Poor Inflation Fighting Ideas

Part Two

Econ Buff Podcast #42 with Rex Pjesky and Ryan Mattson

Dr. Ryan Mattson and Dr. Rex Pjesky continue the discussion with me about inflation and potential policy responses to it. We respond to a Washington Post article proposing different things the White House can do to combat the current inflation episode. Dr. Pjesky reacts to the proposal suggesting taxing wealthy investors. He discusses how increasing taxes might actually be used to fight inflation. He says for any policy to fight inflation it has to shrink the money supply. Dr. Mattson discusses the suggestion to prepare for FED intervention and to de-escalate the trade war. He lays out the importance of forward guidance and argues the FED should target divisia aggregate measures of money and the asset balance sheet to fight inflation. Dr. Pjesky addresses Matt Darling’s proposal to improve America’s supply chains. He notes that the ideas laid in Darling’s proposal are good ideas but are not inflation-fighting ideas. In what is easily the most enlightening portion of the podcast, Dr. Mattson explains how supply shocks and other short-run issues are related to expectations, not aggregate supply. Dr. Mattson identifies all of the shocks as aggregate demand shocks citing that they are not institutional or technological changes. Dr. Mattson argues that supply chain improvements are aggregate demand increases. Dr. Pjesky summarizes Dr. Mattson’s approach as taking “inflation is everywhere and always a monetary phenomenon” seriously, and anything that increases income, has aggregate demand effects because every dollar of spending is a dollar of income. Dr. Mattson and Dr. Pjesky then both take on the suggestion that “inflation is a wildly overblown attempt to stop progressives”, which both reject as a reasonable assessment. Dr. Mattson argues we are not necessarily facing an inflation crisis. Dr. Pjesky discusses why curbing corporate profiteering is not an effective inflation-fighting technique. I then lay out the argument that corporations are always profit maximizing and hence cannot explain the change in inflation. Dr. Pjesky expresses frustration with the way the field of economics measures and then teaches inflation, such that it confuses the public into thinking inflation can be fought sector by sector. He then shows that lowering prices in any one area is not the same as lowering inflation. Dr. Mattson then explores inflation measures like CPI. Finally, Dr. Mattson has a one-word reaction to using price controls to fight inflation.

Photo by Jorge Alcala on Unsplash

Transcript

Stitzel: Hello and Welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. We are here to do, sort of, part two of our “What Should the White House Do About Inflation?” where we are reacting to The Washington Post article that suggested 12 different ideas we've already done. What the first four here my guests have been gracious enough to come back and, sort of, finish this episode up. So, with me again is Dr. Ryan Mattson, professor at West Texas A&M University and the Center for Financial Stability. Ryan, welcome back.

Mattson: Thanks Lee. It's great to be here.

Stitzel: Also, with me again is Rex Pjesky. Rex is a professor at West Texas A&M University. Rex, welcome.

Pjesky: Also, good to be here.

Stitzel: O.K. so, just really quickly to recap what happened. We have an episode here. I'm sorry, we have an article here from The Washington Post that's asking experts to weigh in with different ways that the White House could combat inflation. And we, sort of, addressed the first several of these. So, if you haven't listened to the first episode, [then] now's a good time to go back and do that, and then you can come join us here. We're going to pick it up with where we left off with the fifth suggestion which is to tax wealthy investors. So, quoting from the article:

“We need to focus on measures that increase the supply of goods and target price inflation [….] rather than taking measures that would destroy jobs and weaken growth. One way to do so would be to raise capital gains taxes on investors and levy new taxes on income from stock dividends.”

“It is worth stressing the potential danger of alternative approaches using the blunt instrument of raising interest rates, the tool of the Federal Reserve, would be an attempt at price controls. But the mechanism for lowering prices would broadly shrink demand across the income distribution.”

So, I'm going to toss this one to Rex. What's your reaction to tax wealthy investors as a way to fight inflation?

Pjesky: Well, when I read through these --- and I knew that we were going to talk about them --- my goal was to take each one of these suggestions seriously. And, you know, try to come up with some sort of story or way that I could explain how this might actually work. And so, this one is a rather interesting one, because, I think, the --- it's kind of hard to talk about, because the --- author of this one obviously has goals apart from lowering inflation. But how could, or how would, increasing taxes --- just, sort of in general, you know, no, you know, no specific tax increase, but how would increasing taxes --- in general achieve the goal of lowering inflation? And the answer is that it could if it were done, basically, properly. So, the main thing that you have to do to convince me that your policy will lower inflation is you have to convince me that your policy somehow will shrink the money supply. So, if the federal government increases taxes on wealthy investors, or in this would be generally to any tax increase --- if the federal government would increase taxes on the wealthy investor --- and then use that to basically shrink the deficit, and coordinate that policy with the Federal Reserve to actually shrink the federal reserve's balance sheet in some way; that would effectively take money out of the economy, and could reduce aggregate demand in such a way that would reduce inflation. So, if you have that idea, if that is sort of the mechanism that you want to use to lower inflation, [then] the next question that you would want to ask is: how are you going to lower, or how, sorry, how are you going to raise taxes? So, I would evaluate this particular proposal, not exclusively on whether or not it could in fact reduce inflation, [but] I would evaluate it on the merits of the particulars of the tax increase itself. So, is doing things like raising capital gains taxes, and the other, you know, the other particulars of the suggestion, there are those good ways to raise government revenue.

Stitzel: I think when most people read this article, this is maybe one of the points that's least controversial, or least interesting, or at least incendiary. You know, when I'm reading through this as an economist, and you specifically are saying things like don't use interest rates to fight inflation (you know, the basic tool of the Federal Reserve), that's, like, one of the most aggravating things to be reading etc. And there's people out here that aren't trained economists that are reading an article like this, and they're like: oh yeah, we definitely shouldn’t have the Federal Reserve fighting inflation. That strikes me as a problem. So, I mean it's interesting that you've outlined a mechanism through which this would actually work. I thought perhaps, I thought perhaps Ryan would be…

Mattson: Yeah.

Stitzel:…eager to jump in at this point.

Mattson: You know, let me take the chance to some shameless self-promotion. Dr. Pjesky and I actually have a bit of a tongue-in-cheek article on Modern Monetary Theory on how that mechanism is supposed to work. And he's right on about if we're going to increase taxes to control inflation, it has to contract the money supply. And that means that some of the redistributive propositions of: O.K., we're going to tax capital gains, and then we're going to redistribute to lower income households. That could very well increase the money supply. That could increase the velocity of money. That could be --- actually if we take this further out, that could be --- inflationary, because we tax these capital gains, and then we put them in a position where they would be spent, as opposed to just taken out. What this would propose to control inflation --- that means the government would have to tax this money, and bury it, and not do anything with it. And I don't think people really want a government that that doesn't spend. We want the government to do something with the money that's taken. So, I think that this sounds to me a lot like the Modern Monetary Theory approach to a fiscal attempt to control inflation. And I don't think that a lot of these authors have thought through what that means --- if we wanted to get into a contractionary policy if we want to try and control inflation --- because that would mean not just cutting taxes, but decreasing spending, so that we can reduce the deficits, or even generate surpluses.

