From 1983 to 2005 Gold stayed within 10% of $400 an ounce, a defacto standard. In 2005, everything broke down. Gold went to $1300 and ounce. Inflation hedging swelled by over $10 trillion.
Real median personal income, up by 41% from 1981 to 2000 quit improving as business investment plummeted. Investors abandoned productive enterprise for non-productive enterprise.
Demand for labor withered.
Conditions for labor deteriorated. 75% of our workforce now label themselves dissastisfied with their jobs- hardly the view of a highly productive worker.
13 million discouraged workers sit at home degenerating into alcoholics and drug addicts.
An extra 10 million students attend universities experiencing an extended childhood with no cognitive gains to show for the experience but an added $300 billion in debt.
Trump broke through policy mythology by relying on the laws of economics. Restored confidence in the process. Moved tax rates towards the revenue maximizing tax rate. Fed is now back on the gold standard (gold is the same prices as on election day).
Full-time jobs, the jobs that count, increased 2.4 million in 2017, up 50% from the 1.6 million created in 2016.
The 5 year forward inflation rate, extracted from inflation adjusted bonds is 2.1%. Investors bet billions that inflation is going down, not up.
Unemployment is headed to 2.4%, last seen in 1954. Inflation may hit zero. A 2.4% misery index. Never seen before.
"Why does accelerationism, which worked in the 80s, no longer seem to work?"
Perfectly obvious. DD Vt peaked in 1981 with the "time bomb" (Wonkish)
If I understand this, then not supplying enough demand is a problem of missed opportunity. People make choices over time. When the economy slumps and people face unemployment and shortages, they find ways to survive that don't increase demand. They tighten belts, postpone purchases, stay in depressed places because they cannot afford to move, postpone education and even postpone having babies. Unemployment needs to come down so people can move on with their lives, but they may never finish an education or move to a place that has a stronger economy or renovate a house or buy a new sofa, or have as many children. Their lifetime earnings won't accumulate as much, so retirement becomes more of a struggle.
This happened to middle class mid-cohort boomers in their mid-fifties at the time of the recession, who lost jobs or whose businesses suffered. They are now looking down the barrel at retirement. Some still want to work and are looking for work, even if we don't make it into the statistics. To cope, we are downsizing. We are dreaming smaller dreams, eating lighter, going veggie because beans are cheaper than meat, lowering expectations. We are not stimulating the economy as we used to do, so that our missed opportunities in the aggregate depress demand, while we wind down debt. Barring the recession, we might have earned more during the last decade and saved more. The economy might have been more productive, too. Time is money and we have lost time.
2
The policies that Krugman thinks have not worked for decades have actually worked. Workers and unions have lost both economic and political power. Wealth and power are increasingly being concentrated into the hands of the wealthy and powerful corporate financial institutions that are therefore increasingly able to operate outside of any nation's laws because money is fungible and they are transnational.
The numbers that macroeconomists should be looking at are the median real wages of hourly workers, labor force participation rates, wealth (not just income) inequality, and the percentage of both wealth and coroporate profits being accumulated by financial institutions (including health insurance companies that should be considered financial institutions and NOT health care companies).
Power relations are an important component of market relations and the concentration of power is as important as the concentration of wealth.
When we look at these things, we see that in fact our economic policies have been working -- just not for the people that Krugman foolishly believes they are supposed to be working for.
3
Didn't you consider that both the change/incomplete understanding of the relationship between unemployment and inflation that Dr. Krugman postulates and the recent ability of wealth to dictate wage gains may both be correct?
What has allowed those with the power of wealth to dictate wage gains for average workers? Maybe a change in the way the natural rate works? Or vice versa?
Either way, do you agree that the power of the wealthy to dictate worker wages is undesirable? If so, how does it get reduced/eliminated? [I am not saying the wealthy will have no input, just not be able to dictate wage levels.]
Is your reaction based on an idealogical revulsion to Keynesian approaches to managing the economy [as might be inferred from your use of ad hominem attacks on Dr. Krugman]?
Granted that I'm incompetent to comment, I wonder if wage rigidity is related to growth in non-wage benefits (employee health care, 401ks) and return of workers who had left the labor market keeps the unemployment rate constant. This dumb reader wonders if measuring benefits of working solely in terms of wages is less important than it used to be.
Measuring benefits in terms of wages is still important, but you make a very important point about the return of workers who have left the labor market: Think of the labor market as a chemically buffered system (i.e., the buffered aspirin product Bufferin). As jobs are added to the system, the buffering particles "emerge", go into solution, and maintain the pH of the system.
there are ways to suppress workers bargaining power more for a given level of unemployment
i suggest that we look at those factors
they can make NAIRU exist at a lower level of unemployment
no long run relationship between inflation and unemployment misses the who point. excess inflation occurred and caused decreased REAL demand because not everyone's income kept pace with the excess inflation
that is what caused the unemployment rate to increase again despite high inflation
I definitly consider this article too wonkish for the NYT. It is extremely complex for a non expert, full of yes but not statements. In the seventies I did not buy the Phillips curve as a generalization and i do not buy it today. It may appear as neatly as in the Spain case but this depend of the specific case. If you print money just to generate employment you will get it, however if you generate employment through a different component of the total demand you will not have it. I agree with the conclusion that central bankers may be too cautious at times when some risks could and should be taken. Unfortunately central bankers are risk averse and they are right only half of the time. Risk takers can do best.
2
Really good piece ... Paul sticking to Economics is valuable!
I'm curious as to how the ongoing loss of specific types of human jobs to computers and machines impacts economic recoveries, and how this might change if the job losses begin to impact larger numbers of highly trained or highly educated workers. It seems to me that the periods immediately following recessions are the exact times when such major shifts in staffing might be easier for companies to implement even as they are most harmful to unemployed workers.
2
"We should not let policy be driven by ideas that haven’t worked for decades."
But what're the chances for them to factor into Dr Krugman's views, which are very seasoned. He often writes as a Democratic partisan, not as an economist. So they, despite being a Nobel laureate, might dismiss what he writes as another pitch for Democratic causes.
For whatever it's worth, I would advise Dr Krugman to be more serious and much less of an advocate for Democratic policies. Not that Democratic policies aren't better, and that Republican policies mostly very bad.
I would also say this column is unusually good. Even I understood it, an 82 yr-old layman, when I read slowly and attentively.
2
Any concrete example of Krugman not being serious?
And for all issues that are a matter of politics and not economics, since when is it wrong, in a democracy, to openly admit your political choices ...?
2
I don’t disagree with you.
But far too often Dr K writes more like a partisan Democrat, which diminishes his scholarship as a great economist.
When Dr. Krugman shows that economic proposals put forward by Republicans will not do what they claim, why is that "partisan"?
When Republicans promote some proposal with claims that it works with links to published data that does not prove it works, why is calling attention to that "partisan"?
Dr. Krugman has called out proposals made by Democrats (and Independents, e.g., Senator Sanders) that were clearly hyperbole, and been castigated by those who chose to call them ad hominem attacks, when they were based on the details, or lack of details, in the policy proposals.
When groups of politicians, and for over a decade it has been groups allied with the Republican Party mostly, that continually cite debunked studies, etc. in promotion of policies that will hurt all but those in the top economic status, why is it wrong to point that out? Why is that "partisan"?
1
Dr. Krugman: You say that behavioral economics impinges on our understanding of inflation, so please allow a suggestion from my field of psychology.
Your column makes no mention of income inequality and it's effect on demand and prices. Yet when such a huge share of income merely adds to the wealth of people at the top while wages stagnate, demand would seem to suffer. The multiplier should become smaller. Even so, I suppose we should see an inflationary effect on luxury goods, but that is not where inflationary pressures are commonly measured.
What say you about the effect of income inequality on inflation? Is it being ignored by economists?
1
@ Mr. Johnson...
That sounds like a great point. Living in the PNW, though perhaps not in Roseburg, you can see a great exmple of your idea in the inflation of fixed housing prices in and near the large metro areas.
This is a very localized inflation.
But there is this: Paul Singer (major Republican donor and vulture capitalist) is almost apoplectic about inflation in the Hampton's real estate market and the high end art market:
https://www.washingtonpost.com/news/wonk/wp/2014/11/06/heres-the-latest-...
This is all too funny! My heart bleeds for Paul Singer.
This article defines our wholesale lack of knowledge about cause and effect in our economic cycles and the resistance to change our methods as what we learn about economics changes.
2
So come on Paul, isn't this an argument for L. Randall Wray's, Flavia Dantas', Scott Fulwiler's , Pavlina Tcherneva's and Stephanie Kelton's work on "Public Service Employment: A Path to Full Employment," published this April by the Levy Institute of Bard college?
In the Introduction the authors make, they sound like you and your arguments for lost ground with too little demand.
Senator Sanders is close to making an announcement built on their work, FDR's Second Bill of Rights, in other words on the moral and civic reasons behind the economics pushing in the direction you have outlined.
There is so much work not being done to repair schools, aid the elderly, rebuild our infrastructure and repair environmental damage, work that has been ignored for decades, that the excuses now seem flimsy.
This Austerity based economics is due to ideological neglect of the private sector and the capture of public policy in both parties by the anti-government thrust of Neoliberalism - and its "eyes on the prizes": cheap labor, higher returns, and tax subterfuge - by going "global."
If we want to keep free trade - and it has to be fairer for us with China, Japan, Korea, and the smaller Asian tigers than it has been, then we need a Keynesian Social Democracy work program that brings the working class back into the mainstream of society. where it was rightfully placed by the New Deal, and from 1945-1978 or so.
1
"From the mid-1970s until just the other day, the overwhelming view in macroeconomics was that there is no long-run tradeoff between unemployment and inflation, that any attempt to hold unemployment below some level determined by structural factors would lead to ever-accelerating inflation."
That's not only the neoliberal view: the Keynesians also believed this. The difference was the moral perspective: while the Keynesians attributed high inflation only to high wages (which implied in low unemployment), neoliberals stated that structural unemployment was necessary to control inflation. The illusion of this comes from the fact that we live in a fiat currency world: if real wages go up, the capitalist class can issue more currency ex nihilo, thus rising inflation as a collateral effect.
