This Time Is Different
Except that it's not
Yesterday evening an article crossed my Twitter timeline with the title ‘How Covid became the unlikely hero of our inflation crisis - The case for not painting the inflation we’re seeing as some mysterious disastrous affliction that’s descended on the economy.‘ By James Surowiecki, MSNBC Opinion Columnist.
The article claims that many inflation hawks exaggerate it because, after all, as Surowiecki says, it’s not that bad. He refers to a CNN article that was promoted in the tweet below:
Surowiecki criticizes the argument that such price increases hurt the middle class, although, in his view, no typical middle-class family needs 12 gallons of milk four times a week.
He’s probably right about that, and I won’t argue about it, even though I suspect milk consumption varies very much from family to family. However, I give him the benefit of the doubt that the average milk consumption per family is somewhat lower. Nevertheless, the article becomes more and more bizarre…
Afterward, he continues admitting that it’s true that prices have risen and that those price rises are real. But, according to Surowiecki, this is not that much of a problem:
Of course, having the price of something you buy a ton of rise 10-20 percent in a matter of months hurts. But that’s the point: It’s enough to talk about the inflation we actually do have (inflation we haven’t really had to deal with for more than a decade). You don’t need to, as it were, over-egg the pudding.
Well, I wouldn’t be so sure. According to the US Department of Agriculture, in 2020,
households in the lowest income quintile spent an average of $4,099 on food (representing 27 percent of income), while households in the highest income quintile spent an average of $12,245 on food (representing 7 percent of income.)
I would answer that a 10% rise to something a household spends about 30% of income does matter. Given that the increase in food prices - regarding the recent explosion in fertilizer prices - is far from over, we should not lightly dismiss those price gains.
But the biggest fail of the whole article is yet to come. Here it is:
Historically, recessions have left Americans poorer, not better off. But the Covid recession was different. As people shifting their habits drastically in response to the pandemic, they spent much less and saved more. Even though millions of Americans lost their jobs, enhanced unemployment benefits and stimulus payments left many of them better off, not worse. And the stock market, after initially falling, boomed.
This is one of the worst things I’ve ever read about inflation and recessions. He argues that the government transfer payments actually increased income, and thus households are better off because they can buy so much more goods now because of the savings they’ve accumulated during the pandemic (because there was no way to spend this money)
Surowiecki claims that the higher inflation rate we are now perceiving is the result of higher demand, the result of a strong economy. That’s more than wrong because prices haven’t risen because demand is so strong, but because supply is weak. Supply chain bottlenecks, full ports, and no truck drivers to deliver the goods to the places where they’re needed are why prices rise: less supply of goods and less supply of services because businesses cannot find enough workers.
So, if a household now has more dollars in their bank account than before the crisis, it will still be worse because of rising prices and fewer goods and services available. One can only consume what you have produced, and simply printing more paper and handing it out to households does not help. Because without goods and services to buy, money is worthless except for burning it to heat your home.
And finally, Surowiecki claims that rising inflation expectations will push the inflation rate higher, and thus we should not tell people to be afraid. Again, he is wrong, or as Professor Hanke is always saying: Money matters, money dominates. Without more money printed, there wouldn’t be a rise in the general price level.
Assume that there are only two goods, A and B, and that the economy runs at total capacity. Suppose people expect that the inflation of good A will increase. In that case, they either will have to cut back on the consumption of good B, causing a price decrease of good B, or they’ll cut back on the consumption of good A and therefore, the price of A will either stay at the same level or even fall. Only with additional money in the economy, chasing A and B (additional demand), can the general price increase. Few understand…
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