A Victory Lap for the Transitory Inflation Team
More than two years after economists divided into opposing camps over the nature of the post-pandemic inflation, we now know which side was right. Disinflation has confirmed that the earlier price increases were “transitory,” driven largely by supply disruptions and sectoral shifts in demand.
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Jayati Ghosh on greedflation, debt, corporate taxation, and more
This week in Say More, PS talks with Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst and a member of the Club of Rome’s Transformational Economics Commission.
Project Syndicate: Rather than rely on the “blunt tool of interest-rate hikes,” you argued last November, policymakers should have responded to the latest bout of inflation with “sensible policies such as mending broken supply chains, capping prices and profits in important sectors like food and fuel, and reining in commodity-market speculation.” Nearly a year later, rate hikes seem to have reined in inflation at relatively low cost to advanced economies. Is the bill for these countries yet to come due? What steps can developing economies – which have paid the price – take now to achieve “greater fiscal autonomy and monetary-policy freedom”?
Jayati Ghosh: It is misleading to say that rate hikes have reined in inflation. Correlation does not imply causation. And, in fact, while inflation in the advanced economies has subsided, this is largely because the forces that fueled the latest bout of inflation – spikes in global food and fuel prices, as well as supply-chain disruptions – have subsided. In global commodity markets, prices peaked in mid-2022, but have since fallen, as speculative futures trading waned.
Interest-rate hikes are designed to deal not with cost pressures, like those that fueled the recent bout of inflation, but with “excess demand,” by making both consumption and investment more expensive. As a result, such hikes ultimately dampen economic activity and employment. These effects were less pronounced in the advanced economies this time around, owing to the legacy and persistence of powerful fiscal stimulus.
Low- and middle-income countries have not been so lucky. Advanced-economy interest-rate hikes have had precisely the effects I predicted in the commentary you cite: by reversing the flow of capital from the developing world to developed economies, they have led to “debt crises and defaults, significant output losses, higher unemployment, and sharp increases in inequality and poverty.” In many countries, “economic stagnation and instability” followed.
The resulting currency devaluations have caused the price levels of essential goods to remain high, with food- and fuel-importing countries – including in the developed world – facing the biggest cost pressures. So, advanced-economy rate hikes have caused far-reaching damage, especially in the developing world, though developed countries, too, stand to lose. And the rate hikes may not have even been necessary, because inflation was always going to decline as cost pressures subsided.
PS: Lamenting the global food system’s dysfunction, you pointed out in June that the rise in fertilizer prices since 2021 was the result of “greedflation”: corporations leveraged supply shocks to “increase their profit margins dramatically.” Similarly, the Black Sea Grain Initiative (BSGI) primarily served the “interests of the agribusiness giants trading in Ukrainian grain and the financiers backing them.” How can the power of agribusiness be appropriately limited, and who should take the lead in this effort?
JG: There is no doubt that major agribusiness firms have enjoyed larger profit margins and dramatically higher revenues. But the term “greedflation” should be kept in quotation marks, because this is not an issue of individual corporations behaving greedily. Rather, it reflects the workings of a global food system that has become increasingly concentrated and oriented toward the interests of profit-making intermediaries, not the interests of the actual producers and consumers of food.
The food system has become dysfunctional in other ways, too. It is excessively reliant on chemicals, produces large amounts of greenhouse-gas emissions, and contributes to environmental degradation. Moreover, hunger has persisted, and even increased, alongside excess consumption and wastage. Food is even being used as a geopolitical weapon – most blatantly, in the denial of food to the besieged residents of Gaza.
A range of policies, at the national, regional, and international levels, can reduce the ability of private commercial interests, particularly large corporations, to control the global food system. For starters, governments should build up public buffer stocks and strategic grain reserves, in order to contain price volatility and ensure uninterrupted access to staple foods, especially for more vulnerable segments of society. In addition, smallholders should be given the support and encouragement they need to adopt ecologically sustainable agricultural techniques. And financial activity in commodity futures markets needs to be much more strictly curbed.
PS: The countries that have recently faced the “largest increases in food insecurity,” you note, “are also those engulfed in debt crises and experiencing the severest effects of climate change.” But G20 leaders and institutions like the International Monetary Fund have failed adequately to support debt reduction and climate mitigation and adaptation in these countries. In an ideal world, how would the G20 and IMF embrace, reverse, or redesign to break the “vicious cycle of debt and climate,” and what are they already doing right?
