Business

Why inflation could be a good thing for the US economy, unless inflation stagnates

Not only do you pay more for things than you did a year ago, but continuously reads higher than expected The Consumer Price Index continued to wreak havoc on the stock market, sending the S&P 500 down more than 1,000 points on Tuesday, its worst day since. June 2020.

One of America’s foremost financial historians says the moment calls for an economics lesson.

“The reopening of inflation that we have had so far is a very good thing,” said Brad DeLong, a professor at UC Berkeley. Luck. His comment contradicts more hawkish stance on inflation, says Harvard economist Larry Summers, who worked with DeLong on the Treasury Department during the Clinton administration.

DeLong argues that there is a major economic shift going on that everyone should welcome. It all has to do with our weird but wonderful post-pandemic economy.

The Launch world

The new economy, DeLong said, is one where more time is spent online, fewer jobs that require face-to-face interaction, and significantly higher rates of production of goods.

It’s like we’ve zoomed in decades into the future in just a few years.

“A couple of decades,” DeLong said when asked about how many years of economic change are just over two years away: “A few decades of structural change and economic and social learning about how online as a eternal thing.”

“Less direct labor in retail facilities, more orders, significantly more production of goods, and essentially more entertainment and manufacturing as well,” is how DeLong describes it. Describe your vision for the new economy in a particular time interview with Luck last week introduced his new book, Slide towards Utopia. The meeting took place on Zoom, DeLong noted, proving his point.

According to DeLong, inflation in the US currently serves two functions that can help the economy in the long run: helping to expand new economic areas ready for massive growth, and discovering and optimizing address the supply chain difficulties that have been with us since the beginning of the epidemic.

Unemployment It’s currently at its lowest level since pre-pandemic, but the total number of jobs we’re giving back isn’t the same as the level we left in 2020, DeLong said.

“We want to get back to a full-time economy quickly. But it’s a very different full-employment economy when we go back there,” DeLong said.

Moving workers out of industries such as retail and hospitality and expansion of sectors should come with incentives in the form of higher wages, which, according to DeLong, means inflation.

“If you want to create economic incentives for people to move into expanding sectors where we actually need more workers, then their wages have to go up,” he said.

“When you come out of a major recession, the natural rate of inflation has to be 2% above normal,” he added. “The inflation rate that the market really wants to see in order to bring production, distribution, and transportation into allocative efficiency should be more than 2%.”

In addition to helping usher the economy into a new era, DeLong sees another benefit of today’s inflation: it can help solve paralysis. supply chain bottlenecksbased on the economic adage that High price is often the best cure for high price.

With supply chain issues contributing to price increases and making people less likely to buy, that could be the driving force behind the industry’s resurgence and eventual consolidation, according to DeLong. who says inflation is involving more people figuring out how to produce more of what we need or less of what we don’t.

“That’s the great thing about the market,” he said. “That when prices are aligned with social values, it means you don’t just have one brain or a few brains to solve problems. Everyone’s brain is solving problems. And everyone is doing what they can to deal with it in their immediate circumstances.”

But as always, there is a chance.

Inflation risk

DeLong and other economists acknowledge that the positive outlook for inflation comes with a caveat. Inflation expectations will become entrenched in the economy and sticking around can become a self-fulfilling prophecy, which will lead to something even worse for the economy.

The word for that is Inflation stagnated: the worst case scenario is slow economic growth combined with high inflation. DeLong says it’s still very likely.

“At worst you’re stuck in the stagflation of the 1970s,” he said. “If inflation stays within expectations, that would be a very bad thing.”

The ideal situation, says DeLong, would be a repeat of the recessions that have hit the United States in the past late 1940s and the early 1950sboth were relatively short before inflation subsided.

But the worst-case scenario of stagnant inflation is still possible, DeLong warned, especially if inflation expectations become entrenched in the economy.

“Entrenched” is a dumb word for the Fed this year, and a situation where it desperate to avoid. Penetrating inflation refers to people who expect prices to continue to rise, which can lead to inflation that lasts much longer than it would otherwise.

DeLong said if inflation were to run high during a recession, it would be a “very bad thing” for the economy. Whether this can happen will depend on the direction of gas and energy prices, which have been very unpredictable so far this year.

“Whether expectations are reinforced and we get into the problem of the 1970s really depends on the trajectory of energy prices,” he said. “Inflation expectations are always driven by what people see at the pump.”

Top economists and bankers — including Allianz and Gramercy’s chief economic advisor Mohamed El-Erian and Goldman Sachs CEO David Solomon—Warned that inflation is becoming widespread and persistent around the world. And the World Bank has issued much warning This year, persistent inflation combined with slowing economic growth is leading to the risk of stagnant inflation in many countries around the world is very real.

Also, not all economists share DeLong’s view that there’s much that’s good about inflation right now, with many arguing that it’s a much more pressing issue that the government is out of control. full.

Steve Hanke, an economist at John Hopkins University, recently criticized the Fed for “incompetence and poor management“Leading to inflation and the prediction that the Fed leaves the US money supply short could lead to”businessman“Of a recession next year.

DeLong’s former boss, Larry Summers, has been singing a dire tune about inflation for more than a year, warning last year that the Federal Reserve had too passive about price increases. In releasing this week’s CPI report, Summers wrote that the Fed was faced with “serious inflation problem“And warned that the unemployment rate will likely start to rise before inflation drops significantly.

Many economists fear that today’s high inflation and the Fed’s commitment to curbing it, could trigger a recession early next yearthough the jury is still out on whether this will constitute a deep or shallow recession.

In one blog post last year, when inflation became source of interestDeLong compared the recovering U.S. economy to motorists suddenly accelerating away. The slips left on the tarmac represent inflation – a downside and annoyance for sure – but worth it for getting the economy on track.

A year later, inflation could still be just a temporary slide on the road to recovery, he said. But in the midst of the war in Ukraine and uncertain energy markets for the foreseeable future, DeLong admits that the outlook is much darker now.

“We have energy price inflation and food price inflation stemming from Russia and its attack on Ukraine. That is complicating the picture and making the situation much worse,” he said.

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