There have been a lot of bad takes on inflation out there in the media, from wild speculation about its causes to absurd predictions about when and how the wave of price increases would finally come to an end. But now just about everyone agrees that after two years of rising prices, inflation has finally slowed down. And while there’s still a long way to go, the situation is dramatically better now than it was even six months ago. Mike Konczal from the Roosevelt Institute recently did some research into the disinflation we’ve been seeing, and he returns to the show to tell us what’s really bringing prices back down to earth.
Mike Konczal is director of Macroeconomic Analysis at the Roosevelt Institute, where he focuses on full employment, inequality, and the role of public power in a democracy.
Twitter: @mtkonczal
Supply-Side Expansion Has Driven the Decline in Inflation
How Goldilocks Came to the U.S. Economy https://www.nytimes.com/2023/09/11/opinion/inflation-unemployment-phillips-recession.html
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Nick Hanauer:
I’m Nick Hanauer. As someone who’s been in and around corporate boardrooms my entire career, there’s nothing I know better than the extent to which many of my business colleagues will go to lie to protect their power and profits. And in my new book, Corporate Bullshit, Cc-authored with Joan Walsh and Don Cohen, we make this manipulative duplicity plain as day by placing egregious past quotes from corporate executives next to the equally outrageous contemporary quotes, all of which justify outcomes that lie in pockets while harming society. Again, the book is called Corporate Bullshit, and you can pre-order the book now, wherever books are sold,
David Goldstein:
What the hell is happening with inflation?
Nick Hanauer:
So A, we didn’t have inflation. Inflation to me is a wage price spiral. We had higher prices as a consequence of the most profound global supply chain shock in a hundred years.
Mike Konczal:
So I just wrote a report called, Supply Side Expansion has Driven the Decline in Inflation. And so it’s right there in the title, but I think we probably have to go a little bit deeper to understand everything that’s happened.
Speaker 4:
From the Home Offices of Civic Ventures in Downtown Seattle. This is Pitchfork Economics with Nick Hanauer. The best place to get the truth about who gets what and why.
Nick Hanauer:
I am Nick Hanauer, founder of Civic Ventures.
David Goldstein:
I’m David Goldstein, senior fellow at Civic Ventures. A lot of people have been talking about inflation, Nick, and my first question is how are you doing? I mean, this must’ve been really tough on you, right? That spike of inflation must have really crimped your lifestyle.
Nick Hanauer:
Yes. Not too much.
David Goldstein:
No. You didn’t like cut back your spending. I mean, it certainly cost you more than it cost me because you spend so much more than me.
Nick Hanauer:
But not on milk. I mean, your point is a really good one, Goldie, actually, even though you’re just as always giving me shit, because inflation has been a very big challenge, or I hate the word inflation because I don’t think we’ve had it. Higher prices as a consequence of this big global supply chain shock have been a really consequential thing for most American families because the distance between income and basic necessary spending is so narrow. For most people, 8% more expenses on a variety of things effectively puts them 8% underwater.
David Goldstein:
Because unlike you, the majority of people spend almost everything they earn.
Nick Hanauer:
That they earn, right? Because for most people who earn 50 or 75 or a hundred thousand dollars a year, there’s no room there. It’s not like you’re putting away 25 or 30% of your income every month in some sort of savings program if you’re a typical family in the United States. And I think that because for the people who make policy on inflation, mostly don’t live in that world.
David Goldstein:
You think?
Nick Hanauer:
Yeah. The challenge of inflation is far more theoretical than it is real to them. And I think that as a consequence, we end up with some pretty terrible policy prescriptions with respect to these dislocations. And first and foremost being this idea that the only way to handle inflation is to throw millions and millions and millions of workers out of work. And if we do that and screw up the economy enough, then demand will fall sufficiently so that prices will have to come down because there will be this supply demand imbalance, which of course is fine as long as you don’t care about millions and millions and millions of people.
David Goldstein:
Well, the trick to being an economist, Nick, is not to think of them as people, but to think of them as agents.
Nick Hanauer:
That’s true. Representative agents.
David Goldstein:
Representative agents in your models, and then there’s no moral problem there because it’s just a computer model.
Nick Hanauer:
But of course, Goldie, here’s the good news, is that prices have fallen dramatically, and the rate of inflation has fallen more or less in the last year from 6.5% to 3% depending on how you measure it. The core personal consumption expenditure pricing index, what a mouthful, which excludes volatile energy and food prices. It was 2.9% compared with 4.6% in January of this year. So the news is good, but of course the reality for most people is hard because if they look at whatever it was, a gallon a milk or whatever it was a couple of years ago, it definitely costs significantly more today. And that’s the world that people are living in. They’re not living in the slope of the curve world.
David Goldstein:
Also, let’s be clear, there’s a ratcheting up that happens with inflation. When the inflation rate falls, the inflation rate has fallen, that doesn’t mean that most prices have fallen.
Nick Hanauer:
Have fallen, no.
David Goldstein:
It means that there’s just not rising.
