Mark Blyth on the Winners and Losers from Inflation

Mark Blyth is a professor of international economics at Brown University. In Mark’s first appearance on the show, he discusses his new book Inflation: A Guide for Users and Losers, the concept of angrynomics, a new way to look at price controls, demographic decline, and much more. 

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This episode was recorded on June 4th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University, and I’m glad you decided to join us.

Our guest today is Mark Blyth. Mark is a professor of international economics at Brown University and, along with his co-author, has put out a new book titled Inflation: A Guide for Users and Losers. Mark joins us today to discuss his new book on the winners and losers from inflation and why it is still relevant going forward. Mark, welcome to the podcast.

Mark Blyth: It’s great to be with you. 

Angrynomics

Beckworth: It’s good to have you on, and now we have a common connection on this podcast. Eric Lonergan was a past guest on several episodes, and the two of you published this amazing book in 2020 called Angrynomics. Quickly tell us about that book before we get into your current one.

Blyth: Sure. This shows you our publishing genius. We managed to write a book together and release it in a pandemic when the bookshops were closed. The basic thing was there was a paper that came out in 2016, a big macro historical paper, and it said that when you have a banking crisis, just wait, and you will have basically pretty nasty right-wing politics following it. 

We thought, “Wow, that’s super interesting. Why do you get that? What’s up with that frequency?” We started digging into this and read a whole bunch of stuff, and we came up with this framework of macroangrynomics and microangrynomics. Macroangrynomics are why do you get big financial crashes, and more importantly, why you get political reactions that tend toward the right? What’s going on with that? That’s part of what that book examines.

Then the second part is microangrynomics, which was the surprising stuff, which was essentially about how, how labor markets have been transformed over the past 30 years, just-in-time contracting, zero-hours contracts in the UK, higher-at-will becoming more common, less responsibility for employers to provide healthcare or benefits, et cetera. Who absorbs those costs? It’s workers. Then some of them are able to do that well, and some of them are not, and that changes the dynamics of the labor market. That also feeds back into the anger as to who seems to be winning and who seems to be losing. Again, a common theme that runs through the stuff that I write is actually who wins on this stuff and who loses.

Beckworth: Yes, I saw that connection, Angrynomics, to this book on inflation, winners and losers, so we want to make that link. Just quickly, I have another question about your book, Angrynomics. It speaks to the rise of populism following the Great Financial Crisis. I think President Trump is a good example of that, but also in Europe, we saw signs of this. Do you think this wave of populism has run its course or is close to running its course, and at some point, we get back to normal? Maybe this trade war is the latest manifestation of that. I understand it’s more complicated than just populism. We have globalization and maybe some of the pains from that mixed in with populism. Where do you see this going, if I can ask you that?

Blyth: I think we’re in the middle of a system reset, just as we had at the end of World War II, a regime shift, if you want to put it that way. The same we had in the 1970s to the 1980s, toward the globalized world. I think we’re very much in the reaction against that now, and a recoding of what the responsibilities of states and markets are around the world, of which what Trump is doing is one representative example. I don’t think there’s mean reversion in the set. I think we’re now on path departure and going forward.

Beckworth: Very interesting. I interviewed Doug Irwin some time ago, and he’s a big trade historian. I asked him this question when his book came out on the history of US trade policy. Is Trump just a bump in the road, or is he a systematic change? I think the answer is clear, and what you’ve just said speaks to that as well, so we will keep paying attention as we go forward into this new world order. 

Motivation for ‘Inflation: A Guide for Users and Losers’

Let’s go to your book. It’s titled Inflation: A Guide for Users and Losers. It’s co-authored. Now, who’s your co-author?

Blyth: Nicolò Fraccaroli. He was a former postdoc of mine who’s now at the World Bank.

Beckworth: Okay, so you guys have written an interesting book. Let me kick off this conversation by asking two questions. What was the motivation for the book, and why is it still relevant now?

Blyth: Let’s start off with the second one first. We ain’t seen the last of this. We went through a period of very abnormally low inflation for around 20 years, and it’s back. It’s also coming back for different reasons rather than just purely monetary reasons, and that’s what we explore in the book, how supply shocks may be much more important than we think, and there may be more of those going forward.

How did it come about? Nic walked into my office and said—he’s Italian. He’s got this great Italian accent. He says, “We should do a book on inflation.” I’m like, “Why? Don’t we know this story? It’s everywhere and always a monetary phenomenon, right? That’s it.” He said, “Yes, but it’s a bit like the austerity book that you wrote and the one that I wrote.” I was like, “How?”

He says, “Well, if you think about it, when you raise interest rates at the very simple level, you punish borrowers and you reward savers, and when you raise interest rates, you create unemployment, but not for everyone. In a sense, we tell ourselves the story that everyone suffers from inflation, but is that really true? If you think about it in distributional terms, across the income distribution, what the wealth effects are, et cetera.” I thought, “Oh, you’re right. There may be something more in here than we thought,” and that’s what we decided to explore.

Beckworth: Yes, it’s a very interesting read, and again, this emphasis on different people being affected differently, I think it’s a great point. I think we often go to examples where inflation is really high, and you have a chapter on this hyperinflation, where it is clear that everyone is losing. Very few people benefit in that environment. When you have inflation that’s under, I don’t know, 10% or maybe 20%, whatever you want to put that threshold at, it’s not going to be equally shared. I think that’s a key point you make in this book, so it’s good to have this conversation.

Going back to your answer to the second question, I agree with you. I do think this question about will we have higher inflation going forward is a fair one. It’s something the Fed’s wrestling with right now. If you’ve listened to any of the Fed’s speeches, Chair Powell has mentioned many times. What do we do with supply shocks? The standard story is to look through them, but if they’re persistent, maybe inflation expectations become unanchored. I’m someone, as you probably know if you listen to the podcast, has championed nominal GDP targeting or nominal income targeting, because I think this is a difficult question. You’re not going to successfully navigate with standard approaches to monetary policy.

We’ll come back to that later in the program as we get to the end of your book. You mentioned in that introductory chapter where you’ve highlighted why you wrote the book, Milton Friedman’s saying—I think you just mentioned it a minute ago—“that inflation is always and everywhere a monetary phenomenon.” Now, use that example of a bullet and why this is not necessarily a complete analogy.

Blyth: Yes, someone from the Fed years ago told me when this line came out, I was sitting at a conference, and we were chatting. He says, “You know the Milton Friedman line, ‘it’s always and everywhere a monetary phenomenon.’” I was like, “Yes, of course.” He says, “Well, there’s one that we have at the Fed.” I said, “What’s that?” “Shootings are always and everywhere a ballistic phenomenon.” It’s true you can’t have shootings without bullets and guns, but that doesn’t tell you much about why the shooting happened, who was targeted, who was the one that got hurt, so let’s put it into a bigger thing.

