Inflation is a Global Problem

This New York Times newsletter focusing on global inflation is worth reading. One can debate whether supply chains, excessive government spending, or monetary policy is the chief culprit for the current inflation, though they all play a role. Here is, in part, what the newsletter written by German Lopez says:

“The big factors that drove up inflation in the U.S. also affected the rest of the world: the disruption of supply chains by both the pandemic and Russia’s invasion of Ukraine, and soaring consumer demand for goods.

“But increasing inflation has played out differently in different countries, said Jason Furman, an economist at Harvard University. The U.S.’s earlier, bigger price spike had different causes than Europe’s more recent increase. (Countries differ in how they calculate price changes, but economists still find comparisons of the available data useful.)

“In the U.S., demand has played a bigger role in inflation than it has elsewhere. That is likely a result of not just the American Rescue Plan but also economic relief measures enacted by Donald Trump. Altogether, the U.S. spent more to prevent economic catastrophe during the pandemic than most of the world did. That led to a stronger recovery, but also to greater inflation.

“In Europe, supply has played a bigger role. The five-month-old war in Ukraine was a more direct shock to Europe than it was to the rest of the world, because it pushed the continent to try to end its reliance on Russian oil and gas. That prompted Europe’s recent jump in inflation.”

Trump Plans to Fire Civil Servants Involved in Policy If Reelected

This article in Government Executive caught my attention: “If Trump Is Reelected, His Aides Are Planning to Purge the Civil Service: Officials are looking to revive a controversial order issued in Trump's waning days and have already identified 50,000 federal positions to target.”

Trump wants to revive “Schedule F” and transfer civil servants into this new schedule which does not have the traditional civil servant protections. This was originally reported by Axios.

From the Government Executive article:

“The plan, as detailed to Axios and confirmed by Government Executive, would bring back Schedule F, a workforce initiative Trump pushed in the 11th hour of his term to politicize the federal bureaucracy. The former officials and current confidantes are, through a network of Trump-loyal think tanks and public policy organizations, creating lists of names to supplant existing civil servants. They have identified 50,000 current employees that could be dismissed under the new authority they seek to create, Axios reported and Government Executive confirmed, though they hope to only actually fire a fraction of that total and hope the resulting ‘chilling effect’ will cause the rest to fall in line.” 

From the Axios article:

“They [Trump allies] say Schedule F will finally end the “farce” of a nonpartisan civil service that they say has been filled with activist liberals who have been undermining GOP presidents for decades.

“Unions and Democrats would be expected to immediately fight a Schedule F order. But Trump’s advisers like their chances in a judicial system now dominated at its highest levels by conservatives.

“Rep. Gerry Connolly (D-Va.), who chairs the subcommittee that oversees the federal civil service, is among a small group of lawmakers who never stopped worrying about Schedule F, even after Biden rescinded the order. Connolly has been so alarmed that he attached an amendment to this year’s defense bill to prevent a future president from resurrecting Schedule F. The House passed Connolly’s amendment but Republicans hope to block it in the Senate.”

Father Coughlin ‒ Right Wing Predecessor of Tucker Carlson

Father Charles E. Coughlin was a right-wing radio personality in the 1920s and 30s. It is estimated that his radio audience reached 30 million at its peak. That is enormous.

Two articles on Father Coughlin: “When Radio Stations Stopped a Public Figure From Spreading Dangerous Lies” and “How a Canadian-born Irishman paved the path of hatred that leads to Tucker Carlson.”

From the Smithsonian Magazine article:

“In speeches filled with hatred and falsehoods, a public figure attacks his enemies and calls for marches on Washington. Then, after one particularly virulent address, private media companies close down his channels of communication, prompting consternation from his supporters and calls for a code of conduct to filter out violent rhetoric.

“Sound familiar? Well, this was 1938, and the individual in question was Father Charles E. Coughlin, a Nazi-sympathizing Catholic priest with unfettered access to America’s vast radio audiences. The firms silencing him were the broadcasters of the day.

“As a media historian, I find more than a little similarity between the stand those stations took back then and the way Twitter, YouTube and Facebook have silenced false claims of election fraud and incitements to violence in the aftermath of the siege on the U.S. Capitol – noticeably by silencing the claims of Donald Trump and his supporters.”