Nick Hanauer:
It just means the rate of increase is going down.
David Goldstein:
Right. So you’re not going to get back to those pre pandemic prices for the most part.
Nick Hanauer:
And most people are not going to experience this crash in the rate at which prices are increasing as some massive gimmick where they’re like, oh, wait, yay.
David Goldstein:
You notice when prices go up and because they don’t go down, it feels like the problem hasn’t been solved.
Nick Hanauer:
That’s right.
David Goldstein:
But in fact, we’re at the current inflation rate, whichever way you want to measure it. Well, it’s not down to that pre pandemic post great recession below 2%, which we experienced. That was actually abnormal. We’re actually at a rate at three and a half percent, which is below the historical average. And by the way, far below the global average, Europe hasn’t managed to get inflation this low.
Nick Hanauer:
That’s right. Which by the way, could be a completely reasonable target rather than 2%. I can’t wait to talk to our returning guest, Mike Konczal, with the Roosevelt Institute, who has just authored this really detailed paper on The Causes of So-called Inflation. Again, not inflation, but higher prices. And I think he’s pushed back hard on a lot of the inflation myths that were being pushed by some of our neoliberal friends, mostly people like Larry Summers who believe that the only way we could address this was to make tens of millions of people really, really miserable, which in fact, we have not had to do. We’ve had record low unemployment and falling inflation, which has been super cool. But anyway, I mean, I think we should get to Mike because nobody knows more about this stuff than him.
Mike Konczal:
Hi, my name’s Mike Konczal. I’m a director of macroeconomic analysis at the Roosevelt Institute, a nonprofit policy think tank. I work a lot around inflation and unemployment and it’s recovery and making sure we had a much better recovery than we did during the great recession. I also write for The Nation Descent and a bunch of other venues.
David Goldstein:
I’d like to ask the first question, Nick, because you know me, I like to get really wonky and technical. So we have somebody who knows this says Mike, I guess the technical question is what the hell is happening with inflation?
Nick Hanauer:
There you go.
Mike Konczal:
Yeah. So I just wrote a report called Supply Side Expansion has Driven the Decline in Inflation. And so it’s right there in the title, but I think we probably have to go a little bit deeper to understand everything that’s happened. So obviously inflation went very high, especially in 2021, especially as the economy reopened as vaccines rolled out, as life got back to somewhat normal. And a lot of things were happening at that time, and inflation increased at the time. And there was a big question among economists about what was driving that expansion in inflation. Was it that people were just spending too much money full stop? Or was it that the economy was essentially having to kind of hangover after having been shut down during the lockdowns and during 2020? Was it the fact that supply chains were really crosswired? Was it that a lot of commodities and things like semiconductors were in short supply from having not been produced, even though they’re really important inputs to a lot of things?
And as inflation persisted, especially after Russia’s invasion in 2022, people thought, well, maybe these supply side stories weren’t as important because a lot of them had started to get worked out, and inflation was still very persistent last year in 2022. But out here and starting in the fall of 2023, inflation has really been falling this year. And so I wrote a paper with a really empirical dive and was trying to figure out, well, what was more important in doing that? And I find that basically the majority, even the large majority is entirely the story people had been telling. That it’s largely about things reopening, supply chains being fixed, and things re-normalizing in a way that really meant that we did not need a recession or we did not need quite the aggressive war on investment in workers that the Federal Reserve and some policymakers had been waging over the past year.
David Goldstein:
And by some people, I mean, you have this line in this paper that most can just be happy inflation is declining. The people who can’t be happy. There are people like Larry Summers who insisted we had to suffer.
Mike Konczal:
Yeah, so Larry Summers said inflation would eventually come down a little bit, maybe it’d be around four and a half percent, and to get anything lower would require a lot of people to become unemployed. He was predicting you need unemployment to go up, say 5%, literally millions of people unemployed to get inflation down any further. And inflation-
Nick Hanauer:
Just to be clear, not go up to 5%, 5% more. He wanted an inflation to be eight, 9% or something like that, didn’t he?
David Goldstein:
It depended on the time period. He was saying two years of seven and a half percent unemployment would be required to bring it back down.
Mike Konczal:
Having watched that debate very closely, what he was really saying, a different way of saying was that essentially we were kind of stuck in the way economists think of the 1970s and that inflation was so persistent, it was so built into the economy that the only way to bring it down at all would involve essentially a recession, essentially millions of people losing their jobs. And inflation is much lower than you thought it was going to be, it’s under four. Economists are in a big debate right now about where it’s leveling out and how much will continue to level out, but it’s leveled out without unemployment going up at all. In fact, the labor supply increasing even further.