The Keynesians were demoralized by the stagflation of 1975 (high unemployment, high inflation: an impossible combination according to Keynesian theory), and the neoliberal reign begun.
But, since 2008, we now have anti-stagflation: low unemployment (at least in the first world countries) with low inflation (even deflation in some countries) with low interests. It was the neoliberals' time to be demoralized.
Now we're in some kind of limbo: politicians are still trying to revive neoliberalism, without success (the child of this process is a much more brutal version of neoliberalism, which people call informally "austerity"). The old is dead, but the new refuses to be born.
1
Maybe we're measuring inflation incorrectly. Goods inflation is non-existent, thanks to China & other countries. Services inflation, though, is through the roof. For example, healthcare, education, taxes to pay for local services, insurance, etc. In addition, asset prices like housing are arguably in bubble territory.
Perhaps the government needs to change the way it measures inflation, update it for the 21st century. Or perhaps no one wants it to change because it falsely justifies keeping interest rates low.
1
If you can sell you will never be out of a job.
I read your article Dr. Krugman. Now my head hurts. In real life terms, I observe this, prices, employment, unemployment, imports, GDP, are all about the same relative to each other almost exactly as they were in 1980....'adjusted for inflation".!.... ??. .... Help. From the commoner's perspective.....all thats happened since Nixon....we abandonned the "gold standard" and enforced the "oil standard"(or is that Standard Oil?) ...petrodollars...all oil sales were hinged to their value in US Dollars, regardless of who was buying or selling. The nice, stable world regulated by a weird, complex, secret tax....called "petrodollars".....came unhinged when we discovered that Saddam Hussein was selling his oil to China without first converting the sale to "petrodollars"........everything else follows. Including the incredibly insane strategy of enlarging the already existing Keystone Pipeline which does nothing except transport oil faster to China...(soon thru the newly constructed Chinese Canal in Nicaraugua....possibly protected by new Chinese Naval Bases in Cuba).
❤️
Even as a professional macroeconomist, I found this article basically almost totally
incomprehensible.
Poor writing. Not clear even to economists.
Paul would do well to rework it.
Try explaining all of this to your grandmother so she actually understands it.
What is the bottom line?
Leave out the paleo and net-paleo stuff.
Is there a clear conclusion and policy recommendation?
6
The clear policy recommendation is: when unemployment is low and inflation too but wages tend to stagnate, don't raise interest rates, as centrals banks, and pass bills that stimulate demand, as government, contrary to what mainstream macroeconomics until now advised.
Other than that, I have to admit that I thought that it was the fact that I'm not an economist that explained why many passages in this op-ed remained totally incomprehensible for me (including those explaining why this is the conclusion and policy recommendation) ...
1
I'm not an economist. I got the gist of the article. You recommended conclusions. Mr. Krugman concluded: Keynesian economics really seems to work. Chicago School economics does not. Follow Keynesian theories.
1
More work is being done by computers and robots; less is being done by actual humans.
Add to that the loss of regular increases in wages resulting in the owners being able to keep (hoard) the profits.
Voila! You have the problems that Dr. K describes. Less money for us workers and lower core inflation due to lack of money to spend on things.
1
Raises are forever and bonuses are just temporary. When you have a quarterly earnings call and have to defend labor costs well not hard to see the incentive to not increase wages permanently. Additionally, I think there is just some psychological caps in peoples minds about what job A should pay, job B, and job C. Paying outside those biases is really difficult to get managers to do and to get wall street to approve.
A little off topic but...
David Brooks said something Friday on PBS' News Hour that just annoyed the whatever out of me. He was defending corporate allocations of their tax cut windfalls, saying that (paraphrasing here) stock buybacks have only been 16%, while Capital Expenditures were running much higher.
This is great for the economy, but whose economy? If your factories are overseas, how are those expenditures helping us? If you're buying new office equipment, and said equipment is all built overseas how is that helping our economy?
I believe David's statistics, but there has to be context involved. For instance, Tim Cook testified in Congress that Apple wasn't hiding its money in some Carribean island tax haven. Ireland isn't in the Carribean, so I suppose he wasn't technically lying.
https://www.reuters.com/article/us-usa-tax-apple/apple-ceo-makes-no-apol...
5
Without being an economist, I believe that inflation has to, necessarily, be affected by low wages, which is the case in the US now. To have a minimum wage of $ 7.25/hr is simply incredible. With wages this low, demand will have to be too low to cause prices to increase.
You assume that there has been no inflation, or minimal since the "great recession". This is absolutely incorrect. There has been no inflation based on prices, but in fact the inflation has been in quality and quantity. For the same price, I get a far inferior product or a product of much smaller quantity. THAT IS INFLATION!!!! To buy the same quality / quantity I am forced to spend 2 to 3 times as much.
For example, pre "great recession" I would by a dress shirt for $50. It would last for 5 years under normal wear. It was made in America. Now I buy a dress shirt for $50 and it lasts 6 months. Same price, inferior quality. Ask any woman about the change in the quality of her clothes in the past 10 years verses the price.
Time to admit that we have suffered tremendous inflation over the past 10 years, which of course destroys your whole premise.
6
Krugman falls into a trap characteristic of both social scientists and Americans: he is doing a one-parameter fit to a very multi-dimensional problem. (The American aspect is the demand for simple explanations to everything.) He and his homies neglect the [very important] impact of automation, weakening labor union influence, a global and migratory labor force, redistribution of wealth and the effects of tax "relief" to worsen the inequality...and on, and on. Their ancient model is about as relevant as assuming there are only three TV networks. Life is a lot more complicated than his simple model.
6
It seems that economists never factor demographics into their neat models. Hard to factor the demand curve from '75 to '85 without taking into consideration the entry of the Baby Boomers into their home and family formation years, or to understand today's shrinking workforce without factoring in their hitting retirement age, particularly during a post recession reconfiguring of corporations to eliminate older and more expensive workers. As you say, silly to try to draw macro economic laws by comparing current economies to those of decades ago, like comparing the micro-environment of a small river to that of the large river a hundred miles below. They have water in common and often little else.
2
“Stabilization,” if it comes to so-called fine-tuning, can have the opposite effect: it can lead to (unnecessary/unwarranted) short-term volatility.
Regardless of the theoretical complexities, it is pretty obvious that inflation will only happen when there is a significant increase in demand due to the availability of more money. An increase of low-wage jobs like we have now is not going to put enough money back into circulation to make that happen. Now, tax cuts might do that, but the Trump cuts offer only a pittance to those who need it most, and give an excessive amount to people who cannot possibly spend every billion that they already have. So where does that money go? Overseas, thus paradoxically taking even more money out of circulation and doing nothing for the poor and middle classes. Meanwhile, when interest rates go up, the low taxes force the government to borrow more and more to cover the debt, while most of the interest payback money again goes out of the country as we all fall deeper in debt. Trump and the Republicans have created a very efficient system for sucking the wealth out of our economy, making 90% or more of us poorer and poorer. Without a decisive change, we are doomed to becoming a second-rate third-world economy. Democrats must campaign NOW on a platform of increased minimum wages, higher taxes on the rich, encouragement to collective bargaining, and major investments in infrastructure and technological innovation in order to create more higher-paying jobs that will truly stimulate the domestic economy by adding to the real income of the bottom 90%. THAT will make America great again.
7
Yes! Yes! Yes! Now if only the Democratic Party would take the points made in this comment and hammer, hammer, hammer it home, they might do well in the coming elections. Then they must rise to the challenge of passing appropriate legislation. Hope strings eternal!
3
Oh Paul, you poor dear. Going all wonky on US when we have the densest dumb cluck in the Oval Office takes a lot of chutzpah. But leave it to you, Paul, for speaking Sense to Nonsense. In the Trump Era that takes doing. You radical you.
DD
Manhattan
4
No inflation?? silly man. Lots of inflation in housing costs in certain markets?? ( supply - demand - speculation - foreign buyers - blah blah blah).
Lots of inflation in drug prices. Thank you Congress for not allowing Medicare to negotiate (a Repug idea -- did they all buy stock).
Lots of inflation in CEO salaries.... and how are full professors versus grad teaching assistants and adjuncts doin'? and foot ball coaches and presidents of state universities?
The system is pretty rigged... for whatever reason. BTW AI can do lots of things better than human beans -- and prob. time to plan for that future... and some discussion of what is the planet's capacity to support the species homo sapiens?
I am all for look forward economics. BTW as all inflation control seems to consist of is raiaing the interest rate which means people can stop gambling on the stock market perhaps -- what is wrong with that -- raising the interest rate? )
I have no idea what this article is trying to say.
1
If you are still defining politics by Dem vs Repub...or even Liberals vs True Conservative Values....you are lost in the past......take off yer blinders. Dont be so smugg......the world is passing you by.
In least wonkish terms, Paul - you're describing a dead-cat bounce...
https://www.nytimes.com/1991/11/10/magazine/about-language-double-dip-or...
"...A more graphic synonym for that worrisome news is dead-cat bounce...
Continuing with this snake-water economic model - the secular econodynamic phase-change is that central governments:
> Formerly had been able to inflate their economies - sometimes by distracting consumption cats with zero-interest funds to buy balls of yarn from production dogs...
> Now left only with cat carcasses - at several scales of population - inflate the carcasses on the way down, in the hope that they'll bounce more prettily...
As wonkish as this discourse may be, no quantum computer - or even quantum mechanics - needed...
I simply Carnot believe that you all haven't figured things out by now - or is that you and your ilk fear the potential terrorism wreakable by stateless variables...
One kudo - your data is honest and complete, to the extent it shows the relationship of two variables with unambiguous definitions...
But - as any econophysicist would tell you - ninety percent of success is finding the right coordinate space...
Suggest using some Greek characters - they gave physics (and the EU) an infallible patina of wisdom and authenticity, till recently...
On a seasonally adjusted basis 37,000 jobs were lost (i.e., not created) in March and only 3,000 jobs were created in April.
https://www.bls.gov/news.release/empsit.a.htm
The reason the unemployment rate fell in April is not that employment increased significantly.
