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    How Inflation Affects Turkey's Struggling Economy

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    Even before the pandemic, Turkey was trying to ward off financial meltdown. The crisis has accelerated as President Recep Tayyip Erdogan has doubled down on his unorthodox policies.The signs of Turkey’s disastrous economy are all around. Long lines snake outside discounted bread kiosks. The price of medicine, milk and toilet paper are soaring. Some gas stations have closed after exhausting their stock. Angry outbursts have erupted on the streets.“Unemployment, high living costs, price increases, and bills are breaking our backs,” the Confederation of Progressive Trade Unions said last month.Even before the coronavirus pandemic and supply chain bottlenecks began walloping the world’s economies nearly two years ago, Turkey was trying to ward off a recession as it struggled with mountainous debt, steep losses in the value of the Turkish lira, and rising inflation. But in recent weeks that slow-moving train wreck has sped up with a ferocious intensity. And the foot that’s pushing hardest on the accelerator belongs to the country’s authoritarian president, Recep Tayyip Erdogan.Why is this happening now?Turkey’s economic problems have deep roots but the most recent crisis was caused by Mr. Erdogan’s insistence on lowering interest rates in the face of galloping inflation — precisely the opposite tactic of what economists almost universally prescribe.Mr. Erdogan, who has ruled Turkey for 18 years, has long resisted that particularly painful prescription, but his determination to keep cutting interest rates even as the country’s inflation rate tops a staggering 21 percent appears to be pushing Turkey past a tipping point.Normally, investors and others look to a nation’s central bank to keep inflation in check and set interest rates. But Mr. Erdogan has repeatedly shown that if Turkey’s central bankers and finance ministers won’t do what he wants, he will get rid of them, having already fired three in two years.The value of the lira has nose-dived in recent weeks, and on Monday hit a record low — reaching 14.3 to a dollar, from about 7 to the dollar earlier this year — pushing some businesses and households that have borrowed money from abroad into bankruptcy. The currency’s steep decline means prices for imported goods keep rising. Shortages are common and people are struggling to afford food and fuel. The youth unemployment rate is 25 percent. The president’s popularity is sinking and his opponents have become emboldened.With an election coming up in 18 months, Mr. Erdogan seems convinced that his strategy will enable the Turkish economy to grow out of its problems. Most economists, however, say a crash is more likely.When did Turkey’s economic problems begin?“Interest rates make the rich richer, the poor poorer,” the Turkish President Recep Tayyip Erdogan said in a recent interview.Antonio Masiello/Getty ImagesMr. Erdogan’s aggressive pro-growth strategies have worked for him before. Since he began governing Turkey in 2003, he has undertaken expensive infrastructure projects, courted foreign investors and encouraged businesses and consumers to load up on debt. Growth took off.“Turkey was considered to be an economic miracle” during the first decade of Mr. Erdogan’s rule, said Kadri Tastan, a senior fellow at the German Marshall Fund based in Brussels. Poverty was sliced in half, millions of people swelled the ranks of the middle class, and foreign investors were eager to lend.But Mr. Erdogan’s relentless push to expand became unsustainable. Rather than pull back, however, the giddy borrowing continued.The increasingly unstable economy was caught in a bind. High interest rates attracted foreign investors to accept the risk and keep lending, but they would stunt growth. Mr. Erdogan was unwilling to accept that trade-off, and continued to support cheap borrowing as inflation took off and the currency’s value declined.And he insists that high interest rates cause inflation — even though it is low interest rates that put more money into circulation, encourage people to borrow and spend more, and tend to drive up the prices.“Erdogan has his own economic philosophy,” said Henri Barkey, a fellow at the Council on Foreign Relations.The economy seesawed between these conflicting goals until 2018 when growing political tensions between Turkey and the United States caused the value of the lira to topple.The political standoff eased, but the underlying economic problems remained. Mr. Erdogan kept pushing state banks to offer cheap loans to households and businesses and the borrowing frenzy continued. “Things never really normalized,” said Selva Demiralp, an economist at Koc University in Istanbul.When the chief of the central bank resisted pressure from the president to lower the 24 percent interest rate in 2019, Mr. Erdogan fired him, the beginning of a pattern.To prop up the lira, Turkish banks began selling off their reserves of dollars. Those stocks of dollars are now running low.The global economic slowdown caused by the coronavirus pandemic has added to the strains by limiting the sales of Turkish goods around the world. Tourism, which was one of Turkey’s most dynamic sectors, has also been badly hit.What is President Erdogan’s approach to interest rates and what do economists say?A protest against the economic policies of the government in Istanbul on Sunday.Murad Sezer/ReutersBy keeping interest rates low, Mr. Erdogan argues that consumers will be more eager to keep shopping and businesses will be more inclined to borrow, invest money in the economy and hire workers.And if the lira loses value against the dollar, he says, Turkey’s exports will simply become cheaper and foreign consumers will want to buy even more.That is true to some degree — but it comes at a heavy price. Turkey is quite dependent on imports like automobile parts and medicine, as well as fuel and fertilizer and other raw materials. When the lira depreciates, those products cost more to buy.At the same time, Mr. Erdogan’s disdain for conventional economic theory has scared off some foreign investors, who had been eager to loan Turkish businesses hundreds of millions of dollars but now are losing faith in the currency.And the lower rates go, the faster inflation rises. Over the past year, the lira has lost more than 45 percent of its value, and the official inflation rate has surged past 20 percent, although many analysts believe the rate on the streets is much higher.By comparison, an inflation rate of 6.8 percent so far this year in the United States (the highest in nearly four decades) and a 4.9 percent rate in the eurozone are enough to set off alarms.In Turkey, skyrocketing prices are causing misery among the poor and impoverishing the middle class.“We can’t make a living,” said Mihriban Aslan, as she waited on a long line to buy bread in Istanbul’s Sultangazi district. “My husband is 60 years old, he can’t work much now.” He has a small pension of 1,800 lira — which at the moment is worth about $125. “I sometimes do needle work at home to bring in extra money,” she said.Businesses would rather hoard goods than sell them because they don’t think they will be able to afford to replace them.Ismail Arslanturk, a 22-year-old cashier at a neighborhood grocery shop, complained that the price of green lentils has nearly doubled. “I don’t believe the economy will be fixed after this point,” said Mr. Arslanturk, who added he was forced to leave high school to help support his family. “I am hopeless.’’A currency exchange office in Turkey. Over the past year, the lira has lost more than 45 percent of its value.Emrah Gurel/Associated PressWhat has Erdogan’s response been to the intensifying crisis?The president has doubled down on his approach, asserting he will “never compromise” on his opposition to higher interest rates. “Interest rates make the rich richer, the poor poorer,” he said in an interview on national television last month. “We have prevented our country from being crushed in such a way.”The president has invoked Islamic precepts against usury and referred to interest charges on loans as the “mother and father of all evil,” and blamed foreign interference for rising prices. Analysts like Mr. Barkey of the Council on Foreign Relations said that such comments are primarily aimed at appealing to more conservative religious segments of the country that represent the core of Mr. Erdogan’s support.Turkey’s fundamental problem, Mr. Barkey maintains, is that it has an overly confident ruler who has been in power for a long time. “He believes in his omnipotence and he’s making mistakes,” Mr. Barkey said, “but he’s so surrounded by yes men that nobody can challenge him.” More

