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

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    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

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    Biden Says Spending Bill Will Slow Inflation. But When?

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    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

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

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    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

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    David Card, Joshua Angrist and Guido Imbens Win Nobel in Economics 2021

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    David Card has made a career of studying unintended experiments to examine economic questions — like whether raising the minimum wage causes people to lose jobs.Joshua D. Angrist and Guido W. Imbens have developed research tools that help economists use real-life situations to test big theories, like how additional education affects earnings.On Monday, their work earned them the 2021 Nobel Memorial Prize in Economic Sciences.All three winners are based in the United States. Mr. Card, who was born in Canada, works at the University of California, Berkeley. Mr. Angrist, born in the United States, is at the Massachusetts Institute of Technology, and Mr. Imbens, born in the Netherlands, is at Stanford University.“Sometimes, nature, or policy changes, provide situations that resemble randomized experiments,” said Peter Fredriksson, chairman of the prize committee. “This year’s laureates have shown that such natural experiments help answer important questions for society.”The recognition was bittersweet, many economists noted, because much of the research featured in the prize announcement was co-written by Alan B. Krueger, a Princeton University economist and former White House adviser who died in 2019. The Nobels are not typically awarded posthumously. Despite that note of sadness, the economics profession celebrated the news, crediting the winners for their work in changing the way that labor markets in particular are studied.“They ushered in a new phase in labor economics that has now reached all fields of the profession,” Trevon D. Logan, an economics professor at Ohio State, wrote on Twitter shortly after the prize was announced.Mr. Card’s work has challenged conventional wisdom in labor economics — including the idea that higher minimum wages led to lower employment. He was a co-author of influential studies on that topic with Mr. Krueger, including one that used the border between New Jersey and Pennsylvania to test the effect of a minimum wage change. Comparing outcomes between the states, the research found that employment at fast food restaurants was not negatively affected by an increase in New Jersey’s minimum wage.Mr. Card has also researched the effect of an influx of immigrants on employment levels among local workers with low education levels — again finding the impact to be minimal — and the effect of school resource levels on student education, which was larger than expected.“I’m sure that if Alan were still with us, that he would be sharing this prize with me,” Mr. Card said in a news conference, after recognizing Mr. Krueger’s contributions. He also noted that initially, when it came to the minimum wage study, “quite a few economists were quite skeptical of our results.”David Neumark, an economist at the University of California, Irvine, who co-wrote a paper contesting Mr. Card and Mr. Krueger’s findings in the minimum wage study, said he still thought the work had data issues — but added that there was no doubt that the methodology was important.“They’ve all done great work — they’ve changed the way that labor economists do research,” Mr. Neumark said of the three winners.Mr. Angrist and Mr. Krueger tried in the early 1990s to gauge how much benefit people derive from extra years of education. To figure it out, they took advantage of the fact that students born earlier in the year can legally leave school earlier than those born later in the year. Those born earlier tended to get less education and also earned less later on. The effect of an additional year of education, they estimated, was a 9 percent increase in income.That study helped spur the additional work on research methods that Mr. Angrist and Mr. Imbens later carried out. That contribution has reshaped the way researchers think about and analyze natural experiments, according to the Nobel committee.The pair showed that it was possible to identify a clear effect from an intervention in people’s behavior — like a subsidy that might encourage people to ride bicycles to work — even if a researcher could not control who took part in the experiment, and even if the impact varied across individuals. They also came up with a transparent framework for such research that has increased trust in it.“The challenge, for me, has always been trying to understand, when people do empirical work, what exactly the methodological challenges are,” Mr. Imbens said via telephone in a news conference for the announcement.Two American economists affiliated with Stanford, Paul R. Milgrom and Robert B. Wilson, won the 2020 Nobel in economics for improvements to auction theory. Abhijit Banerjee and Esther Duflo of M.I.T. and Michael Kremer of Harvard University won in 2019 for their experiment-based research in development economics.The award, formally called the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, has been given out since 1969.Because the award is announced in the middle of the night on the United States’ West Coast, two of this year’s recipients were woken up by phone calls from Sweden informing them of their prize.Mr. Imbens said he was asleep when he received the call from the prize committee — around 2 a.m. — and was “absolutely stunned” to hear the news. He said he was pleased to win it alongside friends, noting that Mr. Angrist was the best man at his wedding.Mr. Card thought that a friend of his — whom he identified only as Tim — was pulling a prank on him, he said.“But then the phone number actually was a Swedish phone number,” he said. More

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    Nobody Really Knows How the Economy Works. A Fed Paper Is the Latest Sign.

