Maybe I'm confused here but doesn't increasing government revenue kinda increase inflation -- at least if you assume the government is relatively less efficient than the market?
Like if the UK just increasd taxes and then paid a bunch of people to do no work surely that would be inflationary since -- absent changes to monetary policy -- you now have the same amount of money chasing less goods.
So if the question is whether the UK should cut expenses or raise revenue can't you honestly say the later choice is at least a bit inflationary -- at least on the assumption the government is relatively less efficient at providing goods?
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But yes that is at best 2nd order so kinda misleading.
But as you said "absent some change in monetary policy." But "no change" is also a policy. What you describe is a central bank that decided to have the same money chasing fewer goods, that temporary inflation was better than keeping the price level the same. [All in relation to a target rate of inflation.]
I don't think that you can fairly assume that a decision was made to have temporary inflation. Any major change in fiscal policy may require a change in monetary policy to maintain desired inflation levels. However, it is impossible from reading legislation to know ahead of time what the impact will be on inflation. Accordingly, there is a delay while the legislation turns (gradually) into inflation and additional delays as we use our, not great, inflation metrics to suss out both the instantaneous inflation and the rate at which it is changing (which requires multiple measurements). Thusly, there will always be temporary inflation change(+-) for a major fiscal policy change.
Undoubtedly decisions were made about the relative merits of over vs. undershooting but I think it is ungenerous to deem this a decision that "temporary inflation was better than keeping the price level the same."
(not an economist, just an IC designer who works a lot with feedback loops)
The fact that someone could have intervened and stopped the effect doesn't mean the event setting things in motion doesn't cause of the effect. That still means that -- under the assumptions I gave -- the tax hike is a bit for cause of inflation. At best it makes the central bank policy an additional cause.
For instance, any missle fired at Israel could be shot down if Israel dedicated enough missle defense resources at it. So it's certainly true that if they'd adopted the policy of throwing all their defenses at the n-th missle fired on such and such date it wouldn't have struck it's target. None of that means firing missles doesn't cause targets to get blown up. It just means the choice not to intervene is also a cause.
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Having said all that, I think I understand the point you are making. In normal circumstances, inflation is largely nominal and the central bank can choose the desired rate. But notice that in the case I gave you the effect occurs by a substantial reduction in overall economic outpur and the central bank doesn't have the tools to offset that without incurring other harms (if large enough it can't do it at all...if I reduce the total production of a country to almost 0 the central bank can't recall physical notes so can't avoid inflation.)
Outside the narrow circle of people who seriously study economics, complaints about "inflation" virtually always are actually complaints about the price level. When people insist that "inflation is still high" and that they "want inflation to go down", 90+% of them mean that prices are higher now than they were in 2019, and they want prices to go down (which as the economically-literate know, would be _deflation_, and an environment with general deflation is almost always catastrophic).
You are of course correct that a one-time change in the level of a tax would not raise inflation. It would, however, mean a one-off increase in the price of that particular good. As you say, the question of whether that would be compensated by falls in the prices of other goods as people shuffle their budgets, or the overall price level goes up, would depend mainly on monetary policy. But to the average person, "a highly salient price went up" _is_ inflation. Alas.
The funny thing is -- and I was an adult homeowner in the '70's -- I really had the impression that people meant inflation by "inflation." People talked abut Volker as having conquered "inflation." I don't recall that people really meant that the expected prices levels to return the '60's levels. It was the rate of change that mattered.
I wonder if the confusion arose from talking about "temporary" inflation, economists meaning a temporary increase in the rate of increase of prices, but the public -- helped on by people who wanted to put shade on Biden -- though that meant that the price level would actully fall after rising just like the price of eggs or used cars did.
I also blame the Fed for not straight forwardly saying that it intentionally created temporary inflation and made sure that is WAS temporary. The public still views inflation as having agency like a excitable stallion which the Fed is always struggling to keep down and the Fed does little to disabuse it of that view.
Yeah, definitely agree with this -- we faced a _choice_ between having the contraction of aggregate supply, due to the pandemic's disruption of supply chains and the shift from services to goods, manifesting as a collapse in employment, or a spike in inflation. Pick your poison. They made the right choice! But the general public did not get the memo.
