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The debate over what's causing inflation
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For the past few months, there was a hope that maybe just maybe the high inflation, we've all been experiencing had piqued that inflation would start to come down but that's not what happened. The latest economic data for the Consumer, Price Index, or CPI was that over the last year, inflation grew by 8.6% yoy, the high inflation is happening, like I'm sure where I learned by now, we can bark just rattle off a few off the top of my head. So low interest rates and yes, anything else, what else to do? And I appreciate it. Now, one Economist thinks that all of these reasons I just a distraction, he pins basically all the blame on one thing government borrowing and spending.
Hello and welcome to Planet Money. I'm Wayland Wayland Woods to recent episodes of Planet Money, Daily Show the indicator, these episodes debate. What is causing all this information. The 5 trillion-dollar question, did all that money. The government spent during the pandemic caused the pickle, we're in will talk to someone who makes the case. That maybe. Yeah, it's a fiery hot take and by no means settled, but we want to hear this out sooner from the second part of the show. We will look at some potential reasons why I like the ghost from Jerome. Powell's past is a ghost that have haunted him throughout the pandemic and which may have contributed to the inflation mess that we're in right now. That's all coming out.
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John Cochran is a senior fellow at the free market oriented think-tank the Hoover institution and John has also been running a Blog for over 10 years called the grumpy Economist really a grumpy person but I was reading the offense of one morning and Equipment have written some, particularly outrageous thing. And I spilled my coffee and my children dumped me that grumpy Economist. So I thought that would stick to explain where John Cochran fuse fits among economists. He asked us to picture. A Rowdy seen mainstream economics is like a bar fight. Inflation. Ultimately comes from monetary and fiscal policies, changing interest rates, and fiscal policies means the amount that the government borrows and spends. And so most Economist agree that most of the time both monetary and fiscal policies are the main drivers of on
Inflation. But they might argue over, which is more important, a lot of Economist emphasize the power of monetary policy, the power of the central bank and make a recording this. Where were you standing? I'm standing in the corner. I specialize in, like all the physical theory of the price level, the physical theory of the price level. This means that John Cochran thinks that inflation is largely caused by government borrowing and spending, so he's standing in the same bar as a mainstream Economist to arguing about, which is more important Montessori of Physical policy but he's definitely 21extreme. He's in for sizing fiscal policy and specifically the moments that three covid stimulus and relief packages that totaled around 5 trillion dollars was just a difference of emphasis are relative to other people. See that the Federal Reserve the central bank is maybe less powerful than some others would say.
That's right. So our current inflation I think has a very clear Source the government spent about 5 trillion dollars and sent that as checks to people many of those people really needed the checks, but a lot of people, didn't they overdid it? And that causes inflation over the clock, back to around the time of the relief packages. And the stimulus packages from the government that they were three main packages. What were your feelings? And comments of the time. This is a massive waste of money. Even though the ones where I saw, you know, people lining out throughout my block for donated food, big shock like that. The government has a proper role which is essentially insurance. We left Insurance behind
Government employee with a government, pension and social security owns their own house. Why do they need an extra? And this is why it's called the grumpy Economist, not the magnanimous Economist, but, you know, it's not that government spending per se is inflationary, what matters for inflation is how the three major coronavirus spending bills are paid for, and they were paid for by the government borrowing going further into debt is can borrow imprint an enormous amount of money if they have a clear plan that they're going to pay back the borrowed money and and soak up the money when the time comes. The fact that there wasn't a clear plan for paying it back, I really as is one of the key reasons why we're seeing inflation now. A plan like raising taxes. Raising taxes, cancer, price, inflation, households would have less money to spend on
Renovations in tennis at meaning businesses, can't raise prices as much. And that hasn't happened at least contribute to the high inflation. We're seeing now, but what about monetary policy, the FED keeping interest rates low, isn't that contributing to inflation cuz I was just at this bar fight was very polite, and we had a conference here at the Hoover institution and and we talked about exactly this issue. So is the fifth slowness to react does that year of letting inflation go and and keeping it straight 20 is that by itself an additional stimulus and one into the bar fights it. Absolutely, yes. That is just going to assume that inflation, make it worse. But John doesn't agree that the FED is to blame.
