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Mar 7, 2022Liked by Arnold Kling

FYI, you misspelled Varadarajan.

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> I think that people perceive government bonds as if they were wealth.

Aren't they? They might not be an ideal form of wealth, but they clearly are. Wealth is simply stored value. And all wealth is based on perception of the future. We're holding something. If we expect the supply of that thing to increase or the demand for it fall, the value of the current supply must fall.

Isn't this sufficient explain inflation? I guess I think the talk of myopia and distinctions between real and paper wealth confuse the issue.

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I think writing checks is an excellent way to offset some of the suffering due to income lost because of COVID. Checks cannot off set the decline in production due to COVID. The Fed can prevent a fall in aggregate demand below aggregate supply. There is plenty the Fed can to to maintain its average inflation target regardless of fiscal deficits.

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"The government borrows $1 from me and spends it on you. You have a new dollar. And I think I still have a dollar, because the government owes me a dollar. Neither of us thinks that we will have our taxes raised next year, when the government has to pay me the dollar."

Isn't that MMT in a nutshell? Government spending isn't inflationary because everybody *feels* like it creates wealth? (yeah, slightly snarky but seems accurate based on my limited readings about it)

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A number of years ago, when Ricardian Equivalence was all the rage along with rational expectations, etc., a colleague asked me, "When you see the deficit go up, don't you save more to prepare for the extra taxes in the future?"

My answer: "No, I spend more and save less. I know the gubmnt will look after me, and they'll do it by taxing the big savers even more."

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Kling writes this as if he and Cochrane are rare voices that think deficit spending is bad and cause inflation. Everyone thinks deficit spending is bad. Spending generates more political support than opposition. Spending cuts generate more opposition than support. Asking politicians to support a politically losing issue is asking them to just throw their careers away. No serious politician will do that. Or the ones that do are no longer in politics.

Activists and elites can change this dynamic, like they have done on immigration and gay marriage and abortion. But the activists + elites don't care that much about deficit spending, and they haven't invested into changing this dynamics.

Kling and his preferred pundits have not been serious about reducing deficit spending. Look at Kling and his preferred pundits like Jonah Goldberg and George Will and Megan McArdle. Sure, they write lots of op-eds advocating for reducing the deficit. But, when it comes time to advocating for political candidates, deficit spending has not been a concern. The Democrats have been proposing wildly unreasonably new deficit spending unlike anything we've seen, and that hasn't discouraged support from the likes of Goldberg/Will/McCardle in the slightest. In fact, they've become more hard partisan Democratic supporters than ever before. I just don't see the current or recent incarnation of the Democratic Party that Kling and his pundits fanatically support as anything remotely close to a fiscally responsible direction.

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I hate to go along the lines of "someone should make a model", but I wonder if both you and John are right on your myopic vs future fiscal scenario thoughts... I'm sure there are a mix of either of those approaches out there in the market, and I wonder if anyone has looked at quantifying the split; because, presumably, the appropriate response differs in a world where it's 100% future casting vs 100% myopic, but it also differs in the middle ground scenarios as well.

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"If we are right, then this “transitory” inflation will get worse until Congress has the will to significantly reduce spending and/or raise taxes."

This seems testable and I'm willing to bet that there will be some "worst" inflation, with some low but higher-than-now interest rate, and the patterns of trade will change such that inflation starts to reduce - all while Congress continues to run large deficits (2% GDP more than taxes?) and avoids big raising of taxes (% of GDP going to taxes increases less than 2%).

Arnold should be more specific with testable numbers, and predictions. Rather more like Scott than Tyler.

To be, by example, a better (pick as a Fantasy) Intellectual.

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If the helicopter pilot were instructed to drop just once either 1T of one-dollar bills or 1T of one-year bonds, 12-months later there would a sharp increase in all price indexes which would be much smaller if he were to drop bonds. If he were instructed to drop every month for ever the equivalent to 0.1 T of bills, soon inflation will be equivalent to the % increase in the initial amount of bills and then will be going down but if he were dropping the same nominal amounts of bonds, inflation will be initially much lower and later may start to increase (yes, inflation paths will differ for the two alternative financial sources).

From history we have learned first that those bills and bonds are never perfect substitutes and that some sharp increases in price indexes should not be confused with inflation.

What is the root of current increases in price indexes? We cannot assume that what happened in 2020/21 amounted to a government commitment to drop every month some amount of bills or bonds. So far, in the U.S. and some other countries we are seeing increases in price indexes but in a few others (i.e., Argentina) we are seeing how the inflationary process that started much earlier than the pandemic is still going on. If you compare the U.S. and Chile in 2020-21, you will see that in both countries price indexes have increased to 5-10% in the past 12 months, but in Chile we know that the huge depletion of stocks of savings (including both the government's sovereign funds and the families' pension funds) replaced at least 75% of the huge income losses caused by the government policies to contain the pandemic (the government also borrowed abroad). In the U.S., I don't need to check the FRB's statistics of monetary and financial stocks and flows to know that the Treasury has been borrowing to finance the large increase in the federal government deficit (with respect to the pre-pandemic deficit which was already financed by borrowing), increase due largely to government policies to contain the pandemic.

So, once again, forget about the helicopter. Recent increases in all price indexes have been largely caused by large changes in relative prices. Now be ready for a new phase of large changes in relative prices as a result of what is going on in markets for energy and other markets as a result of the war.

Indeed, no government can borrow forever to finance deficits. We don't know when the U.S. federal government will be like Argentina, that is, unable to borrow to finance its deficits, but we know that government borrowing has not caused increases in price indexes.

For the past two years, the policies to contain the pandemic caused huge losses of income in the U.S., Chile, and many other countries with little benefit in containing it. I wonder why Arnold --like Tyler Cowen and many other economists-- has failed to discuss those policies seriously and ignore alternatives. To denounce government spending to offset income losses is nonsense, and to discuss the additional deficit and its financing is worse than nonsense. There were alternatives to those policies and they should have been discussed not censored and cancel them.

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