The economist Isabella Weber is considered the inventor of the gas price cap. In addition, she is also looking for solutions in the fight against rising prices. The current inflation, they believe, is a new “special kind”. The state must therefore identify the “systemically relevant” price drivers on the market, then it can “intervene in a targeted manner,” she says – without any interest rate hammers.
Ms. Weber, in April you will publish a new book on the Chinese economy. Now you have also published a working paper on inflation in the USA. Is there a connection?
Isabella Weber: In fact, I have been dealing with inflation in the context of rapid historical upheaval processes for a long time, as we are experiencing again today. China has gone through such a process of upheaval in the course of economic reforms. Back when China switched from a planned to a market economy, inflation was always a kind of specter in the room that had to be prevented.
Is that why you called your new book “The Ghost of Inflation”?
Yes, exactly. For the book I looked at the 1980s in China and how leading economists evaluated the development at the time. An important point of comparison at the time was, for example, the transition from a war to a post-war economy. This comparison was also made again in the context of Covid. Suddenly, with the lockdowns, the market no longer decided alone what is produced, who can go to work and who stays at home, but the state has set narrow limits. Of course, the situation on many levels is different today than it was at the time of the transition from the war economy or at the beginning of the Chinese reforms. But in the one point that there are specific bottlenecks at the beginning of the value chain and inflation later, the situation is surprisingly comparable. That was him too Starting point for the working paperwhich I published with three other colleagues.
How did you do it?
So far, two theories have more or less dominated how inflation comes about. First, the monetarist view that there is too much money in the market. On the other hand, the neo-Keynesian view that there is too much demand for the existing supply in the overall economy. In no way do I deny that these theories can explain certain inflations. Rather, my thesis is that we are dealing with a special kind of inflation today – an inflation that is related to the radical upheaval caused by Covid and the war in Ukraine. This inflation cannot be explained solely by the two theories. We need to look at the micro level of individual sectors. In other words, we’ve seen specific shocks in specific markets that have led to broad price increases. These shocks have spread throughout the system, leading to more generalized inflation.
So you mean that individual sectors have caused wildfires with their price increases?
Yes, you can say it like that. When certain industries raise prices, it raises costs for other industries. These also react with price increases. If the price of flour or gas goes up, the baker, for example, increases his prices. When you think about inflation in this way, the question arises as to which sectors are particularly important for overall economic inflation.
And which ones are they?
We were able to identify a total of eight sectors for the USA that are particularly systemically relevant for price developments in all other sectors. The most important here are fossil energies, i.e. the areas of “petroleum and coal products” and “oil and gas extraction” …
This is very close…
Yes, the soaring gas and oil prices have hit many people and companies hard. In addition, there are areas such as “living”, “chemistry”, “food, beverages and tobacco products”, “transportation”, “wholesale” or “agriculture”. All of these areas have a massive impact on prices in other industries – or directly on inflation for consumers.
How do you measure that?
We simulated shocks for all sectors of a large macroeconomic input-output table for the US – so what goes into a sector, what comes out and which other sectors use it. And then we did two things: We did one calculates what this shock would have looked like on average before Corona. And we compared this with how prices developed in the Corona shock. It came out that there is a large overlap in which prices are of great importance for price stability in the entire economy. So there are “structural vulnerability points” – or to put it another way, systemically relevant prices that pull other prices up.
You have now investigated this for the USA. What can be derived from this for Europe and Germany?
That is the big question that we want to answer right now. There are ultimately three components that determine these results. On the one hand, in which position an input factor is located in the value chain. There can be big differences between different countries. In general, however, I expect things like oil and gas to be extremely systemically relevant in Germany – even if we have more renewable energies here. The second is price movements – not all prices move the same amount. The price movements are likely to be similar insofar as they are world market prices – especially for oil and gas.
And thirdly?
It’s about the importance a sector has for consumer spending. The housing market, for example, plays an important role here. In Germany and the USA, people spend a large part of their income on housing. However, real estate values in Germany may be more stable. This would also have a smaller impact on inflation overall.
It sounds like the products that are particularly necessary trigger these cascading effects. This would imply that poorer people are particularly badly affected because they can hardly avoid the price increases. Is that right?
The 34-year-old economics professor is considered the inventor of the gas price cap and a member of the Federal Government’s expert commission. She lives in the USA and teaches at the University of Massachusetts Amherst. She is currently writing her second book, The Specter of Inflation: How China Escaped Shock Therapy.
Yes, the suspicion is obvious – and some studies for Germany are already pointing in this direction. We want to take a systematic look at this in a separate paper soon. For this we would then look at income-specific and group-specific inflation rates, for example for people of color in the USA.
Can concrete recommendations be extracted from the first inflation paper?
Yes, there are certain sectors that are particularly important for inflation. This also means that we should think about things like active price observation for these sectors. This is already happening today, but much more superficially as part of the inflation calculation and not as an early warning system. This would allow us to react to shocks as they emerge, rather than waiting for price shocks in one sector to impact other sectors and trigger inflation.
That smells like the next state intervention in the market – similar to the gas price cap. You were also recently placed by the “macroeconomist” in a series of economists who are calling for the “return of the state”. Do you see yourself classified correctly?
I understand that many people like to work with dichotomies – here are the market economists, there are the state-oriented economists. But I’m more concerned with using the market as an early warning system. A strong price movement indicates a major imbalance in a market. If it turns out that government intervention can help correct the imbalance, as is currently happening, for example, with efforts to find new sources of gas, then that is in a sense a smaller intervention than containing inflation with rapid interest rate hikes and a recession trigger. The interest rate hike will affect all companies and households across the board. Price brakes such as the gas price brake can buy time for the measures that correct the market imbalance. For me, it’s not about the state hitting any industry with a hammer, but understanding the dynamics of the market and intervening as precisely as possible – so that it doesn’t just hold the hammer for interest rate hikes in its hand.
You also played an active role in one of these areas – the energy market – with the cover. Now the electricity and gas prices are falling. For some, the lid is already obsolete. How do you view this development?
The electricity and gas price brake is still important as an insurance policy. After all, it does not cause any costs for the state if the price falls below the cap. On the other hand, it offers households and companies planning security. This, in turn, is good for the economy because people are no longer restricting their consumption and companies their investments for fear of unpredictable gas prices. I would have wished that the instrument earlier, i.e. before the price peak in August, would have come – but that shows once again how important an early warning system for price explosions in systemically relevant areas would be. Incidentally, the Bundesbank assumes that the gas price brake will lower inflation by 1.5 percentage points, and that doesn’t include all the indirect effects I referred to. This is an important contribution to price stabilization and will also moderate inflation expectations and take some pressure off the ECB.
Jannik Tillar spoke to Isabella Weber
The interview first appeared on Capital.de