Putting aside the obscuring factor of so-called fiat money, there is always that old idea that a reserve army of labor ("the unemployed") is a necessary cudgel against workers, who may otherwise struggle for a greater percentage of the wage/profit split.
1980 - USpop 227 million.
2018 - USpop 327 million.
Interesting numbers which basically and intricately explain everything.
Question. Has the death rate been inflated?
In the 2008-present period, have you accounted for the structural change in the work force? The financial crisis coupled with demographics saw many workers exit the work force. Secondly, have you accounted for the vast amount of monetary easing? Wasn’t the Fed doing everything it could to prevent disinflation (and doesn’t the chart represent a passing grade in that effort)? Is your core point unchanged by whatever data distortion might exist from these factors, or do you dispute any distortion from these factors? Thanks.
A more timely question: How does high middle-class unemployment and sanction-induced hyperinflation affect regime stability?
Hyperinflation is not generalizable across cultures. In Germany, high inflation means 3 percent/yr, in Argentina, 6 percent/week. In Latin America, hyperinflation is the rule. By contrast, Iran, in 2012, manipulated the inflationary effects of Western sanctions so they narrowly targeted Iran's greatest domestic threat—the educated Iranian middle class while sparing the politically-important lower classes.
Foreign exchange is transacted in open currency markets. In Iran, however, dollars are supplied to the economy from the government's oil sales to the West. This allows Iran to effectively value the rial at whatever it wants against the dollar—as long as it still has dollars. It has the rial on a "multiple exchange rate" system, which allows Iran to subsidize the prices on essentials, like food, keeping them affordable for the lower classes.
If Trump intensifies sanctions and specifically blocks the sale of Iranian oil to the West, Iran's dollars will dwindle, and the rial and the lower classes will become susceptible to hyperinflation. Conversely, Iran’s higher education system is in crisis, producing far more college graduates than the domestic economy can absorb. An educated, idle, restive middle class and hungry lower classes make especially determined revolutionaries. IOW, 2018 is not 2012.
2
"The thing is, the Fed and other central banks still basically operate with an accelerationist framework. When will they adapt to reality?"
The answer apparently is, "Not anytime soon." I suspect that many economists are influenced by the general conservative media's harping since 2009: "There's too much money flooding into the system. Inflation will run rampant through the economy, creating havoc and ruining the economy."
Never underestimate the influence - conscientiously or unconsciously - of popular but uninformed "conventional wisdom" as espoused by the untrained. [Yes, that means you, too, Larry Kudrow.]
2
Great and timely piece. Economists actually are the opposite side of the 'this time is different' approach favoured by people in finance and investment.
Economists believe (read 'have faith') that each time is the same as the last time.
The planet is now awash in production capacity, automation, AI, and cash that is begging to be invested. New consumers arrive by the millions in several dozen countries every year.
Now what?
A good start is to admit what we don't know.
4
Reality would mean you can explain the difference between the two historical epochs in the two graphs, and can apply that explanation to the current situation. You did neither.
The problem could be how we measure unemployment. Reagan and Clinton changed the definition to make out look lower. Never mind underemployment.
I'm guessing the true number to be close to 7%, which explains why inflation is low.
2
This may have been raised in earlier comments but would the reduction in employment induced inflation by due low a rise in low paying insecure jobs? For nearly three decades since the eighties jobs for the poorest third of developed nations have had their wages suppressed. Consumer demand inflation and wage inflation has therefore been kept lower than it was up to and during the eighties when labour had more clout. Offshoring jobs helped in this process, both exporting wage suppression and reducing power.
1
Dr Krugman says:
"If this cycle [after 2008] had produced an 80s-level disinflation, we’d be well into deflation by now. Instead, inflation is also pretty much back where we started." (https://www.nytimes.com/2018/05/06/opinion/unnatural-economics-wonkish.h...
My question is why according to acceleration view we should see deflation?
I am really confused about it. I would be really grateful if someone could explain it.
Unemployment is not evenly distributed, At lower levels, the unemployed are populated with the unemployable. It is not clear how employing the unemployable creates inflation, let alone accelerating inflation. Nor is it clear how the unemployable turn a supply economy into a demand economy moderated by interest rates. Perhaps at low unemployment workers move, and movement heats up the economy, regardless of interest rates.
Is this the kinetic theory of inflation?
Krugman seems to think the laws of nature have changed. Laws of Gravity, Motion and Thermodynamics and Economics, no longer apply. Sorry to let him down but really nothing has changed except the environment we are living in. Today, more than ever, the world is a single economy and while we have full employment in the United States; Africa, and parts of Asia and Latin America have more that 50% unemployment. This explains wage stagnation in Europe and the United States. Giant trade deficits show transfers of jobs overseas. Discoveries of natural resources and new technologies have resulted in a real decline in the price of natural resources. We are paying for this change in environment with the threat of Global Warming and its potential consequences. These consequences may be nothing and they may result in the end of the human race. Stay tuned and we'll find out. On a more immediate note, the depression of wages and the pressure on the American Middle Class explains the rise of Bernie Sanders and Donald Trump. We also see the rise of a new class of a few thousand billionaires who want to rule the world. But the laws of economics haven't changed. Give it time and balance will return and the old relationships will reemerge.
2
I don't believe the unemployment rate. People who reach retirement age and qualify for social security may continue to work or not. If they actually retire, they are not considered unemployed. Women may decide to stay at home if their husbands can make enough money. They are not counted. And finally, a large number of low-paid workers have a job, but don't earn enough to live. They actually qualify for food stamps. They keep the unemployment rate low, but what kind of job is that. My point is that none of these examples include Americans who are thriving economically. Inflation takes off when people are doing well and have extra money to spend. Some fit in this thriving category, but many do not.
6
If you look around the world, it isn't totally unprecedented to have a combination of low unemployment and low inflation. Switzerland has had unemployment in the range 2 to 4 % for the past twenty years, with inflation well under 2% during that time. Switzerland has been showing deflation since about 2009, with unemployment in the 3-4% range.
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From the mid-70s until 1990, Swiss unemployment was well under 1%, according to numbers from the OECD. I don't know enough about Switzerland to say if that was real or a statistical fluke. Inflation during that period was in the 1 to 6 % range. So very low unemployment did lead to higher inflation, but not nearly as much as you might expect.
1
Links to FRED charts showing Swiss unemployment and inflation.
https://fred.stlouisfed.org/series/FPCPITOTLZGCHE
https://fred.stlouisfed.org/series/LMUNRRTTCHQ156S
The FRED blog briefly commented on Switzerland's anomalously low unemployment rate and ended by saying, " the Swiss secret hasn’t been conclusively explained and needs further study." The FRED blogger pointed to Switzerland's unusually flexible labor market as a potential explanation.
https://fredblog.stlouisfed.org/2014/06/the-peculiar-swiss-unemployment-...
There are a few MSAs in the US that have also had low unemployment and low wage growth for a while. Lincoln, NE, is a small college town of 280,000. It has had unemployment below 3% since 2014, with a current rate of 2.6%.
As of May 2017, wage growth seems to be about 2.2%. So even sustained low unemployment doesn't seem to be producing much wage growth.
Is it possible that the "death of accelerationism" can be tied to the decline (death?) of labor unions since 1980? Unions could take on big corporations and force them to pay decent wages and benefits to their workers who, individually, had and still don't have much bargaining power?
In the '50s and '60s, Unions were strong and the economy was booming because the working class had money to spend on homes, furniture, cars and the rest. CEOs then earned something like 40 times more then their average worker. Now that ratio has exploded to the many hundreds. CEOs and investors are doing great. The rest of us, not so much.
7
I think Paul should explain why, because it's a fairly straightforward explanation. 1) There is still a global oversupply of manufacturing capacity. There are still plenty of places where workers can be hired for $5 a day. 2) Commodities are sourced globally and prices are hard to fix. 3) Manufacturers adjust at rocket speed -- if a commodity gets too costly, products are redesigned to not need it -- and the redesign cycles are faster than ever. 4) Even if some things get more expensive, competition is so ferocious that many, many goods are still dropping in price as people find cheaper ways to make them.
2
Problem solved: “ core” inflation is some rigged bourgeois eco-math concept that does NOT factor in my grorcey bill which increases weekly even though I’ve cut my calorie intake to 1500.
5
Despite all of our efforts to be scientific about the economy, things like unemployment are somewhat subjective because it is derived by a survey largely due to their not being sufficient or timely hard data. Inflation is somewhat based on hard data but the “market basket” used to determine what is, and more importantly is not, included in the calculation has significant implications. What if inflation included the cost of medical care based on medical Charge Master data? Keeping in mind that medical care is almost 20% of the national economy, why is it not in the market basket?
