Would fiscal stimulus during a pandemic cause inflation?

I’ll start by noting that over the past couple of decades, it has proved far less necessary to worry about inflation than most economists have long thought. Economists used to believe in something called the Phillips curve, for example, which asserted that the odds of inflation rise as the rate of unemployment descends. They even used to believe that they could use the Phillips curve to make predictions. The last half decade of low, low unemployment and low, low inflation has trashed that faith. Median wages have only begun to inch up in real terms very recently, and these days many economists believe that the US economy could make profitable and noninflationary use of even more fiscal stimulus than it has received. There’s been a fair amount of fiscal stimulus under Trump; deficit spending has soared in a way that Republicans would never have permitted under a Democratic President, and yet all the indicators have toddled happily along nonetheless. The Fed is so far from worrying about inflation these days that its great fear of late seems to be that it has kept interest rates so low for so long that if it needs to add fiscal stimulus by monetary means, there’s not much lower it can go.

All of this is by way of saying, it’s a little perverse at the moment for me to even raise the specter of inflation, and I know it. Let me explain what made me think to ask the question.

In the 1970s, Keynesian economics failed to explain the combination of high unemployment and high inflation that became known as “stagflation.” This intellectual failure gave a policy opening to Friedman’s monetarism and, a decade later, to Thatcher and Reagan’s neoliberalism. Did Keynesianism fail because its premises were wrong, as Friedman and other advocates of shrinking the government asserted, or because the Keynesians were misreading the economic signals at the time? This is a big debate among economists. Among the most striking economic signal in the 1970s were the spikes in the real price of oil. Looking through the decade’s numbers, I’ve been impressed by the fact that real food prices seemed to spike in tandem with real oil prices, which makes sense, given that modern agriculture is driven by fossil fuel, via fertilizer and farm machinery. In other words, during the 1970s, two costs that an average working person could not forgo, food and fuel, both rose relative to the prices of other goods, leaving workers with less to spend on any other category, and as Keynes showed, the spending of people with less income is far more crucial to the strength of the economy than the spending of those at the top. This leads me to wonder, in my amateur, I’m-only-a-novelist-playing-at-economics way, if an economic crisis caused by a sudden rise in the cost of core goods might be different in kind from an economic crisis caused by a collapse in demand. Maybe the right remedy for one might not be beneficial for the other?

There’s a suggestion of this in an endnote to Binyamin Appelbaum’s new book, The Economists’ Hour. Appelbaum believes that Keynesianism can be reconciled with the conditions of the 1970s:

Stagflation can be explained in a Keynesian framework, but the explanation was not well understood at the time. The gist is that higher oil prices forced people to reduce consumption of oil, or of other goods, which increased unemployment. The United States responded with an economic stimulus, driving up inflation. Why was the stimulus ineffective? The original problem was a decline in the supply of oil, so pumping money into the system drove up prices. It was a demand-side response to a supply-side problem. Nations that refrained from stimulating their economies, including Germany and Switzerland, experienced an economic downturn but did not experience higher inflation.

My question is whether a COVID-19 pandemic, if it does break out in America (this coming fall if not this spring or summer), might be more like the 1970s oil crisis than like the 2009 financial crisis. In America, as in all industrialized economies, the bulk of the economy long ago shifted away from manufacturing to service. But during a pandemic, the supply of services is bound to contract, as people stay home from work because of either illness or fear of illness. And if services end up suffering a supply-side shock—if there are suddenly far fewer people offering services—will pouring money into the economy help? (Pouring in money is what a number of policy makers are now contemplating.) If far fewer people are healthy or brave enough to cut your hair, babysit your children, or deliver your groceries, because they’re all sheltering in place in their homes, won’t juicing the economy merely drive up the price of these services, without doing much to increase the number of people available to perform them?

I’m offering this only as speculation. I may have misunderstood some of the economic fundamentals here; for example, in the gig economy we have now, all those haircutters, babysitters, and grocery deliverers will probably be abruptly without income during a pandemic, and maybe the demand-side shock caused by their loss of income will cancel out any supply-side shock caused by their sudden withdrawal of services, and so they’ll need to get some new money in their wallets after all. Or it may be the case that the underlying capacity of the economy to absorb more stimulus is still simply greater than any compromise of that capacity that might be inflicted by the pandemic’s shock to the supply of services.

UPDATE, 6:20pm: I just discovered that Appelbaum himself raised more or less exactly this issue, more cogently, in an online op-ed at the New York Times a few days ago:

Cutting rates is not an effective antidote for the coronavirus. Lower interest rates increase economic growth by driving up demand, while the disruptions caused by the spread of the virus are reducing the supply of goods. Cutting rates won’t address that “supply shock.” It won’t hasten the return of Chinese workers to factories, or speed ships across the Pacific.

