One could make a pastime observing the way that so-called ‘expert’ commentators change their commentary as the data unfolds. As one rather lurid prediction fails, their narrative shifts to the next. We have seen this tendency for decades when we consider the way mainstream economists have dealt with Japan. The words shift from those implying immediacy (for example, of insolvency), to those such as ‘could’, ‘might’, ‘perhaps’, ‘under certain conditions’ and more. The topics shift. The commentariat were obsessed with ‘this time is different’ during the GFC and the ‘debt insolvency threshold’ rubbish that the likes of Reinhardt and Rogoff propagated. That is, until they were sprung for spreadsheet incompetence. More recently, we have apparently forgotten how many governments were about to go broke and the mania has shifted to inflation. The data shows some price spikes earlier in the year which set of the dogs. Now, things might be shifting again. It is a pastime following all this. Short memories, no shame is the only requirement that is required to be a mainstream economics commentator. Prescient knowledge is not included in that skill set.
On April 15, 2021, a Project Syndicate Op Ed, republished in the UK Guardian – Why stagflation is a growing threat to the global economy – saw Nouriel Roubini jumping on the inflation mania, which was all the rage around 3-6 months ago.
The causality seemed to be this:
1. National statisticians publish data showing that the CPI was rising a bit.
2. Eek, must be a return to the 1970s inflation.
Pretty simple really.
Roubini thought in April that accelerating inflation was coming because:
1. “the US has enacted excessive fiscal stimulus for an economy that already appears to be recovering faster than expected.”
So this is what we call a “demand-pull” motivation – where aggregate spending outstrips productive capacity and firms use market power to push prices up.
2. ” the bulge of private savings brought by the stimulus implies that there will be some inflationary release of pent-up demand.”
Another demand-pull motivation, where households will go on a spending binge because they haven’t been able to spend much during the various lockdowns.
3. The QE programs run by the US Federal Reserve “will drive inflationary credit growth and real spending as economic reopening and recovery accelerate.”
So apparently Roubini thinks that banks loan out reserves.
I don’t know of one country where the banks use the funds in accounts with the central bank that are designed to facilitate the integrity of the payments system (making sure ‘cheques clear’) to make loans to retail customers.
4. “Centrals banks have been monetising large fiscal deficits in what amounts to “helicopter money”, or an application of Modern Monetary Theory.”
Roubini clearly has not comprehended what Modern Monetary Theory (MMT) is.
Even if the central bank had bought zero government bonds, the monetary systems would still be demonstrating the principles of MMT.
MMT is not defined by central banks buying government bonds.
But his point is that because central banks have bought so much government debt, if they tried to sell that again – a process he refers to “Monetary-policy normalisation” (whatever that is) – then bond prices would fall dramatically and credit markets would collapse and there would be “a recession”.
Apparently, this means that “Central banks have effectively lost their independence”.
Of course, they never were independent – that is just a myth propagated by the mainstream to allow governments to depoliticise macroeconomic policy settings by appealing to the volition of technocrats rather than politicians.
Central banks and treasuries cannot be independent because the impacts of fiscal policy have daily implications for the core liquidity management functions of the central bank such that close coordination is always required for both fiscal and monetary policy to be effective.
But there is no reason for central banks to sell off their debt holdings.
The debt will mature and the government will just make some accounting adjustments between the treasury and the central bank and no-one will be any the wiser.
5. Roubini then moved onto the 1970s scare, which is becoming common among commentators.
The problem today is that we are recovering from a negative aggregate supply shock. As such, overly loose monetary and fiscal policies could indeed lead to inflation or, worse, stagflation (high inflation alongside a recession). After all, the stagflation of the 1970s came after two negative oil-supply shocks following the 1973 Yom Kippur War and the 1979 Iranian Revolution.
So back to the 1970s.
We need to be careful here.
The 1970s inflationary episode did begin with the OPEC oil price hikes, which increased imported raw material costs for oil dependent nations and those nations, such as Australia, that foolishly prices its own produced oil on an import parity basis (as a sop to big multinational oil companies who make threats they will stop drilling unless they get super profits).
But that supply shock alone was not sufficient to drive the accelerating inflation that followed and was not fully extinguished until the deep recession in the early 1990s.
What happened next was crucial.
The inflation of the 1970s which persisted into the 1980s was not because there was excessive nominal demand coming up against finite productive capacity.
