Alan Blinder -- Inflation Not Transitory and Not Permanent -- What?

Alan Blinder was cute with his words, but he wrote one of the best pieces I have seen about inflation. It is good writing because it is very clear about defining inflation and discussing its causes. My only rub with his June 1 Wall Street Journal article* is his conclusion.

His title is cutesy. He says inflation is not transitory but is is also not permanent. If not transitory and not permanent, then what is it? I guess it is is something in between. Inflation will hang around for a little while. Maybe that's what he is saying. He didn't say how long it will remain elevated but let's not get too picky.

Blinder does an excellent job of explaining why higher inflation isn't going to last a long time -- Covid and food and energy price impacts are expected to diminish.  And he argues that inflation isn't here forever because, if anything, monetary policy is now aimed at reducing inflation --- not increasing it. 

He is very clear about the analytics. He teaches us about the difference between temporary shocks to the price level that can be caused by many things -- and how monetary policy is the sole cause of longer term or sustainable changes in the rate of inflation. Blinder should get a "best teacher award" for his clarity about causes of inflation. I am not being sarcastic. This is a really good piece of writing and should be required in all macro courses. 

My issue with his article has to do with his policy conclusion. Let's be clear. Like most macro liberals, Blinder has a bias toward fixing output and unemployment. Inflation might catch his attention now and then but he is driven by fixing economic weaknesses. So I don't think he really means it when he concludes that inflation increases are not permanent. By this he implies that shocks will dissipate but even more importantly, monetary policy will not contribute to higher inflation.

And that last point is where I think he is being disingenuous. Should the Fed's anti-inflationary policy succeed, it will do so by causing economic growth to slow and by increasing the unemployment rate. If Blinder is true to his guns, he will not tolerate that. He will turn in an instant and fire his six shooters at the evils of recession and unemployment. Blinder wants to join the crowd and ask Mr Powell to stop inflation. But it really isn't in him. Once the unemployment rate starts to tick up he will get ticked off. 

*https://www.wsj.com/articles/inflation-isnt-transitory-but-it-isnt-permanent-either-federal-reserve-interest-rates-oil-energy-costs-prices-11654113873?cx_testId=3&cx_testVariant=cx_4&cx_artPos=1&mod=WTRN#cxrecs_s

Changing Course?

Is it possible that I might have nothing to say? 

Here's my dilemma. This blog is mostly about the economy -- the US economy. That's my thing. I studied macroeconomics and I taught macroeconomics. That's where my economic interests have been and that's what I love to write about. My mother's influence on me was to be optimistic. And that's my dilemma. Aside from the 1970s when we coined the term stagflation, I could always find a silver lining in the economy. 

But now, the macro-skies seem dark. It seems impossible to think about the usual macro topics without getting sad or angry. Inflation is roaring out of control. And while we are not in a technical recession yet, there is a realistic probability that a recession is around the corner. And those yahoos in the federal government are reacting to all this as if today was a Three Stooges episode. 

I just read an article that said that federal tax revenues are reaching a peak never seen before. And yet despite taking gobs of money from us for taxes, they promise to bring us historically high government spending, deficits, and debt. Why? Because they are not satisfied with spending the increased tax revenues. They want to spend much more than that. 

It doesn't much matter what they want to use the extra cash for. What matters is their total lack of courage when it comes to financial management. Hey mom, I just got a raise. Great honey. Mom, can I borrow a thousand dollars? But honey I thought you just got a big raise? I did, but I really want a new sailboat and a motorcycle. 

What makes matters worse is that no one seems to care. Maybe its that we still don't understand what a trillion means. We see the word so often now. Like mass shootings. Our reaction today is more like, well, how many  kids got killed this time? Mass shootings, like trillions of dollars of deficits, gets spoken so often that they don't really register anymore. That's the effect of frequency. But frequency does not mean unimportance. We can and should do something about politicians who whistle their way to the bank -- with our money and our economy at stake. 

The above is meant to be a last time. I am tired of writing bad news. There is so much going on around us that impacts us more than macroeconomics. Good health is a big one that we ignore until we lose it.  If you are my age, you have your share of health concerns. But if you are reading this, you are alive and so am I. My parents checked out at much younger ages. Wow. I just got another day. How sweet. 

And what about family and friends? How great is that! Okay, relationships are not always perfect. But would you rather have no relationships? I won't bore you with how lucky I am to have people in my life every day. 

Back to my main point. With little fun writing about macroeconomics these days, I need to find better topics to write about. Since that is new to me, I will need your help. Aside from health and friends, what should we be yacking about? 

Is it Happy Hour yet? 

8.3 Million New Jobs

The below quote by President Biden about national employment in the US vividly shows you how easy it is to look at a bunch of data and make it say what you want it to say. 

Joe Biden quote taken from the Wall Street Journal on May 31*. 

     In January 2021, when I took office, the recovery had stalled and Covid was out of control. In less than a year and a half, my administration’s economic and vaccination plans helped achieve the most robust recovery in modern history. The job market is the strongest since the post-World War II era, with 8.3 million new jobs, the fastest decline in unemployment on record, and millions of Americans getting jobs with better pay.

"8.3 million new jobs". What I ask is a new job? The data** is clear -- payroll employment increased by around 8 million jobs between January of 2021 and April of 2022. But what he fails to make clear is that it decreased by about 9 million jobs between January 2020 and January 2021. As of the latest figures, employment in April of 2022 remains lower than in January of 2020. New jobs? I don't think so. Old jobs recycled perhaps.

Worse yet, if you compare the recent "high" number of 151.314 million jobs in April 2022, it is lower than the high of 151.337  million jobs in October of 2019.   Good work Joe. Your employment number is no higher than it was in 2019. Pat yourself on the back again. 

You might complain to me that I am being unfair. Covid not only infected many of our bodies, but it also sickened our economy. Agreed. What I quibble with are the words used by a politician. These are not new jobs. In fact, whatever incredibly aggressive policies he and the Fed used, our national economy remains below par. Employment typically grows by at least 2 million jobs per year in the US. Employment has not grown at all in the US for more than 2 years. That puts us about 4 million below what would have happened in typical times. The strongest job market since World War II? Please Joe. Remember the story of Pinocchio? 

What should Joe say? He should not say things are good (because of him). He should say that we have not yet figured out how to get back to normal. 

But even that admission wouldn't satisfy me because I know Joe's preferences. He will pile on even more demand stimulus and cause inflation to rise even more. That would be disastrous. The economy suffered a huge blow. Policy administered some smelling salts and we are back on our feet -- wobbly but back up on our feet. Administering a heap of pain pills now might just make things worse. Doctor Joe, sit back and take a big breath.   

