The American economy, while never simple, was at least somewhat understood — until the pandemic upended even the most basic assumptions, experts told The Hill this week.
From the recession that didn’t happen, to the relationship between unemployment and inflation, to the reason that inflation took off in the first place, to the disconnect between national economic performance and people’s experience of it, to the efficacy of interest rate hikes — American economics and the people who follow it are having an identity crisis.
It’s not clear how it’s going to resolve.
Some economists feel vindicated by what they’ve seen play out, while others have changed their positions. Others have suggested entirely new models are needed and have encountered pushback from colleagues on that suggestion as well.
But no matter how you frame it, it’s undeniable that where there once was confidence, now a fretful mood has descended over a discipline trying to reconcile long-held dogmas with the near-wartime economic conditions brought on by the pandemic and the sensational recovery that followed.
“What you have is a shake-up of economics here in the United States, because we’re having a shift again,” Richard Wolff, emeritus professor of economics at the University of Massachusetts Amherst and a visiting professor at the New School, told The Hill.
“It remains to be seen in this episode to what extent the normal relationships of many, many kinds — labor, spending, inflation and others — will go back to their pre-pandemic norms, or will be permanently perturbed,” former Federal Reserve Vice Chairman Alan Blinder, a Princeton University economist, told The Hill.
Blinder, who oversaw a period of quantitative tightening in the mid-1990s during the Clinton administration, said the very efficacy of monetary policy is now up for debate.
“The only real precedent that I can identify to the pandemic-era exertion of state control over the economy would be the two world wars,” Daniel Sargent, a professor of the history of public policy at the University of California, told The Hill in an interview.
“It’s also significant that some of the statutory authority that the federal government leaned upon in order to exercise the degree of control that it did derived from [the] Trading with the Enemy Act of 1917,” Sargent added.
While the economy of the 1970s also experienced a series of state interventions, including price controls as part of the “Nixon shock” intended to resolve inflation, the deficit spending of the pandemic makes the post-World War II period the most relevant analogue for today’s economy, Sargent said.
The sudden switch to such a high level of state intervention is likely a central reason that many traditional assumptions have broken down.
The comparison to the post-WWII period was also top of mind for Harvard University economist Stephen Marglin.
“During the pandemic, the same thing happened [as during the war]. There weren’t the civilian goods being produced, and people did get money, but they couldn’t spend it because the economy was shut down, just like the civilian economy had been shut down during WWII. That’s the analogy,” he told The Hill.
Marglin said that a doctrinal shift within economics akin to those that reshaped the discipline in the 1930s and again in the 1970s “probably should happen” but that he wasn’t seeing any immediate signs of a major course correction.
Republicans and conservative economists tend to argue that inflation was caused primarily by the trillions in deficit spending the government sent out to bolster households and businesses during lockdowns.
Democrats and liberal economists focus on muddled supply chains and even corporate greed as the primary drivers.
But the private-sector response to the public-sector spending spans both these explanations, economists say.
“What we had was a situation in which corporations across America understood that the money pumped into the economy to cope with the crash that we were due to have, coupled with the pandemic, was an extraordinary time. The government pumped in enormous amounts of money, enormous amounts of fiscal stimulus, and this made it possible to raise prices to improve profitability,” the New School’s Richard Wolff said.
While the cash injection into the economy made it possible for companies to raise their prices, it also allowed people to keep spending money, helping to stave off recession.
“The central view, I feel, is totally vindicated,” Hoover Institution economist and former University of Chicago finance professor John Cochrane told The Hill. “The central reason we got inflation is the government printed up about $3 trillion and borrowed another $2 trillion, and sent people checks.”
“That’s also consistent with why inflation eased, even without the Fed really doing anything,” he added. “It did not repeat 1980 to 1982 when interest rates were well below inflation even after the Fed started raising them. A one time fiscal blowout raises the price level, so you get a burst of inflation that eventually goes away.”
(continued...)
From the recession that didn’t happen, to the relationship between unemployment and inflation, to the reason that inflation took off in the first place, to the disconnect between national economic performance and people’s experience of it, to the efficacy of interest rate hikes — American economics and the people who follow it are having an identity crisis.