Nick Hanauer:
Yeah. So Mike, I just have to jump in. I mean, I have found this whole conversation to be so profoundly frustrating since its inception because, so A, we didn’t have inflation. Inflation to me is a wage price spiral. We had higher prices as a consequence of the most profound global supply chain shock in a hundred years. I grew up managing global supply chains and sort of working in that world. And anyone who has ever actually managed a global supply chain knows that if the tiniest thing goes wrong, the whole thing comes tumbling down. And a tiny difference between demand and supply turns into a giant difference in prices. And I think that allowing ourselves to have been captured by this inflation narrative rather than a higher prices of consequence, of supply shock narrative, it clouded everybody’s thinking in just a stupidly profound way. By the way, it took years and years and years to get the global supply chains to be as tuned as they were as we went into the pandemic.
It’s not going to get straightened out in 90 days. These things take time to get back organized. So anyway, I mean, it just seems obvious to me from the very start that you just were going to have to let the supply chain get itself back together. And as soon as it did, you would see actual competition and prices start to normalize. In fairness, what I never would’ve contemplated was the greed deflation that we saw. The degree to which big companies used this excuse to expand their margins, that I would not have predicted, but making people unemployed was never going to fix it.
Mike Konczal:
Yeah, absolutely. And I think one reason for the disconnect, even among good faith actors here was that I don’t think there was really an appreciation for the size and scale of the shock we just went through. I think people think, well, okay, semiconductors were hard to get for a while, or, oh, I ordered something online that’s going to take six weeks instead of three days like it normally does. But when you actually think of the major shock, we just all went through, the changes in how we work and live, such that housing markets are very different. We now have maybe a quarter of people working from home that changes the demand for housing, and that takes a long time to change up. People are buying a lot more goods and fewer services, and there’s a big investment wave coming from the actions of the Biden administration, which resulted in a huge upskilling of workers with workers leaving service jobs for much higher paying and more productive goods producing jobs and other kinds of employment.
Generally, a huge turnover in the labor market is people sought out better opportunities, which is something we’ve always wanted them to be able to do. It’s something we really hated about the Great Recession. Even more centrist types hated about the great recessions that there’s just very little labor market dynamism or turnover during those times. It was just very hard. There just wasn’t enough demand in spending the economy to get jobs to that level. But those are all big shocks. They take a while to play out, and I think people thought, well, okay, there’s semiconductors now, or now I can order some stuff faster online, ergo that’s all gone. And that’s a big shock. It perpetuates itself through the economy as a whole.
And I think a lot of people thought, well, maybe that’s relevant for some sectors of the economy, but there’s some other sectors of the economy where these supply shocks aren’t taking place. But they’re still drawing from the same labor pool. The supply chains are all very connected. A lot of the inputs are very connected. So there really wasn’t a part of the economy that was safe from that kind of reopening shock either.
Nick Hanauer:
No. I mean, pretty much every company in the world shut down for a while.
Mike Konczal:
Yeah, exactly.
David Goldstein:
You’re not suggesting, Nick, that there’s some friction to that. No, that you just can’t, it’s not like a switch.
Nick Hanauer:
Turn it back on. No.
David Goldstein:
Yeah, you just turn it off. You can turn it back on. It’s easy.
Nick Hanauer:
No, it’s not like that. It is definitely not like that. And it’s literally, it’s like the law of thermodynamics. It’s hard to build something and it’s really easy to break it. And after you break it, it’s very difficult to put it back together. It’s the same thing with a global supply chain. It’s an incredibly fragile, highly optimized thing, and it doesn’t take very much to throw it all off kilter.
David Goldstein:
And importantly, much more so than it was during the 1970s. Which raises a question for me, Mike. Nick and I are both old enough to remember the 1970s. We weren’t adults necessarily, but we remember what happened then. And my guess is that the economists with the most prestige and audience are all our age or older. How much of the confusion over inflation stems from this overemphasis on the 1970s? Because the 1970s was weird economically?
Mike Konczal:
Yeah.
David Goldstein:
Is it all PTSD from the 1970s and from what Paul Volcker did in response?
Mike Konczal:
Yeah, so it’s tough to know. So on one hand, a lot of the critics here did do their econ PhDs in late seventies, early eighties, where this question was central in their mind. And there was a sense, and once the old models fundamentally got it wrong, and we were living in this kind of harder world at which any hint of inflation required really severe trade-offs in inflation or in unemployment in that you couldn’t really move inflation without unemployment. They get their PhDs in 1980. They live through this, and then for the next 20, 40 years, the whole model is wrong. Inflation basically drifts down with no real changes in unemployment during the nineties, the aughts and the teens. We won’t get too technical here, but the idea of a so-called Phillips Curve, the idea that there’s a really strict trade-off here essentially disappears in the data.
It becomes very hard to find, and people debate why this is, but the idea that the problem of the subsequent couple of decades was just that inflation was always low and unemployment was always high, which you shouldn’t be able to have if this trade-off is real. We had a really high unemployment during the great recession and inflation just bounced around and then unemployment came down, and then inflation just bounced around in its range. And so economists debate why this is, but the idea that that trade-off was guiding us going into this crisis was definitely false. And I think that’s one reason why the Fed was very easy on stuff early on. Now, what I’ll also say is there’s a lot of things to consider in the seventies, but one is that inflation had been around for about 10 or 15 years is an issue. It was around for about 15 months now, that’s just like an order of magnitude difference.
