Economics (Theory and Philosophy)

More stories

  • 125 Shares99 Views

    in Economy

    Pace of Climate Change Sends Economists Back to Drawing Board

    by

    Economists have been examining the impact of climate change for almost as long as it’s been known to science.In the 1970s, the Yale economist William Nordhaus began constructing a model meant to gauge the effect of warming on economic growth. The work, first published in 1992, gave rise to a field of scholarship assessing the cost to society of each ton of emitted carbon offset by the benefits of cheap power — and thus how much it was worth paying to avert it.Dr. Nordhaus became a leading voice for a nationwide carbon tax that would discourage the use of fossil fuels and propel a transition toward more sustainable forms of energy. It remained the preferred choice of economists and business interests for decades. And in 2018, Dr. Nordhaus was honored with the Nobel Memorial Prize in Economic Sciences.But as President Biden signed the Inflation Reduction Act with its $392 billion in climate-related subsidies, one thing became very clear: The nation’s biggest initiative to address climate change is built on a different foundation from the one Dr. Nordhaus proposed.Rather than imposing a tax, the legislation offers tax credits, loans and grants — technology-specific carrots that have historically been seen as less efficient than the stick of penalizing carbon emissions more broadly.The outcome reflects a larger trend in public policy, one that is prompting economists to ponder why the profession was so focused on a solution that ultimately went nowhere in Congress — and how economists could be more useful as the damage from extreme weather mounts.A central shift in thinking, many say, is that climate change has moved faster than foreseen, and in less predictable ways, raising the urgency of government intervention. In addition, technologies like solar panels and batteries are cheap and abundant enough to enable a fuller shift away from fossil fuels, rather than slightly decreasing their use.Robert Kopp, a climate scientist at Rutgers University, worked on developing carbon pricing methods at the Department of Energy. He thinks the relentless focus on prices, with little attention paid to direct investments, lasted too long.“There was an idealization and simplification of the problem that started in the economics literature,” Dr. Kopp said. “And things that start out in the economics literature have half-lives in the applied policy world that are longer than the time period during which they’re the frontier of the field.”Carbon taxes and emissions trading systems have been instituted in many places, such as Denmark and California. But a federal measure in the United States, setting a cap on carbon emissions and letting companies trade their allotments, failed in 2010.What’s in the Inflation Reduction ActCard 1 of 8What’s in the Inflation Reduction ActA substantive legislation. More

  • 150 Shares179 Views

    in Economy

    Is the U.S. Entering a Recession? Here’s Why It’s Hard to Say.

    by

    The U.S. may register a second straight quarter of economic contraction, one benchmark of a recession. But that won’t be the last word.The United States is not in a recession.Probably.Economic output, as measured by gross domestic product, fell in the first quarter of the year. Government data due this week may show that it fell in the second quarter as well. Such a two-quarter decline would meet a common, though unofficial, definition of a recession.Most economists still don’t think the United States meets the formal definition, which is based on a broader set of indicators, including measures of income, spending and job growth. But they aren’t quite as sure as they were a few weeks ago. The housing market has slowed sharply, income and spending are struggling to keep pace with inflation, and a closely watched measure of layoffs has begun to creep up.“A month ago, I was writing that it was very unlikely that we are in a recession,” said Jeffrey Frankel, a Harvard economist. “If I had to write that now, I would take out the ‘very.’”

    .dw-chart-subhed {
    line-height: 1;
    margin-bottom: 6px;
    font-family: nyt-franklin;
    color: #121212;
    font-size: 15px;
    font-weight: 700;
    }

    Change in select recession indicators since February 2020
    Notes: Production and job data are through June. Income and spending are through May and are adjusted for inflation. Income data excludes government transfer payments. All figures are seasonally adjusted.Sources: Commerce Department, Labor Department and Federal Reserve, via FREDBy The New York TimesMr. Frankel served until 2019 on the Business Cycle Dating Committee of the National Bureau of Economic Research, the semiofficial arbiter of when recessions begin and end in the United States. The committee tries to be definitive, which means it typically waits as much as a year to declare that a recession has begun, long after most independent economists have reached that conclusion. In other words, even if we are already in a recession, we might not know it — or, at least, might not have official confirmation of it — until next year.In the meantime, economists agree that the risks of a recession are rising. The Federal Reserve is raising rates aggressively to try to tame inflation, which has already contributed to large declines in the stock market and a steep drop in home construction and sales. Higher borrowing costs are all but certain to lead to slower spending by consumers, reduced investment by businesses and, eventually, slower hiring and more layoffs — all hallmarks of an economic downturn.“Are we in a recession? We don’t think so yet. Are we going to be in one? It’s a high risk,” said Joel Prakken, chief U.S. economist for S&P Global Market Intelligence.But the U.S. economy still has important sources of strength. Unemployment is low, job growth is robust, and households, in the aggregate, have lots of money in savings and relatively little debt. “The narrative that the economy has slowed quite a bit and is showing signs of deterioration from higher inflation and higher interest rates, that narrative is solid,” said Ellen Zentner, chief U.S. economist for Morgan Stanley. “But when you look at factors like jobs, where we’re still creating three to four hundred thousand jobs a month, with an unemployment rate that has not begun to show signs of sustained increases, and the cushions of excess savings, healthy household balance sheets — these are things that go far in keeping the U.S. out of recession, or at least staving off recession for longer.”What is a recession?Americans feel terrible about the economy right now — worse, at least by some measures, than at the peak of the pandemic-related layoffs in spring of 2020. It’s easy to understand why: The climbing cost of food, fuel and other essentials is eroding living standards. Hourly earnings, adjusted for inflation, are falling at their fastest pace in decades.8 Signs That the Economy Is Losing SteamCard 1 of 9Worrying outlook. More

