Cancelling Christmas was, of course, a disaster. Raised in West Germany during the reunification era, Isabella Weber had been working as an economist in either Britain or the United States for the better part of a decade. An annual winter flight back to Europe was the most important remaining link to her German friends and family. But in December, 2021, the Omicron variant was surging, and transcontinental travel felt too risky. Weber and her husband drove from the academic enclave of Amherst, Massachusetts, to a pandemic-vacated bed-and-breakfast in the Adirondacks, hoping to make the best of a sad situation. Maybe Weber could finally learn how to ski.
Instead, without warning, her career began to implode. Just before New Year’s Eve, while Weber was on the bunny slopes, a short article on inflation that she’d written for the Guardian inexplicably went viral. A business-school professor called it “the worst” take of the year. Random Bitcoin guys called her “stupid.” The Nobel laureate Paul Krugman called her “truly stupid.” Conservatives at Fox News, Commentary, and National Review piled on, declaring Weber’s idea “perverse,” “fundamentally unsound,” and “certainly wrong.”
“It was straight-out awful,” she told me. “It’s difficult to describe as anything other than that.”
She gave up on skiing. The proprietor of the hotel made extra soup to cheer her up. But every time Weber checked her phone she was being mocked by a new round of critics. “The ugliness of the reaction to Weber’s op-ed is depressing,” Adam Tooze wrote, in his popular “Chartbook” newsletter. “Depressing and telling.”
In a matter of hours, Weber, who was thirty-three years old, had transformed from an obscure but respected academic at the University of Massachusetts, Amherst, into the most hated woman in economics—simply for proposing a “serious conversation about strategic price controls.” The uproar was clearly about something much deeper than a policy suggestion. Weber was challenging an article of faith, one that had been emotionally charged during the waning years of the Cold War and rarely disputed in its aftermath. For decades, the notion of a government capping prices had evoked Nixonian cynicism or Communist incompetence. And Weber was making her case in a climate of economic fear. Although the most acute disruptions of the pandemic seemed to be over—businesses were reopening and jobs were coming back—supply chains remained snarled and prices were rising faster than they had in forty years. Fringe fantasies of hyperinflation and economic doom were starting to go mainstream.
But Weber’s argument was carefully grounded in history. Price controls, she argued, had been an essential element of the U.S. mobilization strategy during the Second World War. And there were several striking similarities between the economy of the nineteen-forties and that of the present day, including very high consumer demand for goods, record corporate profits, and production bottlenecks in important areas. Back then, the Office of Price Administration simply prohibited companies from raising prices above certain levels. Violators could be sued, or worse. In 1944, Montgomery Ward, the department-store chain, refused to accept the terms of a collective-bargaining agreement—a cap on the price of labor—brokered by the government. President Roosevelt ordered the National Guard to seize the business and remove Sewell Avery, its chairman, from its headquarters.
The O.P.A. program was born of necessity. The traditional inflation-control tactic—jacking up interest rates—would have reduced employment and industrial activity, making it harder for the military to obtain the supplies that it needed to fight. Industry-specific price controls contained consumer costs while encouraging companies to boost profits through higher sales volume. The initiative worked. During the First World War, inflation had run rampant. During much of the Second, it was close to two per cent. And yet factories were operating at peak levels. If contemporary policymakers could do the same thing, Weber argued, they could limit inflation without inducing layoffs and wage cuts.
Today, in a host of key sectors, that’s more or less happening. The European Union is regulating the price of natural gas, the Biden Administration is regulating the price of oil, and the G-7 is enforcing a global cap on the price of petroleum products produced in Russia. Inflation appears to be cooling, and by nearly every measure we are living in the best labor market in a quarter century.
Weber, meanwhile, has recovered from her moment of notoriety. She’s now living something like the public-intellectual dream: shaping German energy policy one day, testifying before Congress the next. Her portrait is on the cover of a recent issue of the German-language magazine Institutional Money, the Financial Times writes about her academic work, the Washington Post wants her op-eds, and Bloomberg can’t stop hosting her on its flagship podcast. Analysts at the French investment bank Société Général and the European Central Bank now take much of Weber’s analysis for granted. In January, Krugman—who apologized to Weber as the fracas peaked—even argued that price controls might be a useful piece of inflation management after all.