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    Charles R. Morris, Iconoclastic Author on Economics, Dies at 82

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    Resisting ideological labels, experienced in government and banking, he critiqued policymakers’ “good intentions” and the costs of health care and forecast the 2008 financial crisis.Charles R. Morris, a former government official, banker and self-taught historian of economics who as a prolific, iconoclastic author challenged conventional political and economic pieties, died on Monday in Hampton, N.H. He was 82.The cause was complications of dementia, his daughter, Kathleen Morris, said.Mr. Morris wrote his signature first book, “The Cost of Good Intentions: New York City and the Liberal Experiment” (1980), after serving as director of welfare programs under Mayor John V. Lindsay and as secretary of social and health services in Washington State.The book was a trenchant Emperor’s New Clothes analysis of how the Lindsay administration’s unfettered investment in social welfare programs to ward off civil unrest had delivered the city to the brink of bankruptcy, and it pigeonholed Mr. Morris as a neoconservative.But as a law school graduate with no formal training in economics, he defied facile labeling.While his 15 nonfiction books often revisited well-trodden topics — including the Great Depression, the nation’s tycoons, the cost of health care, the Cold War arms race and the political evolution of the Roman Catholic church — he injected them with revealing details, provocative insights and fluid narratives.“The Cost of Good Intentions” (1981) was less a screed about liberal profligacy as it was an expression of disappointment that benevolent officials had become wedded to programs that didn’t work. He concluded that the best and the brightest in the government, as well as complicit players on the outside, had figured that if a day of reckoning ever came, it would not be on their watch.Steven R. Weisman wrote in The New York Times Book Review that Mr. Morris, as a former city budget official and, at the time, as a vice president for international finance at Chase Manhattan Bank, was more intent on adding perspective than affixing blame.“He exonerates neither his current nor his former employer,” Mr. Weisman wrote.In the book, Mr. Morris quoted Peter Goldmark Jr., then the state budget director, as saying: “Remember the 14th century and the advent of the plague? Was it possible for those people to stand on the docks in Genoa or Venice, watch the rats pouring off the ships, and not understand?”“Yes,” Mr. Morris wrote dubiously, “it was possible.”He would also belie Thomas Carlyle’s characterization of economics as “the dismal science” by injecting tantalizing nuggets.Reviewing Mr. Morris’s “A Time of Passion: America 1960-1980” (1984) for The Times Book Review, Michael Kinsley wrote that “some of the most vivid moments in this book come when he stops the rush of history to describe incidents from his own time as a poverty-program and prison administrator.”“He truly has been ‘mugged by reality,’ in Irving Kristol’s famous definition of a neoconservative,” Mr. Kinsley added, but concluded, “Overall, his book radiates a generosity and good will that set it apart from the typically sour neoconservative creed.”Charles Richard Morris was born on Oct. 23, 1939, in Oakland, Calif., to Charles B. and Mildred (Reid) Morris. His father was a technician for a printing ink manufacturer; his mother was a homemaker.After attending Mother of the Savior Seminary in Blackwood, N.J., Mr. Morris graduated from the University of Pennsylvania with a degree in journalism in 1963. He was director of the New Jersey Office of Economic Opportunity from 1965 to 1969.He earned a degree from the university’s law school in 1972 while working for New York City government. He was recruited by Washington State on the basis of his reputation as the city’s assistant budget director and welfare director.Praising Mr. Morris’s service to the city and his proficiency as an author, Edward K. Hamilton, first deputy mayor during the Lindsay administration, said that he nonetheless differed with some of the conclusions and recommendations in “The Cost of Good Intentions.”“Many of its stated or implied remedial nostrums, even if desirable in theory, were simply infeasible in the real-world circumstances,” Mr. Hamilton said, “given the complex web of intersecting state, local and federal authorities and the politics overshadowing all of it.”Mr. Morris later served as director of the Vera Institute of Justice in London.He is survived by his wife, Beverly Gilligan Morris, along with their sons, Michael and Matthew; their daughter, Kathleen Morris; and four grandchildren. A sister, Marianne Donovan, also died on Monday. Mr. Morris lived in Hampton.Among his other books were “A Rabble of Dead Money: The Great Crash and the Global Depression: 1929-1939 (2017); “Comeback: America’s New Economic Boom” (2013); “The Sages: Warren Buffett, George Soros, Paul Volcker, and the Maelstrom of Markets” (2009); “The Trillion Dollar Meltdown” (2008); “The Surgeons: Life and Death in a Top Heart Center (2007),” which dissects the cost of care to the public and to practitioners; “American Catholic: The Saints and Sinners Who Built America’s Most Powerful Church” (1997); and “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould, and J.P. Morgan Invented the American Supereconomy” (2005).Assessing “The Tycoons” in The Times Book Review, Todd G. Buchholz, a former economics adviser to President George H.W. Bush, wrote of Mr. Morris, “I admired his drive to delve into competing theories of the Great Depression, sleeves rolled up, digging evenhandedly into the muck of academic research and the tumbleweed of the Dust Bowl.”Rarely allowing himself to be typecast, Mr. Morris would debunk what he called the conservative conventional wisdom that raising the minimum wage costs jobs. He complained in the Jesuit magazine America that the nation’s existing health care system benefits the wealthiest Americans. In an interview on the business blog bobmorris.biz in 2012, he criticized graduate schools of business.“Business schools tend to focus on topics that are suitable to blackboards, so they overemphasize organization and finance,” Mr. Morris said. “Until very recently, they virtually ignored manufacturing. I think a lot of the troubles of the 1970s and 1980s, and now more recently the 2000s, can be traced pretty directly to the biases of the business schools.”In “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash” (2008), which won the Gerald Loeb Award for business reporting, Mr. Morris precisely predicted the collapse of the investment bank Bear Stearns and the ensuing global recession.He wrote the book in 2007, when most experts were still expressing optimism about the economy. He also appeared in the Oscar-winning documentary “Inside Job” (2010) about the 2008 financial crisis.“I think we’re heading for the mother of all crashes,” Mr. Morris wrote his publisher, Peter Osnos, the founder of Public Affairs books, early in 2007, adding, “It will happen in summer of 2008, I think.”Mr. Osnos recalled that after the book was published, “George Soros and Paul Volcker called me and asked, ‘Who is this Morris, and how did he get this so right, so early?’” More

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    The New Jobs Report Numbers Are Pretty Good, Actually