  • 125 Shares169 Views

    in Economy

    Is ‘Greedflation’ Rewriting Economics, or Do Old Rules Still Apply?

    by

    Economists and politicians are debating whether monopolistic companies are fueling inflation in ways that confound longstanding theory.There are few good things about living through a period with the highest inflation in four decades, but here’s one: It’s a chance to re-examine what happens in an economy that’s gone haywire.Since prices started to escalate a year ago, politicians and economists have seized on inflation to tell their preferred story about what went wrong, and what policies would bring it back into line. Some say it’s very straightforward: Supply and demand, Economics 101.“There’s simply a lot of cash out there,” said Joe Brusuelas, chief economist for the accounting firm RSM US, referring to the several trillion dollars in pandemic stimulus that’s filtered into the economy since early 2020. “The competition for those goods is up and that’s sending prices up, whether we’re talking about getting a Nissan Sentra or a seat on an American Airlines flight.”The White House and progressive organizations, however, say wait a minute: This time is different. In a time of extraordinary disruption, they contend, increasingly dominant corporations are taking the opportunity to jack up prices more than they otherwise could, which is squeezing consumers and supercharging inflation. Or “greedflation,” as the hypothesis has come to be known.The argument comports with the Biden administration’s focus on the ills of economic concentration. Congressional Democrats have run with the idea, introducing bills that would impose a temporary “excess profits tax” on companies that charge prices they deem unreasonably high, or simply ban those high prices altogether. Critics, including the nation’s largest business lobby, deride these efforts as based on a “conspiracy theory” and a “flimsy argument.”So what’s really going on?It’s hard to tease out. A pandemic, a trade war, a land war, huge government spending, and a global economy that’s become vastly more integrated might be too complex for traditional macroeconomic theory to explain. Josh Bivens, research director at the left-leaning Economic Policy Institute, thinks that’s a good reason to revisit what the discipline thought it had figured out.“When I hear stories about an overheating labor market, I don’t think about falling real wages, and yet we have falling real wages,” Dr. Bivens said. Nor is the rise in profits typical when unemployment is so low. “The idea that ‘there’s nothing to see here’ — there’s everything to see here! It’s totally different.”When thinking about greedflation, it’s helpful to break it down into three questions: Are companies charging more than necessary to cover their rising costs? If so, is that enough to meaningfully accelerate inflation? And is all this happening because large companies have market power they didn’t decades ago?Productive Profits, or Gouging?There is not much disagreement that many companies have marked up goods in excess of their own rising costs. This is especially evident in industries like shipping, which had record profits as soaring demand for goods filled up boats, driving up costs for all traded goods. Across the economy, profit margins surged during the pandemic and remained elevated.When all prices are rising, consumers lose track of how much is reasonable to pay. “In the inflationary environment, everybody knows that prices are increasing,” said Z. John Zhang, a professor of marketing at the Wharton School at the University of Pennsylvania who has studied pricing strategy. “Obviously that’s a great opportunity for every firm to realign their prices as much as they can. You’re not going to have an opportunity again like this for a long time.”Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Measuring Inflation: Over the years economists have tweaked one of the government’s standard measures of inflation, the Consumer Price Index. What is behind the changes?Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.The real disagreement is over whether higher profits are natural and good.Basic economic theory teaches that charging what the market can bear will prompt companies to produce more, constraining prices and ensuring that more people have access to the good that’s in short supply. Say you make empanadas, and enough people want to buy them that you can charge $5 each even though they cost only $3 to produce. That might allow you to invest in another oven so you can make more empanadas — perhaps so many that you can lower the price to $4 and sell enough that your net income still goes up.Here’s the problem: What if there’s a waiting list for new ovens because of a strike at the oven factory, and you’re already running three shifts? You can’t make more empanadas, but their popularity has risen to the point where you would charge $6. People might buy calzones instead, but eventually the oven shortage makes all kinds of baked goods hard to find. In that situation, you make a tidy margin without doing much work, and your consumers lose out.This has happened in the real world. Consider the supply of fertilizer, which shrank when Russia’s invasion of Ukraine prompted sanctions on the chemicals needed to make it. Fertilizer companies reported their best profits in years, even as they struggle to expand supply. The same is true of oil. Drillers haven’t wanted to expand production because the last time they did so, they wound up in a glut. Ramping up production is expensive, and investors are demanding profitability, so supply has lagged while drivers pay dearly.Even if high prices aren’t able to increase supply and the shortage remains, an Economics 101 class might still teach that price is the best way to allocate scarce resources — or at least, that it’s better than the government price controls or rationing. As a consequence, less wealthy people may simply have no access to empanadas. Michael Faulkender, a finance professor at the University of Maryland, says that’s just how capitalism works.“With a price adjustment, people who have substitutes or maybe can do with less of it will choose to consume less of it, and you have the allocation of goods for which there is a shortage go to the highest-value usage,” Dr. Faulkender said. “Every good in our society is based on pricing. People who make more money are able to consume more.”Sorting Chickens and EggsThe question of whether profit margins are speeding inflation is harder to figure out.Economists have run some numbers on how much other variables might have contributed to inflation. The Federal Reserve Bank of San Francisco found that fiscal stimulus programs accounted for 3 percentage points, for example, while the St. Louis Fed estimated that manufacturing sector inflation would have been 20 percentage points lower without supply chain bottlenecks. Dr. Bivens, of the Economic Policy Institute, performed a simple calculation of the share of price increases attributable to labor costs, other inputs, and profits over time, and found that profit’s contribution had risen significantly since the beginning of 2020 as compared with the previous four decades.That’s an interesting fact, but it’s not proof that profits are driving inflation. It’s possible that causality runs the other way — inflation drives higher profits, as companies hide price increases amid broader rises in costs. The St. Louis Fed’s Ana Maria Santacreu, who did the manufacturing inflation analysis, said that it would be very hard to pin down.“It would be interesting to get data on profit margins by industry and correlate those with inflation by industry,” she said. “But I still think it is difficult to capture any causal relationship.”Concentration’s Double EdgeIf you think that’s complicated, try establishing whether market power is playing a role in any of this.It is well established that the American economy has grown more concentrated. On a fundamental level, domination by a few companies may have made supply chains more brittle. If there are two empanada factories and one of them has a Covid-19 outbreak, that in itself creates a more serious shortage than it would if there were 10 factories.“Concentration has affected prices during the pandemic, even setting aside any potentially nefarious actions on the part of leaders,” said Heather Boushey, a member of President Biden’s Council of Economic Advisers.But most of the public argument has been about whether companies with more market share have been affecting prices once goods are finished and delivered. And that’s where many economists become skeptical, noting that if these increasingly powerful corporations had so much leverage, they would have used it before the pandemic.Inflation F.A.Q.Card 1 of 5What is inflation? More