David Goldstein:
Right? So how do you get a wage price spiral in 15 months? I mean, that was a decade of high inflation and relatively slow growth, relatively higher unemployment. It’s entirely different. But I’m glad, Mike, that you brought up the Phillips curve because I found that part of your paper a little fascinating. I know there’s this mathematical formula and you attempt to describe it. Let me try to translate. Am I correct in understanding that the Phillips curve is essentially inflation equals this arbitrary starting point in historical inflation data plus assumptions about expectations plus actual employment data minus the CBO assumptions about the so-called natural rate of unemployment. Have I characterized that correctly?
Mike Konczal:
That sounds about right.
David Goldstein:
So there’s a lot of assumptions in there.
Mike Konczal:
A hundred percent, but even the more basic intuition that inflation comes from what people expect inflation to be, and by people I also mean businesses. So when they’re setting prices or asking for wages, it’s what they expect it to be. They want keep pace with it. And then a level of how tight the labor market is or how tight the economy is with the assumption that there’s only so much we can produce actually, and if we go over it, it’s just going to overheat. It’s going to all be in prices. And we see two different things. One was even if expectation is a very good theory, that didn’t really change. People understood what we were going through and knew prices would be high for a while, but never thought that they’d become permanently stuck at a higher level. And then second is like the economy is expanding because demand is high.
Labor force participation is the highest it’s been in decades. It’s back to early aughts era. People thought that would never happen during the great recession. There’s a big investment wave coming. There was a big housing wave coming that’s going to soon start to really impact prices. And so the supply side of the economy expands in relationship to demand, and it’s complicated, but even the notion of a strict trade-off has problems on all the fronts. And what I find in the paper is that I go through this exercise where if you’re at the Federal Reserve, this model is basically telling you nothing. It’s either telling you everything’s going to be fine, or it’s going to tell you we’re in the seventies depending on whether or not you put 1970s data into the model as you’d expect. And what I want to point out right away is that the decline inflation is real.
This isn’t just a weird rounding error. We didn’t catch the end points at a certain point. It’s like broken the model that would predict a 1970s inflation. And second is that that theory of the case that we were kind of stuck in this really difficult trade off, that just hasn’t borne out. Now we don’t know where inflation’s going to end up. We can talk a little bit about where things are going to go, but it really did defy critics. By looking at a cross section of different items. The majority is really being driven by expanding supply, more quantities at lower prices.
David Goldstein:
I get on this, there’s a phrase that jumped out at me. You said that if we started you, you got very different results depending on whether you started your inflation data in 1970 versus 1991, 1992. If you started in 1970, you said it implied a quote, “sacrifice ratio of nine.” What’s the scale? Is that out of 10?
Mike Konczal:
That is nine percentage points of unemployment.
David Goldstein:
Oh, okay.
Mike Konczal:
This is where Larry Summers got his idea that you would need unemployment to go 10%. But basically if you started the date in the seventies, you’d say, we can only get the drop in inflation we got if unemployment went to 13%, which is kind of what Volcker did. And so well, that’s a much different story than what we’ve seen. And you can understand why some people of good faith in the Fed freaked out about that. But you can also understand why some actors maybe use this a little cynically to push for more austerity or move to make the Fed move faster than it probably should have.
David Goldstein:
And let’s be clear, Volcker pushed up interest rates so high, you could get like 17% on a CD in 1981. So I mean it was very different even from what the Fed did. So let me ask you a question then. If it was largely about supply in the first place, that’s what was causing inflation, and that’s now what is pushing disinflation. The Fed raising interest rates, was that counterproductive?
Mike Konczal:
I want to distinguish between a few things. One is just the Fed started raising interest rates in the spring of 2022. It waited until unemployment was about under 4% or around 4% to raise interest rates. It’s much lower than they did in the Great Recession. Chair Yellen raised interest rates when unemployment I believe was still above 5% off zero, which is the lowest the Fed can set them under how it normally operates. And the Fed raising rates to kind of normalize demand, as unemployment comes down, as there’s a lot of spending, as the economy has really exited a recession and we’re approaching something better trend, there’s a normalization of raising interest rates. And to my point of view, that is a normal operation, something they should have done, and that was part of their balancing act. The question is whether or not they had to become less accommodative and normalize how accommodative they were in the economy and how much spending investment they were trying to generate versus whether or not they had to become extremely restrictive. At this point, the Fed seems to be of a couple of different minds.
They might raise rates again this year. They may not. They paused again this past month. They seem like they’re going to keep rates higher than I think the financial markets expected, which is causing a little bit of convulsions there. But I think in retrospect that the last bit of fed hiking probably was too much. And I wonder if that’s how people will remember it. But to remember that you actually have to have a non-ideological story about what just happened that’s based in data and the actual experience. I worry a little bit about the people who do this research outside us at the Roosevelt Institute and a handful of our friends like Groundwork and Economic Policy Institute. They’re Federal Reserve economists, and there tend to be macro economists at elite universities who tend to be center right, or they tend to not really emphasize the benefits of full employment as much as people who represent the interests of workers. So I worry some of this can get lost in the way this narrative develops out unless we really emphasize this. So thank you for having me on.
