Is it 1976?

In terms of inflation and interest rates, I think so.

By 1976, inflation was 5.74 percent. Although the interest rate in November, at 4.75 percent, was higher than in 1964, it was lower than the rate of inflation. In that sense, the interest rate was low

That was when inflation was poised to take off.

Every time I hear someone talk about “temporary supply” shortages causing inflation I want to grab them by the collar and shake them. If the government hasn’t gone wild with deficit spending, then a price increase in a supply-constrained sector will be offset by a price decline somewhere else.

The industrial revolution: how did workers eat?

Davis Kedrofsky writes,

There was an Industrial Revolution, and it was slow.

The debate’s been over for two decades. The gradualists, armed with new growth accounting techniques, have won, exorcising forever the Ashtonian vision of an eighteenth-century leap into exponential growth. Where historians once thought the spinning jenny, steam engine, and factory system the immediate preconditions of England’s dramatic transformation, they now accept that these advances emerged in a trickle in a few tiny sectors.

Pointer from Tyler Cowen.

I believe that that the gradualists may have it wrong. Here is a clue, from later in Kedrofsky’s essay.

And a growing share of the population moved out of agriculture and into that increasingly-recognizable branch of manufacturing—from 33.9 percent in 1759 to 45.6 percent in 1851.

How did these manufacturing workers eat? There had to be a significant increase in agricultural productivity. But I am guessing that a lot of the increase did not take place on farms. Here is Wikipedia.

The British Agricultural Revolution, or Second Agricultural Revolution, was an unprecedented increase in agricultural production in Britain arising from increases in labour and land productivity between the mid-17th and late 19th centuries. Agricultural output grew faster than the population over the century to 1770, and thereafter productivity remained among the highest in the world. This increase in the food supply contributed to the rapid growth of population in England and Wales, from 5.5 million in 1700 to over 9 million by 1801, though domestic production gave way increasingly to food imports in the nineteenth century as the population more than tripled to over 35 million

I want to focus on the last point, about food imports. Borrowing a trope from David Friedman, I would say that British manufacturing workers were very productive at growing foodstuffs. They produced manufactured goods, put them on ships, and the ships came back with foodstuffs.

Suppose that productivity did not change in either agriculture or manufacturing between 1800 and 1850. A worker could produce a bushel of grain per day either year, and a worker could produce a bolt of cloth per day either year. But if you can trade a bolt of cloth for two bushels of grain, and you move some workers out of agriculture and into manufacturing, that worker now produces twice as much grain.

Adam Smith and David Ricardo knew more about how living standards improve than do modern productivity historians. And my guess is that the transformation that people who were alive around 1800 were seeing with their own eyes was real, today’s gradualists notwithstanding.

UPDATE: A commenter points to Anton Howes.

The push thesis implies agricultural productivity was an original cause of England’s structural transformation; the pull thesis that it was a result. The evidence, I think, is in favour of a pull — specifically one caused by the dramatic growth of London’s trade.

On the larger question, Howes is a gradualist.

Money printing and manias

Matt Taibbi writes,

In 2021, we’re seeing a surge in con-like corruption cases once again, many involving old-school ripoffs. An economy puffed up by the steroid enhancement of Fed support has led to a great flowering of such creative grifts. Some are not terribly accessible to non-financial audiences at first glance, so to make it a bit easier to keep track of new cases coming in, I’m creating a new feature, “Racket of the Week.”

Charles Kindleberger, in Manias, Panics, and Crashes, pointed out that when there is a lot of new wealth you tend to get a lot of scams.

I would bet that five or ten years from now, people will look back at GameStop, Dogecoin, and Hometown Deli and say it was obvious that monetary policy and regulatory policy were too loose. Future inflation is here–it just hasn’t been evenly distributed.

The thirty-somethings who are driving policy in Washington these days are ignorant. They don’t know history. They don’t know economics. I would not under-estimate the damage they can do.

If you have $200,000 in assets today, it would not surprise me to see that ten years from now inflation and taxes have eroded half of their value. In other words, ten years from now, you will be able to buy what today is $100,000 worth of stuff.

Some assets will hold more of their value. Some will hold less. It is possible that a house could lose even more than half its (inflation-adjusted) value once interest rates go up, because high interest rates make it hard to afford amortizing mortgages. But I expect instead that housing will do well relative to other investments, in part because the Federal government tends to avoid taxing housing wealth as severely as other assets.

Deficits and inflation: a longer historical overview

Michael Bordo and Mickey D. Levy write,

the initial response combined aspects of the policy response in several overlapping crisis scenarios in the past: World Wars I and II, the Great Depression, and the Global Financial Crisis (Bordo, Levin and Levy 2020). These earlier episodes of induced fiscal and monetary expansion in the 1930s and the World Wars led to rising price levels and inflation. In this paper we survey the historical record for over two centuries on the connection between expansionary fiscal policy and inflation and find that fiscal deficits that are financed by monetary expansion tend to be inflationary.

Do not assume that the last ten years settle the issue of whether deficits are inflationary.

Dependency ratios and inflation

In a podcast with Rob Johnson of George Soros’ Institute for New Economic Thinking, Charles Goodhart and Manoj Pradhan offer an unusual explanation for secular trends in inflation. They say that a decline in the dependency ratio creates excess supply of workers relative to consumer, putting downward pressure on prices. This trend has started to reverse, so we will see upward pressure on prices. They say that this upward pressure will become visible soon after the virus crisis is over.

