Editorial note. This article is an unedited excerpt that is the last section of my inflation manuscript. I have been sitting on that manuscript for a long time, as I was not completely satisfied with the final chapter that discussed the post-pandemic inflation surge. (The bulk of the book are primers discussing the basics of inflation, and the wacky theories you see from the inflation nutters in financial/economic commentary.) I think I still need to compress the final chapter’s text, but it is getting close to be ready for external editing. This article is a fairly lightweight discussion of current events, but I expect it to be read by people years from now, so delving into details of the election are not really needed.
I am also throwing in the towel on my Twitter presence. I have not spent much time reading social media or other blogs (mainly Subtstacks now) due to being overrun by projects, but I need to re-build my social media presence before trying to market my new book. With Musk throttling links to Substack, Twitter is effectively dead as a marketing tool. Anyway, I think Blue Sky is building up a critical mass, so I am now going to pay more attention to it: @brianromanchuk.bsky.social
At the time of writing, Donald Trump has just won re-election in a convincing fashion. The emerging conventional wisdom is that the defeat of the Democrats shows that inflation is politically toxic, and so tight inflation control is needed to keep political power. There is no doubt that this view will be contested (as it has ominous overtones for fans of fiscal activism), but I think that it might stick because it fits many people’s biases (and my own, although I noted qualifications below).
The Conventional Wisdom
The immediate analysis of the shellacking of candidate Kamala Harris focuses on the widespread complaints about high prices, particularly for things like eggs. (Gas price complaints were already extremely common in earlier elections in the United States). This gave a negative perception of the economy, even though growth was robust along with job creation.
The implication is that “the inflation constraint” is not a soft one, it is a very hard constraint – even short-term deviations in price stability are politically disastrous. One can point to a trend of other incumbent political parties getting thumped in recent elections to make this point more general.
In other words, the working classes need to be crucified on the cross of price stability. This argument is likely to gain traction since that was already the neoliberal consensus.
Do I Agree with the Conventional Wisdom?
I am not in the policy advocacy business, but my view always was the inflation political constraint had to be taken seriously. The welfare state consensus was destroyed by inflation in the 1970s, and the post-1980 conservative parties feasted on inflation fears. They only dropped out of sight courtesy of the boring nature of inflation during 1990-2020 (although the inflation nutters were always a factor in financial market commentary). As such, I was always somewhat detached from the political conclusions of Modern Monetary Theory (MMT) – my interest was on the economic theory side (which was arguably not the attitude of activists).
Nevertheless, I have my doubts that this was the sole reason for the Democratic defeat. Although I think President Biden’s domestic policies were reasonably successful and he was good at navigating Washington politics, he was hapless in foreign policy and selling his policy outcomes to the broad public. Furthermore, the centre-left coalition that he was trying to form collapsed.
As such, complaints about high egg prices were the most visible because they were the easiest to make; but even if that were taken away in a scenario of price stability, the Republicans could have found another point of weakness.
Republican Strategy Easy…
The predictable and effective Republican economic political strategy for the next couple of decades is to remind voters of high egg prices under Biden and accuse the Democrats of being socialists. This will be enough to win the endorsement of the business press (which dominates economic commentary) on the basis that the owners and the readers of the business press benefit from lower taxes and deregulation.
(The details might be different in other countries, but this is likely to be the reaction of other right-wing parties elsewhere.)
…The Problem is Execution of Policy
It is also easy to predict what could undermine the Republican economic political strategy – incompetence and/or bad luck. One need only look at the short-lived Liz Truss government in the United Kingdom to see the dangers of relying solely on free market ideological zeal in setting policy.
I have no confidence in my ability to predict the policy actions of the second Trump presidency. My feeling is that the policy actions that matter are the ones that he can accomplish without greatly interrupting his golf schedule. (The most significant action in that category is appointing Supreme Court justices.). But it is easy to see how a renewed emphasis on tariffs (a popular campaign topic) could lead to a jump in the price level.
Such inflation misses would be likely to be given a pass in the business press, but they will show in inflation-linked bond total returns and might fracture the Republican political coalition. (It easy to assemble a coalition of malcontents when in opposition, but hard to keep them signing from the same hymn sheet when in power.)
Centre-Left Is Where the Debate Will Be
The main fight over the political significance of inflation spikes will be in centre-left parties. One entirely predictable reaction for the Democrats will be for the centrists to dust off the neoliberal inflation targeting playbook and try to neutralise the issue and be more hawkish on inflation than the Republicans. The reaction of other groups would likely be an attempt to re-frame the debate or just hope it loses its political saliency.
Closer to home, this debate is likely to be negative for MMT. Although the theory is neutral about how hawkish one should be with regards to inflation, the reality is that the main proponents are perceived as being dovish on inflation (and I am certainly not an inflation hawk). (To be fair, a lot of the “MMT debates” happened during the 2010s, when inflation was undershooting targets across developed countries.)
Concluding Remarks
Given that my last book was finalised during the COVID shutdowns and had a negative tone due to expectations of business failures that did not materialise, I do want to make any predictions on the events that are happening just as I shut down the manuscript to further edits. As such, I will finish off with a wishy-washy “the future is uncertain” outlook.
It is easy to see how we could see a replay of the political process that started in the early 1980s: high inflation triggering a shift towards inflation hawkishness. The problem with such a prediction is that the inflation burst in 2020 does not compare to the magnitude or duration of the 1970s inflation process, and we do not know what other mishaps might happen in the coming years that might overshadow it. We also need to keep in mind the reality that the belief in the business press that the Republicans will be better on inflation may not hold any correlation to reality. The business press gives the right-wing parties a free pass, and so they tend to run loose fiscal policy (their love of tax cuts overruns their ability to cut spending that benefits poor people). The free-market parties pledge allegiance to tight fiscal policy and inflation control, but only the centrist parties take such pledges seriously in practice (e.g., the tight fiscal policies of the Clinton Presidency and the Liberal Party of Canada in the 1990s).
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