How is 2021 inflation like 1946 inflation?

Posted on by

Economic advisers Cecilia Rouse, Jeffery Zhang, and Ernie Tedeschi write,

The period right after World War II potentially provides the most relevant case study, as the rapid post-war inflationary episode was caused by the elimination of price controls, supply shortages, and pent-up demand.

But in 1946 government spending was headed down. In the 1950s, the government was running large primary surpluses (tax revenues were higher than non-interest government spending). Today, it is completely different.

[UPDATE: I listened to Niall Ferguson, and near the end of the interview he says that the best historical analogy is with the 1960s, when inflation started out low and ended up at 6 percent. Then came the 1970s.]

8 thoughts on “How is 2021 inflation like 1946 inflation?”

  1. What is the reasoning for focusing on primary surpluses rather than the overall deficits? Debt increased by about $29 billion (about 11%) from 1950 to 1960.

    • What is the reasoning for focusing on primary surpluses rather than the overall deficits? Debt increased by about $29 billion (about 11%) from 1950 to 1960.

      Primary surpluses matter because if the only reason your debt is increasing is because of interest accrual, if you keep your other spending below your income, the interest accrual will eventually go away. (assumes your interest cost does not start out so enormous that by itself it is explosive)

      The increase in debt from 1960 to 1970 was miniscule relative to the increase in nominal GDP over that period, which nearly doubled. So the ratio of debt to GDP fell a lot. Again, if that were to continue, eventually the debt would disappear.

      https://www.econlib.org/archives/2010/04/us_government_d.html

  2. “But in 1946 government spending was headed down”. It’s headed down now too. Sure the fiscal 2021 to fiscal 2022 spending decrease is not quite projected to be as big a share of GDP as the one from fiscal 1946 to fiscal 1947 was, but it will be larger than any of the years since

    • Headed down, perhaps, but most certainly not into the territory where we would be running a surplus. We would have to cut Federal spending nearly 50% to start into surplus territory. (Something like cutting out 47% at the time I write this.) I am all for that, but I don’t see it happening. Especially since a lot of the emergency spending seems like the sort of stuff that needs to spent on year over year. Even without that though, we would have to drop down to ~2013 levels of spending to simply break even (according to https://www.whitehouse.gov/omb/historical-tables/ and assuming 2021 tax revenue looks like 2019).

      I am afraid that I am not optimistic about that.

  3. Suppose the US runs at 3 to 4% inflation for a few years and then drifts down into the high 2% rate.

    The Reserve Bank of Australia targets and inflation rate between 2% and 3% and seems to have had success with that formula.

    BTW, higher inflation seems limited to the US at present. China, Japan and Southeast Asia are all below inflation targets. Europe just reported under 2%.

    Deficit spending and “loose” monetary policy may lead to inflation, but hasn’t done so for much of the global economy.

    India is running some inflation. Are there similarities between the US and India?

    • The five year yields 0.8%.

      What is the real return on that if we average 4% inflation over the next five years?

Comments are closed.