ROLL OVER BILL PHILLIPS

You gotta hear it again today

The way to crush the bourgeoisie is to grind them between the millstones of inflation and taxation. ~ Vladimir Lenin 

The certified nation-builder, Vladimir Lenin, mentions above that inflation can be the bane of many people, even the bourgeoisie. He’s right. Milton Friedman, a certified Nobel-laureate economist, but not at all a fan of Lenin, stated that inflation is taxation without legislation. He’s right, too. They agreed about nothing political, but do agree about the harsh effects of inflation that reduce the purchasing power of money.

Inflation is a general rise in a nation’s prices. Not just the increasing price of fruit loops, Airbnb rentals or window panes, but all prices in a country. Economists cite woeful, recent examples of unchecked hyperinflation such as Venezuela’s 27,364% inflation in 2018, when prices doubled about every two weeks and Zimbabwe’s 66,000+% inflation in 2009. The “winner” in my national hyperinflation hall of fame is Hungary’s unfathomable 1946 general price increase of 9.63 x 10²⁶ percent (prices doubled in less than every one and a half days). Post-war periods and inflation often coincide. Even here in the good ol’ USofA. Cliometricians estimate that in 1779 the US had an inflation rate of 192%, mostly caused by the Revolutionary War’s substantial costs.

Have you experienced noticeable national inflation? Not unless you’re over 35 years old with virtuous long-term memory. The last time the US core Personal Consumption Expenditure price index (PCE), that our Federal Reserve Bank uses to measure official price changes, reached 5% annual inflation was the third quarter of 1983. The PCE has only been over 2% – the Fed’s target inflation rate – in merely two (2) of the most recent 40 quarters (10 years). Long gone are those economically-stormy, early 1975 days when inflation rose to 10.1%.

Thus, with perceptible inflation thankfully being in a long-term coma it’s hardly surprising that last week Federal Reserve chair Jerome Powell and his colleagues altered the Fed’s policy priorities. Going forward, the Fed will re-emphasize its goal of minimizing unemployment rather than its second goal, controlling macro prices (e.g., inflation). The Fed stated that low unemployment would no longer be a sufficient reason to tighten monetary policy, in an attempt to head off expected inflationary trends. In a remarkably truthful statement, the Fed’s wizard vice-chair, Richard Clarida, stepped in front of the curtain to state that the Fed’s macroeconomic models that have predicted inflation would always rise significantly when maximum employment was reached were wrong.

Apparently, Senate leader Mitch McConnell didn’t get this Fed memo, as he’s staunchly refusing to re-vitalize expansionary fiscal expenditures – such as the former $600 unemployment supplement – to ease the lives of too many people, and reduce unemployment. Mitch dismisses the facts that unemployment is now 10.2% and folks are suffering.

For a long time, both the Fed’s goals were nominally given equal policy priority. This dual prioritization was essentially founded on the Phillips Curve. In case you’ve forgotten this slight theme presented in Econ 101, here’s a recap.

The Phillips Curve is named after Professor William Phillips, my favorite New Zealand economist. He gained my fancy in part because he’s the only economist I know of who was a crocodile-hunter in his youth. After fighting in Southern Asia during WWII, he headed for London and enrolled in the London School of Economics (LSE). At the LSE he became captivated by the then quite radical, newish view of macroeconomics created by John M. Keynes and became an academic economist.

In 1958 Professor Phillips published his seminal paper that described an inverse/indirect relationship between a nation's wage-inflation rate and the unemployment rate using early-20th century United Kingdom data. When either unemployment or inflation is low, the other is high, as illustrated below.

The Phillips Curve 

Source: Forex

When similar patterns of wage-inflation and unemployment were observed in other nations at the time, the Phillips Curve became accepted by both academics and policy-makers. If an economy was growing with lower unemployment (higher employment), the Phillips Curve posited that higher wages/inflation will happen. It displayed the short-run macroeconomic trade-off between a strong economy (lower unemployment) and higher inflation.

This relationship has not held in more recent times despite considerable efforts to defend the Philips Curve and its shape. Some macroeconomists have differentiated short-term versus long-term Phillips Curves, others have added inflationary expectations to no real avail. I’ve believed the Phillips Curve has been a chimera for quite some time. But the Congress and the Fed, as well as other nations’ legislatures and central banks, still use the explicit Phillips Curve’s inflation-unemployment relationship for justifying policy.

