A short interview with Dean Baker.
“Mostly the story is that the pandemic caused supply-chain disruptions. And also that the CARES Act and Biden’s ARP involved giving people money in a way that added to those supply-chain disruptions’ inflationary pressure—giving people money helped keep people whole but also sustained demand at levels that were impossible to meet given the pandemic’s disruptions. There was also a factor where low interest rates helped sustain a run-up in house prices.”
Dean Baker is one of my favorite economists. His work is absolutely essential reading for anyone who’s interested in the big issues in today’s world, though investigation is obviously necessary in order to get to the bottom of the economic controversies that Baker weighs in on, so you can’t just read Baker—or any other economist—and immediately know the truth about automation or about Federal Reserve policy.
You can tune into Fox News anytime and see that they’re always talking about inflation—inflation is absolutely core to the GOP’s whole strategy of attacking the Biden administration and the Democrats. What’s the truth about inflation, though? I was honored and thrilled to be able to ask Baker some questions about inflation—see below my short interview with Baker that I edited for flow and added hyperlinks to.
1) What’s the broad story of inflation under Biden? And when it comes to inflation under Biden, what are the most important insights and the most important confusions?
Mostly the story is that the pandemic caused supply-chain disruptions. And also that the CARES Act and Biden’s ARP involved giving people money in a way that added to those supply-chain disruptions’ inflationary pressure—giving people money helped keep people whole but also sustained demand at levels that were impossible to meet given the pandemic’s disruptions. There was also a factor where low interest rates helped sustain a run-up in house prices.
These factors are being reversed now. And inflation seems more contained.
Biden certainly didn’t anticipate Covid’s subsequent waves or the Russian invasion of Ukraine, both of which further disrupted the economy beyond what Biden could’ve reasonably anticipated when he pushed the ARP.
Many people have criticized Biden’s ARP for being inflationary—I think that that’s unfair, since it’s not clear that we would’ve had much of an inflation problem if Covid had continued to decline as was anticipated at the time, though the ARP certainly did contribute to inflation.
2) Who—if anyone—is to blame for the supply-chain disruptions?
In terms of supply-chain issues, I don’t see anyone as especially to blame—the economy can’t be expected to go through a once-in-a-century pandemic without there being any disruptions. And we did pretty well during the pandemic—at least in rich countries—in ensuring that people got food, medicine, and other necessities.
If there’s a clear mistake, it’s that we didn’t pursue open-source vaccines and start mass-producing them as soon as Phase 3 testing started. We almost certainly could’ve prevented the Omicron variant—and possibly even the Delta variant—if we’d done everything possible to produce and distribute the vaccines as quickly as possible.
3) To what extent is the current inflation a global story?
It’s overwhelmingly an international story—the UK has a higher inflation rate than the US, while the eurozone’s rate isn’t notably lower. There’s been a sharp rise in the prices for a wide range of items due to the pandemic and war.
We certainly would’ve seen some rise in inflation—although surely not as much—even without the spending related to the CARES Act or ARP.
4) What’s the best source that ranks the various causes of the current inflation by significance? And that tries to actually quantify the extent to which each cause on this ranking has contributed to the current inflation?
Inflation surged in 2021 and persisted at an elevated rate in 2022 as unemployment fell sharply over that period. Both were the result of strong demand and disruptions to supply, which combined to cause considerable tightness in product and labor markets. Output and employment recovered from the pandemic-induced recession of early 2020 and then continued to expand. Ongoing pandemic-related disruptions caused the expansion to be unbalanced, however; soaring demand for goods strained domestic and international supply chains, and labor force participation remained below its prepandemic levels. Those factors contributed to the restrained growth of supply in product and labor markets. As a result, the growth rates of consumer prices, producer prices, and nominal wages increased markedly. The Federal Reserve ended purchases of long-term securities and raised interest rates in 2022.
I think that that’s reasonable.
5) What’s the best source that explains the best possible policies for reducing the current inflation?
I don’t know of any.
But inflation is likely to come down as the supply-chain problems get resolved.
6) There’s a highly critical view that Noam Chomsky and various other scholars—scholars from across the ideological spectrum, I think it’s fair to say—take regarding the war in Ukraine, namely that the Biden administration is impeding or blocking diplomacy in order to prolong the war. How much is the war in Ukraine contributing to the current inflation? And isn’t the Biden administration responsible for the current inflation insofar as the war is contributing to inflation and the Biden administration is prolonging the war?
The war in Ukraine is contributing to the rise in oil and natural gas prices. But the latter primarily affects Europe and not the US, while the rise in wheat and other commodity prices has been largely reversed.
And it’s certainly true that fighting in Ukraine until there’s a clear military victor is a horrible story.