  • 113 Shares99 Views

    in Economy

    Biden’s Curious Talking Point: Lower Deficits Offer Inflation Relief

    by

    The administration says federal spending trends are helping rein in price increases, but the economic calculus may be more complicated.As Americans deal with the highest inflation in decades, President Biden has declared that combating rising costs is a priority for his administration. Lately, he has cited one policy in particular as an inflation-fighting tool: shrinking the nation’s budget deficit.“Bringing down the deficit is one way to ease inflationary pressures in an economy,” Mr. Biden said this month. “We reduce federal borrowing and we help combat inflation.”The federal budget deficit — the gap between what the government spends and the tax revenue it takes in — remains large. But Mr. Biden has pointed out that it shrank by $350 billion during his first year in office and is expected to fall more than $1 trillion by October, the end of this federal budget year.Rather than stemming from any recent budget measures by his administration or Congress, the deficit reduction largely reflects the rise in tax receipts from strong economic growth and the winding down of pandemic-era emergency programs, like expanded unemployment insurance. And for many experts, that — plus the reality that deficits have a complicated relationship with inflation — makes the budget gap a surprising talking point.“It’s probably not something they should be taking credit for,” Dan White, director of government consulting and fiscal policy research at Moody’s Analytics, said of the Biden team’s emphasis on deficit reduction. The expiration of the programs is mostly “not making things worse,” he said.The Biden administration’s March 2021 spending package helped the economic rebound, but it also meant the deficit shrank less than it otherwise would have last year. In fact, the $1.9 trillion relief plan probably added to inflation, because it pumped money into the economy when the labor market was starting to heal and businesses were reopening.But the White House has explained its new emphasis on deficit reduction and fiscal moderation in terms of timing. Administration officials argue that back in March 2021, the world was uncertain, vaccines were only beginning to roll out and spending heavily on support programs was an insurance policy. Now, as the labor market is booming and consumer demand remains high, the administration says it wants to avoid ramping up spending in ways that could feed further inflation.“Supply chains have created challenges in ramping up production as quickly as we were able to support demand,” said Heather Boushey, a member of the White House Council of Economic Advisers. “The point he’s trying to make is that the plan, moving forward, is responsible and is not aimed at adding to demand.”Moody’s Analytics estimates that inflation will be about a percentage point lower this year than it would be had the government continued spending at last year’s levels.But few people, if anyone, expected those programs to continue. And while it is possible to make a rough estimate about how much fading fiscal support is helping with the inflation situation, as Moody’s did, a range of economists have said that it is hard to know how much it matters for inflation with precision.Understand Inflation and How It Impacts YouInflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Inflation Calculator: How you experience inflation can vary greatly depending on your spending habits. Answer these seven questions to estimate your personal inflation rate.Interest Rates: As it seeks to curb inflation, the Federal Reserve began raising interest rates for the first time since 2018. Here is what that means for inflation.State Intervention: As inflation stays high, lawmakers across the country are turning to tax cuts to ease the pain, but the measures could make things worse. How Americans Feel: We asked 2,200 people where they’ve noticed inflation. Many mentioned basic necessities, like food and gas.The tie between budget deficits and inflation is also more complex than Mr. Biden’s statements suggest.Deficits, which are financed by government borrowing, are not inherently inflationary: Whether they push up prices hinges on the economic environment as well as the nature of the spending or cutback in revenue that created the budget shortfall.Policies that reduce the deficit could be inflationary, for instance. A big, broadly distributed stimulus that gives direct cash aid to low- and middle-income households could be more than offset in a budget by revenue from large tax increases on the wealthy. But shuffling much of that money to people who are likely to spend it quickly could cause demand to outstrip supply, leading to inflation. Alternatively, spending that would enlarge deficits — like debt-financed investments in energy infrastructure — could reduce inflation over time if the program improves efficiency, expands capacity or makes production cheaper.“I’ll fall back on the typical economist answer and say: It depends,” said Andrew Patterson, a senior international economist at Vanguard.The last time the federal government had a budget surplus was 2001. Since 1970, there have only been four years in which the U.S. government taxed more than it spent. Over that period, there have been times of both high and low inflation.“There’s no simple-minded deficit-to-inflation link — you have to look at both the demand and the supply side of the economy,” said Glenn Hubbard, a professor of finance and economics at Columbia University who headed the Council of Economic Advisers under President George W. Bush. The existence or absence of high inflation has more to do with imbalances in the real economy than with complex budget math. “If aggregate demand grows much faster than aggregate supply, you will see inflation,” he said.Complicating matters in the current situation, the stimulus from the last couple of years is still trickling out into the economy because consumers have amassed savings stockpiles that they are spending down, and because state and local governments continue to use untapped relief funds.And stimulus-stoked demand is far from the only reason prices are rising. Over the past year, because of factory shutdowns and overburdened transit routes, companies have struggled to expand supply to meet booming demand. Shortages of cars, couches and construction materials and raw components have helped to push costs higher.Grocery shoppers in Los Angeles. The White House has argued that a shrinking federal budget deficit will help rein in consumer prices.Alisha Jucevic for The New York TimesRecent global developments are worsening the situation. The Chinese government’s latest lockdowns to contain the coronavirus threaten to shake up factory production and shipping, while the war in Ukraine has caused fuel and food prices to increase.Employers are also raising wages as they scramble to hire in a hot job market, and that increase in labor costs is prompting some companies to raise prices to protect their profit levels. Some companies are even increasing their profits, having discovered that they can charge more in an era of hot demand.The demand drag from fading pandemic relief doesn’t appear to have been large enough to substantially offset those other forces. To date, price gains for a range of goods and services have mostly accelerated.Inflation F.A.Q.Card 1 of 5What is inflation? More