From the Yahoo article:

“It was a descendant of the Irish who became one of mass media's most famous racists and a fellow traveler of the Nazis. Father Charles E. Coughlin was a Catholic priest and the founder of the Shrine of the Little Flower in Detroit. Born in Canada, Coughlin preached a particularly poisonous brand of hatred and antisemitism in the 1930s. Through his radio show, he reached 30 million Americans a week, or one-quarter of the U.S. population at the time. For comparison, today's best-known racial dog whistler, Tucker Carlson, reaches about 3 million out of 340 million.”

Manchin's Inflation Concerns Make No Sense

John Cassidy of the New Yorker writes that Senator Manchin's opposition to climate change provisions of the Democrat's proposal "made no sense," since they would have reduced the budget deficit. It sure looks like Manchin is just using excuses to block this. From the article: 

“…Manchin’s reference to inflation made no sense. In devoting only half of the money that would have been raised from tax increases for new spending, and keeping the rest for deficit reduction, the proposal that Democrats were working on would have had a deflationary impact in budget terms. The obvious answer is that Manchin, yet again, is protecting the fossil-fuel industry, which has donated heavily to his campaigns and still plays a big role in West Virginia’s economy. But there are unanswered questions here, as well. 

“Thanks to Manchin’s earlier lobbying, the parts of Build Back Better that would have affected the coal industry most directly had already been eliminated. If he’d followed through on his support for a narrower green-energy package, Manchin could probably have used his leverage to extract concessions on expanding oil and gas drilling, something he has been calling for recently. ‘He could have asked for anything!’ Jesse Jenkins, a Princeton energy expert who has modelled the climate impact of the Build Back Better proposals, commented on Twitter. ‘Instead he has nothing now, and he’ll be a nobody after November. His constituents have nothing. We all have nothing. So utterly SENSELESS!’ Yes. Senseless for Biden, the Democrats, the environment, and even for Manchin, who, yet again, has forfeited the opportunity to make a more positive contribution. What a woeful legacy he will leave behind him.”

Movie Review: “Never Stop Dreaming: The Life and Legacy of Shimon Peres”

 Netflix put the film “Never Stop Dreaming: The Life and Legacy of Shimon Peres” on its streaming service on July 13, 2022. The movie is a documentary about the Israeli politician and prime minister, who died in 2014.

I had a mixed reaction to the film. It is a good but selective review of the history of Israel through the experiences and activities of Peres. The film makes no attempt to take a balanced view of its subject; no matter the historical episode, Peres is always right. Alternative perspectives are not offered, and, Israel being Israel, you know they exist. 

One episode near the beginning of the film focuses on Peres’ efforts to get French help in getting arms in the 1950s and on the subsequent Suez Crisis. The narrator (an off-screen George Clooney) explains that Peres reasoned that Egyptian President Gamal Abdel Nasser, who was anti-Israel, was also supporting the Algerians fighting for their independence from France, and that this would incline the French to be helpful. Peres was not wrong, but the film makes no mention of the atrocities the French were committing in Algeria nor does it mention the political havoc the war caused in metropolitan France (if you think Vietnam was bad domestically, you should read about France during this period). The war ultimately led to Charles de Gaulle returning to power after years in the political wilderness as the last premier of the Fourth Republic in order to liquidate it and replace it with the Fifth.  

As for the 1956 Suez Crisis, this started as a conspiracy between Israel, France, and Britain. The British and the French wanted to reverse Egypt’s nationalization of the Suez Canal and Israel was motivated to undo the Egyptian blockage of the Straits of Tiran, the passageway from the Red Sea to the Gulf of Aqaba. (Israel and Jordan have the neighboring port cities of Eilat and Aqaba at the top of the Gulf of Aqaba, which Israel calls the Gulf of Eilat). Israel was also motivated by the Egyptian-supported commando raids into Israel. 

The plan was that Israel would send troops into the Sinai and that the French and the British would then send troops under the pretext of keeping the peace and would, in the operation, seize the Suez Canal. The major error of the plan was that none of the parties had bothered to inform or find out what U.S. President Eisenhower thought of this. It turned out that he was opposed, and the U.S. successfully pressured the parties to pull back. As it turns out, this was a disaster for Britain and France. The documentary, though, only mentions the Israeli success in getting the Straits of Tiran reopened and deterring terrorist acts until 1967. It does not mention the British and French humiliation or how this episode affected Israeli relations with the Eisenhower Administration. 

