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This. Is the Keto Daily Podcast for

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Friday May seventeenth, Two Thousand Twenty Four

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on Cable Brown Narratives surrounding the post

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Pandemic inflation need to confront a few

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Heskey Fact Kind of is. David backwards

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provides many of them in his essay

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in the new book, the War on

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Prices Valuable Now. So

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David or know if you her. But

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we've had some inflation have recently and

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there is still this sort of lingering.

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nagging. Competing.

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Set of ideas about precisely

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what caused it. We've.

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Had. A big

0:44

spending government before. And.

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To. I think the surprise of

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a lot of economists we didn't

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see. A. Lot of inflation.

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Until. Twenty. Twenty One.

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And. That was. Right

1:00

in the wake of one

1:02

of the steepest, sharpest downturns

1:04

in employment in American history

1:07

and also massive new spending.

1:10

So. In. Relation

1:13

to. Are trying to

1:15

pin down. Causes. Of

1:17

the inflation that we've seen over the

1:19

last couple of years, where should we

1:21

begin? We'll. There are a number

1:24

of factors that contributed to the inflation surge

1:26

of Twenty One Twenty Two that you're referencing,

1:28

and we're still coming out on the other

1:30

side of it. But

1:32

the one that's probably not appreciated

1:34

as much as it should be

1:36

is fiscal policy and a complementary

1:38

role played by the Fed itself.

1:40

so are clearly there are supply

1:43

side disturbances. The pandemic shut things

1:45

down that makes things more scarce,

1:47

more expensive. But on top of

1:49

that, the Federal government added several

1:51

trillion dollars, and particularly the one

1:53

eight added and twenty twenty one

1:55

to twenty twenty. the economy shuts

1:57

down, the government keeps us alive,

1:59

barely. with checks and we can debate that

2:01

as well. But by 2021,

2:03

the economy was getting close to

2:05

full employment. The whole economy was

2:08

largely closed. And then under

2:10

ARP, President Biden added almost

2:12

$2 trillion more. And

2:14

the CBO at that time estimated it was only about

2:16

a $600 billion hole. So it's

2:18

just a question of timing. You fill in a

2:20

bathtub with water at some point, you keep filling

2:23

in water, it's going to overflow. So $2 trillion,

2:25

$600 billion hole. This

2:27

inflation from the demand side from

2:29

fiscal policy was bound to happen. Let's

2:32

understand this at its most basic level.

2:35

The economy turning along in

2:37

2019 and early 2020, a

2:41

sudden massive decline in

2:44

all manner of economic activity

2:47

coupled with massive new spending, lots of

2:49

people with cash in their pockets, but

2:52

for the most part, nothing to do

2:54

with it. There weren't

2:56

a lot of opportunities to go on vacation

2:58

and consume a lot of things. Why

3:01

2021? Why not late 2020 for the inflation? In late 2020, we

3:03

were still recovering from the sharp

3:11

collapse in the economy. So one way

3:13

to think about this is to look

3:16

at total spending in the economy. It

3:18

actually crashes through the floor in 2020.

3:20

So if you're kind of falling along,

3:22

think of a trend path where the

3:24

total dollar spent are flowing and

3:26

it crashes. So we would expect inflation to

3:28

go down. We would expect pressures on prices

3:31

to decrease. And that's what happened. People were

3:33

nervous. They had a lot of uncertainty. What

3:35

was going to happen? Even though

3:37

they were receiving payments from the federal government

3:39

during this time, there was still

3:42

uncertainty and also just some people lost

3:44

their jobs too. So it was maybe

3:46

filling a hole, but in 2021, we

3:48

were well past that. And then to be clear,

3:50

we can debate 2020, I think fairly

3:54

and lengthy about what actually

3:56

happened. And by 2021, I think

3:58

the debate should be settled terms

4:00

of what pushed inflation up.

4:02

So again, I don't want to

4:04

say there was nothing from the

4:06

supply side because clearly there was,

4:09

but the persistence, the extent of

4:11

the inflation surge would not have

4:13

been, had it not been for

4:15

the $2 trillion added to the

4:17

economy in 2021. Well,

4:20

let's talk about that specifically because I

4:22

think a lot of partisans

4:25

would like to lay blame for

4:27

this inflation at the feet of

4:30

Joe Biden and the Inflation Reduction

4:32

Act and the new spending that

4:34

was undertaken early in his

4:36

term in office. How fair is that? I

4:39

think a fair portion of it can

4:41

be attributed to his policies and to

4:44

that $2 trillion. Not all of it,

4:46

but I think a fair portion can

4:48

be attributed to that. So as

4:51

well as the subsequent budget deficits we've

4:53

seen, what's been surprising to

4:55

me is that we continue to

4:57

run large budget deficits even

5:00

this past year outside of

5:02

the pandemic. It was 2023, we

5:04

can think it's well over. The wartime

5:07

effort is something called the pandemic efforts.

