Inflation or Paranoia

Josh Bivens has a good post at EPI on the so-called affordability crisis, making the obvious, but often forgotten, point that affordability is not about prices alone. It is about prices relative to incomes. That is, the price of gas, rent, or health insurance matters, but what matters even more is whether the income of workers has kept pace with the capacity of the economy to produce those things. In other words, the affordability crisis depends not just on the price level, but on the wages of workers, that have not kept up, over the long run, with prices.

This is also why the endless obsession with inflation as the root of all evil is so misleading. I have often noted, following the old Bruno and Easterly paper, that inflation below a relatively high threshold, around 40 percent annually, does not seem to have clear negative consequences for growth (see this post with a link to the paper). Their point was not that inflation is wonderful, or that prices do not matter, but that the conventional view that even moderate inflation is economically disastrous has very little empirical support. Excluding high-inflation crises, they found no consistent relationship between inflation and growth.

Incidentally, when I was at the Central Bank of Argentina and inflation was at around 25 percent per year (below Milei's average inflation, BTW), I often said that inflation was high, but no a problem, since wages were growing faster. In other words, the Very Serious People who treat 5 or 6 percent inflation as Weimar in the making are, as usual, confusing their ideological preferences with evidence.

The real issue with inflation is distributional. If prices rise, and wages follow, the consequences are very different from a situation in which prices rise and wages lag behind. In the latter case, inflation becomes a mechanism for reducing real wages and redistributing income upward. That was one of the central points of my old chapter on money and inflation, that the heterodox tradition, particularly the structuralist and conflict-inflation approaches, understood inflation as the result of unresolved distributional conflict, external constraints, bottlenecks, and institutional arrangements, not simply as too much money chasing too few goods.

The problem is not inflation in the abstract, but who has the power to protect their income when prices change. That is why Josh’s post is important. As he and his co-authors say: "US families’ feeling that life is less affordable than it should be is grounded in objective realities about how the economy has failed them." It's not simply a subjective perception. More or less what I suggested in this post. The affordability crisis is, in that sense, another name for the long wage squeeze.

Note that the paranoia about inflation will have consequences for policy making. Now that inflation increased a bit, as a result of the Iran War, and has remained a little bit above the target, the new Fed chair will a much harder time bringing interest rates down (that is if they do not increase instead). Wall Street anxiety's are more important than the realities of working class people.

PS. On the decrease in real wages see this piece on FT. 

Employment losses in historical perspective

My colleague Chris Magee sent this graphs around about employment losses during different recessions. The first one below show all the recession from the 1970s onwards.

The next one, which I modified to show just the Great Recession and the Great Depression, is below, and gives a sense of the dimension of the Depression.

The sheer size of the Depression is impressive. Even though the last recession is an outlier, it pales in comparison with the Great Depression. You can see in the graph very clearly the Roosevelt recession of 1937-38, and also the fact that the recovery was very slow, even though as one can see from the graph above the current recovery was also slow, by historical standards.

I'm not sure what lessons Chris derived from his graphs, but I would argue that is safe to say that both the macro interventions, the fiscal package and the alternative monetary policy(even if one might have criticisms about particular elements of both), and the more widespread existence of automatic stabilizers, worked very well and precluded another Great Depression. I would see that as some evidence in favor of the New Deal policies and institutions, which essentially were behind the macro policies, and of the importance of Keynesian ideas, which gave theoretical foundation to those policies.

Josh Bivens had a piece on EPI a few years back on the slow recovery which is still worth reading. Btw, his lessons seems to be that there was not enough fiscal stimulus, something that also explains to some degree the persistence of the Depression. I wrote, even longer ago, that one should also take into consideration the conditions of the labor market, and not just the employment recovery, to have a better picture of the economic conditions.

PS: I have done a similar graph with GDP losses comparing the US and Greece. That one indicates the costs of austerity (in Greece).