The economy is part of the human experience and therefore subject to a lot of emotional input. While I may be objectively fine in an economic measurement, I may not “feel” fine, in fact I might feel pretty lousy depending on who and what I’m listening to and reading.
Finally there are those with a vested interest in manipulating our feelings about the economy and in the Post-Freudian Age, they are quite adept at getting a lot of us to express the feelings that they desire to have considered as solid fact (like taxes are, and always will be, too high).
4
Implied inflation expectations seem to move with expectations of future central bank policy rather than expectations of growth and unemployment.
This tells me that, unless the methods for calculating inflation expectations are systemically wrong, or markets are systemically wrong, or my perception of market drivers is just wrong ... its the Fed model that is wrong.
They don't seem to realize that they've won the battle to control inflation. They are stuck in last war syndrome, fighting 70s style stagflation even when inflation has hovered below target for the better part of a decade. They seem not to realize how dominant their expectations setting capability over core inflation in the medium to long term.
It's frustrating because the result of their misperception has been a decade of weak recovery and slack labor markets. Inequality rises and a generation of workers is left scarred, because the Fed erroneously thinks that fast rising wages might set of an inflationary wildfire.
2
The graph tracks unemployment (however defined) against core inflation, but what about expected inflation? Isn't that an important driver of unemployment?
The terms unemployment and inflation need to be deconstructed and their components graphed to analyze what is happening. If that fails to identify the anomalous variable, then one can declare the death of acceleration.
1
I also don't know when the Fed will adapt to reality (here, Dr. Krugman, your guess will be better than mine). But I do believe this particular question -- the "natural" rate of unemployment--will persist until professional economists realize that it is a false question.
As I argued in this column last week, there is no relationship between unemployment and inflation. And there never has been.
There can appear to be one in the following scenario: 1) an economy enters a period of expansion & optimism (for whatever reason - recovering from a recession, rebuilding after a war, exploiting a new technology, etc), 2) business leaders will not only expand output to meet increasing demand, they will experiment with raising their prices (THIS is the root mechanism of inflation- people in a position to set prices decide to raise them), 3) formerly idle workers now get jobs to meet increasing demand, and 4) ONLY when the previously unemployed are back to work will employers have to compete for labor by raising wages. Thus, it will appear that low unemployment triggered inflation when actually the relationship is the reverse.
We cannot divorce economics from human psychology & behavior. They are the only true "market forces." And our psychology definitely includes biases. As Dr. Krugman has repeatedly argued in his column, many economist just don't seem to like working people. The conventional wisdom that gainful employment must somehow lead to inflation is not just wrong, it's sick.
3
@ Jesse the Conservative,
Labor defined as a commodity needs further refinement. In slavery, the slave owner buys the whole human being. In the capital relation, the capitalist does not buy the whole human being; otherwise, your ideas of freedom will quickly collapse. In the capital relation, what the seller (in this case the commodity owner) sells is her capacity to work. Smith made the mistake you keep on making and his value theory of labor bogged down. Marx who was not a liberal advanced the concept by defining labor power as the commodity sold in the labor market. The price of the commodity varies according to several factors including the price of other commodities necessary to produce and reproduce that labor power like education, food, housing, utilities, clothing and so on. So workers have the double freedom: freedom from the means of production (initially land ownership and then the factories and other forms of capital) and freedom to sell their labor power when a buyer is available to buy it. Neither you or Krugman work with this definition
There are myriad reasons that wages, unemployment, and inflation no longer seem to be coupled in accordance with the dogma taught to our economic leaders. The problem isn't the reasons, it is the fact that economic leaders control monetary policy based on useless historical factors.
Control of items like quantitative easing and interest rates need to be adjusted according to 21st Century reality, not historical 19th Century theories. Real damage has been caused by these activities.
Extremely low interest rates, for example, have created a world in which companies can produce more income for their shareholders by borrowing money to buy back their own stock than by investing in factories and jobs. Thus the low interest rates, rather than strengthening a weak economy have buoyed the evils of inequality.
Economic leaders MUST close their 1980's text books and respond to the realities of the 2018 world.
4
To begin with, I accuse ignorance and bafflement at this dubious science called Economy, where we expect, foolishly, a rational approach to an emotional issue. Expecting a more equitable social justice by lowering taxes no matter what (republican rigid ideology ans appeasement of their rich donors), and doggone stagnant wages when unemployment comes down, is a matter of speculation, at least as long as solidarity with the least among us is absent. Paul, all your graphics, interesting as it may be, is clear as mud to me. I guess some of us need a basic course in functional literacy insofar finances are concerned. Is it any wonder that a brutus ignoramus, the current occupier of the Oval Office, is able to demagogue things to add to our confusion, a trickle down economy we thought went extinct with Reagan? And now your graphics confusing data of unemployment and inflation 'reconciliation as a matter of fact?
3
My reality is a very poor grasp of economics. I love Krugman. Still, I wonder, does raising interest rates keep me from getting. raise in my wages? As I recall, raising interest rates is necessary, and it had a secondary effect of keeping wages where they are. (I read the "stickiness" of wages, and it is because people are a half paycheck away from homelessness. )
2
Historically labor force participation has behaved cyclically in the midst of a slightly declining trend. Participation tends to fall during recessions and rise during recoveries as job prospects improve. But in the current economic cycle the participation rate fell during the recession and continued falling.
As a result, the jobless rate has fallen more quickly and by a larger amount than would be expected if traditional patterns prevailed. Depending on the reasons for this collapse in participation, the fall in the published jobless rate from over 10% at the recession's nadir to 3.9% currently could be giving a false signal about the condition of the labor market.
There are many explanations for the decline in labor participation including gender and demographic factors. Here though we focus on an institutional phenomenon than may be in effect, namely and explosive rise in disability rolls since 2007. Has the American workplace suddenly become a much more dangerous place for working age males?
A segment on CBS "60 Minutes" quoted employees of the Social Security Administration and administrative law judges who asserted that lawyers are recruiting millions of people to make fraudulent disability claims. One such judge said "if the American public knew what was going on in our system half would be outraged and the other half would apply for benefits"...."
https://seekingalpha.com/article/3342635
3
Maybe they're letting the marginal claims go through because the economy needs a way to get money to people, to avoid starvation, criminality, and revolution, but it doesn't need them to work. It might be a hidden redistribution system.
1
Many, including some Federal Reserve officials have expressed bewilderment as to why labor force participation has not recovered as it had in prior recessions. I would suggest that for some the answers can be found in the spam folder of their email accounts.
The spam folder in my email account contains numerous emails from attorneys promising that they can get me disability payments. If the labor force participation rate, especially for prime working-age males ages 25-54, had followed its typical cyclical pattern, the unemployment rate would now be well above 5.0%. The headline U-3 unemployment only counts those actively seeking work as in the labor force and unemployed.
Aren't we becoming more like Japan where an aging population coupled with a relatively low birth rate has produced a low unemployment rate which is increasingly meaningless as far as predicting inflation?As more and more people retire and thus leave the employment statistic they(the retirees ) spend less.You have too much supply chasing too little demand and therefore the rate inflation is lower than you would expect.Increasing the wages of the top 10% can't counter this loss of spending power.
1
The businesses I know are stubbornly focused on increasing percent operating profit rather than absolute operating profit. They are willing to forgo growth if would result in the slightest reduction in percent OP.
Wages can not rise for as long as the largest employers are committed this way. There just aren't very many growth ideas that have a greater value than the average value of all previously implemented ideas.
What would happen if corporate taxes were based on percent OP rather than absolute OP.
2
Collusion among employers both overt and covert. HR managers are economically incentivized to NEVER raise wages. They all talk to each other. It's not so much a conspiracy as a "general understanding" that you do NOT engage in wage wars.
This is why I think the recent tax cut will end up being DEflationary as companies use the largess to cut prices.
2
Another reason for stagnation in real wages, to put it bluntly, is that many are essentially giving up what could be considered "ill gotten gains". The wages of unionized teamsters and airline employees have declined in real terms as compared to what they were before airline and trucking deregulation. Airlines and trucking were regulated by the Federal Government. The industries and the unions used their political power to keep airfares and trucking rates far above what free-market prices would be.