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    Many experts are rethinking longstanding core ideas, including the importance of inflation expectations.It has long been a central tenet of mainstream economic theory that public fears of inflation tend to be self-fulfilling.Now though, a cheeky and even gleeful takedown of this idea has emerged from an unlikely source, a senior adviser at the Federal Reserve named Jeremy B. Rudd. His 27-page paper, published as part of the Fed’s Finance and Economics Discussion Series, has become what passes for a viral sensation among economists.The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today. That is especially important right now, in trying to figure out whether the current inflation surge is temporary or not.But the Rudd paper is part of something bigger still. It reflects a broader rethinking of core ideas about how the economy works and how policymakers, especially at central banks, try to manage things. This shift has also included debates about the relationship between unemployment and inflation, how deficit spending affects the economy, and much more.In effect, many of the key ideas underlying economic policy during the Great Moderation — the period of relatively steady growth and low inflation from the mid-1980s to 2007 that also seems to be a high-water mark for economists’ overconfidence — increasingly look to be at best incomplete, and at worst wrong.It is vivid evidence that macroeconomics, despite the thousands of highly intelligent people over centuries who have tried to figure it out, remains, to an uncomfortable degree, a black box. The ways that millions of people bounce off one another — buying and selling, lending and borrowing, intersecting with governments and central banks and businesses and everything else around us — amount to a system so complex that no human fully comprehends it.“Macroeconomics behaves like we’re doing physics after the quantum revolution, that we really understand at a fundamental level the forces around us,” said Adam Posen, president of the Peterson Institute for International Economics, in an interview. “We’re really at the level of Galileo and Copernicus,” just figuring out the basics of how the universe works.“It requires more humility and acceptance that not everything fits into one model yet,” he said.Or put less politely, as Mr. Rudd writes in the first sentence of his paper, “Mainstream economics is replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense.”One reason for this, he posits: “The economy is a complicated system that is inherently difficult to understand, so propositions like these” — the arrant nonsense in question — “are all that saves us from intellectual nihilism.”And from that starting point, a staff economist at the world’s most powerful central bank went on to say, in effect, that his own employer has been focused on the wrong things for the last few decades.Dockworkers unloading cars in Baltimore in 1971. Importers were worried about the effect of the 10 percent duty imposed by President Nixon on foreign-made items as part of his new economic “game plan” to halt inflation.Bettmann/Getty ImagesMainstream policymakers, very much including Mr. Rudd’s bosses at the Fed, believe that inflation is, in large part, self-fulfilling — that what people expect future inflation to look like has an ability to shape how much prices rise in the near term.In the common telling, the Great Inflation of the 1970s got going because people came to believe inflation would keep spiraling. The surge in gasoline prices wasn’t simply a frustrating development, but a harbinger of things to come, so people needed to demand higher raises, and businesses could feel confident charging higher prices for most everything.In this story, the great achievement of the Fed in the early 1980s was to break this cycle by re-establishing credibility that it would not allow sustained high inflation (though at the cost of a severe recession).That is why today’s discussions over the inflation outlook often spend a lot of time focusing on things like what bond prices suggest inflation will be five or 10 years from now, or how people answer survey questions about what they expect.Mr. Rudd argues that there is no solid evidence that the conventional story of the 1970s describes the real mechanism through which inflation takes place. He says there’s a simpler explanation consistent with the data: that businesses and workers arrive at prices and wages based on the conditions they’ve experienced in the recent past, not some abstract future forecast.For example, when inflation has been low in the recent past, workers might not demand raises as they would in a world where inflation was high; after all, their existing paychecks go pretty much as far as they used to. You don’t need some theory involving inflation expectations to get there.Some economists who are sympathetic to the idea that central bankers have overly fetishized precise measurements of inflation expectations aren’t ready to fully dismiss the idea.For example, Mr. Posen, a former Bank of England policymaker, says there remains a simple and hard-to-dispute idea about inflation expectations supported by lots of history: that if people distrust a country’s monetary system, inflation shocks can spiral upward. Economic policy credibility matters. But that isn’t the same as assuming that some survey or bond market measure of what will happen to inflation in the distant future is particularly meaningful for forecasting the near future.“It has been a noble lie that has become a critical part of the catechism of global monetary policy, that long-term inflation expectations are not just interesting but are a decisive determinant of real-time inflation,” said Paul McCulley, a former Pimco chief economist, commenting on Mr. Rudd’s paper.This isn’t the only way in which basic precepts underlying economic policy are shifting beneath economists’ feet.Particularly prominently, for years central bankers believed there was a tight relationship between the unemployment rate and inflation, known as the Phillips Curve. Over the course of the 2000s, though, that relationship appeared to weaken and become a less reliable guideline for how to set policy.Similarly, interest rates and inflation fell worldwide, for reasons that scholars are still trying to understand fully. That implied a lower “neutral interest rate,” or the rate that neither stimulates nor slows the economy, than was widely believed to be the case as recently as the mid-2010s.In many ways, the Fed’s policies just before the pandemic were aimed at incorporating those lessons and embracing sustained lower interest rates — and the possibility of lower unemployment — than many in the mainstream thought reasonable a few years earlier.In the realm of fiscal policy, some conventional wisdom has also been upended in the last few years. It was thought that large government debt issuance would risk causing a spike in interest rates and crowd out private sector investment. But in that period, huge budget deficits have been paired with low interest rates and abundant credit for businesses.All of this makes it a challenging time for central bankers and other shapers of policy. “If you’re a policymaker and you don’t have robust confidence in the parameters of the game you are managing, it makes your job a whole lot more difficult,” Mr. McCulley said.But if you are in charge of making economic policy that affects the lives of millions, you can’t simply shrug your shoulders and say, “We don’t know how the world works, so what are we supposed to do?” You look at the evidence available, and make the best judgment you can.And then, if you think it turns out you were wrong about something, publish a sassy paper to try to get it right. More