The fact is that the number of “Unemployed” (the numerator) fell from 6,585,000 to 6,346,000, not because people found jobs, but because 410,000 people dropped out of the labor force
Even though the number of people employed (“Employed”) remained essentially the same (155,178,000 vs. 155,181,000), the “Unemployment rate” fell from 4.1% to 3.9%.
The “civilian noninstitutional population” increased by 175,000 in April, but because 410,000 people dropped out of the labor force, the “Civilian labor force” (the denominator) shrank by 236,000 people (from 161,763,000 to 161,527,000) .
Unemployment rate calculation:
March 2018: 6,585,000/161,763,000 = 4.1%
April 2018: 6,346,000/161,527,000 = 3.9%
--------------------------------------------------------------------
The “Civilian noninstitutional population” for April was 257,272,000.
March “Participation rate”: 62.9%.
April “Civilian labor force”, adjusted = 257,272,000 * 62.9% = 161,873,000
April “Employed” = 155,181,000
April “Unemployed “, adjusted = 161,873,000 - 155,181,000 = 6,692,000
April “Unemployment rate”, adjusted = 6,692,000/161,873,000 = 4.1%
Jobs + 3,000
Workforce + 110,000
See also:
https://tinyurl.com/yaqg7ccg
2
'We should not let policy be driven by ideas that haven’t worked for decades.
Whyever not? It's the American Way:
the American Way of war.
the American Way of 'health'.
the American Way of education.
the American Way of 'peacemaking'.
the American Way of reality denial.
the American Way of exuberant ignorance.
the American way of governance,
the American Way of much else besides.
Exceptional, indeed. AS the auld Scots toast has it, 'Here's tae us; wha's like us? Damn few. and theyre aa deid.'
(Here's to us; who's like us? Damn few. And they're all dead.')
1
I fail to see where Americans need to apologize for anything. Seems like we represent about 5% of the world's population, while the other 95% wallows in misery of their own creation. And we'll gladly drink a toast wi' ar Scottish brethren......All we want is ar Free!!"
Quote from famous 13th Century Scotsman=Aussie-Merkan Mel Gibson!!
"...the failure to supply enough demand after 2008 imposed an enormous cost, which we can never regain."
A small example of this is in the housing market, where millions of people were foreclosed out of their homes and lost all the equity that they so recently believed they had. This "equity" had been the collateral supporting a whole web of economic activity.
2
The reason why there's no increase in wages despite labor being in bigger demand, might be the extreme weak state of the unions. Especially in America, but in fact, everywhere in the Western world, people have been told unions are dead, outdated. They bought that narrative hook, line and sinker.
5
Amazing article, in that it reveals how little economists even know about that most economical of phenomena, inflation. If even a Nobel Prize winning economist like Paul Krugman is groping for answers as to why low unemployment isn't causing inflation to rise, it means nobody really has a grip on inflation.
2
previous debt - I think consumer debt is over 1 trillion - tons of low paying part time and no benefit jobs - plus I look at the cost of everything and do not grasp how inflation is always so low - it seems to be an unreliable number and is not a broad enough indicator.
3
Girl, please. You know wages are stagnant and most people don't get paid enough to meet anything beyond basic needs. Also that unemployment level is a complete fallacy. It does not include millions who are no longer looking for work simply because it's not available, or who are working multiple part-time jobs. You know this is different and we're in one of the worst economic times in modern history, yet you and your ilk continue to pretend like all is normal. Stop this nonsense.
7
It works better than the deranged lunacy economics - derived from Keynes derived from Marx - promoted by the wonkish pet so-called economist of the NYT.
1
What works better, more precisely?
2
Keynes despised Marx. Never took an interest in reading Capital (just like you). At least Keynes kept these views confined to private correspondence, for instance his epistolary exchange with Bernard Shaw in 1934.
Consumption, conspicuous or not, should have never been viewed as a virtue. Want and need are the pimp and the prostitute. I nominate the pharmaceutical industry as my case evidence. The want and need of good health is exploited not based on the fix (repair), but, instead, on an astronomically inflated (there that word is again) literal "fix..." It is a supremely cheesy mindset that runs things in all things economic: Give me as much as you've got for my minimalist input. Everything else flows from that rank tributary.
1
Isn't this supply-siders heaven - low unemployment to keep the angry white GOP voters on their side, and low pay to keep "those people" down with no political power beyond the vote, which the GOP have completely brainwashed to their side?
2
The problem with Krugman's assertions about demand, is in who supplies the demand. Socialist economists like Krugman believe demand is supplied from public sector (government) spending--euphemistically refer to as "stimulus". As with the Obama stimulus package in 2009, it rarely works--if at all.
Supply-siders believe that lowering the burdens on business, (essentially taxes and regulations) and allowing all taxpayers to keep more of what they make, will spur demand. In fact, some aspects of Keynesian Economic Theory agrees with this.
Keynes, postulated that in times of economic downturn, it was acceptable to use unnatural means to spur the economy--to "prime the pump" so to speak. This could be done by increasing government outlays--but also by cutting taxes. How ironic that Neo-Keynesians can only remember the former, and never the latter.
But Keynes was clear about what to do, once the downturn is reversed. He believed the stimulus should end, that the money be paid back and the books be balanced. He was not a fan of perpetual deficits--and that is the issue he would take with Krugman.
I have been reading Krugman for years, and he has never followed Keynes' theories closely. He agrees with borrowing and spending--but not a single time has he ever advocated tax cuts. Likewise, he has never advocated spending cuts--or paying the money back. In fact, those who worry about balancing the books, he calls "Debt Scolds". He's a "fair-weather Keynesian".
1
The problem with people imagining that centrist capitalists are socialists, is that what they imagine that those capitalists believe and do, doesn't have ANYTHING to do with reality.
Let's take the 2009 Recovery Act, for instance. It only contained government subsidies and no tax cuts, you claim.
In real life, more than HALF of it went to tax cuts. That's more than $400 billion, remember?
And Krugman not only supported it, he argued that the amount of the stimulus should be higher to have more and a faster impact.
As to deficits: like most Democrats and centrist capitalists, Krugman strongly disagrees with Dick Cheney's famous "deficits don't matter" statement (Cheney and Bush then went on leaving the White House with a record and structural $1.4 trillion deficit). Deficits can only be justified if:
1. there's a severe economic recession
2. it's a one-time deficit, not a structural deficit.
As soon as the economy recovers, you have to start lowering previously existing structural deficits, if those exist, and if not start paying back the debt.
And that is EXACTLY what Obama did, who managed to cut the Bush deficit by two thirds.
But now the GOP has taken over, and their first major legislative achievement was to double the deficit, and then they followed up with a first budget, a $1.3 trillion unpaid for spending bill, that increases the deficit even more.
Conclusion: get out of your ideological closet and start fact-checking ... ;-)
3
I've followed him for years too. And you get him wrong and you misrepresent the practice, perhaps unwittingly.
Krugman is not supportive of socialist or Marxist economics. To suggest otherwise is silly. He is indeed a lefty--but so what.
By the way, the left also considers stimulus to be tax cuts (by definition fiscal stimulus can be either). The issue, that you don't mention, is that lower income people are more likely to spend to increase demand. What you write doesn't comport with the research or the theory. And to use the word "unnatural" in a human economy is preposterous.
1
This opinion contains lots of incorrect assertions. Just one example, the Obama stimulus contained no tax cuts. It did but it cut payroll taxes, getting money to people with regular jobs. Not the kind of tax cuts Repubs like that go to those in the top of the earnings brackets.
Dear Professor Krugman:
Should the last sentence of the 5th paragraph read: “Current inflation does depend on unemployment, but it also depends one-for-one on expected inflation:”?
(Wonkish) An Opinion. Mr Krugman's opinion exposes economics for what it is . . . a correlationally-based hypothetical jungle of ideas that cannot be proven or disproven. Given the destructive effects of adopting(selected theories of) Adam Smith and Milton Friedman as economic theology, econo-babble is best ignored.
>
"Darwinian theory tells us that an interest in truth is not needed for survival or reproduction. More often it is a disadvantage."
John N. Gray
1
Another side effect of this low unemployment rate is the massive drain and migration of "talented workforce" at federal + state governments to the (much better compensated) private sector...The first one can't simply compete with the later one in terms of compensation packages...The set "capped" salaries for public servants is simply outdated and ludicrous.
“....temporarily let the economy run hot.”
But, low unemployment is NOT heating up the economy, because labor force participation rates are low. Any many employed people are half time or in low wage service jobs.
Anecdotal example: my daughter’s boyfriend got a job ... in retail. And every week his hours bounce around, never above 29. So he never has steady income.
When I was his age, a job meant you could rent a small apartment, buy a used car. Not anymore. He still lives with his parents. So he is ‘employed’ but that does not mean he has enough spending power to drive up demand.
5
“…the latest US employment report, with its combination of a low reported unemployment rate and continuing weak wage growth, seems to have brought skepticism…”
Could it be that the unemployment rate did not really drop at all?
According to the latest report, 36,000 jobs were lost (i.e., not created) in March and only 3,000 jobs were created in April.
The only reason the unemployment rate dropped is that the “Civilian labor force” dropped drastically, by 158,000 jobs in March and by 236,000 jobs in April.
Without the drops in the “Civilian labor force” the “Unemployment rate” would have been:
March 2018: 4.2% (vs. 4.1% reported)
April 2018: 4.3% (vs. 3.9% reported)
Employment Situation Summary Table A. Household data, seasonally adjusted
https://www.bls.gov/news.release/empsit.a.htm
2
This sentence seems incorrect:
"Current inflation does depend on inflation, but it also depends one-for-one on expected inflation:
Inflation = f(U) + expected inflation
where f(U) means some function of the unemployment rate."
Looking at the equation, I think it should read," Current inflation does depend only on the unemployment rate, but it also depends one-for-one on expected inflation.
It's also possible that Mr. Krugman means something entirely different from what I just wrote, but it's not clear with using the unqualified "inflation" the first time in the sentence and bringing in unemployment used in the equation. Is he just saying that anticipation of change becomes part of the process of change, change in this case being inflation?
This is not a comment, it's an inquiry that perhaps you can pass along to Mr. Krugman in case the sentence needs correction or change.
