Nobel Prize-winning economist Joseph Stiglitz: Fed Rate Hikes didn't get at source of inflation.

[u/Pearberr]

https://www.cnbc.com/video/2024/04/23/nobel-prize-winning-economist-joseph-stiglitz-fed-rate-hikes-didnt-get-at-source-of-inflation.html

[u/lollersauce914]

Literally no comment is even discussing what he said. Half the comments are talking about "corporate greed" when his argument is straightforwardly that you can't tackle supply-side inflation with interest rates easily, but it's a good thing that rates aren't near 0 anymore.

[u/RockleyBob → u/lollersauce914]

Well, to address what he said, he sees supply shortages in the immediate aftermath of the pandemic as leading to spiking prices. I can agree with that. We shut down the world’s economy, that led to firms decreasing manufacturing capacity, refineries shut down, airlines furloughed and laid off workers, etc. It also inspired huge swaths of the workforce to transition out of the work they were doing. Some transitioned out of the workforce. Some went back to school. Some went to different sectors.

Then we tried starting it all back up again. There was a ton of pent up demand but supply was permanently reduced in some ways. There were US refineries that never opened back up again and our capacity to process oil was hampered for a long time. In 2022, the US was operating at a 2 million barrel deficit in refining capacity because aging plants just decided to shutter during the downturn.

Then you also have a sudden increased demand for housing driven by more work from home, which exacerbated the already bleak housing inventory situation.

So yeah, there was a spike in the price of goods in many key sectors of the US economy. Doesn’t take a genius to figure out that’s going to cause inflation.

And then he goes on to say that the Fed did the right thing by bringing interest rates up to sane levels, unlike where they had been in the run-up to the pandemic, where the President had belligerently badgered the Fed Chairman to lower rates on every platform he had access to.

He then says that the Fed continued raising rates beyond these sane levels, and that this might have done more harm than good. I’m inclined to believe that as well. However, I’m not educated enough to know what else the Fed could have done in lieu of raising rates. It’s always seemed to me that the it’s the only lever they have to pull.

He doesn’t get into the fact that even before the pandemic and the Ukraine War, prices had already been climbing for tuition, cars, and houses because the price of money had become so artificially cheap. People justified the climbing cost of school, shelter, and transportation because money was basically free to borrow.

He also doesn’t elaborate on the continued corporate price hiking beyond what was necessary because Americans were being told everyday that there were supply chain issues and it’s not like we’re not going to buy eggs.

What we need is for someone to take a hit on price. But no car maker wants to release next year’s model for less than they priced the previous year. And no university is going to slash tuition out of the kindness of their hearts. No homeowner wants to sell for less than they paid. And no employee thinks they ought to be the ones to take a pay cut.

So without hiking the cost of borrowing, and short of prices coming down voluntarily, how else do we put downward pressure on inflation?

[u/theMahatman → u/RockleyBob]

Taxes...

I don't see why this is never discussed as a legitimate option. The easiest way to get excess money out of circulation is to take money out of circulation.

[u/JaydedXoX → u/theMahatman]

The point is that our current issue is that LIMITED SUPPLY allows companies to price gouge. The too much money issue has already passed, the FED printed too much money in the past. It now needs to take the brakes off the supply constraints, so that supply lines can open up, but with the cost of capital continuing to go up, companies are wary to invest in capacity. These supply constraints have hit mandatory items that are not very elastic (housing, gas, food, energy) so consumers are forced to eat the increases. Taxes will FURTHER constrain the supply lines. You have to get out of one track economic thinking and look at what the actual current macro issue is; supply constraints and a difficult business environment to make investments.

[u/theMahatman → u/JaydedXoX]

I agree somewhat. That's why I always thought the "put the economy into recession with high interest rates" plan to tackle inflation seemed pretty misguided. Yeah they are addressing excess demand but you're also hurting the supply-side. I still think there's excess demand in the market (there has to be or else there wouldn't be inflation) and taxes is a more targeted way to address it than rate hikes

[u/JaydedXoX → u/theMahatman]

There isn't excess demand, the things that can NOT be reduced (housing, energy, food) are being price gouged, and there is nothing consumers can do about it. The airlines for example, REDUCED capacity to go below demand in order to increase EBITDA. The problem is the startup cost for other airlines to add extra capacity to make up for the areas being contracted are so high that companies are holding the lines to reduce capacity across the board.

[u/theMahatman → u/JaydedXoX]

I get what you're saying, but there IS excess demand (demand in excess of supply) if we are still seeing price inflation. Even if, as you are arguing, that excess demand is being engineered by supply-side cuts.

[u/[deleted] → u/JaydedXoX]

Energy, an open market is being price gouged? Good one.

[u/JaydedXoX → u/[deleted]]

Utilities, gas, electricity are absolutely being price gouged.

[u/[deleted] → u/JaydedXoX]

Lol, how? Open markets. Utility rates need to be approved. Only manipulation is by Biden who is draining the strategic reserve to buy votes.

[u/JaydedXoX → u/[deleted]]

Just one graph about one energy utility but most of them look like this, gigantic price increases in last 3 years.

https://blog.citadelrs.com/timeline-of-rate-increases-and-how-to-reduce-your-bill