To ship a certain load of goods from New York City to Buffalo, New York a road distance of 373 miles there was a certain free market rate. It cost more than double that rate to ship the same goods by truck from New York City to Philadelphia a distance of only 97 miles by road. Likewise the cost to ship from Los Angeles to San Francisco a distance by road of 382 miles was less than half the cost of shipping the same goods Los Angeles to Las Vegas.
Before deregulation Airline fares on non-regulated intrastate routes like Los Angeles to San Francisco and Houston to Dallas were much less than regulated interstate routes that were shorter in many cases.
No matter how low the unemployment rate gets, it is unlikely that wages for truck drivers and airline employees will return to the real levels that existed under regulation.
The Federal Reserve's fear that a low unemployment rate will result in excessive inflation may be unfounded. .."
https://seekingalpha.com/article/4110727
Jeff Bezos rose from middle class in the early 1990’s to the world’s richest man, at around $130 billion, today. He’s caused a lot of people to change to lower paying jobs but probably hasn’t had much impact on the unemployment rate, overall. His company, however, has had a powerful deflationary impact, through price and quality transparency and competition.
We seem to be moving toward an economy where robots do the work of making and distributing necessities, people receive income through stock gains and have jobs mainly for social reasons.
Until stock gains are distributed more widely, we can expect inflation in Picassos but not so much in a basket of consumer products and services.
4
From a total economic novice: Could this change in inflation/employment relation be an indicator that this connection is spurious? The real relationship is between inflation and wages. Employment is only relevant as far as working income and spending goes?
1
Perhaps it is not spurious, but oversimplified. Factor in the cost of housing consuming money that would be spent elsewhere, commodities deflation, demographics, online shopping, and probably many other things as well, and you get an equation that is too complex to balance.
I came across a remark today that resonated: don’t take real estate advice from anyone who has financed a property in the last 30 years. Interest rates are so low, historically, that someone getting into real estate today would have to have years of negative interest rates to make the same kind of money.
When the men in grey suits, who are still fighting the battles of their youth, are replaced by other men in grey suits fighting their battles, then the arguments will change.
Maybe Paul needs to plot total consumer debt and median wages along with inflation and unemployment. The average wage earner probably had more savings and more fall-back provisions in the ‘80s than now. People now are making less than the ‘80s (no matter what the CPI says), their credit cards are maxed out, their adult children are already living with them (and perhaps their elderly parents), and corporate/political policy actively preys on consumers to the point where they have to fight continually just to get what is rightfully theirs.
There is no way that demand will increase in this environment where there are no wage growth and workers have no means to secure increases.
5
It would worth putting the price of gasoline on that chart as well. 92/93 octane is in the $3.50/gal range here in CT and increasing by the day. My future chart reads unemployment up a couple of points by this time next year.
1
When pure market forces are distorted by exceptions, it seems many of the "natural/reaction" patterns are distorted. Big time. When low-end salaries in times of low unemployment are still suppressed by greedy employers, when pharmaceutical prices in times of higher competition are still raised by the greed of Big Pharma, when middle Americans' salaries remain static when unions are disabled by big corporations, the "hand" of the market is tied in knots. Sounds like a job for government to do something about the distortions. IMHO.
2
gasp! you mean the government, OUR government, might be part of a solution, and not always a problem?
heresy! what would that do to my pending quarterly bonus or the story we tell to hookwink the voters?
3
Nobody wants to deal with reality. It's untidy, unruly, and doesn't keep up with received wisdom. You have to watch it every second.
Faith-based policies are much easier to administer. What matters is how hard you believe, not pesky facts or inconvenient results.
5
The softer the science, the harder the ideology.
4
Organized labor still had a lot of clout in the 1980s, but is vastly diminished now. Could that be part of the explanation?
3
Any analysis of inflation that ignores out the price of housing is a fantasy.
I still believe that the crash of 2008 happened because foreign competition put downward pressure on wages. The lower wages put downward pressure on housing, which was over leveraged.
Free markets are supposed to adjust to changing realities. However the decrease in housing prices was greater than the headroom in the mortgage industry, and this caused the banks to fail, and the government spent a trillion dollars (more or less) to save them.
Factor in the cost of housing, and the two lines in the lower graph would cross, probably somewhere around the middle of the page.
How can you use the phrases "low inflation" and "housing recovery" in the same phrase without a dose of cognitive dissonance?
2
". . . the Fed and other CBs . . . operate with an accelerationist framework." I assume that means their policy decisions incorporate fairly long term forecasts which incorporate accelerationism theories?
It raises the bigger question, Are the long term forecasts themselves, with or without "correct" accelerationism theories, a fool's errand? Would the CBs do better to forgo them, shorten their planning horizons and make more quicker/smaller adjustments based on what is actually known?
1
When you have two examples 20-30 years apart, that show different curves on a graph, have you described "reality," Dr. Krugman? Or have you just demonstrated that the next "reality" that comes along may look different that what the first two led you to expect?
Come back to this graph a year from now and update your thoughts, please.
Headline inflation at 3% to 5% in a year or so .... ??
1
"When will they adapt to reality?"
Never! Unless, of course, if they have their salaries reduced by 50 % and given the other 50 % as a bonus, if they adjust to reality in their policies; like in Singapore with the Secretaries of Halimah binti Yacob .
When economist talk about wages, is it the overall average or are they comparing wages for each job category over time?
If it is the overall average, then I would expect wages to be rising less as good paying factory jobs are lost and people have to work minimum wage jobs.
That could be related to inflation if people have less money to spend, companies can't raise prices.
It also could mean that product costs are not going up as much because employment costs are not going up.
Yep the high priests at the Fed continue to have their heads buried in their DSGE models and their equilibrium, mean-reverting assumptions. El Erian made a great speech about this
https://www.bloomberg.com/view/articles/2018-04-27/why-innovation-tends-...
In essence all real world considerations are stripped out of the models in order to meet the conditions required by their framework to produce answers. Far worse than useless, dangerous. The cost of this mistake in terms of lost jobs and output is staggeringly high, to say nothing of the political cost.
1
Perhaps we need to see the death of the unemployment statistics as they are currently calculated. The more people who drop out of the labor force, the lower the rate goes. That surely leads to screwy relationships between unemployment and inflation. It's time we went to a simple, more accurate measure: percentage of adults who are employed full-time.
7
Good point. I would add regular full-time as a qualifier. The gig economy shouldn't count as total compensation is significantly reduced.
1
Yes, the gig economy is now calculated at 34%. Should be 43% in two years.
If you walked into an auto dealership in 1985 and said "I'm looking for a vehicle that will last me 25 years that I can drive for 250,000 miles, be extremely dependable, and over those 25 years be relatively inexpensive to repair and maintain" they would have laughed you out of the showroom. Today, this is the standard. I own a 2005 vehicle I bought new in 2005 that has 130,000 miles today that has cost very little to maintain over its 13 years and according to my mechanic will last indefinitely, as he just said to me recently "the car is in perfect condition, there is nothing wrong with it". I am 59 years old, is it possible that I in 2005 I purchased the last car (new or used) that I will ever own?
I'm old enough to remember when things like cars and televisions and kitchen countertops wore out and had to be replaced. Not anymore. If my 2005 car will last a very long time still, just think how long it will take for me to wear out my granite countertops? How does that effect inflation and unemployment?
7
My great grandfather bought a toaster and a refrigerator in the '20s. They both still work. In cynical moments I blame them for causing the depression.
3
Too wonkish to have had a y-axis on the right for fed funds rate?
2
Which unemployment index? There are several. Which inflation items are considered; the only ones that count are those in short supply, like sweet oil.
Also, a chart developed in the 1990's would show the growing influence of AI in industry. This really took off in 1995. Something like 80% of the jobs in manufacturing disappeared because of AI. This has a strong influence on core inflation. Before the 1990s, inflation was linked to re-employment after a recession. After AI, inflation is unlinked: robots don't buy new cars.
5
That reminds me of the cartoon where a factory owner is bragging about the robot that's building his cars. "He doesn't take breaks, doesn't need medical care, and works for free." The skeptic with him says "he'll never buy a car either."
5
This knocks us into the socialism argument again. Since these companies are eliminating jobs shouldn't they be taxed to provide for a minimum living wage (reference Robert Reich).
Capitalists will argue that this is unfair. Here's a thought. WE allow them to set up shop in OUR society. WE can reduce their rights to trade because WE are flesh and blood. The current form of capitalism is as much a failure of true capitalism as communism is a failure of socialism. Both are a far mark from what Marx and Engels envisioned.
But it would correct itself. Innovation isn't made by robots. It can never know what humans ever changing desire are. You might have automate the creation of the first iPhone but you still need people to dream up the second, third, fourth version.