Stitzel: So, if I can synthesize your two points. Rex says: yeah, you can do things with tax, but it’s going to end up what the monetary policy reaction to this is. So, like, the tax can be the impetus, but it's not fundamentally doing anything about inflation. And then what you're saying is: we have a monetary policy tool, and we have a fiscal tool, [so] why are we using the fiscal tool to do the monetary tool job? Is that a fair synthesis of what?

Mattson: [Shakes head yes].

Stitzel: O.K. so the next one's really interesting, because it's another, it's a good one to transition it to. So, the next one is: “Prepare for Fed intervention, de-escalate the trade war” by Michael Strain. So…

“Biden has announced three nominees to fill vacancies on the Federal Reserve Board. Congress, with president’s encouragement should make sure these nominees recognize that the central bank has been behind the curve on taming inflation. Biden's appointees should have as their top priority maintaining stable prices, not addressing racial inequity or risk from climate change. Congress needs to ensure the central bank is prepared to act decisively to cool down an overheating economy before inflation worsen worsens and the longevity of the current economic expansion is put at greater risk.”

“The White House should also de-escalate the trade war with China to reduce the price of traded goods.”

“The White House has made some attempts to ease supply chain restrictions and other measures to reduce inflationary pressures. These are welcome, but ultimately won't have a huge effect on the rate of growth of consumer prices.”

“But filling the Fed board with governors who recognize that inflation is their top priority in easing tariffs while risking looking soft on China would signal that the White House takes inflation seriously. That's the right signal to send.”

So, several things there. React to the nominees to the Federal Reserve board and making inflation their top priority, Ryan.

Mattson: So, this actually, I think, is extremely important, because one of the main legacies of Ben Bernanke is this issue of forward guidance that the Fed wants to manage expectations. When people make contracts, we want them to think 2% inflation. It doesn't have to be 2%, but stable inflation, right? Something that they know is going to happen in the next five to ten years. What we don't want is --- we don’t want unexpected shocks. We don't want an inflation rate of 7% when we’re expecting 2%-3%. And that is a problem that the Federal Reserve is now experiencing. What needs to happen is --- I do believe that the Fed is demonstrating its willingness to maintain price stability. I think that Jay Powell is very willing to do it. I think that the FOMC board members who are now appointed are very willing to maintain that price stability. They haven’t voted in a way that makes me think they aren't. I think the deeper problem, and again, I like this particular proposition, but here's where I'm going to undercut it. I think the problem is the ability. I think that the announcement of transitory inflation, the slowness to react over the past --- how long has it been now, a year --- year and a half has deeply affected the credibility of the Fed. Again, not in terms of I'm going to take them at face value and say they're willing to stabilize prices. I'm beginning to wonder if they are able to stabilize prices. And that, I think, is a much more dangerous situation. And during the Great Recession, you know, everyone throws around these numbers of quantitative easing of $2 trillion. Oh my gosh, this is a huge number. But if you look at, say, a Divisia monetary aggregate, a money supply measure that's more accurate than M2 or M3, that contracted in 2009-2010. The Fed failed to expand the money supply by that measure. They can say that they drove rates down to zero, but when we have a zero lower bound, something we get no information from zero. Whether the Fed is credibly contracting the money supply right now is open to debate. Their asset balance sheet is still, at least last I checked, positive on growth. It's lower growth than we’ve had, but still positive. The Divisia monetary aggregates the Center for Financial Stability puts out are still showing positive growth rates in the money supply. Meaning that, you know, we may not be inflationary, but we’re certainly not disinflationary or deflationary right now as in, you know, as of last month. So, I think the Fed is willing. However, the main problem that I think that we should be focusing on now is whether they are able in the policy that they are implementing right now, because I don't think they're doing what they think they're doing.

Stitzel: So, the nominee part of this particular suggestion is not that important, because you don't think the mindset is the problem.

Mattson: I think the nominees tends to fall in line behind the way that the New York Fed and the chair will vote. And while that is not inflationary, we’re going to raise 75 basis points. I would like to see more nominees who would step forward and say: well, maybe 75 basis points is not enough, maybe we need 125 basis points, [or] maybe we need 150. And while that would be a shock, this is all stuff that Volcker did back in 79-80-81. And it's not outside what the Fed has done in, well, I guess, yeah, recent history. So, nominating to the FOMC, macroeconomists and microeconomists (let's not be too elitist on this) who support price stability is, I think, very good. I think we also need to start thinking about nominating people who are willing to look outside the federal funds rate and talk about the asset balance sheet. Again, I’m a shameless self-promoter the Divisia of monetary aggregates that put out by the CFS. And Bill Barnett and Larry Goodman are in my opinion necessary, and people ignore them for a simple sum or zero fed funds rate. We should be looking at other measures of this money supply angle, because then we need the Fed to be willing to do this, and we need them also to be successful in what they are doing.

Stitzel: You’ve said a couple times now [that] you're not sure if they can successfully fight inflation. What do you mean by that? I think somebody listening to this is gonna be taken aback by that kind of statement.

Mattson: Sure. I've got a good friend who hunts. So, forgive my metaphor here, because I’m fairly certain you guys have hunted before, and know the accuracy of my metaphor here. So, I'm going to try and embarrass myself a bit. When you go out hunting, you want to shoot a target. You want to hit the deer. You want to hit the pheasant. Let's suppose you've got, I don't know, a scope or a site on that gun. If that scope or that site is off, then you’re not going to be able to actually hit the target. Or maybe, you know, just naturally adjust for that error. I think in this case, we're in a point where the target is off. What they are looking at is not as effective as it used to be. I mean the federal funds rate. It's not as effective as it used to be as a measure of the policies they're trying to implement. The asset balance sheet --- better measures of the money supply would allow them a broader look at what's going on in the economy. And focusing on the federal funds rate then gets people thinking about mortgage rates or bond rates or things like that. And then, we start getting people in talking about well, maybe the Fed should be looking at inequality; or well, and I guess they should, because the dual mandate, but employment. But we --- the Fed's got one job, right --- price stability. And that leads us down this path that is something other than inflation is always an everywhere a monetary phenomenon. Which that statement is still true. When we start talking about one single fed funds rate as our intermediate target, there are a lot of things that can affect that, that will make people think of other things. I want people to think about the money supply, because that's what matters to inflation.

Stitzel: So, you're saying it's what they’re targeting, but then you also are mentioning their measures?

Mattson: Yes.

Stitzel: So, those are two separate issues that are both affecting the same thing? Or are those connected somehow?

Mattson: I suppose this would be two different things but connected to it. You know, you want a good target. You want a number that you can look towards, but if you're going to focus obsessively on one particular interest rate, and maybe even an aggregate of other interest rates would serve better; although I'm I can't think of one of those measures off the top of my head, [but] I'm sure it exists. But maybe a basket of bond rates. Maybe a basket of different lending rates. They’re not looking at the broader market --- they're looking at the federal funds overnight lending rate. And while it’s a good measure (or was a good measure in the 80s and the 90s), by the aughts we've already figured out after 10 years it's not descriptive of what's going on.

Stitzel: So obviously, I'm --- the long-time listeners of the podcast will know anytime we start getting into this stuff I start bringing up Scott Sumner's work. What's your reaction to, like, nominal GDP targeting as an option in this case?

Mattson: Oh, I think it'd be better than intermediate interest rate targeting or short-term interest rate targeting. My preference would be a monetary aggregate, but a nominal GDP target I think would serve the same broad focus.

Stitzel: You're saying if you were one of these three nominees to the Federal Reserve, you'd be proposing using the Divisia aggregates as a target themselves?

