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Friday, September 17, 2021

Supply Chain Worries Not Macro-Friendly

I started a piece and then scrapped it, so I will just make a short comment on what I am seeing. Putting aside the questions of how the pandemic will evolve (I am not the person to ask), inflation and/or supply chain issues are obviously the main concern, with a secondary helping of politics.

Supply chain disruptions were something that always came up in brainstorming about potential macro surprises — what if the “just in time” inventory system and outsourcing broke down? Well, the often-predicted bad outcome has showed up, and the sky is black with chickens coming home to roost.

This is an environment that is unfriendly to aggregated macro theory. Saying that prices went up “because there was a supply shock” is a good way of saying that the theory is mainly useful for explaining what happened yesterday. Meanwhile, stories that the central bank sets the price level via expectations are not looking that good right now.

Luckily my inflation primer is largely theory-free, so I don’t have to scrap sections.

On the politics side, I recommend Stephanie Kelton’s recent piece: “It’s Too Late for MMT-Inspired Budgeting.” In the piece, she describes the realpolitik of getting an infrastructure package through. In order to get through negotiations, the package needs “pay-fors,” and Kelton outlines the ones that would be the most attractive to those who are Democrat-leaning. (Republican-leaning readers might not be happy with the proposals.)

Looking through the suggestions, I was not sure if any of them would help untie knotted supply chains. Instead, they are dealing with the distributive effects of taxation (e.g., increasing the Internal Revenue Service budget to increase tax compliance) and undoing the ridiculous step of Medicare not being able to negotiate the prices it pays. (This is a rather basic point from MMT: prices are a function of what the currency monopolist pays.)

My observation is not a knock on Kelton’s argument, it is instead pointing to the principle that the real effects of budgets matters, and not the dollar amounts. That is what is meant by arguing that financial constraints do not matter to a currency sovereign — financial constraints are about dollar amounts, not the real economy. 

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(c) Brian Romanchuk 2021

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