Josh Bivens With Another Reminder About the Stupidity of Austerity

By Josh Bivens

[...] there are multiplier effects, so if actual federal government spending was $118 billion higher today (that’s the gap between actual and “should be” spending identified), then overall GDP would be roughly $180 billion higher. So, the policy decision to pursue austerity is costlier (in GDP terms) than just the difference between government spending levels [...] Government transfers—Social Security, unemployment insurance, food stamps, Medicaid, Medicare—are not classified as government consumption and investment spending in the GDP accounts. Instead, they show up as increased consumption spending [...] Most of the political argument has centered on the recovery phase of this cycle, simply because the actual recession began before the Obama administration took office. Further, it’s really only been since 2011 that government spending has been a truly significant drag on growth. Before then, between the Recovery Act and what we have called “ad hoc stimulus measures” (like the payroll tax cut in 2010), we didn’t have real austerity until the fallout from 2011’s Budget Control Act (passed in the wake of Republican debt ceiling brinksmanship in summer 2011) began.

Read rest here.

Mark Blyth's book Austerity: The History of a Dangerous Idea is highly recommended.

EPI | Why It’s Time to Give Tipped Workers A Living Wage

By Sylvia A. Allegretto and David Cooper

Raising the wage floor for tipped workers is crucial for a number of reasons. Rising income inequality and the accompanying slowdown in improving American living standards over the past four decades has been driven by weak hourly wage growth, a problem that has been particularly acute for low-wage workers (Bivens et al. 2014). Tipped workers—whose wages typically fall in the bottom quartile of all U.S. wage earners, even after accounting for tips—are a growing portion of the U.S. workforce. Employment in the full-service restaurant industry has grown over 85 percent since 1990, while overall private-sector employment grew by only 24 percent.4 In fact, today more than one in 10 U.S. workers is employed in the leisure and hospitality sector, making labor policies for these industries all the more central to defining typical American work life. Ensuring fair pay for tipped workers is also a women’s issue. Women comprise two out of every three tipped workers; of the food servers and bartenders who make up over half of the tipped workforce, roughly 70 percent are women. Allegretto and Filion give an historical account of the tipped-minimum-wage policy and bring much-needed attention to how the two-tiered wage system results in significantly different living standards for tipped versus non-tipped workers. For instance, tipped workers experience a poverty rate nearly twice that of other workers. This contradicts the notion that these workers’ tips provide adequate levels of income and reasonable economic security.

Read rest here.

Bivens, Josh, Elise Gould, Lawrence Mishel, and Heidi Shierholz. 2014. "Raising America’s Pay: Why It’s Our Central Economic Policy Challenge." Economic Policy Institute, Briefing Paper #378. http://www.epi.org/publication/raising-americas-pay/

EPI | Raising America’s Pay - Why It’s Our Central Economic Policy Challenge

By Josh Bivens, Elise Gould, Lawrence Mishel, and Heidi Shierholz

From the introduction:

Slow and unequal wage growth in recent decades stems from a growing wedge between overall productivity and pay. In the three decades following World War II, hourly compensation of the vast majority of workers rose in line with productivity. But for most of the past generation (except for a brief period in the late 1990s), pay for the vast majority has lagged further and further behind overall productivity. This breakdown of pay growth has been especially evident in the last decade, affecting both college- and non-college-educated workers as well as blue- and white-collar workers.This paper argues that broad-based wage growth is necessary to address a constellation of economic challenges the United States faces: boosting income growth for low- and moderate-income Americans, checking or reversing the rise of income inequality, enhancing social mobility, reducing poverty, and aiding asset-building and retirement security. The paper also points out that strong wage growth for the vast majority can boost macroeconomic growth and stability in the medium run by closing the chronic shortfall in aggregate demand (a problem sometimes referred to as “secular stagnation”). Finally, the paper argues that any analyses of the causes of rising inequality and wage stagnation must consider the role of changes in labor market policies and business practices, which are given far too little attention by researchers and policymakers.

Read the rest here.

