Something's Happening Here

Buffalo Springfield sang that something's happening here...and what it is ain't exactly clear. 

Inflation fits that thought. Countless articles have been written lately to document the return of this rabid animal. We haven't had to worry about inflation for quite a while so its a new kind of paranoia. 

I decided to look at some of the numbers to get a better idea and it was a little shocking to see the stark changes. I won't predict the future but I have to say the story does not look as scary as some would have it. 

Much of the increase in inflation has come from admittedly temporary factors associated with Covid and Covid lockdowns. It would be nice to think that those changes are over now but it's probably too soon to put Covid to bed. 

I took numbers from the BLS -- for the monthly CPI. I compared the percentage change last year -- July 2021 to July 2022 to the average of the one-month percentage changes for the past three months -- May, June, and July of 2022. It is pretty startling. 

                                           1 Year  3 months

All  CPI Items                        8.5    0.8

Food                                     10.9    1.1

Energy                                  32.9    2.3

Fuel Oil                                75.6    1.6

Airline Fares                        27.7    1.3

Gas Utilities                         30.5    0.8

Food Away from Home         7.6    2.5

Gasoline                              44.0    2.5   

Clearly the last three months have been as unusual and unexpected as the last year. Looking at the average price of all the items in the CPI shows an increase of 8.5% from 2021 to 2022. That's a whopping increase. That performance has caused us to get a little crazy. Thinking the Fed is going to tighten money and raise interest rates to combat that supercharged inflation is doing a lot of economic damage. Just the worry that the Fed is going to tighten is causing people to be more cautious about spending. We are worried we might even get a recession. The simple expectation of tightened financial conditions is causing us to think a recession is around the corner. 

But then May 2022 arrived and the inflation data turned a corner. After rising at 8.5% for a whole year, we see the inflation rate in recent months falling to less than 1%. Less than 1% over three months! True, its only three months. I don't recall anyone predicting this. But clearly, if inflation surges can be caused by unusual things like Covid, then it is possible that those surges can reverse themselves. 

I don't think this reversal should be considered impossible. Look at some of those increases -- Fuel Oil 76%, Gasoline, 44%, Energy 33%. Those are huge increases and the fact that they had their day and are now returning to something more normal should not seem crazy. Somebody said, "what goes up must come down."

That saying has to do with gravity but is it intuitive that once a price rose by 76% in one year -- that it should keep rising at 76% forever? I don't think so unless you can tell me what permanent change should cause prices to keep rising at 76% for the foreseeable future. 

Stop. What's that sound? Everybody look what's going on. 

Poetry

I read the online version of Writer's Almanac every day. It's full of poetry. It makes me want to be a poet. Poetry isn't what it used to be. I thought to be a good poem the words had to rhyme. Apparently that's "old school" and thankfully so. Rhyming is hard. But eliminating rhyming doesn't make poetry easy. A poem has to say something. It has to say something important. And it has to say something in a beautiful or impactful way. 

The following words were written in the poem, Sea Fever in 1902. "I must go down to the sea again to the lonely sea and the sky. And all I ask is tall ship and a star to steer her by." Wow. How cool!

I am not sure how to differentiate a poem from the words of a song. "You've lost that loving feeling -- oh oh that loving feeling. You've lost that loving feeling and now its gone gone gone." The Righteous Brothers sang those words in 1965.

A few years ago I tried to write some poetry. The only poems that I finished were about aging. "Prostate Blues" and "I Found Myself in my Garage" were comical but they say a lot about getting old.  They are silly but real and heartfelt. Since writing those two poems/songs I have pretty much run dry. Which says to me that I am not cut out to be a poet or songwriter. Or maybe it says that I said whatever needed to be said and nothing else seems important enough for me to write about. Or it might say that I prefer writing prose over poetry. Whatever the motivation, here I sit at my laptop trying to write something that seems important to me. I like the idea that I might write a poem or a song, But nothing is coming today. 

I linger over the end of the last paragraph and wonder what I should write next. The white space is intimidating. When I finish one of my typical blog posts it is usually twice as long as the above. Is it possible that I have nothing more to say on this topic? Maybe this is enough. 

