1 A new economic era: is inflation coming back for good?

 Chris Giles in The FT 

The December meeting of the Federal Reserve’s most important economic committee was routine. Policymakers agreed that the economy could cope with rising levels of spending “without any strong general upward pressure on prices”. 

Although prices of a few raw materials were rising sharply, “finished goods have not been subject to pervasive upward cost pressures”. 

Generalised inflation, the committee concluded, was not a serious concern. 

This meeting of the Federal Open Market Committee was held on December 15 1964, just two weeks before the start of a 17-year period the Fed now dubs The Great Inflation. Inflation: 

Turning points in price trends tend to occur just at the moment when the authorities and expert opinion dismiss the risks. The current consensus is that price rises in commodities and goods markets have clear pandemic-related explanations and that the risks of a resurgence in global inflation remains remote. 

Three decades after the authorities in advanced economies managed to suppress the beast, they remain confident they are in control. The mantra of the moment is summed up by Andrew Bailey, Bank of England governor, who likes to say he is watching inflation “extremely carefully” but not worrying. 

This view is still the mainstream but it is losing supporters. One notable recent defector is Roger Bootle, author of the book The Death of Inflation, who spotted the coming decline in price rises in the mid 1990s. He is now worried. “Financial markets are going to have to get used to the return of troublesome issues that had, until recently, seemed long dead,” Bootle wrote in May. 

Central bankers have not had to deal with an inflation problem during their careers. Having averaged around 10 per cent a year in the 1970s and 1980s, global inflation rates fell to an average close to 5 per cent in the 1990s in the rich world countries of the OECD, 3 per cent in the 2000s and 2 per cent in the 2010s. The question today is whether their view is complacent. Is the world entering another inflationary era? 

While many households think the definition of price stability would be an absence of inflation, economists and policymakers favour a gentle annual increase in prices of around 2 per cent. This reduces the risk that an economic crisis could spark a deflationary spiral with spending, prices and wages all falling, raising the real burden of debts and further hitting spending. Holger Schmieding, chief economist of Berenberg Bank, explains that a little inflation also greases the wheels of the economy, allowing declining sectors to fall behind gracefully. 

“Higher inflation eases economic adjustments as it creates more scope for changes in relative wages without a need for an outright fall in wages in sectors under pressure,” he says. 

In most advanced economies — the US, the eurozone and Japan — central banks have fallen short of meeting their targets of inflation of around 2 per cent despite having slashed interest rates to zero and having created trillions of dollars, euros and yen, which has been pumped it into their economies by purchasing government debt. A modest rise in inflation therefore would be welcomed by central banks, which have generally been delegated the task of achieving price stability. 

And until this year, the main economic concern regarding prices was the risk that countries were turning Japanese and might soon emulate the nation’s 30-year struggle with mild deflation. Such was the difficulty of keeping inflation high enough that some economists even began to question the doctrine of Ben Bernanke, former Fed chair, who argued in 2002 that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation”. 

But this view of the world has turned on its head in 2021. A new whatever-it-takes borrowing and spending programme by the Biden administration, enforced savings during the coronavirus crisis giving households additional firepower, bottlenecks in the supply of goods and a reversal of longstanding downward pressures on global wages and prices have rekindled fears of excessive inflation. 

No one is talking about hyperinflation of the sort seen in Weimar Germany in 1923 or Latin America in the 1980s or even the 10 per cent global rate of the 1970s, but a creeping rise to persistent levels of generalised price increases not seen in a generation. When the April rate of US inflation jumped to 4.2 per cent, financial markets swooned. 

The new concern about a return to inflation is not just the result of immediate economic forces but also reflects longer-term, underlying changes in the structure of the global economy. The aggressive economic stimulus is being adopted at the very moment when the global economy is feeling the impact of ageing populations and the maturing of China’s 40-year transition. 

