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How Does Inflation Work?
Dr. Malcolm Gold • 2022-05-03
Dylan Carnahan:Welcome to the Simple Questions Podcast. I'm your host, Dylan Carnaghan. You're listening to Good Times by Nicole Springer. Nicole is an award-winning, critically acclaimed vocalist, songwriter, and instrumentalist from Kansas City. Her music, written as a means of healing, is a passion-filled vocal showcase. Each of Nicole's songs are personal pieces that drift in and out of her influences from joyous soul pop to ballads reminiscent of blues in old country. The question for this episode is, how does inflation work? You will learn in this episode, factors that impact inflation, what's causing our recent inflation, and steps the United States can take to reduce inflation. Our guest obtained his doctorate degree in economics from the University of Wisconsin-Madison in 2009. He is a professor of economics at Avila University in Kansas City, Missouri, where he teaches topics such as microeconomics, macroeconomics, applied microeconomics, and quantitative analysis. And he is a great lecturer that I had the privilege to learn from. I introduced to you Dr. Malcolm Gold. Through your lectures I have heard bits and pieces about your personal life. And let's go back to before you were Professor Malcolm Gold. What made you want to become an economics professor?
Dr. Malcolm Gold:Before I became a professor, I really didn't know what an economics professor was. Because when I was young, I grew up in such a small town, I didn't know economics was a discipline or was a field of study. I just was curious about problem-solving like math. And then, you know, as an undergraduate, it was kind of a last-minute, what am I going to do with my life? And so I started looking at different jobs and grad school and finally took one of those personality tests that I forced you to take in microeconomics. To actually think about, you know, what might you be good at? And one of the things was econometrics, which was just statistics of economics, but I only taken one economics class at the time and I didn't really understand it very well. So I looked into grad school for economics and got my master's in economics and finance at Baylor University back in turn of the millennium and worked in economic and financial litigation consulting for a little bit over a year and decided I actually liked enough that I wanted to pursue it as a career. I love the research aspect of it. I like answering tough questions. Kind of my own curiosity before I even knew what economics was, was kind of how does everything work? How are we all connected? And how can you make things better? And then after that, I went to grad school at University of Wisconsin-Madison, finished up my PhD, and then I've been teaching since.
Dylan Carnahan:Wow, so you kind of just had, it wasn't a calling from the get-go. You had these natural inclinations and then you found something that fit them.
Dr. Malcolm Gold:Yeah, and in fact, many of your classmates, maybe from your year or even previous or years afterwards, kind of heard this story, but part of what worked for me going to grad school in economics is I already thought like an economist before I even knew what an economist was. And I always took that as more of a serendipitous chance of finding the right fit at the right time. So that was easy for me. It was curious for me. And it was something that was fulfilling. And oftentimes when we're thinking about what are you gonna do with your life and for career and for a job, that's almost as important as the wage because you wanna pay your bills, but at the same time, you wanna find that happiness level that comes with it. And of course economists have went through and put dollar value to how much each of those things measure. But that's kind of the reason that I had you go through that whole process of what are you curious about? What are your strengths? What are the different possibilities? Because the sooner you can figure that out, the better and more fulfilling your life might be than if you wait until just happenstance, finding the right spot at the right time.
Dylan Carnahan:Yeah, no, I think finding an environment that's conducive to your strengths, that's the name of the game. And that requires a little bit of emotional awareness and kind of some retrospect to kind of find that.
Dr. Malcolm Gold:Absolutely. And then that entire awareness of yourself and how you fit in with everyone else, I think is a constant struggle because the world always changes. But knowing the more about yourself and what opportunities are out there, I think the more fulfilling it can be.
Dylan Carnahan:Yeah, and bringing up opportunities. So as you kind of got your graduate degree and you progressed through your education, how did your career as an economics professor begin? How did you get to that point?