Essentially, what it does is it questions the causal importance of money. I think that becomes particularly important when you start to think about supply shocks as more than something you see through. You move away from an expectations model on why you would get accelerating prices. You just think about if you actually have a supply shock, in very simple terms, what happens is stuff gets scarce. Therefore, if there is demand, price will go up. You don’t really need to go through an expectations route to do this. Therefore, it will have an amplitude and then it will have a decay. Once you start thinking in that way, it takes it into a different direction. We use that as a way of playing with Milton Friedman to give us a few degrees of freedom to say, “Okay, let’s think about this in slightly different ways.”

Beckworth: Now, I like what you did. You respected Milton Friedman’s statement, but you said that’s more of a proximate explanation. It’s not the ultimate deeper one, and that’s why we have all these competing theories. We have fiscal theory of the price level, we’ve got monetarists, we have New Keynesians, all kinds of stories you can tell that try to get at the deeper root cause while still acknowledging, yes, money is an important part of a market system and transactions do drive prices, but what drives the transactions? 

Five Things They Don’t Tell You About Inflation

Okay, so let’s move on to your first chapter. That chapter is “Five Things They Don’t Tell You About Inflation.” Okay, so the first one is, “Inflation indices are constructed with significant discretion, what counts and what’s counted.”

Blyth: Exactly. A great example of this is the Bank of England took housing out of the inflation index in the early 2000s. The ECB has never figured out a way to put it in, and the United States has it in, but has owner’s equivalent rent, which is a deeply problematic measure of things that don’t exist, called equivalent houses to condos downtown that are single-family homes in the burbs. Given the fact that a huge component of people’s expenditure is housing costs, you would think that all of these would be one thing, but they’re not. There’s good statistical reasons for inclusion, for including them in different ways, et cetera.

Another way to think about this, a wonderful thing that John Authers, I’m sure you know his work, the guy from Bloomberg did, was he talked about anti-core inflation. It turns out that disconnect that people were feeling in ’24 and ’23 about the officially reported rate of inflation and how it was changing and how it was affecting them wasn’t just about egg prices, although that was part of it. 

Essentially, statistical reasons, everyone listening to this podcast knows that you want to smooth, you want to look at core, you want to get rid of the volatile items. If you’re in the bottom 20% to 40% to 60% of the income distribution in the US, those volatile items are a huge part of your consumption basket. Therefore, if you whip them out, you’re going to end up with a lower number than what people are actually feeling.

John calculated what he called anti-core, which was much, much higher than the officially reported rate. Now, is it true that one is true and the other one is false? One’s statistically true. You track 80,000 different things, you do substitution, you’ve got serious economists and statisticians working on this. Of course, this is the best representation we’ve got, but if you’re in the 23rd percentile and you’re renting a house in a metro area, that doesn’t feel like 4% to you, does it? That has to matter on some level.

Beckworth: Yes, I’ve had many conversations during the inflation surge since I was the economist in my local community. I said, “Well, inflation’s only X percent.” “Ah, David, you know that’s not true. You know they’re lying.” I said, “No, they’re honestly reporting.” What these people were getting at is what you just said. They’re experiencing some component, housing, used cars that are much higher as a percent of their budget, given where they are in their income and their career path. I think that’s very fair. 

I also think of these different measures. There’s a CPI measure, I believe, for older people, the expenditure, the basket they face, which is very different than someone who’s my age. This is somewhat of an art, and it’s not necessarily just a science, right?

Blyth: Yes. Absolutely. It varies by context. If you’re running the ECB, you’ve got 27 different members of the eurozone. They all have very different housing markets. What would be the equivalent of owner’s equivalent rent when you’re doing everything from Latvia to Lisbon, right? That’s a huge, hard problem to solve.

Beckworth: That’s great. Puts a whole new perspective on what’s an optimal currency area when you’ve got to think about how do you even measure things properly, let alone is it robust to shocks and is there offsetting shock absorbers within the union? Okay, this relates to another point you bring up in the chapter. We were touching it, but there is no single true measure of inflation. We’ve touched on that, but anything else you want to add to that point?

Blyth: Just I think the housing one is a fascinating one to get into. Because we have a little subheading in that chapter called “We don’t eat houses, do we?” Words to that effect. Because it’s meant to be a consumption index, and the simplest way to think about inflation is a tax on consumption. Then the relevant question becomes the distributional one, which is, well, how much of your income goes to consumption? If a huge portion of your consumption goes to rent, and that is included as consumption, but you actually are different, let’s say you’re on the 70th percentile, you own your own house, you’re building an asset. 

That’s also an asset as an inflation hedge, right? The distributional consequences of housing in and out of the basket, but across the distribution, are also extremely important. We just wanted to wake people up to the fact that “Look, this thing’s not as simple as you think. Let’s think about a few examples here,” and that was getting people interested in that first chapter.

Beckworth: Yes, it’s such a great discussion as we’ve been talking about, but even for the Fed itself, and I don’t know what the ECB did, but the Fed itself, man, it changed its indice of focus throughout the pandemic. Now we know officially it goes after the PCE, but it went after core, went up core X services, and it had this moving target of sorts. I want to be nice to the Fed, but it does seem like what it emphasized, at one point it was emphasizing inflation expectations, then core X this, core X that. Even they were like, “Oh, this is more art than science when we come down to it.”

Blyth: Nic and I did a paper, it’s just come out in a journal called New Political Economy. It’s a quantitative analysis of basically everything they’ve ever said about inflation in the big three central banks. Then we honed in on the pandemic period. It’s super interesting because the playbook of the 1970s that we talk about in the book, essentially, what did we learn from the ’70s, interest rates are the big thing, this is what you need to use, et cetera. That focuses on two things, basically monetary dynamics in terms of government spending and the state of the labor market in terms of tightness and the fear of a wage-price spiral.

Interestingly, the Fed and the Bank of England, and the ECB all start off with the playbook of the ’70s. They’re like, “Right, let’s look at this.” You had that great line from Blanchard about ’21, saying, “Always look at the label, always look at wages, see what wages are doing.” It became quite apparent that what was going on in Europe was you lost your gas station. It doesn’t have much to do with wages. Wages in the ’70s were set by contracts and highly nationalized economies where we had huge trade unions who had hold up power. Simply not the case now.

What was really interesting about the quantitative analysis is it shows how, in a sense, the central bank started talking this way and went, “No, this doesn’t make any sense. It’s probably this stuff. It’s more about supply shocks. Maybe it’s something else.” They were actively learning, right? They were actively chasing what was going on. They weren’t dogmatic in their adherence to certain frames. The Bank of England was a bit more dogmatic than most, but the Fed and the ECB were actually quite open to going, “Well, maybe it’s this.” I think that’s part of what you were getting into there.

Good, Bad, and Ugly Inflation

Beckworth: Okay. We want to give them credit for being open-minded, having some humility, and learning as it went along. Yes. Another point you raised in that first chapter is that there’s different types of inflation. Let’s assume, for the sake of argument, we all agree and can measure what this ideal measure is. Well, there’s different types. There’s good, there’s bad, and there’s ugly. Help us understand that.

