As House Republicans noisily demonstrate their utter lack of interest in governing, other parts of the federal system continue to operate. The Fed, for example, continues to battle inflation.
In a lengthy October essay in the New York Times, Ezra Klein provided an overview of the causes of inflation and the choices policymakers face when trying to control it.
Inflation often begins as a mismatch of supply and demand. But if people get accustomed to prices rising, then inflation becomes about expectations. And so the task of ending it grows fuzzier: You need to use policy not just to manage the economy but also to alter psychology. The arid language of economics obscures the brutality this demands. You need to hit the economy hard enough to cow everyone who makes decisions within it.
Because that’s what prices are: decisions. Those decisions, even when mediated by algorithms, are made by people trying to predict the decisions other people will make. When people start to believe that other people are raising prices, they will raise prices. If they think other people are raising prices even faster, they will raise prices even faster than that. “How can you persuade people to expect differently?
One way is by increasing supply., but that usually can’t be done quickly. Another is by cutting demand by raising interest rates–but that makes it harder to borrow money or afford homes, and inevitably throws people out of work.
Klein reminded readers of Paul Volker’s approach to “stagflation” in the 1970s.
Volcker forced a recession so deep that the entire psychology of the American economy changed. Today he is celebrated for his steel. Powell invokes him as inspiration. In a speech at a Fed conference in Jackson Hole this summer, he mentioned Volcker twice and said, of the intended rate hikes, “we must keep at it until the job is done,” presumably a reference to Volcker’s memoir, “Keeping At It.”
Using interest rate hikes to manage inflation operates like a sledgehammer: it reduces demand, but also cuts supply.
When people lose their jobs, they stop producing the goods and services the economy needs. When mortgage rates spike, developers build fewer houses, despite the fact that high housing costs are often caused by too few houses. When borrowing money becomes expensive, people stop borrowing it and cease to make the investments that create future productivity.
Klein documents the various ways in which interest rate hikes disproportionately harm the poor and the jobless, and says that it would be “nice to have a policy that targeted the rich rather than the poor and did so in a way that didn’t hurt long-term investment.”
He asserts that “such a policy exists.” It’s a progressive consumption tax.
Here’s how it works. Instead of reporting your income to the I.R.S. and being taxed on that, you report your income minus your savings, and you’re taxed on that. That’s a consumption tax: Your taxable income is what you spend, not what you save. Congress can make it progressive by adding a hefty standard deduction and applying a much higher tax rate to people making much more money, just as we do now.
The economist who proposed this approach wasn’t concerned about inflation. He thought rich people’s spending wasn’t just wasteful, but harmful. Whether one accepts his definition of “harmful” or not–I’m dubious–Klein points to a truly useful aspect of a progressive consumption tax: it can be dialed up and down to respond to different economic conditions.
In a time of recession, we could drop taxes on new spending, giving the rich and poor alike more reason to spend. In times of inflation, we could raise taxes on new spending, particularly among the wealthy, giving them a concrete reason to cut back immediately and to save and invest more at the same time.
Ideally, adjustments could also be made automatic.
Perhaps for every percentage point increase in unemployment above 5 percent, the tax rate would fall by three points, and for every percentage point increase in inflation above 3 percent, it would rise by four points. Other rules could apply for periods when unemployment and inflation moved together. The tax code would become responsive to the economy by default, rather than only through new acts of Congress.
Given the GOP’s semi-religious objection to taxes, and the current domination of the House by people who can barely spell “economic policy,” let alone leave their preoccupations with culture war issues long enough to consider the operation of the economy, I don’t hold out much hope for passage of a progressive consumption tax in the near future, but it’s an intriguing idea.
We should file it away with other good ideas that await a (hoped-for) return of political sanity and lawmaker interest in actually governing.
Well, a real progressive idea would be to eliminate taxes on wages. Period.
Whoever convinced our government pawns to execute that order could have only come from the oligarchy. The oligarchs extract income from workers’ productivity and have devised multiple ways to extract those monies at lower rates than what workers pay.
Also, Ezra isn’t telling us the whole truth about how prices got inflated, to begin with. He can’t, or he’d lose his column in the NY Times.
We just talked about this a few days ago on oil and gas prices. Who is price gouging?
Jerome Powell at the FED coordinates his policy with BlackRock’s Larry Fink, America’s largest investment company.
