Is everyone pretending to understand inflation (or just me)?

Welcome to Sir Attention, I'm PJ Vote, 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 about what I did. I missed tons of classes in school. It's just this is the one that is now bothering me. When pulled 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. But 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 so much cheap so I do notice when prices go up. I understand that inflation partly explains why I paid over four bucks 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 you're appointed 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 segwayed from talking about her background to talking about her plans to make housing worth water. Because here's the thing we know that we have a shortage of homes in housing and the cost of housing is too expensive for far too many people. Who's 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 mustard 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. I took in billions and billions of dollars. 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 read Oasis. It basically is a Beatles tribute band through two monkeys. That's exactly how I feel. It's like if you missed the Beatles but didn't listen to the lyrics at all. Right. Let's see. 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 tough. 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 in a boring myself. Well that was where 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 so 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 the whole day. Why do we think we understood inflation? Because we were all raised on a story about the seven days. We'll talk about that story the 97 days. I began to doubt the story of the 97 days and once you begin to doubt the story of the 97 days a lot of the stuff that we do when we talk about inflation and stuff that we just 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. It's not when people talk about housing 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? Yeah. Now imagine you're looking at a glass of water and you're looking at the top and you got that little line of silver at the top called the surface tension. Yeah. 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 costs 45 bucks. It was like what? Yeah. And this is an effect. This happened in inflation. You know that stuff used to be 30 bucks 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 economists tell us you are 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. This is already how far? This is it. It's the rate of change in the increase in prices. That's the inflation rates. Inflation as a phenomena is the general level of all prices going up. Okay. So let me just 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 any 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. Boom. You nailed it. 100% that's the 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 like deficits all this sort of stuff. And most of human history I mean we didn't even have a government. We'd bloody honor case running around the place and empires and stuff. That's not to say there wasn't a great big inflation or a period in the time of the Roman Empire. There's been other sort of historical examples of this but modern inflation some indifferent and we draw all of our examples from the 1970s. Okay, so let's get to the 1970s. Like what tell me before you de-mythologize it like what is the received conventional like I'm a freshman in college. What do they tell me about the 1970s? Right. So kids there was a time called the 1970s. It's when everyone was a swinger on hard sideburns, 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 US 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. For 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 US 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 pair of troopers 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 got a lot of money. people taken out of the labor market, shipped off to Southeast Asia, you 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. Wait, 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 they're competing for the stuff that you're going to buy as well, government, these drywall as well. 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. Theory, this economy sounds kind of great. Companies so desperate to hire that you can quit your job and launch 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, and they'll stay with me on this because it's important, right. So people who use the prices being stable, and then they become unstable, they start to rise. So then they start to say to themselves, well, you know, I'm going to have to get a higher wage, because everything's going up. So they go to the employer and say, "gay me a higher wage." And the employer says, "No, because I'm dealing with higher prices." And they say, "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 employer goes, "Oh, shit, I'll have to give you a pay rise." So then they give you a pay rise, and then to cover a lot of costs, they then raise their prices. And this creates what economists call 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 the words 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 like 80 bucks a gallon. So you ask for another raise, but at the same time, so does the kind of the grocery store, and the people working in 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 toilet, think Argentina, right? That 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 you're a weekly grocery bill, and your weekly gas bill were 10% higher next year, and the year after, and the things more or less preceded that way for over a decade. Good evening, prices in the United States during the first three months of 1979 went up with an annual rate of 13%. The question is, how long will this go on, in place of running out of control? The answer probably for years. Because the US 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 an affordable. I've been in two gas lines already. This morning? This morning. I learned you wait for the first thing. And in both lines, over an hour. Listen, this disgusting? Why doesn't anybody contact the president? Why is he letting this happen to us? I'm going to run two hours in, and I can't get gas. This is baloney. It kind of doesn't get my vote next year. In 1979, fist fights 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? We can't ask the government to do it. They are the criminals. They're the ones who are spending the money. So you 