Is everyone pretending to understand inflation (or just me)?
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Welcome to the attention and Peter vote. No question too big, no question too small. I am typically pretty comfortable with embarrassing public disclosures, but I have been struggling with this one. I genuinely do not understand inflation. I'm not talking about either part of this.

I both don't understand inflation and I find my confusion about IT somewhat embarrassing like what i'm looking into N, P, R, and they start talking about how the fed might hike interest strates or something something cool down, something soft landing, the words themselves hit my brain, and my brain starts to shake and melt like jelly in a microwave. Inflation talk makes you feel like I missed a class in school. And honestly, it's about what I did.

I missed tens of class in school. Just this is the one that is now bothering me. When pulled, american voters this year reliably reported that a single most important issue determining their vote is inflation. To be fair, IT gets lumped with the economy in Prices, but inflation, not immigration, which often comes in second, not climate change, which i've seen down at number ten, inflation, by which I think they mostly mean that the things we all have to regularly buy have gotten more expensive. I'm not a complete that yet and also i'm someone cheap.

So I do notice when Prices go up, I understand that inflation partly explains why I paid over four box ago on for gas in the batta last month or why I now can't walk out of a fast food restaurant without breaking a twenty. I just don't really get the underlying mechanics of IT. There's a difference between being able to mumble and explanation and actually understanding something.

And I live in that difference. I felt IT pretty acutely actually watching the presidential debate. The very first question spoke to the issue that this election will likely come down to.

I want to begin to tonight with the issue that voters repeatedly say, is there number one issue? And that is the economy in the cost of living in this country. Vice president Harris, you and president trump were elected four years ago, and you're component on the stage here tonight, often ask his supporters, are you Better off than you were four years ago when IT comes to the economy? Do you believe americans are Better off .

that they were four years ago? So I was raised as a middle school kid. Hair was quickly stag way, from talking about her background to talking about her plans to make housing more for the more because here's the thing, we know that we have A A shortage of of homes and housing, and the cost of housing is too expensive for far too many people.

Is actually trump in his answer to bring a inflation. Look, we've had a terrible economy because inflation, as which is really known as a country buster, breaks up countries. We have inflation, like very few people have ever seen before, probably the worst in our nation's history.

Just to say, inflation is nowhere near the worst. It's been international history, but IT has been bad. Trump's proposed solution for influx terms, other countries are going to, finally, after seventy five years, pay us back for all that we've done for the world.

And the tariff would be substantial. In some cases. I took in billions and billions.

What did any of us have to do with the Price of gas? In a the day after the debate, feeling completely, i'd say I didn't what you do when you profoundly, they lose your way in life. I called the Scottish american economist mark.

you daming.

What are you playing? That sounds .

really like a is good IT basically .

the beatles .

tribute band through two monkeys.

That's exactly how I feel. It's like if you miss the beetles but didn't listen to the lyrics at all. Mark life is a political economist, a professor Brown university.

He's wracking a book about inflation. When we spoke last week, I was at search engine studios. Mark was in his home studio surrounded by many guitars.

When Michael league gaga m was setting up the interview, he asked you for ninety minutes of your time. You insisted on forty five minutes because you said inflation was too boring to talk about onder than that proto. I first, I just want to say that .

really makes me trust you and to think I just read a book about the dumb thing. So now I must be in a boring myself.

What that was what I want to to ask you like, how did you decide to read a book about something that you also describe as boring?

This is a really good question. Some of that was pretty boring, to right. Have to be honest. Why write a book about something you, thank you, understand right now.

Why do we, as in sort of people in my job and a political economists, we talk about this sort of the whole day. Why do we think we understood inflation? Because we were raised on a story about the seventies. We will talk about that story. The nineteen seventies. I began to doubt the story, the ninety seventies, and when you began to doubt the story, the one thousand seventeen days, a lot of the stuff that we do when we talk about inflation and the stuff that we doesn't make much sense. That's why the book became more interesting.

The story of the one thousand nine hundred and seventy odier. We've already begun to get ahead of ourselves. Would I get to end to that right now? We are going to start with the basic, basic. I asked mark to just give me a professors definition .

of inflation. What is inflation? Inflation is a rise and the general level of all Prices is everything going up. It's not when people talk about how inflation is not such thing.

That's just houses go up because we didn't build enough for them, right? And inflation is all Prices, any economy going up at once. Now we hold on and gets back hold. This is the thing that makes sense to everybody, because IT totally makes sense, right? yeah.