Letter from the spices aisle

There was plenty of food to buy and there were few people shopping for it at Wegmans yesterday morning, which was probably about right for ten A.M. on a normal Friday. At the entrance, a policeman in uniform was standing in front of the citrus display, but he mostly seemed to be checking his phone. Am I overreacting? I wondered. I was at a grocery store instead of at my desk because I had thought that this wasn’t going to be a normal morning. Over breakfast, I had seen a tweet in my feed of empty shelves in Hokkaido, Japan, where a state of emergency had recently been declared on account of the coronavirus pandemic. Stores there had sold out of all paper products. I knew what happens to milk and bread at New York City grocery stores when there’s a rumor of a snowstorm, and had figured I had better sacrifice my hours for writing, which are never all that productive anyway.

I had a long shopping list. It didn’t make sense not to do the shopping for the week as well as for the apocalypse. I had instructed myself only to buy things that we regularly do eat and use. Oatmeal, farro—neither of which I could find, and I was too shy to ask, though Peter tells me that Wegmans does have both, the oatmeal we like apparently located in the “British” section of an ethnic foods aisle—canned beans, lentils. An exception: tunafish. In the early years of our relationship, Peter and I ate far too many servings of a dish we ended up calling “tunabeans” and now we almost never eat tuna from a can. But cans of tuna seemed very much like the sort of thing one eats at the end of the world. We joke a lot about how we’ll probably have to eat catfood in our old age, for example. I bought two.

Would two be enough? I wasn’t sure what I was planning for, exactly. Sheltering in place during some kind of general lockdown? Sweating out at home our own cases of coronavirus? (Would that even be legal?) I added a couple of cans of chicken noodle soup, which we allow our otherwise vegeta- and pescatarian selves to eat when we have respiratory ailments. But two cans of soup wouldn’t be enough if either of us actually did get sick. On the other hand, we weren’t sick yet. Maybe because it was hard to believe I was really buying groceries for a plague, I only seemed able to do it halfheartedly.

I bought a couple of boxes of tissues, even though I’m a handkerchief person, and as I put them in my cart, in my head I wrote a joke, which I later shared on Twitter, about how I was going to use them in a few weeks as currency, the way packs of cigarettes used to be traded in the gulag archipelago. Shopping in extremis seems to put me in mind of the Warsaw Pact. When I lived in Prague, decades ago, while Czechoslovakia was in a ditch between communism and capitalism, there were rolling, unpredictable shortages because farmers and other producers of goods were hoarding in anticipation of being able to get better prices once the new world order arrived. For a long time there were no potatoes; at one point, there was a run (as it were) on toilet paper, and on paper generally. Having been triggered by the Hokkaido tweet, I bought four rolls, and two of paper towels, in addition to the tissues. For years after Prague, I remained neurotic about keeping a stocked pantry, and about having candles and matches in a drawer somewhere in case the power went out. Half a dozen years ago I even made Verizon give us a backup battery when they insisted on replacing the good old-fashioned copper cable to our landline with a fiber optic one, which doesn’t transmit electricity. The phone company has a power system independent of Con Edison’s, and Verizon’s “update” was going to disconnect us from it. Now this backup battery is so old that it beeps an announcement of its death every few months, but as with most modern applicances, if you unplug it and then plug it back in, it resets and you get a little more life out of it. Just before leaving for the grocery store, in fact, it had been beeping and I had unplugged it anew.

When I started this essay, I thought I knew where it was going, but now I’m not sure.

When I got home, I saw out the window that our neighbors across the way have put up a Gadsden flag. That’s the yellow one with the snake asking not to be trodden. When I was a child, it was just a historical curiosity—I think it was around a fair amount during the bicentennial—but now it seems so dire. Last fall, when I visited my father, who lives in rural Texas, I was struck by how many houses in the state are flying “Trump 2020” flags. I don’t think I had ever seen flags for a political campaign before. Yard signs and bumper stickers, but not flags. And the presidential election was then still a year away! It suggested a shift in the kind of allegiance people were expressing. My parents both often tell me that I don’t understand what support for Trump is like in their part of the country now, and they’re probably right.

I put the groceries away, ate lunch, tried to do a little work. Later in the afternoon, on my bike on the way to Cross Fit, I decided I should write an essay about how shopping for a plague is reminding me of having lived once before in a society that was in crisis, but then I had been young and the disorder had seemed like an adventure and a challenge—like a story that I was visiting rather than one that I was described by. And Wegmans had been so calm! Maybe after all I was the one carrying around the anxiety about being able to provide in an emergency, perhaps on account of still being a writer, which doesn’t quite add up to a living. We still needed oatmeal and farro. There was a Whole Foods on the way back from Cross Fit, and after class, I stopped there on my bike ride home.

At Whole Foods, though I knew where to find the oatmeal we liked, there wasn’t any. “It’s getting pretty cleared out,” said an employee, when I asked if they really didn’t have that brand in stock. They still had another brand that we don’t like quite as much, so I took two bags of it. Then took another three, because we have oatmeal every morning. Would five be enough? There were still a few bags of farro; I took them. The only cans of beans still left were lesser-known varieties, but I already had enough beans. Most of the pasta shelves were empty. Maybe people who shop at Whole Foods are more avid news consumers than people who shop at Wegmans? Or maybe the mood of the city had changed over the course of the day? In which case perhaps it hadn’t actually been crazy of me to have gone to the store in the morning. I got in line with my few items, but while waiting, I started to feel anxious. Did I really have everything we needed? Had I gotten enough tunafish?

