The single issue that might decide the upcoming presidential election also happens to be: very confusing. Political economist Mark Blyth helps us understand: how inflation starts, how inflation is stopped, and shares his theory about why the powers-that-be may be just as confused about inflation as we are. Support the show: searchengine.show To learn more about listener data and our privacy practices visit: https://www.audacyinc.com/privacy-policy Learn more about your ad choices. Visit https://podcastchoices.com/adchoices
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Welcome to Search Engine. I'm PJ Vogt. No question too big. No question too small. I am typically pretty comfortable with embarrassing public disclosures, but I have been struggling with this one. I genuinely do not understand inflation. I'm not joking about either part of this. I both don't understand inflation and I find my confusion about it somewhat embarrassing.
Like when I'm listening to NPR and they start talking about how the Fed might hike interest rates or something, something cool down or something, something soft landing, the words themselves hit my brain and my brain starts to shake and melt like jello in a microwave. Inflation talk makes me feel like I missed a class in school. And honestly, it's possible I did.
I missed tons of classes in school. It's just, this is the one that is now bothering me. When polled, American voters this year reliably reported that the single most important issue determining their vote is inflation. To be fair, it gets lumped in with the economy and prices, but inflation. Not immigration, which often comes in second. Not climate change, which I've seen down at number 10.
Inflation. By which I think they mostly mean that the things we all have to regularly buy have gotten more expensive. I'm not a complete idiot, and also I'm somewhat cheap, so I do notice when prices go up. I understand that inflation partly explains why I paid over $4 a gallon for gas in Nevada last month. or why I now can't walk out of a fast food restaurant without breaking a 20.
I just don't really get the underlying mechanics of it. There's a difference between being able to mumble an explanation and actually understanding something, and I live in that difference. I felt it pretty acutely, actually, watching the presidential debate. The very first question spoke to the issue that this election will likely come down to.
I want to begin tonight with the issue that voters repeatedly say is their number one issue, and that is the economy and the cost of living in this country. Vice President Harris, you and President Trump were elected four years ago, and your opponent on the stage here tonight often asks his supporters, are you better off than you were four years ago?
When it comes to the economy, do you believe Americans are better off than they were four years ago?
So I was raised as a middle class kid.
Harris quickly segued from talking about her background to talking about her plans to make housing more affordable.
Because here's the thing. We know that we have a shortage of homes and housing, and the cost of housing is too expensive for far too many people.
It was actually Trump in his answer who brought up inflation.
Look, we've had a terrible economy because inflation has, which is really known as a country buster. It breaks up countries. We have inflation like very few people have ever seen before. Probably the worst in our nation's history.
Just to say, inflation is nowhere near the worst it's been in our nation's history. But it has been bad. Trump's proposed solution for inflation is tariffs.
Other countries are going to finally, after 75 years, pay us back for all that we've done for the world. And the tariff will be substantial in some cases.
What did any of this have to do with the price of gas in Nevada? The day after the debate, feeling completely at sea, I did what you do when you profoundly lose your way in life. I called a Scottish-American economist. Mark, are you jamming?
I'm just playing a guitar.
What are you playing? It sounds a little like Oasis.
Oh, God, no. I fucking hate Oasis. Basically, it's a Beatles tribute band through two monkeys.
Right.
Mark Blythe is a political economist, a professor at Brown University. He's writing a book about inflation. When we spoke last week, I was at Search Engine Studios. Mark was in his home studio, surrounded by many guitars. When my colleague, Garrett Graham, was setting up this interview, he asked you for 90 minutes of your time.
You insisted on 45 minutes because you said inflation was too boring to talk about for longer than that. That's pretty true.
First of all, I just want to say that really makes me trust you. And to think, I just wrote a book about the damn thing. So, you know, I must be into boring myself.
Well, that was what I wanted to ask you. Like, how did you decide to write a book about something that you also describe as boring?
This is a really good question. Some of it was pretty boring to write, I have to be honest. Why write a book about something you think you understand, right? Now, why do we, as in sort of people in my job, I'm a political economist, we talk about this sort of stuff all day. Why do we think we understood inflation? Because we were all raised on a story about the 70s.
We'll talk about that story in the 1970s. I began to doubt the story of the 1970s. And once you begin to doubt the story of the 1970s, a lot of the stuff that we do when we talk about inflation and the stuff that we do doesn't make much sense. That's why the book became more interesting.
The story of the 1970s, oh dear, we've already begun to get ahead of ourselves. We're not getting into that right now. We are going to start with the basic basics. I asked Mark to just give me a professor's definition of inflation.
What is inflation? Inflation is a rise in the general level of all prices. It's everything going up. When people talk about house inflation, there's no such thing. That's just houses going up because we didn't build enough of them, right? And inflation is all prices in the economy going up at once. Now, wait. Hold on. It gets better. Hold on.
This is the thing.
