Why talk about inflation?

Prices will not spike in the United States for years, maybe decades. In fact, they are falling at record pace. So why talk about inflation? Why risk an economic depression and a painfully slow recovery over the improbable?

The obsession with inflation is here again. Some members of Congress, market analysts, and economists are forcing the debate. Pure politics. They did not learn from the Great Recession. They did not learn from the Great Depression. They do not admit their past errors, and they will sink us again.

Ten years ago, 23 economists penned an “Open Letter to Ben Bernanke.” They told then Federal Reserve Chair that its accommodative policies risked ”currency debasement and inflation.” I remember that stupid letter as a macro forecaster at the Board. How could they? One year after the recession ended, when consumers , were struggling to come back. When the letter ran the unemployment rate was nearly 10%. The Fed stayed the course to help Wall Street: they bought more assets; keep interest rates low; and stock prices rose rapidly. (The inflation the wealthy enjoy.) Political risks and inflation fears stopped the Fed from saving Main Street. They did not have the courage to act.

The letter writers were prominent then and remain on the scene. Among them, John Taylor, namesake of a rule for monetary policy; Kevin Hassett, a key adviser to President Trump now; David Malpass a former Treasury and World Bank official in this Administration; and Kevin Warsh, an integral actor in the Federal Reserve bailouts in the financial crisis. They were wrong. Inflation never exceeded the Fed’s target of 2%. The recovery dragged on for years. No surprise: they never admitted their error. They did not learn.

Fast forward to today and the inflation posse is back. They are peddling the same tired inflation fears by retrofitting them to Covid-19. They claim that with many workers furloughed and businesses closed that money from Congress will overheat our economy, causing prices to shoot up. Too little to buy and too much deficit spending. My life in past three months is nonstop shouting match, trying to convince others that we have the “mother of all demand shocks.” More deficit spending, trillions more, is all the stands between us a depression.

Inflation fears are ideology not economics. Not one letter signatory expressed alarm in 2017 when President Trump’s massive tax cut blew out the federal debt. Then they peddled supply-side snake oil, driving in reverse from 2010. They promised that lower taxes in the longest expansion on record would bring growth and tax revenues, leaning on the flimsy Laffer curve. Wrong. Covid-19 is their new crutch, rebranded it as a supply shock. Wrong and dangerous.

What are the facts? Consumer prices, excluding food and energy, are falling. They will tell you official statistics “might be meaningless” today. What? The personal consumption index, the Federal Reserves target series, adjusts its weights as consumers change what they buy. The Bureau of Economic Analysis uses a technique called chained prices, international standard for measuring inflation. US statistical agencies addressed many concerns of the Boskin Commission in 1996. Even so, Michael Boskin signed the letter to Bernanke.

The facts are the facts. Inflationists ignore facts. Americans pay the price.

Far more than the signatories to the open letter are sounding the alarm. Economists across the profession join them. Last week Olivier Blanchard, the former chief economist at the International Monetary Fund, started asking questions. He offered three ways that inflation “might surprise on the upside:” soaring public debt-to-GDP ratios (discredited trope); jump in interest rates (after declining for decades); and fiscal policy overriding monetary policy (Fed cannot do it alone, listen to Jay Powell).  Of course, Blanchard stands by this intellectual exercise. To be clear, most of his arguments were against inflation. Even so, after a decade answering questions as a staff economist at the Federal Reserve, I know that the questions we ask are a window to our thinking.

Tyler Cowen, the Director of the Mercatus Center, applauded the Financial Times piece and he said we should worry about inflation now. He took his troll style further and castigated economists who push back as “dogmatic” and “yappers.” Who is name calling now? So goes the debate among professional economists. So goes the repeat of the Great Recession. “Serious economists” as Paul Krugman says must accept economist whose models build in supply side disruptions from Covid-19. Wow, exclusionary.*

Arin Dube and Casey Mulligan, professors at University of Massachusetts-Amherst and University of Chicago respectively, could not be further apart in economic policy today. (Dube earned his PhD at Chicago, so they do have common training.) Yet, Dube has concerns with the $600 per week extra jobless benefits. He raised concerns (along with may economists) that weekly checks higher could discourage people to return to work, even when it’s safe. To be clear, Dube is working tirelessly for better jobless benefits and higher minimum wages. Mulligan dishes out harsh (and bad) criticism of jobless benefits. Too few workers, as demand returns, will require that employers to raise their wages (dare to dream). Wage inflation would pass to price inflation. Wrong.

