Pent-up inflation from low labor force participation rate?

In the spring of 2020, the typical state governor ordered his/her/zir/their subjects to stay home and watch TV or play Xbox. A lot of us are still following the habits that we developed in 2020. The U.S. labor force participation rate:

A business executive with whom I talked in Oslo said “it takes three months to create a new habit,” which was his explanation for why a fair number of Norwegians haven’t returned to their pre-coronapanic work habits. (World Bank stats show that Norwegians are much more likely to work than Americans, with participation rates of 66 percent versus 61 percent. Part of this may be a difference in family law. It is not straightforward in Norway to live comfortably off a prior sexual relationship, either by alimony or child support. The country offers no-fault (“unilateral”) divorce, but anecdotally, profits are limited to about 10 percent of the defendant’s pre-tax income. Having sex with a high-income defendant and harvesting child support is even less lucrative.)

I’m wondering if there is some pent-up inflation that we’ve built into the U.S. economy by teaching people how great life at home with a plethora of screens can be. Getting Americans back to work at previous levels plainly will require paying them more than what employers are currently paying.

We saw evidence of this in every state that we visited this summer between Florida and Oshkosh, Wisconsin. A coffee shop near Great Smoky Mountain National Park:


A hotel manager in Oshkosh explained that he had to fly people in from Florida and Georgia to work during the peak EAA AirVenture week.

An airport manager retired in May 2021 and, as of July 2022, the city of Prairie du Chien had not been able to find a replacement at the wages offered (about $63,000 per year, plus benefits worth another $40,000 per year?):

The saddest photo of all… a homemade donut shop with shortened hours in Chattanooga:

What do we think? Is there a round of inflation built into our society that is yet to hit us? Either employers will have to raise wages to get Americans off our couches or money will need to be borrowed/printed by the government to fund all of the means-tested benefits to which the couch-dwellers are entitled (raising tax rates is not an option, I don’t think, for increasing revenue because rates are already set to the level that maximizes taxes actually collected). Both of these changes would be inflationary.

(Norway, incidentally, has no help-wanted signs nor, as far as I could tell given my illiteracy, any apology signs. The locals say that service businesses are short-staffed and that quality has suffered, but that all recruiting is done online so customers won’t see signs encouraging job applications.)


  • “Who Are America’s Missing Workers?” (NYT, 9/12/2022): “I could jump back in, but then I got used to being retired,” said Thomas Strait, who chose early retirement at the beginning of the pandemic. [moving from California to Florida] … men in their prime working years, from 25 to 54, have retreated from the work force relative to February 2020, while women have bounced back. [Is it men or women who love Xbox more?] … “A lot of workers are still disconnected, and we’re just not seeing them come on,” said Jesse Wheeler, an economic analyst with the polling and analysis firm Morning Consult. “It’s unclear how all of them are making ends meet, but I think it has a lot to do with consolidation of households and cutting costs. It would’ve been difficult to change if they weren’t forced into it.”
  • Help-wanted ad from the University of California, Santa Cruz: The Critical Race and Ethnic Studies Department ( at the University of California, Santa Cruz (UCSC) invites applications for a an Assistant/Associate Professor of Critical Race Science and Technology Studies (STS). … A demonstrated record of research that de-centers Western scientific ways of knowing and challenges extractivist capitalist practices is especially welcome as are commitments to queer and indigenous ecologies, trans-species studies, and race-radical approaches to STEM. … Ideal applicants will demonstrate an approach to science and technology grounded in histories of and innovative methods of analyzing anticolonial, decolonizing, liberationist political thought and praxis, … Document requirements … Statement of Contributions to Diversity, Equity, and Inclusion** – Statement on your contributions to diversity, equity, and inclusion, including information about your understanding of these topics, your record of activities to date, and your specific plans and goals for advancing equity and inclusion if hired at UC Santa Cruz. Candidates are urged to review guidelines on statements (see before preparing their application.
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Today’s stock market drama

From May 9, 2022, S&P 500 down at least 6 percent since Joe Biden took office:

Who wants to get bragging rights by calling the bottom on this market slide? I’m going to say that the correct value is 3,200 (pre-coronapanic value) plus 0 percent growth for 2020 when Americans cowered in place and 8 percent growth for 2021. Then add 20 percent for the inflation rate that is experienced by people with enough money to buy stock. So today’s correct nominal value is 4,096. Markets tend to overshoot, though, so let’s take 5 percent off that for the bottom: 3,891.

