March 08, 2022
On March 3, 2022, the Center for Economic and Policy Research convened three leading economists to look at some of the major issues relating to current inflation in the United States. The event can be viewed via the video directly below. A transcript of the event is also available below.
- Dean Baker is Senior Economist at, and co-founder of, the Center for Economic and Policy Research, and the author of the award-winning book Getting Prices Right: The Debate Over the Consumer Price Index.
- Jason Furman is Professor of the Practice of Economic Policy at the Harvard Kennedy School, a Senior Fellow at the Peterson Institute for International Economics, and was chairman of President Obama’s Council of Economic Advisers.
- Joseph Stiglitz is a Nobel laureate in economics, Professor at Columbia University, Chief Economist at the Roosevelt Institute, and a member of the advisory board of the Center for Economic and Policy Research.
- Algernon Austin (Moderator) is the Director for Race and Economic Justice at the Center for Economic and Policy Research.
“I don’t think we’re looking at the sort of wage-price spiral we saw in the 70s. I expect that inflation will be reasonably well-contained. And basically, there’s no basis for panic.” — Dean Baker
“The headlines that I’ve sometimes seen — ‘highest inflation in 40 years’ — gives a tone that we are facing a crisis. The fact is that the inflation that we’re facing right now is not a crisis and that the conditions that led the inflation to levels that were so politically and economically troublesome back in the 70s, the conditions today are markedly different. And therefore, we’re not likely — likely as a keyword — to have that kind of wage-price inflation.” — Joseph Stiglitz
“One, we should be really careful in how we forecast inflation and try to be accurate about it and separate that forecast out from what our views about how much of a problem it is and what should be done about it. Two, I think we should not be completely dismissive of the fact that people hate inflation. In fact, I think we should accept and understand that. And finally, I don’t think policy should panic [or] overreact and it would be especially bad if policy focused only on inflation and didn’t continue to deal with all the medium- and long-run issues that we know for sure are still going to be with us two or three years from now after hopefully the inflation has gone away.” — Jason Furman
“My takeaway from this is that even if we hadn’t had the Recovery Act, we still would have seen a big jump in the inflation rate. Now, clearly it added to that, my guess would be somewhere around two percentage points… That was a very good deal. We’re the only country that has not only our GDP is above the pre-pandemic level, but we’re basically on the pre-pandemic growth path. That’s a really great story. We also got our unemployment rate down where we’re at 3.9 percent in December, but 4 percent in January. That’s a pretty good story. So, to my view, that was a really good tradeoff.” — Dean Baker
“The problem of global instability that might be brought about by excessively, rapidly increasing interest rates is something that we should be aware of. The rapid increase in interest rates back in the end of the 1970s brought about the Latin American debt crisis.” — Joseph Stiglitz
Transcript
[00:00:05.870] – Algernon Austin
Okay. Welcome, all. Good morning. My name is Algernon Austin, and I’m the Director for Race and Economic Justice at the Center for Economic and Policy Research.
In January, the year-over-year increase in the overall inflation rate was 7.5 percent. This was the fastest pace in 40 years, and it prompted President Biden to make it one of the top areas of focus in his State of the Union address. And he said it’s going to be his top area of focus going forward. We’re here today to try to better understand the current high rate of inflation — what are its causes, its consequences for people in the United States and beyond, and perhaps most importantly, what is the appropriate macroeconomic policy response? Today we’re joined by three leading and distinguished economists to discuss this issue and to hear their views on these questions and more.
Before we get to introductions, just a bit of logistics. Let me give you the structure. Each panelist will get ten minutes for opening remarks. After all the opening remarks are done, each panelist will have four minutes to respond to what they’ve heard. And following these responses, we will move to the Q&A. At any time, feel free to share your questions via the Q&A box on Zoom. Do not use the chat box. We will not be taking questions from the chat box. Use the Q&A. When you enter your question, and this is very important, please identify yourself and the organization or institution that you represent. While this event is open to the public, priority for the questions and answers will be given to the press and congressional offices.
With that, I would like to introduce our three panelists in the order in which they will be presenting. So, the first presenter will be Dean Baker, and Dean Baker is Senior Economist at, and Co-Founder of, the Center for Economic and Policy Research. He’s the editor of the award-winning book Getting Prices Right: The Debate Over the Consumer Price Index, and the author of Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. These are just two of his titles. He has several others. Jason Furman will be the second presenter. And Jason Furman is Professor of the Practice of Economic Policy at the Harvard Kennedy School. He is also a senior fellow at the Peterson Institute for International Economics, and he was chairman of President Obama’s Council of Economic Advisors. The third presenter will be Professor Joseph Stiglitz. And Professor Joseph Stiglitz is a Nobel Laureate in economics. He is also a professor at Columbia University, the chief economist at the Roosevelt Institute, and a member of the advisory board of the Center for Economic and Policy Research. Of course, these are just the brief bios of these distinguished panelists. You can Google them and find out the complete bios. So right now, again, put your questions in the queue as they come to you. But right now, let us begin with Dean Baker.
[00:03:54.690] – Dean Baker
Thanks, Algernon. Let me see if I can get my PowerPoint up here. I’m striking out here in my PowerPoint. There we go. So, it’s showing up for people? Algernon, can you see that?
[00:04:11.880] – Algernon Austin
Yes, I can see it.
[00:04:13.620] – Dean Baker
Okay.
[00:04:14.380] – Algernon Austin
Do you want to go into presentation mode?
[00:04:16.950] – Dean Baker
Yeah. Why is this not working? Okay, great. Alright. Thanks, Algernon. And thanks, Joe and Jason, for joining us on this. I want to go into three main points on this.
First off, talking about inflation and living standards. I think there’s been a lot of misrepresentations, confusions on that. Most people do have higher living standards today than they did before the pandemic. Secondly, the causes, the extent to which the Recovery Act, as opposed to supply chain problems are the main causes of the inflation we’re seeing. And probably the most important issue, the future prospects. Are we looking at the 70s again or is this temporary, transitory, whatever we want to say, are we in a wage/price spiral that’s long or short? Okay, first off, in terms of living standards, most people get most of their income from wages. And what I’ve done here is I’ve taken the average hourly earnings and the first bar is all private. And I’ve combined two years. And I understand this overlaps administrations, but the world isn’t always convenient for us. And the logic here of combining the two years, the blue bars, is very simple. We know in the first year, 2020, there was a big pandemic effect, both in the form of composition: all the lowest paid workers left the workforce. I’m exaggerating, but that raises the average. The second year we had the reverse of the composition effect. The lower paid workers came back into the workforce. So, if we want to, in my view, have an honest discussion, you look at the two together. I should also point out there is a pandemic price effect. Again, I think it’s pretty much indisputable. We know in 2020 the prices of many items, most visibly gasoline, plummeted because the economy had collapsed. So that happens when your economy… we got very high unemployment, gasoline prices plummeted. We got people back to work in 2021. So, they rose, they rose more back than they had fallen, no doubt about that. But the point is that if we just looked at 2021 in isolation, it’s not giving us an honest picture.
So, to my view, we want to look at the two together. In any case, if we want to see how people’s living standards compared today to how they were in 2019, of course, we have to take the two years together. So again, I don’t care whether you want to say, oh, this is all Trump’s wonderful, whatever. The point is, if we’re comparing 2019 to 2021 or 2022 now, we need to look at the two years together. So, if we look at the average hourly wage for all workers over the last two years, it’s gone up about two and a half percent. For production, non-supervisory, a little bit more than that. Important point here, that workers lower down the wage ladder have done better. So, this goes directly against what we often hear, how low- and moderate-income workers are really having it hard. Well, actually not. These are real wages after adjusting for inflation. I just picked a few here. You see that in the case of retail, it’s about a 4 percent increase. In the case of convenience stores, I picked them out because obviously it’s very high wages, but that’s a really low paying job. It’s about a 23 percent pay increase. Same story with restaurants. We have very high pay increases in the lowest-paying industries. So, the idea that those workers at the bottom were very hard hit. No, I’m sorry, that’s simply not true. Which again, I know that’s not every worker these are averages.