*https://www.wsj.com/articles/my-plan-for-fighting-inflation-joe-biden-gas-prices-economy-unemployment-jobs-covid-11653940654?mod=hp_opin_pos_3#cxrecs_s

**https://data.bls.gov/cgi-bin/surveymost

Life in Seattle in 2022

Its been around three years since I left Bloomington and came to Seattle. 

I went from 3000+ square feet of housing to around 600. I used to have a cleaning lady but these days I can clean my tiny place with a duster buster. 

I went from a town where I knew people and places to one where I am a stranger. Every name and place is new to me here. 

Seattle is a big city with all the attendant congestion but I live in a neighborhood that is known to be a recreational hub with lots of restaurants, bars, and a beautiful lake. If I get on I5 I can experience plenty of traffic and I can be downtown in 15 minutes. 

Even in my neighborhood parking is at a premium. It is not easy to find a spot. Luckily my unit comes with one parking space in a secure garage. It comes with a huge garage door that grunts and groans. I sit here at my laptop looking out my window overlooking 70th street. I watch people try to park their SUVs in tiny parking spots on the street below. . 

Victor runs the Mexican restaurant that sits within a five minute walk from my place. I love the nights when I sit in his restaurant at a table and he joins me and we talk about changes in Seattle. Sometimes Tequila is involved. I also live near Starbucks and the Green Lake Bar & Grill.

The gym is also a five minute walk. It is a neighborhood gym and now after a few years of living here I feel like I know the staff and many of the customers. Going there is both physical and social. The gym attracts people of all ages but if I go at 11am, I am mostly grunting and groaning with a lot of other old people. It feels safe and friendly. 

Jason and family live close to me too and I am lucky to have them so near. Last Saturday he grilled some amazing ribs for the family.

I read about inflation a lot and there is no question that just about everything costs more than when I first moved here. Luckily I bought my place so I don't have to worry about the landlord raising my rent. If the price of my unit increases, then that means I can sell it for a better price. But I am guessing I won't be doing any selling anytime soon. 

Luckily I live close to most things. I can walk to the grocery store but sometimes I get in the car and drive to the Safeway -- a mile or two down the road. I can drive to Jason's house in 10 minutes. Some friends also live nearby. Even though gas prices are so high, I don't drive enough for the price to impact me very much. 

Aging is challenging. At 76, my joints are less reliable, my hearing is fading, and my memory is challenging. I can remember things from a long time ago -- but sometimes it takes me a moment to remember what I ate for breakfast. Overall I feel pretty good and manage to do a lot of walking and spending time in the gym. 

I will continue to use my blog space to pontificate about macroeconomic trends and issues but some friends encouraged me to reflect and write about a wider pool of topics. I am getting sick of taking a negative slant on macroeconomic policy. I don't see the bad guys disappearing and it is getting boring saying the same negative stuff over and over. I am losing my sense of humor. That's not good. 

So I hope you approve of this kind of message. I am enjoying the change myself.  

Inflation the Scapegoat

Inflation has become the new Frankenstein monster . They tell us it erodes our buying power. Even with large recent increases in incomes, the rise in the cost of goods and services reduces our buying power. What?  I got a big raise this year and even that wasn't enough to overcome that dastardly inflation. Damn that inflation.

Biden says who me? Congress points the finger of shame at Biden. It must be Covid. Supply chains. Greedy corporations.  Putin. Green people from Mars. 

So let's back up and start with a few simple ideas. Inflation is defined as the percentage change in prices -- usually prices of the typical goods and services that people buy. It's a number. It gets calculated every month. Easy enough. But that easy start causes most of the confusion because it doesn't specify time period. 

Time period? Inflation, like many other economic indicators, bounces around from month to month. If February's CPI was 100 and it rises to 150 in March, we say yikes. That's a 50% increase in only one month. While that fits the basic definition of inflation, its only one month. It might fall by 55% the next month if that one month change was a temporary event. 

Point -- technically inflation might be a big number from month to month but it doesn't mean squat for the national economy. One month's price rise does not eat away at our incomes. Yes, it can be called inflation -- but its not INFLATION. I used all caps to distinguish macroeconomic inflation from the month to month reported statistic. 

INFLATION in a macro sense exists when inflation becomes a macro issue. It becomes a macro issue when it lasts a while. Let's arbitrarily say that "a while" is a minimum of 6 months. Like a big wave hitting the beach, macro inflation becomes recognizable when it has a little time to build. If you learn that prices rose by 10% over the last 6 months then that sounds like it could affect buying power long enough to create a macro impact. It also sounds like it night endure even longer. Crap, the first wave hit us and now comes along a second wave. 

Okay -- so a price index might rise or fall for a month, but we get INFLATION when it rises in a sustained way. How do we know the difference?

Here is where cause and effect plays in. If bugs eat the tomatoes in June, we might get a big rise in the price index for a month or two. Fertilizer might solve that problem. But what happens if  inflation rises for 6 or more months? That would be a hell of a lot of bugs. Rather we look elsewhere for the source of the inflation.

I doubt Covid has sustained effects and I doubt supply chain issues do either. I doubt greed has such a history. Which gets us back to the usual suspects. You don't have to be an economic wizard to know that  inflation is usually the result of expansionary monetary and/or fiscal policy -- The Fed and the Congress have the singular powers to use policy to cause large and sustained changes in national spending. The Fed juices up spending by  lowering interest rates and making money easier to find. Congress unleashes spending by its own spending or by motivating us to spend by giving us larger transfer payments and/or lower tax rates. 

Only the Fed and Congress can create Frankenstein and engineer wave after wave of higher spending and higher inflation. All the other talk is nonsense. But like your kid who got caught stealing in your neighborhood candy store -- neither the Fed nor the Congress is admitting that they need remediation. Sadly, they do need it. In the meantime say hello to INFLATION. 

Kicker by Default

Because I was a weird kid, I used to bring my football and my kicking tee to the playground that was across the street from Coconut Grove Elementary School. The walk was no more than one long block from my house at 3180 Oak Avenue. That must have been around 1956. I was 10. 

Back then no one I knew wanted to be a kicker. Yes, there were some famous professional football kickers but no one I knew wanted to be the next Lou Groza. We all wanted to be star Heisman Trophy running backs like Hopalong Cassady of Ohio State and the Detroit Lions. I had no pretense of being a great player so I spent a lot of hours in that playground kicking the ball against the wire fence that protected the windows of the dining hall at the school. Kick -- get the ball -- set it up -- kick again. As I said, I was a weird kid. 