  • 125 Shares119 Views

    in Economy

    Employer Practices Limit Workers’ Choices and Wages, U.S. Study Argues

    by

    A Biden administration report says collusion and other constraints on competition hold down pay and prospects in the labor market.The recent narrative is that there is a tight labor market that gives workers leverage. But a new report from the Biden administration argues that the deck is still stacked against workers, reducing their ability to move from one employer to another and hurting their pay.The report, released Monday by the Treasury Department, contends that employers often face little competition for their workers, allowing them to pay substantially less than they would otherwise.“There is a recognition that the idea of a competitive labor market is a fiction,” said Ben Harris, assistant Treasury secretary in the office of economic policy, which prepared the report. “This is a sea change in economics.”The report follows up on a promise made by President Biden last summer when he issued an executive order directing his administration to address excessive concentration in the market for work.Drawing from recent economic research, the report concludes that lack of competition in the job market costs workers, on average, 15 to 25 percent of what they might otherwise make. And it emphasizes that the administration will deploy the tools at its disposal to restore competition in the market for work.“This is the administration declaring where it is on the enforcement of antitrust in labor markets,” Tim Wu, a special assistant to the president for technology and competition policy on the National Economic Council, said in an interview in which he laid out the report’s findings. “It is sending a strong signal about the direction in which antitrust enforcement and policy is going.”Across the economy, wage gains generally come about when a worker changes jobs or has a credible offer from outside that will encourage the current employer to provide an increase, argues Betsey Stevenson, a professor of economics at the University of Michigan who was on President Barack Obama’s Council of Economic Advisers.The State of Jobs in the United StatesEmployment growth accelerated in February, as falling coronavirus cases brought customers back to businesses and workers back to the office.February Jobs Report: U.S. employers added 678,000 jobs and the unemployment rate fell to 3.8 percent ​​in the second month of 2022.Wages and Prices: A labor shortage is helping to push up workers’ pay. With inflation running hot, that could be a problem for the Federal Reserve.Service Workers:  Even as employers scramble to fill vacancies, service workers are seeing few gains. Part-time work is partly to blame.Unionization Efforts: The pandemic has fueled enthusiasm for organized labor. But the pushback has been brutal, especially in the private sector.New to the Work Force: Graduating college seniors will start their career without the memory of prepandemic work life. Here is what they expect.“Companies are well aware of this,” she said in an interview, so they rally around a simple solution: “If we just stop competing, it will be better for everybody.”The Treasury report lays out the many ways in which employers do this. There are noncompete agreements that bar workers from moving to a competitor, and nondisclosure agreements that keep them from sharing information about wages and working conditions — critical information for workers to understand their options. Some companies make no-poaching deals.“There is a long list of insidious efforts to take power out of the hands of workers and seize it for employers’ gain,” said Seth Harris, deputy director at the National Economic Council and deputy assistant to the president for labor and the economy.This is happening against a backdrop of broad economic changes that are hemming in the options of many workers, especially at the bottom end of the job market.The outsourcing of work to contractors — think of the janitors, cafeteria workers and security guards employed by enormous specialist companies, not by the companies they clean, feed and protect — reduces the options for low-wage workers, the report argues.The mergers and acquisitions that have consolidated hospitals, nursing homes, food processing companies and other industries have also reduced competition for workers, the study says, curtailing their ability to seek better jobs.The report notes, for instance, that mergers trimmed the number of hospitals in the United States to 6,093 in 2021, from 7,156 in 1975. It cites research into how some of these mergers have depressed the wage growth for nurses, pharmacy employees and other health workers.The Treasury’s document is drawn from a body of research that has been growing since the 1990s, when a seminal paper by David Card and Alan B. Krueger found that raising the minimum wage did not necessarily reduce employment and could even produce more jobs.The conclusion by Mr. Card and Mr. Krueger, which economists would consider impossible in a competitive labor market in which rising labor costs would reduce employer demand, started the discipline down a path to investigate the extent to which employers competed for workers. If a few employers had the power to hold wages below the competitive equilibrium, raising the wage floor might draw more workers in.Lack of competition, the Biden administration argues, goes a long way to explain why pay for a large share of the American work force is barely higher, after accounting for inflation, than it was a half-century ago. “The fact that workers are getting less than they used to is a longstanding problem,” Ms. Stevenson, who was not involved in the Treasury report, noted.Anticompetitive practices thrive when there are fewer competitors. If workers have many potential employers, they might still agree to sign a noncompete clause, but they could demand a pay increase to compensate.Even if there is no conclusive evidence that the labor market is less competitive than it used to be, the report says, researchers have concluded that there is, in fact, very little competition.Suresh Naidu, a professor of economics at Columbia University, argues, moreover, that institutions like the minimum wage and unions, which limited employers from fully exercising their market power, have weakened substantially over time. “The previously existing checks have fallen away,” Mr. Naidu said.Unions are virtually irrelevant across much of the labor market. Only 6 percent of workers in the private sector belong to one. The federal minimum wage of $7.25 an hour is so low that it matters little even for many low-wage workers. The Treasury report argues that an uncompetitive labor market is reducing the share of the nation’s income that goes to workers while increasing the slice that accrues to the owners of capital. Moreover, employers facing little competition for workers, it argues, are more likely to offer few benefits and impose dismal working conditions: unpredictable just-in-time schedules, intrusive on-the-job monitoring, poor safety, no breaks.The damage runs deeper, the report says, arguing that uncompetitive labor markets reduce overall employment. Productivity also suffers when workers have a hard time moving to new jobs that could offer a better fit for their skills. Noncompete clauses discourage business formation when they limit entrepreneurs’ ability to find workers for their ventures.Addressing the issues that the report singles out is likely to be an uphill task. The administration’s push to increase the federal minimum wage to $15 has been unsuccessful. In Congress, bills that would ease the path for workers to join a union face long odds. Going after noncompete clauses, no-poaching deals and other forms of anticompetitive behavior would be an easier task.Last year, the Justice Department’s antitrust division brought several cases challenging no-poaching and wage-setting agreements. In January, four managers of home health care agencies in Maine were indicted on federal charges of conspiring to suppress the wages and restrict the job mobility of essential workers during the pandemic.Still, deploying antitrust enforcement in the job market is somewhat new. It has been used mostly to ward off anticompetitive behavior that raises prices for consumers in product and service markets. Persuading courts to, say, prevent a merger because of its impact on wages might be tougher.A note by the law firm White & Case, for instance, complained that the move to block Penguin Random House’s attempt to buy Simon & Schuster on the grounds that it would reduce royalties to authors is “emblematic of the Biden administration’s and the new populist antitrust movement’s push to direct the purpose of antitrust away from consumer welfare price effects and towards other social harms.” More