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    They fell far short of analyst expectations, but they reflect a steady expansion that is more rapid than other recent recoveries.It’s not as bad as it looks.That’s the most important thing to take away from Friday’s release of the September jobs report, which found that employers added 194,000 jobs last month, a far cry from the 500,000 analysts expected. The initial response among experts was to wonder whether it called for an exclamation of a mere “oof” or a more extreme “ooooooof.”But when you peel apart the details, there is less reason to be concerned than that headline would suggest. The story of the economy in the second half of 2021 remains one of steady expansion that is more rapid than other recent recoveries. It is being held back by supply constraints and, in September at least, the emergence of the Delta variant. But the direction is clear, consistent and positive.Much of the disappointment in payroll growth came from strange statistical quirks around school reopening. The number of jobs in state local education combined with private education fell by 180,000 in September — when the customary seasonal adjustments are applied.There is reason to think the pandemic made those seasonal adjustments misleading. Schools reopened in September en masse, and employed 1.28 million more people (excluding seasonal adjustments) in September than in August. But a “normal” year, whatever that means anymore, would have featured an even bigger surge in employment. In other words, this might be a statistical artifact of a shrinking education sector earlier in the pandemic, not new information about what is happening this fall.Or as the Bureau of Labor Statistics put it in its release, “Recent employment changes are challenging to interpret, as pandemic-related staffing fluctuations in public and private education have distorted the normal seasonal hiring and layoff patterns,” which is the government statistical agency equivalent of a shrug emoji.Another detail in the report that takes some of the sting out of the weak payroll gains was news that July and August numbers were revised up by a combined 169,000 jobs, implying the economy entered the fall in a stronger place than it had seemed.Meanwhile, the focus on the underwhelming job growth numbers has masked what should be viewed as unambiguously good news.The unemployment rate fell to 4.8 percent, from 5.2 percent in August. It fell for good reasons, not bad — the number of people unemployed dropped by a whopping 710,000 while the number of people working rose by a robust 526,000. (These numbers are based on a survey of households, in contrast with the payroll numbers that are based on a survey of businesses; the two diverge from time to time, including this month.)This represents a remarkably speedy recovery in the labor market — attaining sub-5 percent unemployment a mere 17 months after the end of the deepest recession in modern times. By contrast, in the aftermath of the global financial crisis, the jobless rate did not reach 4.8 percent until January 2016, six and a half years after the technical end of that recession.Part of it is the unusual nature of a pandemic-induced recession and part of it is the highly aggressive response of fiscal policymakers to the crisis. But the result is that jobs are abundant and most people who want to work can.And while participation in the labor force remains well below prepandemic levels and has lots of room for improvement, it is not as bad as it was in that last expansion.In September, for example, the share of people 25 to 54 who were in the labor force — that is, either working or looking for work — was 81.7 percent. That is still well below 83.1 percent before the pandemic, but considerably better than the 81 percent achieved in January 2016, the point in the last expansion when the unemployment rate got this low.Labor force participation remains the Achilles’ heel of this recovery. Many Americans who have dropped out of the work force — because of whatever mix of burnout, challenges with child care, or ability to live on pent-up savings or government benefits — are not yet back in action.Notably, even as expanded unemployment insurance benefits expired in early September, there was no surge in participation in the labor force. The labor force participation rate for all adults fell by 0.1 of a percentage point, to 61.6 percent. That suggests that the end of extra-generous job benefits may not be the solution to labor shortage woes that many business groups have argued it would be.Low rates of labor force participation and the weaker-than-expected job growth numbers are most likely two parts of the same story. Businesses want to hire and expand, and labor shortages are real. But there are fewer workers available to be hired right now than there were before the pandemic.That makes for good opportunities for Americans who do want to work. It is reflected in higher pay — average hourly earnings in the private sector were up 4.6 percent in September from a year ago. But it is also acting as a constraint on just how fast this recovery can go. More

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    Poverty in U.S. Declined Thanks to Government Aid, Census Report Shows

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    When government benefits are taken into account, a smaller share of the population was living in poverty in 2020 even as the pandemic eliminated millions of jobs.The share of people living in poverty in the United States fell to a record low last year as an enormous government relief effort helped offset the worst economic contraction since the Great Depression.In the latest and most conclusive evidence that poverty fell because of the aid, the Census Bureau reported on Tuesday that 9.1 percent of Americans were living below the poverty line last year, down from 11.8 percent in 2019. That figure — the lowest since records began in 1967, according to calculations from researchers at Columbia University — is based on a measure that accounts for the impact of government programs. The official measure of poverty, which leaves out some major aid programs, rose to 11.4 percent of the population.The new data will almost surely feed into a debate in Washington about efforts by President Biden and congressional leaders to enact a more lasting expansion of the safety net that would extend well beyond the pandemic. Democrats’ $3.5 trillion plan, which is still taking shape, could include paid family and medical leave, government-supported child care and a permanent expansion of the Child Tax Credit.Liberals cited the success of relief programs, which were also highlighted in an Agriculture Department report last week that showed that hunger did not rise in 2020, to argue that such policies ought to be expanded. But conservatives argue that higher federal spending is not needed and would increase the federal debt while discouraging people from working.The fact that poverty did not rise more during an enormous economic disruption reflects the equally enormous response. Congress expanded unemployment benefits and food aid, doled out hundreds of billions of dollars to small businesses and sent direct checks to most Americans. The Census Bureau estimated that the direct checks alone lifted 11.7 million people out of poverty last year; unemployment benefits and nutrition assistance prevented an additional 10.3 million people from falling into poverty, according to an analysis of the data by The New York Times.“It all points toward the historic income support that was delivered in response to the pandemic and how successful it was at blunting what could have been a historic rise in poverty,” said Christopher Wimer, a co-director of the Center on Poverty and Social Policy at the Columbia University School of Social Work. “I imagine the momentum from 2020 will continue into 2021.”Poverty rose much more after the previous recession, peaking at 16.1 percent in 2011, by the measure that takes fuller account of government assistance, and improving only slowly after that. Many economists have argued that the federal government did not do enough back then and pulled back aid too quickly.Despite the more aggressive response this time, however, median household income last year fell 2.9 percent, adjusted for inflation, to about $68,000. That figure includes unemployment benefits but not stimulus checks or noncash benefits such as food stamps. The decline reflects the pandemic’s toll on jobs: About 13.7 million fewer people worked full time year-round compared with 2019. More