Okay, second point, going beyond wages, other factors that affect living standards, we could look at the lowest-end workers: the people in convenience stores, restaurants. These are lower-paid workers. What about people higher up the pay scale? Well, they also benefited in a lot of ways over the last two years. One of the items that hasn’t gotten nearly the attention I think it deserves: increased work from home. Not only does that save you time from commuting, but people have big work-related expenses. They spend on commuting on their cars or taking a train, bus, whatever it might be. They need clothes for the office. You can see this in the data. People going to get haircuts, to beauty salons, that’s way down. These are savings on work-related expenses that improves their living state. I know there’s costs associated with working from home as well, but on the whole, I think those don’t come close to matching the cost that people have to pay going to work every day. Mortgage refinancing. We’ve had around 20 million people refinance their homes over the last two years. Savings are over $2,500 per home on average, which is simple arithmetic there. If you have a $250,000 mortgage, you knocked a percentage point off the interest. That’s $2,500 a year. That’s a big deal for, say, a family earning $60–$70,000 a year. That hasn’t gotten much attention, but that’s a really big deal.
The last point, rising house and stock prices. I tend not to like to emphasize that because house prices go both ways, stock prices go both ways, but the reality is both have gone up a lot. And if you happen to own a home at the start of this period, as two-thirds of families did, home prices went up a lot. Again, you had money in the stock market. Again, a higher-income person, not someone earning $10 an hour. But if we talk about more middle-, higher-income people, they benefit hugely from stock prices. So, the story that people are hurting in a big way, just to be clear: we know there are always a lot of people hurting in a big way. But the idea that more people are hurting in a big way today than before the pandemic, that’s not supported by the data. Okay, second point. What was the cause? And I’ve been back and forth. Jason, we’ll talk more on this, I’m sure, and I know we differ somewhat. But the point I’m making and putting these up here is we’ve seen big jumps in inflation everywhere. The US has the biggest — these are harmonized inflation rates, to be clear — so, this is the OECD, and they try to make them comparable. Jason may have gotten more into the weeds of this than I have, but I think there’s still differences, most importantly in the United States. Well, I shouldn’t say most importantly, but one of the important ones, we have a peculiar way of covering having used cars, which has added a lot to our domestic inflation rate. We count the gross value of used cars, whereas if you look even in our own personal consumption expenditure deflator, we count on the net value. The difference between if I sold the car to someone and what they paid for it, we don’t count the gross value, just what they paid. But in our CPI, we do count that, and used cars added over a percentage point to the core inflation rate in the US over the last two years. So, it actually is a very big deal. But anyhow, the point here is that we’ve seen big jumps in inflation rates in pretty much all the OECD countries. Not really true of Japan, but most of the OECD countries. The point here is that this was due to reopening after the pandemic, so these countries didn’t have anywhere near the sort of stimulus that we saw with the Recovery Act. Nonetheless, they saw big jumps in inflation rates.
My takeaway from this is even if we hadn’t had the Recovery Act, we still would have seen a big jump in the inflation rate. Now, clearly it added to that, my guess would be somewhere around two percentage points. I know Jason will put that higher, but to my view, let’s say it was two percentage points. We can argue actually if it is higher. That was a very good deal. We’re the only country that has not only our GDP is above the pre-pandemic level, but we’re basically on the pre-pandemic growth path. That’s a really great story. We also got our unemployment rate down where we’re at 3.9 percent in December, but 4 percent in January. That’s a pretty good story. So, to my view, that was a really good tradeoff. We basically insulated the vast majority of our population from the worst economic effects of the pandemic. And yes, the cost was somewhat higher inflation, but again, to my view, that was a cost well worth it. Okay.
So, going forward, what do we have to look to? Again, I’m looking at the supply chain story. I’m picking on two items here because they tell you a very different story. TV prices are what I’m hoping is the model for the economy going forward, the supply chain problems. TV prices have been falling for decades. So, you could look back, the 80s, 90s, 2000s, they typically fall to 3 percent a year on a downward path. These are quality-adjusted prices. People accept they’re paying more for their TVs. These are quality-adjusted. So, they’ve been falling consistently, but then they rose 8.7 percent between March and August. So, this was clearly supply chain. It didn’t suddenly become much more expensive to build a TV. This was a supply chain story. People want to buy a lot of TVs. We couldn’t get them to the stores quickly enough. So, the prices rose, but then they fell 6.3 percent in the last five months. Okay, so my story at least what I hope to be the case. And again, I think there’s some basis for it. We’re going to see this with a lot of items. We’re going to see this with cars, new cars, used cars, appliances, all these other items that had rapid rises in prices through 2021. I would say because of supply chains, we will at some point — I think we’re starting to see it, obviously, we’re seeing with televisions — will get through these supply chain problems and prices will not just stop rising that rapidly, they will actually fall. So, I think there’ll be a lot of areas where we see drops in prices. Now, the other story here: beef prices rose 23 percent from January 2020 to January 2022. I should point out much of this was by January 2021. So, people blame Joe Biden for high beef prices, it began before he came into office. But regardless, so they rose 23 percent. They fell a little bit at the wholesale level in the fall, but they actually have stayed pretty much where they are at the retail level. And this is in spite of the fact that demand is back to pre-pandemic levels. So, if you look at demand for beef, it rose rapidly through this period. Part of that was just that people were buying food at home rather than restaurants. But in any case, it rose rapidly. And arguably that was the cause of price rise. But it’s now back to pre-pandemic levels. So, it’s not clear to me, at least, why it would still be very high. Presumably, these are supply chain issues. But again, I would expect that that will be rectified going forward. But it’s obviously not demand at this point because demand is back to pre-pandemic levels. Okay, so I’m expecting beef and a lot of other things are going to look like televisions in the next year, which is why I think that inflation too will start to come down.
Okay, so are we in the 1970s, wage-price spiral? A few big differences. Expectations are largely contained. Again, these are obviously up and down. I know expectations, if you look at like ten-year break-even point, that’s gone up a little bit in the last few days, I’m not sure what exactly. Well, I’m not sure what exactly, primarily because Ukraine and Russia are in the middle of a war and a lot of things are pretty uncertain at this point. So, I don’t know that people suddenly expect a lot more inflation as opposed to, you had a shift to treasury bonds. The interest rate in treasury bonds, of course, plummeted as people sought safety. But in any case, if we look at the break-even inflation rate on the ten-year treasury, that had been around 2.5 percent. I haven’t checked the markets this morning, but I think it was around 2.7 percent earlier. So that’s gone up a little bit. But that’s not a story of runaway inflation. And again, most of that, if you just say people expect something like 3.5 percent inflation this year, that pretty much gets you back to a little over 2 percent for the rest of the decade. So, I’m not convinced that expectations have gotten out-of-line. And let me just emphasize, expectations are important in this story because if we’re telling a wage-price spiral story, then it has to be the case that the people that are setting prices — meaning business owners — they have to expect higher inflation. And for the time being, at least they don’t, at least not over the next decade. And so, again, those expectations could well be wrong. I’m well aware that markets are not infrequently wrong. But the point is that these are the people setting prices and they don’t expect high inflation over the decade.
Second point, big shift from wages to profits. The profit share — this is net income, I won’t go into great details, I took the calculation, I just said, okay, “what’s wages? what’s profits?” — the profit share rose from 24.1 percent of corporate sector income in the fourth quarter ’19 to 26.7 percent. A few points on this. If we’re in the 70s, that really was a wage-price spiral story. Again, there’s a lot of things we could argue about with the 70s, but the profit shares were shrinking there. So, you certainly could tell a profit squeeze story. You can’t tell that today. So, in my view, if people say what I hope will happen, well, I hope we’ll see that wages go back to something like their 2019 share. I actually wouldn’t mind if they go above that. But in any case, it’s reasonable to think that they could go back to their 2019 share. And employers, businesses, don’t have to pass that on as higher profits. Some other things are different.