Blyth: This was an ECB member who coined his little triptych on this one is what’s good inflation? You don’t actually want real price stability, because if you do, you’ll probably get into deflation, and deflation is ugly for its own reasons. You do want the 2% target, et cetera. That’s good, et cetera. What’s bad? Bad is when you start to get unhinged expectations, if you go down the expectation channel, or you have policies which basically were going to create disturbances in markets that could be treated as monetary shocks. You don’t want to go there. You want a stable policy framework, et cetera. All standard stuff. Ugly is hyperinflation.

The reason we highlighted this was because we wanted to do a chapter on hyperinflation. Because there is this story that whenever there’s a financial shock, one or two people will come out of the woodwork in the media and say, “Well, this is it. Next thing, we’re all going to be Weimar, Germany, or Argentina, or whatever it is.” We can get into this when we get to this chapter, but that’s not how it works. These countries are deeply broken, and they have hyperinflation because things are deeply broken. It’s not as because they had 2%, went to 5%, and then went to 5,000%. That’s not how it actually works. We were just basically setting the table for that conversation, though.

Beckworth: Okay. That’s a great point, because it is often easy to see people say, “Ah, the Fed’s going to push us into hyperinflation.” In fact, I believe—

Blyth: Absolutely.

Beckworth: —QE2, there was talk about this in some newspapers. Your point is, if we get to hyperinflation, there are bigger issues at play than whether the central bank slipped and accidentally hit the gas pedal too much.

Blyth: It’s a consequence of the fact that you have no economy, rather than a cause of the fact that you have no economy.

Beckworth: Yes. Okay. Last point to raise from that chapter: “Inflations causes and consequences are more contested than commonly acknowledged.”

Blyth: Great line from, I think it was Ben Bernanke, when he was Fed chair. It might have actually been Jerome Powell, which is, inflation is different because we’re all affected by it. Again, this is the thing that we want to talk about, the distributional aspects of this again. That’s the setup for that part of the book, which is that’s simply not the case. I’ll give you a great example of this. The book, we actually don’t call it winners and losers. We call it users and losers, because we wanted to get at the idea that some people actually can use this as a way of making supernormal profits and beyond the standard price gouging models. I’ll give you an example of this.

In 2022, America’s biggest carbon majors, the oil companies, made $220 billion in profits above what they did before. Now, did they really move their margins, or was this just basically a cost adjustment, whatever? Just leave the raw number, right? Share issuers, as you know, are highly concentrated. Top 1% of Americans own 50% of the shares. Rough back-of-the-envelope calculation in terms of dividends and share appreciation of that $200, $100 went to the top 1%. Given that they have a very, very small consumption footprint, that’s pure profit. They absolutely profited by inflation. Okay, they actually won. The notion that we’re all negatively affected by it, simply not the case.

My fun example of this one was Saudi Arabia made so much money they bought Cristiano Ronaldo to play in a soccer league that no one cares about. That’s when you’re making silly amounts of windfall gains. It was basically those types of things that we wanted to start to explore as well.

Interest Rates and Inflation

Beckworth: Okay, and we’ll come back to some of this as we get through the rest of the book. All right, so let’s move on to your next big point in the book. You critique the dominant or maybe the mainstream view on the reliance on interest rates, how to deal with inflation. Walk us through the point you’re trying to make here.

Blyth: The point is, if monetary policy is broadly distributional and there are winners or losers, et cetera, et cetera, according to when you hike rates, that itself, number one, should be acknowledged. The bigger point is, why do we think interest rates are the thing that you should use? If you go back to the ’50s and ’60s, the way the mainstream economists thought about inflation then, it was completely different. It was actually prior to Milton Friedman’s declaration about money, which we take as foundational. Prior to that, there was a whole series of views about it. It was cost-push factors, bottlenecks, and so on and so forth. Very different story on what inflation is and how you deal with it.

In fact, how you dealt with it was things like price and incomes policies in Western Europe, corporatist bargaining amongst big business and big labor, which still goes on in places like Germany and France. They had a very different understanding of inflation. What we do in that chapter is to sort of say, “Okay, let’s go back to the Volcker shock,” and we go back to this at different points in the book. This is where we introduced the notion that we shifted to a view of inflation as not being caused by these factors, but being caused by runaway expectations. That story about runaway expectations of time-inconsistent politicians, political business cycles, et cetera, is very much part of the explanation of why the ’70s was the ’70s: stagflation, huge number of strikes, et cetera, declining profits, so on and so forth.

Our solution to this, the institutional fix, if you will, the hardware mod for the period, was independent central banks. What gave that wind was partly the change in economic thinking around these ideas, much more micro-founded, much more to do with expectations, but also because you had Paul. Paul at the Fed basically jacks up rates to basically 20% nominal, 16% real, whatever it was at that high point, and essentially causes a huge recession and blows up large parts of what was the emerging Rust Belt and causes a lot of unemployment at exactly the time that Reagan and his folks are changing the way the economy works. There’s much more emphasis on the supply side, et cetera.

The lesson that we came away from this was that interest rates caused a recession, but it cured inflation. We thought, “Well, is that really what happens?” Again, it’s the bullets and the gun, right? We know that the rise in interest rates was associated with the decline in inflation, but is that what really caused it? Now, without giving the game away, jump forward to the 2020s. Central banks learned something. They had huge interest rate rises from zero. They went to 5% or 6%. Nobody’s going in the teens.

If I’m not mistaken, none of the central banks actually raised their policy rate above the rate of inflation at any point in time. They were being very careful because they were aware of the demand destruction that could happen if you pulled a Volcker. They were also thinking, given 10 years of work before that, are there other ways of dealing with this? Is this how we should really think about this? The purpose of that chapter is to say, “Okay, we’ve got a nail. It’s called inflation. We’ve got a hammer. It’s called interest rates. Kind of makes sense to use the two of them together. Is it always the optimal tool?”

Price Controls

Beckworth: Yes, and I’m going to come back to this mystery or this interesting development where we had immaculate disinflation or a soft landing, because we talk about it later in your book. We’ll come back to how do we resolve that mystery of sorts. I do want to park here for a few minutes to talk about price control. A lot of economists listen to the show. I’m an economist, you’re an economist, and we typically are very cynical and critical of price controls. Walk us through the examples that you have in the book, where in some places they were tried during the pandemic, didn’t work out well, but in other places, at least on the surface, looked like maybe it worked out okay.

Blyth: The first point to make is that we have this imaginary where price controls is this thing that we have on the shelf in a box that’s locked up that says, “Do not touch even under emergencies,” but we use price controls all the time. It’s in normal day-to-day stuff. Electricity markets throughout the world, price controls as far as you can see. Tariffs are a form of price control, if you want to put it that way. So number one is they’re not that unusual. 

Number two, are they effective? I’ll give you some of the examples. The first one that seemed to be pretty reasonable was what they did in Spain. Spain didn’t try to go to the supermarket and say, “You shall not raise the price of bread.” What they did instead was they said, “If you’re below a certain income threshold, we’re going to make public transport free and we’re going to give you some subsidies on some basics, not to do with direct consumption subsidies.” What that does is it eases the budget constraint on those folks so that the inflation hurts them less. If you think that it hurts distributionally across, that’s a policy that makes sense. Is it a price control? We can quibble, but it’s kind of.

