What’s behind global inflation and where are we headed?

The year 1996 saw the publication of Roger Bootle’s provocatively titled book The Death of Inflation, which argued that inflation was no more the threat it used to be and fixation with keeping prices low can hamper growth unnecessarily. The book is a compelling read. Yet, the challenges brought about by the pandemic may be in conflict with the optimism in it, as reflected in Bootle’s own columns and interview.

COVID19 did not just catch the global health infrastructure off guard, but wreaked havoc on the world economy as well, particularly in terms of ushering in an era of intractable inflation. Here’s a look at how the infection jumped from person to person, eventually subduing the economy, and throwing demand and supply into a nagging imbalance.

The demand side: The virus and the price of your groceries

Faced with sudden outbreaks, panicking governments the world over were left with no choice but to swallow the bitter pill of lockdowns. It was clear that there was no alternative, at least in the short run. The policy helped control the contagion, but not without business closures and job losses. This, in turn, raised a natural question: how to help the common person muddle through the crisis with the economy at a standstill?

Almost all economists favored economic stimulus—financial help from the government channelled through the fiscal and/or monetary policies—but answers to how, how much, when, and where varied drastically.

Most governments around the world offered one kind of stimulus or another. Yet some countries with the highest stimuli—say, Canada, Germany, Spain, or the United Kingdom—are now experiencing record inflation.

Inflation in the United States, the country with perhaps the largest stimulus packages, has hit a 40-year high, with prices this March being 8.5% higher than March last year. This has meant the average household having to spend nearly $327 more per month than they used to, a year ago.

After all, if one gets up one fine morning and finds a serendipitous check at their doorstep, which literally happened in the U.S., sooner or later, they are going to go shopping, i.e., demand increases. But the neighborhood grocer has limited items, i.e., supply remains the same. More people running after scarce goods made the prices rise, as it does. This effect was worse in service industries, where some businesses even had to pack up.

Arguably, the stimulus packages, while helping the economies recover, perhaps also created conditions for high inflation by encouraging consumption. While stimuli may be more conspicuous in the advanced economies, almost all economies offered some kind of stimulus, swelling their fiscal deficits, as governments increased spending to make up for the fall in economic activity.

The supply side: The rising costs of production

Yet, to fault the economic stimulus for inflation would be somewhat simplistic. Many economists expected such inflation to be transitory—short-lived—after all. Transitory, it could have been, if it hadn’t been for the surge in the price of oil.

Note that COVID19 had initially caused inflation because of the sky-rocketing costs of shipping, supply chain disruptions, erratic demand, and international business desynchronization due to asynchronous outbreaks. Economic activity had plummeted, sending oil demand—and its price—into a free fall.

One of the reasons the oil price fell is that oil supply is relatively “inelastic” in the short run. That is to say, oil companies cannot cut down on oil production suddenly. These are giant enterprises with fixed, long-term costs. As demand vanished due to the virus—and supply could not suddenly be scaled back immediately—oil flushed markets, and oil price fell drastically.

This should have made everything cheaper. But as economies recovered, often with a sharp, V-shaped recovery, thanks to the vaccines, the demand for oil rebounded phenomenally. So much so that even though the world economy still has not fully recovered from the pandemic, oil demand may have already surpassed its pre-pandemic levels.

The resurgence in oil demand—with limited supply available—made the prices skyrocket, from a record low of minus $40 per barrel at the start of the pandemic to around $120 per barrel now.

Yet of course, this rise is not without the added conundrum of Putin’s war on Ukraine. Supply disruptions due to the war, with the added effect of sanctions, and now an embargo, have worsened the spike in energy, both oil and gas, prices, given the fact that Russia is among the top three producers of crude oil, and the second largest producer of natural gas in the world.

In addition, uncertainty brought by the war has affected investment and financial markets the world over. Stock markets have been bearish. Businesses are having to look for alternative trading partners. These factors, along with higher oil prices, are making costs of businesses soar, leading to “cost-push inflation”—higher prices arising from higher costs of production.

The outlook is not good as yet

Together, resurgence in demand after quick initial recovery, and a fall in global supply due to higher costs of production, have translated into an indomitable surge in prices the world over. Turkey has seen prices rise by 70% between April 2022 and April last year.

The corresponding figure for Argentina stands at 58%, and for Venezuela, Sudan, and Lebanon, at over 200%. While inflation in these countries may not be attributable exclusively to the above stated factors, as these economies were already stuck in macroeconomic blues—sometimes trying their luck with unorthodox policies—the pandemic and war have complicated things considerably. Even in advanced economies, the IMF estimates a 38-year high record inflation for the current year.

Average incomes, in turn, will grow only modestly this year, as reflected in the world GDP forecasts being revised over and over again. While growth in the oil-exporting Gulf economies forms an exception, as they are benefiting from higher energy prices, even those will not be immune to food inflation, considering 85% of their food comes from imports.