Dr. Malcolm Gold:Well, when you finish up your PhD, you're going into the job market search and within the economics profession, it's a very structured, annualized search where most of the jobs are gonna be posted in the fall. There's a huge American Economic Association meeting at the end of December, beginning of January where there's this massive job search. And this includes federal government jobs, private equity jobs, private consulting jobs, even the private industry jobs and mostly academic jobs. And so it's very coordinated to overlap when everyone's getting close to being done with their professional degrees and the PhD so that you're interviewing in January and February, potentially in March, you have job offers, oftentimes contingent on completion of your degree or maybe it was window. And I came out in 2009, and this was kind of right at the end of the Great Recession. And so many of the state schools and budget shortfalls that were coming through from 2008 after the second year of the Great Recession really hit largely. And I had two young kids. And so when I went into grad school, I was thinking I was gonna do research and love this and thinking about nonprofit think tanks and public policy. And then all of a sudden I had kids and my priorities kind of changed. I said, hey, I need to be a dad. I didn't wanna work more than about 60 hours a week. And I knew that people that were working in those research jobs were oftentimes 70, 80 hours a week. And as competitive as it was, you had to be kind of careful not to tell people that you didn't wanna work 70 hours a week because that meant that they weren't willing to talk to you because you weren't someone that was gonna be around long-term. And it kind of worked out that being a teacher gave me the lifestyle of what I was looking for for my family and my family goals and life goals and use the resources and the skills that I have. But that was really a big change during grad school. In fact, I mean, I didn't go into grad school thinking I was gonna become a professor. It was instead, my wife was very patient and she would sometimes listen to my research ideas and conversations and I love that aspect of it, but I love being a dad more. And so I'd much rather fail in a profession and be successful as a parent rather than risk the other one. And since I'm a very risk averse individual, I'm like, hey, I can become a teacher and then after that it's a whole bunch of reading, a whole bunch of conversations, try to figure out how to become a better teacher and staying current so you can make economics relevant in the classroom.
Dylan Carnahan:And if I'm not mistaken, I just heard you name drop risk aversion. Now I know that's a vocab word for economics, but I think we could transition to another vocab word, so to speak here, which is what is inflation?
Dr. Malcolm Gold:Well, risk aversion is a vocab word, just means I don't like taking chances. For anyone that doesn't want to look it up. Inflation is a huge macroeconomic term, and inflation is generally the overall change of that average price level.
Dylan Carnahan:So when we hear the average change of the price level, there tends to kind of be a negative connotation with that. Is inflation a good thing or a bad thing?
Dr. Malcolm Gold:Well, it's both. And part of it, and you're going to hear this a lot from me because economists usually say it depends on the situation. A little bit of inflation is probably good compared to no inflation or negative inflation, or what should we call deflation. So if prices drop, it's a really bad situation. So we actually want, from the economic perspective, for the macro economy to make things work better, we want prices to increase just a little bit. What we don't want is for prices to rise so much that it causes some of these massive concerns. And what we're experiencing today is kind of a little bit of an intermediate where prices are going up more than what they've happened in the past, and it's causing this angst and this concern, because when I say inflation is the average price level, it doesn't necessarily indicate that all prices go up at the same rate. Some prices are going to go up very quickly. Some might actually even go down, but inflation is a macro large-scale concept that's going to say what's the average price. So if you look at your entire expenditure as a consumer, how much do you have to spend this year compared to last year for the same standard of living and all the things that you buy?
Dylan Carnahan:Interesting. And when we focus kind of on the consumer, I know we get terms thrown in there that are like CPI. And can you kind of explain what that is and what that tells us?
Dr. Malcolm Gold:Yeah, we actually have two different measures that are used often to measure inflation. The one that you hear about on a more regular basis is what's referred to as the Consumer Price Index, or the CPI. It's measured by the Bureau of Labor Statistics. And it's a measure of the average expenditure for out-of-pocket expenses for the urban consumer in the United States. So, the average urban consumer actually will buy a ton of different items, but the Bureau of Labor Statistics will go through and look at the Consumer Expenditure Survey to figure out how much of each of the items you buy to weight it. So, we know roughly that you're gonna buy a lot more chicken than you're gonna buy caviar. And so, the price of chicken increase will affect the Consumer Price Index more than the price of caviar. Well, we look at the average urban consumer, and then we're looking at an index, which is just basically saying we're gonna pinpoint this measure in one time and point or one time in place, and then compare it relative to that. Because the Consumer Price Index is all about what you buy on average out of pocket. And so, by having an index, we can easily compare it one time to the next and measure inflation as the growth rate or the change in percentage terms of that Consumer Price Index. Now, the second measure of inflation, that's probably the one that's more important when we're thinking about public policy and we're thinking about going forward, what might be considered for different actions to fight some of the inflation concerns we have today, is actually the PCE. And the PCE is actually the, well, make sure I look this up so I get this one correctly.