For the acceleration theory to hold, it seems logical that the underlying structure of both variables need to remain the same or have changed in the same manner.
With increased globalization, advances in technology, weakening of private sector labor unions, and shift away from goods production to services in the economy, both the structure of the goods and service markets and labor markets have significantly changed over the last 30 years.
With these changes, it is not surprising that the concept no longer holds. As you state the real problem is not that the concept is faulty but that policy is based on a misguided principle not unlike mercantilism policies of the past.
2
Have we got the cause and effect reversed. Is the unemployment rate a symptom of inflation and not a cause. Obvious if prices are inflated and people's incomes have not moved in stride they will buy fewer items while spending more. Demand will go down and manufacturers will layoff people. Since we manufacture less of what we buy in the USA anymore, fewer will lose jobs in the USA if demand goes down.
2
Forgive me if you've already read my argument in the previous column. I'd like to expand on the subject though.
I think we're safe in saying a relationship between unemployment and inflation can exist. Minds smarter than my own have established this principle. However, if we approach this problem from a modeling perspective, unemployment is really a proxy for what we're actually trying to measure. Wage growth and inflation should demonstrate an acceleration effect. Unemployment should impact wage growth. Therefore, unemployment and inflation share a correlation through wages. But that's not what's happening.
Wages have been decoupled from unemployment. As a result, inflation no longer reflects the acceleration principle either. The question I posed before is: Why aren't wages responding to low unemployment? If you solve this problem, you solve the mystery.
Here's one guess: Some labor markets are tight enough to skew the national average so wages look flat. However, other sectors are actually experiencing wage deflation or possibly annihilation through capital substitution or foreign competition. I can't say from an aggregated graph. We'd have to start digging through the BLS by industry and region to get any clear sense of what's going on. That's my guess.
4
I think the factor being missed is the rate of invention of labor saving machines. High rate means the employed are working at lower skill levels. Low rate means that businesses must employ higher skilled workers to increase productivity, and pay them more. The simple employment rate doesn't tell the whole story. Since the invention of the microchip we have had high rates of invention and interests rates have been falling steadily.
1
Dark matter in the universe has not been directly observed, but it is implied from a variety of effects that cannot be explained otherwise.
Dark matter in the economy cannot be directly observed, either, so it must be implied from a variety of effects that cannot be explained otherwise—like the changing relationship between unemployment and inflation that Krugman puzzles over.
No doubt a significant portion of this economic "dark matter" is the shifting power balance between capital and labor. If true, this becomes a political issue, not an economic one. Can the power of the unions be restored, for example, and if so, how?
Just some musings.
22
The baleful force of monopsony is the dark matter of economics.
2
Hey Krugs, how about an article explaining why my take home pay was slashed under Bush/Obama and has never recovered?
4
It is an interesting comparison - one wonders how the context was different between 1980-88 and 2008-16. The key difference seems to be the starting point of core inflation. Over 8% in 1980 versus 2% in 2008. Do we have a situation where accelerationism does not apply at lower core inflation levels because prices and wages are sticky downward? In 1980 wages and prices decreased because if they are unchanged inflation reduces them. This cannot happen in 2008. In sum, context matters for when mechanisms (accelerationism) work.
1
A better word for 'Accelerationism' might be 'hysteresis'. It embodies the notion of both system lag and overshoot.
Still, reading the discussion, I am reminded of Eisenhower's cry:
"Would someone please find me a one armed economist!"
<on the one hand.... and on the...oh, wait >
We have a language problem, which is affecting economic understanding on the part of both politicians and the electorate.
The media, NYT included, conventionally regurgitate the quarterly economic report... which inevitably states quarterly growth in annualized terms. As if this past quarter will hold the rest of the year.
The economy didn't grow at a 2.5% rate in the first quarter...it grew on the order of .67%.
The next component journalistic fuzz...that number, whatever it is, is variously thrown around as 'economic growth' and 'inflation'.
In reality, we have an economy that has been limping along, as are many other national and regional economies. Most are buoyed by monetary policies which keep the cost of money low.
One major global shock, and we could easily slide back into recession. Disturbing trade relations with our major trading partners...NAFTA, TPP... China... could easily be triggers.
Unfortunately, the present occupant of public housing on Pennsylvania Avenue has no concept of unintended consequences.
1
In answer to your last question, when we replace the Fed with robots.
Using precisely measurable but only marginally relevant quantities to draw conclusions could be part of the problem.
There *was* a dramatic spike in prices in 2008 -- in fact, it was a precipitating factor in the Great Recession. "Volatile energy and food prices" (i.e. energy and energy prices) are excluded from "core" inflation, so you can't see the inflation spike I the graph (remember oil at $147/bbl?). But actual people need energy and food and suffer from inflation in those critical commodities.
Similarly, the crude measure of unemployment in these graphs conceals much. The steady decline in the real minimum wage and the drop-off in the labor participation rate make it harder for people to consume and help to keep inflation down even while "full" employment is approached.
3
They adapt to reality alright, but its political reality not economic reality. The Fed appears to look at the economic climate and make adjustments based on how they think investors will react to their changes in interest rates. It matters not if investors understand economics the way PK does, they could be dead wrong (and frequently are) but the Fed will still honor investors' opinions.
1
It seems important to look at union participation in the 80’s (about 30%) vs today. Back then unions received COLA adjustments automatically. So if inflation ticked up, they got an automatic raise, companies passed on the cost and inflation went up some more. Could that be a big driver of accelerating inflation in the 80’s?
3
Making the highest and best use of his time at that "dismal" table.
2
TL;DR
Summary: Economists don't know how the economy works.
Which is not exactly news, for anybody who has been paying attention.
4
Perhaps human nature does resemble the weather, subject to unpredictable fluctuations. Only Marxists consider economics a social engineering science.
2
Human nature is certainly not as natural as you believe. It is socially created by humans themselves through their interaction with nature. Marxists may consider economics a social engineering science, but nowhere in Marx numerous writings you find such a contrived idea. Did you make that up? Any citation?
1
Unfortunately, this includes Krugman.
I like the wonkish editorials. Keep it up.
2
If employers know that there is an endless pool of 'temps' to exhaust before they ever have to give anyone a raise...
7
And I wonder if workers these days are thinking: "If I ask for a raise I'm just giving my boss one more reason to replace me with a robot."
4
Progressives, including Mr. Krugman, always have a difficult time understanding the unemployment rate, as it pertains to inflationary wage growth--when in actuality, it should be easy to understand.
The Left cannot come to terms with one essential fact: labor is a commodity. subject to the laws of supply and demand--no different than energy, paper, steel, plastics, etc. It is something that companies purchase in order to operate their businesses.
I think the basis for Krugman's confusion is that categorizing labor in the same way we do diesel fuel or steel, seems like it is devaluing workers. It's not--it's just a reality. When there is an oversupply of labor, wages are suppressed. When the economy booms, we see wage inflation as labor becomes scarce.
Breaking it down to a supply and demand equation makes it easier to see the forces at work. There are several reasons why lower unemployment rates do not correlate easily to wage growth.
The first is simple: the "unemployment rate" is phony. It only counts those actually looking for work. Our social safety net lets millions sit on the sidelines. When the economy improves, the supply of labor increases as workers return to the market. This helps to satisfy demand.
The second situation is easier to understand. Fifty years ago, we did not have millions of illegals working in our economy. But our open borders policy--which Liberals support, further increases the supply of labor--and thereby depresses the wage scale.
3
If labor were simply a commodity, that would be a simple model. But as you've heard, if wishes were horses, beggars would ride.
Name another commodity that businesses buy, that makes choices which actively depress their revenue when they don't buy it.
Good thing Paul is the economist here.
4
The Left understands the labor market just fine. The word "market" explicitly means supply and demand. Labor is not a commodity though. You're saying labor is a homogeneous good. You're dead wrong. Labor is differentiated by skill sets so labor is nothing like commodities. Milk is milk is milk. A delivery driver is not a radiologist is not a lawyer. So you actually have thousands of little labor markets each with their own supply and demand determining the price of labor according to profession. The hard part is aggregating all this information into a reasonable snap shot for the nation as whole. When you figure that one out, feel free to come back and share your discoveries.
5
Why do you start by applying a label to the views of Dr. Krugman? What do you intend to imply with your spurious labeling?
1
Steve Keen says the difference is that debt is now the accelerator.