I think it was one of Matt / Brian's Politix podcasts recently where they were discussing the likelihood that a future government would make the opposite choice, and intentionally under-stimulate the economy, on the theory that the Obama experience of slow-but-steady recovery, while objectively worse for the country compared to rapid bounceback (but at the cost of inflation), was easier to weather politically. Better to ruin the lives of 5% of the country, than to mildly inconvenience 90%. :-/
I would be willing to believe that people are more ignorant about this topic today than they were in the '70s.
For starters, there are a lot fewer institutions _trying_ to provide accurate information. Unions used to actually educate their members about this (in relation to bargaining over COLAs).
The mass media used to do a better job as well -- Kronkite and his cohort took their responsibility to talk to the general public seriously, whereas now trying to talk to a truly mass audience is just not a profitable venture, and so nobody's really doing it. Media outlets are cultivating a narrow audience, and in the case of the _kind_ of outlet that might provide this info, mostly they can _accurately_ make the assumption that the audience doesn't need this topic explained. When Vox originally launched, this was the sort of thing they were interested in doing -- but they also found they couldn't make money off doing it. I wouldn't be surprised if they had a "card stack" on exactly this topic.
And then you have media outlets that are actively invested in misleading people, and the fever swamp of people just talking to each other and spreading memes that reinforce membership on Team Red. Members of what passes for an elite among the Republican Party talk about inflation this way, and at this point they just outright _lie_ about the topic (like Trump saying the price of bacon is up 4x, or 10x, or whatever he's saying now).
All part of the general degradation of civic knowledge. It's very hard to make a democracy work when you have somewhere between 30 and 45 percent of the population not only engaged in a kind of "rational ignorance" where they mostly focus on other stuff, but have moved beyond that into "knowing" a lot of stuff that ain't so. Back when I was in college I thought Noam Chomsky's "Manufacturing Consent" was kind of over-stated and overly pessimistic. If Trump wins this time, I'm going to have to re-think that.
Maybe I'm confused here but doesn't increasing government revenue kinda increase inflation -- at least if you assume the government is relatively less efficient than the market?
Like if the UK just increasd taxes and then paid a bunch of people to do no work surely that would be inflationary since -- absent changes to monetary policy -- you now have the same amount of money chasing less goods.
So if the question is whether the UK should cut expenses or raise revenue can't you honestly say the later choice is at least a bit inflationary -- at least on the assumption the government is relatively less efficient at providing goods?
--
But yes that is at best 2nd order so kinda misleading.
But as you said "absent some change in monetary policy." But "no change" is also a policy. What you describe is a central bank that decided to have the same money chasing fewer goods, that temporary inflation was better than keeping the price level the same. [All in relation to a target rate of inflation.]
I don't think that you can fairly assume that a decision was made to have temporary inflation. Any major change in fiscal policy may require a change in monetary policy to maintain desired inflation levels. However, it is impossible from reading legislation to know ahead of time what the impact will be on inflation. Accordingly, there is a delay while the legislation turns (gradually) into inflation and additional delays as we use our, not great, inflation metrics to suss out both the instantaneous inflation and the rate at which it is changing (which requires multiple measurements). Thusly, there will always be temporary inflation change(+-) for a major fiscal policy change.
Undoubtedly decisions were made about the relative merits of over vs. undershooting but I think it is ungenerous to deem this a decision that "temporary inflation was better than keeping the price level the same."
(not an economist, just an IC designer who works a lot with feedback loops)
The fact that someone could have intervened and stopped the effect doesn't mean the event setting things in motion doesn't cause of the effect. That still means that -- under the assumptions I gave -- the tax hike is a bit for cause of inflation. At best it makes the central bank policy an additional cause.
For instance, any missle fired at Israel could be shot down if Israel dedicated enough missle defense resources at it. So it's certainly true that if they'd adopted the policy of throwing all their defenses at the n-th missle fired on such and such date it wouldn't have struck it's target. None of that means firing missles doesn't cause targets to get blown up. It just means the choice not to intervene is also a cause.
