On p. 33, he writes,
it’s far easier to understand inflation and deflation if we think in terms of explaining changes in the value of money than if we try to imagine the factors that would be changing the prices of each and every good, service, and asset in the economy.
During much of the Great Inflation [1966-1981, in his telling], people did try to explain the problem by searching for factors that were pushing up specific wages and prices. Indeed, in a sense the Great Inflation was caused by this misconception.
As I see it, we are seeing the same misconception this year. But on his blog, Sumner seems to disagree. He is willing to buy into the theory that we are facing transitory supply shocks in a few sectors. I think the main reason he goes with this story is that trust in the forecasting ability of financial markets is part of his worldview. But financial markets got it wrong during the Great Inflation, also.
I have just started the book. I am sure I will have more to say about it at a later date.
How do you square your worry of runaway inflation with your view that there is no such thing as “the interest rate?” You’ve written previously that there’s no such thing as one interest rate, but, per PSST, there are different parts of the economy with different dynamics/returns/interest rates/etc. It seems that if that’s true, then there shouldn’t be one “inflation rate” any more than one “interest rate,” and you’d always expect to see “transitory supply shocks in a few sectors,” due to varying Patterns of Sustainable (or not-so-sustainable) Specialization and Trade.
Certainly there would not be one rate of price change for all purchases. However, superimposed over all the changing relative prices would be an average increase. Some prices would go down, some would go up. Some would go up a little, some would go up a lot. But the weighted average would go up at a substantially positive rate.
“But financial markets got it wrong during the Great Inflation, also.” Markets fail; trust markets!
Markets not only get things wrong, but they are not a “pure view” on anything. Inflation expectations may be well behaved because the market assume the Fed will tackle inflation if it persists. This is basically circular.
See https://www.econlib.org/recession-risk-and-the-circularity-problem/
Even as late as 2008, there was a bit of a shortage in both capital/ cash available to invest, as well as high Return On Investment (expected!) projects.
Almost all Americans have as many Big Macs, milk, and tennis shoes that they want to buy. So more cash in their pockets won’t have they buying more raw quantity, tho more will likely try to up their quality.
The low elasticity in supply of auto-chips, and the very low elasticity of demand for oil (high inelasticity), mean that supply chain problems can’t be quickly overcome by supply increases. These and other high changing prices might well be different than gradually general price rises, which are now occurring at the same time. Most supply constraints of consumables will be resolved soon, thru greater production (more supply!) as well as higher than average price rises (less demand!). Oil likely more easily than chips.
How’s the Big Mac index? That’s a better consumer-consumable price index than CPI right now, despite being designed for PPP comparisons between countries. (Philosophically it is an easy argument that America today is a different country than 10 years ago).
Asset hyper-inflation is what we already have. Scott doesn’t seem to talk so much about this – tho I admit that I’ve hugely reduced my reading of him.
Rents are up 13.6% YTD.
How much of that increase would you estimate is due to limitations on landlord’s abilities to evict tenants?
Seems to me that a good chunk of it could be explained by that factor alone. Landlord wants to sell, but no one will buy a property occupied by a non-paying tenant. Or alternatively, tenant churn is lower because there’s no incentive to pay rent, whereas in normal times tenants behind on rent would vacate and move in with family or downsize.
This is pure speculation on my part.
Where did you get that data?
In the metro where I live, there is a huge disjunction between how home prices have increased and how rents for single family homes have increased. My guess is that there is a lot of greenfield development of apartment complexes on the periphery of the metro.
But I don’t have a good sense of what is happening nationally.
I think the problem with Scott Sumner’s book is that he did not consult more with David Beckworth.
In a world of very liquid and globalized capital markets in which money is a fungible commodity, how do you stimulate the economy of a defined geographic region through monetary policy only?
Using monetary policy to inflate the economy of the US is like trying to lower global air pressure to inflate a balloon.
I venture the best way to inflate the US economy is through tax cuts, such as Social Security tax holidays. The Fed can offset lost revenue by buying Treasuries and placing them into the Social Security fund.
Trying to explain why Japan has no inflation is another interesting exercise. If Western macroeconomists believe in their axioms, then Japan shouldn’t exist.
You know what is sad? If we get through this terrible patch of a Covid-19 economy, and inflation is only moderate 4% or less and then retreats back down towards 2%….no macroeconomist will change their view of the world.
Modern macroeconomics is like a religion.
Or maybe he’s just jumped the shark?
Happened some time during the Trump years, in my estimation.
I haven’t read Sumner’s new book, but I have read his blog posts and some of his articles for decades, so I’m waiting for Prof. Kling or someone to tell me whether Sumner (in that new book) renounces his oft-stated view that the cure for any and all economic woe is more central-bank money-printing. He has stuck to that for a long time, brushing off any worries about inflation (a phenomenon which he blogged repeatedly that he does not believe in). Does he say anything different now.