[00:17:20.690] – Algernon Austin
Can you start wrapping up, please? Thank you.
[00:17:22.890] – Dean Baker
Yeah, I’m just almost done. Okay. A couple of other things. Of course, we have a much lower unionization rate. We had 20+ percent unionization rate in the private sector in the 70s. We have about 6 percent today. Much more internationalized economy and again, you can’t sustain big differences in inflation rates unless the dollar were plummeting and it’s going the other way. Dollar has actually risen, and that’s before the war with Ukraine, it has risen more, but it actually has risen earlier this year. Last point, in the 70s, we had a big slowdown in productivity growth. After the long golden age, we saw productivity growth fall from 2.5 to about 1 percent. We saw the opposite here. We went from about eight-tenths of a percent in 2018 to 2.3 percent the last year. So, for these reasons, I don’t think we’re looking at the sort of wage-price spiral we saw in the 70s. I expect that inflation will be reasonably well-contained. And basically, there’s no basis for panic. I’m sorry for going over. I didn’t see the clock. But anyhow, thank you.
[00:18:26.150] – Algernon Austin
Thank you, Dean Baker. Let me repeat that if you have a question, put it in the Q&A and also identify your organization or institution. We are looking, we are giving priority to questions from the press and from congressional offices. We will not be — do not put questions in the chat. Put them in the Q&A box. And now we will turn to Jason Furman.
[00:19:03.970] – Jason Furman
Great. Thanks so much for hosting me here with two of the people that I’ve learned the most about economics in general, and inflation in particular, from, over the course of many decades. So, let me separate really in my discussion, three distinct questions. One question is what do we think is going to happen to inflation — that shouldn’t really depend on your values or your orientation in life. It’s a strictly positive question. The second is what impact is inflation having on workers? And the third is what should policy do, which is informed by the first two questions.
Before I get to those, though, I did want to talk for at least one moment about the rest of the economy. GDP has recovered much faster than it did after the financial crisis, much faster than in most previous recessions. The unemployment rate when it was 15 percent in 2020. I did not think I’d see a 4 percent unemployment rate again in the next two years. That’s where we already are. And you look at the United States compared to other countries. This is real GDP compared to the pre-pandemic forecast. And the United States is only a little bit below its pre-pandemic forecast — the rest of the G7 considerably more below. So, we want that context. And I agree with Dean Baker that the American Rescue Plan contributed to this good outcome. I actually agree with Dean’s number on inflation. I think the American Rescue Plan contributed about one to four percentage points to the inflation rate last year. Dean said two. That’s well within my close point estimate. I don’t want to extensively relitigate it. I think had it been smaller, the dollars we reduced would have done more to reduce inflation and less to reduce output, but we can talk about that if we want to.
I think running through a lot of the inflation discussions are two really broad questions and perspectives. One is a macro perspective. It asks questions like what’s the overall state of demand, how tight is the labor market? What are inflation expectations? These are things that affect all prices and all wages in the economy, because if people have more money, they’ll buy more of lots of different things. If people have higher inflation expectations, they’ll build in bigger price increases, bigger wage increases, et cetera. The second is a micro perspective. Rental car companies dumped their fleets in 2020. They needed to repurchase fleets in 2021. Semiconductor factories in Malaysia were shut down. This port couldn’t get this many containers, et cetera. And I put the so-called greed or firm price setting power a little bit in the micro story, although arguably it belongs in both.
On the topic of greed, I just wanted to do a one second aside, that there are two really different theories out there. One is a hot economy theory, which I think was the one that Dean just articulated. The second is a corporate greed theory, which you hear, for example, the Groundwork Collaborative articulating. Those are two very different arguments. The hot economy thesis says a hot economy increases labor’s bargaining power more than it increases businesses’ price setting power, raising real wages. What I’m calling the corporate greed thesis is the opposite. It says that at a time like this, businesses’ price setting power goes off more than wages’ bargaining power and real wages go down. Deciding which of these two is true is quite important in evaluating how you think of a hot economy.
So now let me look forward and tell you why my expectation for inflation over this year [2022] is in the range of three and a half to four and a half percent, and probably closer to the bottom end of that range for the PCE that the Fed is focused on and closer to the top end of that range for the CPI, which is probably what gets the most public attention. Back in April, May, and June, there was a lot of attention to inflation, and people like Dean were correctly pointing out that so much of the inflation we saw in those months was new and used vehicles. Also, some of it was pandemic-affected services. We’ve seen some resurgence and return of the new and used vehicle inflation in recent months, but a lot less. What should make us nervous, though, is the blue bars: that’s the other in core CPI. It takes out energy and food, it takes out cars, it takes out pandemic services, and, if anything, it continues to rise. And in January, it was quite strong. That is the observation that many have made, that inflation has become very broad-based. So, we’ve seen inflation pick up whether you look at median or trimmed mean or whatever core concept you want. There are some common arguments for inflation to ease, but I think they’re all overstated. One argument is workers will return to the labor force. Another is consumers will shift from buying goods to services. A third is the pandemic will become a manageable endemic. The reason I think all three of these arguments are overstated: they all have some truth to them, but they also all unleash countervailing forces in the opposite direction, usually in the form of extra demand. And so, the impact they’ll have on inflation isn’t the gross effect that people talk about, but the net effect of the two different things that are going on. And that net is smaller magnitude and, in some cases, uncertain sign.
So just to go through them, let’s say workers return to the labor force, we might end up with a year of 500,000 jobs a month. That’s what you need to get everyone back into the labor force who left. I think that would increase supply. That would also increase demand. Those workers would make more. They would buy more stuff. The companies they worked for would decide to invest more and the like. I think if anything, my bet would be that this is more inflationary if we see 500,000 a month rather than 50,000 a month, which is if those people don’t return. So again, you get supply and demand when the workers return. How about the shift from goods to services? Goods price inflation, as Dean noted, has been a really big part of the inflation story over the last year. But look at services. Service inflation has been picking up. Services have five times the weight of durable goods in the inflation numbers. And there’s a lot of reasons, which I’ll come to in a moment, to expect service price inflation to continue to rise. Finally, there’s the pandemic. What happens with the pandemic? Sort of interesting to trace the evolution of views. In 2020, the shutdown decreased inflation. In June of 2021, the widespread view is that the rapid reopening of the economy was raising inflation. But then somehow that view reversed and people started to think that the slowdown in the reopening of the economy was raising inflation. It’s possible all those statements are true. I find them implausible. As the pandemic eases and becomes a manageable endemic, and we’re basically almost there right now, it will cause both demand and supply to increase. It could cause higher service prices and lower goods prices. The net effect on inflation, I think is unlikely to be very large, and the sign is unclear.
There are some legitimate reasons to expect inflation to ease. Global supply chains un-snarling. Major monetary and fiscal support is over, should have added Ukraine, although that goes both ways for energy prices, so maybe I shouldn’t have added it, and then possibly the factors I just said. But there’s also some things going in the other direction. There are some other micro stories like housing and then some of the major macro stories. Labor markets are tighter than they were a year ago. Inflation expectations higher than a year ago. And there’s some wage-price persistence. And possibly workers returning and manageable Covid would raise inflation. Let me just do those quickly.
