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Larry Summers And Stimulus, Manufacturing And Inflation

Mar. 03, 2021 12:21 PM ET6 Comments
Tim Worstall profile picture
Tim Worstall


  • Larry Summers has been warning about too much stimulus - he thinks $1.9 trillion is too much - because it might well bring inflation back.
  • Manufacturing output is soaring and significantly adding to inflationary pressures in the sector.
  • I've posited before that inflation might make a comeback, we need to be ready for it if it does.

Manufacturing capacity and inflation

We have the purchasing managers index for manufacturing for the US and it's booming.

PMI(US manufacturing PMI from IHS Markit)

Well, that's OK, we like booms, it means we're all getting richer. We don't, however, like this part:

As a result, goods producers registered a severe uptick in cost burdens. The rate of input price inflation accelerated to the sharpest since April 2011. Higher raw material prices, notably for steel, and increased transportation costs were widely linked to the rise.

Costs are going up as well, that's inflation. The problem with this isn't, in fact, that it just means the value of that money we're earning is going down. Rather, it means that if inflation really does come back then someone is going to do something about the inflation. That is, they're going to curb the growth of the economy to get rid of the inflation.

As a general rule we think that, over time, steady growth will beat boom and bust. Because that curbing the inflation takes its time and so we miss out on some of the growth we could have had in a more sober manner.

OK, but that's just manufacturing

It is indeed true that this cost inflation is as yet only in manufacturing. As we all also know manufacturing is only 10% of the economy so we can have 10% inflation there and end up with only 1% over everything - below our target rate in fact. No, of course, it never does work out that way but it is important to recall that manufacturing is only a fraction, a small one, of the economy, not the be all and end all of it.

Unfortunately when we look at the Flash Composite numbers (services and manufacturing, but an incomplete survey) we see the

This article was written by

Tim Worstall profile picture
Tim Worstall is a wholesaler of rare earth metals and one of the global experts in the metal scandium. He is also a Fellow at the Adam Smith Inst in London and an writer for a number of media outlets, including The Times (London), Telegraph, The Register and even, very occasionally indeed, for the WSJ. This account is linked with that of Mohamad Machine-Chian: https://seekingalpha.com/user/52914142/comments

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