Near the end of Natural Born Recovery Killers Paul Krugman writes
Let me just add that White and others seem in addition to be victims of the fallacy of immaculate inflation. As Karl Smith said in the linked piece,
Any attempt to tell a story about inflationary risks that does not explain where excess demand for goods comes in is, necessarily, monetary mumbo-jumbo.
Inflation must proceed through market processes. Demand for some product must rise or supply must fall.
Any attempt to tell a story about inflationary risks that does not explain where excess demand for goods comes in is, necessarily, monetary mumbo-jumbo.
Karl Smith asserts and Paul Krugman repeats the assertion that inflation "must" "necessarily" be demand-pull inflation.
Not sure about that. Leave aside that PK reduces Karl Smith's demand must rise or supply must fall to the one-dimensional "excess demand for goods". Admit that a fall in supply (relative to demand) *IS* a version of the excess demand for goods.
Is the excess demand for goods the only cause of inflation? I think not.
Inflation was once thought to be driven by "cost-push" forces:
Under Fed chairman Arthur Burns in the 1970s, inflation was seen as cost-push, arising from forces beyond the Fed's control. But Volcker challenged that, seeing inflation as demand-pull. According to Volcker, "the inflation process is ultimately related to excessive growth in money and credit”.
Paul Volcker made the decision that inflation was always the result of excess demand for goods. See, that's where I have a problem. This is not how the economy works. We cannot just make decisions about how the economy works. We have to understand it.
Oh sure, it simplifies everything to say 'inflation is always and everywhere a monetary phenomenon'. Unless it's not true.
Meanwhile, these days, the notion of cost-push inflation is dismissed without a thought. See, for example, the comments following this post.
So, what could possibly cause inflation, other than excessive growth in money and credit? How about expectations?
Economists are big on expectations, as a way to explain everything. Everything other than inflation, that is.
Not what I think. I think expectations as an explanation is a joke. I think Arthur Burns was onto something with cost-push.
Suppose there was an unidentified factor X that was increasing costs for both the supply side and the demand side. On the demand side, X would push living standards down. On the supply side, X would raise costs and reduce profit. The result would be very much like the world in which we actually live.
X is the cost of finance.
6 comments:
The quote you lifted is not at all central to the point of PK's post. And context matters. In the current environment - and that is his focus, there is no cost push inflation and precious little demand pull inflation.
That is what he was getting at. He is arguing against the current crop of inflationistas who think that there will suddenly be some magical demand surge.
At the ZIRB, that doesn't happen, and classical economics becomes useless.
Cheers!
JzB
And your comment is not even peripherally related to the point of my post.
You are right -- the quote I lifted is NOT central to Krugman's post. It seemed to me an afterthought of sorts. Doesn't matter.
"In the current environment - and that is his focus, there is no cost push inflation and precious little demand pull inflation."
So then, you are saying I am not allowed to talk about the types of inflation and what causes them, until inflation becomes a problem?
Uh - no.
I guess I missed your point.
So I just went back and reread the post. And your point is, I gather, that the cost push is in essence the dead weight of finance charges.
I wouldn't disagree, but in the context of the post, it comes out of nowhere.
I hope you can cut me a little slack and understand that my comment having nothing to do with your point might have resulted in some vague way from your conclusion having nothing to do with the quote placed so prominently at the head of your post.
Cheers!
JzB
Krugman: "Any attempt to tell a story about inflationary risks that does not explain where excess demand for goods comes in is ... mumbo-jumbo."
In other words, "inflationary risks" arise from "excess demand for goods".
In other other words, excess demand is (always and everywhere) the cause of inflation.
In other other other words, inflation is demand-pull.
To which I say, in not so many words: bullshit.
My FIRST sentence after the Krugman excerpt is: "Karl Smith asserts and Paul Krugman repeats the assertion that inflation "must" "necessarily" be demand-pull inflation."
To summarize the rest of the post:
"Is the excess demand for goods the only cause of inflation? I think not."
"I think Arthur Burns was onto something with cost-push."
And then I show a cost that could be the driving force behind cost-push inflation: "X is the cost of finance."
Apparently, you missed it.
The cost of finance can be inflationary even in a mostly deflationary environment where asset prices are falling and businesses are not hiring. This can come about when a business doesnt change the term of its debt and is experiencing low sales. Usually low sales will lead to a drop in prices as a way to sway customers to you but when you need a certain level of revenues (as opposed to real output) because your borrowing costs are fixed you will raise prices in the face of diminishing real output. Fewer units sold x higher price per unit allows you to meet your debt obligations
Finance is becoming a cancer
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