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    Pandemic Recession Officially Lasted Only Two Months

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    The pandemic recession is officially over.In fact, it has been over for more than a year.The National Bureau of Economic Research, the semiofficial arbiter of U.S. business cycles, said Monday that the recession had ended in April 2020, after a mere two months. That makes it by far the shortest contraction on record — so short that by June 2020, when the bureau officially determined that a recession had begun, it had been over for two months. (The previous shortest recession on record, in 1980, lasted six months.)But while the 2020 recession was short, it was unusually severe. Employers cut 22 million jobs in March and April, and the unemployment rate hit 14.8 percent, the worst level since the Great Depression. Gross domestic product fell by more than 10 percent.The end of the recession doesn’t mean that the economy has healed. The United States has nearly seven million fewer jobs than before the pandemic, and while gross domestic product has most likely returned to its prepandemic level, thousands of businesses have failed, and millions of individuals are still struggling to get back on their feet.To economists, however, recessions aren’t simply periods of financial hardship. They are periods of economic contraction, as measured by employment, income, production and other indicators. Once growth resumes, the recession is over, no matter how deep a hole remains. The recession that accompanied the 2008 financial crisis, for example, ended in June 2009 — four months before the unemployment rate hit its peak, and years before many Americans began to experience a meaningful rebound.The unusual nature of the pandemic-induced economic collapse challenged the traditional concept of a “recession.” The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” Taken literally, the latest downturn fails that test — the recession lasted mere weeks. But the bureau’s Business Cycle Dating Committee decided that the contraction should count nonetheless.“The committee concluded that the unprecedented magnitude of the decline in employment and production, and its broad reach across the entire economy, warranted the designation of this episode as a recession, even though the downturn was briefer than earlier contractions,” the committee said in a statement. More

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    Fed Unity Cracks as Inflation Rises and Officials Debate Future