David Goldstein:
Well, it’s funny because I first read your paper because Krugman linked to it in one of his pieces, and it’s been so much fun reading him as he seems to be having a little crisis, mini crisis of faith here. It’s an internal argument. And one of the things which he suggested was that that 2% target that maybe that’s too low, that that was too low, that may be 3%, 3.5% might be more appropriate. Whereas when you read Larry Summers, he’s clearly saying, no, we still have to get down to two. We haven’t gotten there yet. What’s your take on this? Because historically, the below 2% we had for that long period of time, we were talking about secular stagnation. We were fearing that we might get into disinflation, which yes is worse than inflation. Should we be targeting a higher inflation rate than we’ve had for the previous 15, 20 years?
Mike Konczal:
Yeah. It’s funny, Larry Summers actually during the later half of the Great Recession, was arguing for a 4% inflation target. He was also arguing for other things that are equivalent to a three or 4% inflation target, like targeting nominal spending. And many other economists who are a little bit more hawkish right now had during the Great Recession been arguing for it. And many of them are arguing for it now, but they say that we have to go back to two and then back up to whatever’s appropriate because quote, unquote, “credibility,” which when you’re hearing people utterly divorced from financial markets and supply chains and business investments talk about credibility. It’s like, for whom and for what? Do you think?
Nick Hanauer:
Yeah, credibility in the faculty lounge.
Mike Konczal:
Yeah, in Cambridge. I don’t even understand.
Nick Hanauer:
Yeah.
Mike Konczal:
Amazing. Yes. So it would be nice to know a little bit more about their theory of how the world works, that this matters that much because many countries have higher inflation targets. Many countries move their inflation targets during periods of higher inflation with no negative consequences. And I think an intuitive way to say this, it’s a little complicated. I don’t want to lose the audience, but at 2%, it’s like a targeting stuck in a low gear. That there’s an element where’s just not enough spending to get the economy going. And we can’t always rely on Congress to do what it did, say during the COVID pandemic and spend money at the rate to get it out of the ditch to get it into a higher gear. And alternatively, there’s arguments that, so we here at the Roosevelt Institute, my colleague Justin Bloch fellow with us, wrote a paper arguing for a two to three and a half percent range, which some countries do as well to give the fed some flexibility in this range.
It’s an argument we made before this pandemic, so it’s not opportunistic, but I think this has made it seem even more important that the Fed is working under a cloud of confusion with huge stakes to getting things stuck at the low end, but also needs space to be able to see what’s going on on the higher end with a lot of globalization supply chains going on. So my view, and I think there’s a very strong academic case for it, is to do that. The 2% target was essentially made up. And I am not saying that dismissively, though I am, but it was literally made up.
Nick Hanauer:
There’s nothing magic about 2%.
Mike Konczal:
Yeah, it just kind of made it up. There was one country that did 2%, New Zealand, that seemed to have good experience with it, and so they ran with it. This was all stuff invented in the nineties, and most engineers and most people who are thinking of dynamic systems would be totally willing to update this parameter. People at any large company that involves a large decisions like this would happily update this thing for now. But the way economists work is that their credibility is on the line. But that’s a very arbitrary number, and it has moved for many other countries, and I think it should move again now.
Nick Hanauer:
The other thing, Mike, I find just really dispiriting about this whole conversation about inflation is while prices have gone up, the economy is effectively burning a trillion dollars a year in stock buybacks, which if you applied to prices, that’s like a $7,000 per worker per year raise. If you simply distributed that money in the economy as wages, and then you don’t actually have, well, I mean you might have higher prices or slower prices.
David Goldstein:
If you’re not taking profits at such a high margin to do all those stock buybacks.
Nick Hanauer:
That’s right. You could make every single American consumer whole simply by taking the stock buyback money and either using it as higher wages or lower costs, and we never have that conversation. That’s never part of-
David Goldstein:
What you’re saying, Nick, is we never have a conversation about what the appropriate sacrifice ratio should be for billionaires.
Nick Hanauer:
Exactly. Or corporate profit. Why is that never in the consideration set?
Mike Konczal:
And beyond just workers or lower margins, just higher investment. One reason inflation can be high is because productivity is low and productivity is low, is because businesses haven’t been investing for several decades. And if you ask people at the high degree recession, why are you doing these then record high buybacks? They say, well, look, there’s not demand for our products. The economy is kind of slow. We’ve matured out.
Nick Hanauer:
That’s because they don’t pay their workers enough. If they paid their workers more, their workers would buy more stuff and then they would have demand.
Mike Konczal:
Exactly. And so one thing that I’m excited about right now is that we’ve actually been having an investment wave this year. Part of it is generated by the Inflation Reduction Act and other bills that President Biden passed, but also I think it’s because people are spending more money and firms with tight labor markets firm have to think about being more productive for the first time in a long time.
