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Blog Post | June 20, 2024

The Truth About Matt Yglesias and Inflation

Economic MediaEconomic Policy
The Truth About Matt Yglesias and Inflation

Hey Matt! 

Thanks for the shoutout in your recent newsletter! That said, we wish you were more honest about the positions you are criticizing. Let’s go piece by piece.

The American economy had a huge demand deficit in 2009 that was only partially filled in subsequent years. As a result of this inadequate demand, inflation and interest rates were persistently low, as was the share of working-age people who had jobs.

True, good work so far!

This vexing lack of employment had a lot of consequences. Non-working young men living with their parents tended to spend a lot of time playing video games. Employers grew quite reluctant to hire anyone who would need on-the-job training. Lots of people accepted low-paid gig work rather than a proper job. Many others with degrees “undermatched,” and took food service positions. Construction activity plummeted, and the people (mostly men) who used to swing hammers had to find jobs (mostly lower-paying) in other fields.

Okay, still nothing too bad. The video games point seems a bit out of the blue, but whatever.

Because the consequences of this demand shortfall were so widespread, lots of little stories that got the direction of causation backwards started to sprout up.

Maybe video games and porn had become so good that people didn’t want to work anymore? Maybe there was a “skills gap,” and workers didn’t have the skills they needed to get jobs? Maybe we’d built too many houses before the crash, and now nobody would ever want to live in a house again? All of these micro-theories had a kind of limited validity. It’s true that for any given worker, if that specific worker had better skills and more intrinsic desire to work, he would be more likely to get a job. But even collectively, these microeconomic points couldn’t explain the phenomenon of overall low unemployment. Among young, inexperienced workers there are always people — half the people exactly, in fact — who are below-average in skills and motivation, and in a healthy economy, these people get jobs, too. In an unhealthy one, they don’t.

Totally agree, the causal claims are weak for all of these theories, though I’ve never heard the “nobody would ever want to live in a house again” one, seems like a bit of an obscure pull. The stronger story is that the jobless recovery was driven by a number of factors. For a start, the trend of secular stagnation continued, accompanied by only modest growth. Relatedly, monetary policy’s influence on employment and economic growth was, to an extent, untethered. This was the first time since its advent that it was totally obvious that the Phillips Curve did not hold for the United States. Finally, there is truth to the skills gap point; the jobs that were destroyed were not the same ones that were being created. There are plenty of better, more comprehensive accounts, but those are several of the largest factors.

Some of the stories that people told were wrong, but plenty of them were right. It can be interesting and valid to explore micro-dynamics that help explain which people get jobs when jobs are scarce and who is particularly likely to suffer. But as a broad explanation of why jobs were scarce, these micro-stories fail. You need to bring macroeconomics into the picture: the government did not do an adequate job of stabilizing aggregate demand, which kept unemployment high.

Okay, I see where you’re going. Yes, the point about insufficient stimulus is true. However, this is about to set up an argument about micro dynamics explaining pricing and why you need the macro context there as well. Let’s see:

More recently, the United States has been at full employment, with a decent amount of inflationary pressure added by high budget deficits and by the expectation that deficits will continue to be high. This has spawned articles exploring the micro-dynamics of how, exactly, companies go about raising prices. A lot of this is interesting. If you’ve ever been involved with a business in any way, you know that people don’t just sit around and say “aggregate demand is up, time to hike prices.” A lot of calculation and effort go into being clever about it. But a lot of the work that’s been done in this field, like this recent package of American Prospect articles on “How Pricing Really Works,” is mistaking a micro-scale exploration of pricing dynamics for a macro-scale explanation of why inflation happened.