Dylan Carnahan:This is for credit, Professor Gold. For credit. PCE is for credit, yeah.
Dr. Malcolm Gold:Well, the personal consumption expenditure.
Dylan Carnahan:Okay.
Dr. Malcolm Gold:And the personal consumption expenditure, instead of being measured by the Bureau of Labor Statistics, is actually measured by the Bureau of Economic Analysis. So they're both government agencies, they're tracking data to look at the overall expenditure and price change, but the PCE incorporates things in your total expenditure, that might not be including your out-of-pocket expense. So this could include things like healthcare or things that are purchased by others. The CPI tends to be a little bit higher than the PCE, but the Federal Reserve tends to target the PCE more than the CPI. And yet, if you're looking at AP or Reuters or looking at news releases, you're gonna hear about the CPI.
Dylan Carnahan:Okay, so it sounds like the PCE may give a more complete picture as to what's going on. It is.
Dr. Malcolm Gold:The problem with using the PCE is the way that it's constructed is we actually have to go back and look at how you change your expenditure. Because if prices change and you go to the grocery store, if one item goes up in price, you're gonna buy less of that. And substitute towards the cheaper good. We just don't know exactly how much you're going to do that. And so we actually need all of the data from today to figure out the entire effect on your average prices for the PCE. The CPI doesn't take in consideration all of that substitution effect, simultaneously. It's actually a difference in how that index is constructed. So the PCE can't be reported until after the fact. The CPI is actually reported today based on sampling techniques to get you a better idea.
Dylan Carnahan:OK. Now, when we have the CPE or PCE, I think I was supposed to say... PCE, we got the PCE, the CPI. We're hearing all about this. And we're going, oh, my goodness. We got some people saying, my caviar is going up. We got other people saying, more importantly, my chicken's increasing in prices. What are some factors that impact inflation?
Dr. Malcolm Gold:Well, we really have two major factors that affect prices. And it's going to make sense probably more from the individual level, but this shows up at the macro level as well for the country. And we typically think of these as our cost push inflation. And cost push inflation is typically something that's going to be driven by a change in the production process. So if it becomes more expensive to actually produce a product, then that cost is going to get passed on from the firm and the producer to the consumer. If we think about cost push inflation, we might be thinking something like low unemployment rates, where it's really tough to hire workers, and so the firms have to offer higher wages. That would be something that's referred to as cost push inflation. But we could also think about increases in other raw materials. We could think about natural disasters. We could think about supply chain. We could think about changes in technology or regulation, such that the productivity of the worker is actually going to decrease, therefore, increasing the cost per unit of production. That's one type of inflation. The second type of inflation source that we have, and both of them oftentimes exist together, but the second source of inflation is something's referred to as demand pull inflation. Demand pull inflation happens when you have individuals that want to purchase more than what's actually available to purchase. When the production levels are less than what the consumers currently want to purchase, this excess demand is going to drive the price up because consumers want it, and they're going to bid against each other, and the firm knows because they have a limited supply, they can raise the price and still sell the product. If we think about demand pull inflation, we could think about some of the things that maybe would cause this, something like overall marketing or changes in taste and preferences. One of the things that we've seen just recently is this overall massive change for the desire for Lysol cleaning products or a hand sanitizer. It was a huge change in the marketing and the preferences for this, and the demand far exceeded hitting the production capacities. So the prices for these products just skyrocketed. We also have other situations where we'd have demand pull inflation, things like low interest rates. So you have the ability to go borrow money. You want to go buy a house because of all-time mortgage rate, low of whatever it was, 3.15 percent for qualified buyers for a 20-year fixed mortgage rate. Or if we think about having some of the stimulus checks that came on in the last couple of years, all of a sudden you have this extra money that's showing up in your bank account that you weren't planning on, and now you're going to go spend it. And that extra money that shows up in your bank account when you go spend it, increases the demand for products and then pulls the price up. So those are the main two drivers for inflation. In certain situations, we have a third one, but this one I don't think is probably nearly as important in the grand scheme of things. But that's really about the consumer expectations. So if we expect prices to go up, the self-fulfilling prophecy of a market-based system is that prices will go up because we're going to go buy more today, which is that demand, pull inflation, and consumers are going to have this same effect as the producers because the producers are expecting the price to go up. So therefore, they're going to be buying up more of their resources along the way to increase their production, and both of this is going to be the cost-push, demand-pull inflation. Hence, it's going to be a self-fulfilling prophecy. So it's really critical when we think about what is going on. If everyone believes that we're going to have 10% or 15% inflation, we're probably going to have that.
