CRADLE Whitepaper – October 2021: “Inflation in the 21st Century: Taking Down the Inflationary Straw Man of the 1970s”

By Daniel Alpert (CRADLE advisory board member; senior fellow in macroeconomics and finance at Cornell Law School; and founder and managing partner of Westwood Capital LLC)

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Abstract

“Inflation in the 21st Century” is an overview of the history of, and future prospects for, undesirable levels of price inflation in the U.S. economy. The paper concludes that concerns raised in 2021 by several well-known economists and analysts – regarding the prospects for accelerating levels of inflation as a result of pandemic-era and post-pandemic fiscal and monetary policy (enacted and proposed) – is misplaced. The wisdom of continuing expanded fiscal policy from late 2021 onwards is supported in the paper by an analysis of the prospects for future inflation in terms of both (i) the shortfall in aggregate domestic demand relative to existing endogenous and exogenous supply; and (ii) the metrics of untapped existing sources of additional supply of labor, capital and resulting production to offset incremental demand. To eliminate the issue from comparative association, the paper draws a multi-pronged distinction between the conditions of the early 21st century and those of the latter half of the 20th century that yielded the painful inflation crises of the 1970s. The analysis also includes a comparison of earlier periods dominated by cyclical core goods inflation, to the 21st century history of below-target inflation being supported primarily by service sector inflation in contract rents related to capital assets and in service sectors heavily influenced by third-party payment systems. The conclusion reached is that the four decades of relative fiscal austerity in the United States, coupled with accelerating globalization and technological development, have produced a disinflationary-to-deflationary tendency – extending from prices to labor incomes – that only substantial amounts of targeted federal spending can restore to equilibrium. With sustained levels of accelerating inflation being very unlikely.

The paper is written in a style designed to be accessible to those who are not necessarily practicing economists, avoids complex mathematics in favor of graphic explanations, and eschews (or explains) terms that are not familiar to those with only a basic understanding of macroeconomic issues. The paper includes a forward by Paul Allen McCulley, former Chief Economist at Pacific Investment Management Company LLC (PIMCO) and a colleague of Mr. Alpert’s at Cornell.

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Access Companion Presentation Deck/Summary in PDF Here