  • 150 Shares199 Views

    in Economy

    Modern Monetary Theory Got a Pandemic Tryout. Inflation Is Now Testing It.

    by

    The sun was sinking low over Long Island Sound as Stephanie Kelton, wearing the bright red suit jacket she had donned to give a virtual guest lecture to university students in London that morning, perched before a pillow fort she had constructed atop the heavy wooden desk in her home office.The setup was meant to keep out noise as she recorded the podcast she co-hosts, a MarketWatch production called the “Best New Ideas in Money.” The room was hushed except for Ms. Kelton, who bantered energetically with the producers she was hearing through noise-blocking headphones, sang a Terri Gibbs song and made occasional edits to the script. At one point, she muttered, “That sounds like Stephanie.”What Stephanie Kelton sounds like, circa early 2022, is the star architect of a movement that is on something of a victory lap. A victory lap with an asterisk.Ms. Kelton, 52, is the most familiar public face of Modern Monetary Theory, which posits that if a government controls its own currency and needs money — to make sure its citizens have food and places to live when, say, a global pandemic pushes many out of work — it can just print it, as long as its economy has the ability to churn out the needed goods and services.In the M.M.T. view of the world, “How will you pay for it?” is a vapid policy question. Real-world resources and political priorities determine how much lawmakers can and should spend.It is an idea that was forged, and put to something of a test, during a low-inflation era.When Ms. Kelton’s book, “The Deficit Myth,” was published in June 2020 and shot onto best seller lists, inflation had been weak for decades and had dropped below 1 percent as consumers retrenched in the pandemic. The government had begun to spend rapidly to try to prop up flailing households.When Ms. Kelton appeared on a Bloomberg podcast episode, “How M.M.T. Won the Fiscal Policy Debate,” in early 2021, inflation had bounced back to around 2 percent.But by a chilly January afternoon, as ducks flew over the frosty estuary outside Ms. Kelton’s house near Stony Brook University, where she teaches, inflation had rocketed up to 7 percent. The government’s debt pile has exploded to $30 trillion, up from about $10 trillion at the start of the 2008 downturn and $5 trillion in the mid-1990s.The good news: The government has had no trouble selling bonds to fund its spending, contrary to the direst projections of deficit scolds.The bad news: Some economists blame big spending in the pandemic for today’s rapid price increases. The government will release fresh Consumer Price Index data this week, and it is expected to show inflation running at its fastest pace since 1982.And that may be why Ms. Kelton, and the movement she has come to represent, now seem anxious to control the narrative. The pandemic spending wasn’t entirely consistent with M.M.T principles, they say — it wasn’t assessed carefully for its inflationary effects as it was being drawn up, because it was crisis policy. But the situation has underlined how hard it is to know just where the economy’s constraints lay, and how difficult it is to fix things once you run into them.Last summer, Ms. Kelton called inflation a temporary sign of “growing pains.” By the fall, she painted it as a good problem to solve, compared with a continued weak economy. As it lingers, she has argued that diagnosing what is causing it is key.“Can we blame ‘MMT’ for the run-up in inflation?” she tweeted rhetorically last month, just hours before her podcast recording.Understand Inflation in the U.S.Inflation 101: What is inflation, why is it up and whom does it hurt? Our guide explains it all.Your Questions, Answered: We asked readers to send questions about inflation. Top experts and economists weighed in.What’s to Blame: Did the stimulus cause prices to rise? Or did pandemic lockdowns and shortages lead to inflation? A debate is heating up in Washington.Supply Chain’s Role: A key factor in rising inflation is the continuing turmoil in the global supply chain. Here’s how the crisis unfolded.“Of course not.”Emon Hassan for The New York TimesThe economy is the limitTo understand how M.M.T. fits in with other dominant ways of thinking, it’s helpful to take a trip to the beach.In economics, there’s a school of thought sometimes called “freshwater.” It’s the set of ideas that became popular at inland universities in the 1970s, when they began to embrace rational markets and limited government intervention to fight recessions. There’s also “saltwater” thinking, an updated version of Keynesianism that argues that the government occasionally needs to jump-start the economy. It has traditionally been championed in the Ivy League and other top-ranked schools on the coasts.You might call the school of thought Ms. Kelton is popularizing, from a bay that feeds into the East River, brackish economics.M.M.T. theorists argue