3
I have written often on my blog that inflation is a monetary phenomenon driven largely by antagonism over the wage relation between workers and capital. Krugman is entirely right to stress that Friedman’s NAIRU and the Philips curve could not and should not be read as static absolute relationships expressively in percentage terms. Yet they do refer to complex industrial realities that include not just unemployment but also and above all the composition of the workers and that of industrial capital on the other side. The picture gets even more complex if one adds the monetary policies of central banks. Cheers.
The Volker-driven interest rate spike to suppress inflation only increased its rate until it put the country into recession. The real issue is the optimum risk-adjusted time value of money, and how much it should change, if at all.
"Capitalism" is a system of universal exchange mediated by fiat currency whose value rests on its capacity to make more of itself when deposited in banks to be loaned out to others.
1
But in your social engineering you forgot that money itself is mediated by production. The universal commodity does not breed itself. It does not have magical powers unless mediated by living labor being used by past socially accumulated labor ( in any of its forms: money or commodities or the universal and particular embodiments of value)
2
Absolutely true, all capital comes from labor!
There is no economic correlation of any kind that can stand the test of time, which is why Economics is called "the dismal science." Just when historical graphs demonstrate correlations a new set of results emerge contradicting the former, as occurred with the J-Curve and other discredited theories.
The economy of any nation operates like a multi-dimensional chess board affected by monetary and fiscal policies, science and productivity developments (AI), demographics, domestic politics and foreign influences. None of these features is rigid but developing individually over time. That's why, quite literally, "the past is no guide to the future."
6
Have faith wayward soldier. There's a reason economics is treated as a social science. No social science is ever right forever. You can apply advanced mathematical methodology but at the end of the day, economic theory explicitly accounts for being wrong most of the time. In other words, we already have a disclaimer built into out science. "Assume we had a can opener."
To attempt to answer some of the good Docs questions I have gone back and been trying to read the works of Michał Kalecki. Most don't know him. He was a contemporary of John Maynard Keynes and Joan Robinson. There was little if any collaboration between the three. The one consistent element that runs through Kalecki, Robinson and Keynes was that of market imperfections such as monopoly, oligopoly and monopsony do exist and tend to dominate. The neo classical model which inspires belief in NARU and the efficacy of monetary policy ignores imperfect markets. As a consequence the NARU crew become addicted to correlational behavior that breaks down over time. The papers keep coming (that's what economists do) but the search to the past work of the three giants is not found. I think the answer lies there. But don't ask someone from the Neo Classical school. They are two busy arguing about what is the true Natural Level of whatever.
4
And unlike Keynes, Kalecki and Robinson were very well versed on Das Kapital, whose volume 2, the circulation of capital, presages many Keynesian ideas. Robinson and Kalecki were very aware of this.
1
Rational economic regulation seeks to make the efficient market theory work by assuring that all the direct and indirect life costs of products are fully reflected in their expenses of acquisition and ownership
1
Economic product is measured in movement of money.
US political economy separates narratives from numbers, but narratives often influence politics more than numbers do. To political ends, myths persist, despite numbers to the contrary; numbers often enable myths of blame. If a narrative says inflation is bad or tax cuts are good, it is politically useful as a tool of fear or praise. But the numbers also miss internal changes, statistical thresholds. When these thresholds are reached, they change the character of institutions and markets, social values. this intersection, a favorite of Paul's', growth after bubbles.
US political economy seldom explores racism, but its economics reveals racial thresholds. As inflation, employment, GDP, national debt rise and fall, the black income gap (70%, 80%; M, F) and the black employment gap (2X, twice the white rate) have remained constant or increased for five decades.
The question: is the income gap constrained from the economy by racial narratives and identity politics? Is the employment gap lost productivity? Together, are they the fixed costs of racism? The cost of white privilege, rarely discussed by men in gray suits?
Trump's lower unemployment numbers didn't change the disparity. Black workers remain unemployed at twice the white rate. Their wages are lower. Structural racism remains, a bold contradiction in the face of so many singular exceptions, who collectively have not added up to a threshold of change. The gap persists in the face of black success.
8
The “natural rate” is of course an empty abstraction, which initially served the ideological purposes of preserving capital profitablity at a brief moment in history when wages were relatively high in relation to capital.
That is not the case any longer as the use of machines, technology, and socially accumulated knowledge in general has outpaced the living labor it uses (despite its global growth in the same period). The productivity of labor therefore has increased tremendously in the last 40 years, so we need less living labor in relation to capital as described above (or objectified past social labor). This indicates that less labor power is needed in relation to current GDP. This extends to the production of items like clothing and iPhones despite the global character of their production (global value chains) where the origin of labor is irrelevant (in this sense).
So the trend is towards the general cheapening of labor power and its concomitant reflection in lower wages. The “natural rate” idea served the purpose of attacking organized labor in the 1980s and facilitate the liberalization of capital flows or neoliberalism. It is now brought up despite that labor is no longer able to afford the houses it builds and the education and healthcare it needs to better its own condition. It continues to serve as an ideological weapon.
6
In 1980 the US Dollar was still adjusting to life without the gold standard, interest rates had just reached their all time historic high.
Don't you have to factor in changes in productivity with unemployment (or conversely, employment) to get a full picture of the relationship with inflation. In other words it is not how many people are employed or unemployed but how efficient (productivity) their total output. For example 4% unemployment in a low productivity environment might put a lot of upward pressure on prices but the same 4% unemployment in a highly productive environment might actually be equivalent to a much higher unemployment in a low productivity environment.
I am not saying that there is still not the "Death of Acceleration" but simply that one has to consider productivity to determine if it is truly dead.
3
There's a variety of sectors in the economy. Specifically, let's take the food sector...Food sector is affected by food consumption. For example, "Do we have the same restaurants anywhere as in 1980?" - The answer would be very few are the same and even there the menu might have changed. Diet habbits, public perception on health...etc. all a topic to alteration. A cross section analysis could provide more colorful insight. Beliefs/cultures do affect food consumption behavior diversely, let's say. Some traditional cultures can easier deny food consumption, some believe to overcome any crisis through more intense eating in favor of better struggle to overcome problems...the critical questions would be whether in a time series analysis or cross-section...how is the quality of a consumption shock affected (also dynamically) through any such reasons. The psychology may have altered, all sectors in the economy in aggregation, the new situation may not result accelaration, or maybe an accelaration in the opposite direction is possible, anyway. There are countries where inflation drops, and in very similar conditions in some other countries inflation rises. Same statement might be also true for unemployment. If there's alteration in American data, among other reasons there should be a probability that the psychology which is affecting consumption shocks might have changed due to many possible reasons.
Let me see if I have this straight. Beginning in 2009, the Fed began loading up its balance sheet with assets, primarily T-bills and mortgage-backed securities, purchased to keep interest rates low and to goose the money supply, hoping to get greater economic activity that would shore-up employment. This was the famed “Quantitative Easing”. It forced inflation lower and had a big role in keeping it largely low since. They started with $900 billion in assets at the start and ended with about $4.7 trillion in 2014, when they stopped making large purchases. Today, they haven’t unloaded those assets, but as securities mature, they buy additional securities merely to keep the asset levels constant.
I always found this curious. The Fed buys securities and waits for them to mature, then uses some of the money gained in maturings to buy replacement securities and turns the remaining profit over to the Treasury Dept. Against a base of $4.7 trillion of assets, that’s still a lot of churn. And it still sounds like a perpetual-motion machine they set in place that derives economic benefits without paying for them AND creates paper injections for the Treasury.
Where can I get in on this? Oh … I guess I already am.
But doesn’t it have a dramatic ongoing effect on inflation? Might the Fed want to get to the point when it can devise a program to safely off-load those assets permanently, reducing the artificial effect on inflation in order to allow more normal processes on it to resume?
1
When Richard begins a comment with, "let me see if I have this straight", I know we're in for a magical mystery tour. Or at least a distraction.
And another dig at the left, whose last president, Obama, saved the world economy, because he was the only real Republican in the white house for decades.
5
Prof Krugman the graphs you present are an accurate reflection of the past and not the future and therefore lack predictability and an index of individuals within age groups and income levels would be better. Consumer confidence and an average individual's answer to the question "Am I better off today than a year ago or 4 years ago" and whether I am able to buy goods and services I need today compared to 4 years ago are at a better price or more affordable. Gas prices are rising and for persons driving large gas guzzlers can be a reason to be upset with their own situation. For a person like me driving a small fuel efficient car the increase in gas prices is no big deal and is even compensated by somewhat of a recovery from the recent fall in the stock market in the retirement portfolio due to increased stock market values. Another change is fixed deposit returns today are significantly better than the pathetic interests that fixed deposits were getting 2 years ago. For a frugal person not buying or not affording expensive inflated non essential goods there is no death due to acceleration because it is a problem of extravagance and those living high on the hog and beyond the income received. Hope the examples I have given underscore the variability in lifestyle choices and incomes that require a different index to take in to account complex issues that will answer the question are you better off and has your standard of income improved. When I asked a colleague he said yes.