This is the price of shelter. This is what the CPI shows is 4 percent. These are a lot of other measures. They’re measuring different things. Most of these other measures are measuring new leases as leases come up and get renegotiated. In most months, most leases don’t. But those new leases tell you what’s going to happen over time as more and more leases come up. So, the fact that the marginal lease is going up much more than the average lease tells us that this one is probably going to be rising over time, and it has a huge amount of weight in inflation. Second is that compensation is well above trend. Compensation and the productivity numbers is growing at a 7 percent annual rate. Productivity is growing at a 2 percent annual rate. That means unit labor costs are growing at about 5 percent a year. Now, you could see the labor share rise. So, you don’t need to have this compensation translate into inflation. I would love to root for that team. That’s not the same, though, as predicting which team is going to win the game. I think roughly predicting a draw on this game is the right prediction, and so as long as we have unit labor costs rising at about 5 percent a year, it’s hard to have inflation much below that. Inflation expectations are the factor that confuses me the most. If you look at longer run inflation expectations, they’ve barely increased. In fact, the increase there has been good. Those expectations were below the Fed’s 2 percent target going into this. Now they’re more in line with the Fed’s 2 percent target. If you look at shorter run expectations, they’re up quite a lot, especially what businesses think and what consumers think. Historically, statistically, what matters is longer run inflation expectations, not shorter run expectations. I’m much less sure of that now when a record number of businesses say they expect to raise prices in the year 2022. I would take that more seriously as a guide to what’s going to happen to prices in 2022 than what the survey of professional forecasters says about the next ten years. But I’m uncertain about that. Dean and I can discuss this more later. I use the Employment Cost Index, which adjusts for compensation. I see real wages down. Real compensation, actually, these are real wages. Real wages [are] down over the last two years in most sectors other than leisure and hospitality and retail trade. That’s true of middle-wage sectors like education, manufacturing, construction, and high-wage sectors like finance and information. I think this does matter.
So, what should we do about it? First of all, expand supply. We should do everything we possibly can. I support almost everything President Biden is doing in this area, but I’m not under much illusion that it would take away more than a few tenths from inflation, possibly not even that. We need to normalize monetary policy and probably continue to raise rates past normalization. My ideal outcome, which we can talk about more in a bit, would be steady inflation at a 2 percent rate. But even to get there, we need to move interest rates off of where they are now in a hurry. Third is sort of message advice: I would under-promise and over-deliver. Last year there was a lot of over-promising and under-delivering on inflation. If I’m wrong about inflation between 3.5 and 4.5 percent, let that be a pleasant surprise rather than telling people low inflation is right around the corner. And finally, none of this should deter us from continuing to push for investments in climate and children. In fact, if anything, it should redouble our efforts. If families are having a hard time coping with costs, one of the most direct and easy things we can do is provide them more support to help them to pay for those costs. And it would be terrible if that doesn’t happen because of the inflation that we’ve seen. Thank you.
[00:31:54.210] – Algernon Austin
Great. Thank you. Thank you, Jason Furman, again, if you have questions, please put them in the Q&A and identify your organization or institution as you make your question. We will now turn to Professor Joseph Stiglitz.
[00:32:14.370] – Joseph Stiglitz
Thank you. And it’s really a pleasure to have this important discussion on a topic which has obviously grabbed the interest of so many people in the United States and around the world. I’m going to begin, and I think you’ll discover there’s actually less difference among us than one sometimes has a feeling in the media, a huge controversy. And I think this discussion narrows the controversy and that will itself be a contribution.
I want to begin with the question of how concerned should we be as an economic matter about inflation. When we think about the question, “Where did the number 2 percent as our goal for inflation come from?”, we have to admit it was pulled out of thin air. There was no basis for it, no argument that if inflation is a little higher than 2 percent, if it’s 3 percent or 4 percent, growth will be lower. There is actually no strong empirical or theoretical argument for this magical number of 2 percent. In fact, not long ago, there were people, very mainstream economists like Olivier Blanchard that were talking about [how] we ought to commit ourselves to a 4 percent inflation rate. The fundamentals, people like George Akerlof who shared the Nobel Prize with me, have argued that when the economy is going through rapid changes — and we are going through rapid changes right now, the climate change, the post-pandemic change — the optimal inflation rate is considerably higher than it is in periods of less change. And so, if two percent was the right number in the Great Moderation, the right number for inflation that we ought to be focusing on is much higher than 2 percent. Part of the reason that there is concern about inflation is it’s political and there are misperceptions about the consequences, and we’ll talk about that a little bit later. I don’t want to deny that there are misperceptions about the consequences of inflation and misperceptions about the consequences of what we might do about inflation. So, there is a political issue, but I’m trying to keep it more narrowly defined on the economics and the economic consequences.
Now if it doesn’t have a significant adverse effect on economic growth, what is the other source of concern? Well, distribution. You get a hint maybe that issue has been overblown. When so many on Wall Street talk about inflation, they’re not worried about — even though they say that they’re worried about the poor, I’m not sure that that’s really at the heart of their concern. Now we’ve had a little bit of an interesting discussion between Dean and Jason about what’s happening to real wages, and I’ll tell you, I’m more persuaded by Dean that if you look over a two-year period looking at real wages, where we are looking at that two-year period adjusts for the compositional effect, there isn’t a significant adverse effect of the kind of Jason — and almost surely a positive effect. So, I’m not that worried. When we also often talk about the retired people, well, we have indexed Social Security, index payments in other areas, and I’ll come back to this a little bit later. So, we’ve already had some protection, social protection for these other groups. If you believe labor markets work fairly well, and if you believe that there is tightness in the labor market, and if you believe that it is not a story of greed and market power, then you have to believe that real wages will be going up, although there are always problems of the speed of adjustment.
Another important aspect as we think about the economic consequences, and distributive consequences in particular, of inflation, is that one of the important components of inflation is housing. Jason brought that up. But for a majority of Americans, they own their own homes. That’s why it’s a little bit like the net and gross used car price issue that Dean brought up, and the difference between the way Europe and the United States measures this. If house prices go up, then you’re compensated for the increase in the implicit rent and the CPI measures the increase in implicit rent. But the fact is you’re no worse off because you’re protected by your ownership of housing. And therefore, this important component, very large, about 25 percent of the CPI, does not have the adverse effect on standards of living, which is what we ought to be focused on. Obviously, it has effects between owners and non-owners, those who own and not.
In the remainder of my time, I want to really focus on the question of what do we do about inflation. And here I agree in many respects with what Jason said. We ought to be moving away from a zero interest rate where zero is not the scarcity value of capital. Having interest rates as low as they’ve been since the crisis of 2008 distorts capital. There’s lots of evidence risk is mispriced. So, it would be a good thing for us to move towards a more normal interest rate environment. What I worry about is the pace with which that is done. I worry about it partly because many countries around the world are heavily indebted, and particularly [in] poor countries where a significant increase in the interest rate could cause trauma and would really set back the recovery and certainly have very adverse effects on particular countries, of an enormous magnitude. So, while I think the objective of raising interest rates over the medium term to lead to a real interest rate that is higher than the real interest rates that we’ve experienced — I think one has to do that gradually and with caution.
Now, anybody believing in demand and supply recognizes that prices are going to be affected by the magnitude — by aggregate demand. It is one of the components, even if the underlying forces are largely supply driven. But if the underlying forces of inflation are largely supply driven, then the net benefit from reducing demand will be limited and the cost can be very large. We know the groups that are forced out of the labor market when we tighten, when we reduce aggregate demand, are those marginalized groups. Unemployment rates among African Americans are much higher than among the population as a whole. Among young African Americans, are about four times the average. And that’s why the Federal Reserve, before the pandemic, has moved its framework away from looking just at the average unemployment rate with greater sensitivity to how various groups in our economy are affected. So, to me, when anybody talks about distribution, one has to take into account, what will happen if we unnecessarily obstruct aggregate demand? And when I say unnecessarily, what I mean is the benefit versus the cost.
