What caused the sharp rise in inflation in recent years? The mass mind of America’s elites is currently deciding the “answer”. The chilling quotes are necessary because America’s elites largely exist in an elaborate, hermetically sealed fantasy world – trading flattering stories with each other in the columns of The New York Times and at their dreary dinners and parties. only slightly less gloomy orgies until they settled on various stories about the world. These stories often have the downside of being 180 degrees the opposite of reality. But they still have the advantage of telling the powerful that they’re super nice and deserve more money.
During this time, a recent post by Thomas Ferguson and Servaas Storm of the Institute for New Economic Thinking looks at the question of inflation without parties, orgies, etc. It has the advantage of focusing on the real world. However, it has the main drawback – at least in terms of penetrating the fortified minds of the people who run America – of telling them that they are not nice and deserve less money.
A troubling finding from Ferguson and Storm is that some of the recent inflation can be attributed to climate change. This is very bad news. First of all, this is a problem that will not only not go away, but will only intensify. Second, it’s easy to imagine a future in which right-wing parties around the world cite severe bouts of inflation as a reason to put them in power, where they prevent action on global warming, thus making inflation worse. , again and again in a vicious circle.
The answer to the current inflation question boils down to whether it happened through a demand shock (a sudden increase in demand), a supply shock (a sudden decrease in supply) or a combination of the two.
The story now freezing on the American opinion pages is that it was a demand shock, caused by the government and the Democrats. In particular, the American Rescue Plan Act passed in March 2021 simply made ordinary people too rich and therefore free to spend with reckless abandon. Larry Summers, Secretary of the Treasury in the Clinton Administration and Director of the National Economic Council in the White House under Barack Obama, published this warning while writing the ARP:
Normally, a family of four with a pre-tax income of $1,000 a week would bring in about $22,000 over the next six months. Under the Biden proposal, if the breadwinner were fired, the family’s income over the next six months would likely exceed $30,000.
The “can you imagine” tone here is remarkable. Ordinary families bringing home $30,000 in after-tax income in just six months! Obviously, normal humans who earn a little more money violate the laws of economics and therefore invite the punishment of the inflation gods. (Summers is listed in his speaker’s office as be available to explain all this for a fee of “$100,000 or more”.) The only answer to a problem created by the government giving people too much money is for the Federal Reserve to bludgeon the economy until the unemployment rate is rising – thus taking money back from all the nurses and firefighters who have flown too close to the sun of prosperity.
Ferguson and Storm strongly disagree. They point out that “nearly 90% of cumulative pandemic relief spending” took place in June 2021. In fact, in the second quarter of 2021, combined tax and spending policies across all levels of government – local, state and national – were actually subtracting demand from the economy. Yet inflation only picked up in the second half of 2021 and only really kicked off in 2022.
So government aid to ordinary people doesn’t seem to have created a demand shock, in which everyone took their checks and started spending them on goods and services that the economy couldn’t produce.
But, argue Ferguson and Storm, there was actually a demand shock — but not worker demand. From the first quarter of 2020 to the first quarter of 2022, they note, overall personal wealth in the United States increased by $26.1 trillion, largely due to the surge in the stock market. Forty percent of that increase went to the top 1%, and another 33.4% to the next 9%, meaning about three-quarters of the increase went to the 10th richest American. And in late 2021, Ferguson and Storm write, “affluent Americans came out in force and started spending.” The economy could not generate enough supply for what the rich wanted to buy. But the best solution for this kind of imbalanced demand would have been progressive consumption taxes rather than largely slowing the economy via the Fed.
Next, Ferguson and Storm detail four supply shocks – that is, problems that would have generated inflation even if the government had never sent relief to ordinary people.
One was rising energy prices, largely caused by the war in Ukraine. Another was rising corporate profit margins. A third was the shrinking workforce due to Covid-19, as Americans were killed or disabled by it, retired to avoid it, or were forced to resign to care for workers. children because childcare has become virtually impossible to find.
Finally, import prices increased, due, among other things, to “the [Ukraine] war and climatic disasters. On climate, they point to reports from Swiss Re, one of the largest reinsurers in the world, i.e. the companies that provide insurance to insurance companies. They are the last financial defense in the event of a disaster and are therefore deeply concerned about the costs of climate change.
Swiss Re estimates total economic losses from natural disasters in 2021 and 2022 to be $292 billion and $260 billion, respectively, well above the average of $207 billion over the previous 10 years. There is currently a “trend of an average annual increase of 5-7% over the past decade” in insured losses. A Swiss Re newspaper quotes an executive with the title of “disaster risk manager” who says global warming is one of the “key factors at play”. Climate change, writes the company, “presents the greatest long-term risk to the global economy.”
Ferguson and Storm explain that while they “are cautious about extrapolating recent studies indicating unusually high rates of loss from natural causes during pandemic years… [t]The very hot temperatures of 2022 in particular are a warning.
Their rational, in-depth examination of the past culminates in rational suggestions for what to do in the future. They ominously describe the world as facing “a future of branching supply shocks”, explaining that “the brave new world of supply shocks is likely to stay here indefinitely”.
This means we need to focus on the underlying reality of financial machinations rather than the financial machinations themselves. For example, there should be a new effort to eradicate Covid-19 and prepare for future pandemics. Every effort should be made for international cooperation rather than letting the war in Ukraine be a harbinger of the future.
And because diseases and wars will thrive in a warmer world, we absolutely must do all we can to stop climate change.
In other words, if Ferguson and Storm are correct, controlling inflation will require governments in the United States and elsewhere to be nimble, sophisticated, and willing to ignore their own elites – an extremely difficult task. But if we want to avoid enormous suffering and a reactionary policy, this is what is needed. A first step will have to be ordinary people ignoring their elites and investigating these complicated matters on their own – and we could all do much worse than start here.