1
For the people in the luxury boxes the economy is running hot. For those of us in the cheap seats there's a cold wind blowing. The unemployment figures are a sick joke. How many of those people who have found jobs are working full-time? What are the wages and salaries of all these glorious jobs? Bill Clinton was highly praised for the number of jobs that were created during his administration. However, the income from those jobs averaged together was $8 an hour. I'll call the economy hot when all the food pantries that are having a hard time meeting people's needs go out of business.
3
Not too wonky for me, but, hey, I am a mathematician. So, you posit the additive factor, f(U), where the units of U are unspecified as are the features of your function f, you are guilty of what we in the biz call "mathiness", that is, injecting mathematical terms where they are not needed.
This is your second recent column on inflation and unemployment in which you have not mentioned the E-Pop ratio. Please talk about that.
The Phillips Curve seems focused on the demand-side, so it probably does fine in the absence of monetary and supply side shocks. Our aging demographics may also be creating more slack than the curve indicates when we use the unemployment rate.
In years past, supply-side shocks (e.g., oil embargoes) could drive inflation without unemployment. But now oil isn’t as a big a part of the economy, so it’s tough to see how we get inflation that way.
I suspect the Fed printing $4 trillion had something to do with why we had a gigantic spike in unemployment but not deflation during the Great Recession. Take that printing away and one can only imagine how much deflation we would have had.
An alternate Phillips Curve, using the relationship of the employment cost index (ECI, a measure of inflation) and (1 – EM Ratio, a measure of employment) is robust throughout, perhaps better taking slack into account.
I'm struggling to understand why we are looking for a correlation between just two trailing indicators. Inflation is something that happens due to other factors, and employment is too. Shouldn't we look for those leading indicators? Things like stimulus spending, bank bailouts, interest rates, trade deals, brexits, tariffs, wars etc. could make the charts a lot more revealing. And should we also examine what we're measuring to gauge inflation? Home prices are inflating rapidly. Should the inflation of milk prices count as much as housing?
1
The prime graph:
https://fred.stlouisfed.org/graph/?g=jKCE
January 15, 2018
Price index for personal consumption expenditures less food and energy & unemployment rate, * 1980-2018
* Employment age 16 and over
(Percent change and Percent)
The last time the unemployment rate reached 4% was the late 1990s a period in which workers really did begin to gain some of ground they've lost since the 1980s. One of the reasons for that was Alan Greenspan. You can criticize Greenspan for many things such as his long standing advocacy for financial deregulation and especially his refusal to regulate the mortgage market after Congress explicitly granted the Fed the power to do so. He also failed to see the housing bubble.
These failings set the stage for the 2008 financial crisis. There's no question that Greenspan's early association with Ayn Rand inspired his laissez faire views.
Yet, Greenspan was also a heterodox economist who did not subscribe to standard orthodoxy held my most economists that a low unemployment rate would lead to an acceleration in the rate of inflation. Instead Greenspan looked to other indicators notably the Future Inflation Gauge, which is something that's still around and published by the Economic Cycle Institute. As a result monetary policy during the 1990s was much easier than would have been the case with a more orthodox Fed chair.
Business investment and labor productivity both soared during the late 1990s and it's arguable that these unexpected positive effects were largely result of keeping interest rates lower than others thought prudent at the time.
Concerning your statement: "the failure to supply enough demand after 2008 imposed an enormous cost". It sounds like you are suggesting that the govt should have done something to increase demand and prices for homes. Need I say more?
As to ANY arguments about the unemployment rate, especially any that compare its impact 20 or more years ago with its impact today, you are comparing apples to oranges. There is NO MEANINGFUL relationship between the unemployment rates in the past with those in the present. Today, he number of people who COULD and would LIKE to work is much greater than in the past, and greater even than the number "officially unemployed". This is the REAL unemployment rate. Almost as bad is the fact that there are far more jobs (as a percentage of the total) today with menial pay than in the past.
If you want to measure a number that gives you a REAL idea of current employment health, give me the average and median hourly wages of everyone who is either employed, looking for work, or would like work but has given up.
2
Paul, I am still a Keynesian, having studied from Hansen's work and Keynes at Harvard long ago but you would have done us all a favor had you neatly summarized the "Neo-paleist" view in your last paragraph rather than merely referred to it. I still don't quite get it.
3
It's tough when your equations stop working. Naturally you suspect the data and try various variables. Then you examine the constants.
If you can't patch it up, especially in a subject with physics-envy, it's hard not to force reality into the equation. But eventually there's a readjustment to the new reality.
We're experiencing a new normal that feels unnatural and we're trying to adjust.
The degree of concentrated power in our economic system has burst its historical boundaries. Now called toxic capitalism, it's gone past a tipping point and won't be coming back. We've been left in the dust. As GDP doubled our wages barely moved (only 3%).
Note that Marx predicted our current exploitation, alienation, and class struggle, due to five guys owing as much as half the population of the world - i.e. excessive capital concentration.
He also predicted revolution as a natural solution.
7
"For given what we now seem to know, output lost to weak demand is lost forever; there is no chance to make up for it later."
What about demand for durable goods? At the consumer level, people postpone buying new cars, refrigerators and washing machines in slim times, and that pent-up demand is -- at least anecdotally -- "made up for" in fat times. The same is said to hold for factory-and-farm-equipment upgrades. Stock-market analysts put a lot of stock in these ebbs and flows as they affect manufacturing.
I have faith the good professor, but that sentence really threw me as it seems to run counter to received economic wisdom.
I understand your point, but what I believe Professor Krugman alludes to is long-term demand.
Let's say you need to buy a new washing machine every 10 years, and you were due a new washing machine in 2010, but waited until 2014 to purchase it because of the economy. Had you purchased it in 2010, you would presumably replace again in 2020. Now that you've purchased in 2014, you probably won't replace in 2020 just because that was your pre-recession trajectory. You'll wait until 2024 to replace. But let's say a moderately large recession, worse than 2000 but less than 2008, hits in 2022. You push back that 2024 purchase until 2027. Now you won't buy again, assuming no recessions, until 2037.
Thus, on previous trajectory, you would have purchased washing machines in 2010, 2020, 2030, and 2040. Now, you've purchased in 2014 and 2027, and 2037. Thus, in a 30-year window between 2010 and 2040, you've purchased one fewer washing machines. The new trajectory will never really catch up to the old trajectory.
I still agree that it seems unlikely that *zero* percent of lost demand is recovered. But I think the Professor is correct that the vast majority is lost forever.
4
"Current inflation does depend on inflation, but it also depends one-for-one on expected inflation". Um, maybe second occurrence of "inflation" should be "unemployment"? The Konczal article is much clearer, imho.
No, the entire point of this op-ed is about the fact that inflation is related to expected inflation.
I see this sentence has now been changed per my suggestion.
Mr. Krugman is calling for the Fed to allow the economy to run hot. If they take his advice, the economy will flourish, and that will benefit Donald Trump and the Republican Congress in a meaningful way. I take it as a sign of Mr. Krugman's honesty that he calls for action that, he must know, will harm his political leanings in the short run.
9
Writing this comment, other's comments are visible as I write, which point to a lack of demand. Truly amazing that the 'Great Recession' has been called over for such a long time with out rising inflation and wages. Capitalism is great for workers in times of very low supply and high demand (think post-WWII with the Marshall Plan), but otherwise leads to a race to the bottom.
6
Too complex macroeconomic theory at least for a lay public like me.
Learned Professor concludes his argument that we should not let policy be driven by ideas that haven’t worked for decades.
How about giving more thoughts to the theory of Buddhist economic model based on which Leopald Kohr, Michael Shoemaker and Gandhi ceaselessly propagated, economics as if people mattered?
How about Michael Shoemakers view of the time tested economic philosophy that the “wisdom demands a new orientation of science and technology toward the organic, the gentle, the elegant and beautiful”?
Today's extraordinary mess current civilization facing is in no small measure due the fact that “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage — to move in the opposite direction.”
Buddha understood clearly the theory of economics for happy non violent society stating "spiritual and philosophical approach to the study of economics. It examines the psychology of the human mind and the emotions that direct economic activity, in particular concepts such as anxiety, aspirations and self-actualization principles".
What a paradoxical so called modern man who does not experience himself as a part of nature but as an outside force destined to dominate and conquer it. He even talks of a battle with nature, forgetting that, if he won the battle, he would find himself on the losing side!!
7
I cannot remember the source but someone asked President Kennedy what the difference was between a conservative and a liberal. He replied that a liberal sees people as the ends and capital as the means and a conservative sees the opposite.
6
Forgive me Dr. K. Doesn't inflation respond to demand? Demand depends on many things, but especially having cash (or credit) to purchase.
Working at a low paying job, or one that is limited to less hours, constrains buying power.
Pricing is also dependent in part on demand. Apple for example prices independently from cost. (Previous post.) Likewise, employers are slow to increase wages in the present, if anticipating a slump in the near future.
A lack of readily available labor should mean an increase in wages as one employer lures workers from other companies. (and/or better benefits)
Other factors are holding down wages, as noted on C-SPAN this am. Better paying jobs are declining due to out sourcing and automation. Also, corporate profits are high as a result.
To add insult to injury, financial interests are sucking the wealth out of home grown companies and passing it up. Pensions are also raided.
The question is: do we have an economy for its own sake or for the elite; or do we want an economy for the benefit of the citizens?
5
Working at a low paying job, or one that is limited to less hours, constrains buying power. ...."
I recently read where credit card debt is NOW at the same level it was before 2008 so people are spending way beyond their means given that wages have increased hardly at all.
It seems probably that any linkage between inflation and unemployment may depend on the expectations of both employees and employers.
Short term fluctuations probably do little to adjust expectation of a return to the norm. But long term departures could easily be seen as a new normal. If neither workers nor companies expect wages to rise soon, they probably won't, particularly in an environment where the role of collective bargaining has been diminished.
Additionally, some jobs are perceived as more competitive than others, from either an employer or an employee perspective, leading to a different set of expectations around wage adjustment based on the career. In an economy where the workforce has been retooled in favor of lower skilled service jobs, one might expect workers in this category to have lower expectations for wage growth. A large scale shift in expectation could easily yield changes in wage elasticity in the broad economy.
