While these conclusions may not come as a surprise to those who came of age during the Great Recession, the publication last year of this short, earnest, and plaintive but restrained book is worth considering not only for its argument but for the identity of its authors. Fraccaroli is an economist at the World Bank, one of the two international financial organizations, along with the International Monetary Fund, created after World War II to govern international finance and development. He is also a visiting professor at Brown, where Blyth is a professor of international economics.<\/p>\n
The authors have their feet in the worlds of mainstream academic macro-finance, understand that economics is the \u201clanguage of power\u201d that \u201csets the field of play for everyone else,\u201d and are therefore concerned that \u201cthe ideas of the 1970s and the institutions that they spawned in the \u201980s that were supposed to safeguard us against inflation\u201d\u00a0\u2014 independent central banks with inflation targets\u00a0\u2014 \u201cnstead made us more vulnerable to its return.\u201d<\/p>\n
In making this argument, they have to cover a lot of ground, and the speed with which they do so may diminish the force of what they are saying. What should land with the impact of a meteorite is obscured by the orbit required to survey the landscape of \u201cmainstream\u201d consensus on inflation and inflation policy: what is measured and how; how economists theorize and conjecture about the relationship among measured variables; how central the unmeasurable variables have become to the consensus; and how governments and business typically interpret and react to those measurements.<\/p>\n
About half the book is made up of this background material. To establish that there are \u201cdifferent kinds of inflation,\u201d Blyth and Fraccaroli employ the spaghetti western terminology of Fabio Panetta, the governor of the Bank of Italy: \u201cthe good, the bad, and the ugly.\u201d<\/p>\n
\u201cGood\u201d inflation is where \u201cwages, in theory at least, rise in line with workers\u2019 productivity\u201d\u00a0\u2014 around 2 percent, though some have advocated for 3\u00a0\u2014 and \u201ceven if prices increase, wages are catching up, and people can afford the same amount of goods, if not more.\u201d<\/p>\n
\u201cBad\u201d inflation is a onetime jump in prices, kicked off usually by some single-industry or country problem: Ukrainian wheat and Russian oil getting cut off in 2022, for example, before Brazilian and Persian Gulf supplies could meet the higher price level.<\/p>\n
\u201cUgly\u201d inflation is when \u201cprices and wages push each other upward in a cycle,\u201d and the \u201cbad\u201d inflation kicks into a self-sustaining race between companies, workers, households, and investors to stay ahead of the game.<\/p>\n
Such distinctions are tolerated within the mainstream. Nobody disputed that there were different kinds of inflation in Washington in 2021: the debate within the mainstream was whether the bad inflation that began that year would turn ugly without austerity and interest rate hikes\u00a0\u2014 whether it was \u201ctransitory.\u201d What economists disagree about is how a bad inflation turns ugly.<\/p>\n
Arguing the point requires what Blyth and Fraccaroli call \u201cinflation storytelling,\u201d the narratives constructed to explain causal relationships in the price system. For \u201cteam transitory,\u201d during the pandemic inflation, the story was that the price level rise was a one-off event. \u201cLet markets work\u201d was a common refrain of progressive economists opposed to Federal Reserve interest rate increases in late 2021: having jumped from 1.3 to 6.2 percent in the first ten months of 2021, the inflation would slow and come down as supply caught up to demand on its own. In the terms of economic theory, inflation \u201cexpectations\u201d remained \u201canchored.\u201d<\/p>\n
\u201cTeam permanent,\u201d their intellectual opponents both within the White House and among its partisan enemies, told different stories: excessive government spending from the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan was raising household spending or creating a disincentive to work, reducing supply; too-tight labor markets from lockdowns, or lazy or greedy workers, were pushing wages up too far, too fast. In economic theory terms, \u201cexpectations\u201d were becoming \u201cde-anchored.\u201d The ease with which national broadcast media slipped into the \u201clabor shortage\u201d hysteria of late 2021 and 2022, as the inflation accelerated, demonstrated the stakes of these narratives. The failure of the 2021\u201322 Congress to pass a budget for the administration\u2019s first full fiscal year until ten months after it began demonstrated their effectiveness.<\/p>\n
Missing from this account of the Joe Biden years is what most people actually believed. Blyth and Fraccaroli cite a May 2022 survey from Deloitte that found 60 percent of Americans thought \u201ccompanies are taking advantage\u201d of the pandemic \u201cby raising prices beyond their own rising operating costs in an attempt to increase profit.\u201d While economists and journalists disagreed among themselves about whether or when the Federal Reserve should raise rates, they agreed almost unanimously that this was wrong.<\/p>\n