Now imagine you're looking at a glass of water, and you look at the top, and you got a little solar at the top called the surface tension yeah, when economists talk about inflation, they're actually looking at the surface tension because what they talk about when they talk about inflation is the rate of change in that growth of Prices. So let's take a simple example. I want to dinner on sunday with my family.

I ordered a short rib. I nearly fell off the seat because the dumb and costs four to five books. I was like, what? yeah.

And this is an effect this time. And inflation, you know, that stuff used to be box. And then I went up to forty, and now it's stuck at forty if if it's never gonna thurday again. Now, when economist tells you orbit inflations been falling for the past six months, what they mean by that is the rate of change and how fast is going up has been coming down. So right.

this is already helpful.

This is that is the rate of change in the increasing Prices. That's the inflation rate. Inflation as a phenomena is the general level of all Prices go up. okay.

Let me just let me say you back to to make sure I have IT. It's inflation when the Prices of everything are going up done. If one day you more expensive, it's not inflation. Don't use the word you are confused you. And then secondly, when we say inflation is going down IT doesn't mean that anything's going shiver IT just means that things are going to get expensive more slowly.

Bomb you nail the hundred percent. That's a validator college .

drop out, actually. Okay, so we now have a working definition, inflation. Let's take up a ride.

So what actually causes inflation? In theory, inflation can check IT anytime. There's lots of reasons why Prices might totally all go up together. But if you look back in human history, inflation actually used to be much more rare. The idea that inflation is something we talk a lot about, worry a lot about, make podcasts, trying to understand that is a fairly modern idea. And IT exists partly because of a particular feature of modern governments.

So the basic understanding is the government spend too much money, and that pushes up Prices that realizes on you have in a government that actually spends a lot of money, raises a lot of taxes, runs a lot of like deficit, all the sort of and most of the human history. I mean, we didn't even have a government. We are bloody on our case, running, running to place an empire and stuff.

That's not to say there wasn't a great big inflation repetitive in the time of the roman empire. There has been other sort of historical examples of this, but modern inflation something different. And we draw all of our examples from the nineteen ninety.

Okay, so let's get to the thousand nine hundred and seventy. Like what tell me before you are deem mythologize IT? Like what is the received conventional black? I'm a freshman in college. What did they tell me about the thousand .

nine hundred and seven? right? So, so, so kids, there was a time called the one thousand nine and seven is this one.

Everyone was a swinger and hot side burns, right? And IT was all crazy. Uh, and starsky and hutch was a popular T.

V. suo. No, what else happened in the ninety seven? So I go back, but you have to veit war.

The story mark is telling. Economists refer to IT as the great inflation. He goes like this.

In the years before the vietnam war, the U. S. Government has been spending more money than usual. President Johnson, in one hundred sixty four, had a cce new social programs like medical, along with greater investments in urban renewal.

Far in your time, we have the opportunity to move not only a told the rich society and the powerful society, but upward to the great society. Then in thousand and sixty five, the U. S.

Enters the vietnam war, which pushes government spending up even further. We have to beat the soldiers. We need gas for the tanks. Thirty nine hundred paratroopers ers are .

members of the one hundred and first airborn, and they bring the total of american service men in south vietnam to seventy nine thousand as president. So what that means? If you have the government spending a lot of money, you got a lot of people taking out the labor market, shipped off the southeast days, got a lot of government spending all the sort of stuff. And the basic gloss of the story is that everybody was spending a lot of money than more than you could cover with taxes and economies all through the developed world, all through the west started to slow down and not a bit of appropriate.

So just to make sure i'm following carefully, it's like the first thing that happened. One is government spending lot of money that's going to drive Prices .

up because like because they're competing for the stuff that you're .

gonna buy as well. Government is dry wall as well. The is milk. And then also because there's a draft, people are being sent to war, which means that everybody who is left, who wants a job has a job exactly.

And not just thought you're pooling in marginal workers to cover them and you got super tight labour markets on employments, pretty much non existent. So what that means is you would be a domus person in your firm, leave a job at twelve, get a Better paid one of four, because everyone's compete in for like .

the last possible worker got IT. In theory, this economy is sounds kind of great companies so desperate to hire that you can quit your job at lunch and find a new one in time for your afternoon cubicle nap. But the reason this can be bad is because if the companies are super desperate, desperate enough to pay workers more than they can afford, then to make that money back, they will have to raise Prices.

So what then happens, and this is the official story, is that people began to focus on what are called the future expectations of Prices. And I stay with me on this course, is important, right? So people are used, the Prices being stable, and then they become unstable to start to rise.

So then they start to say themselves, well, you know, i'm going to have to get a higher wage because everything gone up. So they go with the employer and they give me higher, which and the employer is no, because i'm deal higher Prices. And a simple fine will go on strike.