Mattson: I'd be proposing the Divisia aggregates and the weekly asset balance sheet measure.

Stitzel: That I'm quite taken with both of those ideas. Rex, do you have a reaction to that? Weigh in on.

Pjesky: You know, well I agree with everything that Dr. Mattson said. And, you know, in terms of, you know, the proposal that was made --- I think, in addition to perhaps the, you know, the targets and the measures being, shall we say, in flux right now --- we also have it being almost a necessary and sufficient condition for good monetary policy (for the monetary authority, in this case the Federal Reserve) to be credible to the economy, in terms of its desire and ability to do what it's going to do. We also have to have high levels of credibility and coordination with the fiscal authority as well. So, if you're going to push this discussion into, you know, this topic, which is basically we need to prepare for Fed intervention. And we have to let that, sort of, manage our expectations about where the inflation rate and the economy in general is going, and then thinking that that's going to make a difference. You can't have the Federal Reserve using measures and tools that don't work, and they're inconsistent. So, the Federal Reserve has raised interest rates quite a bit, not as much as what a lot of people wanted them to do. And they've raised them more than what others have wanted them to do. But the, you know, the Federal Reserve is focused on the federal funds rate. And they have said: well, we're tightening monetary policy. But, yet at the same time, the balance sheet is growing.

Stitzel: Yeah.

Pjesky: And I don't see monetary policy tightening right now, you know. If you're looking for a sign --- it’s not --- it has slowed down. And then on the fiscal side, you have the White House [and] you have the political process trying to blame inflation on everything except the money supply. So, it's, you know, it’s the war in Russia, it's the pandemic, and, you know, all of those events and realities are in the mix of course. So, they --- and by that, I mean, their considerations. So, when we make fiscal and monetary policy, we’re making it in response to these things. But that really harms the credibility of the policy, and it harms the ability of the fiscal and monetary authorities to coordinate. So, this has been a big topic in, you know, the monetary policy literature since, at least, the 1980s, where you had Sargent and Wallace and Barro talk about how important it is for the fiscal authority and the monetary authority to have some, sort of, coordination, if their policies are going to be both credible and successful. And we do not have that right now. So, if people have doubts of the monetary authority’s ability to act at all, in my opinion, [then] that would be the source of those doubts. We have no credibility across policy makers right now.

Stitzel: You’re saying the credibility is fundamentally tied to the interaction of the fiscal and the monetary authorities?

Pjesky: Yes. That is exactly what I'm saying. And so, you don't have any acknowledgment at all by almost anyone right now, which again, which is why these appointments are so important. You don't have any large-scale agreement by anybody right now that inflation is even caused by an increase in the money supply, that it's even caused by an increase in the Fed's balance sheet. Until you have that, it’s going to be very, very difficult for me, at least, to think that the policy is going to work. You know, if we have inflation going down in the near future, it might just be a coincidence.

Stitzel: So, if Ryan has his way, and the three nominees, you know, come in and they're gonna issue simple sum measures, which I think is…

Mattson: They're not. I thought they were appointed. I thought, they were. I thought they were on.

Stitzel: Right, right. But I would say, like…

Mattson: Oh.

Stitzel: I'm giving a hypothetical.

Mattson: I thought.

Stitzel: I'm giving a hypothetical. O.K. So, you know, turns out they were Divisia deep state agents, right? And they show up, and they're like: hey, we, this is ridiculous that we use simple. So, which I agree with, right? Which is why I think Sumner's work is interesting. Which is why I think your work is interesting, right, that, you know, prices are one of the most fundamental things to economics. And somehow, we get to monetary policy to address money and then immediately throw prices out the window. It's ridiculous, right? So, we have other episodes about that. So, I digress. If I understand Rex's point, right, though is Ryan's hunters could correctly reattach the scope. And if the fiscal authorities are running around set, you know, talking to the to the American public, and setting up all these strawmen --- or strawman's not the right word --- but these other boogeyman of what's causing inflation, [then] that will dampen even a correctly oriented Federal Reserve's ability to fight inflation. Is that?

Pjesky: Yes. I mean, if you have --- and I'm going back to the work of Sargent and Wallace. If you have a monetary authority that is dedicated to fighting inflation, but yet you have a physical authority that will not reduce the budget deficit, [then] one of those two groups is not going to get their way, all right? And so, you're going to throw policy into areas that no one intends, right? So, you're going to have massive inflation. You have to have massive spending cuts or tax increases somewhere down the future. So, you know, the fiscal and monetary authority that they're in this interactive game with one another. And if their goals are incompatible with one another --- so large government budget deficits would be incompatible with the goal of reducing inflation --- especially in an environment that we're in right now, where you've got basically no resource slack; [and] if those sides don't get together, then one of them is going to win and one of them is going to lose. So, we’re either going to continue, and we're going to have budget deficits persist, and we're going to have runaway inflation, which is one possibility; then, the other possibility is that we’ll have massive increases in taxation or government service cuts and inflation will come down. So, in other words, another way of putting this would be this in a world where the fiscal and monetary authorities aren’t credible and coordinated. The chances for the soft landing that we want is almost zero.

Mattson: So, I mean we're right back to a Volcker-Reagan style conflict.

Pjesky: Yes.

Mattson: And the way that the Fed got around that was to massively increase the Fed funds rate and contract the money supply quite a bit, deepening a recession or creating one, depending on who you ask. So, is that what we can expect, I guess, in the next few quarters?

Pjesky: Well, it's certainly possible. Again, I think the thinking today is that you can navigate that policy problem and not have a major recession.

Mattson: Hmm mmm.

Pjesky: That's the soft-landing.

Mattson: Yeah.

Pjesky: That's the soft landing. That is not what happened in 1980-1982, but I think people's belief is that we know more now than we did. I hope we do. It's been 40 years ago, hopefully we've learned something.

Stitzel: You know, what I like about this discussion is we're reacting to an article proposing what the White House could do to combat inflation. And then, it suggests mostly a bunch of non-monetary solutions --- which, you know, when I see this, start pulling my hair out --- except that now, you've brought this back around to exactly how the White House should be guiding that fiscal side of the policymaking in order to facilitate monetary policy actually.

Pjesky: Yeah. I mean, a lot of the [articles display] --- in all 12 of these, you know, there are --- negative truths in almost all of these. Maybe not all of them, but almost all of them. But then, there's also loads of nonsense in them as well. So, you know, talking about, you know, trade wars or trade policy in the context of inflation --- it's just nonsense.

Stitzel: Yeah, let's do that, because this one --- prepare for Fed intervention, de-escalate the trade war --- mentions trade war with China. And then, the next one is talking about supply chain. So, let me read you off the supply chains and then get your reaction. So, improving America's supply chains by Matt Darling:

“We are not seeing high inflation and out-of-stock goods because the supply chain is performing worse than usual. Instead, ports are overloaded with goods because we are importing 20 percent more than before the pandemic. The fast-paced economic recovery is leading to supply chains that are functioning above --- not below --- their normal capacities. The fixes we need to implement are ones that improve the functioning of the supply chain when demand is high.”

“On the sea, we should repeal the Jones Act --- a 1920 law that prohibits shipping of goods between U.S cities unless the vote is owned, built and crewed by the United States. This sort of protectionism dramatically raises the cost of shipping to and within the United States. The Biden Administration has already ordered ports to stay open 24 hours a day, seven days a week.”