A couple issues here:

  1. Did you actually read the TAP pieces in question? They are related to inflation, in that they show how corporations have amassed pricing power, but they are specifically not trying to tell the macro story. What they do, extremely well, is demonstrate that without law enforcers empowered to intervene, corporations have both the means and the inclination to impose higher prices and thus extract rents—which is part of explaining why corporations did raise prices, using higher costs as a smokescreen and exacerbating inflation. (It is funny how focused you are on being “tough on crime” when it comes to urban law enforcement, but how little you emphasize it with respect to America’s notoriously law breaking corporate elites.)
  2. Deficits do not, in and of themselves, necessarily cause inflation. The spending that  they finance can and often does, but you could run a deficit in order to cut corporate tax rates for the biggest firms and that wouldn’t be very inflationary (corporate tax cuts, unlike broad-based ones, do not drive a significant increase in consumption or investment). Remember Consumption Spending +Investment +Government Spending+Net Exports=GDP. 
  3. What empirical evidence we have is mixed and doesn’t show an especially strong correlation between deficits and inflation. For instance, Japan has run broadly similar deficits to the US over the past decade, but has had considerably lower inflation at the same time. Canada, on the other hand, has run considerably smaller deficits, but has experienced inflation almost as sharply as the US.
  4. There certainly are models that do show that deficits, or sometimes deficit expectations, do raise long term interest rates but it is a very contested point that economists have been debating for decades. Simply asserting it as fact with no explanation (and not even a citation) is pretty flippant. At least explain why you think this is a given.
  5. The problem with most models that do agree with you here is that it is extremely difficult to disentangle the effect of running a deficit from fiscal policy in toto and from the overall economic conditions. Here’s one interesting paper that tried to get around that by using CBO projections, but it still doesn’t fully solve the issue. (CBO projections are still modeled using current economic conditions, so some of those are baked into the estimates.)

Skipping ahead some:

A story about how Uber developed surge pricing tactics and other companies learned to copy them is a much more interesting read. And you don’t need to be a hard-core leftist to become entranced by this stuff. Nate Silver wrote a piece last fall about how companies are getting better at price discrimination, which he thinks is driving higher prices. And I’m not saying Silver is wrong; he’s clearly correct. My kid’s go-to McDonald’s order is 10-piece Chicken McNuggets, and if you fire up the McDonald’s app, there is always a special deal available to get you a discount price on those McNuggets. They raised the stated price on the menu and then created this discount to make sure thrifty customers don’t cut back on their purchases. It’s a shrewd business tactic, but also kind of annoying, and if you want to understand the world, then learning about these implementation details is interesting and enlightening.

That being said, it doesn’t explain anything about the rise in the overall price level. In a different macroeconomic situation, companies would implement price discrimination by keeping the headline price level and introducing discounts to attract thrifty customers. The reason new pricing tactics are being implemented in a price-hiking way, is that companies believed, at least until very recently, that most consumers could and would pay the higher price.

The problem with this point is that it assumes that the higher base prices will be mostly offset by discounting to draw “thrifty customers,” which just doesn’t pass the arithmetic sniff test. Take for example, a restaurant selling square hamburgers that introduces dynamic pricing. Your argument assumes that a critical mass of patrons will be able to change their behavior. But a lot of people don’t have much power over when they take lunch, which sticks them with the higher price. People rushing between two jobs also will be less able to access the preferential prices. And because there will probably still be more people getting food at the peak times, the average price will increase. If other restaurants follow suit, that would ripple through and impact the price level. It wouldn’t be a massive shift, but it would probably make a bigger difference than protections for au pairs that you’ve complained about being inflationary.

Now we get to the part that we really need to wrangle with:

In the first round of arguing about this, leftists liked to talk about “greedflation,” which led to a lot of pushback from those of us who argued that greed is not a variable and can’t explain a change in pricing behavior. Now, though, folks like the Revolving Door Project (which theoretically has something to do with monitoring executive branch conflicts of interest, but in practice just antagonizes random center-left figures) are upset that anyone would ever talk about greed. The story is supposed to be “sellers’ inflation:”

You then go on to quote our introduction of the new Hackwatch bio for Catherine Rampell, rather than, I don’t know, any of our work that actually interrogates the inflation discourse. There are a lot of problems with this little paragraph:

