs campaigning is the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act, a $52 billion package of industry subsidies Biden signed into law in August. Manufacturers who stand to benefit from these subsidies have played along, with Micron’s leadership saying that its facility is “the first of Micron’s multiple planned U.S. investments following the passage of the CHIPS and Science Act.” Micron, however, was publicly teasing the possibility of new manufacturing facilities as early as October 2021, long before the CHIPS Act became law.”
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“Just as the Jones Act ends up distorting the shipping industry, shaping it in ways that make it less flexible and less responsive to genuine consumer demand, we should expect the CHIPS Act to push the semiconductor industry into labor and production decisions intended to satisfy politically determined subsidy requirements rather than genuine market needs. Subsidies are more likely to incentivize inefficiency and dysfunction than genuinely useful production, inflating prices in the process. When subsidies are driving decisions, that means subsidy programs, not end users, are the true customer. “
Would a “Wealth Tax” Help Combat Inequality? A Debate with Saez, Summers, and Mankiw
Gavin Newsom Cites Dubious Evidence That His Lockdowns Saved California’s Economy
“The pandemic was a mass death event. It was also a very messy one for determining the effects of particular public policy interventions on COVID transmission, death, and economic performance. It’ll take years of research to get anywhere close to definitively answering big questions about what policies worked and what didn’t.”
Markets Aren’t Perfect, but Government Is Worse
“The free market’s price system, along with competition by sellers for customers and by consumers for good deals, play an essential role in gathering and processing the information about our economy that is dispersed among millions of buyers and sellers. The resulting prices are a measurement of how much people value goods and services.
In a well-functioning competitive market, this argument continues, these critical price “reports” tell us the most advantageous ways to use finished goods and services, intermediate goods, raw materials, and—importantly—human time and talent, and lead entrepreneurs to produce what we want most intensely as efficiently as possible. In economics terms, prices convey information about scarcities and about wealth-creating incremental substitutions.
It’s a mind-blowing system where, as French political scientist Frederic Bastiat reminded us decades ago, although no one plans it, “Paris gets fed daily.”
Enter Samuel Gregg and his wonderful new book, The Next American Economy. Gregg’s case for the free market goes beyond the classic economic argument.
He writes that “the case for free markets involves rooting such an economy in what some of its most influential Founders thought should be America’s political destiny; that is, a modern commercial republic.” He adds that “politically, this ideal embodies the idea of a self-governing state in which the governed are regularly consulted; in which the use of the state power is limited by strong commitments to constitutionalism, the rule of law, and private property rights; and those citizens consciously embrace the specific habits and disciplines needed to sustain such a republic.”
Yes! I like to believe I’m a great advocate for markets, but whenever I omit these last points, I sabotage my own case. For one thing, terms like “competitive markets” give the impression of a heartless process. But the most important aspect of this competitive process is cooperation.”
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“No serious free marketer believes that markets are perfect. We aren’t utopians. Unfortunately, perfect markets and perfect competition are often the starting point of economic textbooks. This rosy starting point leads many to conclude that when conditions are less than perfect, the best course of action for a correction is government intervention. It’s wrong.
Not only is government itself imperfect, as anyone can plainly see, but the market is a process to find and fix errors. A market imperfection is an opportunity for entrepreneurs to profit. As Arnold Kling recently wrote, “Markets fail. Use markets.” That’s because, Kling adds, “entrepreneurial innovation and creative destruction tends to solve economic problems, including market failures.”
This isn’t to say that the government plays no role aside from protecting property rights. But it means that faith in government intervention should be tempered with an acknowledgment of government’s own flaws, including a tendency to favor one group of people over another and an inability to adapt when policies fail or circumstances change.
The bottom line is that when we talk about the “free market,” it is a shorthand for a combination of institutions that allow people to cooperate, tolerate one another, live in peace, and flourish. As Gregg reminds us, all these elements are a quintessential part of what President George Washington envisioned for the new nation he led and described as “a great, a respectable & a commercial nation.””