“On the roads, the fundamental problem is the number of truck drivers. Trucking employment has struggled to recover to its pre-pandemic high, despite the surge in demand. One way to alleviate the problem is to reduce the legal barriers to becoming a truck driver.”

“A prosperous economy will always rely on imports. We should use this as an opportunity for reforms that help us manage growing abundance.”

So, I almost need to set this up, because there's a bunch of things that we're going to want to address here. So, we’ll react to some of these, kind of, in order. But just first, as a transition to what from what you were saying a moment ago, Rex, with trade war with China, and preparing for Fed intervention. And then, this next one is saying we need to address supply chain issues. Start with what I view as like the simplest question here, which is: what does that have to do with inflation?

Pjesky: Well, I mean, it's seemingly nothing. And that this was an interesting one of the 12, because, you know, his menu of policies there, most of them, are extremely good ideas. You know, we should get rid of the Jones Act. And we do need more truckers. And if ports need to be somehow reinforced, then that would be a good idea as well. But what any of these things have to do with inflation is really, kind of, beyond me. And you see this in almost every single one of these one of these proposals. So, you know, the, you know, policy makers might have a role to, you know, rethink how we provide childcare, for instance. But that has, you know, that is, you know, completely irrelevant to any discussion about inflation, as would be things like the Jones Act, and, you know, any kind of situations with ports and trade wars. And it's also interesting that one of these authors say, you know, we need to restrict trade, and then another author says we need to expand trade. And so, those are clues to me that all of these proposals are, you know, filled with things that might not be nonsense, but they're nonsense in the context of a discussion about inflation. So, the question to me is how do any of these things, you know, reduce the, you know, reduce the money supply? I think, if you take these things seriously, [then] what the author of this proposal is trying to do is saying we can grow our way out of inflation. So, if we can't reduce the money supply [and] if we can increase productivity in the economy, then that will relieve price, you know, pressures. And if you look at an aggregate supply and demand model, [and] if you look at you know quantity theory of money and stuff like that, [then] that's probably true. But again, that doesn't give any particular direction to, like, the monetary authority, about what they should be doing now, which is still reducing the money supply. We had all of these problems in 2019 and we did not have inflation. So, something else changed, you know, that we had the Jones Act in 2019. There was talk about shortage of truckers in 2019. All of these problems that this author has identified existed before the inflation. So, it's really, really difficult for me to say that these things are causing the inflation right now. And if that's the case, then addressing inflation by addressing these things is almost certainly not the best way to go about things, because you’re not addressing the cause. You know, what's happened the last two years that may have caused inflation that was unique? Well, the Fed's balance sheet and the federal deficit exploded in the last two years. We've, you know, the governments in the United States and around the world have spent, you know, trillions of dollars basically trying to facilitate people not working. And so, they’ve done that crudely with printed money. And so, that’s inflationary. Address that, and you will address the inflation. Everything else is on the sidelines.

Stitzel: So, Ryan let me ask you this. This claim that, you know, we're actually seeing more importing, we're actually seeing, you know, supply chains doing more, not less. This is at least counterintuitive. It's not something I've seen argued elsewhere. What's your impression of that is?

Mattson: So, my impression on this, and this may just be because I'm teaching Principles of Macro and doing a lot of AS-AD [aggregate supply-aggregate demand] stuff with the students. One thing I keep trying to come to terms with, is when people start talking about these supply chains and supply then supply shocks, they're all referring to short run issues. In the long run, you know -- this and let me, I guess, be a classical economist about this, you know, in the long run --- the waves will calm down after the storm, right? And then, the Keynesian in me is saying: well in the long run, we're all dead. If we're going to deal with short run supply shocks, and this is the SRAS [short run aggregate supply] curve. So again, I'm being a big Keynesian here. I need my pictures. So, I'm going to have to try and talk through this. The short run aggregate supply curve --- which is what everyone is saying, you know, [that] this would be the stagflationary approach, or the short run supply shocks we get --- is not actually determined by the fact that we have too many or too few ships and ports, or too many and too few truck drivers. It's driven by the expectations that firms make on those prices. If we have too many ships in the port that we can't unload them, then that means those contracts that they made a long time ago are now not reflecting the proper value of the real goods and services that are supposed to be coming off that ship. So, the short run aggregate supply curve --- these supply shocks should all be couched in an argument about expectations, not about actual supply sides or a supply chain improvements. The supply chain improvements he's mentioning in the article, you know, you're going through those and everything in my head I was thinking [about is] aggregate demand, aggregate demand, aggregate demand; which, you know, this is all --- remember we can go back to GDP, right? Y is C + I + G + NX [Consumption + Investment + Government Spending + Net Exports], right? So, that investment spending and consumption spending is just not or is too far up or too far down, but what he's suggesting, in my opinion, is not on the supply side. That’s not affecting the long run aggregate supply. I don't see any huge technology or institutional changes that would lead, you know, be something like the tech boom or moving from agriculture to manufacturing. I don't see that kind of supply-side shock that would cause a long run movement. It's not short run because it's not expectations. So, what he's suggesting is aggregate demand, and that would be an aggregate demand expansion, which at the end of the day would be inflationary. The benefit is we get more output growth from it. So, that's good. But in terms of taming inflation, I don't see that unless we can find some way to manage the expectations of these firms. If what they’re doing would change the expectations of how the firms are making those contracts, and then those sticky prices become a little bit less sticky, and they're able to move back and forth as they should, then yes. But I'm not sure I see the mechanism in what he's suggesting. I would see that as an aggregate demand increase, which in the at the end of the day would be inflationary; but probably, the inflationary we would like, where we have some real production associated with the price increases, as opposed to (I don’t know) $4 trillion dollars on the balance sheet, and, you know, as Rex is pointing out, in an effort to encourage people to not produce and to stay home.

Stitzel: So you're saying, yeah, if these things were to happen --- you repealed The Jones Act, you drop regulations that prevent people from being truck drivers, [and] you increase those things, [then] you see those as aggregate demand effects?

Mattson: I see those as aggregate demand effects.

Stitzel: I mean, this is going to be counterintuitive to anybody who’s listening…

Mattson: Right.

Stitzel:…to this. So, what? How do you? How do you view things…

Mattson: So.

Stitzel:…that we would?

Mattson: Remember, the macroeconomy is large, right? And someone's spending is someone else's income. So, when you…

Stitzel: You are a Keynesian.

Mattson: I am.

Stitzel: I never said I wasn't. I just quiet down every now and then, but yeah. You know, if you get more truckers or you pay them more --- which I think, you know, micro-economically speaking a fantastic idea --- but from macroeconomic context, they get more income and they spend more, [then] you get those ports to finally be able to open up a bit more and handle all of the volume that they're not able to handle. Well, you're giving more people more income and they're going to go out and they're going to spend more. This is the kind of stimulus that, yes generally we tend to like, because then we get more money chasing more goods and hopefully that evens out; and then, you know, the inflation is stable and expected. What we have is an unstable inflation that is unexpected. And I think that these particular policies, while they would be very good for ports and truckers, and, you know, and consumers as well, would not affect the high inflation that we have, because the high inflation that we have is based on something else.

Stitzel: So, you're in class you're drawing your AS-AD [aggregate demand-aggregate supply] curves, and you want to give an example where in a shocking turn of events that nobody expected, The Jones Act gets repealed in Congress tomorrow. What are you doing in your model?

