Rather than write a few small articles, I am just going to have a single article covering a few threads. My blog writing time has been limited by working on my manuscript.
De-Liberation Day?
Outside observers have argued that the Trump administration’s arguments before the Supreme Court were shambolic at best, and the questioning by judges was viewed as hostile. Although the Supreme Court normally bends to the will of President Trump, the argument that he can impose taxes at will might push the conservatives too far. The recent blowouts of Republicans in state and municipal elections is a reminder that politics has not yet been abolished.
Although I would not find it too surprising the the Supreme Court will somehow find justification for the concept that President Trump can do whatever he wants, the possibility exists that De-Liberation Day could be mandated — all the various tariffs added in the past year be stricken down. This would generate a nice deflationary shock, but it would also make the White House very sad and probably even more erratic. It is possible that Congress may be pushed to enact new laws giving Trump the authority to re-impose them — adding another major source of uncertainty to the business outlook.
At the time of writing, the shutdown looks to result in the crippling of air travel going into American Thanksgiving, and we have the remarkable situation of the military losing their food supply. (Although everyone claims to have read The Art of War, a good portion of the text discusses the importance of feeding your troops.) It is hard to see how this situation is politically sustainable, but the problem is that the right wing has created an isolated information system where negative news is actively suppressed. As such, hard to guess when the shutdown ends.
AI Spending Worries
Headlines about the “AI capital spending bubble” continue to appear. Although a blow up fits my Minsky-an views about the business cycle, I still lean towards this being a sectoral problem (although it would slot in with a broader-based slowdown). Although I had just commented on this, I realise that I had skipped over one part of my logic — this is not really a global bubble. Previous financial disasters (like the Financial Crisis, the early 1990s real estate melt down, the 2000 tech wreck) featured globally synchronised stupidity. If we look at the 2000 tech wreck, even though there was a massive tech bubble throughout the developed world, it still only resulted in a sectoral recession — GDP and broad employment contractions were mild.
Inflation Reading Recommendations
In the comments from a previous article, I got a couple of reading recommendations from “DFWCom” and “eg”: this article by Blair Fix (which I read when it came out) and the book Inflation: A Guide for Users and Losers by Mark Blyth and Nicolò Fraccaroli (which I have not read).
I obviously cannot address the contents of the book, but it was not clear to me whether the Blair Fix article fit well with my book manuscript.
To recapitulate the theme of my manuscript, it is a description of the mechanics of inflation without attempting to get bogged down in theoretical disputes. Very simply, there is no point in arguing about the causes of inflation when some of the people involved are making categorically incorrect statements about inflation. A corollary is that the book makes no attempt to discuss how to respond to inflation — that showed up in my previous book on MMT.
The following excerpt captures a key argument of Fix’s article/
Unfortunately, this thinking [Milton Friedman’s dictum that inflation is always a monetary phenomenon] falls apart on further inspection. The problem is that it treats inflation as a uniform rise in prices. That’s theoretically convenient, but empirically false. In the real world, inflation is wildly divergent. At the same time that the price of apples rises by 5%, the price of cars could grow by 50%, and the price of clothing might fall by 20%.
To understand inflation as it actually exists, we must look not to economics textbooks, but to real-world data. That’s what political economist Jonathan Nitzan did during his PhD research in the early 1990s. His work culminated in a dissertation called Inflation As Restructuring. In the real world, Nitzan observed, price change is always ‘differential’, meaning there are winners and losers. The consequence is that inflation is not purely a ‘monetary phenomenon’, as Milton Friedman claimed. Inflation restructures the social order.
Although I am happy to agree that Milton Friedman was wrong about inflation, that does not necessarily say very much. Although one can detect whiffs of Monetarism in things like Quantitative Easing, it is nearly impossible to find anyone halfway competent who takes Friedman’s k% money growth inflation control theory seriously.
It is completely unsurprising that different prices rise at different rates — people look at “core inflation” for a reason. Furthermore, aggregated inflation is not meaningless, as it has real-world effects via the inflation targeting mechanism and cost-of-living adjustments.
It is entirely reasonable to say that the dispersion of price changes makes forecasting it an extremely difficult exercise — I am in the camp that inflation forecasting is at best an art, not a science. Standard neoclassical models are premised upon an aggregate price level, but they have a defence in the form of analytical tractability. Saying that “inflation is too complicated to forecast” is not an answer that leads to promotions as an inflation-linked bond or central bank analyst. Nobody realistically can hope to capture every wiggle of inflation data, but one might be able to get the broad trend correct.
Finally, there is the question of the political economy of inflation. Arguing that inflation is the result of power is arguably correct, but that runs into the “so what?” question. How does this help us understand what is happening? Does it have predictive value? Or is this just an attempt to revive the political case for price controls?
I am looking at my manuscript to see whether to add modifications. If I read the Blyth/Fraccaroli book, I could work it into my references, but I want to avoid having too many links to blog articles, given the fragility of websites.
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The comment section here is largely dead. My Substack or Twitter are better places to have a conversation.
Given that this is largely a backup way to reach me, I am going to reject posts that annoy me. Please post lengthy essays elsewhere.