Hungary, Orbán tried to basically control the prices in the supermarket. Textbook failure, supermarkets run out of stuff, black market, the whole nine yards just didn’t work. Smarter one, tried one in Edinburgh. I’m Scottish, and I was interested in this one. They basically put a moratorium on getting people out of rental accommodation during the pandemic and a freeze on rents. Okay, those ones usually don’t work out. How did it not work out this time? What it did was it incentivized landlords to immediately get out of all leases and turn everything into ultra short-term rentals, which then caused an even bigger shortage, which pushed up the prices.

On the other hand, we had the gas price break, as it was called in Germany, which was an epic effort at price controls. Again, we can quibble about what’s a control versus something else. Essentially, it was an attempt to regulate the price of gas, and it worked. The German industry didn’t blow up. It ended up costing much less than people thought, and if they hadn’t have done it, the reasonable counterfactual, is that huge amounts of German industry would not have been able to stay online.

What we come away with at the end of this is there’s lots of things you can do. The problem’s in ex ante, ex post. Ex ante, it’s hard to tell what will work. Ex post, it’s hard to do the identification to tell that the thing that you did was the thing that was important, but it doesn’t mean that there’s nothing you can do apart from interest rates. That’s basically where we end with it.

Beckworth: Okay. Yes, it’s an interesting question. As an economist, you’re trained to think about markets providing this important role, clearing systems, and prices being the signal that helps markets work. There’s stories from World War II and other places where they sort of worked, but it was wartime, a special occasion. 

Blyth: Yes, you’re closing down the whole economy. You can set prices directly. That’s it. Right.

Beckworth: Yes. It is interesting to see these different experiences. Again, the takeaway is context-specific. They weren’t wholesale. The ones that were more wholesale didn’t work well, like in Hungary, but other contexts more targeted. You also raise the point, though, that if a politician did nothing, even if the price control did not work or was just symbolic, maybe it’s important to keeping the state running.

Blyth: I think that’s exactly right. If we think about Italy, here’s another example. One of the things that everyone probably noticed on our neck of the woods was the net interest margin on banks. Fed puts up rates. Suddenly, the cost of borrowing money gets more expensive, but what about the depositors and the savings rates? I was watching mine, waiting for it to move above dead. I don’t think it even got close to nearly alive. That would be 1%. That net interest margin explodes for banks.

Now, in Italy, what they did was they tried to tax some of that back, and it got caught up in core, and they got less than they wanted, whatever. Perhaps what was less important than the fact that the banks didn’t get all the windfall was the fact that the government was seen to recognize that, “Yes, we are hurting down at the bottom here, and these banks are literally getting windfall. Gosh, we should all share in the windfall,” and that creates more support for an anti-inflationary policy going forward.

Stories About Inflation

Beckworth: Okay. Your next chapter, you get into stories that we tell about inflation. This is the chapter where we try to make sense of what happened during the pandemic. It’s a more general point, but pandemic is the case study you look at. What caused the pandemic inflation surge? You go through a list of options. I have my favorite on the list, but you’re being fair, and you’re putting them all on the table. Walk us through. You have four that you lay out. One is fiscal and monetary policy being too supportive, too stimulative. You also have labor cost push, supply shocks, and corporate greed. Maybe walk us through the standard stories told around those different options.

Blyth: Sure. This is the first chapter we actually wrote. We actually got really interested in the way the debate was evolving. That playbook from the 1970s that we’ve all been raised on, you’ll recall Larry Summers came out and got up as a hot mic and said, “We need to have 7% on interest rates for three years or whatever employment.” It was very much like the Phillips curve is back, and we need to push it, and this is how we’re going to solve it. That was the first dominant narrative that came out of that one. Particularly in the United States, that got a lot of attention because of the Biden stimulus checks. One of the best research papers on this comes from the San Francisco Fed, and the error bars on this are pretty big.

Basically, it caused either between 0.9% and I think it’s 3.2% of the overall inflation. That’s a big spread. We got interested in this because we were thinking, but again, context is important. We were sending 80% of the labor market home at the time we were doing this. The counterfactual is, if you hadn’t have done that, well, what would have happened to consumption and what would have happened to the economy? I started to think of these less as stimulus checks and more as compensation for a big supply shock, as all the labor goes home. Then I looked at the survey of consumer finances, and it turns out that the two stimulus checks were largely spent, the first one was on the largest reduction in credit card receivables in American history, they paid back their credit cards, and a lot of the second one went on back rent.

Yes, there were a bunch of bros who bought crypto, et cetera, et cetera, but that wasn’t it. Then the other one is 30 countries suffered inflation, only one of them had American stimulus checks, so there has to be something going on. That took us to the second one, so the rival to Larry Summers, of course, was always Paul Krugman. Paul came along with Team Transitory, and this is just a supply shock, and it too will fade. What was interesting about Paul’s rendition of this was the weight put on expectations, that somehow people know that this is just a supply shock, and therefore, expectations won’t get out of hand. It was like, “Well, why would they know this? Are we all conversant with the history of the 1940s? Why would you have that confidence?” We started to question that.

Then there was the third one, and the third one came along and basically says, “This is obviously corporations pushing up profits,” and we’re sympathetic to that one. The ECB in 2022 estimates that 40% of the inflation in the eurozone after the gas price thing fell a bit, the inflationary shock from that, was basically, you’ve got, in a sense, hysteresis over prices. You’ve got concentrated markets, so if people can push their margins, they will, and they did. The ECB estimates 40% of the inflation that year came from that source. Yes, the Bank of England, incredibly skeptical about this. The Fed, generally skeptical about this, but it got more of a hearing in Europe, actually, perhaps because of their market structures. Then the fourth one, ex---ternal exogenous shocks, basically, is what’s driving it. That was the four that we outlined.

Beckworth: Mark, let me ask about corporate greed because I’m typically more skeptical of this explanation, but I want to give it a fair hearing here. You told an interesting account of what happened in Europe. Maybe flesh out why you think Europe is a more convincing case, and maybe why you think the US might be as well, despite my skepticism.

Blyth: Sure. Let’s take the US one. A simple one is eggs. Everyone’s obsessed with eggs, right? The difference between our tribe and the rest of the world is the rest of the world looks at levels. Price level goes up, doesn’t come down, they say there is still high inflation. We look at the rate of change, say that it’s going down, and say that there is no inflation, and that creates a big disconnect. Now, imagine you’re a firm, and you’ve got, if you will, hysteresis over prices, nobody knows what they should be. If you’re in a concentrated market like eggs, whereby there are hundreds of thousands of producers, but two buyers, and yes, there’s also cover in the fact that you’ve got bird flu, then why wouldn’t you push up prices to take advantage of this?