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    Federal Reserve officials are debating what to do as price risks loom, even as its leaders and the White House say today’s surge will most likely cool.Federal Reserve officials spoke with one voice throughout the pandemic downturn, promising that monetary policy would be set to full-stimulus mode until the crisis was well and truly behind America. Suddenly, they are less in sync.Central bankers are increasingly divided over how to think about and respond to emerging risks after months of rising asset values and faster-than-expected price increases. While their political counterparts in the White House have been more unified in maintaining that the recent jump in price gains will fade as the economy gets past a reopening burst, Washington as a whole is wrestling with how to approach policy at a moment of intense uncertainty.The Fed’s top officials, including Chair Jerome H. Powell, acknowledge that a lasting period of uncomfortably high inflation is a possibility. But they have said it is more likely that recent price increases, which have come as the economy reopens from its coronavirus slumber, will fade.Other officials, like James Bullard, president of the Federal Reserve Bank of St. Louis, have voiced more pointed concern that the pickup in prices might persist and have suggested that the Fed may need to slow its support for the economy more quickly as a result.Unwanted and persistent inflation seemed like a fringe possibility earlier this year, but it is becoming a central feature of economic policy debates as prices rise for used cars, airline tickets and restaurant meals. For the Fed, the risk that some of the current jump could last is helping to drive the discussion about how soon and how quickly officials should slow down their enormous government-backed bond-buying program — the first step in the central bank’s plan to reduce its emergency support for the economy.Fed officials have said for months that they want to achieve “substantial further progress” toward their goals of full employment and stable inflation before slowing the purchases, and they are just beginning to discuss a plan for that so-called taper. They are now wrestling with the reality that the nation is still missing 7.6 million jobs while the housing market is booming and prices have moved up faster than expected, prompting a range of views to surface in public and private.The bubbling debate reinforces that the central bank’s easy money policies won’t last forever, and sends a signal to markets that officials are closely attuned to inflationary pressures.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” said Jerome Powell, the Fed chair.Al Drago/The New York Times“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, who is president of the Federal Reserve Bank of Dallas and is one of the people pushing for the Fed to soon begin to pull back support. “In a situation this complex and this dynamic, if I weren’t seeing debate and disagreement, and there were unanimity, it would make me nervous.”The central bank’s 18 policy officials roundly say that the economy’s path is extremely hard to predict as it reopens from a once-in-a-century pandemic. But how they think about inflation after a string of strong recent price reports — and how they feel the Fed should react — varies.Inflation has spiked because of statistical quirks, but also because consumer demand is outstripping supply as the economy reopens and families open their wallets for dinners out and long-delayed vacations. Bottlenecks that have held up computer chip production and home-building should eventually fade. Some prices that had previously shot up, like those for lumber, are already starting to moderate.But if the reopening weirdness lasts long enough, it could cause businesses and consumers to anticipate higher inflation permanently, and act accordingly. Should that happen, or if workers begin to negotiate higher wages to cover the pop in living costs, faster price gains could stick around.“A new risk is that inflation may surprise still further to the upside as the reopening process continues, beyond the level necessary to simply make up for past misses to the low side,” Mr. Bullard said in a presentation last week. The Fed aims for 2 percent inflation as an average goal over time, without specifying the time frame.Other Fed officials have said today’s price pressures are likely to ease with time, but have not sounded confident that they will entirely disappear.“These upward price pressures may ease as the bottlenecks are worked out, but it could take some time,” Michelle Bowman, one of the Fed’s Washington-based governors, said in a recent speech.The Fed’s top leadership has offered a less alarmed take on the price trajectory. Mr. Powell and John C. Williams, president of the Federal Reserve Bank of New York, have said it is possible that prices could stay higher, but they have also said there’s little evidence so far to suggest that they will.