Brad DeLong: Worthy reads on equitable growth, November 9-15, 2021

Worthy reads from Equitable Growth:

1. My impression is that Equitable Growth’s academic grantgiving is more short of good projects to fund than short of money with which to fund them, so it is definitely worthwhile to throw your hat into the ring if you have what you think is a good idea for how to discover important things about equitable growth. Go to Equitable Growth’s “2022 Request for Proposals,” which “seeks to deepen our understanding of how inequality affects economic growth and stability. To do so, we support research investigating the various channels through which economic inequality, in all its forms, may or may not impact economic growth and stability. Equitable Growth promotes efforts to increase diversity in the economics profession and across the social sciences. We recognize the importance of diverse perspectives in broadening and deepening research on the topics in this request for proposals.”

2. In an interview with NPR, Michelle Holder does a very good job explaining “how the economy has managed to pull off a disappearing act with people’s wages.” Listen to Stacey Vanek Smith and Julia Ritchey, “The Money Illusion: Have Americans really gotten a raise?

Worthy reads not from Equitable Growth:

1. I confess I do not understand why anybody thinks that the 1970s are a better model for what is now going on with inflation than after World War II. This seems to me to be a likely mistake that nobody who has learned any history could make. Read Paul Krugman, “History Says Don’t Panic About Inflation,” in which he writes: “Back in July the White House’s Council of Economic Advisers posted a thoughtful article to its blog titled, ‘Historical Parallels to Today’s Inflationary Episode.’ The article looked at six surges in inflation since World War II and argued persuasively that current events don’t look anything like the 1970s. Instead, the closest parallel to 2021’s inflation is the first of these surges, the price spike from 1946 to 1948. … It was a one-time event, not the start of a protracted wage-price spiral. And the biggest mistake policymakers made in response to that inflation surge was failing to appreciate its transitory nature: They were still fighting inflation even as inflation was ceasing to be a problem, and in so doing helped bring on the recession of 1948–49. … Demand in the United States actually doesn’t look all that high; real gross domestic product … is still about 2 percent below what we would have expected the economy’s capacity to be if the pandemic hadn’t happened. But demand has been skewed, with consumers buying fewer services but more goods than before, putting a strain on ports, trucking, warehouses and more. These supply-chain issues have been exacerbated by the global shortage of semiconductor chips, together with the Great Resignation—the reluctance of many workers to return to their old jobs. So we’re having an inflation spurt. … So what can 1946–48 teach us about inflation in 2021? Then as now there was a surge in consumer spending, as families rushed to buy the goods that had been unavailable in wartime. Then as now it took time for the economy to adjust to a big shift in demand. … But the inflation didn’t last. It didn’t end immediately: Prices kept rising rapidly for well over a year. Over the course of 1948, however, inflation plunged, and by 1949 it had turned into brief deflation. … An inflation spurt is no reason to cancel long-term investment plans. The inflation surge of the 1940s was followed by an epic period of public investment in America’s future, which included the construction of the Interstate Highway System. That investment didn’t reignite inflation — if anything, by improving America’s logistics, it probably helped keep inflation down. The same can be said of the Biden administration’s spending proposals, which would do little to boost short-term demand and would help long-term supply…. People making knee-jerk comparisons with the 1970s and screaming about stagflation are looking at the wrong history. When you look at the right history, it tells you not to panic.”

2. Disagree with this assessment of the housing market bubble in the 2000s, but it is smart. After the start of the Great Recession, the United States was starved of housing construction for a decade, especially construction in places where people can get jobs of high productivity or where people can get very good value for their leisure. This shortage of supply means that today’s elevated housing prices are quite likely to be “fundamental.” But 2005 was half a generation ago, and then the supply demand balance in housing was different. So values in 2005 were a bubble, I think, even though the same inflation-adjusted values today are “fundamental.” Read Timothy B. Lee, “The 2000s housing bubble was greatly exaggerated,” in which he writes: “Housing prices are now above the supposedly unsustainable levels of 2006. And that’s after adjusting for inflation. And yet not very many people think we’re in the middle of a second housing bubble. Rather, most experts believe that today’s housing prices reflect ‘fundamental’ factors. Interest rates are at all-time lows, giving homebuyers more spending power. And regulatory restrictions have created housing shortages in many metropolitan areas. But that leads to a question that at first glance might seem crazy: What if those same explanations largely explain the housing boom that peaked in 2006? What if the big problem in the early 2000s wasn’t an excess of houses but a shortage of them? … That’s the thesis of ‘Shut Out,’ a 2019 book by Kevin Erdmann. … Erdmann argues that policymakers misdiagnosed the causes of the housing boom, and that led to catastrophic policy errors. In particular, because the Federal Reserve thought housing was overvalued in 2007, it didn’t cut rates fast enough in response to the housing crash. … If Erdmann and Schubert are right, we’re still living with the consequences of misdiagnosing the housing boom as a speculative bubble.”

November 15, 2021


Brad DeLong


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