JG: The failure of global “leaders” to tackle these challenges is both depressing and terrifying, because every day that goes by without a solution, the problems deepen – and become more difficult to solve. Those with the power to make a difference appear to be wedded to expensive and increasingly performative summitry, which brings little real-world progress. The G20 and the IMF acknowledge the obvious problems, but do next to nothing – or too little, too late – to address them.
One action that can and should be taken immediately is another issuance of special drawing rights – the IMF’s reserve asset – which would provide foreign-exchange liquidity to countries in need. The United Nations’ High-Level Advisory Board on Effective Multilateralism, of which I am a member, advocates regular annual allocations of SDRs, in service of SDRs’ original goal: to serve as a key component of global reserves.
We also recommend that the IMF’s Articles of Agreement be reviewed to allow for “selective SDR allocation,” so that SDRs go to countries with weak external positions, rather than being distributed according to the size of countries’ IMF quotas, which guarantees that countries that need them least get the most. The Articles should also establish that SDRs should be issued in response to specific, predetermined developments, such as climate-related or terms-of-trade shocks. This would accelerate the global response to such crises.
A second urgent imperative is to reform the global tax system to make it more just and efficient. The current system – developed a century ago, when multinational corporations were less common and wealthy individuals could not shift their assets around easily – leaves far too much space for tax avoidance and evasion, which is particularly damaging for low- and middle-income countries.
The specific reforms are well-known. First, we must implement unitary taxation of multinationals, meaning that each country taxes its share of a multinational’s profits, based on sales and employment, at the same rate as local firms. Second, we need a global minimum corporate-tax rate that is high enough to make a difference. Third, we must ensure that countries are maintaining and sharing their national asset registers, so that extreme wealth is taxed appropriately.
The OECD’s Inclusive Framework on Base Erosion and Profit Shifting got these principles right. But the outcome of the process reflected so much compromise – including carveouts and reductions in coverage – that it will not get us anywhere near where we need to be. In any case, only the 15% minimum corporate-tax rate – which is too low and well below the median global corporate tax rate – has been accepted by major countries. As tax negotiations shift to the UN, we must work rapidly to close loopholes and ensure that all countries benefit from the increased fiscal space that would result from a more effective system of taxation.
A third urgent priority is addressing the sovereign-debt crisis. The first step is to establish a “coordination platform” involving all creditors, in order to facilitate rapid, systematic, and reliable cooperation on debt treatment on terms that preserve the economic and social rights of citizens in debtor countries. With strong political will, this could be done rapidly. After all, governments have shown that they are capable of responding quickly to debt crises in “systemically important” institutions, from Silicon Valley Bank in the US to Credit Suisse in Switzerland. The same sense of urgency and willingness to do whatever it takes is essential to tackle the sovereign-debt crisis that is now affecting much of the world – including hundreds of millions, if not billions, of people.
BY THE WAY . . .
PS: The 2022 report Earth for All, produced by the Club of Rome’s Transformational Economics Commission (of which you are a member), establishes empowerment of women as one of five “extraordinary turnarounds” that the world badly needs. How should empowerment be measured, and what are the most powerful levers for achieving it?
JG: To measure women’s empowerment, some standard indicators – such as those relating to nutrition, health, education, incomes, and asset ownership – are useful. Data showing time dedicated to unpaid labor further enrich the picture. All such data must be compared to the same indicators for men. Data providing insight into the extent of women’s agency and voice also help; rates of political representation are a good example.
Public-policy approaches to boosting women’s empowerment tend to focus on improving nutrition, ensuring universal access to quality health care and education, and delivering universal pensions. But such priorities, while important, are not enough.
Consider care work, which continues to be performed primarily by women. The only way to prevent this from impeding women’s social and economic empowerment is to recognize, reduce, and redistribute such work, while ensuring that care workers are rewarded for their efforts. Political representation for care workers would also help.
To achieve equality in the workplace, interventions should include improving the quality of public employment and implementing regulations that reduce or eliminate discrimination. While the dismantling of socio-cultural barriers to women’s empowerment will take a long time, legal and institutional barriers can be lowered quickly.
PS: “Income redistribution,” Earth for All concludes, “is not negotiable.” You have long advocated a tax on extreme wealth, in India and beyond. How should developing-country policymakers design such a tax to prevent evasion and maximize revenues? What complementary policies might be needed to ensure fair and effective implementation?
