Times of inflation

There is debate among economists, politicians, commentators and various experts about rising inflation in America and other countries of the world (we in India also have inflation problem). In America, there are various theories out there on inflation among various groups. A group, lets call them inflationists, says US spent too much in too little time which caused inflation (read 1, 2, 3, 4). This group says that to stop wage-spiral crisis (coming in near future), we have to use blunt tools like Fed rate hikes, sucking liquidity out of economy. The inflationists also want scaling down fiscal spending as they think that economy is overheating due to expansionary policies which they say spell a disaster down the road - wage price spiral and period of stagflation. The idea of inflationists is to bring down demand in economy (at cost of jobs, economic recovery & growth) to prevent bad future. The inflationists have been somewhat successful in stalling govt spending plans and convincing people about inflation fears. 

 

The other group - lets call them rationalists (Keynesians & Post-Keynesians etc) - are on opposite fence. They do not have rigid belief of "too much spending caused inflation" in present context. They have two main contentions. First, inflation is not a monetary phenomenon and Fed rates are a blunt tool to fight inflation. The inflation is not limited to America and also happening in other nations (UK, Germany, Eurozone etc) which have different policy dynamics. So inflation is a complex problem. Secondly, this group recognizes that Pandemic has skewed economy in peculiar ways. The pandemic has created big uncertainty on global and national economies. Frequent shutdowns, virus control measures, travel restrictions and threat of virus itself has caused ineffable economic disruptions. And these disruptions have caused complex issues - skewed spending patterns, supply chains disruptions, re-balancing of economies to "new normal" (whatever that is), change of jobs dynamics, new norms of hiring/firing of employees are some of the problems the economy is facing (read 1, 2, 3, 4).

 

To summarize some of the things. The spending patterns and Jobs market is facing disruptions with waves of pandemic. The demand for services like Restaurants and recreation shrinks with arrival of pandemic wave and jobs in these sectors shrinks. The closure of restaurants and bankruptcies is well known in America. Similarly, people are postponing their education and learning because of pandemic and disruption in education system. This has caused major job losses in education sector. The job losses in one sector is fortunately accompanied by job gains in other sectors but the it has skewed conventional job market patterns. While people are spending lesser on services, there is significant increase in spending on durable goods and food products (why?). The increase in demand for durable goods means increase in demand for trade, commerce and production of these goods. Here we have more problems.

When economy shut down in first wave, it caused disruptions in Businesses and jobs markets pretty much everywhere. First wave caused unprecedented collapse of demand in economy with economic shutdowns. The businesses associated with supply chains (logistics, carriers, cargo companies etc) also partially reduced its operations as economy was shutting down. The jobs in these supply chains services were lost and people went elsewhere for better avenues of employment. But after the winter wave and Delta wave, the economy started reopening pretty quickly as pandemic subsided. But our supply chains which got disrupted earlier were not prepared to accommodate sudden rise of demand when economy started going to somewhat normal levels. Then we also had increased consumer spending on durable goods. Results was supply chain paralysis, cargo ships lining up at ports, shortage of truck drivers etc - basically slow movement of goods from producers to consumers. 

 

But the problem with Pandemic wave was not one-off thing, as we now have new Omicron wave. Though not as severe, but still causing partial shutdowns and disruptions in economy. Good news is that businesses are trying to adapt to this challenging times and overcoming these supply chains disruptions - which now come and go every 6 months.  There are also complicated problems in some sectors that have unfortunately converged with our pandemic induced problems, most notably is scarcity of semiconductors which has impacted production of variety of consumer goods - Automobiles, electronics etc. Basically anything that requires computer chips (and many things in today's world are) is impacted by chip shortage. Problems with chip scarcity is most prominently seen in manufacturing of cars and manufacturers are trying to find solutions to this problem. Fortunately in America, there is bipartisan consensus about addressing semiconductor shortages (this is because it has also become a national security problem). US Govt has also taken certain measures but its unlikely that it can have positive impact in short term.

So the rationalists, are hesitant to rush in taking "conventional" policy decisions. They call for wait & watch mode and carefully observing the economy, and trying to figure out what's the best course ahead. Instead of just applying fiscal brakes and 4 rate hikes this year to fight inflation. Some economists are ready to switch sides (going from rationalists to inflationists), but they maintain that - so far - there is no evidence of wage price spiral. Rationalists also suggest that inflation is acceptable risk at this time given there are no better alternatives in this disruptive economic situation. While its debatable whether the economy is overheating (inflationists claim so), some experts also don't mind running the overheated economy for a while because the alternative is bad. 