Today the S&P 500 closed at 3,932, down 4.3 percent after the government released inflation numbers.

Let’s look at the chart:

Not a huge change compared to May 9, 2022, at least in nominal dollars, but the index is down in real terms given the inflation that continues to eat away at savings.

My prediction that the stock market would bottom out at 3,891 was wrong. 3,667 on June 16 was the local minimum. But some of the folks who commented were off by even more, e.g., with a prediction of 2,700 (but on the third hand, I didn’t specify a time interval so it is possible that we will yet reach 2,700).

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Inflation at Target

The latest CPI numbers are out today. What’s the correct level of panic?

Here are a couple of mid-August pictures from Target:

Prices were going up to fast that the “Sale!” numbers are actually higher than the regular prices, listed above (it isn’t a positional error; the SKUs match).

“U.S. Inflation Eased to 8.3% in August” (WSJ, today) headlines what seems like an irrelevant number in a world where half-trillion-dollar government spending programs may be announced at any moment (e.g., Joe Biden’s transfer of student loan debt from the laptop class to the working class, funding housing, health care, food, etc. for millions of additional migrants, ). Is the price increase compared to a year ago informative regarding what to expect next month? If we dig into the article we can learn a bit about what is happening now:

On a monthly basis, the CPI increased 0.1% in August from July, despite a sharp decline in gasoline prices. The core CPI rose 0.6% in August–double July’s pace.

The best estimate of current inflation, then, is 7.4% annually (the 0.6% core number, fed into the Google as 1.006^12). But it could also be only 1.2% (based on the 0.1% month-to-month number).

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Europeans printing their way to happiness

“As Crises Mount, Europe Turns Once Again to Big Spending” (NYT, today):

Nationalizations. Subsidies. Cash handouts. Price caps. Profit taxes. It’s back to 20th-century economics in Europe.

Governments are resorting to old-school solutions, long dismissed as bad policy, throwing vast amounts of money at the energy crisis engulfing the region, in a bid to avert a political, social and economic meltdown.

In response [to rising energy prices], E.U. governments have already earmarked more than $350 billion to subsidize consumers, industry and utility companies; ministers are to meet on Friday to finalize the bloc’s direct intervention in markets to grab excess profits, cap electricity prices and subsidize utilities companies.

The huge public spending is in addition to a nearly trillion-dollar stimulus package adopted over the past year to deal with the economic fallout from the pandemic, mostly through borrowing. The ballooning debt load would have normally caused an uproar in the bloc, where fiscal conservatism has dominated policy and politics for years.

“This is clearly an exceptional and one-off situation,” said Daniel Gros, a German economist and director of the Centre for European Policy Studies, a Brussels-based think tank, who normally takes fiscally conservative positions. “It’s different from increasing unemployment or social benefits structurally forever, and it’s a special situation that won’t last forever.”

The last paragraph is my favorite. Coronapanic was exceptional, so borrowing/printing and spending $1 trillion (amateurs! the U.S. spent $10 trillion) in 2020/2021 was okay. The rise in energy prices is 2022’s exceptional event, so borrowing/printing and spending another $1 trillion will also be okay. The end of the paragraph is also interesting. The U.S. actually did make “structurally forever” changes to the American welfare state, already the world’s 2nd largest (percent of GDP), the free-forever broadband benefit for those who choose not to work and King Biden’s forgiveness of student loans previously owed to the Crown. According to the Germans, therefore, we are headed for disaster.

Eurocrats seem to think that voters won’t notice the subtle inflation tax caused by these programs and/or future standard tax increases. They’re paying subjects with their own money:

The Belgian government has handed out $100 to every household irrespective of income.

This is a fascinating example of human psychology. Europeans will eventually have to pay for all of the energy that they’re consuming in 2022 and they’ll have to pay the 2022 price. But they’re going to be happier paying starting in 2023 if the government gives them a Three-card Monte game to watch in 2022. And they’ll be happier getting a pay cut via inflation than getting a pay cut in nominal euros.

What’s non-EU-member Norway doing, other than getting insanely rich from the war in Ukraine? The nation’s hydroelectric power is being sold at record prices to the rest of Europe. The oil and gas wells are producing unprecedented gushers of money. Consumers have to pay higher prices for natural gas, but the government steps in and pays, using the record revenues coming in for oil and gas, 90 percent of the amount over a set price. Cruise ships that formerly stopped in St. Petersburg now come to Oslo for two days per sailing, paying enormous port fees and buoying the local tour operators.