Josh Bivens: Nowhere Close: The Long March from Here to Full Employment

By Josh Bivens

The last official business cycle peak occurred in December 2007. After that, the economy entered 18 months of virtual freefall—with job losses averaging more than 750,000 per month for the worst six-month stretch. The official end of the recession was June 2009—and some have recently declared full recovery has been reached in the 54 months since, as 2013 per capita GDP finally exceed its pre-recession levels. However, for the very large majority of Americans who rely on paid employment for the vast majority of their income, recovery likely still feels very far off. And they’re right—by any reasonable definition the United States is far from having reached a full recovery. That’s because simply clawing back to the per capita income level that prevailed before the start of the Great Recession is far too low a bar to clear to declare mission accomplished on recovery. The reason for this is simple: Joblessness (and the sapping of bargaining power that accompanies its rise even for still-employed workers) rises whenever a gap develops between the economy’s underlying productive potential and aggregate demand for goods and services. The intuition here is simple: A given number of customers’ demands can be satisfied with fewer people as each incumbent worker becomes more productive, and each new potential worker (new graduates, for example) seeking to enter the workforce will only be employed if there is extra consumer demand for what he or she produces. So, demand has to rise in line with the economy’s productive potential in order to keep joblessness from rising.

Read rest here. 

EPI: Recovery Fails To Reach Escape Velocity in 2013

By Josh Bivens

We now know that the U.S. economy grew at a 3.2 percent annualized rate in the last quarter of 2013, and grew 1.9 percent during all of 2013. This is simply too slow to generate a full recovery from the damage inflicted by the Great Recession in a reasonable amount of time. Too many policymakers seem eager to move on to other economic issues, but the necessary condition for addressing almost every other economic challenge—be it boosting job quality or increasing opportunity or checking the rise of extreme inequality—is a return to full employment, and that should be the nation’s first priority.

See rest here and here

Despite Upshot in Employment, No Real Changes in Long-Run Trends

Source: EPI's analysis of Bureau of Economic Analysis National Income and Product Accounts (Table 1.1.1 and Table 1.4.1)

By Josh Bivens

The Bureau of Economic Analysis (BEA) reported today that gross domestic product (GDP)—the widest measure of overall economic activity—grew at a 2.8 percent (annualized) rate in the third quarter of 2013. This was a slight increase relative to the second quarter’s 2.5 percent growth rate. 

However, there is little reason to celebrate today’s GDP numbers. For one, they remain disappointingly weak for an economy with so much productive slack. Further, growth in final demand—GDP stripped of the contribution of volatile inventory investments—grew at just a 2.0 percent rate in the third quarter. This arguably better indicator of underlying economic strength indicates that growth in the second quarter is essentially on the same disappointing trend that has characterized most of the recovery phase since the official end of the Great Recession. Additional evidence that third quarter growth was insufficient to soak up the economy’s productive slack is the continuing very low rates of core inflation measures. All in all, this is a status quo GDP report, and it clearly remains the case that the economy needs further support from both fiscal and monetary policy to generate growth sufficient to spur real improvement in the U.S. labor market.

See rest here.

By Heidi Shierholz

The jobs report released this morning by the Bureau of Labor Statistics showed the labor market gained 204,000 jobs in October, along with an upward revision of 60,000 to prior months’ data, bringing the average growth rate of the last year to 194,000. There appears to be no discernible impact on the payroll numbers of the partial government shutdown in October; in the payroll survey federal employees on furlough during the partial government shutdown were still considered employed. Importantly, the labor force participation rate dropped 0.4 percentage points to its lowest point of the downturn, 62.8%. The unemployment rate was little changed in October, ticking up slightly to 7.3%. The partial government shutdown may have played a role in the unemployment numbers, since federal employees on furlough during the partial government shutdown should have been counted as unemployed on temporary layoff in the household survey.

See rest here.

Austerity, Not Uncertainty, Is the Scary Part of Fiscal Shutdowns

There is a general consensus that annual fiscal policy fights hurt the economy’s recovery. Many people, however, get the story quite wrong. It has nothing to do with 'uncertainty'; rather, it's the unfortunate fact that the brouhaha, in the final instance, leads to smaller budget deficits, i.e. 'austerity', significantly diminishing the level of effective demand.

It’s austerity that is reliably damaging to recover efforts, not uncertainty. And each year’s fiscal drama has tended to produce another dose of austerity. The very large reduction in the budget deficit between 2009 and 2012, combined with the extraordinarily slow pace of recovery over this same time period is not a coincidence. This should be a lesson to evidence-based policymakers: You should be much more worried about accepting more austerity as the price of ending the fiscal drama than any damage caused by the drama itself.

See rest here .