Inflation went nowhere. So, if Siri that says, if interest rates tickets are in a matter, what, inflation spirals out of control is, is directly contradicted by the, it's not as crazy as it sounds. It's not as crazy as it sounds. I love the disclaimer. And to be clear, John agrees that the FED could have raised interest rates are like maybe in the middle of 2021, could have slowed, the economy in nipton fashion but that doesn't mean that the FED cause inflation the war in Ukraine. You know, are the supply shocks not meeting. It's harder for manufacturers to make stuff and restaurants to find staff. Does not driving up inflation. What should happen in a supply. Shock things are harder to make so we're poor we can't produce as much. Do prices will go up, but wages won't with high a price.
Is this is the way that the market is essentially rationing limited Goods but he saying in the real world, at the moment, that is not. What's happening wages. Yes. True. They haven't fully kept out with high inflation but they are going up for a lot around 5% over the last year more than normal. So John thinks that we are seeing something closer to a classic inflationary, spiral prices of stuff, going on and wages following suit, and those boosted wages. And the booster prices at both driven by Aldo stimulus packages, but of course he would be the guy who's been holding that world is ending sign for the last 10 years. And he's going to be saying, spend last. He's going to be wanting these impending doom.
2008. Right, right. Right. And I was wrong about the hypochondriac who put on his Tombstone, when he dies at 95. See, I told you, I was sick, the role of the fed and Supply, shocks and driving up inflation.
Belmont Apartments think that despite whatever has been causing inflation. The Federal Reserve which is chaired by Jerome Powell really slow to act on it to be slow to embrace it. Just right. And start raining in Old that accept cash that Spain driving up inflation. So why hasn't the FED acted sooner after the brake indicator Cohoes Adrian by and I will tend to the Skies of Jerome Powell.
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So the big economic news of this week, it is essential that we bring inflation down. If we was that Jerome Powell the chair of the Federal Reserve. The US Central Bank announced that the Fed was Raising interest rates by three-quarters of a percentage Point. Ongoing increases in that red will be appropriate since 1994. It's meant to bring down high price inflation by making it harder for everybody to borrow and spend but this big jump is quite a change in strategy than what the FED has had over the last year. Can I have this extremely slow and steady boiled frog? Gently kind of thing. Like, Jerome Powell took a very long time to start announcing that the Fed was going to raise interest rates, which is out of doing this year, even though inflation was really high last year. There are a lot of people are frogs that said, this approach took too long like The Economist magazine for instance, they ran a headline, a few months ago that said, the fee,
That failed burrito and a lot of reasons why the FED kind of think it's time to fight inflation, but we really want to understand the psyche of the fed and it's Chad, Jerome Powell the particulate two episodes from recent history that shaped pails thinking to better understand the fed's thinking we're going to start with What's called the taper, tantrum tantrum. So bring your mind back to 2008, the height of the financial crisis. The FED had already brought short-term interest rates down 20 but the economy still needed, a further nudge in the ribs. Right in needed more stimulus until the FED try to do something new. It start to buy up over it eventually become trillions of dollars of assets to help drive down long-term interest rates. And this is what became known as quantitative easing or QE. So, it brought a bunch of bonds which meant that there was born.