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    Biden and the Fed Wanted a Hot Economy. There’s Risk of Getting Burned.

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    So far, in a real-world test of a new approach to economic policy, prices have been rising faster than wages.Seen at a U-Haul in Overland, Mo., earlier this summer. A “high-pressure” economy has brought more people into the labor market and pushed up wages at the lower end of the income scale. Whitney Curtis for The New York TimesThere is a big idea in economic policy that has become ascendant in recent years: Great things can be achieved for American workers if the economy is allowed to run hot.The notion of creating a “high-pressure” economy is that government should be willing to risk a bit of inflation in the near term to achieve conditions that will over the long run lift people out of poverty, prevent the scars of recessions from becoming permanent, and make the nation’s economic potential stronger.This idea has origins in a 1973 paper by Arthur M. Okun, and was largely confined to think tank conferences in the 2010s. Now, it is the intellectual underpinning of American economic policy, embraced at the highest levels by the Biden administration and the Federal Reserve.It makes for a real-world test of a new approach to economic policy. The results so far show that pushing the economic accelerator to the floor has trade-offs, specifically the combination of trillions in federal spending with interest rates held near zero.While that combination has some created some important beneficial effects, the summer of 2021 has not produced quite the high-pressure economy its enthusiasts were hoping for.The good news is that job openings are abundant, wages for people at the lower end of the pay scale are rising quickly, and it appears that the post-pandemic recovery won’t be like the long slog that followed the three previous recessions.But consumer prices have been rising faster than average wages — meaning that, on average, workers are seeing the purchasing power of their paycheck fall. People looking to buy a car or build a house or obtain a wide variety of other products are finding it hard to do so. And while much of that reflects temporary supply disruptions that should abate in coming months, other forces could keep prices rising. These include soaring rents and the delayed effects of higher prices from companies having to pay higher wages.“I don’t think of the last few months as either vindication or repudiation, yet,” said Josh Bivens, director of research at the Economic Policy Institute and a longtime enthusiast of policymakers seeking a high-pressure economy.In effect, unlike the slow-moving developments of the 2010s, when the debates over running the economy hot took shape, things are moving so fast right now that it is hard to be sure how things will look as conditions stabilize.Still, “I think the benefits of carrying on the go-for-growth strategy will come,” Mr. Bivens said, noting exceptionally strong job creation in recent months.A more traditional view has been that it is unwise for policymakers to try to push unemployment too low, because doing so will generate inflation. That thinking lost credibility as the 2010s progressed — the jobless rate fell ever lower, with few signs of an inflation spike.But while the tight labor market from 2017 to 2019 generated strong inflation-adjusted wage gains for workers, especially at the lower end of the pay scale, there is nothing automatic about that process. In a booming economy, if companies raise prices more rapidly than they increase worker pay — taking a higher markup on the products they sell — it will mean workers are effectively making less for each hour of work.In the past, it has cut both ways. In the strong economies of the late 1960s and late 1990s, average hourly earnings for nonmanagerial workers persistently rose faster than inflation. In the late 1980s, the reverse was true.And it is also true now. Wages and salaries in the private sector were up 3.6 percent in the second quarter from a year earlier, according to Employment Cost Index data, the strongest since 2002. But the Consumer Price Index was up 4.8 percent in that same span, meaning workers lost ground. Other measures of compensation and inflation tell a similar story.One big question is whether elevated inflation is simply an unavoidable consequence of the reopening of the economy after a pandemic, or is at least partly a result of the aggressive use of fiscal and monetary policy to heat up the economy quickly.For example, automobile prices are through the roof, which analysts attribute mainly to microchip shortages caused by production decisions made during the pandemic. But is part of the spike in prices also a result of high demand, spurred by stimulus checks the government has sent and low interest rates that make car loans cheap?Jason Furman, a Harvard economist and former chairman of the White House Council of Economic Advisers, points out that the United States is experiencing significantly higher inflation than other countries that are facing the same supply problems. Consumer prices rose 2.2 percent in the year ended in July in the euro area, compared with 5.4 percent in the United States.“My guess is that real wage growth is faring better right now in Europe than it is in the United States, and it’s faring better because there is less demand and thus less inflation,” Mr. Furman said.The story is better when you look at how lower-paid workers in the United States are doing. The shortages of workers, especially in service industries, are translating into raises for people who don’t make a lot. Data from the Federal Reserve Bank of Atlanta shows that median hourly wages for people in the bottom 25 percent of earners have risen at a 4.6 percent rate over the last year, compared with 2.8 percent for the top 25 percent.And many of the benefits of a hot economy come in the form of pulling more people into the work force and enabling them to work more hours. Employers have added an average of 617,000 jobs a month so far in 2021, versus 173,000 a month in 2011, in the aftermath of the global financial crisis. If sustained, the United States is on track to return to its prepandemic employment level two years after the recession ended. Such a recovery took five years after the previous recession.Advocates of running a hot economy emphasize that a rapid recovery is good for reducing inequality, in part by ensuring there are plenty of job opportunities so that people don’t have to be out of work for long stretches.“We are seeing ongoing stimulus and expanded income support programs doing what they’re supposed to do,” said J.W. Mason, a fellow at the Roosevelt Institute and a longtime proponent of running the economy hot. “The numbers we should really be looking at are employment growth and wage growth, especially at the low end, and those trends are positive and encouraging. They’re the numbers we would have hoped to see at the beginning of the year.”In the late years of the last expansion, employment gains were particularly strong for racial minorities, people with low levels of education, and some others who often have a hard time getting hired.“The thing we know for certain is that when you run a hot economy, people get jobs who wouldn’t otherwise get jobs,” Mr. Furman said. “That by itself is sufficient reason to want to run a hot economy. You’re talking about some of the most vulnerable workers getting hired, and that’s a wonderful thing.”Still, even some supporters of running the economy hot see risk that the scale and pace of stimulus actions have been too much.“It’s not that my commitment to a tight labor market has weakened,” said Michael Strain of the American Enterprise Institute, one of the center-right voices who favored the approach. “It’s that the specific policy mix is a mistake, for a bunch of reasons. There is such a thing as too much stimulus, which becomes counterproductive, either because inflation eats away wage gains or the supply side of the economy can’t keep up.”Even people who believe in a high-pressure economy, in other words, would do well to keep an eye on just how high that pressure is getting, and how sustainable it really is. More

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    Black Workers Stopped Making Progress on Pay. Is It Racism?