Now, it’s very hard to tell if they’ve done this because ultimately, you need to know the cost of their intermediate inputs, and it’s really hard to get those data. Therefore, to do the counterfactual that you’d need to do to model this out. But if you just simply look at Canadian egg prices, British egg prices, everybody’s dealing with bird flu, ours tend to be a bit more expensive. Other examples of this, you don’t even have to price-gouge. Just the windfall effects of what happened with oil companies. They did tremendously well on this stuff. Governments are very hesitant to tax those windfalls, banks with net interest make margin, et cetera, et cetera. There are certain market structures when there’s uncertainty over prices. It’s not that I think that this is axiomatic.

By the way, we do have hundreds, if not thousands, of hours of calls that were earnings calls that were made where companies basically fessed up to the fact that this is a great moment to push on prices. They all said it. My question is, if I was running a firm and I could do this, why wouldn’t I? That’s always, to me, the simple counterfactual. I’m in a profit-making business, and there’s no competition because nobody knows what prices should be. If the market structure is such that it’s basically oligopolistic anyway, the other guy is going to take advantage of this. We’re going to shadow each other. It’s going to be a Stackelberg rather than anything else. In a sense, it just makes sense to me that they would try this. 

Now, when market structures reverse or become more normalized, the supply side adjusts, can they keep up those prices? It’s interesting the levels don’t go down. If you’re in construction, they’re still sky high. They’ve leveled off a little bit, but we’ve got all the timber we need now, and it’s still about 30% more expensive than it was before the pandemic started. I think there’s something in there that we need to be a bit more head-scratchy about rather than acceptant.

Beckworth: Now, you listed two industries in the US that are maybe more capable of taking advantage of these opportunities. Are you suggesting in Europe, there’s even more concentration and therefore more opportunities over there for that?

Blyth: The French government recognized this with their supermarket sector because they basically got them all together because there’s really just four big ones and said, “We know you’re at it. Now you’re all going to come out in public and promise not to do it.” They went, “Yes, all right.” They all came out in public and said, “We’re not going to price-gouge you. Honestly, it’s great. 100%, we’re there,” right? It’s classic, exactly what you’d expect in oligopolistic competition models. It lasts for about four weeks, and then it just starts to fall apart. 

Again, it’s like there are certain market structures which allow these things to happen, but also because Europe was such a supply shock driven by fuel costs, and everybody uses fuel. Who’s to say that you’re not just covering your costs versus pumping your margins? Very hard to tell. At the end of the day, as I said, there’s an ECB report that we list in the book for their estimate for 2022 is 40% of it coming from that source. That was way higher than I ever expected.

Beckworth: Okay, so that is a more convincing story. Let me come back to the US and provide a little pushback. You tell me where I’m wrong here. The Kansas City Fed came out with a study during, I think, 2023, where they looked at corporate profits did go up in 2021 and coincided with the rise of inflation. What they showed and what they argued is that increase was in anticipation. These firms are forward-looking, and they want to price so they don’t lose. They highlighted that corporate profits actually fell in subsequent quarters as inflation went up. Now, the question then is, why would these firms anticipate a price increase? This leads me to my second point.

For someone like me, I like to look at the total dollar size of the economy because, of course, I’m a big advocate of nominal GDP targeting. Nominal GDP, the total spending on the economy by the end of 2022 is $2 trillion higher. If you look at PCE expenditures, similar, a little bit less, so somehow households were spending more money. If I’m a firm and I see this robust demand that’s above what we anticipated prior to the pandemic, yes, one, maybe I need to increase prices because I anticipate cost increases coming up the pipeline, or two, I take advantage of it. If the cause is coming from robust consumer demand, couldn’t I put the blame on really supportive macroeconomic policy? I’m just responding. I’m just profit maximizing, as you said.

Blyth: Yes, I think that’s a perfectly reasonable explanation. What it does is to suggest that then profits aren’t about skill, they’re about the macro environment, so ultimately the profit level is then a function of the level of federal spending, which takes us to a very interesting place. I’m not sure we want to go there. 

Hyperinflation

Beckworth: In certain circumstances, special cases, yes. Okay, well, let’s move on to your next discussion. I think this is an important one because it is the default for some of us when we start to get worried about inflation. That is in chapter 4, you have this chapter titled “When Inflation Goes Hyper,” hyperinflation. You give the example of Germany, Zimbabwe, Venezuela, Argentina. Let me ask this question first. Do you define inflation at a certain level? I know there’s this 50% number in the literature that goes back some time, but what would you define as hyperinflation, and how is it distinct from what we experienced in the pandemic?

Blyth: The 50% number is there. It was made up in the ’50s. Kaletsky actually had a refinement on that one. It was again brought up in the ’70s. Steve Hanke at Johns Hopkins has used this one in his work. We went with that, but my personal example is in a footnote, which is I spoke to Martín Lousteau, who was the finance minister of Argentina at some point about a decade and a half ago. He tells a story about when he was in graduate school, when you went out with your friends for pizza, you knew you were in hyperinflation when you had to negotiate what you were paying at the end and what you were paying at the beginning, and then which one you wanted to go for. When you’re basically auction pricing a meal from beginning to end, that’s when you know you’re in hyperinflation. That, to me, is a better rule.

Beckworth: Great story.

Blyth: It’s a cracker, isn’t it? No, the serious point in this chapter is this one, that we have this implicit assumption of a step function, a Hayekian road to inflation, if you want to put it this way, where you start off with a little, and then it becomes a bit more. Once it becomes a bit more, you adjust to it. Then you do a bit more. Again, a lot of this is based upon the 1970s and the notion of the collapse of the Phillips curve and the political business cycle, et cetera. None of which actually resulted in hyperinflation in the developed world, it must be remembered, right? 

What then were hyperinflations? We were really excited to do this chapter, because we didn’t really know. Not that many people have actually bothered to sit down and do the work on Zimbabwe and Venezuela. What it comes down to is one of two stories. I can talk about the specifics of any country you want, but it’s basically two stories. Number one, Milton is right. If you just spend an absolute ton of money in a broken economy, it’s going to show up as inflation. No doubt. 100%. Right?

To take the Argentine version of this, did the populace under Perón build an electoral coalition that couldn’t squeeze labor for development purposes by basically inflating the economy? Hell, yes. Absolutely. 

There’s another story in all these ones as well, which is the exchange rate. If you think about a country like Argentina, Venezuela as well, what is it that they do? They basically make two, three, four, five, six things, and they sell them in the world. Then everything else is imported. Now, that creates a structural vulnerability because you get caught in commodity super cycles. People want your soy, so you chop down more Amazon. You make more soy, you sell even more soy. Eventually, you get the super cycle effect where you produce so much that you flood the market, and it crashes. 

Your exchange rate is effectively a proxy for your commodity exports. Your exchange rate goes through the floor. You have to import everything. We’re talking medicines. We’re talking baby formula, right? How do you pay for that stuff? You run the printing presses. In the first story, money is 100% primary cause. In the second story, it’s a reaction to the fact that you’re on a commodity-dependent economy and your exchange rate collapses.