Moreover, history also tells us that neither politicians, economists nor policymakers can guarantee the world will maintain low and stable inflation. As the Fed’s experience from the 1960s demonstrates, turning points in inflation arrive with little warning. Unlike in the US, where there was no fear of inflation after the second world war, concern about inflation was “always rumbling on” following devaluations of sterling and higher import prices in the UK during the full employment years of the 1950s and 1960s, according to Nick Crafts, professor of economic history at Sussex university. 

But it only really took off in the 1970s after the first Opec oil shock and a switch in government policy from austerity to “a massively excessive stimulus, pushing the economy beyond any reasonable estimate of the sustainable level of unemployment”, Crafts adds. 

Research from Luca Benati, professor at Bern university, suggests that the world’s faith in central bankers being able to tame any similar episodes is probably overblown. The UK’s inflationary pressure in the 1970s was so strong, he found, that when he ran history again in multiple simulations assuming an independent central bank is in charge of controlling prices, inflationary forces would have been more powerful than any likely action by a Bank of England with an independent Monetary Policy Committee. In the 1970s, it would have had only a “limited impact” on quelling price rises which reached an annual rate of 26.9 per cent in 1975. 

According to Karen Ward, chief European market strategist at JPMorgan Asset Management, this means the Bernanke doctrine still stands and should not be forgotten. “We’ve always assumed that the structural supply side enhancements such as technology and globalisation are so great that we could never overwhelm them with demand, but it still must be the case that you can overwhelm supply with demand and ultimately generate inflation,” she says. 

It is exactly this fear which is raising inflation rate expectations in the US and Europe at the moment. Alongside a recovery of energy prices to pre-Covid levels, there has been a shortage of microchips, wood products, many metals and even cheese. These have been the proximate causes of higher inflation, but financial markets worry that the ultimate cause has been the pandemic-related fiscal and monetary stimulus which has led to a much faster economic recovery in advanced economies than was thought possible at the end of 2020. 

With economic policy pressing harder on the accelerator than at any time in recent history, spending could exceed the capacity of economies to provide goods and services, especially if the coronavirus crisis and government support have left people less willing to work, creating labour shortages and significant pressure on companies to raise wages. 

Such is the potential imbalance between rampant demand and more constrained supply, especially in the US, some supporters of centre-left policy ideas say that warning lights are flashing. Larry Summers, Treasury secretary in the Clinton administration, thinks policy has become far too lax, repeatedly criticising the “dangerous complacency” over inflation of today’s policymakers in recent weeks. 

While the White House has hit back, saying “a strong economy depends on a solid foundation of public investment, and that investments in workers, families and communities can pay off for decades to come”, even Janet Yellen, current Treasury secretary, has acknowledged the possible need for interest rates to rise “to make sure that our economy doesn’t overheat”. 

The policy shift has come at a point when economists generally accept that some of the big global forces holding prices down are much weaker than they were. In the 1990s and 2000s, globalisation led to a huge transfer of the production of goods from high wage economies to China and eastern Europe, accelerating a decline in the power of workers in advanced economies to force their employers to pay them more, keeping prices low. 

But these forces are at a turning point, according to Charles Goodhart, former chief economist of the Bank of England, and an author of the book The Great Demographic Reversal. The long boom in the size of its workforce has ended and its population is on the verge of falling for the first time in decades. Goodhart says that fewer new workers becoming integrated into the global labour force at a time of shrinking workforces in advanced economies as populations age will raise the pressures on companies to push up wages, increasing underlying inflationary pressures. 

The change in demographic pressures have already been around for a decade and are intensifying, Goodhart says. He had been wary of putting a date on the coming inflation, saying that the world is likely so see rising inflationary pressure within five years and “we are fairly sure it would have happened by 2030”. 

That was before Covid struck. Now, he says the underlying pressures, alongside more stimulative policies and Covid-related restrictions in supply, have brought forward the moment. “We tend to think that because of supply constraints in particular, it’s going to be more inflationary in 2021 than central bankers originally thought and it will last longer in 2022 and 2023 because there will be a confluence of the build-up of large monetary balances . . . combined with large continued fiscal expansion.” 