JG: Both income and asset inequality have now reached such high levels – globally and in many countries – that it can be described only as dystopian. This is not unavoidable; it is a political choice.
Addressing inequality requires a two-pronged approach. The first is “pre-distribution” – ensuring that policies, institutions, and regulatory systems do not allow the generation of sky-high incomes and wealth by a few, while denying working people decent wages. The second is redistribution – creating tax systems that force extremely wealthy people and large corporations to pay their fair share, and making sure that these resources are used to finance investment in public goods and spending that enhances people’s social and economic rights.
Above, I described the fair and just global tax architecture that is needed. Within developing countries, policymakers must move away from reliance on regressive taxation, such as raising value-added taxes or charging users for essential amenities and public services. Instead, governments should be taxing those with the ability to pay, especially those who have benefited disproportionately from booms, and suffer relatively less during slumps. In low- and middle-income countries that face cross-border capital-flow volatility, such policies need to be accompanied by the right types of public expenditure, and by capital-account management that ensures that the prospect of higher taxes does not spur capital flight by wealthy people and firms.
PS: “India has a robust and admired statistical system,” you recently wrote, but Indian Prime Minister Narendra Modi’s government has been using its power to “control, manipulate, and suppress official data” to reinforce an official narrative that touts the country as the next economic superpower. Just how flawed is that narrative?
JG: No country can hope to be an economic superpower if it does not first ensure that the basic needs of all its citizens are met in a sustainable manner. Here, India has failed miserably: the growth of the past two decades has been accompanied by sharply rising inequality and relatively little improvement in social indicators. While the top 10% of earners and the emerging upper-middle class have benefited from significant income growth, most of India’s enormous labor force is locked in informal employment offering fragile, uncertain, and low incomes and little or no legal or social protections.
This majority has suffered mightily from policies like the dramatic demonetization of 2016, which hit informal activity hard, and the rigid and ill-planned imposition of a national Goods and Services Tax, which disproportionately affected small enterprises, the following year. The COVID-19 pandemic, which brought harsh lockdowns and little support for workers (especially informal workers), made matters far worse.
Compounding the problem, public spending on health and education has been woefully low. This is reflected in poor human-development indicators, which have actually worsened in recent years in some parts of the country and among some segments of the population. Nutrition indicators have stagnated at very low levels, especially for women and children. Real wages have barely increased, and there are major gaps and inequalities in basic health access.
Instead of recognizing these problems and seeking to address them, Modi’s government has sought to suppress the information available to the public (and to itself!). A consumption survey conducted in 2017-18 was simply shredded, and no such survey has been conducted since, even though such surveys form the basis of poverty estimates and are thus essential to guide most types of public intervention in this area.
Other data are either not collected or not made available to the public. When the National Family Health Survey found that anemia is on the rise among women and girls, and that open-air defecation persists (contrary to the government’s narrative), the head of the organization conducting the survey was forced to resign. We don’t even know how many people there are in India: the decennial census, which was meant to be completed in 2021, has not yet started.
Without reliable data, public policy becomes a shot in the dark. It should be obvious that good governance requires leaders to prioritize the effectiveness of interventions over perpetuating their preferred narrative.
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Did the Fed Rein in Inflation?
According to the traditional rules of politics, the US Federal Reserve and President Joe Biden’s administration should get credit for America’s relatively painless escape from inflation, regardless of whether their past policies helped create it. But do they really deserve it?
CAMBRIDGE – On November 14, remarkably, the US Bureau of Labor Statistics announced that the consumer price index was unchanged in October. To be clear, that means the level of the CPI was unchanged; its rate of growth, or inflation, was actually zero. Of course, one month doesn’t mean much. Gasoline prices won’t plunge 5% every month, as they did between September and October. But there are also more promising – and meaningful – longer term data available: the headline CPI inflation rate over the last 12 months was 3.2%, far below the 6.5% average in 2022. At the risk of tempting fate, one might say that the inflation battle is being won.
Contrary to the predictions of many economists – and the enduring perception of many Americans – the US inflation rate has, so far, come down without a major decline in economic activity or employment. In fact, the economy has added an average of 204,000 jobs per month over the last three months, well above the labor force’s long-term growth trajectory. As a result, unemployment remains under 4%, almost the lowest level since the late 1960s. Meanwhile, annualized GDP growth amounts to 2.3% so far this year, faster than the average rate since the turn of the century.
