“Much of the income that was saved over the past 18 months was created at the stroke of a pen by government “stimulus.” In my story, as people spend this paper wealth, we will see inflation.”
Prof. Kling, I’m surprised at you. This kind of prima facia logical thinking has no place in current MMT economics theory or practice. How could someone of your expertise and stature make such a mistake? If I might provide a suggestion, please read some of the lesser-known giants in the MMT practice group, Prof. David Copperfield Ph.D. and Mssrs. Seigfreid & Roy et al.
Arguably, this is a very MMT way of thinking. MMT doesn’t accept that government financing constraints are real, but there are real resource/inflation constraints. MMT recommends tax hikes to drain excess demand when inflation starts to rise. That part just isn’t as popular with politicians.
Funny you mention that, because MMT, and the inflation that it causes, are a tax. They’re just not called that.
And ‘taxes’ are rising….the more you know!
Low rates -> increase asset prices -> capital gains tax, property tax, etc.
When my house goes up in value 20%, so do my property taxes.
My county charges a property tax on vehicles too. That’s a lot less than real property tax, but with newer cars it can be pricey.
Now, with houses, people are used to seeing the property tax go up each year because of appreciation, and so inflation’s contribution isn’t really salient.
But with vehicles, people are use to seeing those taxes go down steadily, especially during a car’s first few years when they usually lose most of their new value.
This year, however, because of the shortage of chips and used cars, car prices are up so much that it has overwhelmed the usually rapid depreciation.
And so people’s cars actually went up in nominal prices, despite being a year older and having all that extra wear-and-tear on them. So, the taxes went up too.
That’s driving people nuts, and they are not being shy about expressing themselves. And so the country is trying hard to communicate why it’s happening, but most people seem to think they are just making excuses for another stealth tax increase. People don’t like inflation, sure, but they don’t like taxes either.
Not how it works in California…
Please be patient. Prop 13 will get repealed eventually. BTW – how are those income and sales taxes treating you over there?
You seem to be pretending to not understand English. “What is the U.S. interest in attacking mainland China?” is a question about the second definition of “interest” in some dictionaries; not the definitions that mean “attention” and “the expense of a loan”.
–“The Fed won’t let inflation happen”–
Inflation has already happened, the only question is how long it persists and what will be necessary to quell it. The hope is that it is due to temporary supply constraints. But how temporary are those constraints? Used car prices are high due to low new car production, but the chip shortage is making new car production difficult and this is expected to continue into 2022. There’s a record number of unfilled jobs out there, how many workers are going to live with the normal corporate 2% wage bump in a time of high job vaccines and 5% measured inflation? It’s certainly not a given that inflation falls back to 2% next year.
The CPI is at 5.4% YoY, including hedonic adjustments, and with a make-believe owner’s equivalent rent rising at something like 2% when actual home values are up double digits. Economists may talk all they want about how including house prices capture “investment value”, but at the end of the day, our paychecks need to enable us to be able to pay for actual real estate on the market, not some hypothetical rent to ourselves. Include actual housing, and CPI is up probably closer to 8% YoY. Arguably, some metric for stock prices should be included as well, as they are the primary means of saving for most people. If stocks are highly valued, then to achieve a target future balance, more will have to be saved. It’s entirely possible that the answer to the question of “how much more do you need vs. last year to earn to stay on the same track with your consumption and financial goals” is as high as 10%.
–“are you short the long bond?”–
Bond yields are whatever the Fed wants them to be, and there’s no guarantee of success even if Arnold is right about inflation.
Suppose a new variant emerges next month which is more deadly and we go through another round of lockdowns/supply crunches, with more government stimulus as the response. Despite the upward pressure on prices in this scenario, does anyone think that the Fed would let the long bond rise in that environment?
“ There’s a record number of unfilled jobs out there, how many workers are going to live with the normal corporate 2% wage bump in a time of high job vaccines and 5% measured inflation?”
Shouldn’t that job churn raise productivity growth? I suspect that the companies that can pay higher wages are more efficient. Workers quitting inefficient businesses to go work at more productive ones should tend to hold inflation down. Isn’t this what we are seeing a bit with restaurant groups? They are closing down their least profitable restaurants to ensure that their most profitable restaurants are adequately staffed.