We won’t really solve the underlying drivers of inflation by reducing average demand through monetary or fiscal policy. The underlying drivers remain, very clearly, I think as Dean said, as some supply side interruptions. And that gives us hints about the appropriate policy responses. Structural policies, industrial policies, some of the short-run, some medium-term, some long-term that will address the supply side constraints. In that context, the provisions and Build Back Better, for instance, that have a supply side effect by enabling women to get back into the labor force will have in effect counterbalancing inflationary pressures. There are, as Jason correctly pointed out, and almost everything we do, both demand and supply affects those are intertwined. [It’s] one of the things I’ve emphasized in a lot of my work, and one can actually do a better job in calibrating some of our demand side measures, like on infrastructure, where the short-run benefits may be low and slow those down and accelerate those measures where the short run benefits like getting women into the labor force by providing child care can be much larger.
So, I think we ought to be focusing right now on these structural programs. And the second thing we ought to be focusing on are extending the social protections for those who are adversely affected by inflation. So that means making sure that we have adequately indexed our food stamp programs, our Medicaid programs, our Medicare programs, our Social Security programs. Overall, I think it would actually make a great deal of sense to have a one-time tax rebate. You might say an inflation protection tax rebate for lower- and middle-income Americans financed by a tax on the enormous profits that those who have done very well during the pandemic, including the kinds of numbers that Dean brought out, that their profit shares have gone up. So, attacks on these groups to help protect those that have been adversely affected. If we did that —
[00:45:11.150] – Algernon Austin
Professor Stiglitz, if you could wrap up, please, that would be great.
[00:45:14.570] – Joseph Stiglitz
If we did that, then we can say, look at those kinds of inflation numbers that Jason is talking about, 3–4 percent, there’s no growth, significant growth effects that may actually be good for the economy. And we would then have protected the major groups that are adversely affected if they exist. And some of us will be persuaded by Dean that they probably don’t exist or they’re not as large as Jason thinks. But whatever your view is, we can protect them by taking active actions to respond to the inflation that is occurring.
[00:46:01.550] – Algernon Austin
Thank you very much, Professor Stiglitz. Again, if you have questions, please put them in the Q&A and identify your organization or institution. We will now go to the four-minute response and we will start with Dean Baker. Four minutes, Dean. Dean, you’re on mute if you’re talking.
[00:46:41.730] – Dean Baker
I’m really striking out today. Anyhow, I was saying it’s interesting [that] Jason and Joe and I agree on a lot of things here. Let me quickly respond to a few things. Mostly what Jason said, one of those I’m talking about labor shares — I’m not trying to be wildly optimistic. I don’t think conditions of competition have changed as a result of the pandemic. I could be wrong on that. But that’s my prediction, that we get back to pre-pandemic shares. So that’s why I’m saying we could see an increase in share without that being passed on in prices. In terms of the differences, wage numbers, real wage numbers that Jason and I were showing, a couple of points.
First off, the difference again, you can’t have real wages falling and having wages pushing inflation, that doesn’t make sense, at least not in a context of positive productivity growth, which of course we have. But on the two measures, because Jason shared the data with me, I looked at the history of the Employment Cost Index wage measure and the average hourly earnings, they’re very close in prior years. That’s not true in the pandemic. And in 2021, the average hourly earnings grew 4.9 percent, as opposed to 2.8 percent in the Employment Cost Index. Just the wage side. And we know that was composition. Low-wage workers left. Low-wage workers came back in 2022. We should have expected the average hourly earnings index to underperform the Employment Cost Index. Instead, it overperforms slightly. My explanation is that you had a lot of employers giving wage increases in the form of promoting people, and this is particularly at the bottom end. So, you have a worker in a fast food restaurant wants higher pay. The boss says, oh, okay, I’m going to make you an assistant manager. That doesn’t get picked up in the Employment Cost Index. It does get picked up in average hourly earnings. That’s a very large survey, so, I have to think that reflects what people are actually earning. So again, we can go back and forth on that. I know Jason knows that series very well. Final point I’ll make on wages. We have 2.3 percent productivity growth last three years. Other things equal, that translates into 2.3 percent real wage growth without inflation. There are some complications there could go into those. But the point is, people can be seeing rising real wages without inflation, if you have that sort of productivity growth. Whether we sustain that, I can’t say, that’s just what we’ve been seeing.
Rents, Jason makes a very good point. The CPI tends to lag other indexes. Let me bring an important thing on the other side. Not a happy story, but it’s the reality. We normally have close to a million evictions a year. We were way below that in 2020, 2021 because of the moratorium. It’s a good thing, but those evictions are coming. So that is a big part of the story. To my view of rising rents, that people weren’t being evicted. Again, I’m not happy to see people evicted, but the reality is, that opens up spaces. If we just look at the data, there was an increase of three and a half million occupied units between 2019 and 2021. That’s a huge increase. Again, a very good thing, but that’s not going to continue. We’re also building homes at a very rapid rate. So, I don’t know what this means this month, next month, the month after for rents. But the longer-term picture, I’m somewhat less concerned about rapidly rising rents there than Jason for those reasons.
The last point I know, Jason was saying, “Oh, it’s the pandemic that caused a disruption of supply, demand.” Let me give a very simple story as to why I’m optimistic about the ending of the pandemic. I shouldn’t say ending — becoming endemic, being a better story for prices and productivity. We know that in December and January, as Omicron was going through the roof — that’s not a debatable point — businesses had all sorts of problems meeting their production schedules because workers were sick and other people were quarantining. This is widely reported. It’s not a secret. Average hours went down two tenths of a percent. That’s a big deal. That’s about 1 percent. That’s a big fall in hours. That’s coming to an end. I expect to see very good numbers in February, in March, on hours, I should say, and that will allow firms to operate much more efficiently because they don’t have to constantly cover for this person or that person being sick. So that’s one reason I’m pretty optimistic on productivity. Again, we’ve seen big gains, and I think that’s likely to continue. But I followed productivity data enough to know that only a fool predicts productivity. But there’s some good signs there. So, I’ll stop.
[00:51:04.700] – Algernon Austin
Great, thank you, Dean. Jason Furman.
[00:51:08.490] – Jason Furman
Great. I want to start with Joe’s, “Should we care about inflation?” In our introductory class yesterday, we covered the topic of inflation, listed three reasons to be bothered by it and three reasons why inflation could be beneficial, at least at somewhat low levels. I told them about menu costs and shoe leather costs. It’s hard to get that excited about menu costs and shoe leather costs and think they add up to very much. There’s some arbitrary redistribution. Joe talked about how households are hedged on the shelter side. Some households aren’t. Renters obviously aren’t, and those are some of the people we’re most care about. So that’s just one form of redistribution. But to some degree, part of why people seem to be bothered about inflation may be money illusion, that they think they deserve their pay increases, their wage increases or something Biden did to them or Powell did to them, or an evil company did to them, or somebody else did to them. And so, they’re sort of confused. I think all of these have something to do with it.
The question, though, is how much we should listen to people. And I always thought maybe that we should listen to them more possibly even than Joe thought we should. And I think I think that even more than I thought a year ago, even if I think it less than everyone else does. People are quite unhappy about it, and that has a political reality to it, that has an economic reality to it. To some degree, we sort of want to help people’s utility, and right now that’s down because of anxiety about these prices. So, I think we need to listen to that. I, for example, used to be in favor of a 4 percent inflation target, in part listening to the way people have reacted to the last year. I now would prefer to be at three. Now, could we go up from three to four eventually? I’d be really happy if people got used to three, and then we could move to four. But four now makes me nervous in a way that it didn’t two years ago. So, I changed my mind on that.