Nick Hanauer:
In a long time. Yeah.
Mike Konczal:
And hopefully that diverts some of that money that’s going to just bid up financial assets or rich people playing games with each other, instead is diverted towards investment and wages and productivity, things that might actually help sustain a strong high pressure economy instead of the so-called secular stagnation, but the perpetually quasi recession economy that we’ve been in for several decades that I think is very bad for workers but also bad for everyone, including owners who I think if the entire economy was working better, would be in a position at least potentially make more profits.
Nick Hanauer:
But can you clarify that? You think we’ve been sort of wavering near recession for a long time, is that?
Mike Konczal:
I think if you look at the recovery from the Great Recession, there are arguments to argue, I think the economist, Brad DeLong made this point around 2016 or so that the recovery actually doesn’t look that much better than the Great Depression. The Great Depression obviously was worse at the beginning when unemployment went to say 25%. And our government isn’t on the gold standard. We have a robust as imbalance of social insurance system and many other things that can perpetuate spending. So we’d never hit that. The unemployment did get to 10%, but if you look out like seven years, eight years, nine years, Great Depression recovered a lot where the Great Recession did not recover very much at all. In fact, it basically did not recover back to the previous trend we were on.
And so we just ended up in this kind of perpetual quasi recession, especially during the Great Recession, and whether or not our county just could not sustain the level of spending that it would need and whether or not that’s because of rampant inequality with so many of our resources tied up with people who are just really not spending them or just financial markets and corporate governance structuring our businesses. So they don’t want to invest in corporate concentration at very high levels leading firms to not invest even more just to kind of rake in their profits. There needed to be something to break that. And I think the spending during the COVID recession, I think the shock of the reopening and the empowerment of workers and the investments, I think actually might be able to, if we can sustain it, and especially if we can dodge a recession, really do have the potential to kind of break us out of this really bad economic equilibrium we’ve been in.
David Goldstein:
Good old fashioned Keynesian fiscal stimulus.
Mike Konczal:
Yeah.
David Goldstein:
Because there was very little the Fed could actually do once interest rates were near zero, that was pretty much as far as it could go or it was willing to go. It wasn’t willing to go to negative interest rates, so you couldn’t get a boost from monetary policy, which raises a question for me related to inflation, and that is when the Fed started increasing interest rates, its ultimate goal was to bring down inflation. But am I correct to say that its proximate goal was to increase unemployment so as to bring down inflation and it failed to do that. One would think that such a substantial rise in interest rates under the old models should have caused a spike in unemployment. It didn’t happen. Is monetary policy kind of toothless?
Nick Hanauer:
I mean, Goldie, to be clear, you don’t know what the effect was because instead it’s possible that without the action, we might’ve even had lower unemployment than we have today. Even though it’s lower than it’s been in a long time,
David Goldstein:
It’s hard to get much lower because there’s always some friction in the labor market. There’s always going to be some turnover. I’m just wondering, did the Fed accomplish anything?
Mike Konczal:
To understand what the Fed’s trying to do? You have to enter the topsy turvy world of macroeconomics where everybody’s spending is someone’s income and everyone’s income is someone’s spending. So what the fed’s trying to do is lower spending, but every dollar spent is someone’s income. So as it tries to lower spending in the economy, which is investments and other things, it’s going to lower people’s incomes, which leads to unemployment, which is kind of one of the chains. And the way it is probably most effective is through the unemployment channel. People talk about other kinds of things it can do. It can affect valuations of financial assets and things like that. But when it comes to actually changing spending, it tends to show up in people’s wages and their employment situation. Now, did the Fed do anything? It’s a really good question. We know slowed down the housing market, which had very high price increases.
I’m sure everyone’s tried to buy a house or you’ve rent a new place has experienced. On the other hand, it’s also slowed down some housing construction, which has a longer term impact, though there was a big wave of housing construction at the beginning. This is what my paper tries to get an empirical handle on because prices did decrease. People spent less money. Now were they spending less money because they felt poor because of the Fed or because things were normalizing and things were just cheaper? My paper takes a look at about 130 categories of spending and sees which ones actually involve people getting less stuff while prices decreased, AKA their demand went down, they just bought less. So did the Fed do anything? Well, people are going to debate this for a while. So in my research to try to get a handle on how much the Fed impacted, I look at 123 categories that the government keeps track of for inflation, different kinds of spending categories, pet food, car repair, things like this.
I look at the categories in which prices fell, which is to say they decelerate, which is to say their inflation rates came down. And how much of it involves people actually buying less stuff, controlling for prices? Has their demand for it gone down? Are they just spending? Are they getting less things there? Their demand has fallen, which is what the Fed wants to do with interest rates. And how much are they actually getting more stuff or the same amount of stuff, which is more consistent with supply increasing that things have reopened in such a way that you can actually start getting things to consumers faster and easier, and competition is bringing down prices. And I find the large majority, probably about two thirds to three fourths. Is from the supply side story. So demand has some role to play, but it’s a very small role.
