Wednesday, December 22, 2021

Inflationary Pressures in the Time of Covid-19: MMT as a Theory of Inflation — Andrés Bernal

Abstract: According to Modern Monetary Theory (MMT), the only constraint on public spending for a currency issuing authority like the United States government is inflation. This paper develops an alternative understanding and analysis of economic inflation through the lens of MMT in the aftermath of the Covid-19 public health crisis and consequential economic shutdown and reopening. It argues that conventional explanations of inflation remain ideologically constricted to an outdated social theory and conceptual framing. As such, public policy responses to contemporary price increases are limited in scope and incapable of neither effectively stabilizing prices nor avoiding the worsening of social inequities and harm. The paper will first develop MMT’s insights about inflationary pressures as a theory of qualitatively determined resource use, costs, and political coordination, as opposed to a collapse in the value of money from excessive public spending. An analysis of price pressures throughout 2021 is then provided by examining supply chains, industry specific shocks, and market power. Lastly, inflation is explored in the context of an ongoing planetary climate and environmental crisis with deep implications about the future of sustainability, economic development, and price stability.
I said this some time ago. The concept of inflation is not useful for at least two reasons. First, it is not good science. Secondly, the term carries both emotion and ideological charge. It should be retired.

Inflation in contemporary economics and finance suffers from the physics envy that affects the economics profession and spills over into finance. It is a search for a simple solution to a complex problem that is complicated by economics and finance being historical and social rather than naturalistic, as theories of inflation assume.

Moreover, attempting to apply concepts that apply more or less general special cases involving exogenous shock, which the pandemic certainly is, can be myopic unless one addresses the speciality of the case. This is compounded by the criticism of those opposed to fiscal policy for ideological reasons (rather than evidence) who claim that rising prices are proof of fiscal profligacy.

Global Institute for Sustainable Prosperity
Working Paper No. 132 —December 2021
Inflationary Pressures in the Time of Covid-19: MMT as a Theory of Inflation
Andrés Bernal, Research Fellow

See also
Larry Summers has struck again with yet another missive agonising about inflation risks. What is somewhat interesting about this latest piece is that parts of it could have been written by myself. Unfortunately for Summers, that is not exactly complimentary for his world view, for reasons that I will explain.
Bond Economics
Almost Agreeing With Larry Summers (And Why That's Bad...) 
Brian Romanchuk
http://www.bondeconomics.com/2021/12/almost-agreeing-with-larry-summers-and.html


7 comments:

NeilW said...

That's not a Theory of Inflation.

It's a random collection of appeals to authority tied into a particular USA focused political viewpoint.

Very disappointing.

Tom Hickey said...

That's not a Theory of Inflation.

If "theory of inflation" were possible, one would be dominant as a result of evidence and predictive power, given the amount of brain power invested and the significance of the outcome financially and economically.

Business schools (MBA programs and management science programs) switched from teaching theoretical econ to the case method long ago.

Looking for a "theory of inflation" is a the result of Milton Friedman's mistake. We need to move beyond that. MMT needs and explanation of price stability/instability, and it already has one based on a different model.

Warren B. Mosler #MMT
@wbmosler

Only MMT first models the currency itself, a public monopoly driven by coercive taxation, and then the rest follows. The mainstream, unfortunately, begins with relative value models, and then adds the currency as a numeraire.

Matt Franko said...

“ Looking for a "theory of inflation" is a the result of Milton Friedman's mistake. We need to move beyond that.”

lol we need to move beyond the Socratic/Platonist bullshit dialogic academe entirely..

Why do you dialogic people always want to synthesize with Science?

Fearful of what we’d did in 1860 ie left your sorry asses behind in the academe?

Science stands IN CONTRAST to you people..

Matt Franko said...

“ Very disappointing”

Neil… WEAK from you here…

Neil, how about : FUCK…these …. people ….

…we should have ZERO expectations… ie nothing to be disappointed about..,

They are lower than whale shit…,

Matt Franko said...

Tom,

Today nat gas was like $3.75 and a few years ago iirc it was like $13…

So how does the Art degree training leave people with the belief that 13 < 3.75 ?

What goes on over there?

Trying to understand …

Peter Pan said...

inflation = bad
wage and price controls = bad
Putin = bad

These are theories of what is bad, written by the usual suspects.

Tom Hickey said...

“ Looking for a "theory of inflation" is a the result of Milton Friedman's mistake. We need to move beyond that.” lol we need to move beyond the Socratic/Platonist bullshit dialogic academe entirely.. Why do you dialogic people always want to synthesize with Science? Fearful of what we’d did in 1860 ie left your sorry asses behind in the academe? Science stands IN CONTRAST to you people..

The problem is that the approach to inflation has been pseudo-scientific, looking for either a linear function (Friedman) or a stochastic one (central banks). These are not all art degree people either. Wall Street is also on this, since inflation is a huge factor in prices, affecting markets. They hire the cream of the crop in physics since they can afford the best.

As Keynes pointed out, it is not possible to write a function that is useful without knowing all the relevant inputs and in social situations that includes "animal spirits," which the Fed calls "expectations." It's a wild goose chase.

The author of the post does get it right that it is impossible to measure inflation. It is not an observable and has to be estimated, e.g., through construction of an index. There are a lot of problems with this, especially since the factors change over time and the computed "inflation rate" cannot be compared across time (which many people ignore).

MMT knows this.

The author of the post also notes that politicians are unlikely to take action for various reasons. MMT knows this too, which is the reason for automatic stabilization and a JG to obviate the need for ad hoc measures, although sometime political conditions, e.g., involving exogenous shock would require political action.