The last thing I’d say is everything Dean said was possible, but some of it sounded a bit like the pricing to perfection that we’ve done over the last year. If a bunch of different stories go right, then inflation will go right. And a lot of different stories went wrong over the last year. I just would count on some things pushing it up, some things pushing it down. Let’s make sure we’re looking at all of them. I think on balance, inflation comes down, but on balance it stays pretty high. And then the last thing, Joe, I would both as an economic and even more as a political matter, focus on long-term solutions right now. So, things like the child tax credit, preschool that will last forever, rather than something — temporary payment that gets us through the next year and itself would even be mildly inflationary, although much less so when combined with the tax increase that you proposed that I very much agree with. But again, I’d rather have a permanent tax that goes up regardless of the inflation rate.
[00:54:24.670] – Joseph Stiglitz
Okay. Let me first respond to the question of how much we should care. I agree, absolutely. We have a political problem, and there is evidence for a long time that what people respond to is not the average inflation rate. They respond to particular things. Men buy gasoline, beer — that’s their price index. And the unfortunate thing is that if we raise interest rates high, it is probably the case that the gasoline price will stay high. Now, the fact that the gasoline price is determined by global factors, and that we’re not going to be able to do anything by our monetary policy to affect gasoline prices, is just part of the reality that the politics of the moment, we’ll have to deal with. Whether we have two, three, four or five percent inflation, the level of gasoline prices is likely to be high. We’re talking here, though, not about perceptions of levels of prices, but about inflation.
And I think one of the key points here is that the market is seeing that there is not a strong wage-price spiral. They’re seeing that there is not inflation momentum. And as Dean said, the market sometimes is wrong. But in this particular case, I think the market is right. And the reason I think the market is right is that there are a large number of factors that are idiosyncratic, that — let me say — can’t be sustained as a level of inflation. That is to say, yes, we increase the price of energy, the price of fossil fuels, oil, from $30 to $110. I don’t think we are going to anticipate increasing the price of oil from $110 to $440. We’re going to bring in renewable energy. We’re going to bring in shale. We’re going to bring in the elasticity of supply of fuel, of energy, is fairly high, at levels when we get around 100, 110. So, the question is, “Will we continue to see the increase in prices?” I don’t see that.
But just to come to a conclusion, I think from a political point of view, if that is what our concern is, and I do think that is the central concern, it is important to protect people. And that is also not only a political issue, it’s a question of basic social wellbeing. And I think we can do that. And that’s why I agree perfectly with Jason. Most of our policies need to be focused on the long run — what we can do to make our economy grow faster and with more shared prosperity. But we are now in the short run. And the question is, in the short run, how do we make people weather this particular pandemic, and the aftermath of the inflation that’s associated with it, the best that we can. And that’s why these policies that are focused on the short run, supply enhancement and the social protection of those who are adversely affected, seem to me should be at the core of the policy response.
[00:58:34.590] – Algernon Austin
Thank you, Professor Stiglitz. Okay. We have lots of questions, so, let’s see if we can get through them all. I will start off with a question from Rich Miller of Bloomberg, and he asks, “Over the last couple of decades, inflation has been arguably held by structural forces like globalization, technological change, and demographics. What will the impact of those and other structural forces be on inflation going forward?”
[00:59:12.430] – Dean Baker
Well, I mentioned earlier the uptick in productivity growth. Again, I’m not prepared to say that will continue, but the reality is we’ve had three years of very good productivity growth after a decade of very weak productivity growth. So that will be a very important factor. Now, globalization, I don’t see a huge increase in trade, but it is important to know that, and both Joe and I mention this, that we’re a much more globalized economy than we were in the 70s. So, it’s hard to envision us having really high inflation here unless you’re also seeing that in Europe and elsewhere. Again, unless the dollar plummets, then you have that story, but the dollars going the other way, at least to date. So, I think we’re still in a story where we could look to good productivity growth — and again, there’s a lot I’m not one of these big techno-enthusiasts — but you do have them out there with web3 and artificial intelligence, which again, I don’t put a huge amount of stock in, but I’m willing to put a little in. So, I do think that it’s plausible we will continue to see good productivity growth, which again, we had not seen. So, we had very good productivity growth, ’95 to 2005, but the last 2005 to 2018, it was actually pretty weak. Even as everyone was talking about the robots taking all the jobs, the opposite was happening.
[01:00:26.750] – Jason Furman
Let me just add to that. I agree with a decent amount of that. Rich, I think it would be a mistake to forget what we thought two years ago, which is that we are worried about inflation being too low, about demand being insufficient, about the equilibrium interest rate being very low and too low, some of that called secular stagnation. I don’t think we should assume we’re in that secular stagnation, low inflation, et cetera, problem right this minute. So, we need to adjust to circumstances. But in making the adjustment, it would be a mistake to go all the way back to the other extreme. Now, standard practice for monetary policy, even a relatively dovish practice, would have the interest rate at three or four percent, right now. That would be sort of a dovish view of where it should be given the unemployment rate at four and inflation at seven. So, in some sense, anything we’re talking about, or at least I’m talking about, or the Fed is talking about with this path of one rate increase a meeting, et cetera, continues to keep interest rates low and continues to be more dovish than you would have thought historically. And I think that’s probably appropriate because we don’t want to overcorrect and get ourselves back in the problem we had. The only other thing I’d say, though, is that these forces of globalization, technology, et cetera, they’re global, but countries have different inflation rates. Japan has had an inflation rate of about zero. Iceland has had an inflation rate of about 4 percent. So, even with those forces, you’re going to have pretty different inflation rates depending on expectations and policy. So, I certainly don’t think those forces are a guarantee that we get back to the happy 3 percent I’d like to see, or the 2 percent the Fed claims to want to see without some action to get there as well.
[01:02:24.170] – Joseph Stiglitz
Can I just add, I think the point that Jason made is really important, that we went through until the pandemic twelve years in which there was a deficiency of global aggregate demand. This was a global problem of weak demand. Central banks all over the world had interest rates at zero, and that was not a normal situation. And so, if I look at the world returning after the pandemic, whenever that happens, I don’t see a fundamental change in the underlying forces that are going on. When I say the forces, technology, demography, fiscal policies, globalization. And so, I think that I don’t see strong forces for a retturn to the kinds of inflation that we had in the 1970s. I’d worry more on the other side, but we can’t be certain. And that’s why I agree that we ought to be thinking about moving towards a more normal world, and a more normal world is where the real interest rates are positive 1 percent, 1.5 percent. And part of that movement, I think, is going to necessitate a stronger fiscal policy. We have insufficient fiscal policy for much of the period after 2008. Many countries were putting excessive amounts into reserves.
The final point has to do with what is the right unemployment, what is the right goal? As I said, that number — two percent, three percent — I don’t see that as a magical number. And I think if we think that there may be more restructuring post-pandemic, I think we ought to be thinking more about a three, four, five percent inflation rate. But the unemployment rate that generates that, there’s a great deal of uncertainty about that. The notion of the NAIRU, what is the non-accelerating inflation rate was something that Jason and I wrote about back at the end of the 90s together — very difficult to predict as a function of the demography and many other forces. But I think the 25 years since we did our research together, when we were on the Council together, I think has highlighted the instability of that number. And so, we ought to be exploring, how do we make sure that we have a tight labor market, both to redress the decrease in real wages that we’ve seen happen or the decrease relative to productivity that we’ve seen happen, and to ensure that we have more inclusion into our labor market.
[01:06:03.590] – Algernon Austin
Great. Thank you. Now, I want to go to really three related questions. So, Jason Furman in his presentation mentioned that there are two different theories as to what’s going on or what’s driving inflation or components to — pushing inflation. One is the hot economy. And then there’s the alternative, corporate greed. And I was wondering if the sort of rising profits that Dean mentioned and also the failure of the price of beef to come down might be evidence of that sort of, the sort of corporate greed argument as having some merit. And also, from Owen Haaga of the Congressional Joint Economic Committee asked, and this was directed to Dr. Furman, “Do you consider lower real wages in many sectors to be evidence for the Groundwork hypothesis, and how would you state it precisely?” And Dana Naimark of the Impact Project said that, “Jason touched briefly on the corporate greed thesis of a hot economy. Can each of you comment on the contribution of corporate power to today’s and tomorrow’s inflation?”
