As the saying goes, writing for Washington Post means never having to say you're sorry. Hence, the paper never apologized for saying NAFTA had caused Mexico's GDP to quadruple when the true growth was just 84.2 percent. And Robert Samuelson needs never apologize for silly warnings about run away inflation.
The latest line is that we are supposed to be scared about the 0.5 percent inflation rate shown in the Consumer Price Index (CPI) for January. He begins his piece telling readers:
"Anyone looking for good economic news will be disappointed by the latest inflation report, which showed the consumer price index (CPI) advancing by 0.5 percent in January. By itself, this isn’t especially alarming — prices jump around month to month — but it has troubling implications for the future. To some economists, it suggests the possibility of another financial crisis on the order of the 2008-2009 crash.
"Until recently, inflation seemed to be dead or, at least, in a prolonged state of remission. It was beaten down by cost-saving technologies and a caution against raising wages and prices instilled by the Great Recession. From 2010 to 2015, annual inflation as measured by the CPI averaged about 1.5 percent, often too small to be noticed. In 2016 and 2017, the annual rates inched up to 2.1 percent. On an annualized basis, January’s 0.5 percent would be 6 percent."
Actually, monthly CPI data are pretty erratic. If we are supposed to be scared by January's 0.5 percent figure, we should also have been bothered by the 0.5 percent figure for last September as well the 0.5 percent rate for January of 2017. We also hit 0.5 percent in February of 2013 and again in September of 2012, which followed a 0.6 percent rise in August. In short, the 0.5 percent CPI inflation rate for January really doesn't provide us much basis for concern about rising inflation.
Even this rise was driven by a 3.0 percent jump in energy prices. Since energy prices are highly erratic, economists usually pull energy prices, along with food prices, out of the index and focus on the "core" rate of inflation. This was 0.3 percent in January. The core rate over the last year has been 1.8 percent. Samuelson would have had a better story if he wrote this piece last year. The year over year core inflation rate as of January 2017 was 2.3 percent.
Just about everything else in Samuelson's story on inflation's "rebound" is equally confused. He tells us:
"Rates on 10-year U.S. Treasury securities have already moved to about 3 percent, up from 2.5 percent in early 2018."
Yes, rates are a bit under 2.9 percent now. He tells us this is due to the inflationary concerns of the "bond vigilantes." Were the bond vigilantes also worried about inflation in January of 2014 when the interest rate on 10-year Treasury bonds crossed 3.0 percent? What about in the late 1990s when it was over 5.0 percent, or the mid-1990s when it was over 6 percent?
The basic story is that bond yields remain low by any measure. They were always expected to rise. In fact, the striking part of the story is that they remained so low for so long. None of this comes close to the global financial meltdown that Samuelson is obsessed about. (Yes, I saw the last one, he didn't.)
Next, we get a largely incoherent story telling us that we won't have any growth because growth had previously been driven by the baby boom cohort and China's integration into the world economy. Huh? Is this a demand story or a supply story?
If the argument is we lack demand, just run large budget deficits — that should be easy. If the story is we will have slower growth due to slower labor force growth, so what? Serious people care about per capita growth, not overall growth. It's hard to see what the problem is if growth is a percentage point lower because population growth is a percentage point lower.
Then we get Samuelson giving us wisdom from on high because it surely is not based in reality.
"There is something dangerously seductive in accepting 'just a bit more inflation' as a tolerable cost for lower unemployment and more economic growth. These promises are illusory, but they were believed by economists and political leaders in the 1960s and 1970s."
"Illusory?" Good thing God told Samuelson this fact because the rest of us would never know it otherwise. In the late 1960s, the country had the lowest unemployment rate since World War II. This allowed millions of additional workers to be employed. The tight labor market also meant that workers at the bottom of the wage distribution were able to get their share of the extraordinary growth of the period. These workers were disproportionately black. Samuelson apparently doesn't think their getting jobs and higher wages was a big deal, but the people who benefited might think otherwise.
He then gives us the bad story that followed.
"It was a disaster. Inflation crept up from about 1 percent in 1960 to 13 percent in 1979. During these decades, we experienced four recessions (1969-1970, 1973-1975, 1980 and 1981-1982) and the pervasive uncertainty of not knowing what our incomes and savings would be worth, month to month."
In correcting this story, let's start with the basic numbers. There was an error in the way the CPI was calculated in this period. If we use the CPI-U-RS measure of inflation, the peak year was 1979 when it was 10.9 percent. While a 10.9 percent inflation rate is certainly high, the difference between Samuelson's 13.0 percent and the real world's 10.9 percent is 2.1 percentage points. Add that to the 1.8 percent core rate of the last year and we would be 3.9 percent. That is a qualitatively different story.
But let's look at the run-up in inflation in the 1970s. There were two periods in which the price of oil roughly quadrupled. The first was in 1973–74 following an Arab oil embargo of the United States. The second time was in 1978 when the Iranian revolution removed the country's oil from the world market. That was a time when the US was much more dependent on oil and its economy far less flexible than it is today.
We also had huge grain sales to the Soviet Union in 1973 which sent prices soaring. That was great news for farmers, but bad news for inflation.
And there was the mistake in the CPI noted above. That mattered hugely at a time when many contracts were formally indexed to the CPI. If a mistake led the CPI to show a higher inflation rate it got passed on in higher wages to tens of millions of workers, higher rents, and higher price in all sorts of other areas.
For some reason, economists have never had an interest in examining the impact of this error in the inflation rate. Alan Blinder and Janet Yellen consider the impact of much smaller errors in the CPI on the course of inflation in their book on the 1990s, but it seems no one wants to think about the implication of errors of more than 2.0 percentage points in the late 1970s.
Anyhow, the 1960s and 1970s were not a world of continually rising inflation. It was period of serious shocks which would have created problems for the economy if the inflation rate was zero. But we get it — Samuelson is happy to throw millions of people out of work and make tens of millions take lower pay because of his irrational fears of inflation. Well, what do you expect from the Washington Post opinion pages?