Thursday, February 10, 2022

The Inflation Story Marries Complexity With Mendacity and Self-Righteousness

by Neil H. Buchanan
The latest inflation report was released this morning, and it was basically in line with forecasts, with the top-line number showing year-over-year inflation as of the end of January at 7.5%, up from 7.0% last month.  Because even the non-opinion reporting about this issue has been in hyperventilation mode for months, the press pointed out that the 7.5% estimate (and to be clear, the official reported numbers are estimates, subject to revision) was slightly above the consensus forecast of 7.2%, making the story about how "a key inflation measure [came] in higher than expected."
This week, I have already written two columns about inflation, one a two-parter on Verdict (published on Tuesday and today) and the other here on Dorf on Law on Tuesday.  In the two that were published on Tuesday, however, I tried to spend as little time as possible talking about inflation, even though the topic was in fact inflation, because I wanted to avoid boring my readers.  In today's entry on Verdict, I finally bit the bullet and tried to do the slogging work of explaining inflation, with the ultimate goal of showing that the Biden Administration's attempt to use the public's outrage over inflation for not-exactly-related purposes (increased antitrust enforcement) is necessary and appropriate.

I should say that I was truly surprised by how difficult it is to write about inflation.  My writing, both in purely academic articles and in the hybrid of popular and policy-wonk writing that I publish in my two online venues, is often addressed to very technical matters.  It is a challenge to explain the debt ceiling, or why budget deficits can be good, or the constitutional complexities of impeachments or the Twelfth Amendment, even to knowledgeable and intelligent audiences.  From the feedback that I receive, there is evidence that my efforts have been somewhat successful.

Because inflation has not been a newsworthy matter (or even a live topic among economists) for the entirety of my adult life, however, this week was a bit of a shock.  Having taught the mechanics and policy questions relevant to inflation in the 1980's and 1990's while I served on economics faculties, I knew that it was surprising to students to be told that most economists do not want inflation to be 0.0%, just as it was a surprise when they learned that unemployment -- even by the lights of the most aggressively pro-labor economists -- can never be anything close to 0.0%.  Beyond that, however, it is very esoteric stuff, and clarity is a serious challenge.

Stipulating that my perception of inflation being uniquely difficult to explain might be merely a matter of not having much experience doing so (at least recently), I do think it worth exploring how inflation's conceptual complexities open the door to old-fashioned lying (confusing people with loose talk) and self-righteousness.  That latter problem is the more infuriating.
In a classic example of making the perfect the enemy of the good, some commentators on the center-left have decided that President Biden must always hew to a technically correct description of inflation, even though what upsets voters about inflation has nothing to do with its pure definition.  Henry Clay famously said that he would "rather be right than be president."  Some people want Biden to be textbook-correct about inflation, no matter how much that confuses or frustrates people -- or how much political damage it would do.
If democracy itself were not on the line, this would be mere pedantry.  Even on its own terms, however, the critique of Biden's approach is beyond obtuse.

What is inflation?  It is not "high prices," even though that is what most people think of when they think of inflation.  Inflation is a general, sustained increase in prices over time.  In other words, just as velocity is the change in distance over time, income is the change in wealth over time, and deficits are the change in debt over time, inflation is the change in prices over time.

As a purely technical matter, then, an increase in one or more prices is not evidence of inflation.  Even so, inflation must be measured by computing a weighted average of price changes in a given month or year, which means that even price changes that are not truly evidence of a general inflationary trend will show up in the monthly inflation estimates.

For example, if all other prices were stable, but only the prices of vegan food items were rising (because of, say, a fire at Miyoko's Creamery -- which I pray will never happen), the average of consumer prices would rise during the month because of the increase in that subset of prices.  A pure economic analysis would tell us that, “well, (some) prices are up, but inflation is not the culprit."  Moreover, if the relevant prices stay at their higher level, inflation will be zero in future months, again because inflation measures price changes.  (If the vegan dairy items' prices go back down, measured inflation would be negative, which would look like deflation.)

As far as this goes, I am all for being clear and using the economists' definition of inflation.  After all, those of us (with, as usual, Paul Krugman being the most prominent and the most pithy) who are on Team Temporary have been saying for a year now that price increases are not the same thing as inflation and that the price increases that have fed the reported inflation numbers are not likely to continue.  Indeed, supply-chain problems are likely to be largely resolved soon, and we will see many prices falling again, not merely holding steady.
I explain this concept at some length in today's Part Two of my Verdict column, adding for good measure some explanation of why Team Permanent's theory of a bigger problem is not backed by evidence.  And I can now add that today's inflation report does nothing to change any of that, because the same news reports that are hyping the "historic" levels of inflation are also reporting that nearly everyone in the forecasting business is expecting inflation to revert to the three percent range by next year or soon thereafter.

That, however, is simply not soon enough for Biden and the Democrats.  Although the Federal Reserve was already planning to (wrongly, in my judgment) tighten policy to fight the inflation scourge, and even adding in the Fed's sure-to-come further tightening in response to today's announcement, nothing that happens to monetary policy can make the inflation picture improve any time soon.

