The Four Horsemen of Inflation

War, pestilence, climate change, and the rich.

A field of sunflowers, some of which have been damaged by drought, is seen on Sept. 13, 2022, in Cluj County, Romania. Photo: Andreea Campeanu/Getty Images

What caused the big surge in inflation over the past few years? The mass mind of U.S. elites is currently in the process of deciding on the “answer.” The scare quotes are necessary because U.S. elites largely exist in an elaborate hermetically sealed fantasy world — swapping self-flattering tales with one another in New York Times columns and at their dreary dinner parties and at their only slightly less-dreary orgies until they settle on various stories about the world. These stories often have the disadvantage of being 180 degrees the opposite of reality. But they always have the advantage of telling powerful people that they are super nice and deserve more money.

Meanwhile, a recent paper by Thomas Ferguson and Servaas Storm from the Institute for New Economic Thinking looks at the inflation question without any parties, orgies, etc. It has the advantage of focusing on the real world. However, it has the key disadvantage — at least in terms of breaking into the fortified minds of the people who run America — of telling them that they aren’t nice and deserve less money.

One unsettling conclusion of Ferguson and Storm is that some recent inflation can be attributed to climate change. This is extremely bad news. First of all, that’s a problem that’s not just not going away, but also will only intensify. Secondly, it’s easy to imagine a future in which right-wing parties across the world point to severe bouts of inflation as a reason to put them in power, where they will prevent any action on global warming, thereby worsening inflation, on and on in a vicious circle.

The answer to the current inflation question boils down to whether it happened thanks to a demand shock (a sudden increase in demand), a supply shock (a sudden decrease in supply), or some combination of both.

The story currently congealing on America’s op-ed pages is that it was a demand shock, caused by the government and the Democrats. In particular, the American Rescue Plan Act passed in March 2021 simply made regular people too rich and therefore free to spend with reckless abandon. Larry Summers, secretary of the Treasury during the Clinton administration and director of the White House National Economic Council under Barack Obama, issued this warning as the ARP was being written:

In normal times, a family of four with a pretax income of $1,000 a week would take home about $22,000 over the next six months. Under the Biden proposal, if the breadwinner were laid off, the family’s income over the next six months would likely exceed $30,000.

The “can you imagine” tone here is notable. Regular families taking home $30,000 in after-tax income in just six months! Clearly, normal humans making a bit more money violates the laws of economics and hence invites punishment from the inflation gods. (Summers is listed at his speaker’s bureau as being available to explain all this for a fee of “$100,000 or more.”) The only answer to a problem created by the government giving people too much money is for the Federal Reserve to bludgeon the economy until the unemployment rate goes up — thereby taking the money back from all the nurses and firefighters who flew too close to the sun of prosperity.

Ferguson and Storm strongly disagree. They point out that “almost 90 percent of cumulative pandemic relief expenditure” occurred by June 2021. In fact, by the second quarter of 2021, the combined tax and spending policies at all government levels — local, state, and national — were actually subtracting demand from the economy. Yet inflation didn’t pick up until the second half of 2021 and didn’t truly get going until 2022.

Thus government aid to regular folks does not appear to have created a demand shock, in which everyone took their checks and began spending them on goods and services the economy couldn’t produce.

But, Ferguson and Storm argue, there in fact was a demand shock — just not demand from working people. From the first quarter of 2020 to the first quarter of 2022, they note, aggregate personal wealth in the U.S. went up by $26.1 trillion, mostly due to a skyrocketing stock market. Forty percent of this accrued to the top 1 percent, with another 33.4 percent going to the next 9 percent — meaning that about three-quarters of the increase went to the top 10th of Americans. And in late 2021, Ferguson and Storm write, “affluent Americans came out in force and started spending.” The economy could not in fact generate enough supply for what the rich wanted to buy. But the best solution for this kind of lopsided demand would have been progressive consumption taxes rather than broadly slowing the economy via the Fed.

Then Ferguson and Storm detail four supply shocks — i.e., problems that would have generated inflation even if the government had never sent any relief to regular people.

One was higher energy prices, largely caused by the war in Ukraine. Another was higher corporate profit margins. A third was the shrinking of the workforce due to Covid-19, as Americans were killed or disabled by it, retired to avoid it, or were forced to quit to take care of children as child care became all but impossible to find.


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Finally, there were higher prices for imports, caused by, among other factors, “the [Ukraine] war and climate disasters.” Regarding the climate, they point to reports by Swiss Re, one of the world’s largest reinsurers — that is, the companies that provide insurance for insurance companies. They are the final financial backstop in case of disasters and hence are keenly concerned about the costs of climate change.

Swiss Re estimates that total economic losses from natural catastrophes in 2021 and 2022 were $292 billion and $260 billion, respectively — far higher than the $207 billion average over the previous 10 years. There is currently a “trend of a 5–7% average annual increase over the past decade” in insured losses. One Swiss Re paper quotes an executive with the title “head of catastrophe perils” as stating that global warming is one of the “key factors at play.” Climate change, the company writes, “poses the biggest long-term risk to the global economy.”

Ferguson and Storm explain that while they “are cautious about extrapolating recent studies pointing to exceptionally high rates of losses from natural causes during the pandemic years … [t]he very hot temperatures of 2022 in particular are a warning.”

Their extensive rational examination of the past ends with rational suggestions of what to do going forward. They ominously describe the world as facing “a future of ramified supply shocks,” explaining that “the brave new world of supply shocks is likely here to stay for an indefinite period.”

This means that we need to focus on the reality underlying financial machinations rather than financial machinations themselves. For example, there should be a renewed push to stamp out Covid-19 and prepare for future pandemics. All efforts should be made for international cooperation rather than allowing the Ukraine war to be a harbinger of the future.

And because disease and wars will both flourish in a warmer world, we’ve definitely got to do everything possible to stop climate change.

In other words, if Ferguson and Storm are right, controlling inflation will require governments in the U.S. and elsewhere to be nimble, sophisticated, and willing to ignore their own elites — an extremely tall order. But if we want to avoid enormous suffering and reactionary politics, that will be what’s required. A first step will have to be regular people ignoring their elites and investigating these complicated subjects for themselves — and we could all do a lot worse than starting here.

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