“The problem with socialism is that you eventually run out of other people’s money,” said Margaret Thatcher. Norway has amended this to “The beauty of socialism is that you never run out of the dinosaurs’ money”.

Here are some of Oslo’s gleaming new waterfront neighborhoods next to the gleaming new Munch Museum:

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Inflation ideas roundup

Having fizzled out, at least on a month-to-month basis (see Inflation of 0 percent reported as inflation of 8.5 percent), inflation got a big boost today when Joe Biden decreed that some members of the laptop class won’t ever have to pay back up to $20,000 of student loans (the debt will be transferred to Walmart cashiers and other working class chumps) and nobody needs to pay student loans until the end of 2022 (and no interest will accrue). From

“no one with a federally held loan has had to pay a single dollar in loan payments since President Biden took office.” I think that this is the more significant driver of near-term inflation. If no one has had to pay a single dollar in loan payments then no one needs to put down the Xbox controller, leave mom’s basement, and look for a job. An employer will have to keep bidding up wages in order to woo some of the limited number of Americans who’ve decided, perhaps out of habit, to stay in the labor force.

With Americans anxious about inflation, how could it make political sense for a politician to do something that will obviously stoke inflation? Nate Silver explains why this is not an irrational move for a federal government run by Democrats:

Note the “redistribute well-being” from the working class to the laptop class, just as low-skill immigration does according to a Harvard prof and just as the newly expanded $7,500 electric vehicle tax credit does. I’m beginning to wonder how much more the working class can be made to pay to the laptop class. In which year of the Biden administration does the Walmart cashier begin to have to subsidize the laptop class member’s purchase of a new fuel-efficient Cirrus airplane?

Economists are back to their multiple hands… “Nobody Knows How Interest Rates Affect Inflation” (WSJ, 8/24, John H. Cochrane):

Conventional wisdom says that as long as interest rates are below the rate of inflation, inflation will rise. Inflation in July was 8.5%, measured as the one-year change in the consumer price index. The Fed has raised the federal funds rate only from 0.08% in March to 2.33% in August. According to the conventional view, that isn’t nearly enough. Higher rates are needed, now.

This conventional view holds that the economy is inherently unstable. The Fed is like a seal, balancing a ball (inflation) on its nose (interest rates). To keep the ball from falling, the seal must quickly move its nose.

In a newer view, the economy is stable, like a pendulum. Even if the Fed does nothing, so long as there are no more shocks, inflation will eventually peter out. The Fed can reduce inflation by raising interest rates, but interest rates need not exceed inflation to prevent an inflationary spiral. This newer view is reflected in most economic models of recent decades. It accounts for the Fed’s projections and explains the Fed’s sluggish response. Stock and bond markets also foresee inflation fading away without large interest-rate rises.

The learned and credentialed author concludes with no conclusion about who is right. Even our most notable economists aren’t going to get rich via financial market trades, it seems, based on their superior predictive abilities for inflation rates.

Also from the WSJ, but written by a journalist rather than an economist, “Jerome Powell’s Dilemma: What if the Drivers of Inflation Are Here to Stay?”:

In an August 2020 book, “The Great Demographic Reversal,” former British central banker Charles Goodhart and economist Manoj Pradhan argued that the low inflation since the 1990s had less to do with central-bank policies and more with the addition of hundreds of millions of low-wage Asian and Eastern European workers, which held down labor costs and prices of manufactured goods exported to richer countries.

Mr. Goodhart wrote that global labor glut was giving way to an era of worker shortages, and hence higher inflation.

Meanwhile, the U.S. labor force has roughly 2.5 million fewer workers since the pandemic began, compared with what it would have if the prepandemic trend in workforce participation had continued and after accounting for the aging of the population, according to an analysis by Didem Tüzemen, an economist at the Kansas City Fed.

The low-inflation environment of the past 30 years caused consumers and businesses to not think much about price increases. Fed officials now worry that even if prices rise temporarily, consumers and businesses could come to expect higher inflation to persist. That could help fuel higher inflation as workers demand higher pay that employers would pass onto consumers through higher prices.

The expert witness world could serve as an example for the last paragraph. An expert witness engagement usually lasts no more than 3 years and, with inflation expectations low, it was conventional for a contract to call for a fixed rate for the entire engagement. Starting in 2022, however, it became conventional for contracts to allow for annual price increases.