When inflation appears set to rise, the Fed has typically tightened the money supply (by increasing interest rates), generating a little more unemployment. When inflation is poised to fall, the Fed has done the opposite. The result is that unemployment edges up before inflation can, and goes down before inflation falls. Monetary policy (and to a much lesser extent fiscal policy) is changed so that inflation will not.

But inflation has appeared to be less sensitive to differing employment levels, as mentioned above. Inflationary pressures have been in a coma. This past February (a lifetime ago) when the macroeconomy was quite strong with very low 3.5% unemployment, the PCE inflation rate was a remarkably quiet 2.1%.

The Philips Curve has apparently flattened over the past decade, so that a given change in unemployment, due to variations in monetary and/or fiscal policy, has had a smaller effect on wages/inflation than previously. This change is the basis for the Fed’s recent prioritization of fighting unemployment with much less concern about eventual inflation.

Oh my, Professor Phillips, your curve has broken down and metamorphosed over time to be far flatter, in spite of some macroeconomists’ best efforts to explain this change and do something about it. The Fed is going to focus now principally on promoting employment, downplaying price-stability.

That’s perfect timing because we’ve been in a significant recession for at least five (5) months. The Fed’s Board of Governors now will “appreciate the benefits of a strong labor market, particularly for many in low- and moderate-income communities.” After this Spring, when the Fed began its sizeable efforts to reduce the pandemic’s recession, will inflation awaken from its long, Ambien-induced torpor? A pro pos of the well-known Niels Bohr quote, predicting inflation is very difficult, especially about the future. But it appears that most economists and market analysts, despite voluminous and contrary opinions, do not think noteworthy inflation is anywhere near imminent.

I think the recent flatness of the Phillips Curve has contributed to the rise and spread of progressively-liberal economists’ Modern Monetary Theory (MMT). A simplified tenant of MMT argues that countries which issue their own currencies, like the US does, can never “run out of money.” The federal government is not financially constrained in its ability to spend. MMT claims that the government can afford to buy anything that is for sale in its currency with minimal concerns of resultant inflation.

Ironically, when Dems come into full federal power on January 20, 2021 with enough of them subscribing to the flatter Phillips Curve and MMT, they could embrace the Repubs own de facto fiscal policy that has exploded the federal budget deficit with their specific, pet fiscal initiatives like giant tax cuts for corporations and for the bluest of the rich as well as ever-increasing defense expenditures, with no discernible rise in inflation.

By brandishing the Phillips Curve’s modern flatness, adopting MMT and pointing a fiscal mirror at #45’s and the Repubs’ massive deficit spending, progressive Dems could justify, with enough backbone, their own expensive, pet fiscal initiatives. Ones like the Green New Deal, government-guaranteed $15/hr jobs and Medicare for All. It could be the Dems’ way of stating, if you Repubs can do and have done it, we can too for far broader benefit.

In my mind, it all started with one clever, crocodile-hunting Kiwi economist.

 

 

BACK TO THE PAST? OR BACK TO THE FUTURE?

What you gonna to do when you’re black & blue? ~ Louden Wainwright III 

In an all too real a sense, the coronavirus has forced everyone to grudgingly drop our hubris. Our now-exposed conceit is that we could straightforwardly surmount any issue we’re facing because of our richly “cutting edge” technology, science and vast knowledge. Not this time.

Once again Mother Nature has reminded us, “You are not in control of this situation, I am.” Is it going to be back to the past echoed by the 1918-20 Spanish Flu one more time? Hopefully not, but it does have its rhyming parts.

At this point, it seems we have a choice: Are we going back to the past, or back to the future (admittedly without Doc Brown’s time-travelling DeLorean)? My hope is that with clear, systematic planning and proper policies we can head back to the future, albeit a different one than originally planned.

For thousands of years diseases have challenged our place on Earth. However, for the first time a viral attack is happening with the modern rendition of widespread personal and national globalization as our standard operating practice and with social media instantly available to billions of us.

Virtually everyone has followed the coronavirus’ ruinous voyage ever since it first attacked humanity in Wuhan, China last December. We’ve tallied its daily destructive path via social media. And it’s rapidly turned the world upside down – in no small part because of globalized mass travel and complacent conceit.  

