Alan Blinder Again

 

Alan Blinder (Princeton economics)* never gives up. He used to be a moderate -- that is, while he might have tended to the liberal side of macroeconomics, he was a good economist. One with a more conservative macro bent might disagree with Blinder, but finding the holes in his arguments was never easy. It was always very challenging to disagree with him.

But now, Blinder has crossed over to the far left side of the river and he makes it too easy to dismiss his articles. Since he is a famous Princeton economist, his words are published by the best periodicals. This time it was his nemesis the Wall Street Journal that published him. Why would they publish him? The New York Times yes. But the Wall Street Journal. Why? 

He is supposed to be an intelligent economist, yet he continues to spread the big lie that it will cost nothing to pass the latest liberal spending and taxation bonanza. You would think that he is on the Democratic Party payroll. Or maybe he is running for office with Biden. I have no idea why he writes this stuff. 

Since when do economists say that things cost nothing? One of the biggest increases in spending ever yes, but he says it will cost nothing. How can you say that? Trillions of dollars of spending will appear out of a hat? Of course it will cost something. 

Since when are higher taxes neutral to the economy? He admits that corporations and the rich will pay for all those trillions in extra spending. Okay, he doesn't like those folks and loves to add to their tax bills. But are those people so dumb that they will send the extra trillions to the government and not change any of their behaviors? Will firms continue to hire? Will they continue to expand their spending on equipment and other capital? Will they give the workforce a big pay increase? Or will they maybe find clever ways to not pay this huge tax bill? 

What macro course does Blinder teach at Princeton where he tells the students that you can raise taxes by trillions of dollars to afford that much more spending and it will have no impacts? In what economics course does he teach students that extra spending is free? I never taught those ideas but then I am not a rich and famous economist from the Ivy League. 

Okay put aside the free idea. What about his total acceptance that the extra government spending will be done wisely and will result in society's ills being addressed and solved? Sure it's a lot of money he admits, but in a few years from now we will have solved poverty, invested in a huge defense buildup to scare Russia and China, solved the puzzle of productivity, increased employment while reducing inflation, and basically solved all of our problems. 

If you believe all that, I have a very nice 2014 Hyundai Santa Fe I am willing to sell you. Those and other problems have been persistently stubborn over the decades. Have we really figured out how to solve problems associated with income inequality? Trust Alan Blinder -- this time, if you give Washington DC enough money, they will finally put all these negative trends to rest. Hurrah Alan. 

I hate to sound so mean and small. But this guy is whistling his way to the bank. I hate to spend our precious time even bringing up these points. But you gotta do what you gotta do. Folks, it has always made sense to watch your spending and debt. Nothing has changed. 

Read his article if you think I am exaggerating.  

* https://www.wsj.com/articles/look-at-build-back-betters-benefits-not-price-tag-federal-budget-bbb-reconciliation-debt-cbo-11638718325?mod=opinion_major_pos4

Fedspeak and Gobbledygook

Two scenarios. In each scenario, Pete told Charlie not to mess with his golf bag. Charlie then messed with Pete's bag.

    Scenario 1: Pete slugs Charlie

    Scenario 2: Pete tells Charlie that he is thinking about someday maybe retaliating in some way against Charlie. 

These scenarios remind me of the Fed and its current plans to retaliate against the hated onslaught of inflation. Keep in mind that inflation has already picked up. The rise in inflation is not probable nor off in the future. It is here and now. 

The Fed reminds me of the parent who threatens and threatens his child but never follows through. The Fed shows it true colors with gobbledygook. The Fed does NOT want to do anything about inflation until it is forced into it kicking and screaming. Meanwhile it resorts to gooledygook.

Below -- in italics below are quotes from an article* published in the WSJ on December 15. Following each quote I comment. The bottom line for all this nonsense is that the Fed cannot be trusted to do one damn thing about inflation. 

The Federal Reserve set the stage for a series of interest rate increases beginning next spring, completing a major policy pivot that showed much greater concern about the potential for inflation to stay high.

     Setting the stage for a future pivot is not an action, is not a date, and shows nothing about concern. A major policy pivot is a glittering generality and not a specific policy action.

The Fed penciled in at least three quarter-percentage-point rate increases next year. 

   Penciled in is not a decision. Notice that the policy changes are indicated for next year. Inflation is a problem now and they are talking about a policy "sometime next year". Are they going to let inflation get rolling for a few months and then get serious about it?