[I should do a separate blog post at some point about how economists don’t seem to account for human nature in forecasting labor force participation. The assumption is that humans don’t get habituated to either working or not working. So an American will jump in and out of the labor force as soon as wages or conditions are adjusted. The American’s value of leisure time will be constant and won’t depend on whether the American has just spent the last two years not working, participating in a bunch of online games, in-person clubs and leagues, etc. Because of this flawed model of humans, economists are surprised on a daily basis that higher wages haven’t lured more Americans back into the labor force. There is nothing in the economics models that says if you play a lot of Xbox for a year you will get better at Xbox and enjoy playing Xbox more and, therefore, require a higher wage to tempt you out of the house.]


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Inflation is an emergency so I will start cutting back in 2026

“Passage of Inflation Reduction Act gives Medicare historic new powers over drug prices” (CNBC, August 12) is a headline that matches my understanding of the Inflation Reduction Act that addresses the emergency situation facing Americans. The Federal government will no longer necessarily pay huge $$ for mediocre pharma (or Bad Pharma!) and we’ll have something more like the British system where a committee asks “How much are the additional life-years obtained by use of this patented drug, compared to the effects of cheap generics that are similar, actually worth?”

Digging into the article, however, we find that no government worker need get off the sofa to do any negotiation for a few years. The soonest that taxpayers might spend a little less as a result of negotiations is 2026 and only 10 drugs will be affected.

Individual analogy: “My compulsive spending has resulted in a financial disaster so I’m cutting up my credit cards… four years from now.”

Returning to that CNBC article… What if you’re not old?

Lawmakers on the left such as Sen. Bernie Sanders, I-VT, have criticized the legislation for leaving out the overwhelming majority of Americans who are not on Medicare.

“If anybody thinks that as a result of this bill we’re suddenly going to see lower prices for Medicare you are mistaken,” Sanders said during a speech in the Senate earlier this week. “If you’re under 65, this bill will not impact you at all and the drug companies will be able to continue on their merry way and raise prices to any level they want.”

Who should do the negotiation on behalf of the beleaguered American taxpayer? The obvious choice: Martin Shkreli!


  • “The Journalist and the Pharma Bro” (Elle): Over the course of nine months, beginning in July 2018, Smythe quit her job, moved out of the apartment, and divorced her husband. What could cause the sensible Smythe to turn her life upside down? She fell in love with a defendant whose case she covered. In fact, she broke the news of his arrest. It was a scoop that ignited the internet, because her love interest, now life partner, is not just any defendant, but Martin Shkreli, the so-called “Pharma Bro” and online provocateur, who increased the price of a lifesaving drug by 5,000 percent overnight and made headlines for buying a one-off Wu-Tang Clan album for a reported $2 million. Shkreli, who was convicted of fraud in 2017, is now serving seven years in prison.
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Zillow’s inflation forecasts

From February 2022, when we were dumb enough to sign a contract to buy a house:

The market will go up 23%.

In April, when we were dumb enough to close on a house:

The market has gone up a little and will go up 18.3 percent more.

In June, Zillow is busy celebrating Pride Month (from 2020: “They’re bold, bright and one-of-a-kind — they’re the homes we love, Pride-month style. We may not be celebrating together in person, but we’ll never stop celebrating what’s beautiful.”), but the company’s robot still has time to say that the forecast is 14.6 percent:

August 5, 2022, the “typical home value” is up by a staggering amount and the forecast is 7.8 percent more:

August 14, 2022, the “typical home value” is still up (yet houses have seemingly been slow to sell for a few months now and there have been many price cuts) and, with the Inflation Reduction Act nearly signed by the vigorous Vanquisher of Corn Pop, the inflation forecast is down to 5.3 percent:

These forecasts aren’t mutually inconsistent. If we take the starting “typical home value” and inflate it by the forecast 23.1 percent increase we get $647,098 for the expected typical home value in February 2023. If, indeed, the current value is already $627,655, the forecast 5.3 percent inflation rate (to August 2023) will make that happen.

Do we believes these precise forecasts? If so, should Joe Biden ask Zillow to come in and take over the Fed?