Now remember, this is the seventies. Twenty five percent of people were in unions at that point in time. Back in the day, things were made in the country.

If you went on strike, you held up the production of the form, so then the employee was a shell, have to give you a prize. So then they give you peace. And then to cover the cost, they then raise their Prices. And this create economists of the time, called a wage Price spiral. And IT just kept gone up and open up.

So to recap, your worried because everything's is getting more expensive. So you ask for a raise your boss gives to you because unemployment is super love and the word you're going to quit, great. Except then you go to the grocery store and you realize while you were having that conversation, milk went up to leg eighty box to go on, so you ask for another race. But at the same time, so grocery store and the people work in the diary farm, and milk is a hundred box of gallon and you need another race, and pretty soon you could be making a hundred box an hour, but IT will feel like you're making ten.

Now that's a super dangerous ous time because it's gonna control. You going na get to what we call hyper inflation when it's just think argentina right of.

So in amErica in the thousand nine hundred seventies, Prices for everything, we're rising instability. I'm not going to quote these Prices to you. They're won't sound impressive since obviously everything is much more expensive today in twenty four. But the way to picture IT, imagine that your weekly grocery bill and your weekly gas bill, or ten percent higher next year and the year after, and that thinks more or less proceeded that way for over a decade.

Good evening crisis in the united states during the first three months of nineteen seventy nine, one up in an annual rate of thirteen seven.

The question is, how long will this go on?

Inflation running out of control?

The answer, probably for years, because U. S. Had not ever experienced anything this bad for this long IT was unclear how to solve the problem. People, panicked people, and even more when gas.

in particular.

affordable, isn't this disgusting? Why does not anybody contact the president? Why is he letting this happen to us? As I can get guess, this is kind of doesn't get my vote. Next year in thousand nine hundred and seventy nine, fist fights broke out at gas stations. The idea of not being able to reliably feel your car, religion of home for people, this profound sense that things have gone awfully wrong here.

So what we need to do, slam on the bricks. So how do you slam on the bricks? You can ask the government to do that.

They are the criminals, are the ones who are spending the money. So you got ta go to the police. Who are the police? To the bankers.

the central bankers. These were the people who, in the classic telling of the story, solved the american inflation crisis. The heroic central banker who figured out had a cool everything down was a man in paul Walker as cigar loving, thick spectacle wearing petition man from cape may, new jersey.

Paul Walkers, the central bank, or who's appointed by example, corner turn the fed. And he basically says, right, i'll sort this out. I'm gonna ET.

The cost of borrowing money, I wateringly expensive, some of interest rates up to sixteen, eighteen percent. But what happened was the inflation rate collapsed. And then by one thousand nine hundred and eighty four, the inflation was moral less so far. And IT was rag's famous morning in america.

morning in america, with this political act cut by ronal dagon, a very famous one where he took credit for finally ending the inflation crisis, a credit taking historians disagree with. But the topic for another podcast, anyway, this is the kind of political add you get to put out if you provide, over the end of an inflationary crisis, morning again in amErica today, more men and women will go to work than ever before in our country's history.

Was interested, said about half the record highs of one thousand nine hundred eighty. Nearly two thousand families today will buy new homes more than at any time in the best four years. This is what passed for smr in the one thousand nine hundred eighties. This afternoon, sixty five hundred Young men and women will be married. And with inflation of us than half of what IT was just four years ago, they can look forward with confidence to the future.

And then after a thought for a long period, we had preta low inflation and pretty high growth. So the story of the seven is, was that what happened? Government, bad markets kind of good.

Uh, government can be trust to spend too much money. Federal, deserve good. Independent, keep them away from the politicians, push interest rates up, rush the economy, sorry, unemployment, but don't what IT will already be .

two years and it'll be fine.

That was a story and everything is interpreted through .

that moment got IT. But you feel that that story is wrong or incomplete?

exactly. I don't think this tall little I think it's incomplete.

After to break a different explanation for what happened to amErica in the one thousand nine hundred and seventy is an explanation which, if it's correct, would suggest that the way we talk about and try to solve inflation in this country today is wrong. That's address mad for reasonably Priced goods.

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Welcome back .

to the show.

The thing about the economy that all of us understand, all of us, is that IT is breaking ingy complicated the product of more human decisions and happenstance than we can ever totally grasp. But we need to comprehend IT so we simplify a complex thing into a story, a story that eliminates the parts that we hope we can safely ignore. But the story epic has consequences.