The story in other developed economies is similar, with inflation rising in 2021-22 and then falling, though their performance lags behind that of the United States. Canada, the eurozone, Japan, and the United Kingdom are all growing more slowly than the US, and inflation in Europe has not fallen as much as it has across the Atlantic. Inflation remains very low in Japan.
According to the traditional rules of politics, the US Federal Reserve and President Joe Biden’s administration should get credit for America’s relatively painless bout with inflation, regardless of whether their past policies helped create it. But do they really deserve it?
It seems clear that, two years ago, US policymakers underestimated inflation risks. Moreover, interest-rate hikes did not rein in inflation through the usual causal route – that is, by driving down output and employment. But that does not mean that raising rates made no difference. There are other transmission mechanisms between interest rates and inflation, including the housing market, the exchange rate, and commodity prices.
Mortgage interest rates, which help determine the demand for housing, have risen sharply over the last two years, as the Fed ended quantitative easing and tightened monetary policy. Furthermore, the US dollar’s effective exchange rate has appreciated more than 8% against other major currencies since March 2022, when the Fed began to raise interest rates, though admittedly currency appreciation does less to dampen tradable-goods prices in the US than elsewhere.
Then there are the prices of commodities, such as oil, minerals, and agricultural products. From March 2022 to October 2023, the global price index for all commodities fell more than 30% in dollar terms – a predictable outcome, given that high interest rates put downward pressure on these prices.
But none of these developments explains why the disinflation has been accompanied by so little loss in economic activity. What could explain this phenomenon is the proposition that the Phillips curve becomes much steeper when an economy is close to full employment. With unemployment below 4%, and job vacancies running above 7%, any decrease in aggregate demand is translated almost entirely into lower inflation, rather than into lower economic activity.
But there might be a better explanation: supply-chain disruptions, which were formidable in 2020-22, melted away in 2023. The COVID-19 pandemic led to clogged ports, order backlogs, input bottlenecks, labor shortages, and other supply issues. But according to the Global Supply Chain Pressure Index, produced by the Federal Reserve Bank of New York, such disruptions peaked in December 2021, and have been declining steadily since April 2022. It seems that the “invisible hand” of the market, which had gone missing during the pandemic, has returned to its normal task of encouraging the economy’s smooth functioning.
A favorable shift in the aggregate supply relationship should allow for lower inflation at any given rate of economic growth. The question is why this shift resulted in lower inflation, rather than higher GDP growth. (Since last year, US growth has eased down from the levels recorded in 2021, when the economy was overheating – the soft landing for which we were all hoping.)
The answer may well lie in monetary tightening. If the Fed hadn’t raised interest rates after March 2022, the US economy probably would have continued to overheat, regardless of the favorable supply shift, and inflation would still be high today.
Let’s give credit where credit is due. The Fed deserves a fair share of it.
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Why Mainstream Economics Got Inflation Wrong
Leading economists' misdiagnosis of inflation in 2021-22 was the latest episode in a long-running series of failures, from not foreseeing the 2008 financial crisis to endorsing self-destructive austerity in the 2010s. Either mainstream economists need to re-examine their core beliefs, or the profession needs a new mainstream.
AUSTIN – In his November 7, 2023 New York Times newsletter, the economist Paul Krugman asks a good, albeit belated, question: Why did so many economists get the inflation outlook wrong? After all, the near-consensus among mainstream economists in recent years was that inflation would persist – and even accelerate – and that this justified substantial interest-rate hikes by the US Federal Reserve. Yet the quasi-inflation of 2021-22 proved transitory.
Krugman poses his question with impeccable diplomacy, professing “respect” for three authors of a September 2022 paper published by the Brookings Institution (which was then promoted by Harvard University’s Jason Furman) projecting that it would take at least two years of unemployment at 6.5% to bring inflation back to the Fed’s self-imposed 2% target. But inflation had already peaked before the Brookings paper appeared, and long before the Fed’s rate hikes might have been felt. Over the next year, inflation petered out, even as unemployment remained below 4%. “Team Transitory” – which once briefly included US Secretary of the Treasury Janet L. Yellen – endured two years of derision, but it was correct all along.
Krugman rightly focuses on the illogic of certain inflation “pessimists,” who “came up with new, completely unrelated justifications” for their contention that inflation would “remain stubbornly high” long after the 2021 fiscal stimulus packages had been absorbed. Since these pessimists encountered very little mainstream dissent, their doomsaying continued to dominate the discourse well into 2023.