The original assumptions - that there was a link between domestic unemployment, domestic wages, domestic prices and hence domestic CPI - only hold when there is limited external input to the system.
When domestic consumption involves a high percentage of items that have low domestic labour inputs AND high percentage of foreign production then the link between unemployment and inflation does not exist.
Increased automation of US farming makes food prices less dependent on labour costs. Cell phone prices depend only weakly on US labour costs.
Prices in the US may be more affected by wage increases in China/Korea/... than wage increases in the US.
3
I think we're not considering that the relationship between unemployment and inflation has declined over the last 25 years or so due to geopolitical changes.
In other words, is it possible that disconnect between employment and wages that we're currently seeing the result of the fact that, in a post-USSR world, companies no longer have to throw a bone to workers anymore?
Marxism was concerned with the proper distribution of wealth between labor and capital (favoring labor), and with Marxism so thoroughly defeated on the geopolitical stage, has there been a reaction whereby capital is now able to arrogate wealth to itself?
There's no longer a great power that proffers an opposing model to late capitalism... the divide is between (generally) liberal/democratic capitalist states (USA/EU) and (generally) illiberal state-controlled capitalist states (Russia/China). Either way, capitalism won. Now the competition is about economic growth and power between liberal/illiberal states, and that competition itself favors capital over labor (as capital reinvests in itself, while labor merely consumes).
Hasn't this theory been borne out in the extreme wealth distribution inequality we're experiencing, and lack of wage growth? The way in which caring about -people- as opposed to -revenue- has vanished even in our health care and education systems? To me it's all consistent with capital/labor power imbalance, favoring capital, that defies older theories predicated on C/L balance.
3
Not an economist, but I think the keyphrase to explaining inflation or the lack thereof is 'necessary and sufficient'. Wages are bounded on the lower end by minimum wage rules. But the reality is that many poor and middle income people are living on negative net incomes (expenses exceed income). As wages have stagnated, the fraction of marginal to low income workers has expanded.
So, yes, you can have low unemployment without wage inflation. It's necessary, but not sufficient. You also need wage growth and I would posit that there is an enormous gap in demand - more than enough to explain the lack of inflation.
Isn't the massive GOP tax giveaway to the rich a way to juice the economy, thereby making it run hot? Maybe it already is running hot.
1
The GOP tax cuts for the .1% wouldn't make the economy run hot, but they're doing wonders for the stock market.
2
It's what the GOP SAYS it will do, but all available data and evidence show that those are mere words, or as they prefer to call it, "alternative facts".
In economics, it often takes a while for the effects of change to manifest themselves, especially because surrogates are often measured or acted upon. Workers may be reluctant to switch jobs. Switching jobs is an initial cause of wage inflation. Head hunters prefer the employed to fill new positions and will very reluctantly seek out the unemployed. After a recession, it is understandable why workers might place a premium on stability over risk, at least until there are many opportunities from which to choose or fall back upon. Some of my former work mates are serial opportunists, they are not finding many doors open right now. Employers need confidence to hire, both in a worker's ability and a market demand for products. Workers need confidence to move. When that happens, wages will increase.
2
All good points. I also believe that the current expense of healthcare/ medical insurance, compared to 30-40 years ago is another factor contributing to the 'calcification' of job mobility, for want of a better word. Many employers work on a 'contract to hire' basis, which means no immediate subsidized health insurance, and even if hired as an employee, many companies don't offer benefits right away. Then there's the rise in part-time jobs as well, which also offer no benefits typically.
Not sure I agree with the hypothesis, but I applaud Prof. Krugman for finally writing a piece without using the T word.
2
It strikes me that when a recession begins, that unemployment increases exponentially, only to subsequently decline linearly. It is like a contagion, a shared expectation that "things are going bad" and businesses try to get ahead of it by quickly firing workers before decreasing demand is manifested. Like a game of musical chairs. During the recovery, the process is the opposite---businesses have to be convinced by evident demand to hire one more worker, and unemployment decreases linearly with time.
To me, our economic slumps look more like a mass behavioral disorder, than manifestations of real changes in demand and supply. We try to pretend it is math, when it is really contagious hysteria.
6
" . . .For given what we now seem to know, output lost to weak demand is lost forever; there is no chance to make up for it later." Some of that lost output is the result of permanent exclusion from the workforce of a significant cohort of workers. This permanent loss is a human loss but also an economic one. Since workers are also consumers, and since our economy is biased toward consumption, demand suffers.
3
I also read this as a drastic lessening of the factor of 'pent-up demand', which had historically been assumed when unemployment dropped and wages rose. This is due to the factor you cite, low labor force participation rates, but other factor as well, including wage stagnation and much higher income inequality than was present in the 1970s and 80s.
Unnatural Economics will be trying to decide who works and who gets paid even if they don't work or don't work much in the future. Not just unnatural inflation indicators.
Toys are US closing are both about a business going bust but also that children don't play with toys like they used to. They like video games and its too dangerous outside for children to go out and play independently anymore.
Robots, like Rosie the robot on the Jetsons, for many tasks we take for granted, might be cheaply available soon. We have the low cost plastics and electricity and the programing or AI seems to be getting better. Work will mean different things.
We could have a world were all cars and trucks are self driven, cheap 2 dollar robots mow the lawn and load the dishwasher. Work might be laying in bed dictating by a voice to a computer making keyboards obsolete.
I also see the world in an optimistic light. The 1970s only 30 or 40 countries were democratic. Now it is easily half of the worlds 200 countries are democratic. Also on a side note for the time being immigration creates adults who can be tax payers right away. We need taxes for the time being.
This is a bit off topic but the future might be less work overall, and the 40+ hr a week work ethic as we know it will be finished.If you want to imagine obsolete. Try to imagine all these people where a strong work ethic equating morality and survival and it will mean less or next to nothing in the future world.
3
There is nothing natural about economics. Economics is not a science. Economics is gender, color aka race, ethnicity, national origin, theology, history, law, acounting, banking, finance and politics plus arithmetic. There are too many variables and unknowns to craft the double-blind controls that provide repeatable and predictable results. Wonkish economics is a synonym for opinions.
2
Both the 1980 stagflation and the more recent 2008 recession were due to different, but unusual circumstances. The 1980's combination of high inflation and high unemployment was caused by the gas crisis. The Middle East put the US on an oil embargo which caused an immediate and huge rise in the price of energy.
The more recent recession was caused by widespread financial malfeasance, a completely different mechanism. The recession's unemployment, combined with the movement of high paying jobs to low wage countries, is still affecting our economy.
7
What does the chart look like if you substituted wage inflation or total payroll for unemployment rate?
2
What is different now is we have unlocked a virtually infinite supply of labor through international trade and automation (automated labor if you will). Goods are now made in China and places with even cheaper labor and imported into the US with very little impediment.
So when the labor market tightens, we use offshore labor to make our goods and also to provide our services such as call center and Information Technology support. Or import labor here either through legal/illegal immigration or through the H1B visa program. Any linkage between unemployment and inflation caused by a tight labor market has therefore been lost.
5
Since you live in Rock Hill and I live in Lake Wylie maybe you can explain that table entitled Spain's Phillips Curve, 2000-2017. Maybe it is my lack of background but I've never seen a graph line that curves back around like that. At first I though that I was looking at a hurricane tracking map.
I like Paul Krugman but it is obvious that he needs to get some experience living with the masses in order to broaden his outlook. There are several things that are different this time around. First overall inequality in the US, measured by both income and net worth, are at their highest level since the Great Depression. Second the attempts to revive the economy during the Great Recession were almost all in monetary policy, not fiscal, and therefore benefited almost exclusively those with large amounts of assets which due to the first point is an extremely small percentage of the population. Third we now have as official government policy enshrined in law which basically allows large businesses to prey upon consumers by manipulating markets, limiting competition, committing illegal acts, all with essentially no chance of penalties because class action lawsuits have been outlawed, no enforcement by the executive branch, and a Supreme Court ruling which gives corporations the same rights but none of the responsibilities as people.
The economists at the Fed can push and pull all the Wizard of Oz levers in monetary policy that they want but it is not going to help the Munchkins.
24
Excellent summation of the problems. Just to add that the money that has been transferred to the wealthy is being used to keep Republicans in power and to keep those same Republicans "in line" so that the wealth of the wealthy does not get distributed to the needy.
12
In reality, half of the 2009 Stimulus consisted of tax cuts, remember?
And not tax cuts for the largest corporations, but tax cuts and tax credits for ordinary citizens and small businesses, AND with strings attached (a tax credit for a family having a kid in college, a tax cut for a small business hiring a new worker or not firing one that would otherwise be fired, etc.).
So no, you can't say that "the attempts to revive the economy during the Great Recession were almost all in monetary policy, not fiscal".
And the Obama administration INCREASED Wall Street regulations and consumer protection, it's only now, since Trump's election, that the executive is starting to do the opposite again.
By the way, I'm quite convinced that Krugman knows all this.
Sometimes the best way to "broaden your outlook" and concretely do something for "the masses" is to fact-check your own opinions and to try to debunk popular but false economical theories ... such as Krugman is doing here ... ;-)
4
"...a Supreme Court ruling which gives corporations the same rights but none of the responsibilities as people."
This is the one that sticks in my craw.
1
Thought provoking, as always, Paul. It appears that we can maintain employment with the low inflation rate. I think that this past recession, while horrible, saw enough people working such that this recovery has taken us back to where we were, with the rest of the population now working, but with little competition for labor between companies. We are starting to see some competition, but company growth plans aren't yet significantly thwarted by a lack of labor.
To get wages up, companies will have to see their bottom lines threatened by the inability to produce due to a labor shortage. We'd know a labor shortage when we saw it. At the end of the Clinton administration companies were vocal about not being able to hire. We aren't there yet.
There are a lot of new variables; more automation, more outsourcing, more global component to the economy. And more growth through equity investment which requires relatively little labor.
In normal recoveries, companies would be investing in factories, stores and other new sources of revenue. Some of this is visible on the NYC skyline with the construction. Who's putting that building up that's blocking my view of the Empire State Building? Unconscionable. But I think that we are still "growing" back to where we were.
And another new variable is the way that companies grow. Maybe the relation between available labor and profit needs to be examined. Revenue per employee must be far greater than it was, and more elastic.