2
Most of the inflation arguments are cover for other agendas. In a contrary mode, Prof Krugman wants the Fed to continue its support strategies to help the economy, even though he hates the Repub control of the government. In Obama's time as President, the Repubs kept bringing up the inflation threat because they didn't want the economy to go well while a Dem was in charge thereby helping the Dem maintain control. Similar to their fight on the deficit. The deficit was bad as long as it was caused by the Dem agendas on domestic spending. The deficit is OK now when caused by corporate tax reductions. I think that it's unfortunate that if the Fed follows Prof Krugman's advice, the economy will improve more and the Repubs will all get re elected with their vile racism, anti environment and pro rich agendas.
2
Core inflation is one number. Possibly valid for a few people in one unique set of circumstances. Regional variations count for a lot. In my area, housing costs are rising at multiples of the core inflation rate, and compose a large proportion of many incomes. For the people in this area, with an extremely low unemployment rate, the economic equation of 'tight labor market means increased wages' is broken, while the new model of 'lower unemployment with inflation unaffected' does not hold true. The oversupply of jobs, drawing many into the area, has outmatched housing. High housing costs are driven by high tech-industry wages. Non-tech workers face living costs inflated for the higher wages of the tech sector, a heavy burden on non-tech workers in this area. The core inflation rate must be adjusted for regional circumstances, urban v/s rural, coasts v/s interior.
1
I don't think that the unemployment rate as currently measured is an accurate measure of the spare labor supply.
3
Umm, evidence? Actually, it might help if you started with what you meant by "spare labor supply".
1
My phrase "spare labor supply" is intentionally vague. If something is in short supply, the price of it is supposed to go up. However, wages are not going up much despite the unemployment rate being low. That is why I suspect that the unemployment rate as currently measured is not an accurate gauge of the state of the labor market.
Also the duration of unemployment is much longer that it was before the Great Recession, which suggests to me that the labor market has not fully recovered regardless of what the unemployment rate might say.
https://fred.stlouisfed.org/series/UEMPMEAN
It would appear that the Fed doesn't have the evidence to raise rates as unemployment falls, as it has no idea whether that will drive inflation anymore. In other words, with no labor power, is there a NAIRU?
So why raise rates? In fact, if printing $4 trillion in money didn't do anything to inflation, why not experiment by printing $1.5 trillion to pay off student loans? Let's see if that generates inflation, or if a world with no labor power means unemployment and inflation are no longer connected.
8
Today’s column by Paul is related to the one he wrote on May 6, 2018. In both columns, he discussed the relationship between unemployment and inflation, but at different chronological times and under different economic conditions.
I suggest that inequality of income and wealth must be playing a significant role in the inflation versus unemployment equation.
Low wages over a long period of time lead to inequality. Low wages also depress inflation. My question is: Does inequality sustained over a long period of time create a powerful class of plutocrats who, because of their ownership of the means of production, control wages so much so that they are able to depress inflation despite “full” employment?
56
Excellent point. An environment with full employment but "repressed" wages is something that we've never witnessed before. It's actually something that we could have seen in fascist dictatorships, had they expanded to major industrial countries. Basically a situation in which the oligarch / elite plutocratic class controls the government, the means of production and the retail supply chains, effectively reducing ordinary citizens to indentured servants, unable or prevented from demanding higher wages despite full employment. Being unable to benefit from the growing economy through higher earnings, average citizens do not increase consumption, enabling the ruling class to enjoy their ever increasing capital without any inflationary risk.
Wake up, people: plutocratic fascism is here at home, and the economic indicators are unequivocal proof. And it's probably too late to do anything about it. The fascists have won.
2
Interesting. So basically, the Plutocrats prevent the working class from benefitting from the Law of offer and demand, the bedrock of of the sacro-saint free market economy!
Dr. K,
My thoughts, carried over from your last wonkish discussion of your "natural rate hypothesis", has caught my interest again. I agree that the Fed should adapt to reality.
One alternative thought that I had is perhaps the measures for inflation and unemployment do not adequately reflect the economic realities of the factors or absence of the factors that affect the quality of life for Americans.
Looking at the change in rankings of international comparisons in measures like the GINI index to measure distribution of income, access to healthcare and education, and affordability of a nutritious diet plus the data from the Center for Disease Control on the rankings of years lost due to causal factors such as fatalities from highway accidents and pollution from internal combustion engines, it seems to me that the simple relationship between "unemployment" and "core inflation" is not a good measure for policymaking at the macro or fiscal policy level.
I also offer in support of the flaw in this measure, two accepted authorities: the study by Angus Deaton and Ann Case, that showed a spike in white male morbidity and also his other works on income distribution, https://scholar.princeton.edu/deaton/publications?page=1
Thomas Piketty's Capital in the Twenty-First Century also makes a good case for income inequality in Europe and the United States since the 18th century, which you reviewed.
Bottom line: we need a better index than inflation and unemployment.
5
Bottom line: we need a better index than inflation and unemployment..........."
what we really need are extensive and ACCURATE numbers, not robocalling 1200 people to see if they worked in the past year. We have automation and we have a social security number and a computer can count how many numbers are active and currently making payments to the government. That will be closer than Nate Silver's number by a long shot.
for a nation that sent a probe to the end of the known universe we sure don't use technology to advantage. We are still counting on our fingers and toes in 2018.
4
So how do you account for early retirement, or people who sell property or stocks and make sporadic payments to the IRS in the form of cap gains? They don't robocall 1200 people, they interview at least 60000 families each month, repeating the same families for three months (rotating basis so each month they drop and add 20000 new families) and they do further interviews to get state and local data.
Your graphical comparison between "Core" inflation, which excludes fuels inflation, and unemployment is a flawed presentation. The spike in fuels prices in July 2008 was extraordinary and crippled business leading to the graphically represented spike in unemployment.
1
I'm wondering whether the US shouldn't be classed as the world's largest Second-World country.
A gig I get every so often has me reading comparison tables about all of the world's countries. With the exception of data meaningfully correlated with population size, more often than not, the US is found somewhere near Means (averages), Medians and qualitative Typifications. That is, at Mediocrity.
Hmmmm.
7
When the terms were first invented, "first world" meant the capitalist west , spec the US and her allies, the "second world" as the Soviets and their satellites , and the "third world" were non-aligned nations. The original intent of the expressions have obviously changed.
1
@ Harold - In your very few words you make a good case for the Times or perhaps you to provide the very first column on USA, World's largest Second-World Country.
During 11 months of the year I submit comments written either here in Linköping (same size as my adopted US city, Burlington, VT) or an island, Styrsö, a bit west of the pier in Göteborg my other city where my Swedish "farmor", then age 13, boarded the first of the two ships that would take her to Boston.
In that other month I fly to Boston and begin my daily experience of Second World America. Not even 2d world train service Boston-Albany. Bus service definitely 2d world or worse. No all electronic banking system. Mass Tpike bump bump bump - if you can move at all. Giant landfills - thinking of Springfield - wasting a renewable energy resource that heats my Swedish cities. People even still have oil burners in their cellars. 2d or even 3d world infant and maternal mortality/illness statistics.
Against that are the pleasures of the Green Mountains, the MA coast, Madison Ave neighborhood in Albany, temporarily enjoyable but no substitute for UHC, all renewable, full-scale public transport and much more.
Tell us about one of your gigs, write that column.
Only-NeverInSweden.blogspot.com
Dual citizen US SE
@ Sal Yonkers - Thanks, have checked and it is clear that we need something equally useful as that once was. That is why I asked Harold to tell us about one of his gigs and then, more to the point, about the tables he uses to compare countries.
Since I am usually writing about health care or renewable energy here, I use measures within those two fields but it would be helpful to have new terminology.
Larry L. -see reply above
The CPI does not include housing costs, just goods and services. There has been a significant amount of housing price inflation.
If housing costs are included, then the correlation between employment and inflation would be stronger.
5
https://www.bls.gov/opub/ted/2018/consumer-price-index-rose-2-point-4-pe...
They most certainly do include housing.
You can not accelerate if you have no traction.