5:09

That was done and yet we continue

5:11

to run large deficits and projected to

5:13

do so again. So this

5:15

to me is a big part of the story,

5:17

both 21, but even today

5:19

going forward, as you noted, even

5:22

though inflation has come down, it's

5:24

picking up again slightly. At

5:26

best case scenario, it's come down and it's

5:28

moving sideways and the Fed's not getting

5:31

anywhere near its inflation objective of 2%. Now,

5:34

if there is some good news, I suppose,

5:36

to come out of this persistent

5:38

inflation that we've had for the

5:40

last few years, it's that

5:43

we didn't see a lot of super

5:45

heavy-handed interventions like

5:47

price controls, controls

5:49

on wages, that sort of thing. We

5:52

haven't seen a lot of that and

5:55

there might have been every reason, I think, to

5:57

expect it, given the nature of the downturn. Yeah,

5:59

that's... That's a great point. I think

6:02

probably the countervailing force and

6:04

the reason we did not see that is because we

6:07

relearned how much people hate inflation

6:10

and they want to get at the source of

6:12

that inflation. So there were calls to get rid

6:14

of inflation, but there weren't calls for price controls,

6:17

fortunately. But there was some, to

6:19

be fair. Some people, some progressives

6:21

were calling for it, but fortunately,

6:23

Better Sense has prevailed and the

6:25

Fed tightened policy, talks

6:28

about what was actually driving it. But

6:30

yeah, I think what we learned from this

6:32

is how much people really hate inflation. There's

6:34

an interesting study that was done that

6:36

tracked whether people pay attention to

6:39

inflation or not. So they looked

6:41

at Google searches for inflation and

6:43

they tied a number of searches to what the

6:45

actual inflation rate was. And they found that once

6:48

inflation hit 3% to 4% strong

6:51

correlation, people really begin looking at

6:53

the word inflation. So there's a

6:55

threshold where people really begin to

6:57

care. And we saw that in

6:59

2022. I mean, it had

7:02

a bearing on the elections, the midterm elections, not

7:04

as much as we thought it was initially, but

7:06

still had a bearing, this red wave people were

7:08

talking about. People really dislike inflation.

7:10

There was number one in the poll for

7:12

a number of years, going back these past

7:14

few years. There's another survey

7:17

out called the Ipsos Poll that tracks

7:19

top concerns around the world and inflation

7:21

is still the number one concern. So

7:23

I think what we have seen

7:25

is that politicians have once again,

7:27

wakened up to the reality that

7:29

people really care about inflation and

7:32

inflation hits everyone. It's not just a certain group.

7:34

It hits everyone. I was

7:36

a little surprised not to have

7:38

seen more direct interventions. We see

7:40

Joe Biden offering up his

7:43

attempt to attack junk fees. There

7:46

are members of Congress on both

7:48

sides who would like to see

7:50

credit card interest rate caps and

7:54

people like Elizabeth Warren and others

7:56

in Congress view. corporate

8:00

greed as not

8:03

a constant in

8:05

the economic calculation. As

8:08

Bill Niskanen liked to say, greed is

8:10

a constant when you're doing the equations

8:12

on various economic

8:15

elements. But I'm still a

8:17

little surprised that we didn't see a bigger

8:19

uptick or take-up of this

8:22

idea of greedflation and how

8:25

some prices went up sooner than

8:27

others or more than others

8:29

as our supply chains were so rattled in

8:31

2020 and 2021. But

8:36

we still hear it. It's still

8:38

out there as a notion,

8:40

and a lot of people buy it. Yeah,

8:42

there was a period where greedflation

8:44

was really pushed as part of

8:46

the explanation for the surge. People

8:49

were looking at profit margins, that they

8:51

were going up, and they

8:54

were blaming corporations. Now, of

8:56

course, this comes from one side in particular. And

8:59

maybe on Twitter, it was louder than it

9:01

was in the real world. But there was

9:03

still some push for thinking about it from

9:05

this perspective. Now the problem with this view,

9:08

to me, is very fundamental. Even

9:10

if corporate profits are going up, even

9:12

if firms are more profitable, you have to ask

9:14

the question, well, how are they able to do that?

9:16

How are they able to generate more revenues? They

9:19

don't just magically wave a wand, let's

9:22

jack up prices. So imagine they jacked

9:24

up prices, and there

9:26

was no household ability to purchase

9:28

the goods at higher prices. You

9:30

wouldn't see sales. You wouldn't see

9:32

the profit margins. Households

9:35

had to be able to spend more. If

9:37

the story they're telling is true, evil

9:40

corporations raise prices, there had

9:42

to have been pent up purchasing power,

9:44

the ability to buy higher priced goods.