As a result of all that, I became a kicker. The truth is that even with all that practice I was not a really great kicker. Since most kids were not weird and most kids did not want to be a kicker, it fell on my toe by default because I was not worse than the other kids. I was very lucky because I played on a high school team with "There is No Defense for Larry Rentz" and we won all but our last regular season game. That put us into the playoffs and we won the Florida state championship. Yes we won by my last minute field goal but even that kick was not especially long or interesting. Larry Rentz was the holder. 

At 76 years old, it is fun for me to bore you with some of my personal history. It's also fun to think about how different things were a half a century ago. For example, Dwight D. Eisenhower was president in 1956 and Richard Nixon was his VEEP. My parents wore campaign buttons that said "I like Ike'. No one I knew liked Nixon. He was not a very likable character. He goofed up at the Watergate Hotel and was pretty much a disgrace. 

Today we hear endless stories about Covid and Russia. Back then we heard endless stories about Nixon and the Soviet Union. In Miami we were 90 miles from Cuba and we were sure the Soviets were going to use Cuba as a place to attack the US. Some of my richer friends built bomb shelters in their backyards and the rest of us walked around on pins and needles waiting to be blown into smithereens. 

Back then some girls wore poodle skirts. They also wore something called Bobby-socks. We went to events called sock hops where we danced to 1950s rocknroll songs in the school gym. My high school was in the richest part of Miami -- Coral Gables. I did not live there but I could either attend Coral Gables (CGHS) or Miami High. I had the choice. My parents thought CGHS was a better school so that's where I went.  

Going to school with the richest kids in Miami was an eye-opener. They shopped in the best stores and wore the coolest clothing. I wanted to look like them so I spent a lot of my youth earning money mowing yards and painting houses and I spent it all on clothes. One very peculiar thing about our high school was the social life. Those rich kids really liked to party. We even had fraternities and sororities. The coolest kids were in a frat named Ching Tang. I was in something called Wheel Club. Sometimes the boys in those Frats would get in fights. I recall when Larry Rentz decided to join Wheel instead of Ching Tang. The Chinks came to our next Wheel party and we had a sort of gang war. Ouch.

I believe I have hit my limit for childhood boredom. I promise to get back to macroecon next week. 

Monetary Gobbledgook

I have been complaining for weeks about the Fed's inherent bias against fighting against inflation. And they have done it again -- they have waiting so long to work against inflation that they now are between that rock and hard place. Inflation has accelerated and that means that to effectively stop the climb, there will be very negative consequences to economic growth. 

So how does the Fed handle this? Easy, They obfuscate. I just read an article that had an easy title. The title indicated the Fed is proposing to use some tools that will work against inflation. Sounds good. Not. Reading the article was like reading an advanced physics textbook. Instead of blatantly or directly addressing the idea that setting higher interest rates would be used to slow demand and quell inflation, we got a long and complicated thesis about the Fed's buying behavior. 

The Fed is not buying the latest spring fashions. The Fed says it is going to stop buying as many government bonds. When I taught monetary theory, the story was pretty simple. If the Fed stops buying or it begins selling its huge stock of government bonds, it usually has the effect of reducing the market prices of these bonds. As the market price of the bonds falls, the return or market interest rate rises. That rise in interest rates is designed to reduce spending and inflation. Pretty simple. 

But not now. I never saw any of that in the recent articles. Instead we are fed a diet of minutia about passive runoff.  Passive runoff? Is this gardening 101? That sounds like a urinary issue for over-70 guys. But no, passive runoffs appears to be the way the Fed is going to fix our inflation problem. They are not going to aggressively sell some of their infinite stockpile of government bonds. That might be too clear. Maybe too aggressive. Instead, behind the scenes they are not going to replace some of the bonds they hold that mature. Passive. Runoff. Wow. 

Do they ever say why they want to behave passively? I can't find it in anything I see published. I am left to conclude that they want to be clever. Better, they think, to obfuscate than to be clear about the fact that they are fighting inflation. Maybe this way, when the usual negative growth follows a policy to fight inflation, they can blame it on corporate greed. Or blame it on Elvis. If no one understands what they are doing, the Fed can skate. If people do not understand what the Fed is doing on its backdoor, then the negative effects of fighting inflation on economic growth might at first be smaller. But the Fed can't hide its true intent for long. People will figure it out eventually and then all hell is going to break loose as dismal economic expectations take hold. 

What's the alternative? The alternative is honesty. Sorry folks, we waited too long to fight inflation and now we are going to have a recession.  Either way, we are going to have a recession if the Fed fights against rising inflation. They can choose to be honest or instead they can confuse people with strange language. So far we are not getting much honesty. Passive runoff. Really? 

Cancelling Student Debt

Let's start with the obvious. Some politicians want to cancel student debt. Student debt? Are you kidding? It is definitely not about student debt. Imagine all the debts that students have. Many students are bad poker players and have a lot of poker debt. Some have car debt. Some have grocery debt. Some owe their parents for their education but in most cases it is the parents that have the real education debt. Many of these parents are lawyers and other well paid folks. 

This whole political thing is not about student debt.  Apparently it is mostly about money that parents/children borrow to go to college. College? You know, that's the place where students, who were treated as prisoners in high school were finally emancipated and sent to dorm rooms where they could party at night and oversleep in the morning. The amount they spend on one weekend's partying at the frat house dwarfs the actual cost of their required sociology course. 

Boo hoo. Student debt. What is with our liberal progressive politicians that they are turning their backs on people who need real help so they can help EVERYONE who borrows for college? 

Who is getting bailed out here? Yep, parents for sure. But what about the colleges? If students don't have to pay to go to school -- they are writing checks to universities on accounts that have borrowed money which doesn't have to be paid back. Not only are the kids/parents skating but the colleges are being subsidized too. Without these non-repayable loans, how would people pay the colleges for their services? In the usual old way-- out of checks from accounts or from loans they actually have to service. 

Now that's the grabber. If they actually have to use real debt or real money to pay for school, they will be judicious with their money. Maybe junior won't go to the Ivy League where one semester's tuition costs more than a new Lamborghini. Maybe junior won't take a random sampling of courses for years on end before graduating. Maybe junior will think as much about supporting herself as she consumes the latest woke news from her long-haired professors. 

When you buy most things, you ponder a bit. Do I really want/need this thing? What do I have to do without if I buy this thing? You make reasoned choices. If college education is essentially free, do we handle decisions about it with the same attitude as buying a house or a car? Is this degree really worth the money I am really paying for it? Is there a way to get the full benefits of a college education at the lowest possible cost? 

Nope. Some of our politicians want you to have a free college education. 

Don't get me wrong about one point. I am not saying that government cannot find ways to subsidize people who cannot afford it. We need social policies that help the poor and a university education ought to be part of that. But writing off student debt in general is not the right way to do that. 