Separately, speaking of house price inflation, it occurs to me that the capital gains tax applied to homeowners does not make any sense. Suppose that Dana Dentist, a gender-neutral driller of teeth, purchased a 4BR house for $500,000 fifteen years ago. Dana falls in love with someone he/she/ze/they met at a Pride March in another city. Dana sells his/her/zir/their house for $1.5 million (in 2022 mini-dollars) and buys an identical size/quality house in the new sweetheart’s city, which just so happens to cost $1.5 million. Dana is no better off. He/she/ze/they has exactly the same size and quality of house. Yet the IRS now hits him/her/zir/them for capital gains and Obamacare investment income tax on $750,000 (the first $250,000 of gain on a primary residence is exempt). There may be state capital gains taxes to pay as well if Dana did not live in Texas, Florida, or a similar state.

Note that this wouldn’t happen to a commercial property owner. If he/she/ze/they sold House 1, which had been rented out, and bought House 2 in order to rent it out, the sale/purchase would be done in a 1031 exchange and there would be no tax on the fictitious capital gain until, perhaps, House 2 was sold and not replaced.

What’s the downside of the Feds and states taxing fictitious capital gains? By making moving more expensive, the policy discourages people from moving for better career opportunities and, thus, reduces the overall growth rate of the U.S. economy (not as much as our family law system does, but at least to some extent).

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Inflation of 0 percent reported as inflation of 8.5 percent

Subhead from the newspaper of record today, “The Consumer Price Index climbed 8.5 percent in July, a bigger slowdown than expected, but inflation may remain uncomfortably high for some time.” Let’s dig into the article:

The Consumer Price Index climbed 8.5 percent in the year through July, compared with 9.1 percent the prior month, a bigger slowdown than economists had projected. After stripping out food and fuel costs to get a sense of underlying price pressures, prices climbed by 5.9 percent through July, matching the previous reading.

On a monthly basis, the price index did not move at all in July. That’s because fuel prices, airfares and used cars declined in price, offsetting increases in rent and food costs.

Core inflation was also slower than economists had expected on a monthly basis, climbing by 0.3 percent. In June, that figure was 0.7 percent.

The best official number that we have for the current inflation rate is actually 0 percent (“the price index did not move”). Or perhaps 3.65 percent (0.3 percent per month, annualized). But we are informed that inflation is a frightening 8.5 percent because of price changes that occurred at some point prior to July.

Do we believe that the 0 percent rate will endure? On the one hand, the typical American has bought so much since 2020 that it is tough to believe he/she/ze/they could fit anything more into his/her/zir/their house or apartment. On the other hand, every kind of service enterprise, including travel and tourism, is jammed, struggling to raise wages enough to attract labor, etc. (As noted here previously, one would expect that these enterprises would be half empty as the Followers of Science shied away from crowded environments so as to #StopTheSpread, but it seems that Science says the best way to end the COVID-19 pandemic is to gather unmasked in airliners, theme parks, concert halls, etc.)

Here’s the saddest photo from our Oshkosh trip, a donut shop in Chattanooga that has cut its hours due to “staffing shortages”. When they finally decide that they need to pay a high enough wage to open long enough to make enough profit to pay the rent, won’t they also have to contribute to inflation by raising donut prices?

In other words, until the labor market has cleared via employers raising wages, shouldn’t we expect more inflation? Also, we are still addicted to deficit spending since we can’t accept that the appropriate size for government is whatever we’re willing to pay in tax. It is tough to imagine inflation staying anywhere near 0 percent while politicians in D.C. are, at our behest, borrowing and spending (and then having the Fed magically absorb the new debt?).


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Current prices at CVS and Walgreens

Our AirBnB didn’t come with shampoo or soap, so we hit the Walgreens in Gatlinburg, Tennessee. All of the travel items that I expected to cost $0.99 were $2.99 or more. Inflation? It then occurred to me that I had seen these prices back around 2018. The current Walgreens/CVS prices for stuff are the same as one would have paid in a resort hotel’s lobby boutique in 2018.

Given that nearly every drugstore seems to be either a Walgreens or a CVS, and there has also been a fair amount of consolidation among manufacturers/brands, could lack of competition also be a factor in why toothpaste, shampoo, and other basics are costly? (Walmart’s store brand equivalents are only about half the price compared to the name brands at CVS/Walgreens, right? That tells us it isn’t about the materials cost or the dreaded “supply chain”.)

Loosely related, a Rite Aid in downtown San Diego (June 2022). The precious deodorant is locked down and alarmed.

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