Turning to specific examples of prices he expected to see rise, Goodhart notes how the added demand for holidays in the UK would push up the prices of holiday rentals, hotels and even ice cream this summer. “You’d have to be a saint not to raise your prices,” he says. 

Demographic pressures are not something that can be reversed quickly, nor he argues can the forces of globalisation, which have gone into retreat having become politically unpopular in many advanced economies. Again, this is most acute in the US where economists such as Adam Posen, president of the Peterson Institute for International Economics, urges Americans to “embrace economic change rather than nostalgia” in domestic production, especially in manufacturing, as a means to improving living standards and promoting non-inflationary growth. 

So far, however, although financial market expectations of inflation have risen sharply in 2021, mainstream policymakers are remaining calm. 

There is increasing chatter in the Fed that at some point the current members of the interest-rate setting committee need to think about scaling back the pace of money creation and purchases of government bonds. But the view is that inflation is recovering to more normal levels and the US central bank has pledged to keep policy ultra accommodative until it achieves a more inclusive recovery. 

This is the right approach, says Laurence Boone, chief economist of the OECD in Paris, a view which chimes with similar attitudes in central banks around the world. “It’s too early to ring the alarm bells about inflation,” she says. “That doesn’t mean one doesn’t have to watch what’s happening and we’re seeing frictions with the reopening of demand and supply after the crisis . . . but the right policy is to ease tensions on the supply side more than central bank action [to quell inflationary pressures].” 

In most economies, there remains significant slack in the labour market, she adds, and the big demographic pressures could be eased significantly with later retirement, while other parts of Asia and Africa would be delighted to integrate into the global economy as China did. 

Boone’s view still represents the consensus opinion among economists and there is considerable confidence in central banks that any rise in inflation this year will be temporary and easily tamed without having to tighten policy significantly. 

But, for the first time in many decades, there is the possibility that a significant turning point has arrived, that price rises will be more than a flash in the pan and something more difficult to control.

Coronavirus is our chance to completely rethink what the economy is for

The pandemic has revealed the danger of prizing ‘efficiency’ above all else. The recent slowdown in our lives points to another way of doing things. Malcolm Bull in The Guardian

 

Illustration: Matt Kenyon/The Guardian


There’s been a lot of argument about how best to handle the coronavirus pandemic, but if there are two things on which most people currently agree, it’s that governments should have been better prepared, and that everyone should get back to work as soon as it is safe to do so. After all, it seems more or less self-evident that you need to be ready for unexpected contingencies – and that it is better for the economy to function at full capacity. More PPE would have saved doctors’ and nurses’ lives; more work means less unemployment and more growth.

But there is a catch to this, and it has been at the heart of political debate since Machiavelli. It is impossible to achieve both goals at once. Contingency planning requires unused capacity, whereas exploiting every opportunity to the full means losing the flexibility needed to respond to sudden changes of fortune.

It wasn’t until the mid-20th century that economists started to realise that it might be better to leave a bit of slack in the economy to help cope with exogenous shocks. In the years after the Great Depression, governments saw the problem as “idle men, idle land, idle machines and idle money”. But there were also economists, such as the Englishman William Hutt, who went against the Keynesian consensus and pointed out that there were some things – fire extinguishers, for example – that were valuable precisely because they were never used. Having large stocks of PPE, underemployed nurses, or a lot of spare capacity in ICUs, falls into the same category. Idle resources are what you need in a crisis, so some degree of inefficiency isn’t necessarily a bad idea. 

Trying to manage a pandemic in a world of just-in-time production lines and precarious labour brings these issues into sharper focus. On the one hand, there weren’t enough idle resources for most countries to cope adequately with the spread of the virus. On the other, the enforced idleness of the lockdown leads to calls to get the economy moving again.