  1. Leftists did not like to talk about “greedflation.” Your entire characterization of this is simply untrue. Greedflation originated as a pejorative for centrist pundits to attack the idea of sellers’ inflation. The term was pushed heavily by Catherine Rampell as a means of trivializing real academic work by professional economists. That doesn’t mean there has been no reappropriation of the slur… but given how recent this history is, these types of distortions are in evident bad faith.
  2. No one who was really pushing the idea of sellers’ inflation was ever arguing that greed was a variable. In particular, singling us out as though we did is incredibly dishonest. If you ever bothered to actually read our account of the sellers’ inflation debate, you would know that we have continually maintained that “it doesn’t really have anything to do with variance in how greedy corporations are.”
  3. Read our about page. Our weighing in on economic media discourse is firmly covered by the third and fifth paragraphs there. We monitor the executive branch. We also do other work to oppose corporate influence in politics. If you ever catch us singing odes to Elon Musk or Sam Bankman-Fried or other corporate fat cats… well, then you’ll have us dead to rights. But the fact that we dislike the idea of Larry Summers being an influential pundit almost as much as we have fought against him as a possible Fed Chair or Biden Administration economic advisor is hardly surprising and not at all contradictory.
  4. The real story is that both we and our allies said “Corporations are exploiting inflation to raise their margins, which is making inflation worse.” Then you, Rampell, and others attempted to dismiss the argument with the strawman that corporations suddenly got more greedy. You have been arguing against the very strawman you erected for the past two years. 
  5. This is the thrust of our actual argument: “As anyone who has ever watched a crime show could tell you, when you want to solve a whodunnit, you need to look at motive, means, and opportunity. The greed (which, again, is at the same level it always is) is the motive. Corporations will always seek to charge as high of a price as they can without being dangerously undercut by competitors. Sellers’ inflation doesn’t posit a massive increase in corporate greed, but a unique economic environment that allows firms to act upon the greed they have [always] possessed.” 
  6. It’s fun that, after years of ragging on the theory, you finally read the seminal work that all of this is based on. But it seems you still haven’t read what other folks that you call Weber’s “popularizers” wrote.
  1. Our case is extremely aligned with Weber’s and has been the whole time. She called my piece in The Sling a “Great review of the debate on sellers’ inflation.” 

Next up:

The main work on Sellers’ Inflation comes from Isabella Weber and Evan Wasner, two economists at the heterodox University of Massachusetts economics department.

Their argument, which I accept, is that if you ask the question “where did the money go?” when companies raised prices in the face of surging demand, the answer is “partially higher wages but mostly higher profits.” This strikes me as useful, valuable research. But it’s not research that explains why inflation happened, it’s research that explains why inflation is bad.

The entire point of your piece is that sellers’ inflation doesn’t identify the cause of the initial inflation, but explains why it was so elevated. That has been our argument the entire time! You were the one arguing against it. I wrote that:

“Under the sellers’ inflation model, inflation begins with a series of shocks to the macroeconomy: a global pandemic causes an economic crash. Governments respond with massive fiscal stimulus, but the economy experiences huge supply chain disruptions that are further worsened with the Russian invasion of Ukraine. All of these events caused inflation to increase either by decreasing supply or increasing demand. The stimulus checks increased demand by boosting consumers’ spending power–exactly what it was supposed to do. Both strained supply chains and the sanctions cutting Russia off from global trade restricted supply. Contrary to what some opponents of sellers’ inflation will say, the theory does not deny the stimulus being inflationary (though some individual proponents might). Rather, sellers’ inflation is an explanation for the sustained inflation we saw over the past two years. Those shocks led to a mismatch between demand and supply for consumer goods, but something kept inflation high even after the effects of those shocks should have waned.”

It’s great you finally read Weber and Wasner, maybe you could try making a habit of looking at what the people you criticize say before spending years denigrating their argument. But, unfortunately, you aren’t done.

