Episode 78, Carola Binder, author of Shock Values: Prices and Inflation in American Democracy, host Rick Ferri
Jan 17, 2025
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Carola Binder, an economics professor at the University of Texas at Austin and author of "Shock Values," dives into the historical context of inflation in America. She discusses the origins of price indexes, including the inaugural index created in 1750, and charts the political ramifications of inflation throughout U.S. history. The conversation reveals how economic shocks shape monetary policy, the struggles surrounding national banks, and lessons from past crises that inform today's strategies for managing inflation. A must-listen for anyone interested in economics!
Inflation is a complex phenomenon impacting various economic groups differently, particularly debtors and creditors, causing political tensions.
Government intervention during price shocks often leads to expanded authority, illustrated by historical price controls and their lasting implications.
The evolution of inflation targeting reflects lessons from past crises, emphasizing the need for a broader economic context beyond mere inflation metrics.
Deep dives
Understanding Inflation and Its Definitions
Inflation is defined as the growth in aggregate prices across the economy, distinguishing it from merely rising prices of specific goods like eggs or gas. Conversely, deflation, characterized by falling prices, can have harmful effects, particularly when caused by low aggregate demand, as seen during the Great Depression. The concept of nominal illusion, where workers are more resistant to wage cuts than equivalent real income reductions during inflationary periods, contributes to the Federal Reserve's strategy of targeting a moderate inflation rate, typically around 2%. Through such measures, a balance is sought to protect employment while sustaining price stability.
The Impact of Price Fluctuations on Various Interest Groups
Price fluctuations can significantly impact different economic groups depending on their positions as debtors or creditors. Historically, inflation could benefit debtors like farmers by reducing the real value of their nominal debts, whereas deflation would exacerbate their financial burden. In modern contexts, homeowners and renters also experience contrasting effects during inflationary periods, with homeowners benefiting from rising property values while renters face increased housing costs. Such disparities contribute to political tensions and complicate policy responses to inflation.
Government Response to Price Shocks and Its Consequences
Governments often perceive price shocks, stemming from both demand and supply changes, as crucial moments requiring intervention. This intervention can range from monetary policy adjustments to direct regulations and price controls, reflecting a tendency for governmental authority to expand during crises, as articulated in Robert Higgs' concept of 'Crisis in Leviathan.' This phenomenon creates a lasting impact, as enhanced governmental power during emergencies seldom fully recedes post-crisis, leading to long-term regulatory changes. Historical examples, such as World War II price controls, illustrate the often contentious balance between managing economic stability and maintaining market freedoms.
The Evolution of Inflation Targeting in Monetary Policy
The evolution towards formal inflation targeting in the United States has been a gradual process shaped by historical economic challenges. The Federal Reserve did not establish an explicit inflation target until 2012, although discussions around the concept extended much further back, often analyzed through pivotal economic events like the Great Inflation of the 1970s. The interplay between fiscal policy, monetary policy, and inflation expectations reflects a complex legacy where central bankers have struggled to adapt their frameworks to new economic realities, battling against past failures while anticipating future inflationary pressures. Moreover, the nature of these targets has raised questions about the efficacy and flexibility of merely focusing on inflation metrics without considering broader economic indicators like nominal GDP.
Lessons from Economic History for Current Federal Policies
Past economic crises provide essential lessons for interpreting current inflation trends and the Federal Reserve's responses. The COVID-19 pandemic and subsequent fiscal stimulus created unprecedented demand spikes amid supply chain disruptions, complicating inflation control efforts. A shift towards more proactive and unconventional monetary policies reflects lessons learned from the past, particularly the Great Recession, where slow responses led to prolonged economic malaise. Scholars like Carola Binder advocate for exploring alternative measures, such as nominal GDP targeting, which could provide a more comprehensive framework for managing both inflation and economic growth.
My guest on Episode 78 is Carola Binder, an associate professor of economics at the University of Texas at Austin and a fellow at the Hutchins Center on Fiscal and Monetary Policy. She is also a research associate of the National Bureau of Economics Research in the Monetary Economics group. Carola holds a Ph.D. from the University of California, Berkeley.
Carola’s work focuses on inflation, inflation expectations, monetary policy, and economic history. She is the author of Shock Values: Prices and Inflation in American Democracy, a book on the history of inflation and price stabilization in the United States. She has also published research in several economic journals and is an associate editor for the Review of Economics and Statistics and the Journal of Money, Credit, and Banking.
The Bogleheads on Investing podcast is hosted by Rick Ferri, CFA, a long-time Boglehead and investment adviser. The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads' have held national conferences in major cities nationwide. There are also many Local Chapters in the US and even a few Foreign Chapters that meet regularly. New Chapters are being added regularly. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax-deductible donation to the Bogle Center is appreciated.
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