That makes sense to everybody, because it totally makes sense, right? Now, imagine you're looking at a glass of water, and you're looking at the top, and you've got that little line of silver at the top called the surface tension. When economists talk about inflation, they're actually looking at the surface tension.
Because what they talk about when they talk about inflation is the rate of change in that growth of prices. So let's take a simple example. I went to dinner on Sunday with my family. I ordered a short rib. I nearly fell off the seat because the damn thing cost $45. I was like, what?
Yeah.
And this is an effect that's happened in inflation. You know that stuff used to be $30, and then it went up to $40, and now it's stuck at $45, and it's never going to be $30 again. Now, when an economist tells you, ah, but inflation's been falling for the past six months, what they mean by that is the rate of change in how fast it's going up has been coming down. Ah. So, right?
This is already helpful.
This is it. It's the rate of change in the increase in prices. That's the inflation rate. Inflation as a phenomena is the general level of all prices going up.
Okay, so let me say it back to you to make sure I have it. It's inflation when the prices of everything are going up. Done. If one thing is getting more expensive that's not inflation, don't use the word. You're confused. You're right. And then secondly, when we say inflation is going down, it doesn't mean that anything's going to get cheaper.
It just means that things are going to get expensive more slowly.
100%.
That's a valedictorian. Got it.
College dropout, actually. Okay. So we now have a working definition of inflation. Let's take it for a ride. So what actually causes inflation? In theory, inflation can strike at any time. There's lots of reasons why prices might suddenly all go up together. But if you look back in human history, inflation actually used to be much more rare.
The idea that inflation is something we talk a lot about, worry a lot about, make podcasts trying to understand, that is a fairly modern idea. And it exists partly because of a particular feature of modern governments.
So the basic understanding is the government spends too much money and that pushes up prices. That relies on you having a government that actually spends a lot of money, raises a lot of taxes, runs a lot of deficits, all this sort of stuff. And most of human history, I mean, we didn't even have a government. We had bloody anarchies running around the place and empires and stuff.
That's not to say there wasn't a great big inflationary period in the time of the Roman Empire. There's been other sort of historical examples of this, but modern inflation, something different. And we draw all of our examples from the 1970s.
Okay. So let's get to the 1970s. Like what, tell me before you demythologize it, like what is the received conventional, like I'm a freshman in college. What did they tell me about the 1970s?
Right. So kids, there was a time called the 1970s. It's when everyone was a swinger and had sideburns, right? Right. And it was all crazy. And Starsky and Hutch was a popular TV show. Now, what else happened in the 1970s? So go back a little bit. You had the Vietnam War.
The story Mark is telling, economists refer to it as the Great Inflation. It goes like this. In the years before the Vietnam War, the U.S. government had been spending more money than usual. President Johnson in 1964 had announced new social programs like Medicare, along with greater investments in urban renewal.
Far in your time. We have the opportunity to move not only toward the rich society and the powerful society, but upward to the great society.
Then, in 1965, the U.S. enters the Vietnam War, which pushes government spending up even further. We have to feed the soldiers. We need gas for the tanks.
The 3,900 paratroopers are members of the 101st Airborne, and they bring the total of American servicemen in South Vietnam to 79,000.
So what that means is you have the government spending a lot of money. You've got a lot of people taken out of the labor market, shipped off to Southeast Asia. You've got a lot of government spending, all this sort of stuff. And the basic gloss of the story is that everybody was spending a lot of money then, more than they could cover with taxes.
And economies all through the developed world, all through the West, started to slow down. And that's a bit of a problem.
And so just to make sure I'm following carefully, it's like the first two things that happen. One is government spending a lot of money. That's going to drive prices up because like... Because they're competing for the stuff that you're going to buy as well.
Government needs drywall as well.
Right. The government needs drywall. The government needs milk. And then also because there's a draft... People are being sent to war, which means that everybody who is left who wants a job has a job.
Exactly. And not just that, you're pulling in marginal workers to cover them, and you've got super tight labor markets. Unemployment's pretty much non-existent. So what that means is you can be the dumbest person in your firm, leave a job at 12, get a better paid one at four, because everyone's competing for the last possible worker. Right. Got it.
In theory, this economy sounds kind of great. Companies so desperate to hire that you can quit your job at lunch and find a new one in time for your afternoon cubicle nap. But the reason this can be bad is because if the companies are super desperate, desperate enough to pay workers more than they can afford, then to make that money back, they'll have to raise prices.
So what then happens, and this is the official story, is that people began to focus on what are called their future expectations of prices. Now, stay with me on this because it's important, right? So people are used to prices being stable. And then they become unstable. They start to rise.
So then they start to say to themselves, well, I'm going to have to get a higher wage because everything's gone up. So they go to the employer and say, give me a higher wage. And the employer says, no, because I'm dealing with higher prices. And they said, well, fine. We'll go on strike. Now, remember, this is the 70s. 25% of people were in unions at that point in time.
