Greedflation is fake

Greedflation is fake. 

By Matthew Yglesias. 

Suppose for a moment that you own a company that sells tables.

Along comes a global pandemic that leads some governments to formally shut down aspects of the in-person service economy. And beyond that, even in places that don’t close bars and restaurants and movie theaters, people tend to go out less. At first it seems that this might lead to a catastrophic recession due to lost incomes, but the government wisely steps in and provides massive fiscal and monetary stimulus. The result is that people are spending less on services than they did before, but have just as much — if not more — cash in their pockets as ever.

And so they start buying more furniture than ever. This means great sales for your table company, and you respond to this surge in demand by making more tables.

But there are fundamental chokepoints in the production process. You can increase output to some extent by buying more wood or aluminum or whatever your tables are made out of. Beyond a certain point, though, you’d need to train a whole new set of people to work at your company or buy more table-making equipment — or both. You don’t want to make big costly investments in response to a temporary surge in demand for tables, so with people buying more tables than you can make, your tables end up back-ordered. At this point, you realize that if you raise prices, you’ll get fewer orders but you’ll be able to fill the orders promptly. That’s going to mean your customers (who were very annoyed by the shipping delays) are more satisfied and your profit margins are going to go up — it’s a win-win. Except for people who are annoyed by inflation.

So imagine your surprise when politicians start screaming that the high-profit margins prove that this inflation is really “greedflation” driven by monopoly power when all you did was make tables available promptly to people who wanted tables.

Democrats have gaslit themselves about inflation

I’m referring of course to left-wing Democrats’ take on the current inflation situation.

To the extent that this blaming corporate greed for everything is just rhetoric to pass the time while the Federal Reserve does its work, I don’t mind at all. But Elizabeth Warren introduced a bill last week she calls the “Price Gouging Prevention Act of 2022,” which is more serious business.

Warren’s main proposal is that the Federal Trade Commission should step in to block “price gouging,” which the bill defines as selling things (a table, for example) at an “excess price” relative to the average price over the prior 120 days. You can get out from under the charge of price gouging if you can prove that you only raised prices because the price of your inputs went up. So for example, an airline would, I think, still be allowed to raise airfare in response to an increase in jet fuel.

This suggests to me that Democrats perhaps got a bit high on their own supply last year in attributing various inflation phenomena to “supply chain problems.”

There were specific problems in the supply chain for automobiles, but in general, people just bought a ton of durable goods last year. If we’d actually had a negative shock to global supply chains, then nominal prices would have gone up but inflation-adjusted consumption would have gone down. What actually happened, though, was people bought more durable goods than ever in inflation-adjusted terms. The problem in the supply chain was people ordering tons of stuff.

But because Democrats convinced themselves that the inflation was caused by supply-chain problems rather than by a surge in demand, they then turned around and found themselves shocked to discover that profit margins went up. It turns out it wasn’t about supply problems at all, it was about greed!

At the end of the day, though, only a very stupid person would think companies suddenly became greedy in 2021 after years of being non-greedy. In fact, during this whole period from 1997 until 2020 when the price of durable goods was steadily falling, I routinely heard that ascribed to greed. The bad corporations were outsourcing jobs to China to cut costs — greedy!

And if the companies passed some of the savings on to you, the consumer, that was only due to their greedy desire to sell more stuff.

Yes, companies are greedy when they ship jobs overseas to cut prices. And they are also greedy when they raise prices in response to a surge in demand. Greed is a constant. But the cause of this particular inflation was a surge in demand, not a surge in greed.

Universal rationing?

Warren is correct that it’s not a law of physics that a surge in demand needs to lead to a surge in prices.

When Ben & Jerry’s holds a free ice cream cone day, they get a surge in demand. They could respond to that surge by raising prices to a non-zero level to improve profit margins, but that would kind of wreck the marketing gimmick. You just get a situation where the line is very long and you need to wait a while for your ice cream. As a once a year promotion, that’s kind of fun. But in general, an economy where you need to spend tons of time standing in line waiting for things is kind of a bummer. Time wasted in queues is a real loss.

At times, it probably is appropriate to respond to economic problems with a mixture of rationing and price controls. During World War II one of my grandfathers was a radioman on Navy planes, and as a kid I loved to hear his stories about combat in the Mediterranean Theater. My other grandfather was an economist in the Office of Price Administration working specifically on footwear, which when I was a kid seemed awfully boring. The military needed tons of boots for the troops and rubber for tires. But civilians also needed shoes; in particular, people in certain critical industries needed work boots. So there was a whole system of shoe-rationing and price controls to try to make sure that the country’s footwear-production capacity was mostly turned toward military uses. Now that I’m a grownup, I find this aspect of the war more fascinating in a lot of ways.

Today we seem to be moving toward a system of soft rationing and price controls to address shortages of baby formula. That seems appropriate for that specific sector given the emergency. But note that the formula shortages are in fact caused by a negative shock to supply — one of Abbott’s big factories was shut down for health reasons, and ultimately the only real solution here is to get the factory back running.