The Here and Now

Buddhism has helped to popularize the very useful idea of living in the here and now. On the surface it sounds like the right idea. The past is sewn up so why spend precious time worrying about that? The future isn't here yet so worrying about that seems unproductive. We can proactively plan for the future but that's different from worrying about things that might never happen. 

Sensible advice. Focus on what you can change. Focus on here and now. Right here and right now. 

Then I started thinking more deeply about that and came away confused and unsure. It might have been the gin. I can't be sure. This is not a macroeconomics topic but since it seems to be the cornerstone of a major world religion, I had to pursue this topic and enlighten my faithful followers. 

I started thinking more deeply about the now part of here and now. What is "now" anyway? The second you can utter the word "now" the now has up and gone. Where did it go? It was here a second ago but now its gone -- only to be replaced by another now. Call that now-2. So upon further thought, I am wondering how useful the idea is. We are supposed to focus on something that you can't really nail down. 

Now is here and than wham -- it's gone to be replaced by something else. 

How can I focus on that? It's like that rabbit playing in your yard. It was just there a minute ago. Where did it go? How can I focus on that?

It seems to me that anyone sitting legs crossed and contemplating the here and now should be concerned about this. What in the hell are we supposed to be thinking about? One school says to focus on your breathing. Focus on that instead of the job you just lost or your child who just got kicked out of the second grade for pulling Mary Ann's pigtails. 

But that is a fool's game. Which breath do you focus on? The current one? Certainly not the past one or a future one. But what is the current breath? Is it the one you just exhaled or the one you are about to inhale. I don't think so. What about the current one? Not really. An instant after you have that breath it is gone and is part of the past. How can you focus on that? 

So that's that. I decided to take on an existential* subject today and I have come away with nothing. The here part makes sense to me but the now just makes me wonder if Buddhists have a strange sense of humor and want to torment us Christians and Jews. 

So that's it for today. Maybe next week I will return to less existential topics like inflation and gross private domestic investment. Or maybe not. The future is not part of the now and I really shouldn't be fretting about that. I guess I will have to work on it in the now whenever that is. 

Have a nice day. 

* Existential.  I have noticed lately that everyone from Joe Biden to my local grocery clerk uses that word often and with great confidence. Here is the way Webster defines it: a chiefly 20th century philosophical movement embracing diverse doctrines but centering on analysis of individual existence in an unfathomable universe and the plight of the individual who must assume ultimate responsibility for acts of free will without any certain knowledge of what is right or wrong or good or bad. Wow. 

Inflation and Greed

Inflation has been on our minds lately. Most measures show it rising and we have different opinions about how high it will go and for how long it will last. Some see it as a flash in the pan, rising and then falling. Others worry that the increases will be sustained. It is a legitimate issue with no easy answers. 

And then there is the question of what is causing it to rise. At one extreme are the folks who believe corporate greed is causing higher sustained inflation. At the other end are people who believe higher inflation is the result of macroeconomic policies -- the rapid increase in the money supply engineered by the Fed and the waves of increased fiscal stimulus packages. 

What I find interesting about this discussion is that one's opinions about the causes of inflation come from very different definitions of inflation. The greed folks look at inflation literally. Who actually changes those prices? Neither Nancy Pelosi nor Jerome Powell have ever set any price. That would be well below their dignity and pay grade. The people who set prices every day are the people who manage companies. 

We don't usually see the people changing the price signs, but when we drive down a street with a gas station on the corner, we see that someone at that gas station has changed the price on the sign. In the old days we used to see them climb up on ladders to physically change the price. Whether we see them or not, we understand someone from Shell Oil decided to raise or lower the price that day. We know who did it!

When inflation rises, therefore, it is easy to imagine store managers changing their prices. Often times they increase the price. Usually we are humble enough to know we don't know all of the many things that might cause them to increase price at a given time. Imagine all the things that go into the cost of a gallon of gasoline. Yep, greed or the desire to increase profits is surely one of them. But it could be a lot of other things too. 

My point is that, yes, it is easy to imagine a person or a company responsible for price and inflation. It is easy to imagine that the greed of the person on that day promoted the price increase. But it is also easy to imagine that there might have been some other things causing that manager to raise that price. I am always interested to know what might cause a given company to have more greed today than yesterday. But I never had a course about the causes of greed change so I can only guess. 

Which leads me to my second point -- while we know that some person actually changes the price -- a legitimate question is why she changed it. Yes, greed could be the answer. But it could be a lot of other things. In economics we have something called price theory and without reviewing all the details here, let's just note that price theory says that changes in demand and supply cause changes in price.

No, I am not going to review price theory today (maybe tomorrow?) But I will make note that the demand for goods and services can be very much affected by macroeconomic policy -- by the Fed's monetary policy and the government's fiscal policy. And those of us awake lately, know that these macroeconomic policies have been off the chart. A policy to keep interest rates at zero and highly stimulative fiscal policies have been designed to get us to spend spend spend. Surely those policies put pressure on demand for goods and services and prices to rise. Today with all sorts of factors preventing supply to respond to demand leaves us with much higher inflation. 

Yet, most of us don't want to admit policy is the cause. It seems so theoretical. It involves markets, and demand curves, and supply curves, and theories, and such. That line of thinking seems so fuzzy compared to thinking about a greedy guy sitting in a plush office giggling on the way to the bank as he raises prices. 

Friends, greed might be a factor today. But before I buy that line of thinking, I want to know two things. First, why did greed increase so much lately? Second, relative to greed, how much of what we see in prices is coming from monetary and fiscal policy? Let the greedo-maniacs answer those questions please.  

Deficits as Far as the Eye Can see

Since 1962 through 2020 and projected through 2022, the US has had a government deficit every year except during the Nixon years 1969 to 1973. 

The table shows revenues, outlays, deficits, and total government debt since 1962*. 

Including the Nixon presidential years (1969 to 1973) does little to affect the notion that the US government has yearly budget deficits.  From 1962 through today we have a string of annual government deficits sans the Nixon years. That's roughly six decades of deficits. 

An annual government deficit means the government spent more in that year than it received in tax revenues. So what? So what is that the government incurs a debt in each of those years. In order to spend $5.44 trillion in 2022 it raised taxes of $4.39 trillion. Obviously the revenues did not cover the whole amount of spending. What we call the national government deficit is the $1.154 trillion difference between spending and tax revenues. That's how much we had to borrow for just that one year. 

