Larry Summers isn’t the only economic official from a past Democratic administration who’s sounding the alarm bells about inflation. (Read this post from Andrew with an all-time great headline for more on that.)
Jason Furman, chairman of the Council of Economic Advisers under Barack Obama, has an op-ed today in the Wall Street Journal detailing why he’s still worried about the price level. He writes, “Many economists and market watchers expect most of it to disappear in 2022. I am much less sure and expect the economy to experience elevated inflation this year, possibly even higher than in 2021.”
He points to four “countervailing forces” that he believes could keep inflation high.
- Tight labor markets. The unemployment rate can’t go much lower, and quit rates are high. “Nominal wage growth is running about 5 points above productivity growth,” Furman writes.
- Sustained high demand. The reduction in Covid-related fiscal stimulus happened eight months ago, Furman points out, and demand still remains high. And he thinks policy moves this year will only encourage demand further:
Fiscal support will remain relatively high with more than $500 billion of the American Rescue Plan being spent this fiscal year. Tax cuts and spending increases by states and localities, flush with huge surpluses, are adding to fiscal support. Add the lagged effects of extremely accommodative monetary policy, the excess savings households have from two years of high incomes and low spending, and rapidly rising employment and wages, and you have a recipe for continued high spending. At the same time, supply chains should improve but are unlikely to be fully recovered for much of 2022.
- Inflation expectations. “Consumers, businesses, forecasters and financial markets all expect near-term inflation to be about 1 to 3 percentage points higher than a year ago,” Furman writes.
- Covid. Furman writes that if the virus becomes endemic and everything reopens, that could increase demand even further. And if China remains committed to its zero-Covid policies, global supply chains will have a hard time meeting that demand.
His case passes the smell test of economic reasoning. His second point is especially interesting and worth keeping an eye on. It’s a clear fiscal-policy mechanism that would bring about too much money chasing too few goods over two years after the Covid recession ended.
Of course, all of this is impossible to predict with any certainty, and economists do not have a great track record when they write op-eds making predictions. But it’s worth noting that it’s not only right-wingers who are concerned about the Biden administration’s economic policies.