What we found in most of these stories, the two standard stories of Latin America, this is what happens. There’s both populist money doing it, but there’s also the exchange rate effect. What you find in Germany is a super interesting one. I wrote about this in my book on austerity a decade ago, is that this was, essentially, the Germans decided, after the French invaded the Ruhr, to crush the economy. The reason they were crushing the economy was because, under the terms of the Versailles Agreement, 40 pfennigs out of every mark was going straight to the French treasury.

They just said, “we cannot possibly economically recover, nor can we basically pay the reparations. We’re going to allow the exchange rate to completely collapse.” That created hyperinflation. That brought in the Americans in the form of the Dawes Plan, which swapped the seniority of commercial credit and war credit.

That’s when you got the roaring ’20s in Babylon Berlin, because all the money came in from America for five years. Again, that’s a very different understanding of how this happens. The basic story is the following. The monetary story is completely true and possible, but it’s not always the story. If you are a big commodity independent exporter, the exchange rate does a heck of a lot of the work.

Beckworth: Yes. I think that’s a great point. You can’t just look at M1, M2, and try to tell the story. You’ve got to look at the deeper developments at the state.

Blyth: Yes. Why is M2 going through the roof? Absolutely. Why is it going through the roof?

Beckworth: Exactly. I’ll briefly mention the case of Zimbabwe: I have a collection of notes from the 2008 period where the actual denomination of the notes are reasonably sized $1. They’re called dollars, and they’re in English, $1, $5, $10. Then throughout the year, they blow up and I have all these notes. The final note they issued before they ended it was $100 trillion note. In classes, when I would teach, I would say, “Look, do you know I’m a billionaire? I have a billion dollars right here with me. Of course, it’s worth absolutely nothing.”

Now, I want to go back to this question of hyperinflation. I’m going to make a claim, and I want to see what you think. I don’t think the US can easily get to hyperinflation. I think it would take a lot to get us there, far more than the challenges we face now, and there are many who we face right now.

To get to a place like hyperinflation, you would have to have a serious breakdown of the state. Maybe even a civil war in the US. Something really dramatic. I’m someone who is worried about the emerging threat of fiscal dominance. I do think, given the stock of debt, if interest rates are higher, how do we finance the debt on the debt?

Blyth: A nice bit of financial repression coming your way soon. Yes, exactly.

Beckworth: Exactly. I think what they did in World War II might be happening now. What makes it ironic now, though, is we’re doing this during peacetime. It’s not a world war. It’s not a pandemic. All of those are major wars of sorts. What we’re doing now, to me, is less excusable. Even with that said, it’s hard for me to see how we get from a moment like this to something like one of these failed states. What do you think?

Blyth: I think that’s exactly right. Essentially, the chances of any functioning state that has an economy, that has even a mildly positive growth rate collapsing into hyperinflation, that’s not what happens. Essentially, you have state collapses.

Zimbabwe is a great example of this. You come out of colonialism after a brutal civil war. You then get into a situation whereby you manage to mismanage your farming assets. Then the banks get involved with this in a bad way. Then you start an actual war with a neighboring country.

Every policy misstep you could make just concatenates and gets to the point whereby the state is broken. People transact in a foreign country, the currency. They import their goods from the neighboring country by walking over the border.

When you got to that point, you have hyperinflation, but it’s because you don’t have an economy. That’s not the United States’ problem. I’m sure he must’ve been on your show at some point, Mike Green. Has he ever been on the show, Michael Green?

Beckworth: No.

Blyth: Super interesting guy. He’s got a brilliant, brilliant blog, which I highly recommend called Yes, I Give a Fig. He’s a fun guy, quite a fun guy, but very smart. One of the things that he says is super interesting that people don’t pay attention to, and I’m guilty of this as well, is one of the main drivers of disinflation is both an aging population and a shrinking population.

What’s the big problem in the developing world now is we don’t have enough kids, and we’ve decided we don’t like immigration. What you’re doing is you’re building a deflationary mechanism into your economy. That’s at least plausible to me. I don’t think that we really think about it enough of what it means.

Pandemic Inflation

Beckworth: Yes, for sure. Let’s move forward and get to your next chapter, where you get to the question of the pandemic inflation. In particular, why didn’t we see it coming, this inflation surge? I’ve made this confession on here many times. I’ll do it one more time.

In early 2021, I was invited to write an op-ed for the New York Times, myself and a colleague. The title of our op-ed—we didn’t choose this, but it was a fair representation—is “Stop Worrying About Inflation” in early 2021. This is something that continues to haunt me, and people continue to remind me. Our argument was actually based off of breakevens. Man, if the bond market doesn’t see anything coming—in fact, we even argued that, man, inflation should be higher, given the size of stimulus and stuff. Maybe the bond market’s getting it wrong. Of course, it did happen.

There were some people, you mentioned Larry Summers, Joe Gagnon. There were some who did see this, a hydraulic Keynesian view of the world, bathtub water running over. They saw that coming. The standard, maybe New Keynesian approach, the Phillips curve, the rational expectations forward-looking Phillips curve, it wasn’t really helpful as a point you make in your discussion. Talk about that.

Blyth: Sure. We go with this, why didn’t anyone see it coming, because it was the same thing that was asked after the financial crisis. You’ll remember the VIX index was at an all-time low in late 2006. We’re all guilty in this one. No one escapes.

You just got nailed for it because you’d wrote it down what everyone else was thinking, right? What we got into this chapter—and again, it’s an unexpected turn, I didn’t expect to go there—was, the whole of the edifice of central banking is based upon the notion of credibility and control through signaling and people having expectations of price formation.

What we began to realize looking at some empirical research is, first of all, there’s not that much empirical research that really backs this up. There’s a lot of models that says how it works in theory, but do people form their price expectations in this way? There’s not that much out there.

What there is, when you do surveys, shows really interesting things. When you say to normal people, “Interest rates are going up. Is that going to make prices higher or lower?” They’ll think it will make it higher because it’s going to make the cost of borrowing more expensive, so they’re going to have to pay more money. They actually see this as inflationary rather than deflationary.

Then things that we know, right? People confuse nominal and real all the time, so on and so forth. One of the papers that we found was this Bank of Spain paper, where they scraped the whole of the web of New Zealand. I have no idea you could do such things. They basically went to the financial sector and said, “What are these guys doing? Are they passing around central bank inflation forecast? Because they’ve had inflation targeting for 40 years. They’ve got pretty low inflation. If anybody’s listening to the signals and taking it in, it’d be these guys.”

They found you were hundreds of times more likely to pass around a cat video in the financial sector than share a central bank forecast. We started to get into this whole notion of, well, if it’s not that way—all the people I know who are normal people, do not spend their time thinking about breakevens.

If they think prices are going up, it’s because they go to the gas station twice a week, and the price of oil is up, and therefore, they think things are getting more expensive. If that’s the case, was that part of the reason that we missed it?

Our models are calibrated to a world where expectations not only matter, that’s the price formation mechanism and the acceleration mechanism. What if it’s actually just something different? That’s what took us to those papers that Alan Blinder had been writing for the previous 20 years.

Beckworth: What did he argue?