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 Maine, 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 I wateringly expensive because I'm shoving interest rates up to 16-18%. What will happen 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." Morning in America was this political ad cut by Ronald Reagan, a very famous one, where he took credit for finally ending the inflation crisis, or credit taking historians may 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. What interest rates had 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 4 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, markets kind of good, government can't be trusted, spend too much money, federal deserve 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 2 years and then everything will be fine. That was a story. And every thing is interpreted through that moment." Got it. But you feel that that story is wrong or incomplete. Exactly. I don't think this tool is 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. This episode of Search Engine is brought to you in part by zero. Okay, you're a great small business owner, but math was never your thing. Totally get it. But if you run a small business, you know how important it is to run your numbers. Consider zero, that's XERO, as in X marks the spot for the perfect platform that puts accounting, payments, payroll, and analytics in one place. So you always have one clear picture of your business. Zero is more detailed than spreadsheets and just as powerful as other leading software, but it's simpler and easier to use. With Visual Dashboards, zero makes it easy to understand your cash flow. You know exactly what's coming in and what's going out. So you make smarter decisions that can help grow your business without feeling overwhelmed by the numbers. And five million customers worldwide who use zero to manage their finances. Learn more at zero.com, that's XERO. Welcome back to the show. The thing about the economy that all of us understand, all of us, is that it is brain-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 job had had won since so many able-bodied men were overseas. But Mark says his research has led him to believe that the reality was more complicated. Well actually, if you go back to the '60s, you got half a million people in Vietnam, 2 million in support. Now that for the first time in American history, women in 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 until companies can stop raising prices. But they didn't. So what was going on here? One theory is that these women in minorities, it feels weird to keep saying that phrase, but here we are, that these women in minorities influence 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 for their wages, right? You see, well, this is good, 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 by things. And here is 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 bottle to $16 a bottle. Given how oil dependent the US and all the other economies at that point, what all big manufacturers and economies, this is what we call a supply shock, some de-took supply off the market. I was literally just as a shortage of supplies, but rapidly. So this is supply, that's what it means. This is a massive supply shock. Americans had noticed the 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 on hinge, not really what's going on, it was a decade in which you got all of these supply shocks. Everyone just got one more known one. 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 causes 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 1970s was, if not wrong, at least incomplete. And for the economists who viewed 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 border, we're incredibly expensive, the dump thing was nearly half over. He caused a 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 coal to anyway, and then you give them, like, a 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 a 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. The new 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 only 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 and comfortably. Prices they're just soaring. Inflation is rising at its fastest rate in 40 years. Play everything from food to clothing, even cars, all costing more. The latest reading came in at the four-decade high of seven and a half percent. 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? Although stimulus checks, you had brews 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 part 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 to checks to buy goods and to the price of goods went up. You can believe it. You can not 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, then 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 inflationist sort of stuff. And what he's thinking is, okay, 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 go learn from Paul Valker, right? 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. 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 and privacy across the system. - Exactly. Which-- It leads us to number three, which is the story about greedy corporations. - Okay. - So the story that then comes out as, yeah, but maybe the government spent too much money. That's your ignition, right? - Yeah. - 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 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 costs 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 religious greed flation. - Yeah, greed flation. I actually prefer sellers inflation. That's actually the better term for it 'cause it's the people who sell stuff on, right? And then the final one is the one, the basically Paul Krugman was banging on about and other people just basically this is just a big supply shock. COVID was just a supply shock. All I meant was we couldn't get cropped 'cause it was all made in China. That's a supply shock, right? - Right. - Remember, supply shocks, sudden shortages of goods also caused 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 when Mark finds most persuasive, but the economy is complicated and the truth is probably that each of these variables had some effect. - So I don't list 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 fashion low-talks Republican and you think the government spends money on load of crop 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, greed flation, or if you prefer sellers inflation. Story number four, supply shocks. (soft music) 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, right? 