And the large majority, the vast majority even, is really driven by the reopening story. It took a lot longer than people thought to really start to kick in, but it’s happened and I think it’s really important to remember that. Now, when I get criticism or pushback of this research, I think people basically accept the results that you can argue at the margins about them. But I think people would say, so far inflation has been driven by the supply side. However, it can’t go much lower and it’s going to stay at this high rate. And the idea that we’re at mission accomplished or something, this thing’s over is wrong, and this paper explains the good part of the story, but the next part of the story will be a lot harder. That’s kind of like Larry Summer’s story. I’d say, first of all, that’s true.
We don’t know what’s going to happen next, but we do know that a lot of the categories of his spending that we think is really sensitive to how much money people have and how tight the economy is, we’ve seen those prices come down as well. So there isn’t a low hanging fruit, high hanging fruit for inflation coming down. Inflation’s been coming down basically across the board. That’s really a positive sign. And if inflation lands at two and a half or 3% and unemployment hasn’t gone up, that is a remarkable achievement that everyone should take a lot of pride in rather than mistakes people have to apologize for.
Nick Hanauer:
Yeah. So Mike, a couple of final questions. First, the benevolent dictator question. If you were in charge, what would be your policy agenda going forward?
Mike Konczal:
In general or regarding inflation?
Nick Hanauer:
Regarding inflation. I know you have thoughts about other things. Yeah.
Mike Konczal:
I mean, I think a system of much more progressive taxation and a system that helps control prices in sectors where we know there’s rampant profiteering and large inefficiencies. Notably healthcare, I think a massive expansion of a public option or an expansion of Medicare, Medicaid. We know actually from the 2010s, changes in prices to Medicare, Medicaid reimbursements really did show up in the inflation data and weren’t just offset by people spending more on other things. So I think if we’re thinking of a robust agenda to help control inflation that goes beyond just the Federal Reserve. We want to think about tax policy that’s much more progressive and also costs in certain sectors that we know are persistent and efficient and notably aren’t just offset by people spending more on other things. Also, a robust housing agenda, something that expands both the supply of housing and allows people who can’t afford housing at any level of supply, the assurance that they’re going to be house secure.
I think housing has been basically one of the biggest stories of inflation all the time, and especially in this recovery. And we’re just down a lot of housing from where we should be for this country, and too many people are housing insecure. So a robust policy agenda that really addresses that, which is tough to do at the federal level, though there’s a lot of things, the Biden administration had a good bill out there, but locally and at the state level, I think that’s a really important lever that could be used.
Nick Hanauer:
Awesome. Final question, Nick.
Mike Konczal:
Sure.
Nick Hanauer:
So why do you do this work?
Mike Konczal:
I do this work on macroeconomics because I think the stakes are so high and because I think it is so undercovered as a policy priority for people. I think for good reason people focus a lot about schooling and access to jobs and things like that, which are very important. But if the Federal Reserve wants a million more people to be unemployed, they’ll probably make that happen. And all the good policy interventions at the individual or community level won’t offset that.
I also do this work because I think the people who mostly do it are academics who are very theoretical and don’t even really think about actual people or industries and don’t care about real time problems, or at least can’t because that’s the academic structure that they’re in, or they’re on Wall Street and they’re really concerned about the effects on bond portfolios, which is their jobs. They should do that. But people who wake up and think about like, well, what’s the Federal Reserve’s impact on everyday working people are few and far between, and me and a handful of our friends at peer organizations, and I think the work is just so important.
Nick Hanauer:
Well, Mike, thank you so much for being with us, and thanks for doing the extraordinary amount of work it must’ve taken to work through this paper. It’s really great and it will be available in the show notes.
Mike Konczal:
Thank you so much for having me out.
David Goldstein:
One of the things that struck me from this conversation and from the conversation that’s been ongoing over the past year, again, we mentioned Krugman, we mentioned Larry Summers, we’ve mentioned the Federal Reserve, is that the people who are making these decisions don’t have skin in the game, that they’re looking at this as a theoretical issue. And I have a solution for this, Nick.
Nick Hanauer:
What’s that?
David Goldstein:
And that is I think that we should tie employment at the Federal Reserve to the unemployment rate. Let’s say for every 1% increase in the unemployment rate, a Federal Reserve governor loses their job. And maybe that’s chosen by random, by lottery, which one.
Nick Hanauer:
Or one of their toes?
David Goldstein:
No. I just think that, let’s be fair, we’re talking about unemployment here, that they should be unemployed. So if unemployment rises from three and a half percent about where it is now to the seven and a half percent that Larry Summers wanted, well, four Federal Reserve governors should be laid off. How about that?
Nick Hanauer:
Well, I think I have a more practical idea. I think that what’s poisonous about this conversation is the only allowable lever here is the pain of working people. When there are plenty of other levers, stock buybacks being the canonical example, you could take all trillion dollars of that and just make it in lower prices or higher wages. Problem solved. I just don’t understand why it’s not part of the consideration set. Why we are not vociferously arguing for allocating that money towards solving these problems.