that society should feel capable of spending to achieve its goals to the extent that there are resources available to fulfill them. Deficit spending need not be constrained to recessions, even theoretically. Want to build a road? No problem, so long as you have asphalt and construction workers. Want to feed children free lunches? Also not a problem, so long as you have the food and the cafeteria workers.What became Modern Monetary Theory began to percolate among a small group of academics when Ms. Kelton, a former military brat and one-time furniture saleswoman, was a graduate student.She had a gap period between graduating with a bachelor’s degree from California State University, Sacramento and attending Cambridge University on a Rotary scholarship, and her college economics professor recommended that she spend the time studying with L. Randall Wray, an early pioneer in the set of ideas.They hit it off. She remained in Mr. Wray’s circle, and he — and Warren Mosler, a hedge fund manager who had written a book on what we get wrong about money — convinced her that the way America understood cash, revenues and budgeting was all backward.Ms. Kelton earned her doctorate at The New School, long a booster of out-of-mainstream economic thinking, and went on to teach at the University of Missouri-Kansas City. She, Mr. Wray, who was there at the time, and their colleagues mentored doctoral students and began to write academic papers on the new way of thinking.But academic missives reached only a small circle of readers. After the 2008 financial crisis punched a hole in the economy that would take more than a decade to fill, Ms. Kelton and her colleagues, invigorated with a new urgency, began a blog called “New Economic Perspectives.” It was a bare bones white, red and black layout, using a standard WordPress template, that served as a place for M.M.T. writers to make their case (and, in its early days, featured a #Occupy[YourCityHere] tab).The theory picked up some fervent followers but limited popular acceptance, charitably, and outright derision, uncharitably. Mainstream economists panned it as overly simplistic. Many were confused about what it was arguing.“I have heard pretty extreme claims attributed to that framework and I don’t know whether that’s fair or not,” Jerome H. Powell, the Fed chair, said in 2019. “The idea that deficits don’t matter for countries that can borrow in their own currency is just wrong.”Ms. Kelton kept the faith. She and her colleagues held conferences, including one in 2018 at The New School where she gave a lecture on “mainstreaming M.M.T.”Rohan Grey organized the conference and a media reception afterward at an Irish pub (“‘Shades of Green,’ monetary pun intended,” he said). It was attended by organizers, academics, “lay people” and lots of journalists. At the happy hour — which lasted until 1 a.m. — Ms. Kelton was mobbed when she walked in the door. “She was already on her way to super celebrity status at that point,” said Mr. Grey, an assistant professor at Willamette Law.When she gave presentations on her ideas, Ms. Kelton would occasionally display a quote often attributed to Mahatma Gandhi: “First they ignore you, then they laugh at you, then they fight you. Then you win.”And her star was rising more broadly. She advised Bernie Sanders’ presidential campaigns in 2016 and 2020, getting to know the Vermont senator. He never fully publicly embraced M.M.T., but he nevertheless advanced policies — like Medicare for All — that reflected its ideals.She amassed a following of tens of thousands, later growing to 140,000, on Twitter. Her first handle, @deficitowl, prompted ardent fans to gift her wise bird figurines, some of which are still on display in her home office. She cultivated a small coterie of prominent journalists who were interested in the idea, most notably Joe Weisenthal at Bloomberg. She signed a book deal. She was regularly talking to Democratic lawmakers, sometimes in groups.Her idea percolated through Washington’s media and liberal policy circles. Mainstream economic predictions that huge debt loads would come back to haunt nations like Japan had not played out, the anemic rebound from 2008 had scarred society and called the size of the crisis response into question. Ms. Kelton and her colleagues were ensuring that their theory on benign deficits was an ever-present feature of the blossoming debate.Then the pandemic hit, and suddenly the theoretical question of just how much the government could spend before it ran into limits faced a real-world experiment.The $1.9 Trillion FloorWithout thinking about paying for it, Donald J. Trump’s government quickly passed a $2.3 trillion relief package in late March 2020. In December, it followed that up with another $900 billion. President Biden took office in early 2021, and promptly added $1.9 trillion more.Inflation F.A.Q.Card 1 of 6What is inflation? More

  • 113 Shares109 Views

    in Economy

    Biden Says Spending Bill Will Slow Inflation. But When?