If you tell the wrong story or an incomplete story about why the economy failed in nineteen seventies, your future solutions for other similarly broken economies might be wrong. When mark and his coauthor went back to try to understand why the economy in the 3， and this an economic m shit the bed, they found that the causes were more complicated than the classic story of inflation. The idea, again, i've been, that Prices had all gone up because the government was buying lot of stuff because of the war, and prizes have gone up because everyone who wanted a job had had one since so many able body men for overseas. But mark says his research has made him to believe that the reality was more complicated.

What actually happened? If you go back to the sixties, you go a half a million people in vietnam, two million in support. Now add for the first time in american history, women in minority is coming to the labor market at scale. For the first time, you would think that, that would be an increasing supply .

Price would go down, right? Except IT didn't work that way. Remember, increasing the labor supply, in theory, should have lowered inflation. Worker power goes down. Paychecks stop going up until companies can start orating Prices, but they didn't.

So what was going on here? One theory is that these women and minorities IT feels weird to keep saying that phrase, but here you are, that these women and minorities influence the economy in a different way. Maybe they were using their new sound wages to make a lot of purchases that they otherwise wouldn't have.

What they do is they all start becoming consumers. They start buying stuff with their wages, right, and see what this is going.

right. The Prices start to go out because you have more buyers.

That's exactly so that was .

one variable that the conventional story may have left out. Prices could have gone up in part because there are now more consumers around to buy things. And here is another, in the thousand, thousand and seventy, lots of america's access to very basic of goods have been disrupted, essentially through a series of unfortunate events.

big failed harvests, weed harvest, canada, the united states, U. S. S, R, as IT was a lot point time, global commodity Prices start going up nine and seven.

And in response to the middle east law, OPEC jokes of oil Prices from four dollars a bottle to sixteen dollars a bottle, given how oil dependent the U. S. And all the other economies point big manufacture. Economist, this is what we call a supply shock. Somebody tooks supply off the market also.

literally just as a shortage of supplies.

But rapidly, this means this is a massive supply shock.

Americans had noticed that fuel Prices have gone up. We know that they were sometimes punching each other gas stations about IT, but what they may missed is how rising gas Prices raised all sorts of other Prices. The trucks that deliver goods need gas factors, need energy to produce really anything. If energy Prices rise, you will notice IT at the gas station, but it'll be reflected in Prices all throughout the economy. And there were sudden shortages of other industrial inputs throughout the thousand nine hundred and seventies.

So if you think about IT actually happened was rather than people's expectations of Prices getting on hand, not really what's gone on IT was a decade in which you got all of these supply shocks. Everyone just go up one more one. Oh, things are a more expensive slam.

shit. Things are getting even more expensive slam. sure. Can we stop getting slam, please? What seems to be the most common causes. We just get hit with all these supply shocks randomly, and then each of them have an inflationary impulse. Each of them die.

Mark is saying that for people in the one thousand nine hundred and seventies, Prices rose. Then there's a fly shock and Prices rose again, and nobody got a chance to calm down because as soon as they did slam, some other good had just become scarce. Mark, as with supply shocks, you typically just wait for the market to correct itself.

Eventually, companies figure out how to get goods to the consumers who want them embrace, come back down. We know that IT is much easier to buy an n ninety five mass today than IT wasn't march of twenty twenty. When I was talking to mark, I could tell how much of this alternate explanation of the one thousand nine hundred and seventy was his own first is something other economists believe. But afterwards we ran this theory by an economic historian who put into a growing consensus that our old popular understanding one thousand nine hundred and seventies was, if not wrong, at least in complete. And for the economist who view IT this way, the story of paul Walkers big hero intervention plans differently by the .

time of volker came in and made the Price of borrow ing incredibly expensive. The dumb thing was nearly half over. He calls the assertion that you didn't need to.

So your theory of the thousand nine hundred and seventies is that, well, it's the understanding has been that the fix was worker stepping in raising interest rates. By raising interest rates, he killed that spiral between workers asking for more money so they could keep up with the cost and cost of being going up like that spiral. He cut the upset of that. If you believe in IT, if there is Prices for everybody, the downside is that a lot of people lose their jobs. You go to a recession solute.

The recession is the Price to be paid for the inflationary party if you want to put them away.

And your belief is that that violent slammed on the brakes that he did. We doesn't need to do IT .

because if what was really .

happening in one thousand nine hundred and seventies were a series of supply shocks using those supply shocks that kind of work their way .

through the system.

pretty much sometimes like getting over the call anyway and then you give them like god came out.

That's a pretty good idea.

And what had happened in the one thousand nine hundred and seventies is not a strictly academic question. IT matters today, because what you think happened then determines what you think should happen. Now we are hopefully coming out of what has been a three year period of relatively high inflation.