What the 1970s Can Teach Us About Today’s Inflationary Politics
“Critics, including some economists associated with the Democratic Party, warned that Biden’s determination to go big could set off an inflationary spiral. Among the most prominent of those critics was Harvard economist Lawrence Summers, a former adviser to President Barack Obama, who in February 2021 wrote in The Washington Post that “while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability.”
Biden ignored Summers’ call for a substantially smaller bill. The president flatly rejected a Republican counteroffer that would have cut the bill’s cost to about $600 billion in more narrowly targeted pandemic relief. He offered no substantial criticism of the idea; he simply objected that it was too small.
There was no risk in overreach. The only danger was in doing too little.”
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” Is America of 2022 simply repeating the mistakes of the 1960s and 1970s? It isn’t a note-for-note remake, but it does feel rather like a remix, a collage of historically familiar elements rearranged and repackaged in an updated aesthetic. If there is a lesson to be learned from the inflationary drama of the recent past, it is that inflation is to some degree a policy choice, made for political reasons. And thus, as with Reagan in the 1980s, it has both policy and political consequences.”
When Sri Lanka Banned Synthetic Fertilizers, the Country Imploded
“Starvation. Poverty. People struggling to buy medicine and fuel.
Disaster happened after one government fell under the influence of the world’s environmental extremists.
Many “experts” say pure nature is best. United Nations officials now tell politicians that the climate “crisis” demands countries make all sorts of sacrifices, like cutting nitrogen waste.
Much of that waste comes from synthetic fertilizer, so activists applauded when Sri Lanka’s government decided to become the first country to really take their advice. Sri Lanka banned all synthetic fertilizers.”
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“Suddenly, the same farms produced much less food. Food prices rose 80 percent.
One result: riots. As my new video shows, thousands swarmed the president’s mansion. Some had a cookout on his lawn.
The president resigned and fled the country.
It turns out that we need chemical fertilizers.”
Biden Forgets That Workers Are Consumers Too
“Consider that supposedly worker-centric trade policy. Biden has left in place many of the tariffs imposed by President Donald Trump, including the levies on aluminum and steel. By artificially hiking the price of imported steel, those tariffs are supposed to boost domestic production, creating more and better-paying steelworker jobs. But the cost of the tariffs rebounds onto every industry that uses steel to make other products. While about 57,000 Americans work in steelmaking jobs, more than 12 million are employed in manufacturing jobs that use steel. The tariffs hurt those workers.
Even steelworkers suffer from the tariffs, which raise prices for cars, appliances, and a host of other products. The Peterson Institute for International Economics, a trade policy think tank, estimates that repealing those tariffs would put about $800 back in the average family’s pockets this year.
Biden also has decided to extend tariffs on solar panels and their component parts, which were due to expire this year. In theory, those tariffs promote domestic manufacturing. In reality, they have cost more than 62,000 jobs in the four-plus years since Trump first implemented them by sharply cutting the number of solar panels available for installation and service, according to the Solar Energy Industries Association.”
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“Trade and labor policies should not be worker-centric or consumer-centric. They should be market-centric, because trade and labor are both parts of a market system that benefits Americans as workers and consumers.”
How to make sense of the positive GDP report
“The US economy shrank in the first half of the year, but in the third quarter, it started growing again — which some economists say is an optimistic sign that the country isn’t in a recession now. But underlying factors show the economy is clearly slowing down, they say.
The country’s GDP grew at a 2.6 percent annual rate in the third quarter, according to Commerce Department data released on Thursday. The growth was mainly driven by trade: American companies exported more goods and services, and imports dropped. Meanwhile, key components of the report — consumer spending and residential investment — reflected weaker economic conditions.
Although the two consecutive quarters of negative GDP earlier in the year met a common but unofficial definition of a recession, many economists said at the time that the labor market was still strong and the country wasn’t yet in an economic downturn. Economists and forecasters have warned about a potential recession in the next year, however, as the Federal Reserve continues to raise interest rates to bring inflation under control.”
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“The labor market is still strong now. Employers have been adding hundreds of thousands of jobs to the economy each month and the unemployment rate stands at 3.5 percent, a half-century low. But economists say the data in the GDP report reflects an economy that is already cooling, and more pain is likely ahead.”