“A pretty substantial part — or perhaps all — of the overshoot in inflation comes from categories that are directly affected by the reopening of the economy,” Mr. Powell said during congressional testimony on June 22.Mr. Williams has said there is even a risk that inflation could slow. The one-off factors pushing up prices now, like a surge in car prices, could reverse once supply recovers, dragging down future price gains.“You could see inflation coming in lower than expected,” he said last week.Which take on inflation prevails — risk-focused, watchful, or less fretful — will have implications for the economy. Officials are beginning to talk about when and how to slow down their $120 billion in monthly bond-buying, which is split between $80 billion in Treasury securities and $40 billion in government-backed mortgage debt.The Fed has held a discussion about slowing bond-buying before, after the global financial crisis, but that came during the rebound from a deep but otherwise more standard downturn: Demand was weak and the labor market climbed slowly back. This time, conditions are much more volatile since the recession was an anomaly, driven by a pandemic instead of a financial or business shock.In the current setting, officials who are more worried about prices getting out of hand may feel more urgency to dial back their economic stimulus, which stokes demand.“This is a volatile environment; we’ve got upside inflation risk here,” Mr. Bullard said at a separate event last week. “Creating some optionality for the committee might be really useful here, and that will be part of the taper debate going forward.”Mr. Kaplan said he had been vocal about his preferences on when tapering should start during private Fed discussions, though publicly he will say only that he would prefer to start cutting policy support “sooner rather than later.”“I see the debate and disagreement as the Fed at its best,” said Robert S. Kaplan, a Fed official who is pushing to start easing support.Edgard Garrido/ReutersHe thinks moving more quickly to slow bond purchases would take a “risk management” approach to both price gains and asset market excess: reducing the chances of a bad outcome now, which might mean the Fed doesn’t have to raise interest rates as early down the road.Several officials, including Mr. Kaplan and Mr. Bullard, have said it might be wise for the Fed to slow its purchases of mortgage debt more rapidly than they slow bond-buying overall, concerned that the Fed’s buying might be contributing to a hot housing market.But even that conclusion isn’t uniform. Lael Brainard, a Fed governor, and Mary C. Daly, president of the Federal Reserve Bank of San Francisco, have suggested that the mortgage-backed purchases affect financial conditions as a whole — suggesting they may be less keen on cutting them back faster.The price outlook will also inform when the Fed first raises interest rates. The Fed has said that it wants to achieve 2 percent inflation on average over time and maximum employment before lifting borrowing costs away from rock bottom.Rate increases are not yet up for discussion, but Fed officials’ published forecasts show that the policy-setting committee is increasingly divided on when that liftoff will happen. While five expect rates to remain unchanged through late 2023, opinions are otherwise all over the place. Two officials see one increase by the end of that year, three see two, three see three and another three see four. Two think the Fed will have raised rates six times.Both Fed policy debates will affect financial markets. Bond-buying and low rates tend to pump up prices on houses, stocks and other assets, so the Fed’s pullback could cause them to cool off. And they matter for the economy: If the Fed removes support too late and inflation gets out of control, it could take a recession to rein it in again. If it removes its help prematurely, the slowdown in demand could leave output and the labor market weak.The Fed will be working against a changing backdrop as it tries to decide what full employment and stable prices mean in a post-pandemic world. More money from President Biden’s $1.9 trillion economic aid bill will soon begin to flow into the economy. For example, the Treasury Department in July will begin depositing direct monthly payments into the accounts of millions of parents who qualify for an expanded child tax credit.But expanded unemployment insurance benefits are ending in many states. That could leave consumers with less money and slow down demand if it takes would-be workers time to find new jobs.As the trends play out, White House officials will also be watching to see whether the economy is hot or not. The administration is trying to pass a follow-up fiscal package that would focus on longer-term investments, and Republican opposition has centered partly on inflation risks.For Mr. Kaplan at the Fed, the point is to be watchful. He said it was important to learn from the lessons of the post-2008 crisis recovery, when monetary policy support was removed before inflation had meaningfully accelerated — but also to understand that this rebound is unique.“Realizing that this is a different situation is a wise thing,” Mr. Kaplan said. More

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    Markets Work, but Untangling Global Supply Chains Takes Time

