[Note to readers: In my January 20 Verdict column, I related information from an American émigré in Canada who described the process of becoming a Canadian citizen as “easy.” I should have specified that he was referring to someone in my position, that is, an established academic who could teach at a Canadian university. Because the “Should I leave?” question is interesting to many Americans whose personal and professional situations are different from mine (and I should add that, for me personally, the thought of bugging out is still quite hypothetical), I have decided to write at least one future column on the topic of why and how Americans might choose to leave their country for Canada or other possible destinations. Today’s column, however, is addressed to a different topic entirely.]
Inflation in the United States, we are being told again and again, has very recently reached “historic” highs that have become a political problem for the Biden administration. The latter half of 2021 did see an increase in inflation that many of us did not expect, but people need to get a grip. This is far from a crisis.
As so often happens with economic issues that few pundits or politicians truly understand, the discussion about inflation has quickly gone off the rails. Therefore, before I talk about inflation, I need to talk about how other people are talking about inflation. Only then can we turn our attention to what—if anything—policymakers should do to address what turns out to be a relatively minor hurdle on the country’s path to further prosperity.
The bottom line is that no president has the tools at hand to fight inflation, even indirectly, because those tools generally are controlled by the politically independent central bank (that is, the Federal Reserve). Even so, President Biden’s plans to fight inflation where he might be able to make a marginal difference do make sense, and more importantly, there is still every reason to think that this is not the crisis that Republicans and some commentators are making it out to be.
In today’s Part One of this two-part column, I will show that the public conversation about inflation is nonsense on two levels, and I will then explain why we should not expect (or want) the inflation rate to be zero. Later this week, Part Two will address the Biden plan for dealing with the recent (and probably temporary) change in inflation.
Talking About Talking About Inflation
Almost any economic issue, it seems, can suddenly become the talking point du jour for politicians. If the moment is right, we can suddenly find ourselves talking nonstop about trade balances, “structural” unemployment, the debt ceiling, or any number of technical and previously obscure issues that steal the spotlight unexpectedly.
Most of the people who weigh in on the public debate during those moments of heightened interest know virtually nothing about what they are discussing. That is not a matter of their being stupid, however, but rather of being simply uninformed. Politicians and political junkies have a skill set that rarely includes anything beyond the most superficial understanding of even mildly complicated policy issues. Because of the nature of TV’s 24/7 shouting shows, however, everyone quickly digs in to defend their hot-take opinions.
The problem, however, is not merely that most of the opinions are ill- or under-informed. People scramble to find default positions that everyone knows are “safe” in the sense that one will not look like a fool or an extremist by hiding behind accepted platitudes.
Thus, a conventional wisdom quickly congeals and hardens on any number of matters that come up again and again. Federal debt? Bad. Trade deficits? Bad. Social Security? Going bankrupt. A person who takes the contrary position on any of those issues—even though the conventional wisdom is utterly and completely wrong about all three of those examples, by the way—has at the very least a lot of explaining to do, and she even runs the risk of being drummed out of polite society for daring to challenge the dominant narrative.
I should stipulate that this go-with-the-flow tendency is not confined to economic issues. For example, the U.S. withdrawal from Afghanistan quickly became condemned for being “botched,” “messy,” and so on, even though no one could say why a withdrawal in that situation could possibly have been smoother. Even so, there is something about the technical nature of economic policies that perversely causes the conventional wisdom to become smugly self-satisfied even as it is wholly uninformed.
But there is also a second, even more dispiriting, stage in the lives of such hot topics. In addition to the standard herd mentality, we sometimes reach an advanced stage of intellectual decay in which public misunderstanding becomes so widespread that people feel comfortable referring to a hot issue completely out of context. That is, we start with, “I think X is a problem, so let’s talk about X” (even if X is not a problem, and even if the speaker has no idea how to talk about X), but we soon end up with people mentioning X where it has no relevance.
That is a bit abstract, I confess, so the best way to think about it is to imagine reaching the point where a topic becomes a throwaway line in day-to-day conversations. Without quite knowing why, politicians and comedians find themselves making knowing references to an issue that they misunderstand, and the rest of us start to absorb the idea that the issue is obviously important. In the America of February 2022, a person can say, “Inflation, am I right?” knowing that people will either laugh appreciatively or at least nod knowingly. Even six months ago, such a cryptic comment would have been met with blank stares.
Other examples abound, but consider two small instances that capture the essence of this phenomenon. In late 2006, when then-Senator Barack Obama first talked about running for President, there was a fair amount of tut-tutting about how a freshman senator should not be so arrogant as to run for President and should not be encouraged to do so.
One can argue about whether that is a sensible objection, but I was taken aback when one of those “it’s too soon” columns made the claim that Obama should spend time in the Senate trying to solve the nation’s pressing problems: “Instead of singling out potential legislators who may someday save Social Security or raise foreign aid to a substantial level, reporters are on the hunt for future presidents.”
Notably, this was not a direct statement that Social Security needed to be saved—which would have been wrong on its own terms, by the way, because Social Security is not going bankrupt—but rather a confident assertion that because everyone knows that Social Security needs to be saved, young senators should not run for President. The conventional non-wisdom regarding Social Security seemed so safe to that columnist that he did not even feel the need to make an argument about it. More to my current point, he brought up this entirely tendentious and irrelevant reference as an “am I right?” afterthought.