The conventional wisdom for how we got this recent inflation surge. Go back to the pan democrat. If you're a democrats, you probably think the pandemic cause inflation.

If you're a republican, you probably believe britten's response to the dependent and conStellation rarely made IT worse. But whenever your politics, unless you are very, very, very bad, paying attention to how you spend your money, even noticed the Prices. I've gone up the restaurant at the grocery store at the gas pump.

I was in new top few months ago. I noticed on the pump itself, somebody had put a sticker of coma Harris pointing to the gas Price sticker, the quote coming out of her mouth, we did that, which, honest, that was pretty cover. Anyway, many people blame government spending for inflation.

But what we know from time at one thousand nine hundred and seventies with mark is that the economy is very complicated and that at any moment where inflation Spikes, there could be a few different things happening, and economists and politicians and voters have to make the diagnosis is. So let's begin with a party that everyone agrees. On march twenty twenty, the country went into locked down, fast breaking developments in the coronal virus emergency in the us. And around the world. The number of at home, that is the order tonight from four state governor.

the store, get out for some solo tary exercise, but stop socializing, not only after .

the first of three rounds of the time to check your bank accounts. The first of the stimulus payments started to appear in accounts over the weekend, and this is just the first time in late twenty twenty one. Everyone notices that the Prices of goods are soaring, uncomfortable.

able Prices, they're just store. Inflation is rising at its fastest rate in forty years. Everything from food to clothing, even cars.

all costing more. The latest reading came in at the four decade high of seven and a half percent to who is he. There's basically four stories that might explain that in you. Yes, you have to decide how much to value each one story. Number one of our recent inflation, too much money.

The first one is the government spends too much money as biden. Is the stimulus, right? All those stimulus checks.

You have brows investing in crypto. Everyone sit in at home like playing ex box. I mean, it's absolutely ridiculous. Ba ba ba, right?

I ll say I do remember seeing the stimulus checks go out and having the stop, right? Isn't this onna cause inflation? And I wound of people think I did.

But problem is, countries that doesn't make out checks hug just as much inflation. Interesting, right? So just let's part that. But as one story is a very powerful story.

right? That's story. Number one, the government sent lots of people stimulus checks.

Those people use the checks to buy goods into the Price of goods went up. You can believe that. You can not believe that.

But that story number one, story number two, too much employment. This surprised me at first, because I remember that unemployment rose during the pandemic. But within a couple years, the unemployment rate actually plumped back down to the lowest IT had been in over half a century. And remember, we know that if unemployment is low enough and workers can all negotiate raises, eventually companies might start raising their Prices to pay for those readers in this version of the story, all the compassionate staff the government did to protect workers, the stimulus checks, loans to businesses to duce the economy and keep people employed. Maybe the government overdid IT.

not that labor markets thought to be spoken about before. This is a lot summer. You might remember what he said, we need to have seven percent unemployment for two years.

The curren influences of, and what he's thinking is, okay, this is may be started by too much government money, but the problem is you got a really tight labour market and people are going to start to expect Price increases. So you're gone to get wage increases and then you're gone to get that spiral. And we're back in the seven is we know the only we break that is to push interest rates. That's what we go from.

Paul Walker, let me say about you story number one, government spends too much money that drives Prices up or gives out too much money, so like we drive the Prices up. Story number two is the labor market actually gets in away like too good yeah. And people are making too much money and they have an expectation they'll continue to make money.

And so they have an expectation that Prices will go up. So therefore, they need to have more wages to compensate. And you get that kind of tool .

pushing up together. So it's like the conversation that when i've been in unrenewed jobs and i've had coverage, my empire, where my kid, the cost of living, like you have to, at least me, raise for the cost of living, it's the theory would go that if too many employees win those conversations and their buying paraos up, the cost of living does go up. But IT goes up more than anyone once, and IT becomes the self fulfilling privacy across the system.

Exactly which leads us to number three, which is the story about greedy corporations.

Okay, so the story that then comes out as, yeah, but well, maybe the government spent too much money that the right yeah and then maybe stop people start to say things are getting to thanks of reality, to my income and to pay us totally reasonable, right? But then what happens is big core portions, particularly the ones that have a lot of market power, like there's basically two companies that do all the chicken in the the united states that sort of stuff, right? They can absorb those costs and they can possible on the consumer to protect the profits.

That's why Prices are rise. We get that. But then they go a little bit further, then they actually push .

on their profit margins. This is story three, that companies weren't just raising Prices because workers, we're asking for more money, but that some companies, particularly companies with more monopolize power, saw Prices going up and realized ua law. This would be a great time to use the economy as cameos to jack our Prices up in a moment where maybe no one will know to blame us.

