When you are eight years old and you want something, you ask your parents. When they give it to you, it seems that they are being nice and nurturing. When they don’t, it seems that they are being strict and tough.
That is the way most people think about government, and the way that journalists encourage us to treat government. When Congress gives us something we want, they are being nice. And when it doesn’t they are being mean.
Thinking about economics should allow you to see a difference. Your parents have something to give you because they worked to create something of value and earned a paycheck. The government only has something to give you because it takes it from someone else. The government cannot be “nice” to everyone at the same time.
It may be a good idea right now to raise taxes on the more fortunate people to give money to the newly unemployed. But instead, government is catering to our childish notions by giving away the money without explicitly taxing anyone. When nothing more is being produced, but we all think we have more money, the result is more money chasing the same goods. Prices will go up.
Why didn’t the 2008 stimulus cause the inflation virus to break out?* First, it was less than half as large as the recent bill. Second, the dislocation to the patterns of specialization in trade was less widespread in 2008 than what is taking place now. Third, in the years subsequent to 2008, there was downward pressure on prices from the ongoing gains to efficiency from globalization. As of now, it appears that globalization will stop moving forward, and it could in fact move backward.
*Note that I did not predict an inflation virus back then; what I did think, I believe correctly, is that the 2008 stimulus would be ineffectual, in that it would not hasten the process of creating new patterns of sustainable specialization and trade.
I agree with your general metaphor of government as the parent, but I question a couple items in your post.
“Less than half as large”. True, nominally. But nominal GDP has grown 50% since 2008, so the current stimulus, although larger than 2008, is more comparable in size than you make it seem.
I would argue that PSST are less affected now than they were in 2008. Construction contracted for years post GFC. When the current shelter in place is lifted, people will immediately resume their habits of entertainment, travel, and dining out.
Todd, you have this exactly backwards. The economy shrank, at most, 4% during the Great Recession. No industries of any kind were completely closed down anywhere in the US- the economy continued to produce all the items it produced before, but just slightly less and with just a small fraction fewer labor inputs. What we are doing now is shutting down all the “non-essential” stuff, and this expectation that it just returns to normal quickly gets less and less likely the longer this goes on.
I like your analogy. If you’re serious about inflation ticking up, you should sell some bond futures on the CBT.
Why didn’t the 2008 stimulus cause the inflation virus to break out? As calling ineffectual, you are agreeing with Krugman’s POV.
I would think about this question a lot more than just the stimulus was ineffectual. The post-GR has had almost bizarrely consistent inflation 1 – 2.5% since 2010 – 2020 January so there seems to something driving this reality. My guess the 2010s were the most consistent inflation/deflation rates in our history. (1950s? maybe?)
And if too much government spending versus debt drives high inflation, how in the hell has Japan had such low inflation for decades! I took upper class Macro in 1990, and their actual experience would have made my Professors burn the textbook. (Also few Economist were predicting a Japan long multi-decade Keynesian reality.)
At the heart what is driving this? I hold that an economy with a low population growth and especially low young labor supply/family formation enforces low inflation on the economy as low population growth hits AD ~10 years earlier than AS. (So less children today has less consumption immediately and then low supply as future labor supply declines.) Of course we fundamentally saw the opposite in 1970s when labor supply was increasing a lot. (I did have an Indian Professor state that Japan would have economic slowdowns in 1993 due to long term birth rates.)
It is easy to see that parents and government are different, even to feel that one is “people” and one is an institution. But what if people were raised by institutions, institutions that try to be nurturing? That is the case today.
Most people under the age of 50 spent a good deal of their childhood in daycare. To the kid, daycare provides for their needs: food, bathroom, things to do. Then, they go to school–though often continuing in after school daycare. School today is not school in the 1950s: “you’re here to learn, take it or leave it.” Schools have become multi-service places, in accord with the idea that students cannot be expected to learn properly if they are hungry, have psychological problems, etc. Moreover, teachers now realize that perhaps the most powerful “classroom management” tool is getting students to believe that they are “on their side”, that the teacher wants them to succeed. They will behave better (and, yes, probably learn more) if they think the school cares, that it is giving them everything they need.
They come to expect it.