Think of this in worldwide terms, with the dollar as the universal unit of account. Over the last several decades, the world labor supply rose because of population trends and the inclusion of more countries, notably China, in the world production system. The share of consumers in the population remained steady, as a decline in birth rates offset population aging by reducing the growth of young dependents.

Going forward, the labor supply will grow slowly and population aging will outpace any further decline in birth rates. So the world dependency ratio will rise, and this will put upward pressure on wages and prices.

Note that money plays no role in this story. What about “Inflation is, anywhere and everywhere, a monetary phenomenon”? Perhaps if you include the hypothesis that the real mission of the central bank is to hold down government borrowing costs, you can tell the story in a way that Milton Friedman would not object. That is, as dependency ratios were falling, there was enough worldwide saving to keep down interest rates, and central banks did not have to monetize a large share of government debt, so that inflation fell. Going forward, worldwide saving will fall, and central banks will face a dilemma. As inflation appears, they will want to stop it by raising interest rates. But if they do that, governments won’t be able to afford the interest cost on their debt, so central banks will be forced to monetize a large share of debt.

Toward the latter part of the podcast, they are asked about why markets differ from their forecast. Basically, they say that markets are extrapolating forward based on the past, in which demographic pressure on inflation was downward. It will take markets a while to realize that we are in a new regime.

The Boomer and the Millenial

A Millenial couple (no relation to me), about age 30, recently summarized their finances. They have about $100K saved for a down payment on a house. Unfortunately, they have $250K in student loans, so the way I see it they are $150K in the hole.

In 1983, when we were their age, my wife and I had about $25K in savings, but no debts. That was enough for a 20 percent down payment on a $125K house.

In the last 37 years, the price of our house went up by a factor of 4 or 5, while inflation only went up by a factor of about 3.3. As a result, our housing costs have effectively been zero–it’s like we lived rent-free all this time.

I think that this is true for a lot of Boomers. They bought houses that subsequently went up in price enough that the capital gains have exceeded what they paid in principal and interest. And they did no start out in the hole to the tune of $150K (or $45K in 1983 dollars).

Wesley Yang has emphasized the difference in circumstances between the Boomers and Millenials. The Boomers have a very high share of wealth, even adjusted for age. The Millenials have a very low share of wealth, even adjusted for age. The Boomers are also slow to exit the stage in politics, academia, and other fields.

So one way to think of the Woke movement is not as a racial fight but a generational one. For Millenials, the moral issues are a way to get back at the Boomers.

Cultural evolution and economics

Nathan Nunn writes,

There are two primary benefits that culture provides over rationality. First, culture-based decision-making provides a quick and easy way to make decisions. To the extent that rational decision-making (narrowly defined) requires costs due to information acquisition or cognitive processing, then acting on one’s transmitted cultural traditions and values saves on these costs. The second benefit is that relying on culture allows for cumulative learning.

More separate excerpts below.
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Bad debt

Amir Sufi talks about consumer debt in this podcast. He makes the point that an economy with a lot of consumer debt is fragile, which is a point I make in my essay on economics after the virus.

He makes interesting points about wealth inequality and consumer debt. He says that when the savings of rich people are channeled into loans for poor people, risk get transferred away from people who can bear it and toward people who are less able to bear it.

Hardly anyone remembers “petrodollar recycling,” which was oil-rich countries lending to underdeveloped countries in the 1970s. The IMF and other “experts” were very keen on it. It worked out poorly. See Latin American debt crisis.

In general, channeling savings from rich to poor in the form of loans is not a good idea.

Europe in the 19th century

Alberto Mingardi paints a rose-colored picture.

While no government adhered religiously to the principles of laissez faire, nineteenth-century Europe represents perhaps the best approximation of the ideal. Free trade, championed by England, swept away most protectionist measures; durable goods and people moved virtually freely. Passports were viewed as relics of an odious past—only states like Russia and the Ottoman Empire issued them. A Victorian idea prevailed: individuals should put checks on themselves, without state interference. John Stuart Mill and Herbert Spencer became household names among the educated class. Europe thrived in a period unshackled by government controls, with millions able to afford new and more sophisticated goods, including products created by an ongoing technological revolution.

Mingardi’s essay reviews Norman Stone’s analysis of the decline of liberalism starting in the 1870s and draws some parallels to the present environment.

The West was lucky to win

I have been delving into J.S. Sharman’s Empires of the Weak, which argues that the story we tell of the triumph of the West as inevitable is quite misleading. In general, he questions the assumption that competition will automatically strengthen states through the processes of learning and selection.

Victory and loss in war are a result of complex and varying combinations of factors, many of the most important of which, like leadership and morale, are intangible. (p. 20)

We tend in hindsight to see correctness in what the winner did and mistakes in what the loser did. We also tend to narrow the list of critical factors. In fact, we may very well be emphasizing the wrong factors, we may misclassify some decisions as correct when they were mistakes and vice-versa, etc.

I think that this is true in business as well.

On the issue of selection, Sharman argues that there is not enough extinction among states for selection to operate effectively. I suppose that because firms go out of business much more frequently than states disappear, one can have some hope that the process of selection leads more reliably to improvement in the case of firms than in the case of states.