9:46

There had to have been some way

9:48

for households to pick up their game

9:50

of spending. And that, in my

9:52

mind, can only have happened if you go

9:55

back to the checks, the support they received

9:57

from the pandemic. balance

10:00

sheets, they're still sitting

10:02

on an unusually large amount of

10:04

liquid assets, checking account, money market

10:07

funds. Those are unusually large.

10:09

They haven't spent all that down. It might

10:11

be part of the reason why we're still

10:13

seeing the story go forward. The

10:15

greedflation story is what economists would

10:18

call a partial equilibrium story. It's

10:20

a small slice. Maybe

10:22

there's some facts there, but you've got to tell

10:24

the whole story. To the extent

10:26

there has been profit by corporations. It's

10:29

driven by strong spending, strong aggregate

10:31

demand. The way I like to tell

10:33

the story is, federal government

10:35

provides strong support to households, the

10:37

businesses. Households spend.

10:39

Businesses respond by rising prices.

10:41

Maybe some profits go up.

10:44

But the story has to begin with

10:47

household spending being supported by the federal

10:50

government and the Federal Reserve. As

10:52

inflation abates, I expect the

10:54

fight over what

10:56

caused it will abate as

10:58

well. But

11:00

this is always sort of in the background. Is

11:04

it incumbent upon people who understand

11:07

these issues as

11:09

clearly as you do to say

11:11

when prices are going down,

11:14

to talk about greed

11:16

deflation? Yeah, I

11:18

definitely think it's important to make

11:21

sure we understand what's driving inflation, good

11:23

times and bad times so that we

11:26

have a consistent message so

11:28

that the public writ large is

11:30

not confused and we have high

11:32

inflation. I guess if there's any

11:34

kind of comfort I take from the past few

11:36

years is seeing that the

11:39

public and politicians are very sensitive

11:41

to inflation. As I mentioned earlier,

11:43

if you go back

11:46

to the 1970s, Gallup poll showed that

11:48

the number one issue in that period

11:50

was high inflation over parts of that

11:52

period. So mid to late 70s, early

11:54

80s, inflation was the top concern. It

11:57

was more important than any other issue you think

11:59

during that period. Any

12:01

of the political scandals, any kind of

12:03

wars, the key thing was inflation. And

12:06

people look back at that and say, man,

12:08

that's strange. Why would inflation be more important,

12:10

social issues? And then we

12:12

relearn the lesson why, I believe in 22, 23. And

12:16

I take solace in that because that tells me even

12:18

if we don't get it right, people

12:20

have this kind of innate, almost allergic

12:22

reaction to inflation when it gets too

12:24

high. And it puts policymakers in

12:26

a place where they need to respond. And

12:28

I am hopeful going forward that things will be

12:31

manageable. I'm hopeful that the Federal

12:33

Reserve can do its part to get inflation down.

12:36

A lot of this, though, rests on the

12:38

Federal Government getting its fiscal house in order.

12:40

As I mentioned earlier, we have

12:42

fiscal deficits as far as the eye can

12:45

see. If this continues, if there isn't meaningful

12:47

change brought to that, the

12:49

Federal Reserve's hands are going to be tied. The Fed

12:51

can only do so much. If the Federal Government continues

12:53

to run big deficits, the Fed at some point will

12:56

have to step in and help support it. In

12:58

that case, all bets are off. Well, what

13:00

you're alluding to is more inflation. Yeah,

13:03

more inflation. In fact, there's a technical

13:06

term economists have for it, fiscal dominance.

13:08

If you get to the place where

13:10

the Federal Government, Congress, and Treasury cannot

13:12

keep the government solvent, the

13:14

Fed is forced to step in to buy up the

13:16

debt, to keep rates low, to keep financing costs low,

13:19

and do its part. And if the Fed has to

13:21

do that, inflation objective is thrown out

13:23

the window. And yeah, we have high inflation. The

13:25

Fed can keep the government solvent. In fact, there's

13:27

no reason why we should ever default. We just

13:30

print the money to pay the bills, but

13:32

we give up price stability. And

13:34

that's my worry is long term,

13:37

if we don't get our fiscal house in order, some

13:41

kind of crisis is going to happen.

13:43

It's going to be tied to inflation. I mean,

13:45

there's a number of scenarios. You can imagine a

13:48

financial crisis. You can imagine massive

13:50

tax increases. I had one friend

13:53

tell me, we're going to end up like Europe. We're

13:55

going to have higher middle class taxes because that's the

13:57

tax base that can support this. But

13:59

without, you know, all the features the

14:01

European system has. So it's going to be, we're

14:04

going to get all the bad side of

14:06

the European tax policy and all the bad

14:08

side of the US social welfare policy as

14:11

well.