Historically, there have been other journeys that have turned the world upside-down. At the end of the 15th century, Christopher Columbus discovered a “new world.” It took him 7 ½ months to present Queen Isabella and King Ferdinand, his royal venture capitalists, with proof of his success. He offered the monarchs as his testimonials; gold, pearls and aji (South American chili peppers) he had taken from indigenous peoples. For our current viral journey, we haven’t had to wait until mid-July to learn about the coronavirus’ presence in China. We learned about it in real-time.

Shown below are some of the pandemics that have significantly wounded us over a very long time.

PANDEMICS THROUGH THE AGES 

Pandemic	Date	Worldwide Deaths
Black Death/Bubonic Plague	1331-1353	75-200M
3rd Bubonic Plague	1855	10-15M
Spanish Flu	1918-20	50-100M
Spanish Flu in the US	1918-20	675,000
Hong Kong Flu	1968-69	1M
Swine Flu	2009-10	150-500K
Typhus	1489+	11.4M
Smallpox*	18th C –1979	900M
Measles	500AD+	1.3M annually
Malaria	450AD+	2M annually
HIV/AIDS	1980’s+	32M
Coronavirus	As of 4/20/20+	151.0K (US: 36.1K)

*The only infectious human disease ever to be completely eradicated. +Continuing

Sources: Wikipedia and New York Times

The reoccurring Black Death that probably killed 30% to 60% of Europe's population in the 14th Century wasn’t the first human pandemic; the coronavirus pandemic won’t be the last. Why? Because Mother Nature always bats last. Non-flu diseases continue their deadly routs around the world. Over their long history of human calamity, “ordinary” diseases like Typhus, Malaria, Yellow Fever, HIV/AIDS and Measles are responsible for more deaths than any others. Thankfully, only a few of these ordinary diseases are endemic in the US.

The chart above shows the dates these pandemics have occurred, from about 15 centuries ago to the present day. Only in the last century has medical science been able to stifle some of these diseases’ plunder. The victory over Smallpox is an impressive, singular example. A strange Black-Death linkage happened this year when many Christian churches around the world were closed for their April 5th Easter Services. When was the last time Churches closed en masse on Easter Sunday? During the 14th Century Black Death.

Perhaps the 1918-20 Spanish Flu is the most similar pandemic to the current covid-19 virus. They are produced by two different virus types, but they both caused (or are causing) tremendous suffering. I have regretted not asking my father, who was then a teenager in Brooklyn, about his recollections regarding the Spanish Flu medical catastrophe.

The Spanish Flu occurred during WWI, when knowledge of viral diseases was yet to be well comprehended, and was unknowingly carried by thousands of troops in Europe and beyond. One expert estimated that the Spanish Flu killed 218 out of every 100,000 people living on Earth at the time. In the US this flu was first noticed at Ft. Riley, Kansas among returning US Army soldiers.

The US was crippled by this flu that preyed particularly on young adults (unlike covid-19). The average age of a 1918 flu victim was 28. Older adults seemed to have some immunity, again unlike covid-19. The 1918-20 flu was particularly devastating in the high-density, industrial cities in Eastern US, especially in Pennsylvania. More than 17,500 Philadelphians (my original home town) died of this flu in the first six months of 1918; magnified by the city’s holding a giant downtown parade on September 29, 1918. About 200,000 people attended the Fourth Liberty Loan Drive parade that promoted the war effort and public purchases of war bonds. Floats displayed the latest locally-built additions to America’s arsenal. Within three days, every bed in Philadelphia’s 31 hospitals was filled with Spanish Flu victims. This flu struck in three distinct waves. In Philadelphia, the case fatality rate was a colossal 37%. By the end of this flu’s rampage over 60,000 Pennsylvania residents lost their lives. [At this point, 1,285 Pennsylvanians have succumbed to covid-19.] Many epidemiologists believe the Spanish Flu is still with us; over time it has metamorphosed into the seasonal H1N1 flu.

The “novel” characteristics of the current coronavirus mean we don’t yet have any way of directly alleviating its damage; mitigation persists as our only means of fighting covid-19. In stark terms, it’s 6-feet apart or 6-feet under. The frenetic, on-going efforts to produce a coronavirus vaccine won’t be finished for at least 12-18 months under the best of circumstances. Success is not guaranteed despite our knowledge and technology. So far, every nation including ours has been fighting a defensive battle against this virus by attempting to flatten the curve.

