MAKING SEN$E -- May 16, 2011 at 10:42 AM ET
'Demand' Driving Inflation? A Viewer Begs to Differ
A complaint lodged with the PBS Ombudsman that was passed along after Friday's broadcast and seemed worth answering in a public forum.
"I do not understand why Paul Solman did not challenge Roberto Rigobon when he said rising prices were due to demand," wrote William Wielert of Fort Lauderdale, Fla. "I do not use more coffee, oranges, soap, toilet tissue or gasoline for that matter. The answer was provided by the Bingo seniors who all said they have cut back on their spending. There was the perfect argument to refute the crazy notion that 'demand' causes higher prices."
As a NewsHour colleague notes, Mr. Wielert, "we provided a context for the noted economist and a group of seniors to exchange their views of a given situation. Their paths would not have crossed, figuratively speaking, if we hadn't juxtaposed them. Then we expect viewers to decide whom they agree with."
As you yourself observed, Roberto Rigobon's assertion that "demand" is causing today's inflation was countered by the seniors in Connecticut. And, I should add, by the sequence about John Williams of ShadowStats.com, who blamed it on the Fed's monetary policy.
Professor Rigobon adds several points:
First, are you spending more on gas? Yes. Does that reduce the standard of living of people? Yes. But that does not increase the price of bread, drugs, movies, nor clothing.
Second, the fact that some groups suffer more than others is exactly what I said in the interview. People that have no access to financial instruments to hedge against inflation -- such as those in retirement -- suffer more. If I work and part of my salary is attached to a bonus on the sales -- then my income is hedged against inflation.
Third, when we look at all the indicators of consumption, the consumption today in the U.S. spends about the same amount of dollars (nominal and real) as the total we had in 2007. This is with more people unemployed, and less investment! How can you explain this without recurring to higher demand?
But "refute"? That's not what we do. Robin MacNeil reminded us all of Jim Lehrer's personal fairness guidelines in his tribute to Jim on Friday. Among them: "assume there is at least one other side or version to every story." This precept can, of course, be reduced to absurdity. Beware, warns journalism professor and long-time NBC executive Bill Wheatley, of "the doctrine of false equivalences": giving equal time to the view that the Earth is flat, say, or about to be overrun by armadillos.
But when a noted MIT economist with a deep interest in inflation suggests that it is rising at the moment due to increased "demand," we do not dismiss it as a "crazy idea." Rigobon explained himself at greater length in the original interview.
Roberto Rigobon: I really believe that what is going on is that our demand has increased tremendously. For example we're almost at the same level of demand that we had before the bubble, okay, this is 2007, before the bubble went bust. Our consumption per capita was roughly the same as what we had at that time, like 1 percent less only, and we have double unemployment. So somebody is consuming a lot in the United States. And that is push of consumption is I think what is increasing prices everywhere...We have sectors in which prices are still sluggish...like real estate which the prices have not increased that much.
Paul Solman: No, in fact going down still according to some accounts.
Roberto Rigobon: Exactly. So, so, we have inflation and that inflation is happening even though some sectors have not increased their prices and commodity [price increases have] not entirely made it to the retailers. So this is extreme expansion of demand. In some countries it has been the government expanding that demand. I think in the U.S. it's us, the consumers that are expanding a lot."
Rigobon could be wrong, of course. But that is for you to decide, not us. Just remember: he's talking about the aggregate demand of entire economy here -- 311 million of Americans according to the U.S. Census Bureau's "population clock" It's not just your demand, or mine, or the seniors in New Haven, Connecticut. It's the spending of Americans -- and there are many millions of them -- whose fortunes have rebounded in the wake of 2008.