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    Decisions made early in the pandemic are having lasting effects on the ability of industries to fulfill surging demand.Auto manufacturing is a complex process with lots of pieces, meaning that the current shortages and higher prices of cars are likely to persist for some time. This is less true of simpler products like lumber.Alyssa Schukar for The New York TimesThe cure for high prices is high prices.That’s an old line used in commodity markets, and it helps explain why the great inflation scare of 2021 has eased some in recent weeks. When the price of something soars because demand outstrips supply, it has a way of self-correcting. Buyers, scared off by high prices, find other options, and sellers crank up production to take advantage of a profit opportunity.It is an idea simple enough to be taught in the first few weeks of any introductory economics class, but one with powerful implications for the American economy as it aims for a post-pandemic reboot.Several of the key products whose prices had soared in the spring have grown less expensive, as producers have increased output and buyers have held tight. This is particularly evident with lumber; as of Friday, its price was down 47 percent from its early-May peak (though still well above historical norms). Sawmills responded to soaring prices by pushing the limits of their capacity.The prices of corn, copper and a variety of other economically important commodities are also down by double-digit percentages since early May. This supports the notion that the inflation the world has been experiencing is transitory — set to ease in the months ahead as the laws of supply and demand take hold.Markets have plenty of flaws and imperfections, but when it comes to allocating scarce goods and sending signals to sellers to make more and buyers to buy less, they work quite well.But just because markets work doesn’t mean they will work instantly. The complexity of the way many of the goods still in short supply are produced, transported and sold means that people in those markets are reluctant to predict the kind of snapback evident in lumber prices.For them, a number of different problems — many but not all caused by the pandemic — are colliding at once, creating supply tangles that are taking time to unravel. In some cases, inflationary forces already set in motion have not yet made their way through to consumers.A common factor: Decisions made early in the pandemic are having long-lasting consequences in fulfilling demand that is surging with Americans’ loaded wallets.“I think we all thought in early 2020, as things were slowing down, ‘We’ve got it, it’s a recession, we know what the standard playbook is,’” said Phil Levy, chief economist of Flexport, a freight company.In a recession, incomes go down and demand for goods goes down. “A lot of shipping lines were cutting service and cutting orders because they didn’t want to get caught with a glut of supply when nobody wanted to ship anything,” he said. “And that turned out to be dramatically wrong.”Now, in what would normally be a slow time of year, container ships are operating at the outer extremes of their capacity. Shipping companies have taken exceptional efforts to create more supply, such as delaying the retirement of ships and pulling ships out of dry dock. But other factors are still holding back importers, like backlogs at ports and lingering ripple effects of the Suez Canal blockage in late March.A widely cited index of transoceanic shipping prices, the Shanghai Containerized Freight Index, is nearly four times its level before the pandemic and has continued rising in recent weeks.Mr. Levy expects prices to plateau at a high level for a while. With the global shipping system stretched to the breaking point, small disruptions could have a bigger impact than usual — the brittleness that comes from a lack of spare capacity.Meanwhile, building new capacity like container ships and expanding ports take time and require shipping companies to make a bet that the current surge of demand is more than temporary. There are signs capacity is increasing, but for now the lagged effects of the early-pandemic retrenchment are more significant.Similarly slow-moving forces are at play in the production of automobiles, a complex product made up of thousands of parts. Since the onset of the pandemic, it has been a nightmare of supply disruption.“In the 30 years I’ve been in automotive supply chains, we’ve seen sustained periods of downturn or sustained periods of upturn,” said Jeoff Burris, the owner of Advanced Purchasing Dynamics in Plymouth, Mich., a consulting firm that advises auto industry and other manufacturing firms on their supply chains. “What we have not seen is 16 months of one type of problem after another.”Now, there are higher prices for base materials like steel and aluminum. There are suppliers being forced to raise wages sharply to keep assembly lines operating. There are semiconductor manufacturers stretched too thin to provide enough computer chips to make as many cars as consumers wish to buy. There have even been shortages of resin, needed in the plastics that are part of a car, caused by Texas winter storms this year. And adding to it all, there are logjams of shipping capacity for materials imported from overseas.“It’s almost like a patient who’s fighting cancer and heart disease and diabetes all at the same time,” Mr. Burris said. The power that automakers usually hold to dissuade suppliers from increasing prices is breaking down, he said, amid the urgency to obtain supplies.And as automakers throttle production, there have been unusual dynamics in the retail side of the market.The inability of automakers to produce at full speed, combined with strong consumer demand, shows up in both obvious (prices are higher than usual) and less obvious ways, said Ivan Drury, senior manager for insights at Edmunds, a publisher of auto industry information. In the past, the “manufacturer’s suggested retail price” was generally a mere suggestion, with dealers negotiating actual sale prices $2,000 to $3,000 below that level for an average car. Now, new cars are typically selling at or only slightly below the suggested retail price, he said.And dealers are resorting to other techniques that restrict sales. With inventories lean, buyers seeking a particularly in-demand car may need to commit to buying it before it has arrived on the lot, sight unseen. Some dealers, he said, will refuse to sell to people from outside the dealer’s area, to ensure that the buyer will generate continuing service revenue.Things are even more wild in the used-car market, where the down-and-up last 16 months for the rental car industry, among other factors, has caused a severe shortage and steep price increases. Used cars and trucks were a major source of overall consumer price inflation in April and May.Mr. Drury doesn’t expect that to change anytime soon. According to Edmunds data, the average trade-in value of a car was still rising through the first three weeks of June, up an additional 2.9 percent after increasing a combined 21 percent in April and May.None of this means that the inflation of the spring will be lasting; plenty of products are experiencing more routine pricing dynamics that bear out the efficiency of the markets. Rather, the complexity of modern global supply chains means that when things get broken, they won’t necessarily get unbroken quickly.Ultimately, the cure for high prices may be high prices. But it takes more than high prices alone. More

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    in Economy

    The Recession Isn’t Over Till They Say It’s Over. (But Who Are They?)