Rather it reflected the ‘battle of the markups’ as bosses and unions slugged it out (in the ‘distributional’ arena) as to who was going to bear the real income losses associated with the OPEC oil price hikes that cut national incomes for the nation as a whole.
Inflation resulted because workers pushed for nominal wage rises (so-called ‘real wage resistance’) and firms responded by pushing up prices (so-called ‘margin resistance’).
The causality work in the opposite direction – I do not suggest here that the trade unions began the process.
This blog post provides more detailed background reading – Distributional conflict and inflation – Britain in the early 1970s (April 7, 2016).
The question then is whether this sort of wage-price or price-wage spiral could respond to the current supply chain cost shocks to perpetuate an accelerating inflation.
My assessment is that there is little prospect of a 1970s-style stagflation because the structural and institutional factors that were crucial to the 1970s episode are no longer relevant.
There was an article in the New York Times (September 18, 2019) – A Rerun From the 1970s? This Economic Episode Has Different Risks – that reflected on these issues.
The article considered the spike in strike action in the US at that time and concluded that:
… there are big underlying differences between the early 1970s and now. Understanding those differences is important in properly understanding the world economy in 2019 and the risks posed by this combination of events.
It noted that:
The early 1970s was also a period of labor strife … That was an era of rapid inflation, and labor unions were at the height of their power — two phenomena that were connected. The G.M. workers demanded pay increases that would outpace the already high rate of inflation, and with the strike, they got it …
Autoworkers and other powerful unions in that era fueled higher inflation economywide by demanding — and getting — ever-escalating pay increases, which fed into consumer prices …
That’s not what is happening in 2019. It’s not just that union membership has fallen to 10.5 percent of the work force in 2018 from about 25 percent in the early 1970s.
And, importantly, the “autoworkers striking today are essentially trying to claw back some of the compensation they have lost over a brutal decade.”
In most nations, the bias towards austerity and the persistence of elevated levels of unemployment have led to a widening and large gap between productivity growth and real wages growth.
That gap, representing a major shift of national income distribution to profits, means there is substantial non-inflationary room for real wage increases.
The decline of trade unions as a powerful counterveilling force in our communities is a global phenomenon.
The following table is taken from the OECD trade union coverage database and shows the evolution of coverage from 1960 to 2018. The entries are aligned at the beginning of each decade although the * entries are for situations where the data is not continuous for the entire period. In those cases, the data is the highest value in the relevant decade.
The trends are obvious.
In Australia’s case, for example, the coverage of the unions has shrunk from 54 per cent in the 1960s to just over 13 per cent now.
And much of the loss of coverage has come from the private sector as the decline of the manufacturing sector and the rise of the services sector has made it much harder for unions to organise.
Legislative shifts have also undermined the capacity of unions to engage in industrial action in defence of their members’ wages and conditions.
The question then is how are workers going to prosecute declining real wages in the event of a supply side shock that firms pass on in the form of higher prices?
The answer is that they have only limited capacity and that capacity is not sufficient to drive a major 1970s style inflation.
It is possible that the increased concentration of industry, which means that firms have greater market power now than in the 1970s, could drive a continuous rise in prices.
But that would be easily dealt with via anti-competitive industrial regulation.
After all that, it seems that Nouriel Roubini has moved on a bit.
His latest Op Ed in the UK Guardian (August 3, 2021) – Biden has a better handle on economics than Trump – but there are still risks – is now more muted.
The article suggests that Biden is really more like Trump than he like Obama and Clinton.
Biden has continued the “sharp break from the neoliberal creed followed by every president from Bill Clinton to Obama.”
Biden and Trump both have deployed “nationalist, inward-oriented trade policies” in contradistinction to the ‘free trade mania’ of their predecessors.
Both have been comfortable with the Federal Reserve Bank funding “large budget deficits”.
Both use “large direct transfers and lower taxes for workers, the unemployed, the partially employed and those left behind.”
And then as an aside, Roubini remembers that a few months ago (cited article above) he was preaching a major inflation outbreak.
So he concludes by briefly rehearsing the “risks” of the maintenance of this policy approach.
And the nuance is in the words:
Loose fiscal and monetary policies may help to increase labour’s share of income for now. But, over time, the same factors could trigger higher inflation or even stagflation (if those sharp negative supply shocks emerge) …
Which means the commentator has no real idea.
Could (pigs) might fly.
That is enough for today!
(c) Copyright 2021 William Mitchell. All Rights Reserved.