Back in the day, things were made in the country. If you went on strike, you held up the production of the firm. So then the employee goes, oh, shit, I'll have to give you a pay rise. So then they give you a pay rise. And then to cover that cost, they then raise their prices. And this creates what economists of the time called a wage price spiral. And it just kept going up and up and up.
So to recap, you're worried because everything's getting more expensive, so you ask for a raise. Your boss gives it to you because unemployment is super low and they're worried you're going to quit. Great. Except then you go to the grocery store and you realize while you were having that conversation, milk went up to lake. 80 bucks a gallon. So you ask for another raise.
But at the same time, so does the guy at the grocery store and the people working at the dairy farm. So now milk is 100 bucks a gallon and you need another raise. And pretty soon you could be making 100 bucks an hour, but it'll feel like you're making 10.
Now, that's a super dangerous thing because it's going to get out of control. You're going to get to what we call hyperinflation when it's just totally think Argentina, right? This sort of stuff.
So in America, in the 1970s, prices for everything were rising inexorably. I'm not going to quote these prices to you. They won't sound impressive since obviously everything is much more expensive today in 2024.
But the way to picture it, imagine that your weekly grocery bill and your weekly gas bill were 10% higher next year and the year after, and that things more or less proceeded that way for over a decade.
Good evening. Crises in the United States during the first three months of 1979 went up at an annual rate of 13%.
The question is, how long will this go on? Inflation running out of control. The answer? Probably for years.
Because the U.S. had not ever experienced anything this bad for this long, it was unclear how to solve the problem. People panicked. People panicked even more when gas in particular got unaffordable.
I've been in two gas lines already. This morning? This morning. How long did you wait for the first one? I've been in both lines over an hour.
Isn't this disgusting? Why doesn't anybody contact the president? Why is he letting this happen to us? I'm in a line two hours in.
I can't get gas. This is baloney. Carter doesn't get my vote next year.
In 1979, fistfights broke out at gas stations. The idea of not being able to reliably fill your car really drove home for people this profound sense that things had gone awfully wrong here.
So what we need to do is slam on the brakes. So how do you slam on the brakes? Well, you can't ask the government to do it. They're the criminals. They're the ones who are spending the money. So you've got to go to the police. Who are the police? The central bankers.
The central bankers. These were the people who, in the classic telling of the story, solved the American inflation crisis. The heroic central banker who figured out how to cool everything down was a man named Paul Volcker, a cigar-loving, thick spectacle-wearing patrician man from Cape May, New Jersey.
Paul Volcker is the central banker who's appointed by Jimmy Carter to run the Fed. And he basically says, right, I'll sort this out. I'm going to make the cost of borrowing money eye-wateringly expensive because I'm shoving interest rates up to 16%, 18%. But what happened was the inflation rate collapsed. And then by 1984, the inflation was more or less over.
And it was Reagan's famous morning in America.
Mourning in America was this political ad cut by Ronald Reagan, a very famous one, where he took credit for finally ending the inflation crisis. A credit-taking historians might disagree with, but it's a topic for another podcast. Anyway, this is the kind of political ad you get to put out if you preside over the end of an inflationary crisis.
It's morning again in America. Today, more men and women will go to work than ever before in our country's history. With interest rates at about half the record highs of 1980, nearly 2,000 families today will buy new homes, more than at any time in the past four years. This is what passed for ASMR in the 1980s. This afternoon, 6,500 young men and women will be married.
And with inflation of less than half of what it was just four years ago, they can look forward with confidence to the future.
And then after that, for a long period, we had pretty low inflation and pretty high growth. So the story of the 70s was, that's what happened. Government bad. Market's kind of good. Government can't be trusted. Spend too much money. Federal Reserve good, independent. Keep them away from the politicians. Push interest rates up. Crush the economy. Sorry, unemployment. But don't worry.
It'll only be two years, and then everything will be fine. That was the story. And everything is interpreted through that moment.
Got it. But you feel that that story is wrong or incomplete?
Exactly. I don't think it's totally wrong. I think it's incomplete.
After a short break, a different explanation for what happened to America in the 1970s. An explanation which, if it's correct, would suggest that the way we talk about and try to solve inflation in this country today is wrong. That's after some ads for reasonably priced goods. One of our sponsors this week is eBay Motors. Hey, everyone.
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The thing about the economy that all of us understand, all of us, is that it is breakingly complicated, the product of more human decisions and happenstance than we can ever totally grasp. But we need to comprehend it, so we simplify a complex thing into a story, a story that eliminates the parts that we hope we can safely ignore. But the story you pick has consequences.
If you tell the wrong story or an incomplete story about why the economy failed in the 1970s, your future solutions for other similarly broken economies might be wrong. When Mark and his co-author went back to try to understand why the economy in the 1970s had, and this is an economic term, shit the bed, they found that the causes were more complicated than the classic story of inflation.