But maybe I need to give it a little more time. I should save this draft and come back to it later. Maybe there is more to say about why I prefer to write prose over poetry.  Maybe not. Let's see. 

Okay, let's finish this with a little about my location. My laptop sits on a desk in front of a sliding glass door in my apartment. I spend a lot of time looking out the window. Across the street is a fairly big apartment building so there is always movement over there. People come and go. Delivery people tap on phones to get them into the lobby so they can leave packages. Its a fairly busy street between me and the apartment building and I see a lot of cars and trucks go by. This street, 70th, more or less feeds into the street that goes around Green Lake. So it is busy most of the time. A young woman with her two daughters just stopped to pick up grandma. Looks like they might be going to the airport. 

That doesn't have much to do with poetry but I am sure a good poet could take the above paragraph and turn it into something. 

Otis Redding wrote something like --- sittin on the dock of the bay watching the tide roll away. I guess I could write something like -- sittin in front of a sliding glass door, watching the people roll away. Or maybe not. :-) 

Cheers.

Bobby Dodd

Most of you have no idea who Bobby Dodd was. I decided that the world would keep spinning if I took another week off from macroeconomics and had some fun sharing my past with you. 

My high school football team played for the state championship of Florida in 1963. It was a close game and we were behind the Tampa Robinson High School football team with only seconds left. Coach Kotys could have put in Larry Rentz at quarterback and tried a hail Mary but instead he looked at me and said, "son, get in there and kick a field goal." I had kicked a few field goals that year and it seemed logical enough until I realized that I might have pooped my pants before running on the field. Larry Rentz held the ball and I kicked it and the Gods shined on us as the ball somehow found that sweet spot between those goal posts.  

As an 18 year old virgin I was pretty sure that kick would get me laid, but it didn't turn out that way. But I was a home town hero for a little while and that was enough to get me a scholarship to play for the legendary college football coach at Georgia Tech, Bobby Dodd. Back then, Georgia Tech football must have been very rich because I was probably one of about 50 freshmen arriving at Tech that summer on full scholarship. Anyway, one of the highlights of my life was the honor of going to such a fine school. No, I didn't  play very much on the team but Coach Dodd let me sit on the bench until I graduated.  

And that seems to be the story of my life. I kinda luck into things. I was called a B+ student in high school -- more interested in sports and girls than studying. Football got me to a school well above my pay grade. Tech was hard. As Jim Kiltie, my Tech roommate and dear friend today is fond of saying -- I spent a lot of time in our room in Smith Dorm studying. I did not want to flunk out and as I said, I wasn't the brightest bulb in the package. Somehow God smiled on me and by the time I left Tech I was a pretty decent student. 

Then luck came along again. In this case, it was mostly bad luck that turned into good luck. The Vietnam War draft came along and my draft board was nice enough to let me finish college and start a MS degree at Tech before I had to enlist. Would I have gone to graduate school without the draft -- hell no. Anyway I got a taste of grad school before the Air Force and then with no other plans after I left the Air Force, I finished that MS at Tech and then went to the University of North Carolina for a PhD in economics. 

I was a pretty good student by then and it turns out that the Business Economics Department at Indiana University wanted to hire someone like me in 1976. They offered me a job but it was contingent on my finishing my doctoral dissertation in one year. Yikes. My topic was the Nixon Wage and Price Controls. I did finish it in a year and concluded that the controls were a failure. No, they didn't control wages or prices. The process colored my approach to research all these years -- taking a skeptical eye toward many government policies. No, I am not very impressed by President Joe's policies. 

So what? If anything, the words above remind me that life is a crap shoot. None of it could have been predictable. I feel so fortunate to be 76 years old, to have friends & family, and a lot of wonderful memories. It is very much the time to be thankful and compassionate. 

Thanks for listening. 

PS While the above might be long and boring it omits many people who helped me through life. I intend no ill will towards the friends, family, teachers, and colleagues who were a big part of my life. I hope to embarrass them in subsequent posts. 

Silver Linings: Lower Inflation and Greener Energy?

I get access to a free online version of the Economist Magazine. Unfortunately the free version is not complete. You can't read a whole article. One of the article summaries on 7/27 was titled "The Silver Linings of a Recession: Lower Inflation and Greener Energy are worth the price of a Short Recession."