And then they make super profits and not what eggs cost much more than they did. That's why beef costs much more. They did.

It's all these concentrated markets, and then they don't push you back down. That's why things don't go back down. So whether .

that's right a wrong that story number three and three, number three I ve heard .

tied at this year been a great flag and fa lation something about time for because of the people who sell stuff on, right? And then the final one is the one basically paul cruger's by and on about people was just basically, this is just a big supply shock. Coit was just a supply shock. All in was we couldn't get crap because IT was all made in china.

That's a supply shock, right? right? Remember, supply shocks, sudden shortage of goods also caused Prices to go up.

And Marks point is that there were other supply shocks during this period besides those caused by in twenty twenty two in europe, russian gas pipelines were blowing up, causing a huge Spike in energy costs, which had consequences throughout the global economy. Of the four stories, this final one is when mark find the most persuasive. But the economy is complicated, and the truth is probably that each of these variables had some effect.

So at all, together, you got four very different stories. They're not mutually incompatible, but people tend to believe one rather than the other, right? And you've got good political motivations behind that, right?

If you have a good full fashion law talk republican, and you think the government spends money and look to crop and people who don't deserve, you're probably gone to believe the biden stimulus is behind IT, right? right? You know? So that are motivated reasons behind us. So these are the fourteen .

days that you get. So story number one, too much money. Story number two, too much employment. Story number three, grade flame, or if you prefer, sellers inflation. Story number four, supply shocks. Here's a question I hadn't known to ask at the outside of this conversation has a possible that inflation is very complicated, but also everyone else besides me seems to confidently .

understand IT so well.

The answer, I believe, is that inflation is complicated because it's a story that we'd lay over a very chaotic weather pattern and people are confident about what's going on because the story you pick probably alliance with your political world via mark, a suspect, is more than the left, although he says he comes to his version of the story mainly just because he's a person, is suspicious of conventional narratives.

Our cultural obsession with the fed and its interest rates IT annoys him because he believes that's just a very reductive way to conceive of inflation causes and solutions. Like right now. Mark points out that if the that raised interest rates IT would not help with this. The shortage that the people I know talk about most often.

The biggest remaining thing that we've got right now and inflation is right, right. So it's rent is the cost of rent. The rent is too dm, high everywhere across america, across europe, across every major city.

Why is this? Is because we stopped the building houses for Normal people thought a years ago, yeah, there's just a supply shortage. So if you're making the interest rate on mortgage more expensive, less building and constructions gonna go on a certain number of apartments and buildings just die every year.

They're usually replaced if it's too expensive to do the replacement cost. Guess what? You've got a shortest of runs.

So what you're going to get, you gonna supply constraints. You go on a places to run out. So if the theories is in treasure to cool the economy, what is he doing at the housing market?

Is making sure the use spending almost the thought to a half year? Don't come on, right? You know, if your rn goes up by thirty percent, hell, yeah, that's going to hard right now. This also tells us someone else is really important and never get gets some discussion of inflation at mars where you said in the income distribution, if you don't rich person a relative to your income, you don't consume much. And inflation is all about the stuff that you consume.

If you're a really rich person, you don't have a mortgage and you don't spend your money on like fine bottle of shatters the feet every week, even if you do, IT probably would make a difference, right? You don't consume that much. You're not heart, not much by inflation if you're a single mom and you're working two jobs and your Prices are going through the roof and you can't afford childcare and your life's falling apart and your landor's throwing you out because you can get someone else to pay a higher absolutely mars, right? So it's like how this affects us individually across the income distribution. This is why people are pest when people tell them inflation going down because the level aim going down, right? It's still far ify for a beef b, but not absolutely scandalous.

right? In saying yet forty dollars for A B for .

but but would be fifty is really called fort right.

After your break, we will return to that presidential, but with a much Better understanding of inflation. And we'll try to code what IT was the candidate for both saying.

I'm taking you when to say so him eleven. I watched the president of debate last night.

I was wondering what you .

looks so toiled and here is talked about when when they asked about inflation, they asked about the economy, SHE talked about housing, which watching yeah to me like a noncircular hearing you talk about this, I actually understand Better the argument, which is implicity making, which is that the cost of housing IT is like hugely important to people's Price experience in american life. And so she's saying I would treat housing as a supplies track issue, fix that.