It’s not clear how it’s going to resolve.
Some economists feel vindicated by what they’ve seen play out, while others have changed their positions. Others have suggested entirely new models are needed and have encountered pushback from colleagues on that suggestion as well.
But no matter how you frame it, it’s undeniable that where there once was confidence, now a fretful mood has descended over a discipline trying to reconcile long-held dogmas with the near-wartime economic conditions brought on by the pandemic and the sensational recovery that followed.
“What you have is a shake-up of economics here in the United States, because we’re having a shift again,” Richard Wolff, emeritus professor of economics at the University of Massachusetts Amherst and a visiting professor at the New School, told The Hill.
“It remains to be seen in this episode to what extent the normal relationships of many, many kinds — labor, spending, inflation and others — will go back to their pre-pandemic norms, or will be permanently perturbed,” former Federal Reserve Vice Chairman Alan Blinder, a Princeton University economist, told The Hill.
Blinder, who oversaw a period of quantitative tightening in the mid-1990s during the Clinton administration, said the very efficacy of monetary policy is now up for debate.
A quasi-wartime economy plays by different rules
Economists see the end of World War II, when debt-to-gross domestic product (GDP) ratios were about as high as where they are today and inflation was above 10 percent, as a point of comparison for the economy of today.“The only real precedent that I can identify to the pandemic-era exertion of state control over the economy would be the two world wars,” Daniel Sargent, a professor of the history of public policy at the University of California, told The Hill in an interview.
“It’s also significant that some of the statutory authority that the federal government leaned upon in order to exercise the degree of control that it did derived from [the] Trading with the Enemy Act of 1917,” Sargent added.
While the economy of the 1970s also experienced a series of state interventions, including price controls as part of the “Nixon shock” intended to resolve inflation, the deficit spending of the pandemic makes the post-World War II period the most relevant analogue for today’s economy, Sargent said.
The sudden switch to such a high level of state intervention is likely a central reason that many traditional assumptions have broken down.
The comparison to the post-WWII period was also top of mind for Harvard University economist Stephen Marglin.
“During the pandemic, the same thing happened [as during the war]. There weren’t the civilian goods being produced, and people did get money, but they couldn’t spend it because the economy was shut down, just like the civilian economy had been shut down during WWII. That’s the analogy,” he told The Hill.
Marglin said that a doctrinal shift within economics akin to those that reshaped the discipline in the 1930s and again in the 1970s “probably should happen” but that he wasn’t seeing any immediate signs of a major course correction.
Causes of inflation spark debate but unite major thinkers
While the nation’s current battle with inflation has sparked a small industry of rhetorical debate, many experts The Hill spoke to said there’s an implicit agreement among different camps that stitches the different arguments together.Republicans and conservative economists tend to argue that inflation was caused primarily by the trillions in deficit spending the government sent out to bolster households and businesses during lockdowns.
Democrats and liberal economists focus on muddled supply chains and even corporate greed as the primary drivers.
But the private-sector response to the public-sector spending spans both these explanations, economists say.
“What we had was a situation in which corporations across America understood that the money pumped into the economy to cope with the crash that we were due to have, coupled with the pandemic, was an extraordinary time. The government pumped in enormous amounts of money, enormous amounts of fiscal stimulus, and this made it possible to raise prices to improve profitability,” the New School’s Richard Wolff said.
While the cash injection into the economy made it possible for companies to raise their prices, it also allowed people to keep spending money, helping to stave off recession.
“The central view, I feel, is totally vindicated,” Hoover Institution economist and former University of Chicago finance professor John Cochrane told The Hill. “The central reason we got inflation is the government printed up about $3 trillion and borrowed another $2 trillion, and sent people checks.”
“That’s also consistent with why inflation eased, even without the Fed really doing anything,” he added. “It did not repeat 1980 to 1982 when interest rates were well below inflation even after the Fed started raising them. A one time fiscal blowout raises the price level, so you get a burst of inflation that eventually goes away.”
(continued...)