Blyth: Alan Blinder, I’m sure everybody knows, Princeton economist, former central banker. He’s been writing a whole bunch of NBR papers. He’s not the only one. It was interesting to discover this, that there was a whole other view of the 1970s that we spoke about earlier. One view of it is the interest rates matter. Volcker was the guy. This is the story, the standard playbook of the ’70s. Therefore, look at labor markets and watch out for wage-price spirals, et cetera. 

What we found is a different one. Mike Green also tells the story, credit to Mike, which is, imagine it was just a bunch of supply shocks. It’s a bit like buses in London. You wait for 10 years, none of them show up. You think you’ll never see a bus again, right? Inflation. Then bam, bam, bam, they all come at once. What were the inflationary shocks that happened? The Vietnam War and its effect on labor markets. You had basically 2% unemployment in the late ’60s. That’s going to have, in a relatively closed economy, huge hothouse effects on real wages. The ability of productivity to pay for those wages declines. Profitability starts to go up.

That’s a part of the standard story on a more country level. Incorporating women and minorities into the labor market the first time at scale. Rather than adding to supply, it just dumped a whole bunch of consumers in, because they form households in very different ways.  Failed harvests. These used to be big news. Russia running out of wheat and so on and so forth. There was a global wheat buffer at one point. I was surprised to find this, and we exhausted it. The oil shocks of ’74, ’79. Put in mortgages in the CPI in 1978.

There were all of these things that individually were an impulse, and on their own, in isolation, would have declined. They all backed into each other for a whole decade. Once you do that, it gives you a very different way of thinking about the ’70s, which is much more congruent with the 2000s.

If the 2000s was really, for Europe, pure supply shocks, and for the United States, because of COVID, the supply and demand shock, and then the secondary effect on energy markets for us because of European demand. If you think about the ’70s as a series of supply shocks, you’ve actually got one theory that explains the whole thing, rather than one that works with monetary dynamics and labor markets, and one that seems to be completely different as a bit of a puzzle.

That’s where we ended up. Not because we were out to overturn the expectations model, but just because we started to say, “Let’s imagine that people don’t do this. What else could be going on?” That’s where we ended up. It’s my favorite chapter in the book because it’s just very exploratory. I just really enjoyed writing it.

Beckworth: Another possible view of the 1970s is the supply shocks did matter, but they were also accommodated by really strong fiscal, monetary policy support. Again, it’s demand coming into a market or an economy that has restricted, constrained supply. What do you think about that?

Blyth: Absolutely. This is the standard critique of the Nixon period, which we actually go into. We could also talk about price controls in the Nixon period. It was actually super interesting. We probably should. Burns basically was goosing the juice, basically, for the economy at that time, for Nixon’s reelection. That was probably going on.

At the same time, you had Otmar Issing in the Bundesbank, and he wasn’t goosing the juice for anyone. Although Germany did better in inflation performance, and a lot of that was attributed for better or worse to the performance of the central bank, across the OECD, not everyone engaged in those types of fiscal policies.

You had a generalized inflation. That suggests to me that the macro causes of the 1960s—we haven’t even mentioned the end of Bretton Woods, what that does in terms of inflation. Also, the exporting of devalued dollars under the end of Bretton Woods. There were so many inflationary impulses going on in that period that, to me, thinking, “No, just look at the labor market. No, look at the complexity and get into it for what it is.” I think that the Burns story is right, but it risks the end of one fallacy in that regard.

Beckworth: I like to look at it not necessarily through a Phillips curve or expectations, but just simple aggregate demand. You can throw expectations on top of that. It might be useful, too, relative to supply. You’re absolutely right. If you look at, for example, inflation in the 1970s, there’s these two big spikes. They crescendo, right? That you see one, it goes up, it comes down. Underlying, there’s a trend. The trend itself is going up. It spikes, it comes down. Again, in the late ’70s, you see this. For me, at least, the trend has to be explained by something other than just supply shocks.

There has to be something that can sustain a trend. I guess my question to you would be, how does Alan Blinder then explain the disinflation? Is it more than Paul Volcker in the ’80s? Does he give any credit to Paul Volcker?

Blyth: What Blinder says at the end of it, in an updated paper from the mid-2000s, is that, by his estimation, the whole thing was deflating at such a rate that you didn’t need to do it. That’s a very big claim, and a very bold claim. Not one that I’m actually willing to make entirely, but I think it’s worth reporting. I think it’s something that we need to entertain in that regard.

As regards to the trend, you can tell a very simple Friedman-esque adaptive expectation story, or even a very simple Keynesian story to the expectations. You don’t have to have a very sophisticated story about people are Ricardians and really see the price level and all this sort of hyper-complex stuff.

Just imagine that there’s a bunch of supply shocks, and each of them keep shoving up prices in sector after sector. You’re a levels person. You don’t care about the delta, right? All you know is the levels are getting higher. Is it reasonable to expect, six months from now, after 18 months of the levels getting higher, the levels are going to get higher or lower?

You’re going to adapt to higher levels. That would explain your trend. Is it an expectation story? Sure, but it’s a very simple one. It’s not the high-tech one that we seem to think we need to explain this stuff. I’m with you. Just macro aggregates do a heck of a lot of work.

Beckworth: Yes. I think this is interesting because I recently went to the Board of Governors Framework Review Conference at their headquarters in Washington, DC. They were discussing a number of topics, but the key theme of the conference was, should we fix FAIT? Should we adjust it, the strategic target? The analysis that was done and discussed was through the lens of a New Keynesian Phillips curve.

In that Phillips curve, you only got three ways to make inflation move. One is expectations. The other is the slack term. The third is supply shock. You could use that and squeeze everything in. You could say, oh, the supply shocks, the disturbances, and preferences, all those could come into that cost term, that shock term.

Your colleague, Gauti Eggertsson, works with the slack term, but he says it’s nonlinear. Normally, it’s not very important. When you get a big, big surge in aggregate demand or labor markets, then you got more oomph, more bang for your buck, so to speak, on the slack term.

Then the last term, inflation expectations, my sense is that most people look and rely on that term. That’s, for them, the important one at the conference. To me, it begs the question, if that’s the story, why did inflation expectations go up? Now, long-term ones were anchored, but short-term ones went up.

To me, again, just for me, an easy story is, well, the helicopter drops, the supportive macroeconomic conditions, refinanced homes really cheap, all these things were very conducive as, this is a great time, spending’s robust. I think prices will probably be higher going forward, all the money we’re getting. To me, that’s the easy story.

It was really supportive of macroeconomic policy, but that’s just through the lens of a Phillips curve. There’s other stories you can tell. John Corcoran likes to tell fiscal theory of a price level. His story is similar, but a little bit different. Literally a helicopter drop. It’s a one-time increase in the price level. Inflation goes up, and it comes down. Monetarists could tell another story. Look at the monetary aggregates. What are your thoughts on all that?

Blyth: I think that what all of these stories do, and I’m not any different, is we do this. We look at the origin, we follow up with our noses, and we follow it down with our noses. They’re all different versions of that same story. Then we say, “Look at what this one correlates with, and the R-square’s tighter on this one, so it must be—”

In a sense, we’re all trend following and trying to find something fit, and that sometimes fits our priors in other areas as well. I don’t want to say definitively, no, these things are wrong or whatever. It just seems to me that, to go back to what we were just talking about, there are simpler ways of explaining how people think about prices and why that might be important.