That’s an important distinction. But branding it as a new phenomenon — “sellers’ inflation” — that is related to “price gouging” and requires some heterodox toolkit to understand has badly confused the entire debate. This sellers’ inflation is just what normal economics textbooks call “demand-pull inflation,” and it’s exactly what my textbook chart illustrates. Demand-pull inflation constrasts with “cost-push inflation,” where a wartime disruption to oil supplies (or whatever else) raises the cost of doing business and forces some price hikes. This is an interesting thing to argue about, because we clearly have had some cost-push inflation related to both Russia’s invasion of Ukraine and to pandemic-related supply disruptions. Most of the time, the Biden administration likes to emphasize these cost-push factors and the fact that the inflationary spike has occurred globally, which is evidence for the importance of cost-push.

You should go back and reread Weber and Wasner. They make it very clear that the idea is not new and dates back to at least the 1950s. I’ve described it as a “specific application of the theory of rent-seeking,” which goes all the way back to David Ricardo in the 18th century. It does not require a new toolkit to make sense of, you just have to think things through. You’re also just wrong. Sure we could call sellers’ inflation a specific kind of demand-pull inflation. But if you’re talking about garden-variety demand-driven price increases, then as the price goes up, companies should start to increase production, which keeps us out of a price spiral. That did not happen, rather companies kept supply restricted in order to keep profits elevated. 

Lindsay Owens, the head of Groundwork, spent the spring of 2022 criticizing the Federal Reserve for raising interest rates and arguing that we should be trying to restrain inflation with price controls rather than by slowing demand growth. This is a dangerous idea in part because the line between politics and substance gets pretty blurry. Something I’ve seen in many polls is that voters would like the government to respond to inflation with lower interest rates, which would make life more affordable. My advice to Joe Biden and other politicians is that, yes, you should be advocating for lower interest rates. But the way to do that is to advocate for deficit reduction (while warning that Donald Trump’s reckless tax cuts will raise debt and interest rates) and supply-side regulatory reforms. If you just say you’re going to muscle the Fed to lower rates, voters will love what they’re hearing until it turns out that it makes inflation higher. And if you say you’re going to force companies to lower prices, voters will love what they are hearing until they’re faced with shortages and rationing.

Okay, criticizing the Federal Reserve is not dangerous. Your side criticized Powell early on, highlighted by Larry Summers yelling that they needed to hike rates much more aggressively. 

Also, the idea that the Fed lowering rates will increase inflation is just an assertion that runs counter to the data available. Inflation is mostly being driven by housing costs, which high interest rates only exacerbate by making building more costly. Summers has even co-authored a paper on the topic.

Finally, you still present a causal link between interest rates and inflation, which is out of line with what we’ve been seeing. The traditional model from Econ 101 you’re using simply hasn’t held in reality. Inflation has fallen even without a corresponding drop in employment, which is the mechanism within that model. 

Parting Thoughts

Matt, we know you don’t like to read things before engaging with them, but you should give it a try. We’re glad you found a block quote you liked from our Hackwatch newsletter, but you ignored all of our longstanding work on inflation discourse, which is much more thorough. You mischaracterized our position, Groundwork’s position, and “leftists’” position. You are arguing against a narrative that does not exist. No one serious has ever been pushing the idea that corporations got more greedy. You can thank your pal Catherine Rampell for driving that misconception. 

You like to call us bad faith, but I read your column every single day and, if you read the pieces where I’ve criticized you, they always focus on the argument you make and I always include a caveat that you’re smart and insightful on a number of topics. You like to just call our Executive Director a liar (without specifying “lies”) and say we’re engaged in character assassination (while simultaneously hurling ad hominems at us), without engaging with the substance of what we say. You were wrong about SBF, you were wrong about Powell, and you’re entirely off-base here. 

Unfortunately, you’ve grated some nerves over here. I’ve been asked to pass along a message from Jeff. He’d love to debate you in any forum you like. Fair warning, Jeff actually keeps up with his reading.

Image Credit: “Inflation” by serbosca is licensed under CC BY 2.0.

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