    by

    The Biden administration has argued that its infrastructure and broader economic package will slow rapid price increases. But that will take time.Rocketing inflation has become a headache for U.S. consumers, and President Biden has a go-to prescription. He says a key way to help relieve increasing prices is to pass a $1.85 trillion collection of spending programs and tax cuts that is currently languishing in the Senate.A wide range of economists agree with the president — but only in part. They generally accept his argument that in the long run, the bill and his infrastructure plan could make businesses and their workers more productive, which would help to ease inflation as more goods and services are produced across the economy.But many researchers, including a forecasting firm that Mr. Biden often cites to support the economic benefits of his proposals, say the bill is structured in a way that could add to inflation next year, before prices have had time to cool off.Some economists and lawmakers worry about the timing, arguing that the risk of fueling more inflation when it has reached record highs outweighs the potential benefits of passing a big spending bill that could help to keep prices in check while addressing other social goals. Prices have picked up by 6.2 percent over the past year, the fastest pace in 31 years and far above the Federal Reserve’s inflation target.Others say that any near-term effect on prices would be small and easy enough for the Fed to offset later with interest rate increases, which can temper demand and cool a hot economy. They argue that potential inflationary risks are not a good reason for the Biden administration to curb its ambitions on priorities like broadening access to child care and easing the transition to cleaner energy sources.“It’s more likely a small positive for inflation in 2022, because it’s preventing a big reduction in spending that would otherwise have happened that year,” said Jason Furman, an economist at Harvard and a former chairman of the White House Council of Economic Advisers during the Obama administration. “The pros and cons of Build Back Better with regard to improvements in climate change and opportunity vastly dwarf any pros or cons on inflation.”Republicans have criticized Mr. Biden on inflation for months, seeking to derail his sprawling proposal to fight climate change, guarantee universal prekindergarten, expand access to health insurance, cap child care costs for low earners and the middle class and extend a lucrative new tax break for parents. They have argued that the bill’s spending, much of which is spread over several years, will push prices higher.Some centrist Democrats have also voiced similar concerns. A key holdout, Senator Joe Manchin III of West Virginia, has questioned whether high and rising prices should persuade lawmakers to tone down their ambitions.“West Virginians are concerned about rising inflation,” he said on Twitter last week. “We cannot throw caution to the wind & continue to pile on debt that our country can’t afford.”The bill remains in legislative limbo, with Democrats preparing to push it to a House vote as early as next week. But timing is uncertain in the Senate, where a vote is likely to be changed or delayed in response to Mr. Manchin’s concerns.The extent to which Mr. Biden’s $1.85 trillion bill exacerbates inflation largely depends on how much it stimulates the economy and whether Americans increase their spending as a result of the legislation — and when all of that occurs.Many economists say it could create a short-term stimulus because the plan is structured to raise money gradually by taxing wealthier Americans, who are less likely to spend each additional dollar they have, and redistribute it quickly to people who earn less and are more likely to spend newfound cash.Because of the difference in timing between when the government spends money and when it starts to bring in more revenue, the bill is expected to pump money into the economy in its early years. Moody’s Analytics — the firm that the White House typically cites when arguing in favor of its legislation — estimates that the government will spend $163 billion more on the package than it takes in next year. And the redistribution could make the money more potent as economic stimulus.“The spending is designed to go to the people who are more likely to spend it than to save it,” said Ben Ritz, the director of the Progressive Policy Institute’s Center for Funding America’s Future. But more than any specific program, “the bigger inflationary issue is the math.”White House economists have countered those arguments. If the bill passes, they say, it would do relatively little to spur increased consumer spending next year and not nearly enough to fully offset the loss of government stimulus to the economy as pandemic aid expires. That the program spends more heavily next year is a feature, they say, because it will partly blunt the economic drag as fiscal help fades. They note that the bill is intended to be offset completely by tax increases and other revenue savings.And they argue that by increasing the economy’s capacity to churn out goods and services, the president’s infrastructure plan and his broader program could both help to moderate costs over time.“If anything, these measures push back on inflationary pressures,” said Jared Bernstein, a member of Mr. Biden’s Council of Economic Advisers.Shoppers in New York last month. White House officials say that by increasing the economy’s capacity to churn out goods and services, the president’s plans could help moderate costs over time.Jutharat Pinyodoonyachet for The New York TimesLawrence H. Summers, the Harvard economist who loudly criticized the $1.9 trillion economic aid legislation that Mr. Biden signed this year, has said that he does not see the current plans as an inflationary threat. The infrastructure and broader spending packages are both spread over time and paid for, Mr. Summers has argued.There is less economic or political debate about Mr. Biden’s $1 trillion infrastructure plan, which cleared Congress last week and which the president will sign on Monday. Economists — including conservative ones — largely agree that it is likely to eventually expand the capacity of the economy, and that it is small and spread out enough that it will not meaningfully fuel faster inflation in the near term.Among Democrats, there is widespread support for the economic ambitions contained in the administration’s broader spending bill, which aims to create more equity for low- and middle-class earners and a bigger safety net for working parents. But the measure is drawing more complicated reviews when it comes to its immediate effect on inflation.Economists at Moody’s found in a recent analysis that the administration’s full agenda would slightly increase inflation in 2022, though they did not expect the program to ultimately raise it because of benefits that would later ease supply constraints. It estimates that with the infrastructure bill alone, inflation will be running at a 2.1 percent annual rate by the final quarter of next year. If the larger spending bill also passes, that grows to 2.5 percent.Understand the Supply Chain CrisisCard 1 of 5Covid’s impact on the supply chain continues. More

  • 113 Shares189 Views

    in Economy

    Democrats’ Divide: Should Obama-Era Economic Ideas Prevail in 2021?