Why is that? LOL
Why do anything at all?
When the system is set up to make as much profit as one possibly can, why would the wealthy worry about inflation?
Who benefits from inflation? Those who short stocks? Those who purchase contracts on commodities? Lumber, food, fuel, to drive up the prices? Commodities are involved in cost at every level of the economic engine. When wages start to rise, when people start working more at a better pay rate, they will spend the money. Don’t you think the players in the stocks and bonds market see that?
They start to buy contracts creating a shortage which drives up the prices which bleeds the consumers dry! Then during the following recession, they short the stocks and make even more money.
Maybe, just maybe, there would be an organized revolt to not pay taxes at all if those taxes are partially used to pay those who refuse to do the people’s work. After all, you can’t arrest a gigantic portion of the population, if that gigantic portion refuses to cooperate with the same old same old.
“As House Republicans noisily demonstrate their utter lack of interest in governing,…”; it was replaced in 2017 by their Trump led supreme interest in using power and control to increase their personal wealth. What we have watched for two days, with day three approaching, is more than the petty infighting between the current 2 or 3 Republican factions calling themselves the “GOP” has used their power to stop all action in the House of Representatives. There is no limit to the number of votes for House Speaker; this can and might continue as their infighting victimizes all of us. The daily reports on shootings here in Indianapolis and nationwide leaves me with the same question; where did all of those bullets go that missed the intended target? The case of the grandson in an unfamiliar rented car in his grandmother’s driveway reports 45-50 actual shots; he was hit 3 times, as an example. The House Republicans, now the majority, are fighting one another but we are all the victims of those “stray bullets”. The Democrats have stood strong behind their candidate; we were prepared for chaos to enter the House on January 3rd but “Meanwhile…” we must first survive the Trump instigated chaos between that party’s members before the 2023 House session can be gavelled into open session and new members sworn in. Contrary to Santos’ announcement that the Speaker of the House had sworn him in.
“But if people get accustomed to prices rising, then inflation becomes about expectations.” One definition of the term “expectations” is “eagerly anticipated”, a positive result. How many of you are “eagerly anticipating” the continuing rise of prices? “Meanwhile…” we wait for the transition from Democrat majority to Republican majority before the House can even open this 2023 session.
Let’s start with a moment of agreement (unlike the House GOP – sorry gratuitous dig).
Fighting inflation with interest rates is like using a sledge hammer. I agree.
However –
Let’s start with one point – generals always want to fight the last war and the Fed always wants to fight the last bout of inflation. There is no stagflation now, and there is NO expectation of never ending inflation like in the ‘70s. The Fed thinks it’s the ‘70s and Powell is going to be the hero Volcker. Sad.
Next, “Inflation often begins as a mismatch of supply and demand” – that’s says a lot and it doesn’t. It’s a great definition, but the source and the cause of the mismatch vary. The solution should vary as well. This one was caused by a combination of switched priorities due to the pandemic, more spending changes as a post-pandemic rebound, and a war. It was exacerbated by a chronic housing shortage which has other contributing causes.
Sadly, thinking this way takes subtly (and time to think) and there often isn’t enough of that to go around.
Now to the solution. I will state here that I am open to being convinced that Klein is correct, but I do see problems with this.
First, it has to be automatic because, as stated, the GOP believes that every tax must be lowered and never raised (the rich are tax cut addicts that need their fix). However, the automation may need to be fiddled with. When I took economics in college, the general idea was a line between 6% unemployment/3% inflation and 3% unemployment/6% inflation. Now we have learned to have lower unemployment with lower inflation, so if we had set our automated changes with 6% unemployment being the norm, we would need a reset. Also, the Fed had liked 2% inflation. Some economists are now saying that 3% inflation would be a decent set point. Another change in the system?
If it is too hard to change, it will soon stop functioning; if it is too easy to change, it will be back to the tax bill mess (I would guess that the initial setup would be a law passed by congress, as would any modifications of the algorithm).
Then there are two other consequences, one big and one small.
The lower you are on the income scale, the harder it is to save. Good, Klein would say. The rich will stop spending and lower inflation, but the rich and the poor don’t spend their money on the same things. I am not certain how much inflation there is in private jets or expensive jewelry, but let’s say it works. The rich decide to save even more. Now, inter-generational wealth accumulation increases — for the rich. Maybe conspicuous consumption goes down, but the building of a permanent aristocracy/plutocracy goes up.
