Allison Schrager, a Manhattan Institute senior fellow, City Journal contributing editor, and regular Bloomberg Opinion columnist, joined the Institute at the beginning of 2020. Her writing has delved into the details of inflation, risk, and pension finance. We recently asked Schrager about the reigning economic issues of today, including inflation—with rates shooting up above 5%—and the huge new bills that Congress is debating.
We keep hearing about inflation, and we keep seeing it at the store—but a lot of us can’t really wrap our heads around why it happens. Help us out: What’s going on here?
Allison Schrager: Inflation happens for many reasons. A supply shock, such as an increase in oil prices or supply-chain disruptions, can drive up prices; so can overly permissive monetary and fiscal policy. In the U.S., supply chains are more the issue right now, but oil may be a bigger problem in a few months and in Europe.
But whether it sticks around and becomes a persistent problem depends on expectations. If people expect high inflation going forward, it can become self-fulfilling—reflected in wage contracts, etc., even if supply-chain disruptions are resolved.
We can probably deal with some inflation; but at some point, it becomes a serious problem, as it was in the 1970s. When should we start getting really worried?
AS: I’d start getting worried if we’re still here next year, or if there’s a big oil-price increase this winter—because the longer it sticks around, the more people expect it. Also, if the Fed increases its target, it is essentially admitting that it can’t or won’t achieve 2% inflation. Even 4% inflation is double what people are used to, and it could have a big impact on rates and people’s real income.
Everyone’s talking about the huge bills going through Congress. How would they affect the inflation picture? And how would they affect the nation’s fiscal health?
AS: It will be terrible for our fiscal health. The second bill, in particular, is a major expansion of the entitlement state, especially for the middle class. It is not only expensive but an ongoing obligation that is very hard to get rid of. The budget claims that these things will last only a few years, but that is like pricing a perpetual bond based on three coupon payments.
I am not as sure what it means for inflation. It will drive up prices of services that people complain are expensive, such as child care, but it may also make the economy less dynamic by discouraging employment, which can be deflationary.
Risk is a big theme of your writing, and you’ve argued that a refusal to take risks is part of the reason that wages are stagnating. Could you tell us a little about that theory?
AS: Like any asset, wages go up when you take more risk. We’ve seen a big decline in risk taking, especially among low-income people: fewer job changes, less entrepreneurship, less moving for opportunity. This all happened while wages stagnated. And it is not just a correlation; wages tend to increase when you change jobs. So we should not be surprised that our zeal to decrease risk also resulted in stagnation. The latest budget goes even further, and I fear it will be counterproductive when it comes to making people richer and better paid.
Also on the topic of risk: Covid-19 is still on the nation’s mind. What advice would you give to the average person when it comes to the trade-off between disease risk and living his or her life?
AS: It is a very personal choice. If you are elderly or immuno-compromised, or live with someone who is, you have a very different risk calculation from that of a healthy 25-year-old. But risk is never zero. At a certain point, everyone will need to live with Covid risk, or live a very constrained life.