How does one spend more than they earn? Tuna knocks over 7/11s. The rest of us have to borrow. Thus a national deficit in 2022 means the government has to borrow $1.154 trillion in 2022. The amount of new debt that year gets added to the existing or old debt. Note that if you have a deficit in one year, you cannot pay down the existing accumulated debt by even one penny.

It is worth pointing out that when the government snaps up that $1.154 trillion in the credit markets, there is less money available for the you, me, and General Motors. Economics say we get "crowded out" by the government. The government has some very large elbows and the rest of us get less. Of course, we don't know that the game is on and so the act of the government and the rest of us trying to borrow all that money sends interest rates up. Between rising interest rates and crowding out, the private sector gets knocked around by those large government elbows. 

Looking at the next to last column (annual deficits) you notice that the debt (last column) had to grow every year -- except the years 1969  to 1973 when we had annual budget surpluses. The last column shows you the accumulated debt of the US government. It started at $248 million in 1962. It has grown and grown to over $24 trillion by 2022.  That's quite an increase. 

Again, you might say so what? After all, the government is not the Tuna and is not even Donald Trump or Bill Gates. You might imagine that the government does not have to pay its debts. No big deal. Have big and bigger debts. 

Well, it does have to pay. Those debts are evidenced by bonds issued. If you hold one of those bonds you fully expect the government to pay you annual interest and then the principal. Just because it is the government does not mean it does not have to pay its debts. The bigger the debt gets, the more concern we have that the government might not pay. 

That's where it gets sticky. If the debt gets too large and we worry the government might not pay, then that creates some problems. For example, if the government tries to sell bonds and we decide not to buy them, the market price of the bonds falls and the market rate of return rises. That influences other interest rates and pretty soon the rise in interest rates hurts borrowing and spending. Higher interest rates adversely affect the buying of houses, cars, and many other goods and services.

And that's not the whole story. You might note that the government controls the supply of money. The Fed can just crank out a bunch of $100 bills and buy those pesky bonds. There today, gone tomorrow, replaced by money. That helps to keep those interest rates down and the government slides on down the road with its huge debt. 

Well, that all works pretty well until all that liquid wealth -- the money -- burns a hole in our national pockets and we start spending like the Tuna at a Macy's Christmas sale... and that starts to bid up the prices of everything from tuna salad to a 42 ounce T-bone. 

It all sounds kind of cool until you realize that there is no reason to let the national debt grow and grow and grow. Grown-up congressmen are allowed to say no to additional spending. They can also raise taxes enough to cover the extra spending. Sadly, the ones we have had lately don't seem to have the sense or the stomach to do what's right. We should tell them to hit the road. 

*To economize on data points in the table, I omitted the years in between the years 1962 and 1972, 1972 and 1982, 1982 and 1992, 1992 and 2002, 2002 and 2112. 

Time to Whip Up a Little Voodoo?

Last week I mentioned supply-side economics as one solution to the tradeoff between inflation and unemployment. I promised to say more about supply-side policy this week.

If your memory is as bad as mine, it won't hurt either of us to review a bit here. Thanks to a guy named John Maynard Keynes and a Paul Krugman band of Keynesians, the dominant view of the economy focuses on spending or what we often refer to as demand for goods and services. The essence of demand-side macroeconomics is that policymakers can attack only one problem at a time. 

If they want to reduce the unemployment rate, they use demand-side (AD) policy to ramp up spending. If they want to reduce the inflation rate, they do the opposite. Last week I lamented the situation when both inflation and unemployment are too high. What can the policymaker do then? Attacking inflation with AD policy makes inflation worse. Trying to reduce unemployment makes inflation worse.  

What a dilemma! Talk about being between a rock and a hard place. Last week I offered supply-side (AS) economic policy as a way out of this dilemma. Today I have to back up and explain my point. 

Let's start with the criticism of supply-side economics. Famous economists labelled it "Voodoo Economics". You have to admit, that's pretty bad. Can you imagine the President telling the voters that he is going to use Voodoo Economics to solve our problems? 

Why call it Voodoo? Maybe snake oil would be better? No matter what you call it, the communication is that there is no theory or no history to support the notion of a policy that radically differs from the usual AD policy. If it ain't D it ain't nothing. We know D. It might not be perfect but we know it.

So what's the big difference? The difference stems from an understanding of basic economics. Basic economics posits that we can explain price and quantity sold with a simple model that focuses on supply and demand. Think of two very different situations.

    If everyone wants more candy and we express that by going to stores and buying more candy, this is the kind of situation that could lead to a shortage and eventually a rise in prices and output. 

    If instead the key change is that firms decide that this March is a wonderful time to supply more candy to stores, then we might have a glut of candy and an ensuing drop in price and increase in quantity sold. 

Clearly, economics says that a rise in supply has effects that are very different from a rise in demand. 

Back to macro. From the beginning of macroeconomic thinking we thought of AD as the driver of the economy. Then someone came along and started talking about AS. Wow. Crazy. But why not? If we can speak about supply in microeconomic markets, why can't we use the same ideas in macro?

There's not a lot more to say. If the current situation of the economy is high inflation AND high unemployment, AD policy is not ideal. The tradeoffs can be very painful. Why not try AS policy? Why not have a policy designed to encourage and motivate firms to produce more? If that policy works, then we will observe firms bringing more output of goods and services to the marketplace. The glut should heal the rising inflation rate while simultaneously reducing unemployment. No tradeoff there!

How do we do this magic? We focus on the AS curve. Two basic forces will increase AS -- lower business costs and higher business productivity. With that logical basis we focus our policy tools away from trying to get people to spend more and instead focus on ways to use policy tools to limit business costs and raise business productivity. 

What are business costs? Easy -- the wage rate, taxes on labor, the cost of capital which include prices of plant and equipment, costs imposed by government regulations, and other costs incurred by companies.

What is business productivity? Business productivity rises when a firm does anything that makes it possible to produce more output with the same amount of inputs. Giving workers better machines could do that. So could better training.  Better business practices would have the same effects.  

Notice the stark difference between AD and AS policy. AS policy might be less well known but in times when AD policy is hampered by tradeoffs, it might not be a bad time to whip up a little Voodoo. 

Recession or Inflation?

On Match 15 I was doing my usual thing. I was reading the Wall Street Journal online and perusing the New York Times free online summary. No, I will not pay for a full subscription to the NYT. That would be like me ordering Bananas Foster when I am allergic to bananas. 

Anyway, I loved the stark contrast. While I could not read Paul Krugman's whole article in the NYT, its title was enough to send the message  -- "We can avoid a Putin recession in the U.S. — if the Federal Reserve doesn't overreact to rising oil prices." Got it? The Fed should not be worried about rising oil prices. It should not cause a recession. It should not tighten monetary policy.