The other minor issue is the splurge. If I am working class, I scrimp and save and (in the American fashion) splurge on buying Christmas gifts for my kids. Well, with this new tax, I scrimp and save, but I can only half-splurge because of the consumption tax. OK, this isn’t that big a deal, but the idea is that the non-rich like to splurge on occasion and just once do something “fancy”. Now that something “fancy” is ONLY for the rich.
We can also mention that some people (usually poorer people) don’t trust the banking system, with good reason. Small depositors can have all of their money taken away by “inactivity fees” or “low balance fees”, for not having a balance of $10,000 or something. If they aren’t in the banking system, how are their “savings” reported?
Maybe it’s all in the details. I’d have to see the details to be convinced.
There has to be some sort of event!
For any change, it has to be some sort of catastrophic sea change.
Politicians will never remedy the problem, they’re paid too much money by the wealthy to change anything!
Have you noticed that when oil prices go up, the cost of metals go up. When the price of oil goes down, metals drop in cost. Oil prices also dictate food costs, for one, transporting the food where needs to go, and also farm equipment.
The war in Ukraine gave cover to those buying oil contracts, the oil goes up, it gives them cover to buy commodity contracts. It’s a self-perpetuating cycle not driven by shortages, it’s driven by greed!
The roaches and rats thrive in darkness. Liars love the dark, it breeds deceptive practice to continue the status quo. Why would you make the slot machine illegal when every time you pull the handle you’re a winner?
Will there be a catastrophic Sea change? I highly doubt it. Catastrophic sea change has a lot of moving parts, probably way more than a depression or a war. Let’s face it, people really don’t like change!
The definition of income skews the tax system now. DJT’s “income” on paper netted him a total tax liability of $0, $750, and $750 for several recent years. A tax on spending is a wonderful idea. But “income” minus savings might not be the best way to quantify this.
Maybe you make it illegal to use cash to purchase anything that cost more then $100, so you now have to have a middle man that can track the spending (credit card company, or bank) and they are required to report all of the money that left your account and it’s up to you to prove you put that money into savings and didn’t spend it.
If this was a good idea, has any state (inside or outside the US) tried this?
To John Sorg’s point: The Republican lust for deregulation is like putting gasoline into the fire of greed. It is GREED that drives inflation when regulations are removed. Marx predicted this. Republicans have validated it. Supply/demand “analysis” is like separating fly poop from pepper. It, mostly, misses the points about basic human psyche: GREED. HOARDING WEALTH.
Those on this blog who have children and grandchildren will keep having this discussion, because that’s what unregulated capitalism does: It perpetuates the inability of humans to govern themselves in large groups. See the Republican shit-show in the House this week, if you need a reminder of how GREED and the Republican party are so irretrievably wed.
“Transformative” ideas like this change in taxation need a few basic practical considerations before considering the politics of getting them done:
– The complexity and cost of changing processes and systems across the economy
– How to ensure the accuracy of reporting? Look how we do now, even with W-9s.
– The multitude and imagination of how this can be scammed
Non-starters to me…let’s get real.
It’s a great idea. Like all great ideas, it needs work before it could be implemented. There are lots of ifs, and, and buts. For example, I have written three rather large checks in the past three months. I bought a new roof, post Ian. We would have to reduce taxes on money spent after disasters to fix whatever damage was done by wind or water or snow or earthquakes. We need to do something, so let’s start preparing ideas that have promise.
“See the Republican shit-show in the House this week, if you need a reminder of how
GREED and the Republican party are so irretrievably wed.” So well said.
Trump did not bring on the craziness in congress, the Tea Party people did, from Paul
Ryan to Jim “Coach of the Year” Jordan.
If Jordan becomes speaker the shit-show will go off the rails!
Those of us who have lived in the corporate world know that every business has a means to set the price they will charge for each good and service that they provide. Generally it’s done by considering the market and their competition and estimating what price they could “get away with” that would have customers choosing their offering over alternatives at the same rate that they can move supply into the market. Obviously the higher the price the less often customers would choose their offering. Of course advertising and feature set play heavily into the customer choice as well.
Whatever algorithm they assume predicts consumer decision making can be wrong or out of date just like is true in voter polls.
If costs go up threatening profits the algorithm still prevails, and they are facing a time of profits below predictions.