Dylan Carnahan:That expectation is going to end up, it's going to create a reality. It is.
Dr. Malcolm Gold:I like what we had talked about earlier about that referencing point and prepping yourself ahead of time. It really comes down to the idea of expectations. Because one of the crazy things we have in economics, this is this idea of how people make decisions. We know from a psychological perspective, that reference point matters and changes our behavior.
Dylan Carnahan:Now, we have these drivers and instances that can impact inflation. Say we talked earlier that we want some inflation. You said that earlier. Say it's getting to an uncomfortable level. How can we reduce that inflation?
Dr. Malcolm Gold:Well, there's a couple of major policies in macroeconomics. They kind of come back to this idea that perhaps the government and the Federal Reserve and the Central Bank can actually influence the economy and influence prices. And so from the individual level, there's a lot of things that we could do to change the price for an individual product. But at the macro level, with change to aggregate price level, those are probably not going to make the same impacts as much as the fiscal and monetary policy. So, when we think about fiscal and monetary policy, we have two different directions, sometimes referred to as contractionary policy, where we're going to try to slow down the economy, fight inflation, oftentimes at the expense of increasing unemployment and slowing down the economic growth of GDP. Then we have expansionary policy, and expansionary policy is where we're trying to increase GDP, lower unemployment at the risk of accepting higher levels of inflation. So, in a moment like we are today, where we have higher inflation, low unemployment, and economic growth that's a lot faster than what was predicted, the federal government and the Federal Reserve are considering contractionary policy. For the Federal Reserve, they're in charge of money supply, as well as the interest rates. And so, if you've been listening to what's going on with the Federal Reserve, the Federal Open Market Committee has come on and very explicitly said, we're going to raise the interest rates. We're going to increase the discount rate. We're going to increase the overall cost of borrowing money. And if we increase the cost of borrowing money, it has a couple of effects. First one is that individuals aren't going to want to spend as much. The opportunity cost of spending today increases because now you have a higher return on your investments than you can save. The second thing is that the firms that want to invest are going to actually have to pay a higher interest rate as well to borrow money. And so the number of projects that are going to have a profitable return on investment are going to decrease. And so it's going to slow down the economy by having a higher interest rate and by slowing down the economy, we're going to decrease that demand, which is going to have a slower pressure on inflation. So that would be one method in which we could slow inflationary concerns using monetary policy. The second type of policy that we could actually use for contractionary policy is actually referred to as fiscal policy. And this is where it's coming out of the executive and legislative branch looking at government expenditure and taxation. If we're thinking about that demand inflation that we talked about earlier, if you had that stimulus check that showed up in your bank account, you went and spent it. But if we wanted to slow the economy, the federal government could actually impose a tax. If we increase taxes so that you have less money in your bank account, you're going to spend less. And as you spend less, there's going to be less inflationary pressures. Yes, it's probably going to slow down the economy. We're not going to produce as much because we're not going to be buying as much. But at the same time, it's going to fight the inflationary pressures that we're talking about that we're experiencing today.
Dylan Carnahan:So in layman's terms, in that instance, for fiscal policy, you're saying that stimulus check people are now going to spend that money, right? And then that's going to increase that demand, which is then going to increase the price of things and create the inflation. So you're saying in instances, the government might actually tax people so that they decrease that demand.