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    William Spriggs, a professor at Howard University, wrote an open letter last year to his fellow economists. Reacting to the police killing of George Floyd in Minneapolis, he began the letter with a question: “Is now a teachable moment for economists?”Slamming what he saw as attempts to deny racial discrimination, Dr. Spriggs argued that economists should stop looking for a reason other than racism — some “omitted variable” — to account for why African Americans are falling further behind in the economy.“Hopefully, this moment will cause economists to reflect and rethink how we study racial disparities,” wrote Dr. Spriggs, who is Black. “Trapped in the dominant conversation, far too often African American economists find themselves having to prove that African Americans are equal.”After a year in which demands for racial justice acquired new resonance, Dr. Spriggs and others are pushing back against a strongly held tenet of economics: that differences in wages largely reflect differences in skill.While African Americans lag behind whites in educational attainment, that disparity has narrowed substantially over the last 40 years. Still, the wage gap hasn’t budged.In 2020, the typical full-time Black worker earned about 20 percent less than a typical full-time white worker. And Black men and women are far less likely than whites to have a job. So the median earnings for Black men in 2019 amounted to only 56 cents for every dollar earned by white men. The gap was wider than it was in 1970.Lost ProgressEarnings of Black men, as a percentage of the earnings of white men, are at the same place they were in the 1960s and 1970s. More

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    Is It Time to Panic About Inflation? Ask These 5 Questions First.