I mean, honestly, in terms of giving people relief. And think about all this way, if you don't have to spend as much money on the same wage, what i've done is have increased your real wage, right? right? So if I can make everybody's rents twenty percent cheaper by increase in the supply housing, less to twenty percent wage increase.

right? And then the alternate argument that was being made, I said trump saying two different things. One thing he was saying with i'm going to fix immigration. And I guess the argument there would be if there's less competition for american jobs, your wages will go up and you will be able to afford Prices. And in the other thing he was saying was he was gonna stick te terrace.

His argument, I believe, is that the same way corporations sometimes Price gouge consumers, he thinks that other countries are Price scouts ging americans and that he can intervene. And I understand the argument correctly. Yeah.

I thank you all. I think you've got both of them right there. I mean, just take the trump one seriously, right? Ah if you throw out every migrant in america, which would include me because i'm one of them, um would you have less workers? Hell, yeah right.

I mean everything here to say to be scrupulous ly fated on trump. He's not said he wants to throw out every migrant in america. What he has vowed to do is to Carry out, quote, the largest deportation in history. His idea being that if you removed millions of undocumented workers from america, way to go up for the workers who were left. That's the theory.

But then you go up. Big problem, because a lot of people that you've got there are who are the people you want to throw out, the ones that put food on the table because they literally work on farms. None of us do that anymore. So I don't know how you're actually going to get sort of like, you know the four year old people who are out of work in some part of the united states to become agricultural. Al worker, there's a huge labor supplied demand as much in this idea. But let's suppose you could do that and you can get everybody out and then as less workers and not means employers have to pay more, how ward employers are going to pay for that, well, either they're really cleared and can increase productivity, pay for the wages, although just push on the Prices to everybody else who are the workers.

right? right? I mean.

IT doesn't come from nowhere.

Let me say back. You just make sure I got sorry. I usually don't do this, but I so the reasoner capital part one is if every grant and document, the many document kicked out the country, yes, there's a kind of new jobs, but a lot of those jobs might not be a jobs that the existing documented american decisions to trumpet lakes, and that allows to stay one. And so in a world where, for instance, there are agricultural workers to pick up vocals in california, Prices will actually go up even though there's more jobs. Absolutely, Prices will go up because of voters become more expensive because you have to pay people more to pick the vote is and is if there's workers and consumer, every workers and consumer, every consumers is a worker.

That's all correct. yeah. So and unless they have a magic of a cade picker, which would automate the process and incase productivity, then they are going to have to push on in Prices. But if they did have, that would lead to unemployment. Right.

right, right.

Do the same with the time I got a hundred percent tf against ina. Everything in walmart is made in china, right? So everything in walmart now doubled in Price. All those workers that you just give a pair eyes, they're getting IT both from domestic cost and from an international course.

So the problem with the tariff ff, is that you you just you end up raising Prices, which raises inflation. Like the idea that you fight inflation with terrace s is like saying you fight buyer with gasoline or matches.

No, there's a Better argument form which goes like this. And again, is the productivity thing, right? If I put up totis what i'm doing as two things I make, I am advantage ing american goods over foreman goods. So more mark stock american goods. Well, the problem is we don't make enough the stuff that we actually consume.

That would be an incentive for american firms to do a lot more, right? Whether they would take up the incentive and any reasonable amount of time or whether they would just basically not bother, we don't know, right? So there are arguments are own totos has called the optimal tow toff about how much you can raise relative to cause all the sort of stuff by the end of the day, generally speaking, most of a sort of a scape to all the workin's things.

You get shortages and the Price goes up on the rest of you're basically making foreign Prices more expensive than domestic Prices on the assumption of domestic deduction will take up last luck. It's not clear to me we're going to do this. Give you one example.

Yeah remember during the pandemic, we hold all the stuff about P, P, E percent equipment. Oh my god, it's all made in china is terrible, right? From parameter and planning to opening up, how long you think I would take to open up a factor in the last states that makes cotton buds?

How long we take?

Five years, five years.

five years?

Not just forgotten cotton buds.

We at what are cotton buds?

Do you know the things you stick and you do? Oh, q tip, q tips takes .

five years over an american q tip factory seriously.

Now in some places that may be take about three years. Text was probably ly has easier permanent. But the point is if you're not making this stuff now, you don't just torn on a top overnight and make IT.

Marks point isn't that we should never have terrace, or that terrace s can help buy america. Time to rebuild parts of our economy is that the timing matters. Terrace will likely Spike inflation short term, and IT takes a longer time to rebuild industry that most .

people realize is wishful thinking. If we change this Price magically, everything will appear. I don't think so. I was a bunch shorter and intention.

