Economics 101: For real this time

As you know, I'm what's called an econoclast -- I think standard economic theory with which freshmen are indoctrinated is bullshit. However, there are actual real facts about the economy that correspond to history and common sense. One is that over the long run -- and even almost always over the short run -- prices go up, and money is worth less and less. Here is the U.S. consumer price index since 2014:

 

 

The only time it's actually gone down since the Great Depression is the 2008 financial crisis, and even then you can barely see it. This chart ends before the recent moderation in inflation, but yes it did take a turn upward in 2020 which exceeded the average, but the slope wasn't actually that much higher than the entire period from 1984 to 2007. Note also the downturn in 1920, known as the "Forgotten Depression," in which the stock market fell by 50%; then the lengthier downturn of the Great Depression in the 1930s; and finally the latest one that ended the George W. Bush presidency and doomed the McCain candidacy.

 

In other words, when prices actually fall, it's bad. It only happens when the economy contracts sharply. It means businesses can't sell their goods and services, and they also stop investing. Maybe this won't always be true in the future, and the comparison is a little strained I'll admit since it was impossible to buy a computer or a jet liner in 1914 so it's not exactly clear what we're comparing. So here's part of a Delmonico's menu from 1913.

 

 

 

It may be a little hard to read so I'll just tell you that the Filet Mignon was a buck and a quarter. Today, it's 65 bucks. 

 

So here's a very interesting Daily Kos diary. According to a poll, people think that inflation going down means that prices go back to what they were several years ago. Believe me, you don't want this to happen. 

The latest Daily Kos/Civiqs survey finds that pluralities of Americans—across party lines—think the problem of inflation won't be solved until prices drop back down to where they were a few years ago; that in a good economy, prices will naturally drift downward; and that when inflation goes down, prices either go down or stay the same. The vast majority also say that something went seriously wrong in the economy over the last few years. A large portion of the public even says that the recent bout of inflation was worse than what we experienced in the 1970s and '80s.

 

Now, to be fair, the recent bout of inflation was a bit steeper than the 1970s and 80s, but it lasted for a much shorter time, and it's over now, meaning the cumulative effect on prices was a fraction as much.  So we have a problem here. Yes, prices have gone up, but wages have actually gone up more. That's another thing that happens with inflation. It does erode the value of savings, for most people, depending on how they've invested, but that's what happens with investments. They go up and they go down, you need to be patient.

Now obviously I'll be the first to tell you there's a lot wrong with the economy. Inequality is at nearly unprecedented levels, housing and higher education are unaffordable for a lot of people, and working people have been stuck with little or no income growth for a long time. But the overall macroeconomic picture is very strong. The problem is not "the economy," it's the issue of winners and losers. Voters need to understand that.