The idea, again, had been that prices had all gone up because the government was buying a lot of stuff because of the war, and prices had gone up because everyone who wanted a job had had one since so many able-bodied men were overseas. But Mark says his research has led him to believe that the reality was more complicated.
What actually happened, if you go back to the 60s, you got half a million people in Vietnam, 2 million in support. Now add, for the first time in American history, women and minorities coming into the labor market at scale for the first time. You would think that that would be an increase in supply. Price would go down, right?
Except it didn't work that way. Remember, increasing the labor supply, in theory, should have lowered inflation. Worker power goes down, paychecks stop going up, and so companies can stop raising prices. But they didn't. So what was going on here?
One theory is that these women and minorities, it feels weird to keep saying that phrase, but here we are, that these women and minorities influenced the economy in a different way. Maybe they were using their newfound wages to make a lot of purchases that they otherwise wouldn't have.
what they do is they all start becoming consumers. They start buying stuff with their wages, right? You see where this is going, right?
So the prices start to go up because you have more buyers. That's exactly right. So that was one variable that the conventional story may have left out. Prices could have gone up in part because there were now more consumers around to buy things. And here's another. In the 1970s, lots of America's access to very basic goods had been disrupted, essentially through a series of unfortunate events.
Big failed harvests, wheat harvests, Canada, the United States, USSR, as it was at that point in time. Global commodity prices start going up. 1973, in response to the Middle East war, OPEC jacks up oil prices from $4 a barrel to $16 a barrel. Given how oil dependent the US and all the other economies are at that point, we're all big manufacturing economies. This is what we call a supply shock.
somebody took supply off the market.
Oh, so literally just a shortage of supplies, but rapidly. Shortage of supply. That's all it means. This is a massive supply shock. Americans had noticed that fuel prices had gone up. We know that they were sometimes punching each other at gas stations about it. But what they may have missed is how rising gas prices raised all sorts of other prices. The trucks that deliver goods need gas.
Factories need energy to produce really anything. If energy prices rise, you will notice it at the gas station, but it'll be reflected in prices all throughout the economy. And there were sudden shortages of other industrial inputs throughout the 1970s.
So if you think about it, what actually happened was rather than people's expectations of prices getting unhinged, not really what's going on, it was a decade in which you got all of these supply shocks. Everyone just got up one morning and went, oh, things are getting more expensive. Slam. Shit, things are getting even more expensive. Slam. Can we stop getting slammed, please?
What seems to be the most common cause is we just get hit with all these supply shocks randomly. And then each of them have an inflationary impulse. Each of them die.
Mark is saying that for people in the 1970s, prices rose, then there was a supply shock, and prices rose again. And nobody got a chance to calm down because as soon as they did, slam, some other good had just become scarce. Mark says with supply shocks, you typically just wait for the market to correct itself.
Eventually, companies figure out how to get goods to the consumers who want them, and prices come back down. We know that it is much easier to buy an N95 mask today than it was in March of 2020. When I was talking to Mark, I couldn't tell how much of this alternate explanation of the 1970s was his own versus something other economists believe.
But afterwards, we ran this theory by an economic historian who pointed to a growing consensus that our old popular understanding of 1970s was, if not wrong, at least incomplete. And for the economists who view it this way, the story of Paul Volcker's big heroic intervention lands differently.
By the time that Volcker came in and made the price of borrowing incredibly expensive, the damn thing was nearly half over. He caused the recession that he didn't need to.
So your theory of the 1970s is that, well, the understanding has been that the fix was Volcker stepping in, raising interest rates. By raising interest rates, he killed that spiral between... workers asking for more money so that they could keep up with the cost of living, the cost of living going up, like that spiral, he cut.
The upside of that, if you believe in it, it lowers prices for everybody. The downside is that a lot of people lose their jobs, you go into a recession.
absolutely the recession is the price to be paid for the inflationary party if you want to put it that way and your belief is that that violent slamming on the brakes that he did we didn't need to do it because if what was really happening in the 1970s was a series of supply shocks you think those supply shocks had kind of worked their way through the system pretty much someone's like getting over the cold anyway and then you give them like uh chemo that's a pretty good analogy actually
And what happened in the 1970s, it's not a strictly academic question. It matters today because what you think happened then determines what you think should happen now. We are, hopefully, coming out of what has been a three-year period of relatively high inflation. The conventional wisdom for how we got this recent inflation surge goes back to the pandemic.
If you're a Democrat, you probably think the pandemic caused inflation. If you're a Republican, you probably believe Biden's response to the pandemic caused inflation, or at least made it worse. But whatever your politics, unless you are very, very, very bad at paying attention to how you spend your money, you've noticed the prices have gone up.
At restaurants, at the grocery store, at the gas pump. I was in Utah a few months ago and noticed on the pump itself, somebody had put a sticker of Kamala Harris pointing to the gas price sticker. The quote coming out of her mouth, we did that, which honestly I thought was pretty clever. Anyway, many people blame government spending for inflation.