David Goldstein:
There’s a lot of things you can look at. When you say levers, really what’s happened is the only lever we’re allowed to use anymore is interest rates. We’ve limited ourselves to monetary policy, and part of that is because of Milton Friedman’s whole monetary revolution that this argument that fiscal policy doesn’t have any impact because people automatically discount it. So it is all this anti Keynesian bullshit, when in fact there’s a lot of things you can do. Mike mentioned as benevolent dictator, he would have a highly progressive tax system. Raise taxes on the rich. Here’s this thing. We used to use tax policy as a lever. Since 1980, we only do one thing, and that’s cut taxes. And remember, we have our friend of the podcast, we haven’t talked to him in a very long time.
Friend of Civic Ventures, Bruce Bartlett, who was very influential in crafting Reagan’s tax policy. And what he told us was, the reason why, the main reason why they cut top marginal tax rates in the Reagan administration was to counter what the Fed was doing in upping interest rates, that it was going to have a devastating impact on the economy. And so they were using tax cuts as a lever to try to soften that a bit, to soften the negative impact on the economy. And he points out that this is a different economy now than we had then, and taxes are already really, really low. So you’re not going to get anything out of tax cuts. But it strikes me that if you have a hot-
Nick Hanauer:
But if you want a lower demand.
David Goldstein:
Right. If you have a hot economy and you want to cool down the economy and you believe that raising taxes will slow growth, fucking raise taxes.
Nick Hanauer:
Yeah, exactly.
David Goldstein:
Because they’re too low right now. And you know what would happen? You’d end up with, you’d be reducing the deficit a bit. You pay off a little bit of debt. We could do that sometimes. Sometimes we could use taxes as a lever by raising them, which by the way puts you in a position in the future. If you need it, you could cut it.
Nick Hanauer:
You could cut them. Right.
David Goldstein:
And this is actually, I’ve been saying this from the very beginning. I think what the Fed is doing here, one of their big inspirations in raising interest rates is that interest rates have been too low for a very long time.
Nick Hanauer:
And that is true, right? You want interest rates not to be zero, right? That makes no sense.
David Goldstein:
Well, because there’s a couple of problems with very low interest rates, with interest rates near zero, and one of them is you get bubbles because money is really cheap to borrow. So You throw it into housing, into real estate, or you throw it into dot coms or you throw it into-
Nick Hanauer:
The siren call of leverage is very strong when interest rates effectively are zero.
David Goldstein:
Right. So that’s one problem. The other problem is you have no room to use monetary policy when there’s an economic crisis. And this happened during COVID, we had very low interest rates going into COVID, and there was nothing the Fed could do, but quantitative easing because you couldn’t cut interest rates much further. And so I really think they’re taking advantage of the post COVID if we are post COVID, the post pandemic economy, to actually get interest rates back into a normal range. It’s a little high right now, but they certainly shouldn’t be. We don’t want 7% mortgages, but four or 5% is not so bad. That’ll be more normal
Nick Hanauer:
That’s right. A 5% mortgage I think makes perfect sense.
David Goldstein:
But the big takeaway from all this, Nick, is how important, and I hate to say it, how important economists are and the things they say and the thinking they do. The impact that they can have on middle class Americans, on all Americans, that if you put Larry Summers in charge, he would’ve done everything he could to jack up unemployment. Not because he’s a bad person, but because he believes, well, I don’t know, maybe he is. I’ve never met the guy. But it’s got nothing to do with that. I think he believes what he believes for whatever reasons. And this idea that, oh, it’s a high sacrifice ratio when you’re not the one who’s being sacrificed.
Nick Hanauer:
Sacrificed. Yeah. It’s very easy to have a sacrifice ratio when you and no one you know is going to have to make any sacrifice.
David Goldstein:
And I think that one of the big heuristics in middle out economics is air on the side of the middle class. Obviously, there was all this debate even at the time the Fed started raising interest rates, all this debate over what was causing inflation and over how long it would last, how high it would go, how fast it would come down. And even now that it’s happening, there’s all this debate over why it’s coming down. They didn’t know. These models are just not good enough. So when in doubt, err on the side of the middle class, err on the side of immiserating as few people as possible.
Nick Hanauer:
And if you need to take a pound of flesh somewhere, take it from the folks who can afford it.
David Goldstein:
Who have a lot more pounds to spare. People like you, Nick. Take it out of your hide, not mine. Not out of the person working at the local grocery store.
Nick Hanauer:
Exactly. Well, progress is being made, that’s for sure, Goldie.
David Goldstein:
Yeah. And again, there’s a link to Mike’s paper in the show notes. Obviously we encourage you to read it. It’s a little wonky economist stuff, but I think it tells a very interesting story.
Speaker 4:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to subscribe, rate and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer. Follow our writing on Medium at Civic Skunkworks and peek behind the podcast scenes on Instagram at Pitchfork Economics. As always, from our team at Civic Ventures, thanks for listening. See you next week.