The missing variable here is labor force participation rate. And the percentage of ‘employed’ people who are in retail and have their hours limited and unreliable.
So when unemployment goes down, it is like you have your foot on the gas. By traditional measures the economy should heat up. The car should rocket down the road. However, so many people have left the workforce, and so many people have poverty level service jobs, the wheels just spin. It is like you are stuck in the sand.
No traction, no increase in demand. The economy goes nowhere.
41
I'm afraid I'm going to get wonky here ... The percentage of the working population employed by retail and food services is almost the exact same today, as when food services and hospitality was first broken out in the 1990 Employment Situations Report. Retail has gone down since 1990, food and hospitality up.
LFPR is a terrible statistic, it includes all non-incarcerated civilians over 16 who are not institutionalized; your 99 year old granny living with her kids is considered part of the labor force, as are 50.9 million senior citizens who are not institutionalized. In slightly under ten years, their share of CPS has risen by four percent, it will break 20% sometime in Q4 this year. Yes LFPR for the 25-64 cohort is down slightly since 1999, but only by one percent. The real issue is an aging population and employers more interested in stock repurchases than employee moral and until we see greater quits (slowly increasing) in the monthly JOLTS report, this will not change.
3
The question is what is the labor force participation rate for 18-64 year olds?
So, there are other considerations out there. Between the wars, German inflation was out of control but this was not because they had 'full' employment. Also, Zimbabwe and Venezuela. The simplest definition seems best: when there are not enough goods that people want, inflation is the result. Never mind if people are working or not. So, as long as stuff is available from Amazon, inflation will be low, very low. Once Mr. Trump imposes tariffs on Chinese products, there will definitely be some inflation but even then not that much - only by the amount of the tariff. When the Chinese finally quit assembling iPhones - really, the infrastructure for doing this kind of stuff does not come easily - iPhone costs will go up, way up.
1
Even worse than the Fed's fear of inflation is analysts' inflation of the fear of inflation, a symptom of an economic missystem where not only the currency, and even stocks, are fiat, but so are the reasons why their prices go up and down.
The US has gone past "money has value because we say so", and even "shares of corporate stock, among other securities and so-called 'financial products' (*shudder*) have value because we say so", all the way to "shares go up and down because shareholders have fears because analysts, whoever those guys even are...said so". It's a system of trust, traditions, and unwritten rules—and "covfefe" shows us just how robust such a system really is.
Future inflation is a red herring, and a cover story for the real reasons bosses won't pay more *cough*STINGY*cough*. For the real problem—fear itself—we need a dose of FDR. A spoonful of GOP removal would help that medicine go down, in the most delightful way.
8
"Accelerationism used to look like a pretty good description of inflation experience."
That was a description that applied to different data. We no longer know what the unemployment rate is, in the same meaning as the numbers that were described by that theory.
First, globalization has led to an international labor pool. Nobody is measuring unemployment in that whole labor pool, but it is all doing the work of much of our employment.
It is not even the same pool for all types of work, since different things cross different international borders to differing degrees. So there isn't just one unemployment rate anymore. There are many, for many forms of work.
We don't even know what is the unemployment rate inside our own border, in terms used before, because a decade of prolonged unemployment has distorted the labor pool numbers. People dropped out, or transferred to other categories like "disabled" who would have just kept working without the huge long downturn.
Even technological advance has thrown the numbers out. Who is unemployed, and who is actually unemployable, for the current work available? We really don't know, not with any precision.
Given the loss of access to the numbers formerly used, we can't apply to them the theories derived from their patterns. We just don't know them anymore.
"So many apples used to mean this" tells us nothing about all the oranges on hand now.
9
Let's start here:
"the idea that low unemployment will lead not just to high inflation,"
That is about as outdated as dinosaurs in in the age of globalization.
Assume for a moment, that an increase in demand for Iphones, will lead to an increase in the number of workers making it, and hence, reduce unemployment , empowering them to ask for higher wages, i.e. leading to inflation.
In a global economy, it will lead to an increase of workers in Zhengzhou, NOT of workers in the US.
Or assume, that IBM's IT business picks up (to take a high tech example). It will lead to hiring more workers in India. [1]
Or assume , that a Union in making cars in the US ask for higher wages. The answer will be to move the factory to Mexico.
Mr. Krugman's puzzlement is an other fine example, that Mr. Krugman still does not understand the distributive effects of globalization that he so eagerly promoted - [2]
---------------
[1] hpps://www.nytimes.com/2017/09/28/technology/ibm-india.html
"The company’s employment in India has nearly doubled since 2007, even as its work force in the United States has shrunk through waves of layoffs and buyouts."
[2] http://www.slate.com/articles/business/the_dismal_science/1997/03/in_pra...
"Such moral outrage is common among the opponents of globalization ---of the transfer of technology and capital from high-wage to low-wage countries
[2]
1
But, most of the economy is service related. You can only outsource so much before it becomes nonsensical; you can send call center jobs and some back office work overseas, but you can't move your receptionist or Walmart stocker or fruit picking jobs to India. There are definite winners even among developed countries for globalization. Krugman, having written extensively about this, is not unaware.
Yes, to the extent that there's globalization we should be cognizant that certain work is not safe, but in a large sense we've already suffered the brunt of this at this current stage and those workers are already accounted for in our fraction of non-working prime aged demographics. Were jobs absolutely interchangeable and frictionless across borders the measured employment rate would skyrocket irrespective of inflation policies because surely in a world of 4 billion people not living in a highly developed country we'd find someone cheaper to do the job.
But you can't, at least not yet. So globalization isn't a full picture either and is no substitute for the phenomenon here.
1
The next 'global' is virtual. AI is going to displace those globalized service workers. What happens when a supercomputer running a state-of-the-art AI program displaces the Hyderabad call center workers who displaced the USA tech support staff? We need a new model. There aren't enough qualified programmers now, but we can't all be programmers either.
Wait a second. All unemployment is not equal. I would suggest this complicates analysis of past stats.
From what I understand, one must not only consider the quantity of unemployment, but its quality. This surely impacts further economic analyses.
How much of our labor force works without health care or other benefits? How much of our labor force works under what would been once considered depressed wages?
This certainly should figure into any discussion of inflation. If 1000 monkeys are working for less in wages and benefits than what 900 monkeys worked for 20 years ago, I would imagine this would majorly influence inflation predictions.
2
The dismal science indeed. My college math professor had great fun in telling us that in economics, they gave the same final exam every year and just changed the answers.
26
Mr. Krugman ignores the effect of deflationary wages, particularly as relates to the rapidly diminishing number of the middle class.
3
I am in Canada. In our liberal democracy unemployment doesn't just happen it is designed by government economic policy. Liberal and democratic socialist see keeping unemployment numbers as as core policy. Conservatives let the private sector determine unemployment levels and the voters tell the politicians which policies suit their fancy and what is working. We call this democracy and elections determine unemployment as it is an absolutely meaningless number in economies where paper is the most important production.
7
As I recall for many years inflation was defined as the amount of a denomination of currency printed in relationship to the amount of gold at a st price, such as $32 an ounce.
Then about 1957 when wages were rising and unions still had some clout, it was redefined as prices and wages in relation to the GDP, in order to stifle the wage demands of the unions.
2
It might be pointed out that the accelerationist framework is based on Keynesian demand management.
When will the Fed adopt to reality? When does anyone ever yield to reality when reality contradicts their tribal believes? You should know that more than anyone Doctor Krugman. After all, you've been calling out zombie economic ideas forever.
3
Employment does not drive inflation, wage increases do. As long as workers are working for stagnant wages, inflation will remain dormant.
It’s a basic demand and supply issue. If people don’t have any extra money to spend, prices on goods don’t get bid up.
32
If wages are stagnant, but more people are earning and spending, then demand goes up and prices should be bid up.
Something else is at play here.
10
Right. In the 70s we had "stagflation," basically because a staple of industrial economies was being cranked up by the OPEC cartel. Now we have "stagployment" apparently because of a conspiracy not to compete for labor. Or maybe because of the globalization of labor. Or something. Neither stagflation nor stagployment fit the traditional model.
17
It's not just wages but goods as well. If the supply of things people want to buy is limited (by tariffs or regulation), their prices will inflate independent of buyers' wages.
3
Could it be because unemployment is only one factor in inflation and perhaps not a very important one one?
Just askin'.
15
And another question is, could it be that under some circumstances, high inflation causes high unemployment, not the way around?
5
Not saying this is the answer but maybe take a clue from stationary and non-stationary transport in crystalline structures.