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    Focus on exactly how and why prices are changing over time, and how these shifts might affect you.A price list at a bakery in 2017. Some price increases are more worrisome than others.Vincent Tullo for The New York TimesTo understand why inflation is so worrying to so many people, you could look at price charts for lumber or used cars or New York strip steaks. There is no doubt that the prices of many of the things people buy are rising at an uncomfortably rapid rate.But to really understand why there is a persistent longer-term buzz of inflation concern, you have to wrestle with the ways in which money itself is fundamentally ephemeral.Ultimately, most money is a mere electronic entry in the ledger of a bank. It is worth only what it will buy, and what it will buy changes all the time. Or as the humor publication The Onion once wrote, money is “just a symbolic, mutually shared illusion.”When prices move abruptly — as when an economy that has been partly shut down for more than a year tries to reboot — that inherent uncertainty becomes all too real. When wild swings like these can happen, what else might be possible?But inflation isn’t so scary if you focus on the precise mechanics by which the value of a dollar changes over time — and how it might affect you. In an inflation-scare moment like this one, you can boil that down to five essential questions:Is this a change in relative prices, or a change in overall prices? Are the prices of items becoming more expensive likely to rise further, stay the same, or go down? Are wages also rising? Is inflation so high and erratic that it is hard to plan ahead? And is this really inflation at all, or is it a shift in the price of investments like stocks and bonds?Let’s take these questions in turn, and look at what aspects of the current price surge look more benign, and which are worrying. Relative prices vs. overall pricesAt any given moment, some things are becoming more expensive and others are getting cheaper. That is how a market economy works; prices are what ensure that supply and demand eventually meet.Sometimes, this happens quickly. Airlines constantly adjust ticket prices; the prices of fresh vegetables bounce around depending on whether they are plentiful or scarce. Other times it happens more gradually. A hair salon may not raise prices the first day there is a line of customers out the door, but it will do so if it is consistently overbooked.Those shifts can be annoying — nobody wants to pay $1,000 for a short-haul plane ticket or see the price for a haircut double. But they are a healthy part of an economy working as it should.Typically, these relative price changes are not a problem of macroeconomics — something best solved by the Federal Reserve (by raising interest rates) or Congress (by raising taxes) — but a problem of the microeconomics of those industries.The core challenge of an economy emerging from a pandemic is that numerous industries are going through major shocks in demand and supply simultaneously. That means more big swings in relative price than usual.Last year, relative price changes cut in both directions (prices for energy and travel-related services fell, while prices for meat and other groceries rose). But this spring, the overwhelming thrust is toward higher prices. There are fewer goods and services with falling prices to offset the rises.Still, many of the most vivid and economically significant examples of price inflation so far, like for used cars, have unique industry dynamics at play, and therefore represent relative price changes, not economywide price rises. One important thing to watch is whether that changes — whether we start seeing uncomfortably high price increases more dispersed across the full range of goods and services.That would be a sign that we were in a period not simply of an economy adjusting itself, but one of too much money chasing too little stuff.One-off prices vs. long-term trendsNot all price changes have equal meaning for inflation. Much depends on what happens next.If the price of something rises but then is expected to fall back to normal, it will act as a drag on inflation in the future. This often happens when there is a shortage of something caused by an unusual shock, like weather that ruins a crop. In an opposite example, in 2017 a price war brought down the price of mobile phone service, pulling down inflation. But when the price war was over, the downward pull ended.On the other hand, a price that is expected to rise at exceptional rates year after year has considerably greater implications. Consider, for example, the multi-decade phenomenon in which health care prices rose faster than prices for most other goods, creating a persistent upward push on inflation.So an essential question for 2021 is in which bucket the inflationary forces now unleashed should be put.One piece of good news if you’re worried about an inflationary spiral: Futures prices for major commodities — including, oil, copper and corn — all point to falling prices in the years ahead.But then there are the labor-intensive service industries, those with no choice but to raise prices