Nice analysis. I think the word "idiosyncratic supply chain factors" in your snippet from Stiglitz-Regmi speaks volumes. It amounts to a this-time-is-different argument, which you demolish quite nicely.
As to your conclusion, none of us - not the Fed, not macro- or policy-economic establishment, not the markets - know how much Fed action is enough. If you buy the theory that inflation expectations are the inflation driver, it seems like the Fed ought to pause and see what comes down. If you take a Phillips curve or labor market approach, the economy must seem stubbornly resistant to fiscal tightening, it seems like they have "more work to do". Inflation-fighting sucks.
The question is which direction is it worse to overshoot? Drive the economy into a recession, or have high inflation for a longer duration of time?
I have a maybe related question. Inflation has been quite low for a while. Wealth concentration has also been quite high for a while. Is there any way to tell if the two are related? If you give a billionaire a billion dollars, his spending is not likely to increase substantially. If you give a million people in poverty each a thousand dollars, all of their spending will increase. The various COVID stimulus bills have definitely been closer to the latter and can explain the higher inflation. Does the wealth concentration help explain the lower inflation from before?
Yes, I think there's probably a relationship there. In particular, I think fiscal stimulus can do more to promote income inequality than monetary stimulus. In the 2010s, the Fed tried to stimulate the economy by buying up a lot of bonds. Those bonds were mostly held by rich people, so a first-order impact of this policy was to make rich people richer. Ultimately I think these policies also helped non-wealthy people by increasing economic activity and improving worker bargaining power—the late 2010s saw strong wage growth at all income levels. But it's very possible that wealthy investors benefitted the most.
The fiscal stimulus Congress undertook in 2020 and 2021 was different. Congress sent out stimulus checks and enhanced unemployment benefits to a broad cross-section of Americans. This not only directly increased everyone's cash balances, but as you say non-wealthy recipients were more likely to spend the money. This increased economic activity so much that we got a severe worker shortage, which in turn improved worker bargaining power, especially at the low end of the wage distribution. As a result, low-wage workers have enjoyed faster wage growth in the last two years than higher-income workers.
Nice analysis. I think the word "idiosyncratic supply chain factors" in your snippet from Stiglitz-Regmi speaks volumes. It amounts to a this-time-is-different argument, which you demolish quite nicely.
As to your conclusion, none of us - not the Fed, not macro- or policy-economic establishment, not the markets - know how much Fed action is enough. If you buy the theory that inflation expectations are the inflation driver, it seems like the Fed ought to pause and see what comes down. If you take a Phillips curve or labor market approach, the economy must seem stubbornly resistant to fiscal tightening, it seems like they have "more work to do". Inflation-fighting sucks.
The question is which direction is it worse to overshoot? Drive the economy into a recession, or have high inflation for a longer duration of time?
I have a maybe related question. Inflation has been quite low for a while. Wealth concentration has also been quite high for a while. Is there any way to tell if the two are related? If you give a billionaire a billion dollars, his spending is not likely to increase substantially. If you give a million people in poverty each a thousand dollars, all of their spending will increase. The various COVID stimulus bills have definitely been closer to the latter and can explain the higher inflation. Does the wealth concentration help explain the lower inflation from before?
Yes, I think there's probably a relationship there. In particular, I think fiscal stimulus can do more to promote income inequality than monetary stimulus. In the 2010s, the Fed tried to stimulate the economy by buying up a lot of bonds. Those bonds were mostly held by rich people, so a first-order impact of this policy was to make rich people richer. Ultimately I think these policies also helped non-wealthy people by increasing economic activity and improving worker bargaining power—the late 2010s saw strong wage growth at all income levels. But it's very possible that wealthy investors benefitted the most.
The fiscal stimulus Congress undertook in 2020 and 2021 was different. Congress sent out stimulus checks and enhanced unemployment benefits to a broad cross-section of Americans. This not only directly increased everyone's cash balances, but as you say non-wealthy recipients were more likely to spend the money. This increased economic activity so much that we got a severe worker shortage, which in turn improved worker bargaining power, especially at the low end of the wage distribution. As a result, low-wage workers have enjoyed faster wage growth in the last two years than higher-income workers.