Mattson: Oh, AD shifts out. Aggregate demand shifts out where yeah.

Pjesky: So, what Dr. Mattson's doing here is taking the statement inflation is always in everywhere a monetary phenomenon on very, very seriously. So, the author of this proposal thinks that we can increase productivity, increase the number of goods and services, and bring prices down. The reason that doesn't work in the aggregate supply-aggregate demand model is that when you increase production, you are by definition giving people more income to spend, which increases aggregate demand. So, any outward shift of long run aggregate supply is going to be matched with some increase also in aggregate demand, which is going to have to be charitable, perhaps an ambiguous impact on prices, all right? So, you might, you know, depending on how things go, you know, you might get a little more inflation [or] you might get a little less. You know, my prediction is it would probably be a wash; because like Dr. Mattson said, every dollar spent is also a dollar that is earned. And so, I would think that that this kind of thing would not have an impact on prices. So, increases so the bottom line is this --- increases in productivity doesn't [or] it’s not going to have any predictable impact on inflation, because inflation is a monetary phenomenon [and] not a productivity phenomenon.

Stitzel: This is your --- what you were…

Mattson: Yep.

Stitzel:…saying that's a very…

Mattson: Yes.

Stitzel:…counterintuitive, Ryan, which is why I wanted to draw this out --- you know, but you guys can feel free to disagree with me here --- but when I’m teaching a macro class, if I can get inflation is everywhere and always a monetary phenomenon, I consider that class a success if my students have picked that up. And I just --- this whole article just reeks of not getting that idea. So, let me turn into a fun one here. So, right? I'm gonna give this one to you: Inflation is a wildly overblown attempt to stop progressives.

“We are nowhere near an inflation crisis. Real pain families are feeling from price increases today is not a result of stimulus spending. Rather, it is structural --- the rest of policy failings and an economic policy infrastructure that has been for years designed to keep wages low and enable the hoarding of economic resources by the super wealthy and the upper-middle class. To be clear, we do not want to see hyperinflation. But the political anxiety around inflation is a straw man intended to curtail a progressive agenda.”

Mattson: So, no. All right, so let me again return to where I see this inflation coming from and --- as my students will recognize this phrase --- I'm going to blame the Fed. I don't see this as a particular conspiracy. I see this as an attempt at monetary stimulus in during COVID-19 that was successful, in terms of keeping aggregate output higher than what the crash should have been or could have been; but the result of that success is inflation, and high inflation which is in reality painful to many families. Painful, especially to families in the lower income (lower income of that lower half of that distribution) because they cannot substitute easily over to, I don’t know, other forms of money where they can maintain value. They've got to hold their savings in dollars which are now rapidly, well more rapidly than they were, decreasing in value. They're getting less groceries. You know, me being a professor, I have a very nice stable income. And I can certainly, you know, say: oh well, maybe I want to put some of my savings into CDs so that, you know, I lose a bit less due to inflation. You know, people will certainly not be affected equally by what's going on with inflation, but to call it some kind of organized conspiracy, to attack the credibility of a particular political party or political leaning is missing the point. And if we miss that point, then we also at that point you start, you know, losing your own credibility. The Fed is not out to win elections. No one at the Fed is elected. They're either appointed --- or they're appointed by the White House and Senate, or they're appointed by the banks and corporations and community representatives within the Federal Reserve System --- but they don't run on election campaigns. They run on whether or not they've been successful with monetary policy, and if they’re not successful with monetary policy, they tend to be shown the door. So, the Fed did what they thought was right with the information that they had, and when it came time to begin raising interest rates, they didn't do it. They were slow. They were slow out of the gate with that one, because this inflation is transitory, which, you know, would have been nice. Then they wouldn't have had to do anything. But now, they have to do something about it. But, yeah, conspiracy? I'm not quite sure is, yeah.

Stitzel: So…

Mattson: I'd like to hear Rex on the conspiracy theory then.

Stitzel: Yeah. I do want to get that as well. I kind of --- there's a couple of statements here that I think they're just --- which I appreciate the bluntness of the statement. And while I might be against the progressive agenda, you're not nearly so, which is why I'm interested in your reaction to this. So, let's just start with the first thing. Are we nearing an inflation crisis? They should say we're nowhere near an inflation crisis.

Mattson: We have had for the past 20-30 years, 1%-3% inflation; and in the past few quarters, we have had double that --- 4%-6%-7%-8%. If we're talking about a Venezuelan hyperinflation crisis, no we're not near that. But we are certainly close to, you know, we're certainly close to pain and suffering that we don't have to deal with. That we --- it does not have to be this way. We can do something about this to stop the pain of it. If we want to go ahead and live with 8% inflation, and I don't know, maybe because we're getting the trade-off from the Phillips Curve here, but that's debatable. And that's a whole other thing. Andrew Kingsley has a podcast on that, right.

Stitzel: Yep. Yeah, we've had Andrew Kingsley on about…

Mattson: The --- if you…

Stitzel:…the Phillips Curve.

Mattson…buy the Philips Curve, and we're trading off, I don't know, 8% inflation for 3% unemployment. If we want to make that trade-off, [then] O.K., I'm not sure it'll stay in the long run; but we are dealing with unexpected inflation. That's going to disrupt contracts. That’s going to disrupt even wage negotiations between workers and their employers; because now, neither the workers nor the employers know what a cost-of-living adjustment is. The Fed will tell them it's 2%, but we all know it's 6%, right? I mean.

Stitzel: Right.

Mattson: That's right.

Stitzel: So, you know, the follow-up to that is they’re saying the real pain. So, they're acknowledging that people are feeling real pain from price increases. They’re saying it's not a result of stimulus spending. Do you buy that at all?

Mattson: Oh, from the fiscal side?

Stitzel: Well, this is what they're saying…

Mattson: Yeah.

Stitzel: The real pain…

Mattson: Oh, yeah. No.

Stitzel:…families are feeling from price increases today is not a result of stimulus spending.

Mattson: No. I don't I think this is where Rex and I disagree. I don't agree that the fiscal stimulus was inflationary. I do put this squarely at the foot of the Federal Reserve; because based on what we saw from the Great Recession, and O.K. you have this $700 billion American Recovery and Reinvestment Act followed by no inflation. And then we have the fiscal stimulus and the Paycheck Protection Program, which I see as a monetary stimulus disguised as a fiscal stimulus, because the Fed was guaranteeing all those loans. I don't think, for example, sending a $500 check to households --- I don't think that was inflationary. I think that guaranteeing loans for firms, whether or not they pay it back, and the fact that the Fed was very clear that they wanted this money out there --- I think that was inflationary. So, if I think what the author's referring to is oh, you know, the, you know, tax cuts for lower income households and increased stimulus payments to families, or things like that, --- no, I don't think.

Stitzel: So, you agree with authors there?

Mattson: And there, I'd agree with the authors. Yes.

Stitzel: So, Rex. Ryan's saying maybe you just disagree with this. Do you have a different take on that on whether the stimulus spending is inflationary?