if workers are able to consistently demand higher pay. They bring us to a different essential question.Wage inflation vs. price inflationMedia coverage of inflation typically focuses on indexes that cover consumer prices: numbers that aim to capture what it costs to go to the grocery store, buy a car and obtain all the other things a person wants and needs.But more properly defined, inflation is about the full set of prices in the economy — including what people are paid for their labor. Whether there is wage inflation goes a long way to determining how people feel about the economy.Even relatively high price inflation is bearable if wages are rising faster. From 1995 to 2000, inflation averaged 2.6 percent a year. But the average hourly earnings of nonmanagerial workers were rising 3.7 percent a year, so it should be no surprise that workers felt good about the state of the economy.It is too soon to show up clearly in the data, but there are anecdotes aplenty that companies are rapidly increasing pay. Just this week, Bank of America said it would start a $25-per-hour minimum wage by 2025, up from $20, and major chains like McDonald’s, Starbucks and Chipotle have announced significant moves toward higher pay in recent weeks.For individuals who benefit from bigger paychecks, that will take the sting out of higher prices for goods. Some may end up better off financially than they had been in lower-inflation environments.Wages play an essential role in the linkage between higher prices and continuing inflation. In the 1970s, workers demanded­ — and received — higher pay. Then companies raised prices, which fueled further demands for pay raises.To experience a wage-price spiral like that, both parts of the equation need to come into play. That means it’s worth watching for evidence of whether pay raises are a one-time adjustment to an unusual job market, or the beginning of a shift in power toward workers after years of meager gains.Steady inflation vs. erratic inflationMany people take it for granted that high inflation is a bad thing.But in truth, it’s not obvious why a country couldn’t comfortably have prices rise significantly faster than they have in the United States in recent decades. Imagine a world where consumer prices rose 5 percent every year; workers’ wages rose 5 percent, plus a little more to account for rising productivity; and interest rates were consistently higher than Americans are accustomed to.In theory, the only problem would be what economists call “menu” costs, the inconvenience of companies having to revise their price lists frequently. (In a way, the pandemic shift away from physical menus in restaurants might even make that concern moot.)In practice, though, not many countries have managed to have higher inflation like that arrive steadily year after year. And there can be big negative consequences when inflation is erratic, swinging from 2 percent one year to 10 percent the next and so on.When inflation is erratic, it creates economic upheaval, essentially offering a windfall to either creditors (in the event of a surprise fall in inflation) or debtors (with rising prices).Over time, lenders would demand higher interest as compensation — an inflation risk premium. And that means that an economy with high and volatile inflation may get less investment, and hence less economic growth.So far, there is not much sign of that happening in the United States. Bond investors appear confident that whatever inflation takes place in the next year or two is a one-off event, not a new normal in which the value of a dollar is unpredictable.But keep an eye on markets for any evidence that is changing.Price inflation vs. asset inflationEven when consumer price inflation is low, some financial commentators may point to a worrying surge in asset inflation, meaning rising prices of stocks, bonds and other investments.Economists generally don’t think of asset price swings as a form of inflation at all. If stock prices rise, it may change the future returns on your savings, but it doesn’t change what a dollar can buy in terms of the goods and services you need to live.But semantics aside, it certainly seems apparent that millions of people have been plowing money into meme stocks and cryptocurrencies (as well as more traditional investments) that might otherwise have gone to bid up the price of home grilling equipment or other things in short supply.And while there is plenty to worry about in terms of bubbly signs in financial markets — and what it would mean if they corrected downward, as major cryptocurrencies did on Wednesday — that doesn’t mean they are making ordinary consumers worse off. You can’t eat Bitcoin; you can’t clothe yourself in shares of GameStop.Sometimes asset prices rise while consumer prices stand still, as in much of the 2010s. Sometimes consumer prices soar while financial assets languish, as in much of the 1970s. Other times, they move together.The implication: High asset prices and rising price inflation aren’t the same thing. Whether with asset prices or other aspects of inflation, being precise and detailed is a way to make the essential ephemerality of money a little more concrete. More