I don’t know about the net effect of job churn on productivity, but there’s probably some optimal level of it. While more efficient companies can pay higher wages, there are also companies that are pretty equivalent but need to poach staff from competitors when they experience turnover and have to pay whatever the market price is for it.
There are definitely some costs to churn. If a firm wants to keep its turnover down in a tight labor market, wages will need to be higher (either doing it in advance to make job searching less attractive, or beating the +20% or +30% offers from other firms). There is also considerations of firm specific human capital, in which employees may end up less productive when they start at a new company as they have to learn new software, figure out how to navigate the politics of a new organization, etc.
In my own case, I’ve been in my current position for a decade and I know how to do it very well. If I left for another job, initially I’d be less capable at that job, and my replacement would, again initially, be less capable than I am now. This holds for any sort of churn in our organization: when someone leaves, it takes about 6 months to replace them, and 12-18 months to train them up to be particularly useful. If more experienced people left, then it might take a year or two to find and hire experienced replacement. Even with experience, that person may take another year or two to get comfortable with all that has changed relative to his old firm. For important clarity, I work in a hyper-specialized field that Garrett Jones would label organizational capital, so our jobs don’t directly generate any output and our experience probably doesn’t generalize that well.
An incredible amount of paper wealth was created by low rates. Cowen seems to think that if the Fed needs to raise rates to stave off inflation everyone is going to tolerate the massive decrease in asset prices that would accompany that.
Back in 2008 we got to see what happens when lots of houses end up under water. If mortgage rates go back to their pre-pandemic levels that should in theory destroy the entire nearly 20% run up in prices we’ve seen.
I think we’ve seen the greatest run up in things like housing because the 30 year mortgage allows ordinary people to do something about their inflation expectations on rent. I can’t really do much about my inflation expectations on anything else (milk and eggs expire if I buy too many) and I don’t trust TIPS because that is the fox guarding the henhouse.
Bonds don’t predict inflation, they react to it. Just look at their track record.
One does wonder if the exact same criticism couldn’t have been made in the late 1960s. “The bond market isn’t predicting long term inflation” would have been an accurate view but wouldn’t have done your investment portfolio any favors.
I do the shopping for my household most of the time (like 99%), and I keep the receipts for the year since TN is a non-income tax state. Now, the sales tax totals have never been high enough to make itemizing worth it, but they have come within shouting distance one year. When buying groceries for the week, I almost exactly buy the same things in the same quantities week after week (and have done so for the last 3 years since my father passed away in 2018), and the exact same things on an averaged basis over any 3 month period. (some things don’t need replacing except on a monthly scale). My average weekly tab for the 2019 was $121, for the last 3 months it has been over $160/week and was $170 yesterday. I haven’t substituted out to lower cost brands because I already generally buy the lower cost alternatives as a routine procedure. I doubt this 40% increase in 2 years is temporary.
FRED series CPIFABSL (CPI food and beverage) says the 2 year change is 7.4% (July 2019 to July 2021). Maybe look for alternative grocery stores and see if your 40% two year inflation experience still holds.
I am saying the CPI calculation is full of it. I have 4 grocery stores within five minutes of here- there are no real differences in prices, just brands.
Too large a stock of saved wealth To the extent excess wealth has been saved by the 1%, then it’s not gonna get spent anytime soon. It will get passed down to heirs and non-profits. Thus it will not contribute significantly to inflation.
“Price level dynamics and money supply processes are murky, at least in recent times.” This is true. I used to think that there was some magic book that I hadn’t yet read that would explain how the whole thing works. But I’ve come to believe there is no such book, and nobody understands how money is created or how big the money supply is. A corollary of this is that the Fed doesn’t understand it either, which means they have no real control over either the money supply or interest rates. Another corollary is that however you want to measure the money supply, nothing on the Fed balance sheet should count.
The Fed not understanding money supply does not imply it does not have control over it.
The median voter hates inflation but what does the median voter think about taxing private wealth? That may depend on whether the median voter is affected by a proposed tax and whether the median voter is rich or poor. Wealth in USD per adult in Australia was published as… mean 483K, median 238K. The numbers from the U.S. are… mean 505K, median 79K. Maybe the median in the U.S. is poor-ish.
“Much of the income that was saved over the past 18 months was created at the stroke of a pen by government “stimulus.” In my story, as people spend this paper wealth, we will see inflation.”
