Thread by @JWMason1

Here is one way to think about the inflation we are seeing now. (a thread)

Over much of the past two years, large parts of the economy were unable to operate as normal. Schools and daycares were shut down. Airports were operating at 5 percent capacity. No one was going to the gym or eating in restaurants. You probably remember this! 1/

Though you might have forgotten the scale of it. For example: In March of 2020, fewer than 100,000 people passed through TSA checkpoints each day, compared with 2.5 million a day in 2019. 2/

This was a different kind of economic shock than we are used to. In macroeconomics we’re accustomed to talking about shifts in aggregate demand or else supply. The pandemic combined elements of both. 3/

When you shut down a restaurant or an airport for covid, two things happen. The food or transportation services it normally provides are no longer available for purchase. And the people who normally work there no longer have an income. 4/

The fall in spending (by unemployed restaurant workers) will be about the same as the fall in productive potential, so there won’t be much price pressure. But underneath this aggregate balance, the specific people who lost their jobs will face hunger, homelessness, etc. 5/

In the longer run, this will be deflationary, since the loss of income will reduce spending even after the interruption coproduction is over. But in the short run, if we do nothing, the fall in aggregate supply and demand will roughly balance. 6/

Alternatively, we can replace the income of people who work in restaurants. Then they'll be able to pay bills, feed their kids, etc. But now we have situation where productive capacity has fallen but income hasn't. So spending that can’t go to restaurants will go elsewhere. 7/

This is different from a normal recession, where restaurants are closing because of a lack of paying customers. In that case, when incomes and demand come back, production comes back right along with them, so there is no imbalance. 8/

In a sense pandemic was less like a recession than disruptions you’d see a premodern economy. If there’s a bad harvest, people produce less food but also have less income; they just don’t eat. If government replaces their income, they won’t starve, but there's still less food. 9/

This wasn’t literal famine, of course. But there's an important parallel. This was a fundamentally un-Keynesian crisis (the only one in our lifetimes, I think) where the problem was not an interruption of money flows but a (temporary) loss of the ability to produce stuff. 10/

In retrospect, inflation may have been unavoidable price of avoiding another Great Recession. It wasn’t obvious in advance that we’d be seeing higher inflation this fall. I certainly didn’t expect it! But with hindsight, I think those were the options. 11/

At some point lost production of services during pandemic had to show up somewhere. In normal course of events, it would have shown up as the immiseration of service producers. That’s what I expected - a year ago I was writing “the coronavirus recession is only beginning.” 12/

I was wrong about that, which I am very glad about. That is big surprise one. But since we avoided that fate, the lost service production had to show up somewhere else. 13/

We might have simply had stable incomes and shift from services to goods. To some extent that’s what happened. But in turns out global supply chains can't handle a rapid rise in demand (especially when many manufacturers had expected and planned for a deep fall instead.) 14/

The brittleness of global supply chains is big surprise number two. One way the current inflation has shifted my priors is it's made me more sympathetic to arguments that onshoring manufacturing should be a policy goal. 15/

But couldn’t we have kept demand in line with productive capacity? The answer is No. Because fall in income and production was concentrated in certain sectors. We wouldn’t have seen modest fall in spending across the board but huge fall for some (mostly lower-income) people. 16/

Given limited time and uncertainty about course of pandemic, the idea that we could have balanced UI and stimulus with a broad tax increase is fantasy. It would have been technically & politically impossible, even if we knew in advance how much was needed, which we didn't. 17/

While some aid was targeted at the worst-hit sectors (the maligned “bailouts”) there was no way to do that at scale. And if we know one thing about social insurance, it’s that targeted programs are much slower and exclude many of the people they are supposed to be for. 18/

To say that if stimulus measures contributed to the high inflation today, that means they were too big, is to willfully close your eyes to the alternatives. It comes from a fantasy world where the economic consequences of the pandemic could have been managed costlessly. 19/

If you shut down big part of the economy, either the people who get their income from it are going to be flung into poverty, or you are going to get a surge in demand in the parts that are still open. I know which one I prefer. 20/

Some people, I’m sure, would rather see a million more families evicted than the price of restaurant meal go up 10%. But many more, I think, are in denial about what the choices actually were. 21/21