Krugman tactfully avoids naming Lawrence H. Summers, whose “justifications” for inflation pessimism included supposedly excessive “savings,” the Fed’s “debt purchases” and forecasts of “essentially zero interest rates,” and “soaring stock and real estate prices.” Yet, aside from his worries about fiscal stimulus, this was all nonsense. As I pointed out at the time, savings cannot cause inflation, and a technical forecast has no causal power.
Adopting the persona of a naïf, Krugman then suggests that it was “almost as if economists were looking for reasons to be pessimistic.” A paragon of politesse, he declines to tell us what those reasons might have been. But two always stood out. The first was fear: if American workers retained a financial cushion from the COVID-19 aid packages, they might be “harder to boss around.” The second reason concerned power: high interest rates tend to support the dollar internationally.
Since then, various Fed officials have acknowledged both motives many times. For example, an obsession with wages permeates all of Fed Chair Jerome Powell’s speeches, and he has openly stated his commitment to maintaining a strong dollar. It is no surprise that mainstream economists endorse – indeed, craft – the same arguments.
But I, too, was being polite, because I omitted a third possibility: namely, that some mainstream economists might call for high interest rates to curry favor with bankers, who enjoy larger profit margins when rates are high (especially now that the Fed pays interest on bank reserves directly). A strong public stance on the matter could generate hefty speaking fees, consulting contracts, or a path to high public office. As Krugman concludes, “I’d like to see some hard thinking about how so many of my colleagues got this story so wrong and maybe even a bit of introspection about their motivations.”
That would be nice, but let’s not hold our breath. Instead, let’s turn to a larger issue. Krugman notes that all the economists he mentions “are very much part of the economics profession’s mainstream.” He means this as a compliment; yet, as Hamlet says, “there’s the rub.” Consider just how often mainstream economists get things wrong – not only small things, but very big ones. Remember their famous failure to foresee the 2007-09 financial crisis, or the woefully ill-advised turn to austerity in 2010? What about the predictably perverse effect of sanctions on Russia? The misdiagnosis of inflation in 2021-22 was merely the latest episode in a long-running series of failures.
The question we should be asking, then, is whether there is something wrong with mainstream economics. Mainstream economists should perhaps re-examine their core beliefs, or maybe we need a new “mainstream” altogether.
To be sure, Krugman notes that “one strand of argument involved parallels with the inflation of the 1970s.” But this only grazes the problem. The real issue is that most of today’s leading mainstream economists were trained in the 1970s, and their worldview – not just the facts, but the theory – was fixed back then. On macroeconomic issues such as inflation, the influences of general equilibrium theory, inflation-unemployment trade-offs, and monetarism remain strong. The legacies of Kenneth Arrow, Paul Samuelson, Robert Solow, and Milton Friedman live on.
That earlier generation’s project was partly scientific, partly political. As “social scientists,” they believed in the power of mathematics, which they borrowed from the celestial mechanics of previous centuries. Politically, they sought to defend capitalism against the Soviet challenge during the Cold War. By uniting these objectives, they fashioned the market-oriented mathematical straitjacket in which today’s mainstream economists were raised – and from which they cannot escape. Yesterday’s Wunderkinder – including Summers and Krugman – are today’s tired old men.
Notably, Krugman’s reflection on disinflation makes no mention of the economists who did not misdiagnose things, including Isabella M. Weber of the University of Massachusetts Amherst, and L. Randall Wray and Yeva Nersisyan of the Levy Institute. They correctly predicted the disinflation back in March 2022.
But economists with better ideas never get citations by name, let alone job offers from so-called top departments, mainly because so many members of the old guard want to preserve the academic, political, and media monopolies they have held since the 1970s. That means purging new ideas and belittling the people who advance them. By offering such a polite, gentle critique of his “colleagues” after their latest failure, Krugman is being diplomatic to a fault.
PISA – As the world was recovering from the pandemic, inflation shot up, owing to widespread disruptions to global supply chains and sudden changes in patterns of demand. While the demand shifts might have posed a challenge to price stability even in the best of times, the breakdown in supply chains made matters worse. The market could not respond immediately to the new demand patterns, so prices increased.