Prof. Kling, I’m surprised at you. This kind of prima facia logical thinking has no place in current MMT economics theory or practice. How could someone of your expertise and stature make such a mistake? If I might provide a suggestion, please read some of the lesser-known giants in the MMT practice group, Prof. David Copperfield Ph.D. and Mssrs. Seigfreid & Roy et al.
Arguably, this is a very MMT way of thinking. MMT doesn’t accept that government financing constraints are real, but there are real resource/inflation constraints. MMT recommends tax hikes to drain excess demand when inflation starts to rise. That part just isn’t as popular with politicians.
Funny you mention that, because MMT, and the inflation that it causes, are a tax. They’re just not called that.
And ‘taxes’ are rising….the more you know!
Low rates -> increase asset prices -> capital gains tax, property tax, etc.
When my house goes up in value 20%, so do my property taxes.
My county charges a property tax on vehicles too. That’s a lot less than real property tax, but with newer cars it can be pricey.
Now, with houses, people are used to seeing the property tax go up each year because of appreciation, and so inflation’s contribution isn’t really salient.
But with vehicles, people are use to seeing those taxes go down steadily, especially during a car’s first few years when they usually lose most of their new value.
This year, however, because of the shortage of chips and used cars, car prices are up so much that it has overwhelmed the usually rapid depreciation.
And so people’s cars actually went up in nominal prices, despite being a year older and having all that extra wear-and-tear on them. So, the taxes went up too.
That’s driving people nuts, and they are not being shy about expressing themselves. And so the country is trying hard to communicate why it’s happening, but most people seem to think they are just making excuses for another stealth tax increase. People don’t like inflation, sure, but they don’t like taxes either.
Not how it works in California…
Please be patient. Prop 13 will get repealed eventually. BTW – how are those income and sales taxes treating you over there?
You seem to be pretending to not understand English. “What is the U.S. interest in attacking mainland China?” is a question about the second definition of “interest” in some dictionaries; not the definitions that mean “attention” and “the expense of a loan”.
–“The Fed won’t let inflation happen”–
Inflation has already happened, the only question is how long it persists and what will be necessary to quell it. The hope is that it is due to temporary supply constraints. But how temporary are those constraints? Used car prices are high due to low new car production, but the chip shortage is making new car production difficult and this is expected to continue into 2022. There’s a record number of unfilled jobs out there, how many workers are going to live with the normal corporate 2% wage bump in a time of high job vaccines and 5% measured inflation? It’s certainly not a given that inflation falls back to 2% next year.
The CPI is at 5.4% YoY, including hedonic adjustments, and with a make-believe owner’s equivalent rent rising at something like 2% when actual home values are up double digits. Economists may talk all they want about how including house prices capture “investment value”, but at the end of the day, our paychecks need to enable us to be able to pay for actual real estate on the market, not some hypothetical rent to ourselves. Include actual housing, and CPI is up probably closer to 8% YoY. Arguably, some metric for stock prices should be included as well, as they are the primary means of saving for most people. If stocks are highly valued, then to achieve a target future balance, more will have to be saved. It’s entirely possible that the answer to the question of “how much more do you need vs. last year to earn to stay on the same track with your consumption and financial goals” is as high as 10%.
–“are you short the long bond?”–
Bond yields are whatever the Fed wants them to be, and there’s no guarantee of success even if Arnold is right about inflation.
Suppose a new variant emerges next month which is more deadly and we go through another round of lockdowns/supply crunches, with more government stimulus as the response. Despite the upward pressure on prices in this scenario, does anyone think that the Fed would let the long bond rise in that environment?
“ There’s a record number of unfilled jobs out there, how many workers are going to live with the normal corporate 2% wage bump in a time of high job vaccines and 5% measured inflation?”
Shouldn’t that job churn raise productivity growth? I suspect that the companies that can pay higher wages are more efficient. Workers quitting inefficient businesses to go work at more productive ones should tend to hold inflation down. Isn’t this what we are seeing a bit with restaurant groups? They are closing down their least profitable restaurants to ensure that their most profitable restaurants are adequately staffed.
I don’t know about the net effect of job churn on productivity, but there’s probably some optimal level of it. While more efficient companies can pay higher wages, there are also companies that are pretty equivalent but need to poach staff from competitors when they experience turnover and have to pay whatever the market price is for it.