--
Having said all that, I think I understand the point you are making. In normal circumstances, inflation is largely nominal and the central bank can choose the desired rate. But notice that in the case I gave you the effect occurs by a substantial reduction in overall economic outpur and the central bank doesn't have the tools to offset that without incurring other harms (if large enough it can't do it at all...if I reduce the total production of a country to almost 0 the central bank can't recall physical notes so can't avoid inflation.)
Outside the narrow circle of people who seriously study economics, complaints about "inflation" virtually always are actually complaints about the price level. When people insist that "inflation is still high" and that they "want inflation to go down", 90+% of them mean that prices are higher now than they were in 2019, and they want prices to go down (which as the economically-literate know, would be _deflation_, and an environment with general deflation is almost always catastrophic).
You are of course correct that a one-time change in the level of a tax would not raise inflation. It would, however, mean a one-off increase in the price of that particular good. As you say, the question of whether that would be compensated by falls in the prices of other goods as people shuffle their budgets, or the overall price level goes up, would depend mainly on monetary policy. But to the average person, "a highly salient price went up" _is_ inflation. Alas.
The funny thing is -- and I was an adult homeowner in the '70's -- I really had the impression that people meant inflation by "inflation." People talked abut Volker as having conquered "inflation." I don't recall that people really meant that the expected prices levels to return the '60's levels. It was the rate of change that mattered.
I wonder if the confusion arose from talking about "temporary" inflation, economists meaning a temporary increase in the rate of increase of prices, but the public -- helped on by people who wanted to put shade on Biden -- though that meant that the price level would actully fall after rising just like the price of eggs or used cars did.
I also blame the Fed for not straight forwardly saying that it intentionally created temporary inflation and made sure that is WAS temporary. The public still views inflation as having agency like a excitable stallion which the Fed is always struggling to keep down and the Fed does little to disabuse it of that view.
Yeah, definitely agree with this -- we faced a _choice_ between having the contraction of aggregate supply, due to the pandemic's disruption of supply chains and the shift from services to goods, manifesting as a collapse in employment, or a spike in inflation. Pick your poison. They made the right choice! But the general public did not get the memo.
I think it was one of Matt / Brian's Politix podcasts recently where they were discussing the likelihood that a future government would make the opposite choice, and intentionally under-stimulate the economy, on the theory that the Obama experience of slow-but-steady recovery, while objectively worse for the country compared to rapid bounceback (but at the cost of inflation), was easier to weather politically. Better to ruin the lives of 5% of the country, than to mildly inconvenience 90%. :-/
Maybe. But it was not "the government" that decided; it was the Fed. I just hope a future Fed would engineer the inflation but dial it back sooner.
I would be willing to believe that people are more ignorant about this topic today than they were in the '70s.
For starters, there are a lot fewer institutions _trying_ to provide accurate information. Unions used to actually educate their members about this (in relation to bargaining over COLAs).
The mass media used to do a better job as well -- Kronkite and his cohort took their responsibility to talk to the general public seriously, whereas now trying to talk to a truly mass audience is just not a profitable venture, and so nobody's really doing it. Media outlets are cultivating a narrow audience, and in the case of the _kind_ of outlet that might provide this info, mostly they can _accurately_ make the assumption that the audience doesn't need this topic explained. When Vox originally launched, this was the sort of thing they were interested in doing -- but they also found they couldn't make money off doing it. I wouldn't be surprised if they had a "card stack" on exactly this topic.
And then you have media outlets that are actively invested in misleading people, and the fever swamp of people just talking to each other and spreading memes that reinforce membership on Team Red. Members of what passes for an elite among the Republican Party talk about inflation this way, and at this point they just outright _lie_ about the topic (like Trump saying the price of bacon is up 4x, or 10x, or whatever he's saying now).
All part of the general degradation of civic knowledge. It's very hard to make a democracy work when you have somewhere between 30 and 45 percent of the population not only engaged in a kind of "rational ignorance" where they mostly focus on other stuff, but have moved beyond that into "knowing" a lot of stuff that ain't so. Back when I was in college I thought Noam Chomsky's "Manufacturing Consent" was kind of over-stated and overly pessimistic. If Trump wins this time, I'm going to have to re-think that.