This astounding turnabout reveals a transformation in how we conceptualize the global economy. If you can understand Weber’s once forbidden theories, you can understand just how dramatically Washington’s economic assumptions have changed during the past two years—and what this new thinking might mean for the country’s future.
At Joe Biden’s first press conference as President, he pitched his $1.9-trillion American Rescue Plan by announcing that he wanted to “change the paradigm” in economic thought. He told reporters that he intended to “reward work, not just wealth.” But the technical side of this new paradigm—what set of tools he’d use to bring about this change, and how those tools would function—remained unclear. His agenda broke with recent precedent in the Democratic Party primarily through its sheer size. Biden wanted more of everything: roads, bridges, housing, child care, and direct cash support to millions of households. Congress obliged. In addition to the A.R.P., lawmakers approved, in August of 2021, a half trillion dollars of new spending on infrastructure—a wave of public investment that followed nearly four trillion dollars in rescue funding deployed by Trump the year before.
Both Biden and Trump spent on this scale to avoid the elevated unemployment and stagnant wages that had hobbled President Barack Obama, whose eight-hundred-billion-dollar stimulus in the wake of the 2008 financial crisis had been enough to hold off another Great Depression, but not enough to prevent the unemployment rate from breaching double digits. Relative to the over-all size of the U.S. economy, Biden’s program was nearly double the scope of Obama’s, and structured to deliver more of its relief directly to working people.
But by the end of Biden’s first year, the sense of possibility that had accompanied his early initiatives gave way to profound pessimism. Inflation was at seven per cent, its highest level since 1982. Those who had opposed his aggressive fiscal policy—most prominently, Larry Summers, the architect of Obama’s more modest stimulus—offered an explanation. The President’s quest to “reward work” had put so much money into consumers’ hands that they were now outbidding one another for ordinary household products, pushing up prices. The basic problem, according to this diagnosis, was that the American public essentially had it too good, and would have to become poorer—spend less—for inflation to abate.
The solution pressed by Summers and like-minded thinkers was to induce millions of layoffs. By raising interest rates, the Fed could make borrowing more difficult for businesses, forcing many to cut costs by firing workers. By the spring of 2022, Summers proposed fixing inflation with a year of ten-per-cent unemployment—meaning sixteen million people without a job. “It’s quite a painful way to bring inflation down,” Weber told me. This story didn’t sit well with her, and she began to find data points that contradicted it. The U.S. spent a lot on economic relief during the pandemic, but so did other countries, including Japan, where inflation peaked at just 4.3 per cent. If too much government spending were the problem, why weren’t all of the big spenders getting hit similarly hard? And if excessive household wealth were the key driver of inflation, you would expect the prices of consumer goods to rise more or less in tandem, as people bought more of everything. Instead, most inflationary pressure came from large spikes in the prices of specific products and commodities, such as natural gas. Were households devoting every cent of their stimulus checks to higher thermostat settings?
To Weber, people like Summers were looking at the situation from the wrong side. The focus ought to be on sellers, not buyers. The pandemic had upended global supply chains, making it harder for corporations to acquire the stuff they needed to make their products. This should have squeezed their profit margins. Instead, as the economy began opening up, corporate profits were wildly outpacing growth in consumer spending power.
Here’s an example. Semiconductor chips are the basic building blocks for electronic equipment. When COVID lockdowns and a string of temporary factory closures led to global shortages, the price of each chip began to rise, as did the price of everything else that used them. This proved especially troubling for the automobile market—a new vehicle can require as many as three thousand chips. As you’d expect, new cars got more expensive. So did the consumer alternative, used cars, which, in the first six months of 2021, jumped in price by nearly thirty per cent. But Weber argued that carmakers were raising prices far beyond what was necessary to cover the more costly chips. By 2022, the ongoing chip shortage had resulted in the fewest annual sales of new cars in more than a decade. Still, profits were up—car companies posted their best earnings in six years.
What if We’re Thinking About Inflation All Wrong?
Source: News Flash Trending
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