But what we know from talking about the 1970s with Mark is that the economy is very complicated. And that at any moment where inflation spikes, there could be a few different things happening. And economists and politicians and voters have to make a diagnosis. So let's begin with the part that everyone agrees on. March 2020, the country went into lockdown.
Fast-breaking developments in the coronavirus emergency in the U.S. and around the world.
Stay at home. That is the order tonight from four state governors.
People can go to the store, get out for some solitary exercise, but stop socializing.
Not long after, the first of three rounds of stimulus checks were sent out.
Time to check your bank accounts. The first of the stimulus payments started to appear in accounts over the weekend, and this is just the first.
And in late 2021, everyone notices that the prices of goods are soaring uncomfortably.
Prices, they're just soaring. Inflation is rising at its fastest rate in 40 years.
Everything from food to clothing, even cars, all costing more. The latest reading came in at the four-decade high of 7.5%. So who is being hit the hardest? So what was happening?
There's basically four stories that might explain it. And you, yes, you, have to decide how much to value each one. Story number one of our recent inflation, too much money.
The first one is the government spends too much money. It's Biden. It's the stimulus, right? All those stimulus checks. You had bros investing in crypto. Everyone's sitting at home, like, playing Xbox. I mean, it's absolutely ridiculous. Blah, blah, blah, right?
I'll say, I do remember seeing the stimulus checks go out and having this thought, right? Isn't this going to cause inflation? And a lot of people think it did.
But... Problem is, countries that didn't mail out checks had just as much inflation. Oh, interesting. Right? So just let's park that. But it's one story. It's a very powerful story, right?
That's story number one. The government sent lots of people stimulus checks. Those people used the checks to buy goods. And so the price of goods went up. You can believe it. You cannot believe it. But that's story number one. Story number two, too much employment. This surprised me at first because I remember that unemployment rose during the pandemic.
But within a couple years, the unemployment rate actually plummeted back down to the lowest it had been in over half a century. And remember, we know that if unemployment is low enough and workers can all negotiate raises, eventually companies might start raising their prices to pay for those raises.
In this version of the story, all the compassionate stuff the government did to protect workers, the stimulus checks, loans to businesses to juice the economy and keep people employed, maybe the government overdid it.
That's the labor market story we spoke about before. This is Larry Summers. You might remember, he said, we need to have 7% unemployment for two years to cure the inflation, this sort of stuff. And what he's thinking is, OK, this is maybe started by too much government money. But the problem is, you've got a really tight labor market. And people are going to start to expect price increases.
So you're going to get wage increases. And then you're going to get that spiral. And we're back in the 70s. And we know the only way to break that is to push interest rates up. That's what we learned from Paul Volcker, right?
But so wait, let me say it back to you. Story number one is government spends too much money that drives prices up or gives out too much money. So like we drive the prices up.
Yeah.
Story number two is the labor market actually gets in a way like too good. Yeah. And people are making too much money and they have an expectation that they'll continue to make money.
And so they have an expectation that prices will go up. So therefore they need to have more wages to compensate. And you get that kind of two of them pushing up together.
So it's like the conversation that like when I've been in unrenumerative jobs. And I've had conversations with my employer where I'm like, hey, the cost of living, like you have to at least give me a raise for the cost of living.
It's like the theory would go that if too many employees win those conversations and their buying power goes up, the cost of living does go up, but it goes up more than anyone wants and it becomes a self-fulfilling prophecy across the system.
Exactly, which leads us to number three, which is the story about greedy corporations. So the story that then comes out is, yeah, but maybe the government spent too much money. That's your ignition, right? And then maybe people start to say, things are getting too expensive relative to my income. I need a pay rise. Totally reasonable, right?
But then what happens is big corporations, particularly the ones that have a lot of market power, like there's basically two companies that do all the chicken in the United States, this sort of stuff, right? They can absorb those costs and they can pass them on to the consumer to protect their profits. That's why prices rise. We get that. But then they go a little bit further.
Then they actually push on their profit margins.
This is story three. That companies weren't just raising prices because workers were asking for more money, but that some companies, particularly companies with more monopoly power, saw prices going up and realized, ooh la la, this would be a great time to use the economy as camouflage. to jack our prices up in a moment where maybe no one will know to blame us.
And then they make super profits. And that's why eggs cost much more than they did. That's why beef cost much more than they did. It's all these concentrated markets. And then they don't push it back down. That's why things don't go back down. So whether that's right or wrong, that's story number three.
And story number three, I've heard talked about this year. It's been referred to as greedflation.
Yeah, greedflation. I actually prefer seller's inflation. That's actually the better term for it because it's the people who sell stuff on, right? And then the final one is the one that basically Paul Krugman was banging on about on other people. It's just basically, this is just a big supply shock. COVID was just a supply shock.