Didn't need High interest rates to attract buyers and those low interest rates were intended to stimulate the economy, but quite amusing was meant as a temporary measure something just to get the country through the 2008 crisis. And so several years later by 2013, some members of the Federal Reserve board which decides monetary policy, they were getting antsy and one of the people on that board was Jerome Powell, so him and a couple of other buddies on the board said to Ben Bernanke, look, we got to get back to something closer to normal. We got a real in this Bond buying in a Fed meeting in June, 2013. Even plan to $18 that, yes, what kind of action was risk-free. But these are actual words with got to jump that he was meeting, they need to get out of Q&A that day, because of that pressure that drone his colleagues were putting on Bernanke Bernanke walked
Over to his usual press conference in front of the reporters and the cameras, and he announced the scenario for slowing down QE purchases for tapering off the buying of bonds, just listened closely to this, cuz this might be on the most expensive sentences ever. Uttered in the 2010s, if the incoming data are broadly consistent with this forecast, the committee currently anticipates, that it would be appropriate to moderate the monthly pace of purchases later this year. And it sounds so innocent and and
We all know it would Ben Bernanke and the bond markets are essentially crashing in this way that drone, Powell and his colleagues hadn't anticipated, the financial press dubbed, it the taper tantrum. And this is like the FED had slammed on the brakes. When is honey talkin about eventually easing up on the accelerator Jerome was reportedly pretty shaken by all this saying, oh my goodness to Ben Bernanke to reply something along the lines of don't worry you were here for 2008. This is nothing but for Powell. It was something he would carry. I mean, serious talk about it in 2019, April 10th from left scars on anybody who was working at the FED at that time and I think it take away was at the market, could be very sensitive to news about the balance sheet.
This was the lesson, be very slow and steady with your tightening messages so slow and predictable. It's like watching paint dry and Jerome. Powell carry this lesson into the pandemic. When the FED launched a new round of quantitative easing surprisingly, well and inflation is rising house hints and slow build-up to tapering had prepared. The markets, a gradual tapering process so that when the announcement finally came in November it is time to taper, we think because the economy has a it was not a 2021 equivalent of a type of tantrum. So it works lesson learned, right? Well, the flip side of not spooking, the markets. Was that in the meantime, inflation, grew and grew to the point that now people are talking about the FED meeting to trigger a recession to help bring it down.
The type of tension was Jerome Powell's Fest ghost ghost can be Illustrated from the closest that fed Economist who never gets to join a rock band tour bus tour. 2019 code fed lessons, is the round, the country consultation with union members with small business owners Community College. Latest America was feeling about the economy and width of the FED should change how it felt about it. And I think the FED has been slow to recognize that the dynamic between inflation in the tight labor market. You are not what they were in. The seventies this is Mark Levinson Chief Economist at service employees International Union. And he's speaking at one of these that listens meetings in New York and would Mark was saying, was that in the past low unemployment, often meant High inflation, you know, as a hot labor market gains steam, that might raise wages and put inflationary pressure on the rest of the
Tommy. But in the years before the pandemic unemployment was actually getting really low and inflation was also really low. And so he was saying maybe there is such a trade-off. Maybe this could actually be a win-win low inflation and low unemployment rates, which could also have benefits for groups of workers that have been historically marginalized. It's the benefits of tight. Labor market is real wage gains that noticeably go to lower and middle-class workers that go to African American workers. Yeah, where the FED listens to her, head started in 2019, the FED started lowering interest rates, making it easier for companies to borrow and hire more people, and unemployment fell. So not that low-wage workers, black workers and Latino workers, we're getting pay Rises and for a moment and coming to close, he was falling and inflation wasn't Rising pretty much.
Another lesson for POW, which he also took into the pandemic. And here he is at a press conference in September 2021. We also said we wouldn't raise rates just in response to very low unemployment in the absence of inflation. So that was another aspect of it. Because we saw that that really benefited, but brought in a labor labor market participants in a brown recluse Jerome. Powell learned not to raise interest rates simply because unemployment was low and that was long with learning to give the market a long lead time before the FED makes big adjustments to its tightening policy. Those were the big lessons from the 2010s. They weren't lessons that helped much to stem our current inflationary spiral,
If you have more questions about inflation, and the weird wild ways that is playing out across the economy. Please tell us, send us an email or a voice memo. Send it to Planet Money at NPR on social media. We're on Facebook, Twitter Tik-Tok, an Instagram. We are at Planet Money and you can subscribe to the indicator podcast with you, get your podcast will have more on the fed and the debate about inflation coming up. The original episodes and Mickey will let it by Robert Rodriguez and Dale Addison Bus episodes and Peyton cut and edit the indicator by Planet Money episode was produced by with a ribbon and it was engineered by dentist Willits was edited by that Blanchard and Molly mesnick, the supervising producer. This is a listening.
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