For months, Fed leaders had stuck to a view that higher price pressures this year were caused primarily by supply-chain bottlenecks and would ease on their own. But Fed Chairman Jerome Powell had in recent weeks signaled much less conviction about that forecast, and the projections Wednesday suggest most of his colleagues share his concern.

     Notice this speaks of projections at the meeting. Projections are not a policy or a policy change. Inflation is here and now. Projections underlie real policy changes when? His colleagues are concerned. What does that mean? I'm concerned about global warming but I don't do anything about it. 

They approved plans that will more quickly scale back their Covid-19 pandemic stimulus efforts, ending a program of asset purchases by March instead of June. That opens the door for them to start raising rates at their second scheduled meeting next year, in mid-March.

     Opens the door? Scaling back? This is like you saying that the doctor ordered you to lose weight to prevent a heart attack, so you have decided to schedule a gain of only 10 pounds next month instead of 15. In the old days, the policy would not have planned to scale back purchases. It would have instigated asset sales. That would be a real policy to fight inflation. 

“There’s a real risk now, I believe, that inflation may be more persistent and…the risk of higher inflation becoming entrenched has increased,” said Mr. Powell at a news conference Wednesday afternoon. “That’s part of the reason behind our move today, is to put ourselves in a position to be able to deal with that risk.”

     He clearly says there is a real inflation risk now. The risk is not next March. The risk is right now. Does he deal with it now? No. He wants to put himself in a position. Wow. Now that's action. Putting himself in a position. 

Fed officials in early November agreed to reduce their then-$120 billion-a-month in bond purchases by $15 billion a month, to $90 billion this month. On Wednesday, officials said they would accelerate that wind-down beginning next month, reducing purchases by $30 billion a month. As a result, they will purchase $60 billion in Treasury and mortgage securities in January, putting the program on track to end by March.

      Now Powell is getting specific. But note. The math says that monetary policy is going to keep injecting money. They should be removing money. There are mountains of money out there. Yet he is clear he wants even more.....by $90 million more this month and finally turning off the money hose in March of 2022. March! That's three months from now. If inflation is a real risk today, why does it take so long to get back into neutral? 

For the first time since the Fed slashed rates to near zero when the pandemic hit the U.S. in March 2020, Mr. Powell said nothing to dispel expectations that officials could be contemplating rate rises in the next few months.

“We’ll be in a position to raise interest rates as and when we think it’s appropriate,” he said. 

“And we will, to the extent that’s appropriate.”

      Those above three quotes are about the Fed's policy to raise interest rates. The first one says Powell said nothing to dispel rate rise expectations. Dispel? Why not say it? We are going to raise rates. The second two quotes add words -- "we will be in a position". What does that mean? Is he going to move from outfield to infield? What does "when appropriate" mean? 

Summary: Obfuscation. Gobbledygook. Stop inflation now before it is too late. 

https://www.wsj.com/articles/fed-officials-project-three-rate-rises-next-year-and-accelerate-wind-down-of-stimulus-11639594785?mod=hp_lead_pos1

Worst Inflation Ever?

The November 2021 CPI announcement created quite a stir. But as usual, the press had to shriek rather than analyze. What I witnessed was a press screaming that inflation in November reached a number so high that even Snoop Dog has never been that high. The press swooned that inflation had not been so high in decades and decades. 

The actual number for CPI inflation in November amounted to a change of 6.81% from November of 2020 to November of 2021. For those of you who remember or who have read about the 1970s, we would have appreciated a rate of 6.81% but that was then and this is now. 6.81% in November of 2021 is not what we want. 

What most of us don't know and we are still discussing is whether or not that number is temporary and fleeting or whether it is a bell weather of what is to come. My crystal ball is at the dry cleaners now so I won't be able to tell you which is which. I will take a guess below. 

But I can request that we back up a bit and examine what is really going on with the numbers. Should we be hysterical about this 6.81%? If you returned from a vacation to another planet recently you might be surprised by the increases in debt by our government and the extent to which the Fed has monetized all that debt. Inflation would not surprise you after all that. And then when you learned about the supply constraints caused by Mr. Covid, you would appreciate why inflation might be rising faster than Elon Musk in his newest rocket ship. 

The CPI is a number that represents the average price of the things we buy -- both goods and services. The BLS sends out a bunch of munchkins every month and they figure out how much all that crap costs in that month. Everything from lettuce to Lexus is counted. Pretty big task, eh. But they do it every month and they publish a number for that month. We call that the CPI value. We now have one for November of 2021.