Biden, in other words, could state accurately that no president has the power to change the inflation rate, just as he has been trying to say that supply-chain-caused price spikes for certain goods (some of which have already reversed, as expected) are not truly "inflation" in the definitional sense.  But either way, he will continue to be pummeled by politicians, the press, and the public.  Why won't the President do something instead of making excuses?! 
The fact is that the public has no particular reason to care about the technical, definitional difference between price increases and inflation.  The difference sounds like hair-splitting, and what people care about is that they are paying more to buy what they want to buy, no matter what economists call it.
One way to demonstrate that this is not Biden's fault is to point to the rise in measured inflation rates in other countries.  I recently discovered a truly great YouTube channel from the UK called TLDR News, which is run by a bunch of young Brits who produce explainers about politics and policy issues in the UK, the US, Europe, and the rest of the world.  (Their four sub-channels are dedicated to those four geographic subdivisions.)  It turns out that the UK is also experiencing "historic" inflation rates that are a bit below ours (most recently measured at 5.4% at an annual rate, although differences in countries' estimation techniques and data gathering make cross-country comparisons imprecise at best).
This morning, TLDR ran a new piece titled "Why is Everything Getting Expensive? Cost of Living Crisis Explained," which in barely more than ten minutes brilliantly lays out the elements of the issue as it pertains to the UK.  I certainly recommend watching that video (and all of TLDR's work, to which I have become addicted), but here I want to make the simple point that the first part of the title of today's video gets at precisely why politicians cannot rely on pure economic definitions when dealing with inflation.
"Why is Everything Getting Expensive?" perfectly distills what people care about.  Not whether a price increase is temporary or permanent, and not whether it is a price increase that is not truly inflation.  They care when things become more expensive, full stop.  TLDR's video points out that the Johnson government has already set in motion a policy change that will increase the average family's gas bill by 54 percent.  That is not a typo, so no, the decimal point is not missing.  A 54 percent increase in a necessity, even though it will then stay at that level and not continue to rise, is going to freak people out.  Moreover, it makes no difference to people that this is not a "market" price.  What they know is that they are going to pay more to heat their homes.

If someone were to tell people that the cost of some other important part of their monthly budget was going to go down by 54 percent, that would be good news, even if the price did not continue to fall.  Nor would people mind that that would not technically mean that underlying inflation has gone down.  As I put it in today's Verdict column, people "do not care that a one-shot price reduction for something that they buy is not going to reduce inflation in 2023 or 2024."
As I noted above and in the title of this column, the conflict between public perception and expert knowledge on this inherently confusing issue opens up two avenues of attack on the politicians who are nominally in charge.  The more familiar is the typical lying and grandstanding that we are seeing from Republican politicians.  This, by the way, is certainly a trend that we saw prior to Donald Trump's appearance on the scene.  Republicans thus lie about why inflation is happening -- Biden was too generous to the poors with his socialist spending packages -- but (as they do so often, such as with the Afghanistan withdrawal or, years ago, with the Iran nuclear deal) offer no substantive proposals to prove that they have any constructive ideas, merely asserting that Democrats should have done better.  Somehow.

Yet it is the self-righteousness on the left and center-left that is especially annoying.  In today's Verdict column, I link to an article by Washington Post columnist Catherine Rampell from last month, in which she mocked the Biden team's decision to blame lax antitrust enforcement for high prices.  Rampell is not an economist, but she in the midst of a long career built entirely upon parroting the talking points of orthodox economists.  (I once called her the "Queen of Neoliberals.")  Rampell chides the Democrats for not adhering to the true definition of inflation, saying that even if antitrust policy works to reduce prices, that is not the true problem.

I am all for intellectualism, but this is insane.  Rampell notes that there are three open seats at the Federal Reserve, then concludes her column with this:
If Biden is truly worried about the threats posed by inflation, he will immediately nominate three professionals with a track record of political independence and a credible commitment to stabilizing prices. Markets need to trust that the Fed is willing to take the punchbowl away if necessary. Even during an election year.
Those Fed slots have gotten less attention than Biden’s performative attacks on corporate greed. But they’re the most important contribution Biden can make to getting inflation under control — and his political agenda back on track.
Rampell is telling Biden that even in an election year, responsible politicians need to do (what she insists is) the right thing, politics be damned.  As she sets it up, moreover, the president would not even be able to claim credibly that it was the Fed's fault if/when the economy tanks, because he would have been the person who put three pro-recession-if-necessary appointees on the Board.

But it is the insistence on ridiculing the importance of decreasing prices that truly rankles.  If antitrust policy (which needed to be stepped up in any case) has even one newsworthy success in pushing down prices -- even a small one, as Rampell claims would be the best that Biden could hope for -- he will have done something that makes voters happy.  And this would not be merely symbolic.  If I buy a good that has a monopoly-enhanced price, and that price falls because of the Biden Administration's actions, I am better off.

Rampell airily dismisses "some warmed-over populist talking points about ... 'corporate greed'" from the White House, calling them "nonsense[, because c]orporations are always greedy. It’s their job to make a buck. They didn’t suddenly remember to become greedy in the past year."  And she adds that it is "not clear his specific fix" will work.  OK, then, better not to try.
The big complaint, however, is that this will not fight "overall inflation" (her emphasis) and adds that "[m]aybe populist demagoguing against 'corporate greed' is effective for energizing progressive Twitter in the near term[, b]ut since it’s not an effective strategy for actually bringing down inflation, it could well backfire."  This, however, is not about progressive Twitter or anything so easy to marginalize.
To Rampell (and she is hardly the only non-Republican making this claim), describing policies that might in fact cause some prices to come down is "populist demagoguing," because it distracts Biden from doing what he absolutely, positively must do: Selflessly destroy his party's political prospects without a second thought, because fighting inflation -- properly defined -- must be his only concern.

We often complain, and quite rightly, that politicians do not listen to supposed experts.  Sometimes, however, we should thank the universe that this kind of thing is relegated to the op-ed pages.