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. - Yeah. - There's just a supply shortage. So if you're making the interest rate on mortgage is 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 you're 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 at the housing market? It's making sure that you're spending almost the 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? Now this also tells us something else is really important and never gets in 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. An 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 like fine bottles of shadow, the feet 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 childcare 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 matters. - 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 for both saying. (upbeat music) (upbeat music) (upbeat music) - I'm tiny when today, September 11th, I watched the presidential debate last night. - I was wondering why you look so tired and distraught. - I always looked like this. Harris talked about when they asked her about inflation, they asked her at the economy, she talked about housing, which watching, to me felt like a non-secretary 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 supplies check issue if it's that way. - Absolutely. I mean, honestly, in terms of giving people relief, and think about it this way, if you don't have to spend as much money on the same wage, what I've done is have increased your real wage. - Right. - Right. - So if I can make everybody's rents 20% cheaper by increasing the supply 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 gonna 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 gonna 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 'cause 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 were left. That's the theory. - But then you got a big problem because a lot of the people that you've got there, who are the people you want to throw out, the ones that put food on the table, 'cause they literally work on farms. None of us do that anymore. So I don't know how you're actually going to get, sort of like, you know, the 40-year-old people who are out of work in some part of the United States to become agricultural workers, right? 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 pay for the wages, or they'll just push on the prices to the 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. - Yeah. - Sorry, I usually don't do this, but I find it very, very confusing. So the reason you're skeptical of part one is if every immigrant undocumented, many undocumented kicked out of the country, yes, there's a ton of new jobs. But a lot of those jobs might not be a jobs that the existing documented American citizens and Trump likes and it allows to stay one. 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. - Absolutely. - Prices will go up because avocados become more expensive because you have to pay people more to pick the avocados. - Exactly. - And it's not as if there's workers in consumer, every worker's a consumer, every consumer is a worker. That's all correct, yeah? - Right, so unless they have a magic avocado picker, which would automate the process and increase productivity, then they're gonna have to push it 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 gonna 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 just, you end up raising prices, which raises inflation. Like the idea that you fight inflation with tariffs is like saying you fight fire with gasoline or matches. - Now there's about an argument for it which goes like this and again it's the productivity thing, right? If I put up tariff, what I'm doing is two things. I'm advancing 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 and any reasonable amount of time or whether they would just basically not bother, we don't know, right? So there are arguments around tariff. It's called the optimal tariff about how much you can raise relative to costs, all the sort of stuff. But at the end of the day, generally speaking, most of us are a bit skeptical of the work on 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 this. 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, that's just for goddamn cotton buds. Wait, and what are cotton buds? You know the things you stick in, you do? Oh, Q-taps. Q-taps, right? It takes five years to open an American Q-tap factory. Yeah. Seriously. Now in some places, and maybe take about three years, it takes up, probably, as easy or permanent. But the point is, if you're not making this stuff now, you don't just turn on a top overnight and make it. Mark's point isn't that we should never have tariffs where 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 need to send it 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, 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 as 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 Bryden is trying to do with the inflation reduction act. And if you think about it, Bryden 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, although they're so far ahead, and the technology is a so well known, that things like 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 that 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 seed the floor to people with worse ideas. Anyway, this feels unusually so boxy for many 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 in which I deeply appreciate, first of all, inflation is when all the prices got for the same time, that like the story of the 1970s is that the government's big tool for fatty inflation is to raise the price of borrowing, which lowers prices at the cost often times in people's jobs. Like 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 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, you know, the biggest problem you ever have with diagnosis is bad diagnosis. Any treatment with a bad diagnosis is not gonna 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, cut out the system. What you're saying is some of the most vulnerable people in our society, the ones that are always gonna 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, Nikolo Freckeroli. Mark is a professor at Brown University where he directs the William R. Road 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. (laughing) - Well, when you spend the past, you're writing a book on it, you're like, do you think you know one or two things about that? But 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. 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