Similarly, I once came across a law review article in which two top-tier scholars were discussing an interesting policy question, but they digressed for a moment to mention that their solution would save the federal government something on the order of forty-five million dollars per year. That is million, with an “m,” not billion or trillion. Even so, the authors could not resist saying that, because everyone knows that the federal budget deficit is horrible and too high, their policy was economically smart. At the time, forty-five million dollars was less than two-hundredths of one percent of the federal budget deficit. But sounding sober and serious by affirming that deficits are just plain bad was apparently too tempting to pass up. Deficits—are we right?
We have now, I fear, reached that same stage with public discussions of inflation in 2022. In a Washington Post op-ed this past weekend, for example, a very smart tax expert persuasively analyzed the problems facing the IRS in the upcoming tax filing season. Because of the Republicans’ chronic and deliberate underfunding of that essential government agency, there will be ever longer delays in taxpayer service this year and into the future.
That was an important column that contributed useful ideas toward solving a serious problem. Unfortunately, even as the author of that column made the important point that the IRS would not be able to process refunds as quickly as needed, she coughed out this odd statement: “About 75 percent of individual taxpayers count on receiving a refund and with the average refund at $2,775, that’s serious cash in these inflationary times.”
Seriously? Inflation over the past year has been reported as hitting 7.0 percent from December 2020 to December 2021. That means that $2,775 worth goods and services in 2021 would have cost $2,593 in 2020. Would that author have said that $2,593 was somehow not “serious cash” if there had been no inflation? Obviously not. The rhetorical move amounted to little more than saying: “Hey, everyone’s been talking about inflation lately, so I’ll toss that into my column, even though it has nothing to do with what I’m talking about.”
All of this means that the public discussion has now come to treat inflation not merely as a potentially important policy question but as so obviously something that everyone cares about that people will reflexively nod along when someone so much as mentions it. This is a form of pandering that is informative solely because it tells us something about the zeitgeist.
And that is why an otherwise manageable and not particularly damaging spate of inflation has become a political problem for President Biden. Headlines tell us that “Democrats worry Biden could pay the political price for rising inflation,” and who can blame them for worrying? When, as I described it above, “inflation, am I right?” becomes a casual social reference point, the politics become much more difficult.
The Underlying Reality of the Inflation Situation: There Is Very Little to See Here
All of the above explains why inflation is now important politically. The reasoning is circular, but it is maddeningly true: inflation matters to people because everyone is telling them that it matters.
Surely, however, it is bad for inflation to have risen to seven percent, is it not? It is, after all, at a level “unseen in decades” (four decades, as it happens). But why is that necessarily a bad thing? The answer, it turns out, is a little complicated and a lot counterintuitive.
It should in fact be surprising that people think that inflation is per se bad. After all, everyone sells things to earn a living, and if what you sell is going up in price, you are better off. Most of us sell our labor, which means that we would love it if wages and salaries went way up. But of course, the people who pay us would hate that, just as we would hate to pay more for things than we are used to paying.
The point is that “I don’t like prices to rise” is never literally true. Everyone wants some prices to rise and other prices to stay the same or even fall. Does that mean, then, that we should want inflation to be zero, so that no one gets what they want but also is protected from paying more to get by? Would it be better if all prices were stable forever?
The answer is no, because the measured inflation rate is an average of all price changes, and a healthy economy will see some prices rise at any given time. Why? If there were suddenly a need for, say, people with expertise in epidemiology (a purely hypothetical example, to be sure), then we would expect to pay them more than we had been paying them before, and the products that they recommend would become more expensive as well. Preventing those prices from rising would be damaging and would even undermine what is supposed to be the genius of market “signals”—we bid up the prices of things that are in relatively short supply.
Will other prices fall, allowing the average inflation rate to remain at zero? That could happen, but there is no guarantee, and even if it did, there is no reason to imagine that we would get there quickly. Meanwhile, as we wait to see if other prices fall, the prices of the suddenly-hot goods or services might themselves fall back down again.
This means that, even if we thought that inflation should average zero percent in some abstract sense, we have no reason to think that it should average zero percent every month or even every year. There might be perfectly good reasons—such as supply chain problems (again, a purely hypothetical example)—that some prices are rising and might again fall back, but those processes are not going to play out in an orderly way. “We have to have zero percent inflation at all times” is an alluringly simple rule, but it is in fact simplistic and damaging.
As it turns out, however, the overwhelming economic consensus for at least the last generation has been that inflation should not average zero percent at all—not for a month, not for a year, not for a business cycle, not at all.
In part 2 of this column, I will first explain why inflation should be positive at all times and then describe the range of inflation rates that would be safe and comfortable. Short answer: Everyone agrees that hyperinflation is bad, but there is a surprisingly broad range of possible inflation targets that would be healthy for the economy.
With that in mind, the question then becomes what policymakers—both the Federal Reserve and the political branches of government—could and should be doing about our current unexpected uptick in inflation. In particular, is the White House’s focus on fighting monopolies a smart inflation-fighting strategy? It is, but for unexpected reasons. Stay tuned.