The lack of context given on these events near the beginning of the film makes one suspicious of what the documentary presents later. For those episodes I know something about, the facts are accurate, but sometime important aspects are omitted. However, one learns a lot about Peres from this documentary. Particularly interesting is the failure of the 1987 London Agreement between Peres, then foreign minister, and King Hussein of Jordan. This was an enlightened agreement to the Palestinian issue, and the documentary argues convincingly that if it had been put in place, the subsequent history in the Middle East would have been substantially different. It was undercut by Yitzhak Shamir, then the prime minister. Given the importance of this initiative, it would have been useful for the documentary to have included the reasons for Shamir’s opposition. 

Inflation, Budget Deficits, Monetary Policy, Climate Change, and Senator Manchin

The big news regarding the Administration’s budget proposal has been Senator Manchin’s rejection of much of the Democrat’s compromise budget proposal, including measures to address climate change. Senator Manchin claims he has been right about inflation and has indicated he will not negotiate any more about increased government spending until inflation comes down.

Journalists reporting on this have generally written that Manchin has been correct about inflation. However, the story is more complicated. In fact, reading what prominent economists say indicates considerable confusion. It could be that Manchin is using inflation as an excuse to oppose climate change measures which affect fossil fuels.

One of the arguments currently being used is that government spending generates inflation by putting more money into the economy. But let’s look at what happens. When the Treasury needs to spend more money than it has on hand, it borrows the funds it needs by selling Treasury securities. In other words, if the federal government is spending more than it is receiving, it takes money out of the economy by borrowing and puts it back in by spending. In the first instance, this is more or less a wash. 

That, though, is not the end of the story. There are models addressing how deficit spending affects the economy, with the impact dependent on what else is happening in the economy. Usually the assumption is that deficit spending increases aggregate demand, because it involves direct spending or results in transferring money to those with a high propensity to consume. If the economy is running at near capacity, the increased demand is postulated to increase inflationary pressures. However, some who were more relaxed about the spending measures during the pandemic thught the inflation risks were minimal because some of the recipients would save some of the money rather than spend it. 

Left out of much of the discussion of Manchin's and other's inflation warnings is monetary policy.  The Federal Reserve, if it decides it is appropriate, can effectively monetize the federal budget deficit by buying Treasury securities. The Fed is prohibited by buying directly from the Treasury, but if it buys roughly the same amount of securities in the market that the Treasury has issued, it has effectively monetized the budget deficit. In other words, it has replaced deficit financing with securities by creating bank reserves. (When the Fed buys securities in the open market, it credits the accounts banks have at the Federal Reserve Banks with the purchase amount. The amounts it credits the private banks are liabilities on its balance sheet and the purchased securities are assets.) The Fed was effectively monetizing much, if not all, of the budget deficit during the pandemic, and this likely has contributed to inflation. (This story can be expanded with more detail, but the details do not matter for the main point of this blog post. Suffice it to say that the effect of monetary policy has been difficult to analyze with short-term interest rates near zero and bank holdings of large excess reserves. These both are unprecdented in our modern history.)

There is a growing consensus that the Fed kept interest rates too low for too long. There may be a price to be paid for that. The Fed has now reversed course, and there is the likelihood that it will not achieve a “soft landing.” If a recession does happen, an increase in government spending would be helpful in pulling us out of it. Mancin appears to ignore this point.

In addition, the current inflation is a global problem. It is hard to make the argument that this is due to excessive U.S. government spending. There are some global factors at work -- among them, war in Ukraine, reduced global grain supplies, oil price increases, reduced production in China due to severe Covid lockdowns, and supply chain issues. What portion of U.S. inflation is due to U.S. government spending and overly loose monetary policy and what portion is due to global issues and supply shortages, rather than excessive demand, is unclear. Except for some economists who project certainty in their pronouncements, there is general uncertainty in the profession about exactly what is going on and what is likely to happen.  

While Senator Manchin may believe what he is saying about inflation, focusing the blame for inflation solely on government spending is misguided. Monetary policy needs to be factored in. No one can predict with certainty how long the current inflation will last, but it should not be used as an excuse to avoid enacting urgently, needed measures to address the growing problem of climate change. 

(This post was revised on July 22 in an attempt to make it clearer.)