All it meant was we couldn't get crap because it was all made in China. That's a supply shock, right?
Right. Remember, supply shocks, sudden shortages of goods, also cause prices to go up. And Mark's point is that there were other supply shocks during this period besides those caused by COVID. In 2022, in Europe, Russian gas pipelines were blowing up, causing a huge spike in energy costs, which had consequences throughout the global economy.
Of the four stories, this final one is the one Mark finds most persuasive. But the economy is complicated, and the truth is probably that each of these variables had some effect.
So add all this together, you've got four very different stories. They're not mutually incompatible, but people tend to believe one rather than the other. Right. And you've got good political motivations behind that, right?
If you're a good, full-fashioned, low-tax Republican, and you think the government spends money on a load of crap and people who don't deserve it, you're probably going to believe the Biden stimulus is behind it. Right. Right? So there are motivated reasons behind this. So these are the four stories that you get.
So story number one, too much money. Story number two, too much employment. Story number three, greedflation, or if you prefer, seller's inflation. Story number four, supply shocks. Here's a question I hadn't known to ask at the outset of this conversation. How is it possible that inflation is very complicated, but also everyone else besides me seems to confidently understand it so well?
The answer, I now believe, is that inflation is complicated because it's a story that we lay over a very chaotic weather pattern. And people are confident about what's going on because the story you pick probably aligns with your political worldview.
Mark, I suspect, is more to the left, although he says he comes to his version of the story mainly just because he's a person suspicious of conventional narratives. Our cultural obsession with the Fed and its interest rates, it annoys him because he believes that's just a very reductive way to conceive of inflation's causes and solutions.
Like right now, Mark points out that if the Fed raised interest rates, it would not help with the supply shortage that the people I know talk about most often.
The biggest remaining thing that we've got right now in inflation is rent. So it's rent. It's the cost of rent. The rent is too damn high everywhere across America, across Europe, across every major city. Why is this? It's because we stopped building houses for normal people 30 years ago. There's just a supply shortage.
So if you're making the interest rate on mortgages more expensive, less building and construction is going to go on. A certain number of apartments and buildings just die every year. They're usually replaced. If it's too expensive to do the replacement cost, guess what? You've got a shortage of rentals. So what are you going to get? You're going to get a supply constraint.
You ain't got enough places to rent out. So if the Fed raises interest rates to cool the economy, what is it doing to the housing market? It's making sure that you're spending almost a third to a half year income on rent. You know, if your rent goes up by 30%, hell yeah, that's going to hurt, right? Right.
Now, this also tells us something else that's really important and never gets in the discussion of inflation. It matters where you sit in the income distribution. If you're a rich person, relative to your income, you don't consume much. And inflation is all about the stuff that you consume.
If you're a really rich person and you don't have a mortgage and you don't spend your money on fine bottles of Chateau Lafite every week, even if you do, it probably won't make a difference, right? You don't consume that much. You're not hurt that much by inflation.
If you're a single mom and you're working two jobs and your prices are going through the roof and you can't afford child care and your life's falling apart and your landlord's throwing you out because you can get someone else to pay a higher rent, it absolutely mars.
Right.
So it's like how it affects us individually across the income distribution. This is why people are pissed when people tell them inflation's going down. Because the level ain't going down, right? It's still 45 for a beef rib and that's absolutely scandalous.
Right. And saying, yeah, it's $45 for a beef rib, but... But don't worry, it won't be $50.
It'll only be $47. It's really cold comfort.
Right. After a short break, we will return to that presidential debate, but with a much better understanding of inflation. And we will try to decode what it was the candidates were both saying. Search Engine is brought to you by Fresh Direct. I really like FreshDirect.
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Lead your e-commerce business into a smarter future with the shipping software that delivers. Switch to ShipStation today. Go to ShipStation.com and use code SEARCH to sign up for your free 60-day trial. That's ShipStation.com code SEARCH. I'm talking to you Wednesday, September 11th. I watched the presidential debate last night. I was wondering why you look so tired and distraught.
I always look like this. Harris talked about, when they asked her about inflation, they asked her about the economy, she talked about housing, which watching, to me, felt like a non sequitur. Hearing you talk about this, I actually understand better the argument she's implicitly making, which is that the cost of housing is hugely important to people's price experience in American life.
And so she's saying, I would treat housing as a supply shock issue and fix it that way.
Absolutely. I mean, honestly, in terms of giving people relief, think about it this way. If you don't have to spend as much money on the same wage, what I've done is I've increased your real wage. Right. Right? So if I can make everybody's rents 20% cheaper by increasing the supply of housing, That's a 20% wage increase. Right.
And then the alternate argument that was being made, I saw Trump saying two different things. One thing he was saying was, I'm going to fix immigration. And I guess the argument there would be, if there's less competition for American jobs, your wages will go up and you'll be able to afford prices. And then the other thing he was saying was, He was going to institute tariffs.