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    The contraction in the U.S. seemed to end quickly in April 2020, but the committee charged with determining an endpoint has been quiet.One year ago, a committee of economists declared that the pandemic had officially caused the United States to fall into a recession. So is it over yet?It might seem a simple question — and yet the committee still doesn’t have an answer. That’s because it’s more of a head-scratcher than it might seem. And the issue raises some other weird questions, like: What is a recession?Let’s back up. America’s semiofficial arbiter of these things is a committee of the National Bureau of Economic Research, a private organization based in Cambridge, Mass. It’s called the Business Cycle Dating Committee, and it consists of eight esteemed academics who specialize in macroeconomics and business cycles.Their definition of a recession has been “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”Economists like those on the committee use the term recession to refer only to the period in which economic activity is contracting, not to the entire period of bad economic times. That’s why the previous recession was ruled to have technically ended in June 2009, even though the economy still felt terrible to people during the sluggish recovery that followed.Which brings us to the pandemic recession. There’s little argument that economic activity peaked in February 2020 and contracted in March 2020. The United States went through a period of rapidly collapsing economic activity with no modern precedent. Travel-related industries were most heavily affected, but sectors as varied as manufacturing, retail, construction and health care also took a hit.“Significant decline in economic activity.” Check. “Spread across the economy.” Check. Ah, but now consider “lasts more than a few months” — what about that?It now looks as if economic activity bottomed out sometime in April, maybe six weeks or so after the February peak. The committee says it weights two monthly data series particularly heavily: personal income excluding government transfers, and payroll employment. Both of these were higher in May than in April, providing evidence that April was the trough.That’s not to say that the economy was in very good shape for the remainder of 2020. The personal income measure surpassed its prepandemic level only last month, and employment is still well below prepandemic levels. But the direction of change has now been positive for more than a year.Robert Hall, the Stanford economist who chairs the committee, declined to comment Thursday on when a ruling on the recession end date might come. But let’s imagine that the end date winds up being April. If the economic peak of the previous expansion was February 2020 and the trough of the recession was April 2020, then it really lasted only two months. Or even less, if you believe the rebound actually started in mid-April.Two months are not “more than a few months.” The previous shortest recession on record was the one that began in January 1980 and lasted six months.In effect, the committee’s judgment is that even if the pandemic recession did not fit the usual definition of a recession, it still was one.In its own words: “In the case of the February 2020 peak in economic activity, we concluded that the drop in activity had been so great and so widely diffused throughout the economy that the downturn should be classified as a recession even if it proved to be quite brief.”Professor Hall declined to comment beyond that, saying that further elaboration on the jointly approved written comments would need to be approved by the committee.But it’s easy to imagine why the committee ended up with that conclusion. It would be awfully pedantic to refuse to classify an enormous economic contraction as a recession just because it didn’t fit a somewhat vague definition that a few economists had written down.“I think way back in March of 2020 there was a question of: ‘Should we call this a recession?’” said Tara Sinclair, an economist at George Washington University who studies business cycles. “Or if this is something that is going to last a few weeks, then the economy bounces right back, should it be treated as a recession or as the equivalent of a natural disaster?”Waiting to call an endpoint made sense, she said, as the committee was watching for evidence of a second wave of virus outbreak that might cause the economy to tumble again. In fact, a wave of infections in the fall dragged down employment numbers for a single month, but by most evidence it did not cause a broad or sustained contraction in economic activity.But “at this point, they are taking a particularly long time to call a particularly clear trough,” Professor Sinclair said.There’s one more wrinkle that shows how the pandemic recession is a weird one. Another common definition of recession, used especially widely outside the United States, is two straight quarters of contraction in G.D.P.Even though the actual economic contraction lasted only a few weeks in early 2020, it appears in the G.D.P. tables as having stretched over two quarters. The economy was shutting down in mid-March severely enough to cause the economy to shrink at a 5 percent annual rate in the first quarter that ended March 31.Then the continued collapse of the economy into early April meant that the second quarter, which began April 1, recorded a further 31 percent rate of shrinkage. If the pandemic had started at the beginning of a quarter rather than the end, the data would most likely have shown only a single quarter of declining G.D.P.The exact start date and end date aren’t of great importance, of course, unless you’re a chart maker focused on where the gray bars should go in an economic data visualization, or a politician looking for talking points on the campaign trail. What matters for people is how long and how severe the bad times turn out to be.But if nothing else, what appears likely to be the shortest recession on record shows just how odd the pandemic economy has really been. More