1
I am a 70 year old retired member of the middle class and have become wary of commenting in the NYT. I am am Socratic and I am a member of the most privileged group of people who ever inhabited this Earth.
I live in a working class neighbourhood and working class Americans do not read or comment the NYT.
This op-ed is not about us , it is about those who suffering in an economy where what we can do is highly rewarded and what they can do means constant insecurity.
Economics is not a science it is a religion but it is our religion and we use it to justify our excess of stuff and freedom and never acknowledge that we created the alienated Trump voter.
I look at the graphs and think about my children and grandchildren who will never know the anger and insecurity of living a working class American life.
It is not the Koch brothers who are responsible for the 50 years of increased insecurity and the growth of working class hostility it is the middle class who are responsible.
We created Trump's America because we enjoy the privilege and security, There may be some readers of the NYT who can relate to unemployment, living paycheck to paycheck and who understand the dictionary definition of middle class but these are few and far between.
Ours is a middle class society and we have chosen to enjoy these graphs because it is what we want.
3
I agree with you that we do well to consider our place in society and to be sensible of the circumstances of others. However, I think your comment represents a gross oversimplification of American politics, sociology, and economics. I believe that the election of Donald Trump, however disaffected some of his supporters may be, was largely the result of decades of systematic political machinations by the Republican Party and their ultra-rich conservative backers. I believe that macro-economic factors in the economy affect people who are living paycheck to paycheck even if they haven't the time or energy to worry about that sort of thing. And I believe that we're all better off if some people with intelligence and a social conscious do worry about it.
3
Stan,
I am in full agreement. However the history of the GOP and men like Buckley and Reagan were on the public record and the public record fully exposed their antiAmerican philosophies.
Middle-class Americans chose to ignore the society they promoted stood in opposition to the Jeffersonian evolutionary democracy that was the core of America..
Three hundred years ago Swift explained liberal economics (neoliberalism) and what it really meant. Despite the evidence chronicled in periodicals like The Economist about the Irish Starvation we refuse to believe it was an Economic genocide that benefited the Irish food export economy and regarded people only as economic tools.
It is we the middle class who allow society to function. It wasn't socialism that destroyed the USSR it was the absence of a middle class willing to comply with a social system that did not grant them the privileges we are entitled to.
America is a Marxist society and whether labelled right or left the struggle for wealth and privilege is the very core of the polarization.
I can't help but be despondent over the rule of the GOP because the core of democracy is a loyal, constructive opposition and America sees opposition as the enemy.
Memphrie et Moi,
You're onto something. Economics is the art of mystifying what people produce with their labor and how they exchange those products (be goods or services) to live (including and especially their own capacity to work). The philosophers, including Aristotle, who have looked into what constitutes the substance of those exchanges represented in value have greatly contributed to clarify the essence of this exchange which escapes the so called economists.
Smith and Ricardo were closer to the essence of value than most modern economists.
1
Doesn't the current situation differ from earlier periods due to relative pricing power? Workers have no "pricing" power due to 1) destruction of unions; 2) automation; 3) globalization, whereas corporations have somewhat limited pricing power due to the concentration of wealth and concurrent (resulting) soft demand. Thus, controlled inflation, but also retarded growth. Given that, isn't fiscal policy more important than monetary? That is, if widespread prosperity is, in fact, the objective.
2
How can the economy "run hot", when most people are living from pay check to pay check. These are the people who needed the tax reform bill to aid them, so they could increase their spending power.
These are the people who can juice up the economy. The every day person, not the 1%.
Until the Congress and the Corporations accept this, we are going to remain in a mess, irregardless of what the stock market does and what economists say.
11
I'm not an economist so I hesitate to step into this wonkish debate, but is is possible that the fact that wage and income growth has only started to increase this year is the reason that inflation remains low?
People may have joined the workforce in the last couple of years, but incomes remained so flat they were afraid to spend, which in turn meant there was little upward pressure on prices? If the current rate of income growth continues, will we see inflation start to rise?
4
Important point: we should not let policy be driven by ideas that haven't worked for decades.
Thanks.
7
But in reality there are more people unemployed than are showing up in the statistics. There are people who have been involuntarily retired because businesses have decided they don't want to hire anyone over a certain age or with a certain amount of experience.
Based upon what I've been seeing when I look for a job there aren't as many jobs out there as is being claimed. The same job is listed multiple times on multiple sites and, often with multiple agencies and the company seeking an employee. Jobs that require a few years experience are listed as entry level. This is one of the many ways companies are using to avoid paying people what they deserve for their years of experience in a field.
What's unnatural here is how many people near the end of their working lives are being forced into minimum wage jobs because, despite their experience and skills, employers look at them as useless or stupid, or not worth the expense even as these same employers claim to value experience. We're seeing the wholesale devaluation of work, experience, and life by employers, our politicians (who don't suffer from unemployment because they have connections the rest of us will never have), and our culture.
It's a shame that those born in the early part of the baby boom didn't consider what they were doing when they said not to trust anyone over 30. Even worse was electing Reagan in 1980.
6
"Based upon what I've been seeing when I look for a job there aren't as many jobs out there as is being claimed. The same job is listed multiple times on multiple sites and, often with multiple agencies and the company seeking an employee. Jobs that require a few years experience are listed as entry level. This is one of the many ways companies are using to avoid paying people what they deserve for their years of experience in a field. "
YES! People tell me the job boards have hundreds of local jobs in my field, but when I look at them there are 10 to 20 headhunters advertising the same job.
2
I'm probably missing something, but I don't see how this explains the stagflation of the late 70s, which I see as something we should assiduously avoid.
"I'm probably missing something..." Astute remark.
As to the rest of the comment perhaps you could reread the opinion, paying particular attention to what was written rather than what was not (e.g. "ideas that haven't worked for decades")?
Also, look up "whataboutism," or bad habits to avoid to improve rhetorical form.
Many regards.
1
The Fed should probably hold off on more interest rate increases until 2019, to see if inflation jumps. I don't see how we get inflation with such little labor power and oil being a less significant part of the economy.
There is a variation of the Phillips curve that compares ECI (employment cost index, a measure of inflation) with 1-EM Ratio for the working age population 25-54 (a measure of unemployment) that gives a pretty high correlation. This version may capture slack a bit better.
https://www.economy.com/dismal/analysis/datapoints/296127/There-Is-No-US...
1
Can you explain the "Spain Phillips Curve, 2000-2017" table? How can it curve back on itself that way ane make any sense at all?
Good question. As an armchair economist only I'll do my best.
We expect to see a downward and to the right "line" (a cluster of dots roughly in the shape of a line) for the Phillips Curve; as unemployment rises, inflation should fall. Without demand from employed workers, inflation should drop.
But we also have to consider the supply side. In the past, oil shocks could drive inflation irrespective of unemployment, so the Phillips curve wouldn't hold under those conditions (i.e., inflation was driven from the business cost or "supply side").
So the 2000 and 2017 comparison in the table (unemployment a few points apart, but huge difference in inflation rate) could reflect some type of supply side factor.
I'm not familiar with Spain; clearly these unemployment rates in the U.S. would indicate a Depression. I don't know what supply side shocks they might have had. Somehow their economy is built to handle this kind of unemployment, perhaps much higher social transfers than we have.
Not sure if that helps, but it's the best I've got!
Translation: the data suggests that Fed policy should be to keep interest rates low to encourage growth, keep the stove on simmer for a while, let the economy stay hot since wages are still stagnant and the risk of inflation is low.
It's the same thesis as the author's regular column.
3
I do other wonkish things that involve equations, so I'm wondering whether this sentence, just before the equation about a quarter of the way through, is an error: "Current inflation does depend on inflation, but it also depends one-for-one on expected inflation." I think the second occurrence of "inflation" in this sentence should be replaced by "unemployment".
No. Current inflation is a factor of expected inflation. If a consumer *thinks* that the price of product 'X' is going to be much higher in 6 months, or a month, or even a week, they are going to tend to buy more of product 'X', a tendency referred to as hoarding. When the demand for any product goes up, in this case due to hoarding, the price of that product will rise (i.e. current inflation).
3
No, it's clearly part of the very essence of the point that Krugman is trying to make.
The reason why inflation isn't merely a function of unemployment, as classical macroeconomics has supposed for decades, Krugman claims (as far as I understood ... ), is because there's also a direct relationship with expected inflation.
When central banks EXPECT inflation to go up, based on the idea that the data show that in the past, once unemployment is low, inflation indeed goes up ... then that expectation has an effect on real inflation too.
Because as inflation is still low but their expectation that it will go up, goes up, the only way to keep tomorrow's inflation as low as today's is to make sure that unemployment goes down even more. And that's why they raise interest rates while inflation is still low, only because unemployment just became low too.
As far as I understood, Krugman's point is that the data actually do NOT show a systematical increase in inflation once unemployment is low, and that's why systematically raising interest rates as soon as the unemployment rate is low is a bad idea, and central banks should do the opposite, in order to stimulate demand rather than reduce it.
If they don't stimulate demand and do the opposite, as they did in 2011 and as austerity measures do, then (for a reason Krugman explains here but that I didn't understand yet ... too wonkish indeed) wage growth will remain low too.
2
I think “expected inflation” is what is driving this whole puzzle about unemployment/interest rate ratio. It is a deeply rooted cultural assumption about how money grows. Deflation is unmentionable.
Expectations for a middle class lifestyle are slipping away for young people. Wealth creation for their parents meant buying a house and selling it years later for a big profit to fund their retirement.
Boomers assumed high interest rates would grow their retirement savings as it had for their parents.
Boomers are taking themselves out of the labour market in vast numbers for the next decade. That shift in the labour pool is another factor to consider.
Whoa. The Powerpoint slides have returned with a vengeance. By the way, "Fred" sounds like that creppy robot in the movie "2001: A Space Odyssey." And we know what happened there.
It's a sad and brutal thing but the Nation is being lead into Plutocracy. That is the GOP's mission and they've been working at it for decades.
How? They control the tenor of the Nation with a well developed propaganda machine.