In the former, electrons are driven by a relatively low frequency electric field and the electron's velocity is fairly proportional to the instantaneous value of electric field. There's no hysteresis in the velocity-field curve. We have good old Ohm's Law.
In the atter case the electric field changes as fast as or faster than the electron relaxation times. That is momentum is randomized by collisions with the conductors lattice but the electric field has changed appreciably in the time so the electrons follow a more ballistic regime so it travels at a higher velocity.
Do I claim the economy follows Maxwell-Boltzmann statistics it's first 3 moments? No. Heck, even this will breakdown when you very submicron distances.
But it seems to me that Krugman ignores the time constants involved with various economic "phenomena". Some of which involves a long history of lessons hard-learned and others acting at a "speed" that is only increasing. Put these together and there might be a nice pretty curve with explanations an economist could use. The constituent components range decisions made by men in grey suits to high-speed trading.
4
Yes, for instance in May 1924, the economic crisis in the Weimar Republic was at its height. Hyperinflation was rampant and unemployment stood at 2 million (13.5%), its peak for the period
2
raising the rate may trigger the already existent difficulties in the "emerging economies", which pay their debt in dollars. case in point Argentina. Despite their own rate increase in some countries, capital is flowing out of places like Turkey, Argentina, South Africa.
2
The economic experiment over the last twenty-some years has eroded essentially all checks on monopoly power. There was a time when the US Government required competition to avoid the concentration of power held by any one corporation. However, after the push for more global trade, the guiding principle is that our mega-corporation will compete with the mega-corporation from China and from each other country. Essentially, three or more sources of goods and products remain but each is located in a different country. This model would seem to work so long as there is truly competition at the national level so that the US’s mega-corporation and China’s mega-corporation compete for market share in the US and other markets. However, this is often how things do not work because of various factors, some created by the home team and its government. So each mega-corporation operates in an environment of increasingly less domestic competition and there are no checks on the accumulation of economic power. The end result is a slow oligarch-ificiation of nation states as the billion class wages economic war for control of at least the national market in which each resides. The oligarchs understand the threat created by high unemployment to their wealth and power, so they at least allow conditions which avoid this; however, oligarchs are not by nature benevolent, therefore, wages are suppressed. And the end result is a decoupling of unemployment from overall inflation within the economy.
10
In the 1970s and 80's boomers were getting careers and households started and were users of capital. Today, they're retiring, investing and supplying capital to the system. 10-year yields are not suggesting restart of inflation, outside of target. 'Acceleration' is just banker-speak for protecting NIM margins.
We have a sovereign monetary system in North America. We choose not to use it, defaulting instead to the commercial banking sector for the provision of credit to the economy.
Meanwhile, the Bank of Korea makes 'special loans' to for-profit organisations every day, some of the proceeds from which find their way into erecting barriers to shield industry in South Korea from foreign competition.
Get commercial bankers out of monetary policy. We need better financial fiduciaries, free of taint from the banking lobby. Free, separate, independent central banking today.
3
"We have a sovereign monetary system in North America. We choose not to use it, defaulting instead to the commercial banking sector for the provision of credit to the economy. "
The reason. Private, is because practically everyone (including those in power) either believe in the kitchen table idea that the federal deficit and debt are bad for the economy and should always be as low as possible which is just plain wrong, or they believe in the great god Keynes who is wrong when he tells us to have "austerity at the Treasury" during the boom so he is only half wrong.
Reducing public debt increases private debt and puts us at the mercy of bankers, who are only out for short term gain for themselves. See 1920 - 1930 . Similarly for too small federal deficits when money is leaving the country in great gobs. See 1996 - 2008.
11
The accelerationist hypothesis is backwards. High unemployment is due to economic dysfunction, which can be inflation, corruption, and many other things. But there's a lag: inflation doesn't start killing jobs immediately, and takes a while to affect people's expectations. Krugman's first graph shows that lag: a couple of years between core inflation and unemployment. His second graph, though, starts with the rise in unemployment in 2008-9 and so cannot illustrate the lag. The latter unemployment crisis was caused not by inflation but by a different economic dysfunction, namely our housing debt crisis that by 2006-7 had become obvious to everyone but Larry Kudlow.
Our next bout of high unemployment quite possibly will be caused by the corruption that the Trump administration continues to promote. Canny and corrupt investors will profit, most of us will suffer, and Trumpist economists will tell their clients that unemployment helps businesses keep costs low and that throwing people out of work will lower the inflation rate.
20
The accelerationist model has contributed to the fall in the labor share since 2000 because central banks have been too quick to tighten policy when labor markets tighten.
It makes sense to relate wage growth and the unemployment rate. After all, a tight labor market should improve the bargaining position of workers who can demand and receive pay raises. And in the absence of collusion, employers have to compete for scarce specialized workers by outbidding one another. But what the natural rate hypothesis claims is an acceleration in price inflation, which in common language means losing control of inflation which central banks fear above all else.
And empirically its was the case during much of the 1970s and 1980s that wage gains and core inflation moved roughy in tandem but that pattern broke down in the 1990s. Indeed, during the late 1990s boom wages grew strongly while core inflation fell as the chart below shows.
https://fred.stlouisfed.org/graph/fredgraph.png?g=jJk6
Since that 1990s breakdown there's been no discernible correlation between wage gains and core inflation.
One explanation is that during the 1970s and 1980s it was common for employers to offer workers annual cost of living pay raises based upon current price inflation. But after inflation came down dramatically in the 1980s these COLA policies were discontinued. Yet, central banks continue to set policy as if they fear wage gains will soon lead to higher price inflation.
7
If the model is to rely on monetary policy alone to pull us out of a recession AND grow the economy, then that is a model that will never work.
While the FED did pull us out of the Great Recession, Congress failed to put in place the requisite fiscal ingredients for a full recovery in which the economy accelerates. Instead, we got the Bush tax cuts made permanent by a majority-held Democratic Congress, followed by GOP obstruction and nullification of President Obama from 2010 on. But what really hurt people was the devastation caused by forced austerity in the states and at the federal level, with the cessation of long-term unemployment benefits, by agreement between Paul Ryan and Patty Murray at the end of 2013. That alone triggered the current housing crisis, with homelessness being declared an emergency in several states.
Of course, now, we have fiscal policy in place that is the exact reverse of what is needed. All of the billions of dollars corporations officially don't have to pay are going to shareholders instead of being reinvested here and creating good jobs. The devastation of the gig economy will stay for a long time. Alongside it, the devastation of automation and a new world without work and a social safety net is what awaits us in our later years, and our children in the prime of their lives.
Ignorance, triangulation and capitulation got us here. We may never get out.
---
https://wp.me/p2KJ3H-2Jr
https://wp.me/p2KJ3H-2GV
42
"The thing is, the Fed and other central banks still basically operate with an accelerationist framework. When will they adapt to reality?"
But I don't think we know what reality is, do we? Prof. Krugman has pointed out the weakness of the accelerations model, and a simple model where the level of unemployment determines the level (as opposed to the rate of increase) of inflation is similarly unsupported by the data.
And yet...surely if labor is in ever shorter supply, eventually employers will start to bid more for it, and wages will rise. We don't seem to be able to predict when or by how much, but it must happen eventually, surely?
It seems to me that the FED is remaining accommodative, while continuing to let the labor market probe just how low unemployment can get before that eventual emergence of inflation. Given our uncertainty, that doesn't seem like a terrible approach.
1
Relations between the supply of labor and wages rely, in essence, on a closed/bounded labor market. This was the case for much of human history because of weak international structures in finance and trade, coupled with economic policies that were expressly nationalistic in scope.
This is no longer the case. Human labor can be outsourced in many cases--and there is still a lot of room in the world labor market. Human labor can also be replaced by software or machines.
I am not hopeful about the possibility of wage increase due to labor shortage in the near term (which I define as the next 20 years). I think we are more likely to see continued stagnation, a continued shift to the gig economy or part-time work, and a shift from medium wage to low wage jobs as labor is outsourced or replaced by AI.
This is particularly true in an environment where labor has no effective means of organization or collective power.
9
The 'competition' for labor in a tight labor market presumes that all labor is interchangeable, and that all employers are competing fully for labor. In many areas, employers have enough market power to control wages, aided by anti-worker ideological policy decisions made over the last 40 years. Long term trends to worker replacement by automation, job relocation from globalization and virtualization, and an increase in 'self-service' online replacements for labor work to suppress wage increases. It seems just as likely to me that a tight labor market will drive a shift towards increased automation and online virtualization of work as to drive wages up.