His argument, I believe, is that the same way corporations sometimes price gouge consumers, he thinks that other countries are price gouging Americans and that he can intervene. Am I understanding the argument correctly?
Yeah, I think you are. I think you've got both of them right there. I mean, let's take the Trump one and take it seriously, right? If you throw out every migrant in America, which would include me because I'm one of them, would you have less workers? Hell yeah, right?
I'm interrupting here to say, to be scrupulously fair to Donald Trump, he's not said he wants to throw out every migrant in America. What he has vowed to do is to carry out, quote, the largest deportation in history. His idea being that if you removed millions of undocumented workers from America, wages would go up for the workers who are left. That's the theory.
But then you've got a big problem, because a lot of the people that you've got there who are the people you want to throw out are the ones that put food on the table, because they literally work on farms. None of us do that anymore. So I don't know how you're actually going to get the 40-year-old people who are out of work in some part of the United States to become agricultural workers.
There's a huge labor supply-demand mismatch in this idea. But let's suppose you could do that, and you can get everybody out, and then there's less workers, and that means employers have to pay more. How are employers going to pay for that?
Well, either they're really clever and they can increase productivity to pay for the wages, or they'll just push on the prices to everybody else who are the workers. Right, right. I mean, it doesn't come from nowhere, right?
Wait, let me say it back to you just to make sure I got it. Sorry, I usually don't do this, but I find the economy very confusing. So the reason you're skeptical of part one is if every immigrant undocumented and many documented get kicked out of the country, yes, there's a ton of new jobs.
But a lot of those jobs might not be jobs that the existing documented American citizens who Trump likes and allows to stay want. And so in a world where, for instance, there aren't agricultural workers to pick avocados in California, prices will actually go up.
Even though there's more jobs, prices will go up because avocados become more expensive because you have to pay people more to pick the avocados. And it's not as if there's workers and consumer. Every worker is a consumer. Every consumer is a worker. That's all correct, yeah?
That's right. And unless they have a magic avocado picker, which would automate the process and increase productivity, then they're going to have to push that on in prices. But if they did have that, that would lead to unemployment, right? Right. Right. Now, do the same with the tariffs, right? I'm going to put up 100% tariff against China. Everything in Walmart is made in China. Right.
So everything in Walmart now doubled in price. All those workers that you just gave a pay rise, they're getting it both from domestic costs and from international costs.
So the problem with the tariff is that you end up raising prices, which raises inflation. The idea that you fight inflation with tariffs is like saying you fight fire with gasoline or matches.
Now, there's a better argument for it which goes like this. And again, it's the productivity thing, right? If I put up tariffs, what I'm doing is two things. I'm advantaging American goods over foreign goods. So Walmart can stock American goods. Well, the problem is we don't make enough of the stuff that we actually consume. That would be an incentive for American firms to do a lot more, right?
Whether they would take up the incentive in any reasonable amount of time or whether they would just basically not bother. We don't know, right? So there are arguments around tariffs. It's called the optimal tariff about how much you can raise relative to costs, all this sort of stuff. But at the end of the day, generally speaking, most of us are a bit skeptical of the work in these things.
You get shortages, and the price goes up, all the rest of it. You're basically making foreign prices more expensive than domestic prices on the assumption that domestic production will take up that slack. It's not clear to me we're going to do this. Give you one example of Yeah. Remember during the pandemic, we had all this stuff about PPE, personal protective equipment? Yeah, yeah. Right.
Oh my God, it's all made in China. It's terrible, right? From permitting and planning to opening it up, how long do you think it would take to open up a factory in the United States that makes cotton buds? How long would it take? Five years. Five years? Five years. And that's just for goddamn cotton buds.
Wait, and what are cotton buds?
You know, the things you stick in your ear. Oh, Q-tip. Q-tips, right.
It takes five years to open an American Q-tip factory?
Yep. Seriously. Now, in some places, it may take about three years. TechSoup probably has easier permitting. But the point is, if you're not making this stuff now, you don't just turn on a tap overnight and make it.
Mark's point isn't that we should never have tariffs or that tariffs can't help buy America time to rebuild parts of our economy. It's that the timing matters. Tariffs will likely spike inflation short term, and it takes a longer time to rebuild industry than most people realize.
It's wishful thinking. If we change this price, magically everything will appear. No, I don't think so. I think you just end up with a bunch of shortages and inflation.
I was watching that debate trying to put myself in the shoes of somebody who found Trump's arguments about the economy very persuasive, and I was trying to do the mental exercise of finding them persuasive. And wouldn't there be somebody listening to this conversation who would say, like,
Yes, everything you're saying is true, but the fact that America can't make things or the fact that everything's made in China or the fact that people aren't being trained is a problem. And we should just, even if we're not going to brute force it overnight, we should shift our economy to one that does manufacture and we should go back to the way things were.