Dr. Malcolm Gold:Absolutely. And I use the example of the stimulus checks because those are the ones that typically show up immediately to the consumer, to the person that's probably listening. But fiscal policy actually has a second option as well, and that's the government spending. So government infrastructure bills or the government spending on military or an education, any of the large items, that money will get them passed through the economy. It just doesn't immediately show up in your bank account as a consumer.
Dylan Carnahan:So it's an indirect thing. So like Eisenhower's highway infrastructure, now we're employing lots of people, right? So we're not directly putting money in the hands of Americans, but we are, say, employing them through government programs.
Dr. Malcolm Gold:Absolutely. And fiscal policy actually includes both government spending and taxation. And so if we're trying to slow down the economy and try to fight inflation, the federal government could actually say, let's spend less money or increase taxes. Either one of those would slow down the economy.
Dylan Carnahan:Those are kind of some of the levers to pull now. I guess who benefits from some who benefits from inflation? Are there some instances that firms or people or say, you know, for or against some of these monetary fiscal policies?
Dr. Malcolm Gold:Well, there's absolutely winners and losers from unexpected inflation. What's not clear whether there's actually winners and losers from expected inflation. So what we want to separate here is when inflation is high, that by itself isn't going to guarantee that this is a good or a bad thing if you were expecting this inflation. Because if you were expecting high inflation, you probably went into a job with the expectation that your wages were going to go up by the same rate. And if you didn't have that in your contract, you probably were planning on leaving and looking for another job because you expected this inflation. Now if we expected inflation, there are some individuals that are going to be still harmed from it. But the number of people are going to be harmed is significantly less than if we think about unexpected inflation. So I want to make sure we address who was actually harmed with expected inflation. And those are individuals that are living on a fixed income. So if we're thinking about a fixed income where it's not indexed to inflation, so Social Security is actually indexed to a cost of living adjustment. So it does go up by inflation measures. It typically doesn't go up as quickly. And at least this is the argument from the individual to say it needs to go up quick, faster. And it doesn't necessarily represent the true cost for individuals on Social Security versus the average inflation. But it is indexed so that anyone that's living on Social Security actually will receive a higher monthly stipend with higher inflation. But if you're living off of a fixed income, or if you're living off of annuity, or you're not relying off of Social Security, and you have a fixed payment coming on every year, inflation is going to harm you because you have a fixed amount of money that's going to show up in your bank account or that you're withdrawing. But your purchasing power isn't going to go as far, and you're not going to be able to purchase as many items as before. And so that's really the big fear about inflation is that your standard of living, your quality of life, and what you're purchasing has decreased. Now if we go back to this question that you started with, which is who is harmed from inflation, and what's the benefits and costs from this, we really are also thinking about unexpected inflation because perhaps the thing that shows up most with inflation is this arbitrary redistribution of wealth from borrowers and lenders when you have unexpected inflation. If you just went and refinanced your house two years ago, and locked in a 20-year mortgage rate of 3.5%, nominal interest rate, and today find that the inflation rates are on 7%, you're saving 3.5% a year if your house is going up by 7%, and most housing is inflation-indexed. That's one of the ways in which you can avoid the concerns of inflation is by physical assets, that the prices are going up the same rate of all the aggregate price levels. So you're paying roughly 3.5% less each year to buy a house because you locked in a nominal interest rate of 3.5%, where the inflation was arguably at the time going to be relatively low, 1%. But now, all of a sudden, we find the inflation being expectantly high, and anyone that was a lender at a fixed interest rate is losing money. Anyone that's a borrower at a fixed interest rate when you have unexpected inflation is a major winner.
Dylan Carnahan:Because you're able to use that inflated dollars. Absolutely. And so you're benefiting from that being that it's fixed, right?
Dr. Malcolm Gold:So you take out a massive loan and you're paying a 3.5% interest rate on it. But the thing that you've purchased is going up 7% over a year. So if you do nothing other than pay the bare minimum, the end of the sell is, and you're making 3.5% above and beyond the borrowing of money. And that's not even taking in factor the risk factor in there for the bank that's willing to actually lend it out to you for a mortgage. But the same thing actually comes true for anyone that's issuing a long term bond. So if you had a situation or a general obligation bond for a municipal bond, anyone that was holding a 10 year or 15 or 20 year municipal bond and holding into maturity, when you have an unexpected inflation, they can't sell that right now. They can hang on to it until maturity and guarantee that 5% rate of return or 5.5% rate of return. If they were going to sell it today, they would take a massive loss because with the higher rate of inflation, they're going to have to sell it at a huge discount to get someone else that's willing to buy it and invest with that risk today.
