The Politics of Inflation

Merchants are silent with regard to the pernicious effects of their own gains. They complain only of those of other people. | Adam Smith

Thanks to the folks at More Perfect Union, I learned about Tim Gurner — a property developer — and his comments at a recent conference, which are openly neofeudal.

I also saw this from Ken Klippenstein of the Intercept who selected a slightly longer quote from Gurner:

Gurner seems like a poster boy for a certain sect of entrepreneurs who believe that the great mass of people are sheep to be shorn or serfs to be put in their place. As I commented on X Gurner is, ‘only a bit worse than the implied thinking behind the 'vibecession' that never happened. Economists and CEOs by the score embraced a version of this worldview. Neofeudalism.’

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Almost immediately after seeing that tweet, I read an article by Ken Klippenstein and Jon Schwarz regarding a memo by a Bank of America economist, which expressed pretty much the same sentiment, except in economics-speak:

The memo, a “Mid-year review” from June 17, was written by Ethan Harris, the head of global economics research for the corporation’s investment banking arm, Bank of America Securities. Its specific aspiration: “By the end of next year, we hope the ratio of job openings to unemployed is down to the more normal highs of the last business cycle.”

The memo comes amid a push by the Federal Reserve to “cool down” the economy, informed by much of the same rationale — that high wages are driving inflation. This year, the Fed has increased interest rates for the first time since 2018. Historically, this has often caused recessions, and that is exactly what appears to be happening now: The Commerce Department reported Thursday that the gross domestic product has fallen for the second quarter in a row, indicating that a recession may have already begun.

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In 2009 — at the worst moments of the economic calamity that followed the collapse of the housing bubble during the end of the George W. Bush administration — the ratio climbed as high as 6.5, so there were more than six unemployed workers for each open job. It then slowly declined over the next decade, reaching 0.8 in February 2020 before Covid-19 lockdowns began.

This recent, unusual moment of worker leverage made Bank of America quite anxious. The memo expresses distress about “a record tight labor market,” stating that “wage pressures are … going to be hard to reverse. While there may have been some one-off increases in some pockets of the labor market, the upward pressure extends to virtually every industry, income and skill level.”

And Harris, Gurner, and many other pessimistic captains of industry would like to see the economic tides reverse through higher unemployment of the sort we experienced after the Great Recession. Not just to dent inflation but to put workers back in their place.

Many other economists, including economics Nobel laureate Paul Krugman, believe we have dodged the bullet on a recession, but that’s reading the tea leaves, and every economist seems to have their own pot and blend of tea they prefer.

Krugman points out that the real issue is inflation — not unemployment — and many conservative-minded economists like Jerome Powell, the Fed Chair, believed in the conventional story about cooling the economy by raising the core interest rate. This is supposed to lead to increased unemployment since companies tend to squeeze out workers when times get tough: the Phillips Curve, so-called. But that hasn’t happened. Inflation has fallen dramatically, and unemployment is very, very low (which is what seems to have pissed off Tim Gurner and worried Ethan Harris).

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Krugman has argued in the past that Powell has done the right thing but driven by the wrong reasons: raising interest rates have cooled the economy but has not led to higher unemployment.

Krugman writes about two optimistic stories that explain why:

One of the two optimistic stories goes under the unlovely name of the “nonlinear Phillips curve.” To put that in something resembling English, in normal times there seems to be a negative relationship between unemployment and inflation, but it’s pretty weak, implying that the Federal Reserve’s strategy of cooling inflation by raising interest rates, and hence reducing overall demand, would have to cause a lot of unemployment to get inflation back down to an acceptable level. The claim, however, is that in an overheated economy, which we seemed to have last year, the relationship between unemployment and inflation gets much stronger, so that the Fed might need to cause only a modest rise in unemployment to yield a big decline in inflation.

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But the nonlinear Phillips curve explains why inflation might fall with only a small rise in unemployment; it doesn’t do as well in explaining what we’ve actually seen, which is falling inflation without any rise in unemployment at all. (The small uptick in August was probably just a statistical blip.)

[Mike] Konczal [of the Roosevelt Institute whose paper] tries to resolve the issue by comparing disinflation across different goods and services. He argues that if improving supply as pandemic effects fade is the main story, we should see inflation falling fastest for goods and services whose consumption has risen the most, because their availability has increased. And that is in fact what we see.

Krugman also offers a second optimistic story, his own: the long transitory:

The other optimistic story has, I believe, a better name, although I would say that, since I think I coined it myself: long transitory, a play on long Covid. This is the argument that as late as early 2023 inflation was still elevated because of lingering supply disruptions from the pandemic, but that inflation is coming down now because the economy is finally normalizing.

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So what I see as growing evidence in favor of the long transitory story is reassuring. That said, of course, policymakers need to stay vigilant.

This argument probably isn’t over. What shouldn’t be an issue, however, is the proposition that inflation has come down far faster than pessimists predicted, at no visible cost.

So, when blowhards like Gurner and ‘very serious people’ like Harris start to talk about the need for higher unemployment, remember, is not about the Phillips Curve. It’s really just that corporations don’t want to share their profits with workers.

I thank Klippenstein and Schwarz for reminding me of Adam Smith’s insight into the complaints of merchants:

The memo is an uncanny demonstration that the economist Adam Smith was right when he described the politics of inflation in his famed 1776 work, “The Wealth of Nations.”

“High profits tend much more to raise the price of work than high wages,” Smith argued. “Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price. … They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.”

Thus, exactly as Smith would have predicted, Bank of America complains loudly about the bad effects of high wages in raising prices, but appears to be silent about the pernicious effects of high profits.

This is especially remarkable given the role that corporate profits have played in the recent increase in inflation. After-tax corporate profits stood at 8.1 percent of the economy at the beginning of 2020 but have since shot up to as high as 11.8 percent of the GDP. In an economy the size of the U.S., that equals an increase of more than $700 billion in profits per year. These higher corporate profits have been the cause of over 50 percent of recent price increases.

That’s a lot of profits. This is why we are seeing so much union activity and strikes across the country. The unions know about the profits that are being made, the CEO pay scales, the stock buybacks. They know Smith’s lesson, that the merchants will remain silent to the injuries that high profits cause, and that inequality is at an all-time high.

The Gurners and Harrises of the world will continue to complain about the gains of others and never the merchants raising prices.

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