And that's what Biden is trying to do with the Inflation Reduction Act. And if you think about it, Biden didn't take down any of Trump's original tariffs. Trump mentioned that in the debate. And why not? Well, because ultimately, if you're going to rebuild an industry that China's got leaps and bounds ahead in, you have to have tariffs. Otherwise, yours will never be competitive.
The real problem with us is just basically, though, they're so far ahead and the technologies are so well known that things like with solar panels, I mean, we could spend billions making American solar panels. And they'll never be as cheap as the Chinese stuff, because ultimately, it's a pretty simple technology.
And they have those huge firms, state-owned enterprises, with all the critical minerals and the polysilicon. It's all made there, right? To make our solar panels here, we need to import the polysilicon from there and turn it into a panel. Just let them do the panel. It's so much easier for them to do the panel.
We should be trying to do the stuff that's higher up the value chain, carbon capture and storage, small nuclear reactors, all the stuff they can't do. But that doesn't supply as many jobs, and it's a bit more of a wild bet. Right.
The question Mark is kicking around, I feel personally very unresolved on. What I do know is that when politicians talk about bringing jobs and industry back to America, that sounds very good to me. I am capable of understanding both that we benefit tremendously from a global economy and that there are serious problems with it.
Problems that are much more likely to affect American workers closer to the bottom of the economic ladder. You could spend a year, a decade, a lifetime on just the question of how do you restore American jobs and manufacturing without going nuts and damaging the economy? I don't know the answer.
But when smart people decide that it's too late to fix this or that it can't be done, I suspect they're wrong. And that by abandoning the question, they cede the floor to people with worse ideas. Anyway, this feels unusually so boxy for me, so let me step off of it.
Moving away from our current presidential moment, I do feel like I have a better understanding of inflation than I did 40 minutes ago. I just had one more question for Mark about how to think about inflation going forward. So, okay. So my understanding now, which I did not have when I watched this conversation and which I deeply appreciate...
First of all, inflation is when all the prices go up at the same time. The story of the 1970s is that the government's big tool for fighting inflation is to raise the price of borrowing, which lowers prices at the cost oftentimes of people's jobs. You hit the brakes, you cause a recession, but you fix it.
Your belief is that actually the problem are supply shocks generally, which work through the system, and we've learned the wrong lesson. We just successfully, most people agree, evaded inflation. bad inflation. Yeah. If you were in charge next time inflation pops up, what would you do?
I would say, did you really evade bad inflation? Was the raise from 0.5% that instrumental in causing the fall in inflation? Or was it kind of like performing a circus trick at the side of the circle while the real action is going on elsewhere? In other words, it was supply shocks. They come along. They dissipate. You're fine. Were the central banks really in control of this?
Were the ones whose magic wand and Jedi mind tricks over expectations really what was driving the show? Maybe it was. I can be open to that argument. But there's also a bunch of other stuff that's going on. So the biggest problem you ever have with diagnosis is a bad diagnosis. Any treatment with a bad diagnosis is not going to work. I think we have incomplete diagnosis.
I think that we need to be more thorough in our diagnosis of what's going on. Because if at the end of the day, you really believe the story is like there's one tool, one hammer, one nail, interest rates recession, kick it out of the system, what you're saying is some of the most vulnerable people in our society are the ones that are always going to have to pay for the costs.
The control valve becomes unemployment. And it's not my unemployment. And it's not your unemployment. It's their unemployment. Right. That is the stakes of them being wrong if, in fact, they're wrong. Exactly.
And they know that. Mark says, to the central bankers' credit, they didn't push interest rates up so aggressively this time around. They seemed to understand that to do so would cause a lot of Americans unnecessary economic pain. And just two days ago, the Fed did something that caused a national sigh of relief.
Central bankers announced they'd actually cut their interest rate by half a point, which I now know means... The government thinks that our inflationary moment is ending, that there is no longer a national concern that all of the prices are going up together too fast. And so the government does not need to induce unemployment to calm the economy down.
Thank you to Mark Blyth for helping us understand all this. His forthcoming book out this spring is called Inflation, A Guide for Users and Losers. His co-author, Niccolo Fraccaroli. Mark is a professor at Brown University, where he directs the William R. Rhodes Center for International Economics and Finance at the Watson Institute for International and Public Affairs. Mark, thank you.
Your ability to talk about this is very impressive.
Well, when you spend the past year writing a book on it, you're like, do you think you know one or two things about that? If I don't, I'm in trouble.
Thanks also this week to Brendan Greeley and to Dr. Rebecca Spang. And apologies to Noel and Liam Gallagher. Search Engine is a presentation of Odyssey and Jigsaw Productions. It was created by me, PJ Vogt, and Shruti Panamaneni, and is produced by Garrett Graham and Noah John. Fact-checking this week by Holly Patton. Theme, original composition, and mixing by Armin Bizarrian.
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