For Donald Trump, the prospect of a prolonged shutdown is particularly alarming because it threatens to undermine the competitiveness of the US economy relative to other nations (notably China) that have dealt with the crisis more efficiently. That’s an argument Machiavelli would have understood very well. One of his constant refrains was that idleness could lead to what he called corruption (the diversion of resources from the public good, which Trump equates with the Dow Jones Industrial Average) – and that corruption leads inevitably to defeat at the hands of your rivals.

For Machiavelli, the contagion of corruption was spread above all by Christianity, a “religion of idleness”. And it is true that the Judeo-Christian tradition, with its sabbaths, jubilees, feast days, and religious specialists devoted to a life of prayer and contemplation rather than martial virtue, built a lot of slack into the system. Machiavelli thought it should be squeezed out through laws that would prevent surplus becoming the pretext for idleness, rather in the way that later economists looked to the pressure mechanism of competition to do the same.

But there’s a contradiction in Machiavelli’s thinking here, because he also acknowledged that one of the things every polity needed was periodic renewal and reform, and that corruption was what preceded it. So you’re in a double bind: either you can squeeze out the slack and never experience renewal, or you can court corruption and create an opportunity to start over and make things better.

With hindsight it looks like that’s one of the problems the religions of idleness tried to address, by incorporating idleness into the calendar. In ancient Hebrew tradition, there were weekly sabbaths, and every seventh year was meant to be a year of release in which the land was left to lie fallow, debts were forgiven and slaves emancipated. The idea was picked up by the Chartist William Benbow, who in 1832 used it as the model for what he called a Grand National Holiday, in effect a month-long general strike that would allow a National Congress to reform society “to obtain for all at the least expense to all, the largest sum of happiness for all”.

Benbow’s plan came to nothing, but it provides an alternative model for how the lockdown might be viewed. The Italian philosopher Giorgio Agamben has complained that the lockdown is a state of exception with an increase in executive powers and a partial abrogation of the rule of law; but the flipside is that it is the closest thing to a Grand National Holiday that most of us have ever experienced. Despite all the suffering the pandemic has caused, for many it has also meant no work, debt relief, empty roads and a rare opportunity to live on free money from the government.

Generally speaking, exogenous threats like wars or natural disasters act as pressure mechanisms forcing us to redouble our efforts to combat them together. The benefit of contagion is that the only way to combat it is to do less rather than more. That has some demonstrable advantages. There has been a dramatic global fall in carbon emissions. The only comparable reduction in greenhouse gases during the past 30 years came as the result of the decline of industrial production in eastern Europe after the fall of communism. That was managed exceptionally badly because neoliberal economists thought that what post-communist states needed was the pressure of free market competition. Shock therapy would galvanise the economy.

The pandemic has been a shock alright, but its effect has been the opposite of galvanising. People everywhere had to stop whatever they were doing or planning to do in the future. That provides an altogether different model of political change. The philosopher Walter Benjamin once noted that while Karl Marx claimed that revolutions were the locomotives of world history, things might actually turn out to be rather different: “Perhaps revolutions are the human race … travelling in this train, reaching for the emergency brake.”

Everyone keeps saying that we are living through strange times, but what is strange about it is that because everything has come to a stop, it is as though we are living out of time. The emergency brake has been pulled and time is standing still. It feels uncanny, and there’s more slack in the world economy than there ever has been before. And that means, as both Benjamin and Machiavelli would have recognised, that there is also a once-in-a-lifetime opportunity for change and renewal.

For some, this might mean a shorter working week, or less air travel. For others, it might suggest the opportunity for a more fundamental remaking of our political system. A space of possibility has unexpectedly opened up, so although the lockdown may be coming to an end, perhaps the standstill should continue.

Would being high achievers make my kids happier? Or should I let them chill out?