Pjesky: No, I mean, I don't think that, you know, the tiny pittance of checks that they sent out was particularly inflationary. Just the, you know, the entire fiscal act of spending trillions of dollars with the specific goal of having people not work, which again, may have been what you wanted to do during a during a pandemic. I'm not questioning that one way or, you know, another in this. But, you know, the differences between this fiscal stimulus and other fiscal stimulus are that usually when you're in a recession, you want to enact policies that help people get back to work, by giving people money to spend, so people have to go buy or go make the stuff that they're buying. You know, that's kind of the goal. What we've seen in the last couple of years are policies specifically designed to, again, not, you know, do that at all. On the Paycheck Protection Program is a really good example of that. So, you give businesses money so that they can support their payrolls. And the idea was is that these businesses could not have these individuals show up to work. So, those businesses are not making anything to economically support their payrolls. So, you have this political process that supports the payroll. So, you have this interruption in production. So, the productivity goes to this is almost the opposite of what we're talking about in the last one. Productivity goes down. What does that do in terms of aggregate demand-aggregate supply? You have supply going down, because you're paying people not to work in one way or another. But yet, you're bolstering aggregate demand by sending out all of this money for various purposes, you know, whether it's the, you know, the household checks, or the, you know, loan supports or anything like, you know, all of those things together. You know, in terms of the proposal, specifically it's very difficult for me to (I can't) take this one seriously. So, I just, you know, I guess the author thinks that fighting inflation would be some mechanism that would stop a reorganization of society, along the lines that would unambiguously help individuals that were currently disadvantaged. Is that what you think the authors are of this are saying?

Mattson: I think so.

Pjesky: And I'm not really exactly sure that that --- I don't think that --- works. I'm not buying that.

Mattson: Yeah.

Pjesky: Regardless of whether or not I think that is beneficial or needed in society, I don't think that that would be my approach. The truth is that a high inflation, or even moderate inflation like what we're having now, really harms the economy. So, inflation isn't harmful because everything costs more. O.K., so this is something, that again --- I’m also teaching principles this semester, so I'm kind of in that mindset. So, if you go out and ask someone: why is inflation harmful? Almost everybody's going to say: well inflation's bad because it makes everything cost more. Well, that answer is nonsense, because if the price of things that I am buying goes up, [then] that means that the money that is received by my counterparty in that transaction --- they're getting more money. So, from society's point of view, the simple increase in prices is a wash. And that that is true if you're talking about individual supply and demand markets. And it's also true if you’re talking about aggregate supply and aggregate demand markets. The exchange of money is irrelevant to societies, you know, to society's well-being, because those transactions are always a wash. The reason that inflation is bad is because in order to support a modern society like we have --- O.K. and maybe the author of this doesn't want that, all right, so that's certainly a possibility. But in order to support the modern society that we have --- you have to have large-scale coordination among strangers, all right? So, whenever you go out and you buy things [and] when you participate in the commercial economy, you are coordinating your actions with millions, and even perhaps billions of strangers. Even when you buy something as simple as a t-shirts, you're doing this. In order to have coordination in any context, you have to have some way of communicating. So, you have to have some sort of language that people use. So, when we're, you know, coordinating our efforts to be here at 8:30 in this studio, we used English, we used email, and we talked about it. And everybody knew that we were going to meet in this room at 8:30 on a Thursday morning. The message was very, very clear because we were all speaking the same language. Well, prices are the language that we use to coordinate our activities with strangers in a commercial setting. It supports the economy as we know it. You could not have the economy as we know it without those kinds of language. What a moderate inflation does in the, you know, 6%-9% range, like what we have right now, is it garbles the communication between parties. So, you know, a 6%-9% inflation might be the equivalent of having a conversation in with someone and every, you know, fifth- or sixth-word being nonsense or garbled or somehow inaudible. If you were in that kind of situation, you would have a very difficult time coordinating your activities with whoever it is that you're talking about. And your life just wouldn't go very well. You couldn't have those kinds of relationships. What inflation does --- is it unravels those relationships. And it’s not clear to me that an unraveling of the relationships that we have right now --- that's going to hurt, all right? It's not clear to me that it's going to hurt the wealthy and not going to hurt the poor as well. I think it's going to hurt everybody. There might be some distribution of pain across the income distribution, but I wouldn’t be confident at all to assign relative harm to one income group or another, like this individual is doing. This individual thinks, apparently, I won’t speak for them; but just based on what they've written here, this individual thinks that inflation has the capability of reorganizing society in such a way that disproportionately benefits people who are worse off. And if you think that efforts to fight inflation, or even identifying inflation as a problem or a crisis in the first place, is an attempt to maintain the status quo that disproportionately benefits people who are more well off. And if I were going to try to reorganize society in such a way, I don't think that inflation would be the tool that I would use to remake society. Because it's incredibly dangerous tool; because you could end up with really, really bad outcomes. There's almost always been bad outcomes after inflation in various societies. And, you know, again, there's been a lot of episodes of inflation. A lot of episodes of hyperinflation. I don't want to say that they always turn out bad, but they often turn out bad. The sort of downside risk of inflation is a huge downside. And so, this isn't really what I would choose as a policy instrument to achieve the goals that this author apparently wants to achieve.

Stitzel: I'm thinking if I seized, you know, dictatorial power of the United States tomorrow, and I thought I really want to stick it to poor people, [then] an instrument as blunt as inflation --- it's not something that I would use in and of itself. Now maybe the different things that I might do might have inflationary pressures or not. But it --- that it fundamentally itself is not a good tool. You know, even in in my ridiculous scenario --- where we’re giving, like, conscious organized thought to it, which is another important point about economics, right, that we should always be driving home, is that these things are emergent as well, and --- you don’t want to assign motive where there's no motive to be found. These are individual people making individual actions in the economy in a lot of cases. That's not going to have an overarching (as Ryan called it) conspiracy, all right? It's kind of interesting. The last thing that I want to say, or get your opinion on here, you know, they go on to sort of say: well yeah, there's 6%-7%-8% inflation, but this isn't unprecedented. There's been inflation in the past. React to that a little bit. I’ll let either one of you --- [decide who] wants to take that. React to that as inflation is not that bad --- we've had this level of inflation before, or inflation is not that harmful maybe.

Mattson: That’s irrelevant. I don't. I mean, we've had all kinds of bad stuff in the past, and that doesn’t mean that the bad stuff is good. So, we've had pandemics in the past. Does that mean that we should do nothing about the current pandemic? We've had wars in the past. Does that mean that we should do nothing to prevent war? So, you know, that's just --- it's just utter nonsense.

Stitzel: So, the next potential solution here is another one that we can say we’ve seen before: Use antitrust to curb corporate profiteering.

“Today’s supply shortages were entirely foreseeable. Beginning in the 1970s, we began a long, sclerotic march towards a hyper-efficient --- but brittle --- economy that brought us to the eve of the pandemic without a semiconductor to spare. Corporate America's ruthless pursuit of short-term profits also fueled a mergers and acquisitions frenzy that resulted in today's economywide monopolies. This extreme concentration has thinned out our supply chains and left the remaining mega-companies perfectly positioned to capitalize on inflation to post record profits.”

“First, Biden should ramp up the enforcement and regulatory power of agencies such as the FTC the Federal Trade Commission, Federal Maritime Commission, and Agriculture Department to break up monopolies, stop price-gouging and encourage competition.”

There has a bunch more, but I'm going to leave off here. Actually, I meant to read more, but I just get so far along here that we're gonna have two months to talk about. So, Rex. Let me kick this to you, and I'm going to synthesize: is corporate profiteering causing inflation?