There are definitely some costs to churn. If a firm wants to keep its turnover down in a tight labor market, wages will need to be higher (either doing it in advance to make job searching less attractive, or beating the +20% or +30% offers from other firms). There is also considerations of firm specific human capital, in which employees may end up less productive when they start at a new company as they have to learn new software, figure out how to navigate the politics of a new organization, etc.
In my own case, I’ve been in my current position for a decade and I know how to do it very well. If I left for another job, initially I’d be less capable at that job, and my replacement would, again initially, be less capable than I am now. This holds for any sort of churn in our organization: when someone leaves, it takes about 6 months to replace them, and 12-18 months to train them up to be particularly useful. If more experienced people left, then it might take a year or two to find and hire experienced replacement. Even with experience, that person may take another year or two to get comfortable with all that has changed relative to his old firm. For important clarity, I work in a hyper-specialized field that Garrett Jones would label organizational capital, so our jobs don’t directly generate any output and our experience probably doesn’t generalize that well.
An incredible amount of paper wealth was created by low rates. Cowen seems to think that if the Fed needs to raise rates to stave off inflation everyone is going to tolerate the massive decrease in asset prices that would accompany that.
Back in 2008 we got to see what happens when lots of houses end up under water. If mortgage rates go back to their pre-pandemic levels that should in theory destroy the entire nearly 20% run up in prices we’ve seen.
I think we’ve seen the greatest run up in things like housing because the 30 year mortgage allows ordinary people to do something about their inflation expectations on rent. I can’t really do much about my inflation expectations on anything else (milk and eggs expire if I buy too many) and I don’t trust TIPS because that is the fox guarding the henhouse.
Good WSJ video on a wine maker struggling to price his product. https://on.wsj.com/3zoKzqv?st=qcpfcwi292fwkwp&reflink=article_copyURL_share
“After I cited low ten-year securities yields…”
Bonds don’t predict inflation, they react to it. Just look at their track record.
One does wonder if the exact same criticism couldn’t have been made in the late 1960s. “The bond market isn’t predicting long term inflation” would have been an accurate view but wouldn’t have done your investment portfolio any favors.
I do the shopping for my household most of the time (like 99%), and I keep the receipts for the year since TN is a non-income tax state. Now, the sales tax totals have never been high enough to make itemizing worth it, but they have come within shouting distance one year. When buying groceries for the week, I almost exactly buy the same things in the same quantities week after week (and have done so for the last 3 years since my father passed away in 2018), and the exact same things on an averaged basis over any 3 month period. (some things don’t need replacing except on a monthly scale). My average weekly tab for the 2019 was $121, for the last 3 months it has been over $160/week and was $170 yesterday. I haven’t substituted out to lower cost brands because I already generally buy the lower cost alternatives as a routine procedure. I doubt this 40% increase in 2 years is temporary.
FRED series CPIFABSL (CPI food and beverage) says the 2 year change is 7.4% (July 2019 to July 2021). Maybe look for alternative grocery stores and see if your 40% two year inflation experience still holds.
I am saying the CPI calculation is full of it. I have 4 grocery stores within five minutes of here- there are no real differences in prices, just brands.
Too large a stock of saved wealth To the extent excess wealth has been saved by the 1%, then it’s not gonna get spent anytime soon. It will get passed down to heirs and non-profits. Thus it will not contribute significantly to inflation.
“Price level dynamics and money supply processes are murky, at least in recent times.” This is true. I used to think that there was some magic book that I hadn’t yet read that would explain how the whole thing works. But I’ve come to believe there is no such book, and nobody understands how money is created or how big the money supply is. A corollary of this is that the Fed doesn’t understand it either, which means they have no real control over either the money supply or interest rates. Another corollary is that however you want to measure the money supply, nothing on the Fed balance sheet should count.
The Fed not understanding money supply does not imply it does not have control over it.
The median voter hates inflation but what does the median voter think about taxing private wealth? That may depend on whether the median voter is affected by a proposed tax and whether the median voter is rich or poor. Wealth in USD per adult in Australia was published as… mean 483K, median 238K. The numbers from the U.S. are… mean 505K, median 79K. Maybe the median in the U.S. is poor-ish.