Decoding Harris and Trump on inflation

In a column for the Atlantic almost eight years ago, the reporter Salena Zito said “the press takes [Trump] literally, but not seriously; his supporters take him seriously, but not literally”.

It was a wonderfully astute distinction for the pre-2016 election period.

But her characterisation turned out to be false. In office we learnt to take Trump sometimes seriously, sometimes literally, sometimes neither and sometimes both. In short, everyone had to engage their critical faculties on different issues rather than rely on her original observation.

So, what should we make of the remarks on inflation and the Federal Reserve made last week by the two candidates to become US president, Kamala Harris and Donald Trump?

Take Harris seriously, not literally

There is no doubt that Kamala Harris feels the need to talk about inflation. Over the past week, her stump speeches in Pennsylvania, Wisconsin, Michigan, Arizona and Nevada have all contained some version of the following remarks (these are from Michigan).

We believe in a future where we lower the cost of living for America’s families so they have a chance not just to get by but to get ahead. Because, look, while our economy is doing well by many measures, prices for everyday things like groceries are still too high. You know it and I know it.

When I was attorney-general, I went after price-fixing schemes. And when I am president, it will be my day one priority to fight to bring down prices; to take on the big corporations that engage in illegal price gouging; take on corporate landlords that unfairly raise rents on working families; to take on Big Pharma and cap the cost of prescription drugs for all Americans. That is the work we will do together.”

Notice there is no talk about disinflation, but an ambition to bring down prices and some specific areas where Harris would like to act. Taken literally, this is a call for the Fed and other parts of government to lower the price level and seek deflation. If this were literally true, the only valid response would be, “you cannot be serious”.

Fortunately, there is an excellent source available to allow us a clear interpretation of the thinking behind Harris’s words. In fact Jared Bernstein, chair of President Joe Biden’s Council of Economic Advisers, wrote it down late last month.

After an eloquent and pretty standard explanation of the causes of inflation, Bernstein noted something I’ve also been banging on about.

Economists obsess over rates; regular people obsess over levels . A central banker wants inflation to get back to target. A shopper wants his or her old price back.”

Now, Bernstein and, I presume, Harris do not explicitly want deflation but recognise that people have powerful rules of thumb about how much things should cost.

So long as inflation is low, these can adjust slowly without a problem. But when inflation is high, Bernstein said a lot more of these rules of thumb are broken and “vibe disruption ensues”. This might take two years to heal, he added. For example, he noted the increase and subsequent recovery in the number of hours it would take typical production workers to earn enough for a week of groceries (below).

The most important passage of his for understanding Harris’s words is the following:

Vibes matter, and economists risk talking past people if we fail to recognise that both inflation rates AND price levels matter. We’re acutely aware of this in the Biden/Harris administration and it is a key reason for our cost-cutting agenda.”

Harris is calling for price and cost-cutting measures not because she believes in deflation, but sees these actions, which would involve relative price changes, as essential to help people reset their price level rules of thumb and slowly accept they are no worse off after the period of inflation.

The upshot: Take Harris seriously, but not literally. And read the whole Bernstein speech. It explains everything.

Harris on the Fed

Harris has also taken some questions spontaneously from journalists. After her rally in Phoenix, Arizona on Saturday, she promised a big economy speech this week and reiterated her support for Fed independence. I think we can take the following seriously and literally (1m25s in this video).

The Fed is an independent entity and, as president, I would never interfere in the decisions that the Fed makes.”

Don’t take Trump’s word for it

If Harris’s stump speech words were extremely carefully chosen and required an economics lecture to explain them, Trump’s comments on inflation and the Fed were improvised and can be summarised by the phrase “I’m the best”. He made this clear in Thursday’s news conference (72 mins in).

The Federal Reserve is a very interesting thing and it’s sort of gotten it wrong a lot and [Powell’s] tending to be a little bit late on things. He gets a little bit too early and a little bit too late and, you know, that’s very largely a gut feeling, I believe it’s really a gut feeling and I used to have it out with him. I had it out with him a couple of times very strongly.

I fought him very hard and, you know, we get along fine, we get along fine, but I feel that a president should have at least say in there, yeah, I feel that strongly I think that in my case I made a lot of money.