The Problem with the Problem with Jon Stewart (and Larry Summers)

Everybody in the heterodox community, in the United States at least, seems very happy with Jon Stewart's performance interviewing Larry Summers. And of course, Stewart is very good at this kind of stuff. But in all fairness, in this he is canalizing some of the ideological views of the left, which on inflation are fundamentally incorrect. 

Stewart presents at the beginning the adding up theory of inflation, thirty percent demand, twenty five percent wages and the rest corporate greed. His argument is that not all of inflation was caused by demand (I would say none of it was). He is correct on the fact that the stimulus during the pandemic was good and not exaggerated, and that monetary policy (the interest rate hikes are wrong). But he accepts the notion that the labor market is tight, which I think is less clear. I’m definitely in the minority on that. That’s perhaps something for a loner post. Below just the employment-population ratio, which suggests things are less rosy in the labor market.

Worse, Stewart’s explanation of inflation as price gauging by Exxon and Apple is simply incorrect, and here he is getting some progressive arguments that have logical problems. Higher oil prices were not caused by Exxon, that certainly benefited from them, and had higher margins. Note that firms certainly will pass any increase in their costs, including wages, to their prices. And, hence, margins might be readjusted and that plays a role in the increase in prices, that is the level. But firms cannot continuously increase prices, without passing the limit that would trigger the entry of competitors. Barriers to entry work so much.

Note that the problem with this kind of confused thinking is made clear by Stewart. For many progressives the idea that inflation is conflictive, and that there are wage-price spirals, is interpreted as suggesting that inflation is caused by workers. They are the bad guys. Hence, the need for an alternative bad guy, evil corporations (and corporate power is certainly excessive and should be curbed).* This is not the best way to think about the economy. Of course, there is nothing wrong with workers demanding higher wages, and it is only to be expected that corporations would resist, and without great government intervention and protections of workers’ rights, might often win. Conflict over wages is inherently also about the share of profits too.

If anything, it is the mainstream that has more difficulty in introducing conflictive inflation into their models, since distribution is ultimately endogenous and determined by relative productivity. At any rate, there is little reason to be concerned with conflict inflation. Workers are relatively weak, and that has not changed. On all of this see my paper forthcoming in ROKE here.

* Arguably Summers is blaming the bad government for excessive spending during the pandemic, and is just another case of good vs bad guys. That Summers knows a thing or two about the role of bargaining power and the macro-economy, and is less naïve that some heterodox economists have suggested, is given in this paper on the declining power of workers as an explanation of the problems of the US economy.