But what if the market expects higher prices from everyone? The algorithm has changed and demand might not be affected so much by price increases as originally assumed. That’s a “free” pass to raise prices.
While central banks have lots of levers to control the behavior of member banks relying on them for money to loan out l, the central bank has no levers to adjust consumer choice directly.
The steering is only connected to one wheel. Oh oh.
Vernon,
Thank you, and well said!
I’ve always maintained that the citizens of this country, mainly the consumers, are just commodities to be used by those in power, as a money spigot. It truly is taxation without representation.
The Boston tea party was a sea change event, it led to catastrophic consequences for the British empire. And yet a couple of hundred and some change years later, The government that perpetrated the Boston tea party, forgot why it happened.
The representatives that are supposedly elected by the citizenry, end up not really representing their constituency, but usually believe that the constituency works for them rather than the other way around!
For the politicians and the Uber wealthy, those connected to the highest echelon of government and finance, why change? The public has really become subservient by politicians dividing and conquering. Why do you think certain individuals want to keep the educational system woefully inadequate?
Because it’s easier to pull the wool over dummies than someone who’s actually alert, paying attention, and not sleepwalking.
Why do herds of sheep or pigs commit suicide en masse by running off the ledge of a precipice? Because they follow the leader!
Why? Why, after some tumultuous event, maybe a depression or a war, people become impassioned and the politicians have to placate them. So, they enact laws, like the glass-steagall act! And then, really just a few years later, they roll it back! The Uber wealthy get more wealthy. Banks are too big to fail? Stick their hands in your pockets and ask for more money. It won’t change! At least, before it’s too late!
If the Freedom Caucus gets control of the House Rules Committee….
Waiting…
I took a degree in economics before going to law school and became a Keynesian, but it didn’t particularly help my understanding of how market based economies work today since that was before The Fed got (heavily) into the act of artificial manipulation of supply and demand via interest increases designed to lessen demand and ultimately, perhaps, increase the likelihood of recession. Now I’m told by experts that schools of economics (The Chicago School, Friedman et al) along with such as Lebowitz, Piketty et al (whose books I have but only marginally understand) have outdated my Keynesian biases, a Keynes who was the British representative at the 1944 Bretton Woods, New Hampshire meeting designed to fashion the WW II postwar world’s economy, and still importantly, estabished the American dollar as the world’s reserve currency (which the Chinese and Russians are hard at work trying to undo).
Of course greed and other market chicanery have left their mark on market economies in varying degrees since Adam Smith, notably then and afterwards with royalty and colonial enterprises and now with Wall Street and large corporations who have (with their purchase of the Republican Party courtesy of the Supreme Court’s holding in Citizens United) are the economic royalists of today.
As for today’s economy I have modified my Keynesian bias in holding that aggregate demand is responsible for economic growth with a necessary corallary to such theory with this: Wages should be doubled and made inflation proof by adjustment and corporations should be regulated for the common good of all its actors, not just shareholders and executives but also their employees, consumers, environmentalists, communities in which they are sited etc.
Socialism? Impossible? Hardly. Such a proposal effectively outlawing the effects of inflation is designed to save rather than destroy our free market system which is currently in the clutches of the greedy, and their protective cover of Citizens United and a Supreme Court combined with the latter’s public disapproval record at historic levels is the stuff of which civil discord is composed. This economy is our economy; corporations are mere participants in it, as all of us are, and we the people in our multiple capacities are entitled to have a say in how it is to be conducted, whatever school of economics we as individuals may follow.
I am still a Keynesian, but with an open mind to change since much has changed since his
death one year after the Bretton Woods conclave of 1944, long before such heresies as Shelby,
carried interest, a captive Supreme Court, fossil fuel propaganda, Citizens United et al. were visited upon us. Let’s agitate for public inclusion in policy making of our economy, its operation and rewards. Perhaps with such citizen involvement we can then agree with some today that The Fed should be abolished. Perhaps.
The more I read about economics the less I understand. There seem to be a whole lot of simple answers, none of which works. I can only hypothesize that if a good system exists it will involve a balance between or among competing proposals.
Macroeconomics 101: You have to have an increase in the money supply to have inflation. During Covid, the federal government handed out checks to people to keep the economy going. How were those checks paid for? By increasing the money supply. Not saying we shouldn’t have been passing out checks to keep the economy from crashing, but now we’re reaping the negative consequences of that policy.