I don't understand the economy as much as the economists but this is my understanding of the situation. US economy came to halt in 2020 with massive economic disruption with arrival of first wave of pandemic. Economy shuttered, markets panicked, there were massive job losses, collapse of demand and growth plummeted. The Govt realized that the best way to fight the pandemic induced recession is to restart economy with high acceleration and try to bring it back to its "normal" pre-pandemic speed. The way to do that was massive fiscal spending and relaxation of monetary policy. The economy did rebound and economic relief measures (expansion of programs like SNAP, extended unemployment insurance, debt moratoriums, rescue to businesses etc) also helped population in the terrible times of economic hardship. While we expected pandemic to be a one wave that will eventually pass away, the situation turned out to be different as we saw more waves - Delta wave last year and now ongoing Omicron wave. With incoming Biden administration and winter wave in early 2021, Biden's mantra was "go big or go home" - that means fiscal spending must continue to weather this pandemic. Then came ARP and more spending & relief programs. US basically flooded the economy with $$$ to keep it in motion.

Lets look at the result, keeping aside the inflation (i will get to this in a minute). US unemployment rate is nearing its Pre-Pandemic level, there is swift recovery in jobs market and US is only among the advanced economies (ok now UK may also be on the list) which has come back to pre-pandemic level of growth. Now look at the context & underlying reality - US economy is in actually reasonably good shape considering huge economic uncertainty cast by pandemic and nearly a 900K deaths from virus. So US economic policy is a success. The recession was very short lived and economy recovered very quickly.

Talking inflation - missing elephant in the room

I think our experts, while talking about inflation, have missed a critical thing - the elephant in the room that is Pandemic. And this is important considering various opinions - inflation as a monetary phenomenon, using blunt tools like rate hikes to fight inflation and applying fiscal brakes to cut spending. I think both inflationists and rationalists do concur that there is a lot of economic uncertainty due to pandemic and a lot of disruption has been created by new waves of pandemic. We can only hope that the newest wave is the "last one" and Pandemic is near the end. So pandemic is the elephant in the room and any serious discussion to end economic uncertainty (and its humanitarian costs) should really be a global coordinated strategy to end this pandemic - we need an exit strategy. Dean Baker has written a lot about this (read 1, 2, 3, 4).  

 

The Pandemic response was mostly left to the invisible hands of free markets. US Govt put investment in development of mRNA vaccine technology, gave funding to Pharma companies in advance for building vaccine production capacity and funded various research programs through federal agencies & private companies. When vaccines were developed and proven to be safe, US federal Govt granted patent monopolies to corporations which they exploited to their best advantage. Then there was a problem of global pandemic response strategy itself. Trump regime's non-cooperation with WHO and subsequent lack of interest in Biden administration to pursue a common pandemic response strategy with major countries of the world meant that pandemic response was mostly driven by Billionaires like Bill Gates and big Pharma companies. It was a broken system which created vaccine billionaires and created vaccine disparity between developed & developing nations. 

 

A lot can be said about what went wrong, but its safe to presume that a global coordinated plan of governments across the world would have created a better mechanism to deal with pandemic. We could've vaccinated the world a lot sooner, we could've developed & produced more anti-Covid drugs and vaccines, we could've made a lot of scientific progress by sharing technology that could've served every nation of the world and mankind as a whole. Developing nations have been asking developed nations to do the minimum, that is temporary waiver of TRIPS patents for the duration of pandemic but developed countries are not budging at WTO.

 

So to fight inflation, shouldn't our primary goal should be an exit strategy from pandemic?  I think experts on both sides of inflation debate can at least agree that economy will be very different if we can beat the pandemic sooner rather than later. I want to see what will inflation looks like in a "more normal" economy. An economy where we don't have to partially shutdown states every few months. An economy where we can restore a degree of normalcy in jobs market (but retaining healthy wage growth). An economy where our education system, schools, colleges, universities, centers of learning & training can reopen safely. An economy where the ports and cargo ships go back to normal operating routines. An economy where service sector face to face jobs are restored to pre-pandemic trajectory.

I also know that situation is more complicated than just manufacturing vaccines and anti-viral drugs. In America, we have a mainstream political party which plans to spread the virus in the nation. This party promotes anti-vaxers, anti-maskers, anti-science propaganda and denial of pandemic healthcare emergency itself. Then we have US supreme court and its conservative majority who have struck down federal govt vaccine mandates to control the pandemic. There is also a lot of right wing propaganda in media which is creating bad messaging about pandemic emergency. All these are complex problems. In America, you have the vaccines but a significant chunk of people don't wanna take them due to ideological reasons.

Let me also talk about India and some poor countries. We also have many problems. We in India have the manufacturing capacity and capability but we lack in pool of vaccines. At this point, we have the capacity to manufacture around 350-450 Million vaccines per month combining output of Astrazeneca, Covaxin (similar to Sinovac of China), Corbevax (newly developed open source vaccine by Scientists in Texas, US) etc in our various factories of Pharma companies. Our problem in India is that we don't have access to mRNA vaccines which are more effective than virus vector and inactive virus vaccines. Also mRNA vaccines are safe for younger age population something which could have greatly benefited us given more than 40% of our population is below 18 years of age.