They masterfully rally their authoritarian base, draw in a few more by playing to cultural proclivities and raw fear
They artfully dampen voter turnout with lies, gas-lighting, red-herrings, straw-men, etc. that cause confusion, cynicism, and/or hopelessness which breeds voter apathy.
Because they control the tenor they set the perimeters of policy, the problems/opportunities we address, and the assumptions and models we use.
They do this whether in the majority of not. They have made the common denominator theirs.
A benevolent Plutocracy may occasionally spread some benefits and peace to many but in reality it is an authoritarian construct based on greed and selfishness that will end up bad for most and in particular horribly bad for groups they have to scapegoat.
What is so dangerous about our GOP plutocracy machine is that its electoral life blood is religious fundamentalism and other social demagoguery. You are what you eat - the plutocracy they will wrought will not comport with social modernity.
We lack a proper economic model and a balanced policy that uplifts all because of the GOP in action. NOT because experts like Dr. K don't see the flaws in our thinking/acting or don't offer corrective insights/hints.
7
The first thing to understand about the economy is that it is not a colossal, unrestrained, beast that randomly rolls around, sometimes crushing, sometimes creating spaces for growth. In Adam Smith’s day, the “invisible hand” was a good enough description for the insidious force of economics because only a handful of shady capitalists had a hand capable of wielding effect. Today, of course, the economy has more hands than Vishnu, capitalism, as a result, becoming a game of winners and losers. These hands, no longer invisible, manipulate the economy.
Friedman et al, wrote the rules of economics from their personal political perspective. No such thing as a free lunch translates as conservatism and equates to austerity. Keynesian mantra, on the other hand, is counter austere, arguing to spend in times of famine, save in times of high yield. In other words, liberal.
It is not expedient to link inflation to employment because both are political hot potatoes. It is better, for public consumption, to divorce the two. Of course, there is a link. Positive inflation is a sign that employment is higher and more lucrative: people are buying with disposable incomes. The opposite applies in low employment. The effect is a boom and bust model that is highly cherished in Canada, for example, because of the sublime way capitalism can manipulate society. For most, the hand remains invisible while it punches them in the face.
4
Dear Krugman, the economy has changed drastically from the 70s.
There are 2 different economies, with different characteristics. You cannot model them as if they were one.
One economy encompasses most people at subsistence levels (99%) who work for a living and own next to nothing. They haven't seen wage increases so they can't push inflation anywhere. More crappy jobs doesn't magically create inflation.
The other economy is at the top, where there is already massive inflation and speculation in assets. People who captured most income are too few for their needs and expenses to push inflation up.
Simple.
13
Exactly. How much gasoline or refrigerators or broccoli or any other consumer or semi-durable good you could name that goes into the CPI can the 1% possibly buy that would budge the demand curve upward.
Perhaps a useful statistic for comparing these two different economic eras would be rates of saving. I remember as an economics student 'back in the day' when this macro statistic was taught as being a useful leading indicator for predicting inflation or recessions and as a gauge of consumer confidence.
I wonder how many years - or decades - it's been since the rate of savings has even been in positive territory.
4
and why we need a LUXURY tax.. altho Leona Helmsley summed it up "Only the little people pay taxes." (nobless oblige.. the nobility did not pay taxes... ask Queen Elizabeth who decided that she should pay taxes.)
Dr. K. I have to admit, I have no idea what you were talking about until the last couple of paragraphs, but then something caught my eye. I think you were saying that after 2008 there was not enough demand created to get things going again, maybe, kinda? Anyway I would interrupt that as your guys and mine at the time didn’t give enough stimulus to the people that mattered, those that would spend money and get things going again, the rank and file, like by creating W.P.A. type employment maybe? I do remember you saying there should have been more spent on infrastructure which ideally( my words not yours) would have given American taxpayers jobs rebuilding our crumbling country( the reason I say “ ideally” is because giving American citizens is not the way construction works anymore, cheapest available labor is, whether a Portland or Palm Beach, I digress. I agree there should have been more spent on infrastructure, I also remember you saying it would be “so much worse” if we didn’t bail out the dirtbags that caused the problem, and we did in spades. You also promote low interest rates, well we had those as well and we had tons of “asset inflation”, stocks, real estate even high end collector cars and art, anything the one percent could through money at went up, up, up and for some reason this is ignored. Meanwhile the lower classes without money to gamble got zero interest on savings, zero good paying jobs, zero increase to S.S., the same we’re still getting ten years later.
14
Macroeconomics is a total joke.
After long oeriods when a theory is rejected by data, the macro folks decide the theory is dead, until some new data come also and then they revive it.
What is terrible is that the bankruptcy of macro brings a bad name to all of economics and that is too bad. Micro actually has very good predictive qualities.
Professor. May I be excised? My brain is full, but my wallet is empty.
7
In the sentence, "Current inflation does depend on inflation...," did you mean, " ... on unemployment"?
1
No. See my reply to Brent L. above.
Classical economics no longer apply because we no longer have a real market economy. Oligarchic control has reduced "Inflation = f(U) + expected inflation" to merely f(u).
10
I'm a liberal like you; and I want you to discuss Bitcoin and their ilk, the vaunted blockchain, and taxing these high speed stock trades.
I'd also like to hear your opinion of China's belt & road initiative.
Of course I'm interested in inflation's effects on jobs, but that's too wonkish for me.
1
Inflation = f(U) + expected inflation
Where's Otto Eckstein and "Social Analysis" 10 when you need them? And where'd I put that old copy of Lipsey and Steiner, anyway? I think my problems started when I signed up for that "radical" section ...
I remember something about wanting marginal cost = marginal revenue. And slopes of some lines were supposed to be important. Actually, that's pretty much all I remember. But it was enough to get me a B, and that ain't nothing.
2
“We should not let policy be driven by ideas that haven’t worked for decades.”
Isn’t that the best case scenario with Republicans in charge? Ideas that haven’t worked for decades.
The more typical policy response from Republicans, especially now in the age of Trump, is complete fraud - based on ideas that have never worked - just scams, con games, welfare for the rich/corporations/military industrial complex/oil industry, selling guns more important than people, anti-science, religious zealotry, propaganda, demagoguery, fear mongering and lies.
9
Wow! I’m awed that over 100 readers understood this column well enough to articulately comment on it. Maybe I need a second cup of coffee....
4
Something even a 'non-wonk' can get about your article, you didn't use the word union once. People generally like to keep all the money they can, and give it up only on demand.
3
No unions now - there's your difference.
7
There is a floor on consumption: Basic subsistence. For an average household (family of four), basic subsistence was $24,793 in 2017, according to MIT's cost of living project. Over 20% of American households have incomes below the consumption floor.
http://livingwage.mit.edu/articles/27-new-data-up-calculation-of-the-liv...
4
The stats you cite prove that 20% of Americans have no business creating families they can’t support.
The single lines and curves that economists have been taught to apply in their attempts to analyze complex economic phenomena are both inadequate and misleading.
The United States economy and the economies of the rest of the world are vastly different from the 1950's. The countries of East Asia are far more prosperous than they were in 1950 and their contributions (exports) to the United States of shiploads of electronics, autos, and household goods surround Americans with products that American business leaders decided not to produce here.
While most Americans have "more stuff" and "better stuff" than they used to have, the distribution of goods, benefits, and services has been uneven. Economic and healthcare insecurity is a fact of today's American life. Pensions are gone, risk of medical bankruptcy is an American only problem. Huge costs of student loans for higher education dampen consumer spending when young adults and their families are most likely to buy homes.
Statistician Hans Rosling's bubble graphs would provide more enlightening and useful tools to better analyze and explain economics and complex relationships. His talks are available at youtube.
The statistical tools are free and can be found at: https://www.gapminder.org/tools-offline/
5
I don't understand the paragraph with the equation:
Inflation = f(U) + expected inflation
What does "Current inflation does depend on inflation, but it also depends one-for-one on expected inflation" mean? If that was a typo & he meant "Current inflation does depend on unemployment...", is he trying to say that the difference between inflation and expected inflation only depends on unemployment?
Look at the graph of expected inflation. https://fred.stlouisfed.org/series/T5YIFR
Compare that with the blue line in Krugman's chart. (You can easily add the graph for Personal Consumption Expenditures Excluding Food and Energy to the expected inflation chart.) I can't see any obvious relationship with the red line in Krugman's chart. Look, you can subtract the curves and use approximation, say polynomial, to find f but it looks like it will have a zillion terms.
And where does this "presumably" come from? It sure ain't obvious from the comparison of the chart with inflation and expected inflation.
Well, maybe I am just too stupid to understand wonkish stuff.
2
Expected inflation does factor into current inflation. See my reply to Brent L. above. It can be described briefly as the 'hoarding effect'.
Mike - Show me the data. It sure ain't clear from the charts I looked at.
Content here requires a higher level of education than I possess (high school--long story), but I've never been able to comprehend the meaning of the term "wonk". It seems to have a derisive quality, anti-intellectual in a distinctly republican way.
1
I had the "highest" possible education and don't understand crucial paragraphs here either.
It doesn't have anything to do with IQ or education level, and everything with not being an economist so lacking the definition of basic technical terms.
If I would write a "wonkish" op-ed like this on a topic belong to my own field of research, all those who don't share my profession (= just like with economists, 99% of the population ...) wouldn't be able to understand it either.
In paragraph 5, should the suspiciously circular “Current inflation does depend on inflation” be replaced by “Current inflation does depend on unemployment”? (That is, according to orthodoxy, through the magical function f(U).)
1
As a completely befuddled reader, what I miss in this article is any discussion of the role of the Federal Reserve. To my uneducated eye, the Fed had gone from a mostly reactive function to a directly active organization, with a huge effect on both inflation and employment. During the downturn of 2008 the Fed kept dropping interest rates and, apparently, printed money. Corporations that saw no increase in borrowing costs and an easy way to borrow, despite little or no rise in revenues, sat on huge stashes of cash with little incentive to increase production. The recent tax bill seems to take us further down that road. Now, however, the Fed has decided to increase interest rates. Voila! inflation is back, although seemingly under some control. But since that inflation seems untethered to any real economic cause, corporate America has not reacted by creating more or better jobs, but by making its owners even more wealthy. In short, the economy seems unhinged from reality, just as the Republicans wish.