[01:07:31.350] – Jason Furman
So, I think we have too much of a problem with corporate concentration in our economy. I think antitrust has been too lax, and now would be as good a time as any to redress those problems. So, I’m very much in favor of the president’s emphasis on greater competition policy. Now, I was in favor of this in 2019. I was in favor of this at an event honoring the 50th anniversary of Joe’s teaching in 2015. I did things with Joe on this in the year, I think, 2000, related to Microsoft. So, I’ve been in favor of this a long time, and that seems to be a little disingenuous for me to say “I think this because inflation is high.” I thought we needed more corporate, more antitrust in 2019 when inflation was too low. And I wasn’t warning, “Oh, no, it’ll make inflation even lower, so we shouldn’t do it.” So, I think this is frankly more about relative prices and about quantities than it is about inflation. I alternate, some days I mind inflation being used as a talking point for it. Some days I don’t mind, because what matters is is the policy good or not. So maybe I’ll be in a don’t mind mood today, but we’ll change my mood again tomorrow. But I focus on the policy.
There’s a debate in economics of, are real wages pro-cyclical or counter-cyclical, and as the economy gets stronger, do real wages go up? Which says worker bargaining power goes up more than firm bargaining power, or do real wages go down? The original Keynesian idea was real wages went down as you brought in more workers and each diminishing marginal product of labor and the like. Dean has, over the last several decades been a real champion, and it’s grounded in new Keynesian economics, and in a lot of work Joe did in the 70s even and 80s, that it goes the opposite way, that when the economy heats up, workers get more bargaining power than firms. I tend to side with the second thesis as a general matter more than the first. But there’s probably less cyclicality to real wages than we think, because boom periods are good times for businesses to raise prices and for workers to raise wages. And the net isn’t as completely obvious. And I may have neglected something in the question, but probably got to enough.
[01:10:00.210] – Joseph Stiglitz
Can I say one complexity in all of this is that in world, many of our models are very simple. We have monopoly models where you get a markup over the marginal costs and the share of the real wage goes down, moves in tandem depending on what happens to market power. But there’s another group of models that is vaguer, less well-defined, where there are conventional equilibria, where you are not oligopoly, where firms worry about what other firms will do. So, it’s not a simple monopoly model. It’s not a monopolistic competition model. It’s one where I will raise my price if you raise your price or if you don’t undercut me. Now under our antitrust laws, the firms can’t get together and so, they can’t conspire to do these things. But what happens is when there is a good occasion, and the pandemic has become a good occasion, where they all understand that they have an increase in — there’s a shortage, they all take advantage of that shortage to raise their prices. So that is the sense in which the existence of a lot of market power is being used, I think, as a framework for increasing prices beyond the level that could be justified by the increase in wages. So, I think that’s what is going on now in many sectors, not all, but in many sectors, and is contributing to the inflationary pressures.
[01:12:06.830] – Dean Baker
I’ll just say quickly on that, I tend to be mostly in Jason’s camp on this, but we’ll have a test. So, let’s assume for the moment that the unemployment rate stays where it is or hopefully it gets a little bit lower, gets back to the pre-pandemic levels. We’re not far from that, but let’s hope something like that. If it was not a story of monopoly power, we should expect to see the capital share get pretty much back to where it was before the pandemic. If the conditions of competition haven’t changed, someone could tell me they have, but let’s for the moment assume they haven’t. If we get back to pre-pandemic conditions in the economy, people being able to go to work and everything, I’d expect the capital/labor shares to go pretty much back to where they were. So, we’ll test this, whether we want to or not. We’re going to have a test of this in the next six, eight months, ten months.
[01:12:59.570] – Algernon Austin
Okay, great. Thank you. So now I have another sort of combined question. So, Jerome Powell, the chair of the Federal Reserve, has announced that he’s seeking to raise interest rates by a quarter point this month. And he has also said that he expects there will be a series of interest rate increases this year. So, I’m interested in the panelists’ views of what do you think the path forward will be for inflation and whether the Federal Reserve response is appropriate, whether the federal government sort of fiscal response, what fiscal responses should be necessary going forward? So where do you see the country going in terms of inflation and what should be done?
[01:13:56.690] – Dean Baker
I guess I’ll start quickly. I think Powell’s being very reasonable. He’s talking about a quarter point, well he said, he’s not just talking abstractly. He said he was going to raise — support a quarter point hike. I assume he’ll get that through the rest of the Open Market Committee in March. And basically, I think he’s saying, “Go slow, wait and see,” which I think would have been warranted in any case, but particularly with the Ukraine war and just so much uncertainty, I think it’d be really irresponsible to do otherwise. And I know there have been a lot of people saying, oh, we have to get out the big guns, a half point and another half point at the next. I think he’s being very reasonable. On fiscal policy, I think we may well have some room. The plans for Build Back Better is that it will be balanced. In other words, they won’t be increasing the deficit. If Senator Manchin has his way, they’ll be reducing the deficit with their programs. But I think we may actually be needing some additional stimulus because we had a long withdrawal stimulus at the end of 2021 into this year. So, I’m not going to be a big pusher saying, “Oh, we need additional stimulus,” but I think it may well turn out to be that case.
[01:15:08.130] – Jason Furman
I’m also okay with what the Fed is doing. One hike a meeting. I think if my views on inflation are right, as opposed to their views, which, by the way, in December were, I think 2.6 or 2.7 percent inflation this year, which we probably all agree is absurdly low, and I doubt they’re likely to reaffirm that forecast two weeks from now. You’ll need some meetings where there are two hikes. How long it goes on depends on how far inflation is away from something reasonable. The fiscal policy, I don’t think we have a big deficit and debt problem with interest rates where they are right now. In terms of investments in children, I don’t think those need to be paid for. So, if it’s up to me, we’d be raising taxes by $2 trillion and raising spending by $3 trillion. We probably do more on both of those. It’s not up to me. So, Senator Manchin sounds like he wants to raise taxes by $2 trillion and raise spending by $1 trillion. And that is a lot, a lot better than raising taxes by zero and raising spending by zero.
And so, I don’t think that deficit reduction is a real economic imperative insofar as it’s a political imperative and the only thing standing in the way of getting things done for climate change and for children, from my perspective, it’s a small price to pay. I would also note that one of those tax increases is changing the way we tax multinational corporations on their international income. And that’s not just important to the United States. That’s important to really hold together and create momentum for the really important agreement that Secretary Yellen helped to reach around a global minimum tax. If the US doesn’t do what it’s supposed to do, other countries are going to have a harder time following suit, and it puts that whole agreement in jeopardy. An agreement, by the way, for a 15 percent rate, I would have rather have been a higher rate. There’s other things. I’d like to be different about that global agreement, but lock something in and then build on it in the future when we can.
[01:17:17.790] – Joseph Stiglitz
So, let me say I agree with everything that Jason and Dean have said on the fiscal side, including the tax side. On the monetary side, let me first say I don’t think that the increase of a quarter point or a half point is going to have much effect on the inflation rate. This is what I said before. You look at those sources of inflation, used car prices, shortage of Intel chips, a shortage of chips, oil prices, those are global forces. We’re not going to affect that. And I can see a year from now a big discussion about the inefficacy of monetary policy, and its ability to tame inflation. And that’s because this is largely a supply side inflation, not a demand side, not totally, but very largely.
And you see that from the global picture. What I worry about, as I said before, is that if we move too rapidly, if we have several meetings in which there is a half point increase, the global consequences could be very serious. There are countries like Italy whose debt/GDP ratio is well above 130 percent, 150 percent, and there are emerging markets, developing countries with very high debt/GDP ratios. And those countries, many of those countries have to pay interest rates that move up as we increase our interest rates and move up even more, move up multiples of the increase in our interest rates. The problem of global instability that might be brought about by excessively, rapidly increasing interest rates is something that we should be aware of. The rapid increase in interest rates back in the end of the 1970s brought about the Latin American debt crisis. I don’t think we’re going to go anywhere near that. But we should at least remember that what we do can have global consequences.