Meanwhile, the WSJ was writing the opposite. "Let's Start Raising Interest Rates" was the title their article. I was able to read that article. 

It is worth writing about this here since this is a classic battle between left and right macroeconomics. The right wants to put out inflation flames. The left worries more about a recession. 

If you know me at all, you know that I side with the righties. I think history is on my side but let's go through this one more time. Krugman is right on one score. Monetary or macro policy is not effective against rising  prices of one or even a few commodities. Macroeconomics teaches the difference between problems that start from microeconomic sources and those that are macro. 

If prices of cigars rise, this is because there is an imbalance between the supply and demand for cigars. We don't bother monetary policy about that. Using monetary policy to attack the price increases of cigars or energy, might be effective but it is overkill. 

So Krugman is right when he says monetary policy is not the best tool to fight energy prices. But as usual, Paul Krugman can be right about one thing but wrong about the right thing. Krugman's past reveals that his real passion is about unemployment rising in a recession. He loves using inflation as his cover, but that's just a game. Ask Paul Krugman. He is more concerned about unemployment. That's his goal. 

But that is exactly the problem. How can one argue about reducing the misery caused by high and rising unemployment? Anyone who ever had a heart (isn't that the words to a song?) has to care and do something about unemployment. No argument there. 

The issue is what to do about a recession and rising unemployment -- especially during a time period when inflation is rising. Yikes -- two problems -- rising inflation AND rising unemployment! 

That's the quagmire. Its a deep quagmire because the usual tools of macroeconomic policy will improve one at the expense of the other. Krugman wants lower unemployment. Good man! But wait -- if we use monetary or fiscal policy to expand spending in the economy that will raise output and employment. Case closed. Nope. 

If there is already high and/or rising inflation and you use policy to expand spending even more, then it will make inflation go higher. Cool. Employment is higher and the cost you pay is higher inflation. 

That's bad enough since no one loves paying higher prices, but the story doesn't end there. Higher inflation and higher expected future inflation drive up wages and many other costs paid by companies. In other words, higher inflation will lead to conditions of lower profits and firms will cut back. They will cut back on output and employment because conditions are poor for earning profits. Got it? Fighting unemployment means unemployment goes down and then it goes back up. Yikes. It's a policy boomerang. 

What did Krugman say about the boomerang in his recent article? Nada. He wants to help folks by expanding the economy and jobs. But what he doesn't say is that doing that in inflationary times just won't work. I won't bore you with the 1970s stagflations -- but history is there for you, me, and Paul to read. 

What do we do when inflation and unemployment are increasing at the same time? First, realize that the idiots running our national policy never should have got us into that place to begin with. Second, fight the inflation, tolerate rising unemployment, and then watch as both problems improve. Third, use something called supply-side policy. I am at my word limit so I won't open up the supply-side can of worms today. 

The Age of Information

Information, like technology and fried chicken, is loveable on the surface. When we read that we are in an age of information, we feel good and we feel proud. We feel modern and advanced and we feel smart. Information is valuable. Like the fried chicken, a big tub of information makes us feel like we have more command over our surroundings. It makes us smarter than our parents. It makes us more productive than those without so much information. 

I could go on. But my point today is that, like friend chicken, you can have too much of a good thing. And that includes too much information. I don't know about you but I shy away from picking up a newspaper, reading an online news source, listening to a radio news telecast or watching the TV news. Why? Because it is boring. It is boring not because of the color of the show or the beauty of the news purveyor. And the truth is that the stories are important. 

So what's the rub? The problem is that they don't know when the story is covered.  And they seem to want to drag out the same story for days if not months at a time. It's as if the press decided to cover a basketball game minute by minute. Imagine them writing a story on Monday that had the Seattle Superconics ahead 2-0 on a layup. And then they wrote an article on Tuesday when they went ahead by 4 points. Boring!

Think about the coverage you have seen lately. It doesn't matter if the topic was Covid or Russia or a missile launched by North Korea. Count the number of articles/stories that came out in the last two weeks about Russia and Ukraine. Could you really even count them? How many of those stories were identical? The first article might have been interesting and informative. But after thousands of similar articles,  I feel beat up by the process. 

I give them a break. I assume that the subsequent articles have something new or interesting or important. So I get sucked in. Read another one. But eventually I see that the story never changes. It is the same points and facts made over and over and over. What has really changed in the last weeks? Putin invaded Ukraine. Ukraine is a sovereign nation. People are dying in Ukraine. The world is unhappy and wants to do something about it. The same story over and over and over. 

What am I trying to change here? Do I want the government to throttle the press? Do I want the press to act responsibly and only print what is new? I don't think so. The marketplace ought to be able to handle this problem if other people feel as strongly as I do. A market can't know how to react responsibly to garbage information unless we start talking about it. Do other people feel the same way as me? 

It's not only that we are getting useless redundant information, Some news is being left out or crowded out by Russia and Covid. The press seems happy relaying another story about Russia or Putin or global warming when they could be writing more articles about the weather, low-rise jeans, suburban crime, Octogenarian sex, and the latest diet crazes. 

Inflation Ain't so Bad?

Happy Tuesday.

I try not to think about inflation too much. While it is painful to pay higher prices for many things at the store, we exaggerate the impacts when we read the announcements of the national figures. The Consumer Price Index* recently rose at a rate of 0.6% in the month of January 2022. If you measure the change over a whole year,  from January of 2021 to January of 2022, the inflation rate of the CPI was 7.5%. The rate was 6% over the year measured by the PCE deflator* which has smaller weights for highly volatile food and energy prices. 

The national inflation measures apply to a large random sample of people and what they are buying. If your buying habits are different from that group, then your personal inflation rate differs from the published one. If you are a smart, savvy shopper, you might do much better than the published indices. Energy and prices at the pump are clearly alarming. But do I really need to ride around alone in my large gas-hog SUV when I could trade it in on something that makes more sense when a gallon of gas costs as much as a gallon of Jack Daniels?   

Another thing is that you buy some things whose prices are not changing. For example, if you have a fixed rate mortgage, your mortgage payment does not go up when interest rates or housing prices rise. If you buy other things on a long-term contract, those prices don't rise either. That's another way of saying that your CPI doesn't rise as much as the nation's.

Finally, is the issue of dollars and cents. Suppose you spend $3,000 per month on things whose prices rise. At 2% inflation, prices go up by $60. At 6% inflation, prices go up by $180. The difference of $120 might seem high but maybe not. It is not welcome but it won't exactly crush you. 

One mitigating factor is how your income or your wages react to inflation. If you are able to negotiate a higher wage or if some of your income is automatically indexed to inflation, then the impact of the price change alone is less. If your income rises by 3% when prices are rising by 6%, your purchasing power falls by 3%. That's not appreciated, but a 3% reduction beats the 6% decline. 