Right now, we are producing much more vaccines that we are able to administer. Last month we had surplus stock of 500 Million Astrazeneca vaccine doses! The excess stock was so high that Pharma producer SII had to cut back its production. We also have problem of vaccine hesitancy in India, though its not as serious as ideologically driven as in America. Now consider this, we have huge vaccine shortage in Africa and we have surplus production capacity in India. So its also the shortcoming of WHO and Indian Govt who failed to utilize India's Pharma sector's excess capacity to vaccinate in poor African states. If developed nations governments have put in serious effort (unlike private efforts of Bill Gates), we could have created a better mechanism and ground based infrastructure that could have utilized global vaccine manufacturing potential to it full use. So the problems with vaccines mismanagement is not just in America or in India, its a global problem. And isn't it in our best interest to vaccinate poor nations where new strains may eventually emerge as pandemic drags long enough? Beta and Omicron variant emerged in Africa (South Africa also has vaccine hesitancy problem). Delta variant emerged in India.

Two roads to future of Pandemic and impact on economy

We have several opinions about future course of Pandemic. On one hand, some scientists say that we are near the end of the line in Pandemic. The Pandemic will go into endemic phase where it will continue to spread at smaller levels seasonally & occasionally but the mortality and severity of virus will be much lower. The pandemic waves will slowly dampen and die down. If that is the case, then there's a good chance that our economy will likely go back to normal soon. And there is basis to the argument. I know that we fumbled our pandemic response in last 2 years but there are positive signs that worst phase is over. While vaccine patents are still a problem, we however have expanded cheap pool of vaccines like Astrazeneca (India has capacity to manufacture almost 250 Million every month) and soon to be coming patent free Corbevax that will further increase supply of vaccines (and more vaccines in trials and development). Chinese vaccines, though less effective than mRNA vaccines, have however helped vaccinations in many lower income states like in South America, thus preventing mortality and severe diseases. 

In kind of morbid observation, many of the anti-vaxers have met their fate - they got infected and attained some level of immunity or they died from the virus. The people in poor nations who could not get vaccines in time have also attained some level of immunity after recovering from infection. A lot of the old and immune-compromised population is dead.  It can be said that Pandemic has made its way through the world population. Now we have vaccines, newly developed drugs and better research on virus which puts in better position compared to where we were in 2020. It may sound too good to be true, but situation with pandemic may improve in near future even with all the initial bungling and mismanagement of our pandemic response. So there's no hurry to urgently act on inflation, cut back fiscal spending or raise interest rates. The wait and watch approach makes more sense if we really are around the beginning of the end of pandemic and global economy going back to normal (or some new normal but with much less uncertainty & disruption)

 

Of course, experts can be wrong. WHO in early days of pandemic predicted a one long wave of virus. But now we see several waves and several variants of virus. Omicron variant has pretty much broke through our pool of vaccines, but fortunately mortality of breakthrough infections is much lower. There is opinion among several scientists that new variants can emerge that will be more deadly. The present pool of vaccines is not a guarantee that they will continue to hold strong. What will happen in future? We really don't know. 

 

But if Pandemic is not over and more waves are coming, then solution to fight inflation is not really rate hikes or delaying/cutting federal spending programs. Our priority should be preparing an exit strategy from this Pandemic - so we go back to square one to Dean Baker's proposals. And we have to also deal with various complicated politics. You have a raging pandemic and your Supreme court says you can't enforce vaccine mandates - this is highly problematic. You have a virus spreader party who plans to use its base as Kamikazes to spread the virus - that is a big problem. And problems are not limited to America, we have problems around the world regarding mismanagement of pandemic. I can write endlessly about pandemic mismanagement and problems created by the Govt in my own country India. I acknowledge that we live in a complex reality and solutions are not simple. But should we just stop thinking about the solutions? Should we start doing Shaman dances as a solution to pandemic? Of course not. 

 

I believe we need to work in right direction to fight pandemic and that includes dealing with all the complex problems. The situation is not as hopeless as we may think. For example, America unilaterally can make (force) its Pharma companies release patents rights and help various nations in manufacturing drugs and vaccines in various bilateral partnerships. Dean Baker proposed radical steps like using Defense production act to force American Pharma companies to partner with Pharma companies of other nations for technology transfers and expanding global manufacturing capacity. That will flood the world with anti-Covid drugs and vaccines. Even while our politicians are incompetent, with large supply of vaccines, much of the vaccines (as they will be cheap & readily available) will eventually found their way into arms of many people. 