[01:19:53.470] – Algernon Austin
Great. And now again, I want to combine some questions. So, the first one is a simple one. Well, no, scratch that. It’s not a simple one. The first one, again, thinking globally, on Monday, the Intergovernmental Panel on Climate Change released a report showing that climate change is proceeding more rapidly than predicted and as a consequence, is causing more harm than expected. And I know, Dean, you had some ideas about putting downward pressure on energy prices, which is a positive. That would be positive in terms of addressing climate change. And specifically, to Dr. Furman from Maria Calderon, from Barbara Lee’s office, there’s a question of, “Can you elaborate on specific climate change investments that could be beneficial?” So, climate change/inflation connections to all of the panelists, your thoughts?
[01:21:10.630] – Dean Baker
Well, I’ll just be quick. I mean, it scared me to death that all these people are saying, “Oh, no, with Putin and we got to hit Russia and do something about the price of oil. Let’s have fracking everywhere.” No, that really is not something we want to do. So how could you lower the price of oil? Well, use less of it. So, two things I thought of: paying people not to drive. I can go through how you can do that. It’s not perfect, but I think we can do that. That would give people a big incentive to drive less. The other thing, free buses. A number of cities have experimented with that, ordinarily we think of price as a rationing mechanism. I don’t want to ration bus trips. I’m happy if people take extra bus trips rather than driving. Or maybe they take a bus trip and they go somewhere they wouldn’t have otherwise. I think that’s great. Those are two things that I think can be done. They don’t have to cost a lot of money. I know in the current environment, any money is a lot of money, but it’s better than fracking everywhere.
[01:22:05.750] – Jason Furman
Ultimately, an important part of what we want to do here is a carbon tax. I realized the carbon tax is not going to pass this year, but just a reminder, that if you combine a carbon tax with taking all the money it raises, giving it out to households in a lump sum manner, about two-thirds of households are going to end up getting more money back from the government, including most households that are lower- and moderate-income. And so, that will actually help them with their energy bills overall. And that not doing it, in some sense, is hurting them. More immediately, there’s a set of climate provisions in the legislation that used to be known as Build Back Better. Those are, broadly speaking, sensible and a good idea. By increasing investments in renewables, subsidies for wind and solar, that’s a way to both improve carbon emissions and reduce costs directly for households. So, passing something like that would be a good idea. I’m not surprised Dean had more creative ideas than I did on the buses and paying people not to drive. I think there’s some near-term trade off between policies on oil and gas extraction and climate change. The fact is the lowest hanging and most efficient fruit for dealing with climate change is reducing coal. The gasoline tax already isn’t too far away from the gasoline tax you’d have under a reasonable social cost of carbon. It’s too low, but not way too low. So, I don’t terribly mind if there’s some additional oil production and gas production. That’s part of dealing with this problem in the near-term. But long-term we need less of all of that. I also don’t object if anyone says you can’t have the long-term always starting tomorrow, you have to eventually start today.
[01:24:04.850] – Joseph Stiglitz
Let me begin by saying climate change is a long-term problem, echoing what Jason just said. And we have to keep our eye on the fact that what we are concerned about is the long-term atmospheric concentration of greenhouse gases. And that means, in terms of the economics, we have to be moving very rapidly towards a system where we are net carbon neutral. Now, what does that mean? That means, for instance, that we do not do any long-term investment in carbon in response to the current [inflation]. We’re going through a short-run problem, and the answer is not to dig our hole deeper. Rather, the way we ought to be thinking about this is, we made a mistake over a long period of time of being too much in fossil fuels. And fossil fuels, we should have known, are highly risky. The price of fossil fuels goes up and down. Something that’s more reliable than fossil fuels is the sun. The sun is there. It’s not going to go away. There’s nothing we can do about it, either way. But if we had moved 25 years ago, certainly ten years ago, towards more renewable energy, the consequences of the movement in fossil fuel prices would have been much less for our economy. We would be much more insulated from what is going on now in Ukraine and Russia.
So, I think it’s just a reminder, what is going on, that we really ought to take risk more into account. I was on the IPCC, one of the lead authors in the second report back in 1995, and we were aware that — of the enormous risk of climate change, and we were pretty confident things were going to turn out worse than we thought. We wanted to be conservative, and it turned out much worse than we thought. The responses that we need today have to be comprehensive. I don’t think a carbon tax is going to go enough. We need regulations. We need public investments. I’m very supportive of what Dean talked about public transportation, but we need a comprehensive approach. And the social cost of carbon that was issued in the Obama administration was much too low. And the temporary social cost of carbon that’s been issued by the Biden administration is much too low. We really need to be moving much more aggressively towards a green economy, and I think that actually would be good for our overall economic performance.
[01:27:18.630] – Algernon Austin
Okay. We’re just about at time, but I’m wondering if all the panelists could take maybe 30 seconds and give a sort of a closing point. We have journalists on the webinar and we have people in congressional offices. [Is] there one little takeaway that you would want journalists to have in mind as they write about inflation or policy — congressional staff to have in mind as they think about these issues. So, let’s — 30 seconds, please.
[01:28:01.770] – Dean Baker
Okay. Let’s start, I guess. Very quickly, Jason and Joe both mentioned we have to worry about what people think. People are concerned about inflation. I saw a poll the other day that Axios published that showed most people think we lost jobs last year, and that has me freaked out as an economist, because if people don’t know we had a record number of jobs created. And that just sort of has me scratching my head that if people could be so out of touch when we have a record number of jobs created, they think we lost jobs. We’ve got a really big problem. I’m not sure exactly what to make of that. But when we talk about we have to be concerned about what people think. Absolutely. But I’m not sure how we know what people think or how we get people to think about reality.
[01:28:44.990] – Algernon Austin
Okay, thank you. Jason Furman.
[01:28:47.310] – Jason Furman
Part of that poll was they might have answered the question, “Do you think inflation is too high?”, when they thought they were answering — when they’re asked job growth. And that illustrates, I think, one, we should be really careful in how we forecast inflation and try to be accurate about it and separate that forecast out from what our views about how much of a problem it is and what should be done about it. Two, I think we should not be completely dismissive of the fact that people hate inflation. In fact, I think we should accept and understand that. And finally, I don’t think policy should panic [or] overreact and it would be especially bad if policy focused only on inflation and didn’t continue to deal with all the medium- and long-run issues that we know for sure are still going to be with us two or three years from now after hopefully the inflation has gone away.
[01:29:38.850] – Algernon Austin
Okay, Professor Stiglitz?
[01:29:40.790] – Joseph Stiglitz
Yeah, I think it’s been a very good discussion. Remarkable consensus among people who might have slightly different views in the beginning. The important point I would say [is] that the headlines that I’ve sometimes seen — “highest inflation in 40 years” — gives a tone that we are facing a crisis. The fact is that the inflation that we’re facing right now is not a crisis and that the conditions that led the inflation to levels that were so politically and economically troublesome back in the 70s, the conditions today are markedly different. And therefore, we’re not likely — likely as a keyword — to have that kind of wage-price inflation. But we are in a state where, as everybody has said, it is a political problem and to me the best way of managing that is to own up to that fact, to say we’re going to do something about it but most importantly try to protect people against the consequences of inflation and I think there are tools that we have in our toolkit that can do that.
[01:31:10.290] – Algernon Austin
Great. So, thank you all. Thanks to all the panelists and that will conclude our event for today. The recording will be available on the CEPR website and there was some request for the slides. We will speak with the panelists and try to get the slides to you assuming that the panels want to share their slides.