That's my story about inflation. Inflation isn't nice but maybe it is not as horrible as it seems.

*The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. An alternative measure of national prices is the deflator for personal consumption expenditures. 

Inflation Scares

We have all heard that inflation is getting worse. The number being quoted measures changes in the CPI during 2022 -- from December of 2020 to December of 2021 the rate of change of prices was about 7.5%. That number makes heads spin. 

It has been decades since we have had inflation so high. In the year before -- 2019 to 2020 -- the inflation rate was 1.4%. Clearly in 2021 something was going on.

Most of the analysis I have seen is not very curious about these increases. My first notion was that maybe it all happened in one month. And it is true that the annualized inflation rate in one month was 10.1%. But that wasn't enough to make the whole year's rate of inflation go from 1.4% one year to 7.5% the next. 

So I was curious. If it had to do with Covid then maybe we had high inflation in most months. So I decided to look at all the months of 2021 to see what the data had to say.

    Jan/Feb averaged 5.8%

    March to June averaged 9.8%

    July to September was 3.8%

    October to December 6.5%

The highest months were March, April, May, June, and October. They ranged from 9% to 11%.

The rest of the months the inflation rate ranged from a low of 2.5% to a high of 6.6%. 

These numbers have already been adjusted for regular seasonal patterns. So we can't blame the differences on regular seasonal patterns. 

But it does make us wonder about 2021 and the future. The worst inflation of 2021 came from March to June. But that was followed by a quarter of much lower inflation. Inflation then increased in the final quarter of 2021 but did not reach previous highs. 

Maybe the worse is over. Maybe not. 

While this kind of analysis is not perfect and it proves nothing -- I enjoy doing it because the press and the government are so bad at breaking down the news. They would rather scare us with screaming about the worse inflation in decades than take a honest look at what the data says. 

The National Debt

The government recently announced that the national debt reached $30 trillion.  It now stands at 128% of the economy. Yes, our national debt is larger than what we earn each year. Wow. You would think that they would be so ashamed that they would somehow hide that obscene accomplishment. I guess its hard to hide such things. That debt amounts to about $90,000 for each person and $240,000 per tax payer.

Equally troubling is that the $30 trillion announcement had almost no effect. If Biden burps at the dinner table the stock market falls.  If the inflation rate rises by a tenth of a point, interest rates skyrocket. But debt reaches $30 trillion. Ho hum, honey pass the mustard please. 

I read several articles announcing this new debt number and came away from that experience with a tummy ache. Lots of angles here and its not really an all-good or all-evil story. 

Take for example, the idea that the debt is $240,000 per tax payer. My first reaction is wow -- huge. But that reaction stems from the illogic of comparing a stock with a flow. The debt is a stock, an accumulation of what we owe. The flow is what we earn each year. We have a lot of years, if we so chose, to earn income and pay off the debt. 

We do that as households every day. We borrow a ton of money for our nice new house or our sleek cool Jaguar and then we spend 30 years paying it off. We might only make $50k per year but in 30 years we can pay off a pretty big chunk of debt. If our national debt is $240,000 per taxpayer, note that we have a lot of years to pay. 

Maybe that's good or not good. Take the case of the house purchase. Hoot might buy a really cool house and doesn't mind paying a big chunk of his income every year. Kiltie might buy a less worthy house and feel like he got scammed. It's the same with the national debt. What are we doing with all that debt? Are we throwing it down a hole or are we using it to our great advantage?

Hmm. Answering that question is full of politics.  It all depends on what you think the government ought to do with our money. Danny wants us to spend it all on national defense and infrastructure. Jason wants us to make incomes more equal. Nolan wants more spending on Kraft macaroni and cheese. 

It also depends on the realities of the impacts. If we spend it on national defense and we lose the next war, then it seems like we could have used that money better. If we spend it on welfare and poverty worsens, then we wonder if we are wasting the people's money. 

Government always has the choice as to spend the money on donuts or steel. Donuts are a consumption item. You spend the money, you eat the donut, you get a sugar high, and then that's about it. The government could instead buy steel. Steel is an example of a capital good. The essential characteristic of the steel is that it lasts and it can lead to even more output. The extra steel lets you build a building. The building might house a donut machine and produce donuts for years to come. Steel or donuts? Consumption or investment?

Finally, regardless the above points, there must be a limit to what is prudential to borrow. Even if you use the proceeds for good things -- one can still borrow too much. Recall that you have to pay it back. If I buy a $10 million dollar house and I live off my Social Security benefit, that is not going to work. 

Surely the above does not cover the whole waterfront. But it does support what I said at the outset. How much national debt we can tolerate is not any easy question. Some debt is good. Other debt is not. Knowing what is the right amount is complicated. But I will stick my neck out and say that we could live in the USA with a national debt less than $30 trillion. 

Paul Krugman, Inflation, and Gentle Tightening

This was Krugman's latest headline. The Fed Should Raise Interest Rates, but Gently. Tightening is obviously necessary but getting it right calls for caution, flexibility and humility.

This is like telling your kids that you are going to lose weight but only one pound per week. Your kids know you and they realize that (a) this is a total lie, (b) this is impossible, or (3) you are in a food coma and don't know what you are saying.

Why do I say this? Largely because I never lose weight for more than a day, and because Paul Krugman doesn't care a wit about inflation -- if it means we might have to trade off some employment/output to reduce the rate of inflation.

It sounds like a cruel thing to say but history proves the point.  I have lost weight at times but apparently I care more about eating that 16 ounce T-bone than about moving down to a size 36. As for Krugman it sounds really good to stand against rising inflation but the truth is that he cares more about other things -- things that reliably pump up the government's budget, aggregate demand and ultimately inflation. 

Look at the title and read some of the article. He uses the word gently. Then he uses words like caution, flexibility, and humility.

Really? What do those modifiers mean to you? Honey -- go on a diet again and this time do it gently. Really?  Have great humility as you try to shed that half of a pound today. Come on folks -- the words tell the truth. If the slightest thing starts to go wrong as we apply pressure against inflation -- GAME OVER. Be more gentle honey. 

Welcome to the real world. You sit on the sea saw and your friend moves up. You get off and your friend moves down. Period. Unless you have a rubber sea saw.

Please ask Professor Krugman for all the episodes -- anywhere in the world -- where policymakers have been able to gently, gradually, and with caution, flexibility and humility been able to reduce the inflation rate. Then ask him how many times governments have waited while inflation soared and then created a recession with their too much too late policies. 

Why does it usually work out this way? The answer is simple.

