July 2nd, 2021

Repressing Labor, Empowering China

Cheap money will boost inequality and geopolitical tension but not inflation

Though the lockdown in 2020 threw many workers out of work, the big fiscal stimulus, fueled by government debt and an unprecedentedly large monetary expansion, offered stimulus checks and elevated unemployment benefits to millions of Americans. In 2020, US federal spending grew by 50 percent, making the deficit share of GDP the largest since 1945, and the M2 in the economy grew by 26 percent—the largest annual increase since 1943. Such fiscal and monetary expansion prevented a collapse in consumption. After an initial fall in Spring 2020, US household consumption bounced back and grew by more than 40 percent in the third quarter.

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June 24th, 2021

Preferred Shares

Inflation, wages, and the fifty-year crisis

In one of her first statements as Treasury Secretary, Janet Yellen said that the United States faced “an economic crisis that has been building for fifty years.” The formulation is intriguing but enigmatic. The last half-century is piled so high with economic wreckage that it is not obvious how to name the long crisis, much less how to pull the fragments together into a narrative. One place to start is with the distribution of national income between labor and capital (or, looked at another way, between the wage share and the profit share of national income). About fifty years ago, the share of income going to labor began to decline, forming a statistical record of the epochal collapse of working class power. Episodes of high employment in the 1990s and the late 2010s did not reverse the long-term pattern. Even today, with a combination of easy money and fiscal stimulus unprecedented since World War II, it is unclear what it would take to reverse the trend in distribution.

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February 13th, 2021

The Legend


The proposed Covid-19 stimulus package in the US has reignited debate around inflation. Much contemporary concern and discussion on the topic still bears the mark of the 1970s, the Volcker disinflation, and the past consensus around the relationship between unemployment and inflation.

In a recent paper, Jonathon Hazell, Juan Herreño, Emi Nakamura, and Jón Steinsson find evidence that points instead to the determining role of expectations around future monetary policy.

From the paper:

"The episode in US economic history that has perhaps most strongly influenced the profession’s thinking regarding the slope of the Phillips curve is the Volcker disinflation. In the early 1980s, Paul Volcker’s Federal Reserve sharply tightened monetary policy. Unemployment rose sharply and inflation fell sharply. The conventional interpretation of this episode is that it provides evidence for a relatively steep Phillips curve. The insensitivity of inflation to changes in unemployment over the past few decades has led many economists to suggest that the Phillips curve has disappeared—or is 'hibernating.' During the Great Recession, unemployment rose to levels comparable to those during the Volcker disinflation, yet inflation fell by much less. The 'missing disinflation' during and after the Great Recession then gave way to 'missing reinflation' in the late 2010s as unemployment fell to levels not seen in 50 years, but inflation inched up only slightly. A similar debate raged in the late 1990s, when unemployment was also very low without this leading to much of a rise in inflation. Some have argued that the apparent flattening of the Phillips curve signals an important flaw in the Keynesian model.

An alternative to the standard narrative of the Volcker disinflation is that the decline in inflation was driven not by a steep Phillips curve but by shifts in beliefs about the long-run monetary regime in the United States that caused the rapid fall in long-run inflation expectations. Volcker’s monetary policy constituted a sharp regime shift that was imperfectly credible at the outset but became gradually more credible as time passed. This regime shift led to a large and sustained decline in long-term inflation expectations over the 1980s but also a transitory rise in unemployment. Perhaps it was this large change in inflation expectations that was the primary cause of the rapid fall in inflation over this period rather than high unemployment working through a steep Phillips curve."

Link to the paper.

  • Employ America's Skanda Amarnath and Alex Williams blog on "Inflation: the good, the bad, the transitory." Link. And Tim Barker blogs on the present inflation discourse. Link.
  • "A puzzle emerges when Phillips curves estimated over 1960-2007 are used to predict inflation over 2008-2010: inflation should have fallen by more than it did." Laurence Ball and Sandeep Mazumder analyze inflation after the Great Recession. Link. And James Stock and Mark Watson probe the question of inflation forecasting. Link.
  • Two recent Phenomenal World essays on the topic: Yakov Feygin on "The Deflationary Coalition" and Andrew Elrod on "Inflation, Specific and General." Link, and link.
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January 22nd, 2021

Inflation, Specific and General

The many causes and effects of inflation

Concerns over a generalized “inflation” loom in the recovery. Yet the prices that most heavily factor into the cost of living for US workers—housing, health, and education—have already been rising for decades. The question we should be asking is whether the extension of the welfare state is the cure for, rather than the cause of, these trends.

Until 1980, the annual rate of change of the Consumer Price Index (CPI), the weighted measure of the cost of a basket of core consumer goods, increased at an accelerating pace in every business-cycle expansion, reaching double digits during the 1940s and 1970s. Inflation—its causes and consequences—was at the heart of economic debates throughout this period, when the discipline of macroeconomics took its current form. While we understand individual industry price changes in terms of supply, demand, and market power, our conceptual tools for understanding inflation remain weak.

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January 9th, 2021

The Deflationary Bloc

Living in Hyman Minsky's world

“An effective way to write the history of the last thirty years of the twentieth century,” economist Albert Hirschman wrote in 1985, “may well be to focus on the distinctive reactions of various countries to the identical issue of worldwide inflation.” Writing just as the global “great inflation” of the 1970s was abating, Hirschman could not have understood how right he was. As Claudia Sahm has recently written in the New York Times, the fear of the great inflation of the 1970s still dominates the thinking of the Federal Reserve, even as its recent messages indicate some acceptance of higher inflation.