Dylan Carnahan:Interesting, so we've kind of went through some winners and losers for expected and unexpected inflation. Now, say we have people that are really concerned, they're really concerned they're seeing these prices go up. How concerned should they really be about inflation?
Dr. Malcolm Gold:It kind of depends on their individual situation and their work situation because if you have a salary or a wage that is indexed to inflation, so you have a cost of living adjustment that goes up with the inflation, your quality of life isn't probably going to change too much from year to year. You will still have the disruption trying to figure out what you're going to purchase because some prices are going to go up more than others, but it also gives you the opportunity then to make more out of your money because there's going to be some deals to be out there. Now, on the other hand, if you have a job or if your income is fixed and it's not going to be going up with inflation, that is a valid concern because all of a sudden, now you're not going to be able to purchase as much as before. And if you're saving a bunch of money, especially if you're not putting into something that's going to be relatively indexed with inflation, that's a concern too because your nest egg just dwindled quite a bit in purchasing power.
Dylan Carnahan:So again, kind of go back, it depends on the situation you find yourself in.
Dr. Malcolm Gold:It does, and I kind of warned anyone listening to this that you're going to get a lot of those answers. You know, it's that was our running joke, what's a good economist? And Truman came back to the one-armed economist because as always on one hand, you got a good answer on the other hand, you got a bad answer. So yeah, the only good economist is one that has one hand.
Dylan Carnahan:So you know, I think we've done a great job. You've done a great job going through and kind of given us a really good macro perspective and kind of, you know, quantifying some of these things for our listeners. Kind of right now in basic terms, what's causing our recent inflation?
Dr. Malcolm Gold:Well, I mean, you have really two major things that have happened in the last two years with COVID. The first was when the shutdown happened in early 2020, everyone stayed home and you had major disruptions to the supply chain. We had major changes to the workforce and the requirements of how to be safe in the workforce. That increased the cost of production and in some instances actually shut down and delayed production of certain key products that we see in the auto industry that's holding back production going forward multiple years later. So we have that major cost push inflation that we were talking about earlier. The second side that we have, and this was the cost push inflation is really what we were hearing about early in 2021 where you saw major price increases in auto industry and it was all about supply chain. I think we actually have both types of inflation though because I don't think that the Federal Reserve or the federal government were predicting the immediate effects of the stimulus checks and lower interest rates. And so the economy has actually rebounded so quickly that we went out of a recession or a short-term one-quarter massive drop in GDP with the highest rate of unemployment since the Great Depression back to an economy that's growing very, very quickly with low unemployment. And what we're having now is we also have that demand pull inflation and the cost push inflation. So both of these are driving it simultaneously. And that's where you're hearing what's going on today, which is maybe we underestimated the effects of keeping the interest rates low. Maybe we underestimated the effects of the fiscal policy with these stimulus checks. Because some of these stimulus checks were very different than what we've experienced in the past. I mean, the stimulus checks that had a massive impact was the stimulus checks that went out for single mothers and single parents or dual parents that actually had lower income levels. So you had this child tax credit that came out to intentionally fight childhood poverty at the same time as an impetus for trying to stimulate the economy. So it wasn't just a stimulus check for everyone. It was targeted at childhood poverty and at-risk populations. And what happened when we saw with this is it dramatically decreased the over childhood poverty, which was exactly what the target was, and almost all of this money was spent. So that had a huge effect on the economy where that stimulus check for some individuals, they didn't need to spend all that money right then to get by. And so some of it just went into a bank. But by changing the way in which those stimulus checks came out, I think it actually had a bigger impact and could have had a bigger impact with less money coming out from the government, but it would have been directed at very specific populations. And then of course, it's going to be a contentious area amongst your listeners, anyone else talking about this, whether that was a good or a bad thing. But I think now we're far enough along that we're seeing that perhaps those steps along the way to right the economy, get it back to full economy, actually were more than enough. And now we're actually growing too fast.