Blyth and Fraccaroli rely heavily on the example of Isabella Weber<\/a>, the professor of economics at the University of Massachusetts-Amherst, who argued<\/a> in late 2021 that the reason the inflation had not subsided was the expansion of corporate profits, particularly in monopolistic industries. Controversy ensued. The existence of the Deloitte survey is itself an artifact of how profoundly challenging the perspective was to what those who control major corporations were willing to countenance: six months after the Guardian published Weber\u2019s infamous opinion, the world\u2019s largest accounting firm, itself a key multinational corporation organizing the informational lifeblood of capitalism, felt compelled to test the popularity of the idea. They found that what a majority of people believed squared with Weber\u2019s contention.<\/p>\n Even though this is the story \u201cthat intuitively most people think is right,\u201d Blyth and Fraccaroli note how \u201ceconomists hate it with a strange passion.\u201d The reason for that is not obvious from the perspective of economic theory. While orthodox price theory holds that in a competitive market, a ceiling on price will prevent the expansion of supply, resulting in shortages, nearly a century of research on \u201cimperfect competition\u201d and \u201coligopoly\u201d has demonstrated what anyone in America knows about corporate competition: most industries have a few key players that drive what the industry as a whole is doing.<\/p>\n Whether like oil refining, in which \u201c[o]ne firm leads the price increase, and the others follow,\u201d or the much more common \u201cmarket structure of oligopoly, in which a handful of firms can set prices above marginal cost, but only if they cooperate with each other,\u201d pricing arrangements in which sellers have a degree of discretion over profit margins exist across the range of real-world market structures.<\/p>\n Diagnosing the nexus of government and business power as the cause of inflation is not likely to be popular among those who hold power, and those who speak on their behalf have adjusted accordingly.<\/p>\n The relevance of this fact for theories of inflation is not that corporate pricing power can kick off inflation. Usually, the risk of losing market share prevents this. Rather, the existence of \u201cimperfect\u201d or \u201cmonopolistic\u201d competition means that when a bad inflation does occur, owing to a natural disaster or war or other \u201csupply shock,\u201d it can become a pretext for the kinds of collective action among corporations that would not normally be possible. The resulting price rise in some parts of the economy becomes rising costs for others, and it is in that moment that businesses can act together to raise the general level of prices.<\/p>\n As Blyth and Fraccaroli explain the logic resuscitated in the work of Weber and her colleague Evan Wasner, \u201cprice gouging may not be the fundamental cause of inflation, but once inflation gets going it\u2019s arguably a large part of what keeps it going.\u201d<\/p>\n Demonstrating the relevance of the point to inflation theory, they cite one survey of retail corporation earnings calls from late 2021 as finding that 56 percent of companies admitted to shareholders \u201cthat inflation gave them the ability to raise prices far beyond what they would have needed to offset higher production costs.\u201d<\/p>\n If you think profits play a role in inflation, Blyth and Fraccaroli write, then the reason \u201cinflation is higher in the United States than in Europe [is] simply because the American economy is more concentrated, and a handful of firms in critical sectors can set prices because they don\u2019t face significant competition and the government does not enforce antitrust laws.\u201d<\/p>\n The reason this occurs is because \u201cthose firms are critical funders of those hugely expensive US elections that elect the folks who regulate these firms.\u201d Diagnosing the nexus of government and business power as the cause of inflation is not likely to be popular among those who hold power, and those who speak on their behalf have adjusted accordingly.<\/p>\n","protected":false},"excerpt":{"rendered":"While these conclusions may not come as a surprise to those who came of age during the Great…\n","protected":false},"author":2,"featured_media":623584,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[11],"tags":[72,113,61,60],"class_list":["post-623583","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy","tag-business","tag-economy","tag-ie","tag-ireland"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/623583","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/comments?post=623583"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/posts\/623583\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media\/623584"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/media?parent=623583"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/categories?post=623583"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/ie\/wp-json\/wp\/v2\/tags?post=623583"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}