Pjesky: Well of course not, of course not, because the corporate profits don't have anything to do with the money supply. So, you know, it just, again, it goes back to the statement that we made several times in this podcast. Someone’s dollar received is somebody else's dollar spent in one way or another. So, you know, excess, you know, profits have various micro-effects. But in terms of the macroeconomy, you know, an increase or a decrease in corporate profits is not going to move supply or demand at all.

Stitzel: Well, this is an important one because this is the thing that I see people arguing in, you know, in my personal interactions and articles that I'm reading, that logic of companies gets to set prices. Big companies have more power over the prices that they get to set. So, when I see increase in prices, it must be that corporations are then increasing their prices now, and something is allowing to do that. Something is allowing them to do that in a way that they were not able to do before. That thing must be inflation. Ergo, corporate profiteering is causing inflation.

Pjesky: I, you know, again, that --- just the logic just doesn't flow there.

Mattson: Yeah. They're using a microeconomic condemn. I mean this is why we have microeconomics and macroeconomics classes, because let's face it. Macroeconomics is not --- it's not just micro added up a whole lot. They're these macroeconomic paradoxes that come in from aggregation, whether you want to talk about, you know, Keynes’s [idea] (and I'm blanking on the name now); but the idea that, you know, if the economy as a whole, or if individuals save more, the economy as a whole saves less.

Stitzel: Paradox of Thrift.

Mattson: Paradox of Thrift. And then you can bring up you can bring up the Laffer Curve, where O.K,. if we, you know, tax individuals less, [then] we may end up with more aggregate tax revenue. These kinds of things happen in macroeconomics all the time. You know, if someone gives me a $100, [then] that's my wealth benefit. If we give everyone in the economy a $100, [then] that can be inflation. These kinds of things get misunderstood and blown out of proportion, I would say. I don't want to say that, you know, large corporate profits are good or bad to see. I mean it says something more…

Stitzel: They might be bad.

Mattson:…about the --- they might be bad….

Stitzel: If these are monopolistic powers….

Mattson: Yeah.

Stitzel:…it might be bad….

Mattson: Sure.

Stitzel:…but what's that got to do with inflation? but that's on --- the microeconomic level. You know, if Bank of America is getting ready, you know, gigantic profits, [then] maybe we need to have a conversation about, you know, what's going on with Community Banks, and why aren't they able to compete on a fair playing field? But that's not a macroeconomic question. I am certainly all for, you know, increasing competition, and if there is some regulatory issue that is giving favor to other firms over others, [then] absolutely. Let's address that in microeconomics. But for inflation, that’s just not going to work --- because as we've had very, you know, O.K. let's say corporate profits are a thing; and the fact that we've put everything under (I don't know) let’s say all the banks are now, you know, one bank, and let's go with that --- [because] that may or may not have any effect on inflation at all. You know, we've had inflation during time periods where there was a lot of competition, and we've had inflation during time periods where there wasn't a lot of competition. It historically --- it just doesn't add up. And, you know, as someone who, you know, I like to see competition. I like to see mom and pop shops. I like to shop local. I feel good about that. Yeah! But let's not pretend that this has anything at all to do with inflation, in the same way with the childcare conversation that we had. You know, do I want to support parents? Absolutely. But if we start saying that's going to do something with inflation, and then we're proven wrong very, very quickly, then that pokes a bunch of holes in these arguments of otherwise worthy causes.

Pjesky: Yeah, I mean this item is almost identical to the item that included things like the truckers and The Jones Act. So, you have a menu of, you know, debatable problems, you know, because just, you know, there are people that would say that none of these things are a problem, just like there are people that would say: well, The Jones Act is a great idea. So, you have a menu of problems here that are (that we) could debate the merits of each individual thing. But the, you know, industry concentration, you know, lacks anti-trust enforcement, you know, things like that --- those, they're just not inflationary. And as Dr. Mattson said, that we only have to look at history to see this, because we've seen bouts of inflation in capitalist countries [and] socialist countries. We’ve, you know, you could have, you know, there's nothing about, you know, (if I could get wonky for a second) like this, there's nothing about the perfectly competitive model that we teach in microeconomics that would say: well, if the conditions of this model hold, we could not have inflation.

Stitzel: Right.

Pjesky: There's nothing there. So, even if we had a perfectly competitive marketplace, where every single thing that is bought and sold matches the assumptions of the perfectly competitive framework that we teach, we could still have inflation. And what would cause us to have inflation under those conditions is if the monetary authority scooped a bunch of money into the economy, then we would have an increase (a general increase) in the average price of everything, which is inflation is. So, again, a lot of, you know, each policy that you've mentioned in this one and most of the others, [we could] have our own podcast about each one of those. But in, you know, inflation is not going to enter the conversation at all. So, you know, you and I could talk about antitrust in its own podcast, and we wouldn't mention inflation one single time.

Stitzel: So, I really like this discussion that both of you laid out. That's a really good way to approach that. So, one of the things I would observe is not only could we, in the way that you are saying that we are currently, we do. This inflation episode has hit categories that we would say these markets have better amounts of competition. Maybe grocery would be a good example of this, where there's, you know, lots of little markets and lots of, you know, and there's no monopoly on provision of these particular things we see. We see inflation there. My intuition might even be some of the things that would pop into our mind first as monopolies might be some of the places where the prices have actually gone up the least. And so, that would be an interesting thing. Of course, I'm sure people that would want to defend this argument would bring up things like Amazon or something like that. But that's a debate, [and] as you said. this would be a different podcast to discuss the merits of monopoly busting in those particular settings. But…

Pjesky: Amazon’s good because often there it's the cheapest place to buy whatever it is that you're looking for.

Stitzel: Well, and you might think of Amazon as having lots of market power, but facilitating lots of competition between third party sellers.

Pjesky: And they do that too. And, you know, Google Services are still free to the ultimate consumer.

Stitzel: Right.

Pjesky: So, there are lots of things that cause this particular story to break down on its own merits.

Stitzel: So, let me synthesize this. What would I like your reaction to this was --- let's think about inflation from first principles. What causes inflation? Monetary policy. Does this have to do with monetary policy? No. And then, I think Ryan’s reaction to, or addition to that, is very useful to say, right? And look at the historical record, or what I would even add like the current episode. Does this fit with this particular narrative? No. In areas where we have more or less competition, we see episodes of inflation happening in those situations. So, why would we want to think that that's a particular driving force in this episode, which, you know, I mean, I'll be generous and say let’s limit this particular point to just happening to do with this particular episode of inflation, as opposed to, like, this is a main mechanism through which inflation happens. You know, one of the things that I would say to this --- if I can add on, and it really, if you think about it carefully, I'm not even really adding to the points that you two made. It's really just another way to synthesize it is to say --- if you want to explain inflation with corporate profiteering, [then] you have to explain to me why corporate profiteering. Now because corporate profiteering was happening before there was an inflation episode. They were charging the highest prices they could charge back in 2019. Why in 2021-2022 is this suddenly now they're able to cause inflation? You have to have some real clear mechanism there, which isn't proposed here. And I’ve not seen it proposed. Maybe one of you have.