Romesh Ranganathan in The Guardian


It was the first day after half term, and I was walking the kids into school when I found myself stunned by a statement made by one of the other parents: “I know I’m a good parent.” How can you possibly know that? Hope? Yes. Strive? Sure. But know? Like, really know? I would argue that if you “know” you are a really good parent, you almost definitely aren’t. How can you be certain that nothing you have said or done has messed up your kids in some way? When I was a kid, my mum told me I had “cute little boobies” and I didn’t go swimming for six months. I still wear a T-shirt in the pool.

The ultimate aim of any parent is for their children to grow up to be happy. But how the hell do you achieve that? Two of our children are at primary school. We really worry about one of them. The other one makes us worry for the school. Last week, he told us his new favourite word was “vagina” and he was going to say it as much as possible. I’m imagining appropriate context was irrelevant to him. Then I became terrified there would be appropriate context. Or inappropriate context. Basically, I didn’t want him using the word vagina. But you can’t say that to him. If you react with shock or panic, you are basically giving that word magic powers. It suddenly becomes a word that will always get attention and then you are in Sainsbury’s and your kid is saying: “Can I have a fidget spinner? Can I have a fidget spinner? VAGINA.”

Parenting presents dilemmas like this all the time. Recently, my wife told me that some of the parents had been giving their children practice test papers and had arranged for them to have tuition. While this seems excessive for primary school, I understand. Education seems to be placing increased emphasis on assessment and tracking, which means parents are terrified that if their kid doesn’t exceed their expected learning level at six years old, they are immediately put in the class that ends up working at McDonald’s.

But what’s wrong with that? The general assumption by parents seems to be that higher attainment leads to better job prospects, which lead to better pay, which leads to happiness. But studies over the past couple of years show that not to be the case. While it is clear that there is a strong correlation between poor education and mental health issues, what has also been found is that the odds of personal happiness are equivalent regardless of levels of educational attainment. I have taken this to mean that I can stop reading with my kids. And, by that, I mean I can stop feeling bad about not doing it. If happiness is not impacted by attainment, then why the hell are we all making our kids unhappy by forcing them to work harder? If they want to study hard, great; but if they don’t, why not just let them be happy slackers?

I have even begun to wonder if a “normal” upbringing might be detrimental to our children. All of the most interesting people had a horrible time as kids. All the best rappers struggled. Kanye West is a notable exception, but in lieu of a terrible upbringing he is trying his hardest to have a truly dreadful adulthood. I am contemplating sending my children out on to the streets for six months to give them a sense of appreciation and a decent backstory.

I’m not even sure that child labour is a bad thing. It has a bad press and we are instinctively opposed, but I think it suffers from the issues of both being poorly regulated and using the wrong children. We should be using children from this country. Our children are spoilt. The lower labour costs will bring us right back into competitive manufacturing and our children might be a little more grateful. Our second son often shouts: “I don’t want to go to school.” How about you go and make iPhones for a couple of years? We’ll see how much you want to go to school then, mate.

This “happiness dilemma” was brought into sharp focus recently when one of our sons asked if he could play on the Xbox on a weekday. (We have a weekends-only policy, mainly because I am trying to make some progress on Grand Theft Auto.) I said no, and he got upset. He told me he didn’t love me any more. Two things occurred to me at this point: 1) I had directly reduced his immediate happiness and 2) Him telling me he didn’t love me had absolutely no effect. In fact, he taught me a valuable lesson on how transient the idea of love can be. It did make me wonder why we were doing it though. What are we training him for? When he grows up, he will be able to play whenever he wants. The obvious argument is we don’t want him playing it too much. But then, why not just let him play and then if it becomes excessive, just say: “You’re playing it a bit too much”? He will argue, we will have to demand he stops, he will then shout and we will have to discipline him. It appears that the reason we have introduced a “weekends-only” policy is so we can have an easier life.

I don’t think my wife and I are doing a bad job of parenting necessarily, but we have no idea how what we are doing is impacting their future happiness, and I am no closer to figuring out how hard to push them at school. I have noticed, however, that our youngest son has cute little boobies, but I haven’t mentioned it. That’s progress.