I was watching that debate, trying to put myself in the shoes of somebody who found trumps arguments about the economy very persuasive. I was trying to do exercise of a finding and persuasive and went, there be somebody listen this conversation, who would say, like, yes, everything you are saying is true, but the fact that amErica can make things, or the fact that everything's made in china, or the fact that people aren't being trained as a problem, and we should just even if if we're gonna brute force IT overnight, we should shift our economy to one that does manufacturer, and we should go back to the way things were.

And that's what brian is trying to do with the inflation reduction acts. And if you think about IT idioms didn't take down any of trump's original tarif .

trump mention that the debate. And why not?

Well, because ultimately, if you're going to rebuild an industry that china's got leaps and bounds ahead and you have to have taught us, otherwise, yours never be competitive.

The real problem with us is just basically, though they are so far ahead and the technologies are so well known that things like with solar panels, I mean, we could spend billions making american solar panel, and they'll never be as cheap as the chinese stuff, because ultimately a pretty simple technology, and they have those huge firms state on enterprises with all the critical minerals in the police. Silicon is all made. They are right.

To make our soul panel here, we need to import the polygon from there and turn and do a panel. Just let them do the panel. It's so much easier for them to do the panel. We should be trying to do this stuff is higher up the value you chain carbon cops are in storage, small nuclear reactors, all the stuff they can do. But that doesn't supply as many jobs and is a bit more of a wild bet, right?

The question mark is kicking around. I feel personally very unresolved on what I do know is that when politicians talk about bring jobs and industry to america, that's really good to me. I am capable of understanding both that we benefit tremendously from a global economy and that there are serious problems with that, problems that are much more likely to affect american workers closer to the bottom of the economic.

Later, you could spend a year, a decade, a lifetime. And just the question of how do you restore american jobs and manufacturing without going nuts and damaging the economy, I don't know the answer. But when smart people decided that it's too late to fix this or that I can be done, I despite the on, and that by abandoning the question, they see the floor to people with worse ideas.

Anyway, this els unusually so boxy for me. So let me step off of IT. Moving away from our current presidential moment, I do feel like I have a Better understanding of inflation than I did forty minutes ago. I just had one more question for mark about how to think about inflation going forward.

So okay so my understanding now which I did not have when I watching this competition in which I D ply appreciate first more inflation when all the Prices are got for the same time um that like the story of the thousand nine hundred seventies is that the government's big tool for fight inflation is to raise the Price of borrowing, which lowers Prices at the cost. Often ends of people's jobs like you, you hit the breaks, you cause recession, but you fix that. Your belief is that actually the problem or supply shocks generally, we work through the system and we've earn the wrong lesson yeah we just successfully, most people agree, evaded bad inflation. Um if you are in charge, next time inflation perhaps up, what would you do?

I would say that you really evade the bad inflation was the race from zero point five percent the instrumental and causing the fAllen inflation? Or was IT kind of like performing a circus trick at the side of the circle? Well, the real actions going on elsewhere in otherwise IT was supply shocks.

They come along. They disappear. fine. One of the central bank really in control of us were the ones whose magic warned in jade mind tricks over expectations.

Really what was driving the show. Maybe IT was I can be open to the argument, but there's also a bunch of other stuff that's going on. So you know, the biggest problem ever, half with diagnosis is bad diagnosis, right? Any treatment with the bad diagnosis is not gonna work.

Um I think we have incomplete diagnosis. I think that we need to be more thoughts and our diagnosis of what's going on because if at the end of the day, you really believe the stories is like there's one tool, one hamor, one nail, interest rates, recession, look out of the system. What you're saying is some of the most vulnerable people in our society, the ones are always going to have to pay for the cost. The control volt becomes unemployment and it's not my unemployment and it's not your unemployment. Is the unemployment.

right? That is the stakes of them being wrong of, in fact.

exit. And they know that mark .

says to the central bankers credit, they didn't push rest rates up so aggressively this time around. They seemed to understand that to do so, a lot of america's unnecessary economic pain. And just two days ago, the fed did something that caused a national driver, leaf central bankers announced they'd actually cut their interest rate by half, a point in which I now know means the government thinks that our inflationary moment is ending.

There is no longer a national concern that all of the Prices are going up together too fast into the government, not need to induce unemployment to calm the economy down. Thank you to mark place for helping us understand all this. His first throwing book out this spring is called inflation, a guide for users and losers.

Go out a niko frc oi. Markey has a professor Brown university where he directs the William r roads center for international economics and finance at the Watson institute, international and public affairs. Mark, thank you. Your ability to talk. This is very.

Well, when you spend the past, you're right in a book er or do you think you know one or two things a lot? I don't i'm in trouble things .

also this week to bring in greely and deductor rebeca span and apologies to no and liam gallagher.

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