Pjesky: I mean, I haven't either. But I mean, yes. The point is --- there's never been a time in history when corporations have not tried to make their profits as obscenely high as possible. That's what they do. That's what corporations do. We can expect that of them. And, you know, why? You know, the question goes what changed? What has changed in the last two years? What could that be? Well, maybe the Fed's balance sheet has grown by trillions of dollars. Maybe that has something to do with this. And I mean, this is the --- you know, all of these explanations are dancing around that issue. And how could anyone so blatantly ignore something that is so obvious? I mean, I have never seen a group of motivated reasoning, you know, motivated reasoning episodes than with these 12 things.

Stitzel: Well, we have another one here. Our next to last one is to drive down healthcare costs.

“Many parts of the government can influence short-run consumer prices. But if you have the tools and authority to do so with the same reliable impact as regulating health-care costs --- the largest single sector of consumer spending.”

“The United States already faces higher health-care costs than any other advanced economy.”

“But healthcare costs are also unique: Policymakers already have the tools and discretion to lower inflation by lowering health-care costs.

“A considerable body of research shows that targeted reductions on government spending to health-care providers reliably reduce health-care inflation.”

So, react to that.

Mattson: Wait, is healthcare the largest part of our spending?

Stitzel: I don't, well, I don’t think so.

Mattson: O.K.

Stitzel: The largest single sector of consumer spending.

Pjesky: It might be that, but it's not a majority. I think it’s like what? It's 17%...

Mattson: Yeah.

Pjesky:…or something.

Mattson: Is that because the Baby Boomers? Is that?

Pjesky: I don't have any idea.

Stitzel: Yeah. I don't know.

Pjesky: Well.

Stitzel: This is a good point. I sort of zoomed past that.

Pjesky: I mean, as the White House has stated, inflation is a global phenomenon. He recently was famously talked about this. And other countries have a higher inflation than the United States, but yet, the United States has the highest healthcare costs. So again, reality doesn't match this as a solutions are one problem. A second problem with this is that if you reduce healthcare costs to consumers, then that means people who produce healthcare are going to receive fewer dollars. So, we would not expect this to change aggregate demand or aggregate supply at all. There's no mechanism here that suggests bringing down the price of goods in one single sector is going to have anything to do with inflations in the aggregate economy at all.

Stitzel: I'm glad you said that. Because, you know, my instant reaction to this is the two statements policy makers already have the tools and discretion to lower inflation by lowering healthcare costs. So, lowering healthcare costs doesn't lower inflation. And then the last one there that says, you know, targeting reductions and government spending to healthcare providers reliably reduce healthcare inflation. Healthcare inflation is not a thing. Right, there are prices.

Mattson: Well, I mean, if you break down CPI, right? I mean…

Stitzel: O.K.

Mattson: There’s that where we can compare, you know, is education going up faster in terms of spending than, I don't know, durable goods and non-durable goods, right? I think that might be where that author is coming from. But yeah, the whole one sector argument, one sector fits all type thing --- it just doesn’t gel with macroeconomics. Inflation is not, it's not going to do that. And to try and emulate Rex here --- and O.K., I'm gonna take this at face value --- how is this going to work out? You know, the best way to reduce healthcare costs, you know, reduce that price is increase the supply. So, O.K. Let’s get more nurses. Let's get more doctors. Let's increase that supply and, you know, if the demand is going to stay the same, then prices should go down. O.K. we do that. But in the macroeconomic context, if you suddenly hire a whole bunch of nurses, like, you hire a bunch of truck drivers, you know, then O.K. again, income is consumption is spending and that's going to be inflationary. So, here we have this problem again with going from the micro to the macro. I think there are some great arguments, again, for finding ways to reduce healthcare spending, and making healthcare more available to people, and that's wonderful. But that has nothing to do with inflation. And O.K. Let's assume that this is going to work, and they reduce the spending, the prices, not the spending. They reduce the prices. Well, that would be an aggregate demand increase, and that that would be inflationary wouldn't it? So, we're kind of stuck here again with going from micro to macro.

Pjesky: Yeah. The economics profession is responsible for all of this bad thinking…

Mattson: Yeah.

Pjesky:…because we measure inflation --- this is the best way we can do it; we measure inflation --- by calculating prices in various sectors and for various goods of the economy. We do some sort of weighted fancy average on those calculations, and then out pops so the CPI is 8.6%...

Mattson: Consumer Price Index.

Pjesky:…or whatever it is. And we teach that is that's present in our textbooks. But we don't do a good enough job of explaining that we calculate inflation using those methods because of practical constraints on our ability to calculate inflation in the real way. So, we calculate inflation by basically using proxies of what everything costs, and we add up everything, and that's how (that's what) the inflation rate is. The real way to measure inflation would be to do the opposite of that basically. So, you know, the reason that we have increases in prices across the, on average, across different sectors and goods of the economy is because inflation is happening. So, we, kind of, due to practical constraints on how we measure things and how we have to measure things, we get the causality backwards here. And so, we come up with people, who are very serious people I assume, you know, coming up with solutions to inflation with things like: well, good grief, we spend a lot of money on healthcare. If we lower prices in healthcare, well then, we’d lower inflation. And in isolation ---, and we've had a podcast about this, and we talked about this for an entire hour, in isolation --- that seems like something that would actually work. So, you know, to bring down measured inflation, if we could target certain sectors of the economy and bring down prices in those sectors, well then, it might, by some weird coincidence, cause measured inflation to actually go down. But you're not really doing anything to the forces that are causing whatever damage inflation is causing to the economy, which is again, you still have increased in the money supply causing inflation. Because if we do policies to --- and like what Dr. Mattson said [is] the best way to decrease prices in the healthcare sector is to increase the supply, if we do all those things, [then] (we can) we might be able to --- decrease the price that you have to pay to, you know, a doctor's visit. Or, you know, your antibiotic might cost less or something like that, but you're still going to have a situation where every dollar that you spend on those things is received by somebody as income, and they're going to turn around and spend that money on something. If we save you money on healthcare costs, you're going to use the excess money to go out and buy something. And the people who received that money --- their income is going to increase and they're going to buy stuff. And so, we would expect any decrease in the price of healthcare to be offset by some kind of increase in the price of something else. And if that does indeed even lower measured inflation, [then] it's --- this is almost a coincidence if it does. But again, when I hear people say nonsense like that, I give them a lot of credit. And I think to myself: well, they must have paid attention in economics class, because if you read the economics textbook and, you know, you could very easily be led to believe this.

Stitzel: So, that's talking about one way to, like, target costs in a particular market. The next logical step is to suggest: well, if we can't do things that sort of organically reduce prices, or intervention goes through and causes prices to go down, [then] let's just limit them. So, our next and final --- I'm going to kick this to Ryan is to consider using price controls. So…

“It is not obvious that price controls are a silver bullet for all of the recent spikes. While there appear to be some instances of opportunistic price-gouging, other price increases appear to be transitory. But to deal with the supply shocks and commodity hoarding that the transition to a clean energy economy could produce, no policy response should be off the table --- especially those such as price controls that have a history of effective use.”

Ryan thoughts on that?

Mattson: No.

Stitzel: My guests today have been Dr. Ryan Mattson and Dr. Rex Pjesky. Gentlemen, thank you for joining me on the EconBuff.

Pjesky: Thank you very much.

Mattson: Thank you Lee.

Stitzel: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at Econbuff Podcast. You can check out our website at www.econbuffpodcast.wixite.com. That’s w-i-x-s-i-t-e.com. You can contact us at econbuffpodcast@yahoo.com.