    by

    A more traditional view is competing against a newer approach that has become mainstream among economists.Over the last dozen years, there has been a sea change in how economists view many crucial questions related to deficits, public debt and the long-term payoffs of social spending.Most Democratic elected officials have embraced this new thinking, and it permeates the Biden domestic agenda. But a handful of Democrats are unpersuaded, holding to a view that was more widespread in the early Obama years, focusing on the risks of debt and spending.That tension, and how it resolves itself — or doesn’t — will be central to the evolution of the Biden presidency and American economic policy for years to come. On the surface, there is a clash between lawmakers with different political instincts. But there is also a clash over whether a more traditional view will prevail over a newer approach that has become mainstream among economists — especially those who lean left, but with some acceptance among center-right thinkers.“I just don’t want our society to move to an entitlement society,” Senator Joe Manchin of West Virginia has said. T.J. Kirkpatrick for The New York TimesIn the older view, it is irresponsible to increase long-term budget deficits because it will curtail private investment and risk a fiscal crisis. Social policies should be seen as a zero-sum trade-off between alleviating poverty and encouraging work. And any major new spending should be coupled with enough revenue-raising measures that the number-crunchers at the Congressional Budget Office conclude the numbers will balance over the next 10 years.This was the approach that the Obama administration and congressional Democrats took in passing the Affordable Care Act, a process made lengthier and more complex by these self-imposed constraints.But since those days, the intellectual ground has shifted in important ways.For one, long-term interest rates have fallen precipitously, even as very large budget deficits have become the norm. That implies the United States can maintain higher public debt than once seemed possible without excessively constraining private investment or facing excessive interest costs.“The long-term downward move in interest rates is the most important macroeconomic development that has occurred over the last couple of decades,” said Karen Dynan, a former official at the Federal Reserve and at the Obama Treasury Department who now teaches at Harvard. (One of her classes is on the economic crises of the 21st century, including a unit on the evolution in thinking they have prompted.)“Lower rates make deficit-financed spending less costly in budget terms and lowers the economic cost, because you can think of lower rates as a signal that the private sector has less demand for that money,” Professor Dynan sad.During the early Obama years, there was extensive discussion, including from some Democrats, that a loss of confidence in America’s debts could cause a fiscal crisis. The experience of the last decade has offered reassurance that in a nation like the United States, with a credible and competent central bank, such an event is unlikely.Republican legislators like Jeff Sessions and Paul Ryan, back, led the charge against spending in 2011 during the Obama era. Michael Reynolds/European Pressphoto Agency“I would have worried 10 years ago that as debt rose to 100 percent or more of G.D.P., folks lending to the U.S. government would start to feel differently about it, and the answer is that they don’t,” said Wendy Edelberg, a former chief economist of the C.B.O. who is now director of the Hamilton Project at the Brookings Institution. “I personally feel like I’ve learned a lot more in the last decade about how monetary and fiscal policy interact, especially in a crisis.”As evidence: The federal government, with extensive help from the Federal Reserve, launched a multitrillion dollar response to the pandemic despite coming into the crisis with an elevated public debt. Rather than spur a crisis of confidence in U.S. government bonds, their values have surged.The evolution in thinking is hardly universal, with some more conservative economists pointing to the risks that conditions could change.“Any economic policy that begins with the premise, ‘Let’s just assume interest rates stay below 2008 levels forever,’ is extraordinarily hubristic and naïve,” said Brian Riedl, a senior fellow at the Manhattan Institute. “Particularly because there is no backup plan if they are wrong and rates ever do revert to pre-2008 levels. At that point, the policies driving the debt will be nearly impossible to reverse, and we could face a severe fiscal crisis.”That is very much the argument that Senator Joe Manchin has made in holding up the party’s social spending bill, seeking to lower its total cost and seek offsetting revenue increases that would reduce the deficit.“While my fellow Democrats will disagree, I believe that spending trillions more dollars not only ignores present economic reality, but makes it certain that America will be fiscally weakened when it faces a future recession or national emergency,” Senator Manchin wrote in a commentary for The Wall Street Journal last month.The national debt clock in New York in August 2020. Amr Alfiky/The New York TimesA similar shift has taken place in how many economists view the potential long-term economic benefits of certain forms of social welfare spending.Not long ago, research into the trade-offs of welfare spending tended to focus on narrow questions like how much a given benefit might discourage people from working. In the last few decades, researchers have used novel statistical techniques (including those that won a Nobel Prize last week) and rich new sources of data to try to determine what long-term benefits they might offer to the overall economy.Take, for example, spending that keeps children well-fed and out of poverty, such as school lunch programs and assistance payments to low-income parents. These appear to have long-lasting benefits for future employment and earning power — creating supply-side benefits, or increasing the economy’s overall potential.“If we give people more resources when they’re young, they can eat better and do better in school, and this could have lasting impacts,” said Hilary Hoynes, a professor at the University of California, Berkeley, and an author of extensive research along these lines. “It doesn’t seem like such a crazy thing to assert, but we had no evidence on that 15 years ago.”This is part of the thinking beneath major elements of Democratic legislation under consideration, including universal preschool and an extension of a child tax credit. Professor Hoynes said she had received many calls from congressional staff members in the last few years seeking to understand the emerging evidence.Senator Manchin, meanwhile, has said, “I just don’t want our society to move to an entitlement society,” suggesting he is focused on the ways these benefits might create a near-term disincentive to work.Beyond the intraparty divide over the risk of deficits and the benefits of social spending, there is a simmering debate over how the costs of the bill should be offset. Centrist Democrats insist upon provisions that raise money so as to keep the programs from raising the deficit, but it’s less clear what that means in practice.During the passage of the Affordable Care Act, that meant a very specific thing — achieving a “score” from the C.B.O. attesting that by its best estimates, the legislation would have a neutral to positive effect on cumulative deficits.This scoring incentivizes an odd gaming of the system, including programs that phase in or out, and revenue-raising measures that are backloaded to avoid near-term pain while making the numbers balance. It also inserts a false precision into the legislative process — as if anyone knows what economic growth and federal revenue will be a decade down the road.“I very much worry that there’s going to be some absurd emphasis on the C.B.O. score, whether it is slightly on one side of zero or the other side of zero,” Ms. Edelberg said. “This is a really important package that will change people’s lives, and that should be the guiding principle. The 10-year window is arbitrary. Aiming for deficit neutrality is arbitrary — it’s arbitrariness on top of arbitrariness.”The Biden agenda, in other words, could depend on just how much the entire range of Democrats in Congress view the strategies and instincts of the Obama years as a model to follow or a cautionary tale. More