You certainly could apply this kind of logic broadly to today’s economy. Meatpackers’ profit margins soared recently, and you could have had regulators prevent them from raising prices. But what happens when demand soars and you don’t raise prices? Well, you sell out of stuff. And if people started regularly going to the store and finding that all kinds of things were sold out, they’d start panic buying whatever wasn’t sold out in order to stockpile (the prices would be low after all). And the panic buying would just lead to more shortages. Then to fix things, you’d need a real government rationing system — so much bacon per week, so many eggs, etc. And then you’d have illicit trade in ration coupons, a black market, the whole deal. And for what? To address a temporary baby formula crisis induced by the shutdown of a plant, it makes sense. To defeat the Nazis, you do drastic stuff.

But this is just too much demand sloshing around, and we need less.

A simple story

Here is aggregate spending growth — nominal gross domestic product — for every quarter of the past 20 years. You can see that during the Great Recession it slowed, dipped below zero, and then bounced back to a normal level. We didn’t have a surge of catch-up spending to return us to the prior trend, which is why the recovery was so slow and grinding.

After the pandemic, by contrast, we did get a huge surge in spending and caught up.

But having caught up, nominal spending is still running at an unusually high level.

And that’s the whole deal. Early in recovery, a surge in spending means a surge in output because all kinds of idle resources are brought online to capture the rising spending. But we do not currently have much in the way of idle resources. The unemployment rate is very low. The ports and freight trucks are crowded. So the extra spending is causing rising prices because we can only work so quickly to make more stuff.

The Fed needs to slow that total spending back down to a more normal level so everyone can catch their breath. And in the political domain, we need to think of ideas that let us make more stuff.

GDP is good, actually

I’ve been mostly ragging on the populist left here, so to change directions, consider a recent post by Curtis Yarvin, the favorite thinker of the new populist right.

In response to me asking for someone to explain what the populist right’s actual policy ideas are beyond various enemies lists and unhinged rants, he delivered a fairly disjointed essay that essentially disclaims any intention of putting forth specific policy ideas. There’s also a bunch of stuff in there about how “GDP is bad” that I broadly associate with the lazy left-wing anticapitalist thought of the 1990s. And of course, it connects to the New Right’s idea that international trade is bad:

According to this Reddit-Harvard-libertarian theory of government, if the Chinese are willing to do all the work of making our stuff, in exchange for pieces of green paper, they are suckers and we should let them. We get all the utility. They get the disutility, and some paper. What’s not to like?

This idea conflicts with both traditional common sense and the human asset model. Common sense tells us that work is good for the human soul. The human asset model tells the regime that work (in most cases) is good for the human asset—it increases the productive powers of the asset. Which may not be quite exactly the salus populi—but it at least correlates with the “common good” better than the satisfaction of desire.

And on the scale of the nation, producing increases the nation’s productive power—obviously making the nation stronger and more valuable. Whereas any nation that consumes but does not produce can be just dropped on its face by the producers.

This is, I think, a weird misunderstanding induced by the inadequate stimulus of most of the 21st century. What I learned at Harvard is that if we let the Chinese make our tables for us, the upside is that our workers can now go work making other stuff. So we get both tables and the other stuff. Now if instead of making tables our former table-makers become unemployed, that’s bad. But that’s just another way of saying that unemployment is bad, not that trade is bad.

And unemployment really is bad! It was a huge disaster that we let unemployment linger so high for so long in the past.

But I am a boring policy literalist, so I want to make policies that will address today’s problems. And right now we do not have an unemployment problem — we have a “people are trying to buy more stuff than we can produce” problem. So to the extent that more stuff could be produced abroad, Americans could be reemployed making other stuff here at home — perhaps building houses rather than tables — and everyone is better off.

The time for tedious neoliberalism

While Warren and Yarvin are somewhat extreme cases, they represent the rising intellectual fashions.

And it’s in a lot of ways a question of bad timing. Back in 2008-2012, the country could have used a lot more unorthodox economic thinking. Protectionist trade policy might have been beneficial. Large-scale debt cancellation definitely would have been beneficial. Deficits didn’t matter. We were plagued by a shortfall of demand, and all kinds of wild populist schemes could have helped people a lot.

But the current inflationary situation calls for the kind of tedious neoliberal thinking that has become painfully unfashionable these days. Fiscal austerity would be helpful. The Federal Reserve raising interest rates is helpful. And most of all, over the medium-term, supply-side reforms that raise economic efficiency would be helpful. So freer trade is good. Expanding legal immigration is good. This stuff the White House did last fall on housing is good, but if we could listen to Brian Schatz and go even more YIMBY that would be better.

Reforming occupational licensing rules would be good. Just going through the whole federal rulebook with a pen and asking yourself, “which of these rules has been supported in the past on the grounds that it ‘creates jobs?’” would be a good heuristic. Because in today’s economy, we don’t want to create jobs. We want to maximize output per worker, which means eliminating wasteful overuse of labor. It’s time for fussy technocracy, not populism.