Waiting is often better than doing. Honey, I am pretty sure my leg is not broken. Let's wait a while before I have the doctor look at it. You know that if the doctor thinks you have a broken bone he is going to give you pain and suffering. Put it off a while. So what if you can't walk. Maybe it will feel better tomorrow. 

Krugman is the head cheerleader for the liberal progressive wing. He knows that the right policy will be painful right away. He knows that the reason for the inflation is probably because our friends in the government spent too much of our money. Maybe they spent too much on defense. Maybe too much on poverty. Maybe too much on whatever. 

If government spending too much on these things and the Fed monetizing these debts is the cause -- then the solution is to reverse them. Ouch. Higher taxes? Lower spending? 

Krugman wants to sound reasonable with his words. But he knows that if a hammer to the head causes a headache -- then you should remove the hammer. That's it. Words like gentle, caution, and humility only are meant to put things off. Go ahead and hit yourself in the head with hammer -- but do it more gently. 

The Fed is Raising Interest Rates

Sometimes I forget when reading articles about the Fed and monetary policy that I spent years figuring out Fedspeak. Lately the news has been about reports that the Fed will soon raise interest rates. I imagined the Fed telling each bank to raise its rate on savings accounts. But that's not really how it goes. So I decided I would put on my teacher hat and explain what I think all this means.

What is the Fed? Why do we expect them to raise interest rates? What are they doing? How are they doing it? Why are they doing it?  How will it work out? How does all this affect the stock market? Whew. Lots of questions. 

The Fed is short for Federal Reserve. The Fed is an organization that is part of the government's national policy making institutions. These policy decisions come out of the Fed's Open Market Committee. That policy making committee consists of the Governors of the Fed and the Presidents of the Fed district banks. Those folks meet regularly to decide on Fed policy.

Fed policy in the real world has two basic goals. The first is to keep the economy humming or at least keep it out of recessions. The second is to create a stable inflationary environment with the inflation rate of goods and services rising at around 2% per year. It has a hard time with these two goals because sometimes making progress on one automatically causes problems with the other. So they have to walk a fine path so as to make economic growth strong enough and inflation low and stable. 

Often the Fed's decisions and its goals are framed using words like money growth and interest rates. Notice I used the word "goals".  On a day to day basis, the Fed does not set interest rates. It is more proper to say that they try to influence interest rates. There is much confusion when people imagine the Fed moving a dial for interest rates. Or telling bankers what interest rate to charge.

This might sound crazy, but the Fed influences interest rates because they buy and sell government bonds. They do not write down an interest rate on a bond. The US Treasury does that. What the Fed really does is to trade government bonds in bond markets as a way to change the market value of these bonds.. 

When the Fed decides to buy a lot of government bonds, they buy the bonds with newly created money. Boring. Create money. Really? Yes they create it at will. Wowee -- makes me think of Scrooge McDuck playing in his vault.

Anyway, back at the vault. The Fed creates money and then uses it to buy bonds. If they create enough demand for bonds, this causes the price of the bonds to rise and the interest rate on those bonds to fall. Aha. The interest rate on the bonds is written in ink -- but if the market prices the bonds higher, then the rate expressed as a percent of the market price of bonds falls. Suppose the bond says 4% on it. The more you pay for that bond and for the stated 4%, the lower return you get. 

Don't moan. The Fed does not tell banks what interest rate to charge. But the Fed does influence a broad swatch of interest rates as it buys and sells government bonds. 

This gets us back to the Fed's goal. If they want a stronger economy they will buy bonds as a means to reduce interest rates and to persuade people to buy more goods and services at those lower rates. If the Fed wants to reduce the inflation rate, then it does the opposite. It will sell bonds as a means to raise interest rates and persuade people to purchase less goods and services. 

I see you are starting to nod off. I did my best to write about a tough topic. I hope it helped you understand the Fed and monetary policy a little better. If not, there is always a sweet walk by the lake with your honey.  

Janet and the Wizard of Oz

This stuff gets funnier all the time. Janet Yellen reminds me of the Wizard of Oz. 

Remember the good old days when words had meaning? For example, government policies could be of several kinds. 

Aggregate demand policy was all about stimulating people's desire to spend. Poverty policy was aimed at reducing poverty. Energy policy was all about promoting more energy while environmental policy attempted to undo harm to the environment. Supply-side policy attempted to shift the nation's supply curve, usually through lower tax rates that created more incentive for people to work and innovate. 

It was all pretty clear. And then the Wizard, I mean Janet Yellen comes along and obscures everything. The title of the article in the Wall Street Journal was Janet Yellen Views Biden Policies as Modernized Supply-Side Economics: In a Speech to the World Economic Forum, Treasury Secretary says the White House is aiming to increase labor supply and boost worker productivity. 

Modernized supply-side economics? What does "modernized" mean? Is it not enough to say they are trying supply-side policy? Maybe not. That would be misleading. The Biden/Yellen supply-side policies have as much to do with supply-side as I have to do with dancing tights. If what they are trying to say is that their supply-side policies are different than the past ones -- then for sure that fits. Their modern supply-side policies are a very long way from what we tried in the 1970s. 

Consider what they include under the umbrella of supply-side. 

    Social programs such as paid family leave, child care, education, and infrastructure.

    Programs for climate change. 

    A global corporate minimum tax. 

The common phrase employed by Yellen for these programs is that they increase labor supply, and or raise productivity while reducing inequality. 

Old style programs that reduced taxes on capital and/or deregulated industries are old fashioned and don't work, according to Yellen. What she really means is that if they worked they might have tilted the distribution of income and therefore they are not part of her modern approach. 

Clearly the bottom line for Yellen is not that they are supply-side policies. The bottom line is that they are part of a plan to redistribute income. I agree that some of the programs she mentions might have supply-side effects, but clearly they are not thought of in those terms and there is little to no historical data or experience to suggest that they do. 

Infrastructure sounds like typical supply-side policy. But even with that one -- she is very clear it has to be infrastructure that makes incomes more equal. Let's build a new subway. But make sure we build it in such a way that incomes are made more equal. No equality -- no subway! Maybe subway builders can't do that. After all, they succeed by making good subways. Not by making incomes more equal. 

It sounds good to say that subsidizing childcare is going to make it easier for the family to provide more labor hours to the economy. But why not tell the truth? We don't know. What Yellen does know is that this is a typical welfare transfer to help people at the low end of the income distribution. Maybe she thinks it sounds cool to pretend that she cares about the supply-side of the economy. But we all know the truth. She is what she always was. She is a part of the Biden administration whose goals are driven by global warming and income distribution. Tell it like it is Janet.