But the outlook for the developing economies is particularly concerning. They are facing capital flight as investors opt for higher return in the advanced economies, where interest rates are rising, pushing the indebted countries closer to default. This will further pressure stressed currencies, worsening inflation, with more countries having to knock the IMF’s door, sooner or later. Calls for international financial institutions to take a more helpful role to help the distressed countries are, understandably, increasing.

Likewise, devising a careful policy at the national level may be crucial to people’s livelihoods. It may be argued that governments need to prioritize fighting inflation over showcasing economic growth. A blind pursuit of growth would lead to higher demand and translate almost inevitably into more inflation.

As for the micro level of managing a household, it may be just prudent to adapt our spending patterns to the disheartening reality of deep-seated inflation, and perhaps spare a few bucks to help those in distress. Inflation isn’t dead, as yet. But the world needs a healing touch, now perhaps, more than ever.

(Published first on Politics Today, June 6, 2022)

‘Else equal, a dismal economist at the helm is better for an economy than a smart CEO

THOMAS Carlyle, in his essay Occasional Discourse on the Negro Question, argued that the idea of abolition of slavery was incompatible with high productivity. It was in this essay that he referred to economics as an abject, distressing, and a dismal science; a reference clichéd since.

One may differ over the dismal nature of economics, not least because of Carlyle’s bizarre, racist arguments. But, economists, to be honest, are somewhat distressing and dismal. You can tell if you’ve actually met one. Imagine a CEO on the other hand, and spontaneously the image of a dynamic, enterprising individual with a healthy risk appetite comes to mind.

No prizes for guessing that Imran Khan himself is more of the latter kind. Whether it in cricket and welfare previously, or is in his position as prime minister now, he prefers leaps of faith over prudence. Naturally, he can relate with the grittier CEO kind better.

Of course, Dr Abdul Hafeez Sheikh was the dismal kind — a somewhat paternalistic economist. One may visualise Dr Sheikh telling a restless Khan Sahib week after week that there was no route to his much-promised land in the immediate future with an irritating consistency, worsened by a stoic face.

On the other hand, Shaukat Tarin, like Asad Umer, is the enterprising kind. How could such corporate giants, with their verve and experience, have failed in economic management?

Indeed, the monetary side of the economy is a somewhat obscure world that lies behind the simpler fiscal side. A policy that is good for raising taxes and building infrastructure — the fiscal side — may lead to higher prices for the common person — a monetary effect — which adversely affects people’s standard of living.

Much like a greenhouse, which otherwise is meant to keep plants warm, can get overheated with the entrapment of too much heat and light, economists say the economy is ‘overheated’ if there is too much inflation. If fiscal policy is like sowing seeds in a greenhouse, the monetary policy is about maintaining its temperature.

According to conventional economic wisdom, you can’t outgrow inflation. That is, a government’s effort to spend more to achieve a higher GDP growth is doomed to failure in times of already high inflation. The government may hope to achieve prosperity with industrial growth, but a stimulus to the economy — say, incentives to spur investment — will almost certainly lead to even higher inflation. And the inflation, unfortunately, comes before the fruit of policy on the fiscal side ie before growth.

The central bank advises policymakers in such circumstances that they’re going to burn the plants in their frantic desire for faster growth. A higher policy rate is one of the bitter pills central banks have to cool the economy, much like opening the windows of a greenhouse.

When Tarin was brought in, the economy was recovering. Government was boasting about the growth it had achieved the previous year (ironically under the Sheikh-Reza Baqir duo). But inflation was still on an upward trajectory. It still needed time to be tamed. In fact, it was suggested that Tarin had been brought in to control inflation.

But Tarin, gauging his boss’s pulse, aimed at instant growth, which was a recipe for worsening inflation. He spared no opportunity to criticise the State Bank for maintaining a ‘high interest rate’, which in his view, had been hurting growth as well as the parity of the rupee somehow. Thus, with much fanfare, Tarin presented a growth budget.

This clearly pressured the State Bank and it tried to accommodate the government’s growth stance, not raising the interest rate for 15 months. With a low interest rate and lesser spreads, the short-term foreign in­­vestors have an incentive to pull their (controversial, hot) money out of the economy. Deprecia­tion in turn affects even the longer-term investors, worsened by a rising current account deficit (even higher without the serendipitous remittances) and higher energy prices, which put downward pressure on the currency.

Now, undergoing a change of heart, Tarin Sahib favoured a higher interest rate in an interview and hoped, the State Bank had learned from high inflation and the rupee’s depreciation. Thus, faced with raging inflation, his enthusiasm for lower interest rates and higher growth, his rallying cry a few months back, has all but disappeared. One really wonders who actually needs to learn what.

What, nevertheless, clear is that because businesses don’t have a parallel, elusive monetary side, even the smartest people from the corporate world have a hard time appreciating that investing can indeed be counterproductive for an economy, for example, when overheated. Economists, for their part, can be thick in their own way, a subject for another day. Yet, sometimes an economy in need just needs an economist, even if a dismal one.

