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    The document discusses reasons for low inflation between the Great Recession and the pandemic despite an inflationary gap. It argues that factors like increasing income inequality, decreased bargaining power for workers, rising household debt, and more aggregate spending going to the financial elite limited disposable income growth for most. This held back expected inflation from expansionary fiscal policy as the bottom 90% did not have enough extra income to significantly increase consumer spending. The document also notes that current high inflation may be partially due to pent-up demand that was held back after the 2008 crisis due to inadequate government intervention.

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    The document discusses reasons for low inflation between the Great Recession and the pandemic despite an inflationary gap. It argues that factors like increasing income inequality, decreased bargaining power for workers, rising household debt, and more aggregate spending going to the financial elite limited disposable income growth for most. This held back expected inflation from expansionary fiscal policy as the bottom 90% did not have enough extra income to significantly increase consumer spending. The document also notes that current high inflation may be partially due to pent-up demand that was held back after the 2008 crisis due to inadequate government intervention.

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    3 views2 pages

    Cet 6 Matt Section

    Uploaded by

    Matt I
    The document discusses reasons for low inflation between the Great Recession and the pandemic despite an inflationary gap. It argues that factors like increasing income inequality, decreased bargaining power for workers, rising household debt, and more aggregate spending going to the financial elite limited disposable income growth for most. This held back expected inflation from expansionary fiscal policy as the bottom 90% did not have enough extra income to significantly increase consumer spending. The document also notes that current high inflation may be partially due to pent-up demand that was held back after the 2008 crisis due to inadequate government intervention.

    Copyright:

    © All Rights Reserved
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    of 2

    4.

    If there is an inflationary gap in 2019 (pre virus) why do you think


    inflation has been so low?

    • In my opinion a large component contributing to the inflation gap without an increase in inflation is
    the decreased bargaining power afforded to labor due to increased automation, digitalization,
    corporate consolidation, and regulatory capture.
    • The increased aggregate spending did not result in an expected increase in disposable income for most
    workers as an increasing amount went to the financial elite as unemployment plummeted.
    • Another factor leading to decreased disposable income that would otherwise cause inflation is the
    increasing debt many households currently hold, especially student loans for millennials. Paying back
    this debt increases the MPS (marginal propensity to save) and decreases the multiplier effect any
    investment or government spending would have.
    • Without increased disposable income, the bottom ~90% were not able to go out and spend this
    money on consumer products, resulting in decreased cost-push inflation than would be expected
    during previous times of expansionary fiscal policy.

    • In summary, I believe factors such as increasing income inequality and household debt held back the
    expected inflation between the Great Recession and the Pandemic.
    5. For 2023, is there relevance today?

    • Yes. The pandemic led to decreased output and the resulting stimulus checks
    increased disposable income for the average American in a much more equal way
    than 2010 era government spending and tax cuts.
    • Along with the student-loan freeze temporarily allowing debtors to reach a higher
    MPC (Marginal propensity to consume), increasing the multiplier.
    • The resulting inflation is a combination of cost-push and demand-pull factors.
    • I think this inflation we are experiencing is in part the inflation that was being held
    back by the inadequate government intervention to bring the economy to
    equilibrium following financial crisis of 2008.
    • Overall, many of the issues we are experiencing today is the result of poor financial
    policy since the 1990’s. These shortcomings were masked by deficit spending, which
    we will have to deal with at some point in the future.

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