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1. Tilting at Windmills: Bernanke and Blanchard’s Obsession with the Wage-Price Spiral

Author:
Servaas Storm
Publication Date:
04-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Bernanke and Blanchard (2023) use a simple dynamic New Keynesian model of wage-price determination to explain the sharp acceleration in U.S. inflation during 2021-2023. They claim their model closely tracks the pandemic-era inflation and they confidently conclude that “… we don’t think that the recent experience justifies throwing out existing models of wage-price dynamics.” This paper argues that this confidence is misplaced. The Bernanke and Blanchard is another failed attempt to salvage establishment macroeconomics after the massive onslaught of adverse inflationary circumstances with which it could evidently not contend. It misrepresents American economic reality, hides distributional issues from view, de-politicizes (monetary and fiscal) policy-making, and sets monetary policymakers up to deliver significantly more monetary tightening than can be justified on the basis of more realistic model analyses.
Topic:
Economics, Monetary Policy, Inflation, Macroeconomics, and Wages
Political Geography:
North America and United States of America

2. Good Policy or Good Luck? Why Inflation Fell Without a Recession

Author:
Thomas Ferguson and Servaas Storm
Publication Date:
09-2024
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
This paper analyzes claims that the Federal Reserve is principally responsible for the decline of inflation in the U.S. We compare several different quantitative approaches. These show that at most the Fed could plausibly claim credit for somewhere between twenty and forty percent of the decline. The paper then examines claims by central bankers and their supporters that a steadfast Fed commitment to keeping inflationary expectations anchored played a key role in the process. The paper shows that it did not. The Fed’s own surveys show that low-income Americans did not believe assurances from the Fed or anyone else that inflation was anchored. Instead, what does explain much of the decline is the simple fact that most workers nowadays cannot protect themselves by bargaining for higher wages. The paper then takes up the obvious question of why steep rises in interest rates have not so far led to big rises in unemployment. We show that recent arguments by Benigno and Eggertson that shifts in vacancy rates can explain this are inconsistent with the evidence. The biggest factor in accounting for the strength in the economy is the continuing importance of the wealth effect in sustaining consumption by the affluent. This arises, as we have emphasized in several papers, from the Fed’s quantitative easing policies. Absent sharp declines in wealth, the continuing importance of this factor is likely to feed service sector inflation in particular.
Topic:
Economics, Monetary Policy, Federal Reserve, Inflation, and Macroeconomics
Political Geography:
North America and United States of America

3. Betting on Black Gold: Oil Speculation and U.S. Inflation (2020-2022)

Author:
Carlotta Breman and Servaas Storm
Publication Date:
06-2023
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
Sharp increases in systemically important crude oil prices have been a major cause of the recent surge in the inflation rate in the U.S. This paper investigates the extent to which the increase in oil prices can be attributed to excessive speculation in the oil futures market. Our analysis suggests that excessive speculation in the crude oil market has been responsible for 24%-48% of the increase in the WTI crude oil price during October 2020-June 2022. These estimates translate into an oil price increase of around $18-$36 per barrel and an increase in the U.S. PCE inflation rate by circa 0.75 to 1.5 percentage points during the same period. We complement the analysis with an empirical investigation of the crude oil market which shows that (speculative) long non-commercial open-interest positions in oil futures have increased considerably relative to short non-commercial positions. We further find that higher futures prices for crude oil ‘Granger-cause’ oil spot prices, the futures prices of corn and soybeans and the fertilizer price. These econometric results show that oil speculators have to be held accountable for not just raising oil prices, but also driving up food commodity prices. We finally discuss measures to clamp down on excessive speculation in oil in order to eliminate its systemically adverse consequences for the U.S. economy.
Topic:
Economics, Markets, Oil, Inflation, and Speculation
Political Geography:
North America and United States of America

4. The New Normal: Demand, Secular Stagnation and the Vanishing Middle-Class

Author:
Servaas Storm
Publication Date:
05-2017
Content Type:
Working Paper
Institution:
Institute for New Economic Thinking (INET)
Abstract:
The U.S. economy is widely diagnosed with two ‘diseases’: a secular stagnation of potential U.S. growth, and rising income and job polarization. The two diseases have a common root in the demand shortfall, originating from the ‘unbalanced’ growth between technologically ‘dynamic’ and ‘stagnant’ sectors. To understand how the short-run demand shortfall carries over into the long run, this paper first deconstructs the notion of total-factor-productivity (TFP) growth, the main constituent of potential output growth and “the best available measure of the underlying pace of exogenous innovation and technological change”. The paper argues that there is no such thing as a Solow residual and demonstrates that TFP growth can only be meaningfully interpreted in terms of labor productivity growth. Because labor productivity growth, in turn, is influenced by demand factors, the causes of secular stagnation must lie in inadequate demand. Inadequate demand, in turn, is the result of a growing segmentation of the U.S. economy into a ‘dynamic’ sector which is shedding jobs, and a ‘stagnant’ and ‘survivalist’ sector which acts as an ‘employer of last resort’. The argument is illustrated with long-run growth-accounting data for the U.S. economy (1948-2015). The mechanics of dualistic growth are highlighted using a Baumol-inspired model of unbalanced growth. Using this model, it is shown that the ‘output gap’, the anchor of monetary policy, is itself a moving target. As long as this endogeneity of the policy target is not understood, monetary policymakers will continue to contribute to unbalanced growth and premature stagnation.
Topic:
Economic Growth, Class, Demand, Middle Class, and Stagnation
Political Geography:
North America and United States of America