Economists lack a good understanding of what causes inflation—and its inverse, deflation. In introductory macroeconomics curricula, Milton Friedman’s mantra “inflation is always a monetary phenomenon” remains central. By this, Friedman meant that excessive price growth happens when a state loosens the supply of money, thus over-expanding the monetary base. However, recent research

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July 10th, 2020

The Crisis and the Free Market

On crisis, partisanship, and public policy

Will the current crisis transform America’s politics and economic institutions? With unemployment higher than at any point since the Great Depression, rising food insecurity, and an increasingly muscular role for government—are we witnessing the beginning of the end of the four-decade-long era of the free market ushered in by Ronald Reagan? It’s a question worth considering, whether you’re a Democrat who blames the rising inequality of the last four decades on the policies of smaller government, or a Republican who thinks those policies saved America.

It wouldn’t be the first time a crisis has altered the trajectory of the country. The Republican Party of today is defined by its commitment to tax cuts, deregulation, and cuts in social spending. But prior to the Reagan administration, the Republicans were actually the party seen as most likely to increase taxes, because their main commitment throughout the post-war period had been to avoid deficits. The party was, in Newt Gingrich’s famous dismissal, the tax collector for the welfare state.

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March 25th, 2020

Tilted Ark


Wartime economic planning

This week, reports swirled regarding President Trump's invocation of the Defense Production Act—a 1950 law passed to manage production in the context of the Korean War—to meet the coming demand of crucial medical supplies to treat people with COVID-19. Much of the ensuing commentary has elided necessary distinctions between the Cold War–era DPA and the more memorable interventions into the productive capacity of the US economy that defined the Second World War. (For a helpful disaggregation, see this essay by Tim Barker; for a rundown of the DPA's history, see this summary from the Congressional Research Service.)

In his book, Arsenal of World War II (the fourth in a five-volume series on the political economy of American warfare), PAUL KOISTINEN provides a uniquely comprehensive and detailed account of the often misunderstood economics and administration of America's World War II mobilization effort.

From the book's introduction:

"An ironic legacy of the New Deal was that it helped create the partnership between corporate and military America that was destructive to reform. In the defense and war years, New Dealers took the lead in preparing the nation for World War II. Once hostilities ensued, the same reformers were at the center of devising the structure and controls essential for successfully harnessing the economy for war under stable economic conditions. Many of those same New Dealers became victims of the industry-military alliance that their mobilization policies and methods had assisted in bringing into being.

Despite advancement in weaponry, massive output was the critical World War II development, and that depended on successful economic mobilization policies. The political economy of warfare involves the interrelations of political, economic, and military institutions in devising the means to mobilize resources for defense and to conduct war. In each war, the magnitude and the duration of the fighting have dictated what the nation had to do to harness its economic power, but prewar trends have largely determined how this mobilization took place."

Link to the book page.

  • Mark Wilson's 2016 book, Destructive Creation, also on the business-government relationships that defined the World War II mobilization effort. Link.
  • A few recent articles on medical supplies: on the ventilator shortage; on mask production in China; on Taiwan's response to the virus; on the EU's plans to airlift masks; on China's increasing medical supply delivery to Europe.
  • From Otto Neurath's 1919 "War Economy": "The main result of our investigation may be expressed as follows: war forces a nation to pay more attention to the amount of goods which are at its disposal, less to the available amounts of money than it usually does." Link to Neurath's collected writings on economics.
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November 18th, 2019

The Banquet


The role of the state in economic development

Major accounts of the role of the state in economic development have held that the state is essential for ensuring private property rights—that democratic checks and balances encourage investment and therefore economic growth. Other schools of development stress the importance of promoting economies of scale and export oriented production. In these, the state takes on a far more active role in planning and coordinating investment.

In a remarkably comprehensive 2016 paper, PRANAB BARDHAN brings together disparate literatures to develop a more nuanced understanding of the state's role in economic development:

"Beyond being a 'nightwatchman' of property rights and markets, the state often needs to be a guide, coordinator, stimulator, and a catalytic agent for economic activities in situations where, for various historical and structural reasons, the development process has been atrophied and the path forward is darkened by all kinds of missing information and incomplete markets.

In general, different types of governance mechanisms are appropriate for different tasks. The state can provide leadership to stimulate individuals to interact cooperatively in situations where noncooperative interactions are inefficient. But the state officials may have neither the information nor the motivation to carry out this role. They may be inept or corrupt or simply truant, and the political accountability mechanisms are often much too weak to discipline them. We thus need a whole variety and intermixture of institutional arrangements to cope with the strengths and weaknesses of different coordination mechanisms, and the nature of optimal intermixture changes in the development process."

Link to the essay.

  • Acemoglu, Johnson, and Robinson's 2001 paper "The Colonial Origins of Comparative Development." Link. And Acemoglu, García-Jimeno, and Robinson's 2015 "State Capacity and Economic Development: A Network Approach." Link.
  • James Scott's 1999 Seeing Like a State examines failures of large-scale state development projects. Link.
  • In a paper from 1983, Bardhan draws on econometric evidence from cross-sectional data in rural India to challenge researchers in development economics to rethink the relationship between active labor markets and economic growth: "Contrary to its common characterization as a feudal relic and a symptom of economic stagnation tied-labor may actually be strengthened by capitalist agricultural development." Link.
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