Sslight increases in the inflation rate in the United States and Europe raised concerns in financial markets. Did Joe Biden’s administration risk overheating the economy with its $ 1.9bn (£ 1.3bn) bailout and further spending plans to invest in infrastructure, creating jobs and strengthening American families?
Such concerns are premature, given the deep uncertainty we still face. We have never before experienced a pandemic-induced slowdown with a disproportionately deep service sector recession, unprecedented increases in inequality and soaring savings rates. No one even knows if or when Covid-19 will be contained in advanced economies, let alone the world. While weighing the risks, we must also anticipate all eventualities. In my opinion, the Biden administration correctly determined that the risks of doing too little far outweigh the risks of doing too much.
Additionally, much of the current inflationary pressure comes from short-term supply-side bottlenecks, which are inevitable when restarting an economy that has been temporarily shut down. We have no shortage of the global capacity to build cars or semiconductors; But when all new cars use semiconductors and demand for cars is mired in uncertainty (as was the case during the pandemic), semiconductor production will be reduced. More generally, coordinating all inputs of production in a complex integrated global economy is an extremely difficult task that we usually take for granted because things work so well and because most adjustments are “on the fringes”.
Now that the normal process has been interrupted, there will be hiccups, and these will result in price increases for one product or the other. But there is no reason to believe that these movements will fuel inflation expectations and thus generate an inflationary dynamic, especially given the global overcapacity in the world. It should be remembered how recently some of those who warn against inflation due to excessive demand spoke of “secular stagnation” born of insufficient aggregate demand (even at zero interest rates).
In a country of long-standing and deep inequalities that have been exposed and exacerbated by the pandemic, a tight job market is exactly what the doctor ordered. When the demand for labor is high, the lowest wages rise and marginalized groups are brought into the labor market. Of course, the exact strain of the current U.S. labor market is the subject of some debate, given reports of labor shortages despite employment remaining significantly below its level of employment. ‘before the crisis.
The Conservatives attribute the situation to overly generous unemployment insurance benefits. But econometric studies comparing the supply of labor in U.S. states suggest that these types of labor disincentives are limited. And in any case, expanded unemployment benefits will end in the fall, even if the global economic effects of the virus will persist.
Rather than panicking about inflation, we should worry about what will happen to aggregate demand when the funds provided by the budget relief plans run out. Many of those at the lower end of the income and wealth ladder have racked up significant debts – including, in some cases, over a year of rent arrears, due to temporary protections against rent. expulsion.
The reduction in spending by indebted households is unlikely to be offset by those at the top, most of whom accumulated savings during the pandemic. Given that spending on consumer durables has remained robust over the past 16 months, it seems likely that the rich will treat their extra savings as they would any other bargain: as something to invest or slowly spend over the course of the year. many years. Without new public spending, the economy could again suffer from insufficient aggregate demand.
Moreover, even if inflationary pressures were to become a real concern, we have tools available to dampen demand (and using them would actually strengthen the long-term outlook for the economy). To begin with, there is the interest rate policy of the US Federal Reserve. The last decade or more of near zero interest rates has not been economically sound. The scarcity value of capital is not zero. Low interest rates distort the capital markets by triggering a search for yield which leads to excessively low risk premiums. Going back to more normal interest rates would be a good thing (although the rich, who have been the main beneficiaries of this era of very low interest rates, may not agree).
Certainly, some commentators are looking at the Fed’s risk balance assessment and worrying that it will not act when it needs to. But I think the Fed’s statements have been correct, and I hope its position will change if and when the evidence does. The instinct to fight inflation is ingrained in the DNA of central bankers. If they don’t see inflation as the key issue facing the economy right now, neither should you.
The second tool is raising taxes. Ensuring the long-term health of the economy requires much greater public investment, which will have to be paid for. The US tax-to-GDP ratio is far too low, especially given the huge inequalities in the US. There is an urgent need for more progressive taxation, let alone more environmental taxes to deal with the climate crisis. That said, it is perfectly understandable that there is reluctance to introduce new taxes while the economy remains in a precarious state.
We should recognize the current “inflation debate” for what it is: a red herring raised by those who would thwart the efforts of the Biden administration to deal with some of America’s most fundamental problems. . Success will require more public spending. The United States finally has the chance to have an economic leadership that will not succumb to fear.
Joseph E Stiglitz is a Nobel Laureate in Economics, University Professor at Columbia University, and Chief Economist at the Roosevelt Institute.
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