Over 36 million and counting claimed jobless benefits since March. At 20% unemployment and with family income in free fall, wage inflation is distant. In fact, 2019 with unemployment at or below 4% led to moderate wage growth. inflation never made it to 2%. I am watching the train wreck of the Great Recession again and it hurts.  I am terrified that we are falling into a deflationary spiral, a brewing economics that the Fed cannot fix.  

Basically, every defunct model of economics is rearing its ugly head. Larry Summers a few days ago, drew attention to to how the unemployed are spending their time at home. Unemployed men “drinking beer, playing video games, and watching 10 hours of TV a day” will not be ready to return to work. Inexplicably, he predicts (people gainfully employed in February, many written off in the last recovery as unskilled) are lazing away after a few beers and Tiger King. Again. The subtext I see (again I watched this train wreck in the last recovery) will lead to too few skilled workers. That will drive wages and prices higher.

Summers, my empty tequila bottles are not a sign of laziness or eroding my skills. Millions of us are trying push the tragedies of today from our thoughts for a few hours. I drank half a bottle by myself after a friend’s grandmother died from Covid-19. And about as much after I read your “Cape-Cod in winter” description of our crisis. You have fans among the cowardly economists on a cesspool forum . They said I am wrong. I am not.**

None of these arguments are new. I have had to listen to them for almost twenty years. With hundreds of economists at the Board, I wasted countless hours on memos explaining why inflationists were wrong. Six years ago, our inflation experts told the Federal Open Market Committee that they would not achieve their inflation target without more effort. They told them trend inflation was below 2%. Deb Lindner, our top inflation expert wrote a memo saying as much. Fed officials attacked it in the Boardroom. The worst offender had to apologize to her afterward for being disrespectful. She did not want an apology; she wanted the FOMC to listen to the staff, to listen to the facts. They did not. Year after year Fed officials expected inflation at 2%. Wrong.

Members of the economics profession—those who signed the open letter and those who did not—are falling into the trap of ideology again. It is intellectually defensible to ask questions and to use abstract models to think through the economy. Inexcusable to use falsified models. Bad models cause suffering. Bad models empower Congress and the President. They will cut off relief this summer. They want to cut capital gains taxes. Bond holders over workers, again. Economists deliver, again.

I created the Sahm rule, highly accurate recession indicator. I have a highly accurate bullshit detector too. Both are flashing red.***

Additional End Notes

* Paul Krugman is consistently on point in his economics and his uncovering of the politics behind the arguments. Of course, his views are wrong sometimes. (Mine are more often and I clueless about DC politics.) My problem with him bestowing a “serious economist” label stems from my crusade (see my first macromom post) to make economics more diverse, inclusive, and equitable. Every women economist, including myself, has had a man colleague walk in their office to tell them they are not a “serious economist” or the equivalent. When a hero joins in the exclusion, even if unintentional, it hurts. Yes, I am sensitive. They hurt me. and many others in the profession.

** My argument here involving Larry Summer center on his policy mistakes and his disregard for the suffering of people without his privilege. Two men journalists at major publications and a handful men economists called me out (using a respectful tone) for connection his words to the “skills gap.” His arguments against basic income (namely the sloth of others) align closely arguments against the skills gap. In addition, I have been around the block and know, in recessions, it is best to pull weeds before they take over.

*** Bill Dudley, the President of the New York Fed wrote me an email last fall as I was packing up at the Board. In the subject line (of course, all the words I got were in the subject line), he told me he had a recession indicator years before me. He pointed me to a Goldman newsletter in his spin through Wall Street. Screenshot of the page and the indicator highlighted in yellow. I have a PhD and over a decade of experience in real world economics. I can read, sir. Why did he say it? Kate Davidson wrote an piece about the Sahm rule, “Are We in a Recession? Experts Agree: Ask Claudia Sahm.” Can you imagine, at a high point of my professional career, a man I have never met, a man who had more stature in economic policy than I ever will, took the time to take me down a notch.

Dudley joined a long list of men who have done the same to me and worse to others. I wrote Ben Bernanke, past President of the American Economics Association, a month ago after an aspiring black woman economist was viciously disrespected, two months before that a black woman professor was referred to as a “monkey.” I told Bernanke, “economics is a disgrace.” For years, our leaders have tolerated bad behavior. They have looked away. For years, economists have been hurt For years, bad actors have taught new economists how to be like them, to exclude and demean others. This post is about bad economics. My passion is making economics better.

If you have read this far or follow me on Twitter, you know I am a pain in the ass and take professional risks that are insane. It is worth it.

**** My views here post are my own. They do not reflect the views of my employers: past, present, and future. I own my words.