(Published in Dawn, December 25th, 2021)

Of gun ownership, psychological health, and being American

The next mass shooting in America is expected to happen in less than 13 hours. That is what 457 incidents by 29th of August, 2021 translates to. This is horrifying.

Yet, as dramatic as it may seem, a graver threat to America comes from the mass shootings that are to likely in the longer run. The momentum that these attacks are building, and have been building on, has largely been ignored, but represents a much grimmer menace.

The underlying causes of mass shootings have become so saturated within the society that they cannot be distinctly identified anymore. Because they’re elusive, institutions and policies that perpetuate such proclivities are even harder to pinpoint and galvanize support against.

When the focus should be on building a better society for future generations, we don’t seem being able to agree on even how to save lives today.

Gun-ownership levels set the US apart

The substance of even more immediate policy gets lost, more or less, along partisan lines. Republicans, who overwhelmingly support lax gun-ownership laws, tend to put the onus on mental health. Former President Trump had gone so far as to say, “Mental illness and hatred pull the trigger, not the gun.”

But consider this. The US is estimated to have the largest number of firearms per person in the world. Even more remarkable is how much the US figure at 120.5 per 100 exceeds even the 2^nd highest country in the list, Yemen at 52.8 per 100, which is a country in the midst of civil strife and war. 

Roughly, every 4 in a 100,000 people die in America from gun violence. That makes a US citizen a 100 times likelier to die from gun violence, than a British – the rate in UK being 0.04 per 100,000.

Yet, even as the frequency and intensity of the shootings have been on the rise over the last few decades, people’s attitudes towards gun-ownership, on average, are still changing only very slowly. According to a Pew survey, as recent as 2019 (latest), 80% of Republican voters said it was more important to protect gun owners’ rights than to rein in gun ownership.

It takes a lot of effort and at least some pretence to say that there would have been as many killings in America if Americans had fewer guns on average. Unrestrained gun-ownership is elephant in the room.

Lagging behind on psychological well-being

Still, gun-ownership is not the only explanation for mass shootings, even if most democrats would be inclined to believe so. Mental health, which the more left-leaning voices cautiously avoid blaming – on rather passionate grounds that it could stigmatize those facing psychological challenges – is nevertheless associated with violence, and America’s situation here is again concerning.

According to a survey of 11 high-income countries by the Commonwealth Fund, every fourth American is diagnosed with a psychological health condition. Moreover, almost half of the respondents reported they had experienced emotional distress due to neighborhood safety concerns, or not having enough money for housing and/or food – an alarming statistic, considering America is the most resourceful country in the world by overall GDP levels.

Even with this state of psychological health, and one of the highest rates of suicide among the industrialized countries, the US compares unfavorably to other high-income countries on the number of professionals working in mental health.

Thus, the problem is way bigger than the precious little legislation in some states on ‘background checks’ for assault weapons manages to capture.

Which one is it?

In a world of complex interactions, a witch-hunt for the absolute fundamental determinant of violence is as naive as it is useless. What is incontrovertible, nevertheless, is that gun ownership levels in the US are not normal for a normal country – and shrugging it off as a byproduct of a sacrosanct ‘gun-culture’ could turn out to be yet dearer in future. Mental health issues, too, are at an alarmingly high level without the required infrastructure for support.

Both of these are problematic. Both need immediate redressal to bring them more in line with a level befitting a country with such massive resources as those of the US.

Yet, it’s already quite late. Gun-ownership may be restricted, but the guns people already have – including assault weapons – cannot be taken away. Mental health may be invested in, but it will be a challenge to pull the society out of such pervasive challenges to psychological well-being at large.

What’s worse, gun ownership and mental health could be interacting in far more complex ways than any research has been able to discern so far. In short, measures taken even today will take a long time to have any effect.

Where do the shootings originate?

But even such measures would be essentially dealing with only the somewhat superficial mechanics of the problem. The underlying causes of mass shootings cannot be identified without reconsidering the contours of social justice in the American society today.

Why is it that the wellbeing in one of the richest countries in the world has not kept pace with economic growth, even as corporations have thrived? While the common person struggles to survive, politicians are in a state of disconnect, essentially being a hostage to groups that enthroned them. It is the special interests who determine who is to get what from the pie, sprinkling peanuts of micro-choices here and there to delude the masses into an illusion of liberty, and even the lure of ‘Americanism’.

There is nothing American about settling for a mass shooting everyday. There is no liberty in not being able to choose to live. If anything, there is an incentive for those who design the frame of our choices to conflate constructed, imaginary ideals with ‘identity’.

If the corporate world can make assault weapons a part of consumption culture, and go so far as to conflate arms-ownership with national pride, elevating guns to becoming a definitive symbol of the American ‘identity’, undoing this formidable milieu is going to take a strong will and a perspicacious strategy as well.

Given the deep-set polarization in American politics today, breaking the categories will take long. Reimagining justice seems, unfortunately, quite distant. 

A distressed, hate-filled mass shooter is planning his attack somewhere, meanwhile. He knows he is short on time.

(This article first appeared here, on Politics Today).