Dylan Carnahan:So there are a couple of things there. The last thing you mentioned is kind of interesting. The fact that the actual distribution of these fiscal policies, this money has an impact, you know, as far as explicitly where it's going. And then it's kind of interesting, too, you bring up that, OK, we are having a lot of supply to train disruptions based upon this global pandemic. We lived in a highly globalized world. We have, you know, ports in Italy where we got wine just sitting there. We know we don't have truck drivers are ill. You know, we have all sorts of these things happening. And then we, you know, through fiscal policy, tried to course correct, if you will. And it sounds like you're saying that we might, of course, correct it a little too much.
Dr. Malcolm Gold:I think that's the general consensus and concern today with the high level of inflation and the low unemployment. A year ago at the time, when these stimulus checks were going out and Congress was passing them, I don't know if anyone was going to say that publicly. Instead, you had the politicking one way or another saying that we need to spend it on something else, or we shouldn't spend it all in general. But the challenge that we always have with macroeconomic policy is it's really tough to get an accurate prediction about what's going on today and how much of an effect monetary or fiscal policy will have. Because it really is almost more like a crystal ball and a potion trying to figure out how much you can add and how much is going to change rather than a cook by numbers or cook by recipe. Because if you're a person where you really like knowing the equal sign in everything and balancing everything out, policy is really tough. You have winners, you have losers, and there's going to be a whole bunch of massaging along the way because those effects aren't as crystal clear one for one. We have things that are referred to as multiplier effects. So if you spend money as a government in some area, it's going to have a bigger effect than if you spend money in other areas for overall effect on the economy. And that disconnect between what's currently going on and accurately measuring just because the size of the economy is so big, we actually don't know what's going on instantaneously today. We have a ton of sampling techniques where we're trying to gather information with the jobs reports. But that doesn't tell us everything. That's just a snippet of information. And the job reports is actually one of the things that came out when the pandemic started, where economists were looking at the numbers like we've always done in the past. And we were predicting that we're going to have a longer, higher level of unemployment than what actually happened. Because as soon as people were willing to go back to work, they went from, I don't have a job, to I have a job. And so the number of people that went back to work after that huge unemployment that started the pandemic really took everyone by surprise because our categories of unemployment didn't actually accurately reflect the descriptions that we had today during the COVID pandemic.
Dylan Carnahan:I mean, just in going through our conversation, I mean, this is a very dynamic situation on a very large scale. And so kind of quantifying some of these things can make it difficult to predict the outcomes you'll get. And much as you mentioned, too, I mean, it's difficult from a political level because you're trying to, your constituents, they've elected you and you have to have their best interests at heart. And it's a super dynamic situation. And instantaneous relief is a necessity. And it's just very tumultuous, right? It is.
Dr. Malcolm Gold:And that's why hopefully, if you're curious about this looking forward, pay attention to what the Federal Reserve is doing because the Federal Reserve and the Board of Governors are not going to be putting out their political advertisements to get voted in. You don't vote for them in. They're confirmed by Congress. They're appointed by the President. And they're really looking at the long-term effects. And so the Federal Reserve and the Central Bank actually is more nimble and more able to make changes than we have through the fiscal policy and congressmen and their representatives.
Dylan Carnahan:And what makes that the case? I know, for instance, Supreme Court justices are voted in for life. Is that kind of the same thing with these positions we're talking about?
Dr. Malcolm Gold:The Federal Reserve was a little over 110 years old right now, or roughly 109 years. So if your listeners are getting upset at me, I don't know the exact date. I apologize for that. The Federal Reserve Act was back in like 1913 or 1911, but it was designed to be apolitical, so trying to be immune or at least a buffer from the fiscal side. The central bank isn't in charge of actually printing their money, but they're in charge of money supply. They're looking at the overall regulatory health of the banking industry, of borrowers and lenders, and monetary policy and the interest rates or money supply to affect the overall strength of the economy, to try to buffer against major recessions or try to slow down the economy when needed to try to fight inflationary pressures.
Dylan Carnahan:Now, I know we've kind of talked from a general aspect, but in the situation we kind of find ourselves in, I guess what steps could the US take to reduce inflation?