It is pretty simple to acknowledge that massive constraint to the supply side matter. To take the example that you just gave, basically the fiscal environment is really positive. I’m going to expect these things going forward. Remember, inflation expectations also went up when we sent 80% of the labor market home.

That was a moment where people were like, “Oh, yes, things are great. We’ve done this. We’ve done this one before.” This was a huge expectation shock. If anything, they should have turned negative at that point, and they weren’t. Again, there’s something in there that we need to tear apart a little bit more if we want to get into this.

I think what’s been good about this period for people like us, not for anyone on planet Earth, is that these are the moments when we get to go back to basics and go, “Really? Is this really what’s going on?” Sometimes, yes, it is. It is really what’s going on. Shut up. Now we know.

In other cases, no, maybe we need to push in a different direction because the world now is not the same as it was then. Although economics loves to have this historical invariance, whereby markets are markets, agents are agents, shocks are shocks, it’s just not true. A shock in the ’70s transmits and means something very different to a shock in the 2020s.

Beckworth: That’s a great point. Yes. I think that’s incredibly important. We can’t generalize from that period, as you said. Much more unionized, very different labor market than today, more globalized. There’s a lot of things, a lot of moving parts. I think it is wise to keep it simple and as basic as you can.

Another observation from that conference, before we move on, a lot of what was said there and what I’ve read in the minutes, and what I hear from speeches is a deep soul searching. We were too ambitious with FAIT. We added makeup policy. We looked at shortfalls from maximum employment.

Let’s go back to something simple, because you know what? That ambition was completely driven by our desire to deal with the zero lower bound world. We were fighting the last war. Let’s go back to something simple. Let’s go from flexible average inflation targeting to flexible inflation targeting.

As Skanda Armanath, who was on the podcast recently, said, they’re making the same mistake. They’re saying to themselves, “Oh, we made a mistake. We fought the last war.” I think, and Skanda thinks, they might be fighting the last war again. They’re going to correct in the wrong direction.

Going forward, we might have more supply shocks, right? We want a framework that’s ready for that. Going back to flexible inflation targeting may not be one that’s the most robust. Now, they would say, “Oh, but we’ll see through. We’ll do this. We’ll do that.”

Like I like to say, and I’ve said many times in the show, 2008, to me, is a good example where flexible inflation targeting can mislead you. In theory, yes, you look through supply shocks. In 2008, the Fed was talking up rate hikes because commodity prices had driven the CPI higher.

Same thing in Europe. Had they been looking at nominal incomes, trajectories for PCE, those things would have provided a nice balance or at least an offset to cross-check them. My worry is, we’re going to do the same thing with FIT that we did with FAIT going forward. We need a framework that’s more robust at every situation. Will FIT do that? I’m not certain.

Blyth: I think that’s a fair point. I would only add to that the following thing. There’s actually a much simpler explanation as to why we had the 30 years of low inflation. It was called 500 million Chinese workers showed up at a time when we had the containership, the IT revolution, and the ability to move our capital to their cheap labor. That seems to be coming to an end. Guess what? Price levels are going to be higher. It’s simple.

Disinflation, China, and Demographic Decline

Beckworth: Yes. Now, going back to what you said earlier, though, about demographic decline, like China. We added all these Chinese. That was a nice positive supply shock. Prices went down. Do you think, though, we might also get disinflation from China from the demographic decline?

In the absolute sense, they’re losing people. I think I read 2 million, 3 million people a year now are disappearing from China, half a million from Japan. I know there’s some debate about this. Some people say it’s going to lead to higher costs. Some say it will lead to lower costs, and I guess, traditionally, have held the view it’s going to lead to lower costs and lower interest rates.

Now, right now, we have higher interest rates. We’re still struggling to get that last mile of inflation down. If we can see beyond maybe this period, where do you think the demographic decline that the world’s now facing long term is going to take us, higher or lower in terms of inflation?

Blyth: That’s a great question. Honestly, I can give you a couple of answers. I’m not sure I believe any of them, because I just think it’s very hard to know. Demography is destiny. Whenever anyone does a full demographic argument, you can usually bet that it’s going to be wrong. It just seems to get blown off course on this one.

I think because it cuts both ways, right? If Americans go older and we don’t like immigrants, then we’re going to shrink the labor pool. If you shrink the labor pool, labor’s more expensive. Things will get more expensive. Simple story. Dead easy, right? We’re good, right?

China’s getting older. China’s going to go the same way as Japan. Japan’s got inflation, again, for the first time in forever, and they’re ever older than they were before. I think that, to credit Mike Green, I think his point is ultimately right. That, ultimately, if you do a very simple production function in your head, right? Number of hours worked, number of people, quality, and quantity of capital. Unless you’re massively increasing quality and quantity of capital, if people are working more hours, if the number of people falls, then basically you’re going to have a smaller economy.

I don’t think there’s anything wrong with that observation, but I’m not sure how long-term demography, technological change, innovation, and everything works around that to produce a world. I think the one thing I would throw into the mix on this is climate change. That climate change is going to manifest itself as a series of supply shocks in increasingly important markets.

The second one is, and we’re already seeing this, there’s some stuff out from the Institute of Actuaries in the UK and other sort of thing. You can’t have capitalism without insurance, or at least you can’t have cheap capitalism without insurance. Climate change is really knackering the reinsurance markets. If you get to a point where you have increasing problems this way, and you’ve got demography, I’d have to go with the “it’s going to end up getting more expensive” view of the world.

Recommendations for Policymakers

Beckworth: Okay. We are getting near the end of our time, Mark. What do you recommend for policymakers going forward? What should they take away from this book? How should they be more careful? What should they think about?

Blyth: The one thing is trying to imagine a Swiss-Army-Knife approach to inflation. If it comes from different sources, one-size-fits-all cures, pushing up interest rates is always going to reduce economic activity. Except weirdly, in 2022, we pushed up rates a lot, and employment went up in many countries.

Again, sometimes things just don’t plan out the way that we wanted. I would say to have an open mind. Remember that the world of the ’70s is where a lot of our textbooks are written from, and we no longer live in that world. Therefore, the application of those rules, just cut from cloth and dumped down, is probably not going to work.

Also, we know a lot about how this world works. We should take that seriously. We should think about demography. We should think about what’s going to happen if we deglobalize. If this attempt to reindustrialize, deindustrialize countries goes anywhere, or sustain this policy, what’s that going to do in terms of prices? It’s not always an everywhere of monetary phenomena, but money is always involved.

Beckworth: Okay. With that, our time is up. Our guest today has been Mark Blyth. Mark is the author of the new book, Inflation: A Guide for Users and Losers. Be sure to get your copy. Mark, thank you for coming on the program.

Blyth: It’s been great to talk to you. Long-time ambition now fulfilled.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth, and follow the show @Macro_Musings.