I went back. “We need QR codes for all of these,” one employee was saying to another, gesturing at empty shelves where cans of beans had been. “They just declared a state of emergency in California,” another employee volunteered. “The whole state?” I asked, shocked. “I don’t know because I haven’t had time to look into it,” he replied. (In fact, so far only a few counties in Califonia have declared emergencies.) I got more tunafish—four cans, this time. There were still two small boxes (not cans, this was Whole Foods) of chicken soup on the shelf, and they seemed to be the last ones. I took them, too. Before I left the aisle I remembered that we needed whole coriander, not for the apocalypse but just for our regular lives. Whole Foods doesn’t have whole coriander, only ground coriander, and I knew this, but “Walk Away, Renee” had started to play on the store loudspeakers, and Peter had told me last week that one of the members of the Left Banke had died recently, so I stood in front of the spices for a while as if to verify that they didn’t have whole coriander and it occurred to me while I was standing there trying to hold it together that this wasn’t going to be the first plague I had lived through, actually, even though this one looked like it was going to move a lot faster, and I suddenly had the feeling that I had had one night during Hurricane Sandy when I was scrolling through Twitter and came across a video of a Con Ed transformer exploding down by the East River—a feeling that everything was coming apart and that maybe it was going to be too much for me. I was fine, though, I knew. Peter and I were in good health (and even if we came down with coronavirus, we’d almost certainly be fine), and I was shopping for things like farro and steel-cut oatmeal. I was living in the richest country in the world. It’s just a sad song, I told myself.

On the ride home it occurred to me that if Trump loses in the fall, then by this time next year he won’t be President. In fact he won’t have been President for five weeks. This might not happen, of course, but it was pleasant to think about.

Working-class heroes

In the 26 August 2019 issue of The New Yorker, in an article titled “State of the Unions,” I review two new books on labor, Steven Greenhouse’s Beaten Down, Worked Up: The Past, Present, and Future of American Labor and Emily Guendelsberger’s On the Clock: How Low-Wage Work Drives America Insane. Please check it out!

A few source notes: Very helpful to me in writing the review were Jake Rosenfeld’s wonky deep dive into union data, What Unions No Longer Do (2014), Nelson Lichtenstein’s humane and insightful State of the Union: A Century of American Labor (revised ed., 2013), and Greenhouse’s earlier collection of war stories, The Big Squeeze: Tough Times for the American Worker (2008). I also drew on Philip Dray’s There Is Power in a Union: The Epic Story of Labor in America (2010), Joseph A. McCartin’s Collision Course: Ronald Reagan, the Air Traffic Controllers, and the Strike that Changed America (2011), and Kirstin Downey’s The Woman Behind the New Deal: The Life and Legacy of Frances Perkins—Social Security, Unemployment Insurance, and the Minimum Wage (2009).

Most of the statistics in my review came from the books named above, with a few exceptions: In estimating that the proportion of union members in the labor force dropped from 12.2 percent in 1920 to 7.5 percent in 1930, I drew on Joshua L. Rosenbloom’s data, “Union membership: 1880–1999,” presented as table Ba4783 in Historical Statistics of the United States, Millennial Edition On Line, edited by Susan B. Carter, Scott Sigmund Gartner, Michael R. Haines, Alan L. Olmstead, Richard Sutch, and Gavin Wright (Cambridge, 2006) and on David R. Weir and Susan B. Carter’s data, “Labor force, employment, and unemployment: 1890–1990,” presented as table Ba470 in the same online sourcebook. In estimating that the proportion dropped from 35 percent in 1954 to 10.5 percent in 2018, I drew on Gerald Mayer’s Union Membership Trends in the United States (Congressional Research Service, 2004), p. 22, table a1, and on Barry Hirsch and David Macpherson’s Union Membership and Coverage Database from the Current Population Survey. In calculating the rate of strikes per decade, I drew on the data in the Bureau of Labor Statistics chart “Annual work stoppages involving 1,000 or more workers, 1947-2018.”

The researchers, mentioned at the end of my article, who found a link between children’s having union parents and earning more later in life were Richard Freeman, Eunice Han, David Madland, and Brendan V. Duke in their working paper, “How Does Declining Unionism Affect the American Middle Class and Intergenerational Mobility?” (2015, NBER 21638). The researchers who found that right-to-work laws suppress voter turnout and Democratic vote share were James Feigenbaum, Alexander Hertel-Fernandez, and Vanessa Williamson in their working paper “From the Bargaining Table to the Ballot Box: Political Effects of Right to Work Laws” (2018, NBER 24259).

“Overthrow,” as thing & as tour

I just got sent a copy of Overthrow as a finished book.

Overthrow by Caleb Crain

Plus, here’s the schedule for bookstore events in August and September. Please come, if you’re in Brooklyn, Manhattan, San Francisco, or Los Angeles! And please consider supporting these bookstores by buying your copy from one of them. Thanks!