Inflation is a word that defines how much that CPI level changes over time. We can calculate the percentage change of the CPI from October to November of 2021. That would represent inflation over the period of one month. We can also take the percentage change from November of 2020 to November of 2021. We call that the annual inflation rate. That is what came in at 6.81%. Wow. That's pretty impressive and the press is right to say that 6.81% for a whole year was a real zinger. 

But hold on. This way of calculating an inflation rate from November of one year to November of the next year only uses two months in the calculation. What about the other months? Don't they matter too? And doesn't this method emphasize those two months too much? 

Yep. that's very true. Luckily we have another way to calculate an ANNUAL inflation rate. If we average the one month rates for all 12 months between December of one year and November of the next one, we get an annual average that reflects all those months -- not just two months! If you do it this way., you find that the annual rate was about 4.5%. 

What can we compare that 4.5% to? You could compare it to the average over 2012 to 2019. That pre-Covid inflation rate amounted to about 1.6% per year. During those 8 years the annual inflation rate was as low as zero percent in 2015 and was mostly lingering around 2% in most years. 

What do you think about the average inflation rate of 4.5% over the past year? It is definitely higher than the Pre-Covid inflation rate of 1.6% and it is definitely higher than the 2% we saw in a lot of years recently. It is clearly not the 6.8% the press is swooning about. 

I suspect that given monetary and fiscal policy and given somewhat lingering supply shortages, inflation is not going to improve very much very soon. The supply shortages should dissipate but if our government does not remove the stimulus from their policies soon, 4.5% might herald a return to the 1970s. But today the 4.5% is more a warning than it is a tragedy. 

The Myth of Scarce Workers

Note: after publishing this post I found that the numbers I quoted were in error. I was lazy and got the numbers from a third-party data source I thought was reliable. While US employment is rising, it has not returned to levels reached before Covid. Before Covid employment was about 152 million. As of this November, the number was approximately 149 million or 3 million below the previous peak. 

I wanted to write something about productivity in the USA. Productivity -- or labor productivity -- is calculated using two national figures -- employment and output. Dividing output by employment tells you how much output we can get from a given amount of labor input. When that division increases, we interpret it to mean that a given amount of employment can now produce more output -- ie, we conclude that labor productivity has increased. 

But on the way to productivity I started looking harder at the employment numbers. They seemed to be  screaming at me for attention. So for now, I a going to focus on employment at the national level in USA. I acknowledge that Florida or New York or Port Townsend might deviate from the national figures. But today we focus only on the whole country. 

Why was the data screaming? Because, as often happens, the press or the politicians so misread the situation that it screams for myth correction. Watching your TV or the Internet you might think that firms cannot find workers. They fabricate this picture of firm after firm not being able to find workers. You will, therefore, have to wait in line a long time for your pizza or semi-conductor order to arrive. Covid-induced supply bottlenecks are often blamed but story after weepy story proclaims we have an enormous employment problem. 

Maybe the Bureau of Labor Statistics hates the press or maybe they are mistaken, but if you go to bls.com and download national employment numbers you will be blown away. It is true that employment was dragged down by Covid and interplanetary visitors in 2020, but we are almost to 2022 and we need to focus on post-Covid numbers.

In October of 2020, US payroll employment was 149.7 million jobs. In October of 2021, a year later,  the employment number increased by 4.4 million jobs to a total of 154 million people employed according to payroll statistics for the business sector. That was an increase of 2.9%. Hmm....it seems that firms were finding new employees. Hmm...maybe some firms were not finding employees but if you look at the nation, that's a lot of workers finding jobs. 

It is true that employment bottomed out in 2020 at 142.2 million jobs. But that was then. How does the current figure of 154 million compare to history?

Interesting, the 154 million figure for October of 2021 is the highest on record. It represents a snapback from the recession but it also represents the highest employment level on record for the USA.

2019  150.9 million

2009  131.3 million

1999  129.2 million

Should I go on? 

How is it possible that today's handwringers can know this data and still say the things they say and write the things they write about employment? 

My answer? They don't care about the data. They care about stories. They care about stories that make you want to cry and open your pocketbook or your rich friend's pocketbook to help solve a problem that doesn't really exist. 

Are some people unemployed? Are some companies not finding workers? Of course. Those people always exist. Is this problem huge or huger? I will let you convince me otherwise. But please, don't tell me about one grocery store that you personally know that can't find people to bag your groceries. 

Maybe next week I will turn to national productivity.