Illustrating the global scope of relevant experience, Liberian Tolbert Nyenswah, who ran one of the most successful contact tracing efforts in Africa during the 2014-16 Ebola epidemic, said “All people are talking about right now is hospital beds, ventilators, testing, testing, testing. Yes, those are important, but they are all reactive. You are dealing with the symptoms and not the virus itself. You will never beat a virus like this one unless you get ahead of it. America must not just flatten the curve but get ahead of the curve.” A growing number of knowledgeable people have united around a test-trace-quarantine strategy, while we wait, hopefully, for an effective vaccine. Before a vaccine becomes available maybe by the end of next year, testing is the most essential tactic for managing the coronavirus.

The initial CDC-designed and assembled coronavirus test proved unreliable, due to its complexity and mis-fabrication (which it only admitted later). It failed to follow Occam’s razor with tragic consequences. The wheels of government always turn slowly: The Administration once promised that 27M tests would be available by the end of March. After this disastrous start, only 3.56M tests have been conducted through April 17.

There has been worthy, wide-spread criticism leveled at #45 and his obsequious associates for not definitively planning how to combat this coronaviral pandemic. His autarkical approach is doomed. I’m reminded of a well-known quote from #34, Dwight D. Eisenhower; “Plans are worthless, but planning is everything.” The current president doesn’t believe in either planning or plans. He’s an all-too-sterling member of the “Ostrich Alliance;” world leaders who have kept their heads firmly planted in the sand with respect to fighting the coronavirus. [FYI: The Ostrich Alliance also includes President Gurbanguly Berdymukhammedov of Turkmenistan; say his name just one time fast.]

We are all suffering because #45’s viral testing efforts are wholly insufficient. Such efforts are vital for reviving our comatose economy that he alleges to care about. Apparently, he’s decided to toss the testing “ball” into the states’ court of already-filled unfunded responsibilities rather than offer any real leadership or support. His decisions are senseless, reckless and irresponsible.

The viral policy contest between epidemiologists and economists has now become more heated. More than 22 million people have filed for unemployment benefits in the past month, 15% of our labor force. The coronavirus’ consequent economic turmoil is growing ever-larger. The US labor market is beyond black & blue. Which has amplified the calls for “opening up” the economy, that in turn has increased appeals/pleas for additional, much-needed federal funds for covid-19 and serology (antibody) testing, equipment and personnel. When is such fiscal relief coming? Astonishingly, the president hasn’t said. Congress should halt its politicking, and get dollars into the pockets of suffering people and businesses.

Economists predict the unemployment rate will rise to at least 15% by May, a level last seen 81 years ago. A gaggle of GDP forecasts for the second quarter range from dreadful (-8%) to disastrous (-15%), portraying an abysmal near-term future. Consumer spending, the single largest part of GDP, is also black & blue and expected to drop at least 14%. Macroeconomic policies are needed to bring our economy out of its coma. But no one knows when they should begin, without causing a second wave of deaths.

From an ivory-tower macroeconomic perspective, the sizeable federal funding that has already been provided, with more in the offing, is affording a tragic, real-time test of nascent Modern Monetary Theory (MMT). MMT posits there won’t be much if any inflationary consequence from the giant, supplementary monetary (and fiscal) policy expansions that have happened within the last three weeks. Many doubt the MMTers.

We are all debt-heads now. Every single dollar of expanded federal, state and local government expenditures that’s fighting the coronavirus is debt-financed. The federal government is expected to increase its deficit-financing by $4 trillion (T) dollars this year alone, a deficit that’s two times as big relative to GDP in any year since WWII ended. Business’ borrowing is also at record levels, and their credit lines are being depleted. Over the past decade households’ debt levels have also greatly increased. To counter this, the Federal Reserve has reduced interest rates to zero and provided more than $2T in loans to banks.

Total government, business and household debt is now 224% of our GDP, a worrying all-time high. Macroeconomic textbooks state in normal times such vastly-increased debt could create increased inflation and topple our economy’s now fragile house of cards. And, of course, these are not normal times at all.

The president’s shouts to immediately “liberate” states from the shackles of Sheltering-in-Place (ShiPing) orders demonstrate his total inability to properly lead our nation. His path will take us back to the past.

Economic and other policy-makers who value peoples’ well-being and public health strongly caution against suddenly stopping the states’ and localities’ mitigation efforts now, despite the economy’s strong recessionary drift. They aptly believe using data from broadly increased testing (at some point) should ultimately foretell when governors can more safely relax their ShiPing rules, and mitigate another covid-19 resurgence. This is the path back to the future.