More and more, colleges act the same way.
It is not surprising that so many young (and not so young) people come to feel/believe/think that this is the way life should always be. Some benevolent institution should provide for you. It has a right to expect something in return, but that’s kind of vague. After all, what has been taken in the past is mostly time, time which they were told was being used for things that were good for them. All they were asked was to behave “appropriately”.
In the 1960s and ’70s, social/political agitation was largely about “liberation”: black liberation, women’s liberation, gay liberation. Today, talking about freedom sounds old-fashioned. Freedom is scary. Protection and nurturance is where it’s at.
+1 or, sadly 🙁 +5 or +10.
All they were asked was to behave “appropriately” “politically correct”.
“Appropriately” usually has a more benign meaning: don’t talk unless the teacher recognizes you, don’t insult another student, etc. Students will often drop an f-bomb because they talk that way to each other. But almost invariably, all you have to do is look at them and say, “Inappropriate” and they give you a heartfelt, “Sorry.”
“Prices will go up,” but only to the extent that the government’s “giving” (extra spending) is financed by expanding the money supply. To the extent that it is financed by issuing debt securities (bonds, etc.), there *will* be a new good being produced: namely, these very securities. The issuance of new debt will not cause prices to rise.
Note that the market does not agree with your inflation forecast.
I think this is an excellent analogy, but I have trouble reconciling this with another idea, which may just be me not understanding economics… I read a book a while ago, I forget if it was Mokyr or McCloskey (or something else?), that contained a passage about gold from the Americas, brought to Europe by the Spanish, stimulating the European economy.
When I read it, I thought it was so ridiculous that gold would stimulate the economy like that. Nobody made anything out of gold. All the production that happened due to the new gold existing could have happened without it.
But it also happened? (Unless I’m mistaken, I’m not actually super familiar with this history) And it makes intuitive sense that it would happen because of the way people think about money and trade.
And if people will literally produce more – if more trade happens due to currency existing – then you can literally boost production and trade by creating currency out of thin air (assuming people trust the currency… big if).
I’m sure this depends on a lot of other things working out as well, and it may indeed be a terrible idea for practical reasons, but I’m curious as to why you seem to discount it as possible at all?
Could someone discuss what part (if any) the Fed’s 2008 increase in banks’ required & excess reserves (in addition to its new policy of paying interest on same) as well as the overall QE+++ policy might have played in controlling inflation despite the “stimulus”?
It seems as though that might have had some effect, but I don’t know enough to take a SWAG as to what that might have been…. : )
All of our favorite economic experiments go thwarted by the virus, it was unpredictable. But ex post is quite enlightening. Sustainable patterns of trade use trade to minimize congestion at all points. We can see the evolutionary connection, maybe not identify the mechanism yet.
“That is the way most people think about government” doesn’t seem entirely consistent with this blog’s tagline, “taking the most charitable view of those who disagree”? While I entirely agree with the core point of this post, it does seem most of those promoting the large bailout just passed have a more sophisticated view of why it is justified.
“The government cannot be “nice” to everyone at the same time.”
And? Isn’t that the point of “government”. To determine who gives and who receives. Does the peasant pay taxes to the lord? Does the lord owe military service to the king? Which tribal chief gets what loot from the sack of a city?
If your want to be generous, everyone’s got a rationalization why the one being taken from is “bad” or “deserves it” or “needs to pay their fair share”. And the one receiving is “good” or “deserves it” or “will do some really great things with it.”
So to pay for this one day either some “bad” person will be taxed or some “rich” bondholder will take a haircut either explicitly or in real terms. How does this realization change the calculus for someone who wants government money right now?
It is ALWAYS a point gained for the individual to receive something from the government. There is nothing childish about that, it’s a very adult way of viewing the world. Children whine about fairness.
I have often heard people say that most people see the government that way
but
I can’t remember ever meeting a real life adult who talked about the government that way
maybe I had a charmed life or maybe this view is just a BS meme that proliferates because it makes people feel superior
The good news is that people don’t talk that way. The bad news is that they act that way. Look at how many people argue that Nancy Pelosi was “mean” because she held up the bill. Look at the flak that Massie took.