So my comments here are based on the title without me reading the actual article. 

The title suggests it might be a good thing if policy was aimed at lowering inflation and reducing pollution from oil and gas. It implies that if such a policy were to cause a recession it would be worth it to attain lower inflation and greener energy. 

Interesting. We now have recessions that are not worth it and recessions that are worth it. I thought that recessions were bad but now we have a major policy periodical saying that some recessions are good. I wonder if they talked to the people who will be unemployed or otherwise adversely affected by the recession in coming to this conclusion. 

Who gets negatively affected by a recession? Laid off workers come to mind. What about all those bright and optimistic young people or other people who are new to the job market? Moving in with mom and dad after graduation might not be that great. Stockholders often see declines in their savings during a recession. Companies have to adjust to a recession. Some quit buying new plant and equipment. That hurts plant and equipment providers. Some find their own markets collapsing. They have to figure out how to adjust to that. What do they do with all those unsold goods? 

Recessions never have been and never will be fun. Even if they are short. Of course the article doesn't say how short short is. 

What about the silver lining -- apparently the article believes that a recession will have some really cool impacts. A short recession will reduce the inflation rate and it will somehow make energy greener. 

Will a short recession really do those two wonderful things? Where is the evidence? Maybe the authors have never heard of stagflation. It is quite possible that a recession will come with higher, not lower, inflation. Think about the theory. A recession means unemployed resources. Those unemployed resources quit buying as much. After enough time, the lack of demand finally sends a clear signal to producers that they better lower prices or nobody is going to buy their stuff. 

In today's economic and inflationary environment, how long do you think it will take before producers decide inflation's back has been broken and it's okay for them to start lowering their own prices? How deep or how long a recession will be required to get people to think the worse is over and they can go back to buying? 

My hands are cramping after discussing inflation. The green energy part of this story seems even more ludicrous than the inflation part. So I will leave it to you, my precious readers, to let me know how a quick recession is going to reduce inflation and move the green energy agenda ahead. 

Teaching Pigs How to Fly

The Editorial Board of the Wall Street Journal on 7/26/22 wrote about the "Economic Mess We Are In."

It is about time the WSJ awakened to the well known tradeoff between inflation and output. The economic mess is simple. The Fed and the Congress tried to stimulate the economy and now that they have a little growth going on they realize that they created a firestorm of inflation. Why this is a surprise to our learned friends at the WSJ is quite puzzling.  I am old as dirt and I remember teaching this simple truth in the 1970s. 

Anyway, what interests and amuses me is what the WSJ thinks we should be doing about the confluence of economic weakness and high and rising inflation.  They seem to have learned or relearned the simple lesson -- if you fight inflation, then you might get a recession. Since they don't want to cause a recession it is beyond funny to see what policymakers are now talking about -- please whisper this -- supply-side economics. 

No, they didn't actually say the four-letter word supply-side but they are basically proposing what amounts to what we used to call supply-side policy. They advocate using tight money to squeeze out the inflation. But to offset the impacts of the decline in aggregate demand, they recommend "economic growth" policies to stimulate supply. If that isn't resurrecting old fashioned supply-side economics, then I don't know what else they have in mind. 

When I was teaching I would use chalk on a blackboard. This kind of policy was popular in the 1970s and it was shown by a downward shift in aggregate demand coupled with an outward shift of aggregate supply. The diagrammatic result was a new equilibrium with higher output and lower inflation. Economic Nirvana! 

Sophisticated economists and journalists laughed at this kind of macroeconomics. I always thought it made sense but then I also thought Bevis and Butthead were funny. 

That's all history. Today the reality is that some people want to see tight money coupled with a fiscal policy inducing economic growth. The words are a little different but it all amounts to a leftward shift in Aggregate Demand and a rightward shift in Aggregate Supply. 

Will it work? Maybe. It depends on a couple of things. First, the Fed has to tighten money enough to reduce the growth of aggregate demand and inflation.  Second, Congress has to use taxation and spending in such a way as to promote more output directly without increasing aggregate demand. 

Maybe? I say maybe because neither the current Fed nor Congress has much experience with either of these policy actions. What are the odds that they know how to do this and are willing to try? Not very high. Kinda like teaching pigs how to fly.