The problem with American experts like inflationists is that they are monomaniac. They don't want to look the problems from a different perspective outside their own way of thinking. And they certainly don't wanna disentangle complex problems we face. Conservative judges by stroke of hammer struck down vaccine mandates. Inflationists don't see this as a problem. Virus control measures are necessary to control pandemic. And pandemic drag creates uncertainty and instability in economy. Doesn't Supreme court decision actually impacts inflation in America to some extent?  Same thing can be said about Republicans and their Kamikazes who are trying to prolong the pandemic just to score political gains over Democrats. Similarly, geopolitical tensions in Europe are contributing to inflation as Oil & Gas price sours. Can this inflation be viewed as a monetary phenomenon?

The inflationists talk about raising interest rates which are a blunt monetary policy tools. And they talk about curtailing fiscal spending. Both arguments tie to theory of monetary basis on inflation. I still find difficult to correlate how raising interest rates will directly make people buy less durable goods or food products. In theory, if rates are high enough, it will lead to rising of rates on home loans, auto loans, personal loans etc debt, and people will spend more in paying their debts and spend less in buying groceries and durable goods. There's also a theory about need to fighting the "inflation expectations" in economy rather than fighting inflation itself.  All these are fantastic theories based on conjectures which i don't fully understand. There's also issue of Quantitative easing (QE) and its impact on inflation. I don't understand much about this but there have been long debates in past about what and what not QE accomplishes in economy. I am inclined towards the view that it fuels asset price inflation but i don't see much relation to consumer goods. Also i don't really understand why Fed is buying corporate bonds like of Apple and Microsoft - which i see as a corporate welfare. These companies already have tons of cash & enjoy patent monopolies granted to them by the Govt.

 

Cutting fiscal spending on other hand will have more direct impact on inflation. Like ending child tax credit program, cutting of which will curtail the spending capacity of lower middle class and poor Americans. But CTC and federal spending itself is not the real cause of inflation as we have an elephant in the room - the pandemic - which has created all kinds of economic problems. And these problems are significant contributors to inflation, not spending in itself. As Krugman put it, should we raise rates just because American ports are clogged with shipping traffic? And not to forget that CTC & other programs have been greatly beneficial to reducing child poverty in America. Similarly BBBA overall has tremendous long term benefits for US economy but now it has been stalled indefinitely (primarily due to whims of two particular senators).

 

And there are things over which we have little control

There's also a question about what really can be done about inflation. Inflation is a complex phenomenon and economists still haven't figured out all its mysteries. But its comforting to feel (to some people) that rates and fiscal brakes should be used to counter inflation, never mind the root causes that cause inflation. I talked about Pandemic and how it has created economic uncertainty and skewed traditional economic activities, employment, consumer demand, spending & commerce etc. Then we also have other things that Govt has little control over. The oil & gas prices are in that category. Geopolitical tensions in Europe (Russia-NATO confrontation) also factors into economics and prices of Oil & Gas. When price of Petrol at pumps spike, the consumers can curse Biden or whoever is in the office. 

 

Some experts have also warned about monopolization and increased cartelization of big businesses in economies. Selected few corporations control means of production and distribution and their profit margins also impact consumer prices. Smaller businesses and enterprises continue to fold and absorbed by larger corporations in pandemic driven economic crisis. While its easier to blame corporations and their rising profits, but i don't how this behavior can be curtailed given all the practical & political compulsions. I also don't see how 'free markets' will solve the problems of chip shortages on their own in near future. How can Govt make big tech companies to build more chip factories in America? That is yet to be seen.

Then there are even more problems like Global warming which also contribute to inflation (see section by Jayati Ghosh). I don't know about impact of climate change in Agriculture sector in foreign nations but in India, its creating problems and Govt is unprepared to deal with these challenges. The change of weather, rain patterns, temperature etc will effect our Agriculture sector. We in India are already seeing the impact with more frequent floods, erratic monsoons and abnormal temperatures. This is upsetting our dynamics of crop cultivation and distribution. India being a developing nation, has weak supply chains, backward Agriculture practices and lack of infrastructure (irrigation system, cold storage facilities, transportation systems etc). So impact on our food production in developing states is more significant than what developed nations face presently.

Conclusion

I know the situation with inflation is complex and so are the challenges with fighting with pandemic, both nationally and globally. So when situation is complex, the easiest thing to do is look for simplistic solutions. In times of crises, our politicians & policy makers looks for advisers who can give them solace of simplistic clarity. What can be more simple that asking Powell & Fed to raise interest rates? Or convincing some politicians to block spending bills to control inflation? Convincing few people in policy circles, politicians at Capitol hill & at the Fed is easier than actually beating the pandemic, tackling economic challenges and disentangling all the complex web of problems. 

 

Raising rates and cutting spending bills is the most convenient political act in war on inflation.