The inflated mystery of our rising prices

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"... [W]e were giving people who needed it quite a bit of help. And then for that to then turn into this horrifying inflation problem ... . I recognize the world doesn't have to please me, but it is maddening ... . [D]oes it have to be this way?"

- Ezra Klein, March 29

America's stampeding inflation, which last week clocked in at 8.5% for the year ended in March — by far the fastest price rises in four decades — has many opinion producers running for cover. They're seeking shelter not just from the potential economic damage of runaway prices, but from the awful necessity of admitting that they might have been wrong about a few things.

The estimable Ezra Klein of the New York Times eloquently captured the exasperation of responsible American progressives in the cri du coeur above during a valuable podcast interview with Larry Summers.

Summers, a Clinton-era Treasury Secretary and former Harvard president, is another well-credentialed liberal, one long willing to occasionally outrage more doctrinaire progressives with the news that the world is not obliged to please them.

A year ago or so, Summers' was a lonely voice on the left protesting that the supersized pandemic relief bills of both 2020 and 2021 risked igniting inflation (and of the lasting, not the "transitory," kind), despite the claims of fashionable economic theories that the fear of harmful consequences from reckless deficit spending is just an old-fashioned superstition. (I noted similar warnings at the time from the Congressional Budget Office.)

In the past few months, Summers' singular if commonsensical prescience has been widely acknowledged, as in the illuminating discussion with Klein.

But shortages of plain talk about what's happened in our economy may linger. Another of the punditocracy's finest, Paul Krugman of the Times, has wrestled with the mysteries of the so-called "Great Resignation" for months. In November, confessing surprise at persistent worker shortages, Krugman still dismissed suggestions that big spending policies might have been responsible — that "enhanced unemployment benefits were reducing the incentive to accept jobs." But he said it was "harder to refute" the idea that "extensive aid families received during the pandemic left many with ... the financial space to be choosier about their next job."

The proposition Krugman rejected sounds rather like the one he found hard to refute. It's true that "extensive aid" included direct stimulus payments, eviction moratoriums and more in addition to the extended and enlarged unemployment checks. But it's all government largesse that might well have made it easier for people to go longer without a paycheck.

Anyway, Krugman ended by renaming the Great Resignation the "Great Rethink," in which workers apparently were contemplating how much they truly hated their jobs.

But more recently, in early April, Krugman reported that new data shows there in fact has been little real lasting change in the labor force. He's renamed the Great Resignation again. Now it's the "Great Reshuffling," with workers "leaving for other, presumably better jobs, rather than leaving the work force."

So people apparently had time to "be choosier" and "rethink" and shuffle off to a better life, presumably thanks to the "financial space" Uncle Sam had given them.

Maybe we should call it the Great Paid Vacation.

Not that there's anything wrong with vacation, mind you. But this brings us back to whether the world exists to please us, or whether there might have been consequences from this national sabbatical.

Calling the rekindling of inflation "one of the biggest economic policy failures of recent times," economist/columnist Tyler Cowen on his Marginal Revolution blog directs attention to an enlightening analysis from four researchers at the Federal Reserve Bank of San Francisco.

Oscar Jorda, Celeste Liu, Fernanda Nechio, and Fabián Rivera-Reyes take advantage of a natural experiment in the fact that inflation recently has accelerated not just in America but throughout the developed world. But it's accelerated a lot more in the U.S. They ask why.

Global causes for inflation's rise include the pandemic's various disruptions to production and transportation "supply chains," sudden shifts in the mix of goods and services being demanded by consumers and, more recently, the dislocations of war. All these forces have pushed prices higher everywhere. And if greed, corporate and otherwise, is a factor, as many liberals believe, it too is a cross-border plague.

So why, the San Francisco researchers ask, has "U.S. inflation increasingly diverged from the other [rich] countries" when it generally was comparable to their rates before the pandemic? The reason, they suspect, is that "policy responses [to the pandemic] have varied considerably" with "U.S. direct fiscal transfers ... higher than abroad."

To find a measure that incorporates many complexities, the researchers compare overall changes in per capita disposable income. They find that the median in other wealthy economies rose only slightly between 2019 and mid-2021. But in the U.S. disposable income soared well above the 2019 level, with particularly large spikes coinciding with "the CARES Act, signed into law [by former President Donald Trump] on March 27, 2020, and the American Rescue Plan (ARP) Act of 2021, signed [by President Joe Biden] about a year later. Both Acts resulted in an unprecedented injection of direct assistance," the analysts add.

An unprecedented injection of disposable income (and thus consumer demand) into an economy suffering supply constraints sounds like a textbook formula for inflation — traditionally explained as "too much money chasing too few goods." These researchers' modest conclusion is that "the sizable fiscal support measures aimed at counteracting the economic collapse due to the COVID-19 pandemic could explain about 3 percentage points of the recent rise in inflation."

They acknowledge, by the way, as all of us should, that avoiding economic collapse was a worthy objective. But we appear to have far overshot that objective.

Making the corrections needed now may prove difficult and painful — especially if we refuse to face facts about how we got here.

D.J. Tice is at doug.tice@startribune.com.