Dr. Malcolm Gold:The Federal Reserve has already come out and pretty much announced that they're going to have a 50% basis point or a 50 basis point increase in the discount rate. We expect to see a half percentage point increase. They've already came out and announced that it wouldn't be surprising that we're going to see another 50 basis point increase in the next couple months even. So if the inflation pressures continue, I think you're going to see interest rates going up in the short term. You're kind of seeing this already if you're looking at the yield curves, that the short term interest rate already has went up high enough that we have an inverted yield curve right now, which is of course one of the things that's concerned for overall future of the strength of the economy and whether we're going to go into a recession or not. But I suspect that you're going to see a lot of conversations from the Federal Reserve and the FOMC coming out saying interest rates were too low. And not only were they too low, they were too low for too long of a time period. And so the interest rates are going up, and at the same time, the Federal Reserve is also liquidating some of the assets they have on the books, which was the quantitative easing that you heard about during the Great Recession. And then they extended again during COVID where they bought some different assets. They're going to liquidate some of that. They're not going to keep it on their books so that they're going to increase the amount of assets that are in circulation by decreasing the amount of money so they're going to be slowing down the economy. And you're going to have lots of pundits, whether you're looking at all the different Federal Reserve presidents from the different regional banks, or if you're looking at actually anything coming out of FOMC, you're going to see a lot of this conversation about what's the right level of increasing the interest rates so that we don't truly just tank the economy and go into a recession because of this, but how do we slow down the economy so that inflation can persist at 6%, 7% for a year or two? That's okay. What we don't want to go is from 8% up to 10% or 8% up to 12%. What we don't want to see is from 8% down to 3% at the risk of causing a recession. And so we're trying to figure out how do we slow down the economy slowly? And the Federal Reserve has already been on the forefront from this. I'd be surprised to see much of anything coming from the fiscal policy side, but I expect to see a lot from the monetary policy.
Dylan Carnahan:You're really, they're trying to find a good balance and you bring up easing, right? We don't want too drastic of a jump. And so I feel like we're kind of in a fish tank here and someone's going for a water change and they're not trying to add too much hot water or too much cold water, right?
Dr. Malcolm Gold:That's a great analogy because it really is the balancing. And this is actually in Congress has passed something that the Federal Reserve has something that's referred to as the dual mandate. The Federal Reserve as a central bank in the United States has to control money supply and interest rates to maintain full employment and stable prices. And you know, we've already talked about to get employment down, you're risking inflation and to keep inflation down, you're risking high unemployment. And so it really is this balancing act between the two of them that are opposing forces.
Dylan Carnahan:Now, Malcolm, Professor Gold, Dr. Gold, if we are listeners that are sitting here, they're going to, I really find this interesting or say they've gone and taken a personality test and they're like, man, this might be conducive to my strengths. Where can people learn more about economics?
Dr. Malcolm Gold:So the American Economic Association is the professional association for economists. It's primarily focused on professional degrees, but there's a lot focused on undergraduates as well as for individuals that like jobs. They're not actually requiring a bachelor's degree or professional degree. And so the website is just www.AEA, americaneconomicassociation.org.
Dylan Carnahan:Dr. Gold, I want to say thank you for, you're an educator. I've had multiple classes with you, as well as I've had numerous peers that have been in your classes. So I think time is one of the most valuable things we each have. And so I want to thank you for the time you spend educating others and for your time today.
Dr. Malcolm Gold:Well, it was a pleasure having you in class and it's a pleasure talking with you today. Thanks for the invite.
Dylan Carnahan:That wraps up our conversation with Dr. Malcolm Gold. We talked about fiscal policy, monetary policy, and what the US can do to combat our inflation. Much as Dr. Gold mentioned, you can go to the American Economic Association to further dive into the concepts discussed in this episode. Do not forget to listen to Nicole Springer's music on Apple Music or Spotify, and go to nicolespringersings.com to check out more of her work and what she has going on. She's too talented for us not to support her and her music, so go ahead and please give her a follow, give her a listen, and support her music. And lastly, subscribe to the Simple Questions Podcast to get notified when our latest episodes are released. Thank you for listening, and remember to keep asking questions.