The Fed’s job is to insure an appropriate level of demand. On occasion, it may be appropriate for inflation to exceed 2% for a period of time due to supply issues. But that’s no excuse for excessive growth in nominal spending. When inflation is higher than it should be for demand side reasons, it is always 100% due to bad monetary policy.
And now Vox tells us that economists are now talking about “corporate greed”? Seriously?
If anyone wants to know how we got in this mess, it’s right there in Klein’s question. Kudos to Ezra Klein for being willing to reconsider his views when new information comes in. But the passionate desire to “run the economy hot” in a misguided belief it would help workers is precisely how we got into this mess. Jay Powell and all the other the run the economy hot people wanted it to be true that the 1960s never happened. (Recall how Powell cited 1965 as a successful soft landing!) But the 1960s did happen, and could happen again if the Fed doesn’t wake up.
The interview is quite long and worth reading in its entirety. Summers makes many of the points I’ve been making, and he recognized the inflation problem well before I did.
At one point the discussion turns to what the Biden administration could do to slow inflation. Summers points out that they could do a few things at the margin, but their actual policy has been almost the exact opposite, to reduce aggregate supply and make the problem worse:
LARRY SUMMERS: Mostly the tools are pretty limited. And the tools that there are, are tools that the Biden administration has so far been very reluctant to adopt. If we reduce tariffs, that would make more goods available at lower prices and perhaps reduce the Consumer Price Index by 1 percent or more. But their rhetoric has gone the other way on tariffs.
If we decided to do public procurement as inexpensively as possible, that would reduce prices of a whole set of things the government buys and increase competitive pressure. But we’ve instead indicated a desire to shift from buying cheap to buying America and buying in ways that protect certain key constituencies.
If we decided to do public procurement as inexpensively as possible, that would reduce prices of a whole set of things the government buys and increase competitive pressure. But we’ve instead indicated a desire to shift from buying cheap to buying America and buying in ways that protect certain key constituencies.
These policies would not reduce aggregate demand, but by boosting aggregate supply they would make the “appropriate” inflation overshoot of 2% smaller than otherwise (from a dual mandate perspective.)
If we could just stop talking about inflation and focus on NGDP growth then all of these concepts would be so much easier to explain. The language of macroeconomics is such a complete mess.
100% of excessive inflation is due to bad monetary policy - TheMoneyIllusion