Recall that we initially experienced a car shortage, simply because there was a shortage of computer chips – a problem that took 18 months to correct. The issue was not that we had forgotten how to produce cars, or lacked trained workers and factories. We were just missing a key component. Once it was supplied, automobile inventories expanded, and prices came down – disinflation set in. (Disinflation is a decline in the rate of inflation, not necessarily of the actual price level, and is what matters for central banks monitoring changes in prices. In this and several other cases, prices actually came down.)
Housing provides another example of this temporary, self-correcting phenomenon. Since population size is a major determinant of demand, the loss of one million Americans under Donald Trump’s pandemic mismanagement ought to have lowered housing prices at the aggregate level. But the pandemic also induced people to look for greener pastures. Major cities like New York came to seem less attractive than places like Southampton and the Hudson Valley.
Increasing the supply of housing in such places is not easy in the short term, so prices duly rose. But owing to well-known asymmetries in how prices adjust to changing market conditions, they did not fall commensurately in the cities. As a result, housing-price indices (which capture the average) went up. Now, as the effects of the pandemic have waned, prices (as measured by these indices) have drifted down slowly, reflecting the fact that most leases last for at least a year.
What role did the US Federal Reserve play in all this? Given that its interest-rate hikes did not help resolve the chip shortages, it cannot take any credit for the disinflation in car prices. Worse, the rate hikes probably slowed the disinflation in housing prices. Not only do significantly higher rates inhibit construction; they also make mortgages more expensive, thus forcing more people to rent instead of buy. And if there are more people in the market for rentals, rental prices – a core component in the consumer price index – will increase.
The pandemic-induced inflation was exacerbated further by Russia’s invasion of Ukraine, which caused a spike in energy and food prices. But, again, it was clear that prices could not continue to rise at such a rate, and many of us predicted that there would be disinflation – or even deflation (a decline in prices) in the case of oil.
We were right. Inflation has indeed fallen dramatically in the United States and Europe. Even if it has not reached central bankers’ 2% target, it is lower than most expected (3.7% in the US, 2.9% in the eurozone, 3% in Germany, and 3.5% in Spain). Moreover, one must remember that the 2% target was pulled out of thin air. There is no evidence that countries with 2% inflation do better than those with 3% inflation; what matters is that inflation is under control. That is clearly the case today.
Of course, central bankers will pat themselves on the back. But they had little role in the recent disinflation. Raising interest rates did not address the problem we faced: supply-side and demand-shift inflation. If anything, disinflation has happened despite central banks’ actions, not because of them.
Markets largely understood this all along. That is why inflationary expectations remained tame. While some central-bank economists claim that this was due to their own forceful response, the data tell a different story. Inflation expectations were muted from early on, because markets understood that the supply-side disruptions were temporary. Only after central bankers repeated over and over their fears that inflation and inflationary expectations were setting in, and that this would necessitate a long slog entailing high interest rates and unemployment, did inflationary expectations rise. (But, even then, they barely budged, reaching 2.67% for the average of the next five years in April 2021, before falling back to 2.3% a year later back).
Before the latest conflict in the Middle East – which again raises the specter of higher oil prices – it was clear that a “victory” over inflation had been achieved without the large increase in unemployment that inflation hawks insisted would be necessary. Once again, the standard macroeconomic relationship between inflation and unemployment – expressed in the Phillips curve – was not borne out.
That “theory” has been an unreliable guide over much of the past quarter-century, and so it was again this time. Macroeconomic modeling may work well when relative prices are constant and major changes in the economy revolve around aggregate demand, but not when there are large sectoral changes and concomitant changes in relative prices.
When the post-pandemic inflation started more than two years ago, economists quickly divided into two camps: those who blamed excessive aggregate demand, which they attributed to large recovery packages; and those who argued that the disturbances were transitory and self-correcting. At the time, it was unclear how the pandemic would unfold. Confronted with a novel economic shock, no one could confidently predict just how long it would take for disinflationary forces to appear. Similarly, few anticipated markets’ lack of resilience, or how much temporary monopoly power supply-side disruptions would confer on select firms.
But over the ensuing two years, careful studies of the timing of price increases and the magnitude of aggregate-demand shifts relative to aggregate supply largely discredited the inflation hawks’ aggregate demand “story.” It simply did not account for what had happened. Whatever credibility that story had left, it has now been further eroded by disinflation.
Fortunately for the economy, team transitory was right. Let us hope the economics profession absorbs the right lessons.