4
I wonder how much demographics changes these equations. For the twenty year period, 1965 -1985, there were many more 20 and 30 somethings as a proportion of the entire population. Wasn’t this a much greater potential source of demand that now exists? I think of all the household formations that just aren’t there now compared to those years when boomers were the dominant cohort. I’ve read a couple of a Federal Reserve papers attributing to demographics about a 1% diminution of GDP growth. I just wonder if demographic differences are the key to the changing data on the natural rate.
3
Wonkish above my level of economic understanding....but my best guess is because wages are still historically low in relation to the cost of living for most of the population that even low unemployment is not enough to ramp up demand as even working people can't afford much beyond basic needs. Therefore, inflation remains relative quiet.
5
"We should not let policy be driven by ideas that have not worked for decades."
That is the point, isn't it?
But I have two complaints.
1) If 1965 was the high-water mark of the US worker (which led to the crash of 1973-75) and it's all been downhill since then (and I believe it has) then why does no one start their graphs in 1965?
and, 2) It was somewhere back in the early 1970ishes that a friend pointed out to me that none of the employment/unemployment stats accounted for those who had been drawing unemployment benefits and exhausted their claim. The polite phrase today is "those who are no longer looking for work"..... and I always wonder who those mythological creatures are. Is there a special place where those people live and eat? How can I join them? Have they ever published a book on how they survive? I'd buy a copy!
So, I think this would all be clearer to me if you gave us a real graph that actually encompassed the actual past.
"We should not let policy be driven by ideas that have not worked for decades."
Exactly.
3
I am an engineer who knows math. The uncertainty of the social science, economics, is nowhere more on display than in describing f(U) as "some function of unemployment". Fiddling with that function is the sort of thing economists do.
An analysis in the limits is: If nobody has a job and their money is running out then inflation is low because they are buying less.
The opposite is true the opposite limit.
f(U) is what goes on inbetween and that is a WAG, another useful engineering term as well as a design parameter on occasion.
It seems best to understand the stagflation of the 70's to understand the employment/inflation relationship now. Richard Nixon took us off the gold standard in 1971. This act had little actual effect of the actual economy, but had a large psychological effect with wealthy people at the time. They believed that money supply causes inflation, so when the oil embargo came in 1973, they lobbied the Fed to increase interest rates, which caused a recession. If interest rates had not been raised; the oil price inflation would have subsided naturally.
The other factor, more relevant to this discussion, is the relationship between labor unions and inflation. I believe it is a correct theory that when labor has power in unions, wage inflation can occur. The absence of labor unions would therefore explain the lack of wage generated inflation.
3
I have a problem with this natural rate hypothesis in a number of ways. In implementing policy it requires that first and foremost we are somehow able to measure the "natural rate" of unemployment. This would require that we know the potential output level in the economy as well the structural changes and other frictions in the labor market. We simply do not, so we make estimates using macro models.
Second, we need to ignore the evidence of wage and price rigidity below this so called natural level. So below this point, any additional stimulus to the economy with increase inflation because prices and wages will rise with no effect on output. With global trade tempering the price increases in the goods market and lack of power by workers in the labor market keeping wage increases low, it is not difficult to see how this theory may break down.
What appears striking is the general decline in inflation over time, which intuitively seems related to (1) technology reducing costs and (2) cheap global employment pools that lead to ever decreasing manufacturing costs. My guess would be that in service economy areas where these effects haven't come into play the graphs look different. Health care, education, and legal costs seem more subject to inflation. Also, behavioral effects, some of which reflect the application of monopsony power or monopoly rents (think tech and ever expanding IP rights) seem like they would interfere with these issues. Thus, things like we need more workers gets translated into people won't work at the wages we want to pay them and wont increase those wages because we shouldn't have to. Some of which intuitively reflects perspectives from an economy that is increasingly driven by economic inequality.
I think a sector analysis would be interesting. It is also why Spain seems more interesting, eg, it has been a bit less subject to some global trends (or so I hear from Spanish friends). And an analysis if it could be done on what price decreases might have happened had lower levels of IP protection, in my view clearly not necessary to spur innovation in a modern economy where technology mostly marches forward, not been protecting monopoly rents in a variety of areas.
The unemployment numbers are rigged, jobs available are in the service industry feeding and tending to the wealthy.
1
The "theory" that is supposed to justify the idea that central banks control economies by adjusting interest rates has never worked in such a way as to lead to desirable outcomes. The simple Phillips curve blew up in the 70's and the Fed was totally unable to control the growth of the money supply; the predictions of the value of the NAIRU have always been wrong; the Fed, the ECB and the BOJ have carried out massive and unprecendented actions since 2007 with QE and other measures with no really demonstrable result.
Economists should get off their high horse and quit claiming they have the answers. And economies should not be turned over to central banks for dogmatic and ultimately ignorant experimentation.
2
Was the inflation caused during the 1970's stagflation caused by OPEC raising oil prices?
If so, that would be outside the normal model of employment and inflation?
From what I've understood (and being taught about stagflation in econ classes), yes.
Differing 'types' of inflation have traditionally been defined: 'wage push', 'demand pull', etc..
The OPEC oil embargo was a supply side 'shock event' to an economy that already had rising unemployment (which would normally dampen inflationary pressures).
And of course this petroleum supply shock would effect more than just the price of gasoline and home heating fuel because the price of these commodities go into the price of any other product that depends on them for its production and/or delivery. Which is to say practically any other product you can name.
Unfortunately, as I'm not an economist, there are crucial parts of this op-ed that someone like me cannot possibly understand. I adore wonkish articles, but it do would be nice if the most basic technical terms/presuppositions were somehow defined explicitly ...
Example of a passage I can't make sense of at all:
"Current inflation does depend on inflation, but it also depends one-for-one on expected inflation:
Inflation = f(U) + expected inflation
where f(U) means some function of the unemployment rate. Meanwhile, expected inflation presumably reflects past inflation. So trying to keep U very low means raising inflation ever higher to keep ahead of expectations, which is not a sustainable strategy."
So ... if I understand well, if past inflation after low unemployment was high, we expect today's inflation to be high too, as unemployment is low today?
As real inflation isn't high yet, we expect it to go up anytime soon ... and as a consequence, we try to keep unemployment even lower, so that expected inflation taken together with unemployment result in the same low real inflation that we have today ... ? Is that what is being said here?
If yes: this op-ed argues that in fact inflation in the past did not necessarily go up in function of low U, so ... we shouldn't keep U low ... ? Is this indeed the point that Krugman is making?
And what's the link between this and low wage growth ... ?
Can anybody here explain this in plain English please?
Thanks in advance.
3
Yes, somewhat dense. However, the main theme seems to be that human attempts at prognostic conclusions are always based on what we know right now and we have no mechanism to predict the future. Humans, after all, just do not behave as the prognosticators project. If we could just persuade people to behave as we expect, everything would be just dandy.
@ Brent Jeffcoat
Thanks for your reply.
With all respect, though, it's not because human sciences can't do as many laboratory experiments as physics for instance, that the word "science" would not be relevant here.
You can actually build theories and test them in many different scientifically valid ways, not only through lab experiments.
What Krugman is doing here is questioning a theory that many long argued is valid, by pointing out that there are data showing that it isn't. It's important to know which human sciences theories are valid and which not, because politics is about making fact-based choices for the future, so we need to know what theories are correct in order to know (1) what we don't know yet and (2) where exactly we'll have to choose based on political philosophy rather than proven facts.
Example of economics doing its job in predicting the outcome of fact-based policies: the 2009 Recovery Act (the "Stimulus") and its effect on the economy as predicted by the CBO analysis made at the time. That analysis (like most CBO analyses) was mostly correct, we now know.
And as it's "we the people" who vote and elect our own government, it's important to know what economical theories are valid, and which ones aren't (because if not, how can we judge the competence/sincerity of our politicians?) ... and as a consequence, to understand this op-ed's main points too (which is what my comment was trying to do).
Any help on this is more than welcome.
As I read PK's argument here, it doesn't really apply to what the central bank will or won't due, but simply what are the causes of inflation as it relates to unemployment/ wage growth before even considering central bank intervention.
Putting the f(U) unemployment 'magic' aside for a moment, inflation is of course a factor of supply and demand, which are in turn determined by many other outside forces. However, inflation is also determined by the *expectation* of future inflation in the consumers mind. This is one of those psychological things that determine individual consumer behavior on a large scale, like the consumer confidence statistic.
If there is an 'expectation' of future inflation, what will consumers do? They will buy more at current lower prices - the hoarding effect. But paradoxically, this behavior based on perception is self-fulfilling in that the behavior itself raises demand, which in turn raises prices, producing inflation. At least, that is, until supply catches up with that demand, which may take weeks, months, or conceivably may never happen at all.
In summary, we are living in a radically different economic environment than the environment in which all the major macroeconomic theories were developed to describe (if not "explain" and make predictions).
Does it really make sense to argue about which 100 year old or even 50 year old theory applies to today's economic realities when the data on which they were based included a very different measure of inflation, a very different work force, and a very different economy?
After 8 years of high unemployment and the rapid change in the type of work available to blue collar folks, it is no surprise that wages are not moving up rapidly. When you start over in a new industry, wages will be lower. China has not helped as it has been manipulating currency values to make its good appear very inexpensive thus locking US companies out of a myriad of product development and manufacturing opportunities. Salaries and stock option grants in Silicon Valley though have been accelerating rapidly and are rising faster than inflation as California piles on the taxes and companies compensate employees ahead of rising costs of living. We live in a time of economic turmoil but be assured that any theory based on Keynesian logic will be completely wrong.
Spain should not be used in this argument since it doesn't have its own currency. And, America should no longer be studied as one entity. The economic results in NY are probably quite different than those in the Midwest and South during the same time period. Blended numbers aren't useful as the size of an entity expands. It's "complicated."
The New Economy made up of all these factors cannot reasonably be expected to be explained by 19th or even mid-20th century economic models based simply on Europe and the North American economies with Agriculture and (Heavy) Manufacturing as their primary components with some organized labor (we are seeing close to NO organized labor now), skilled and semi-skilled labor forces with long term investment in workers (to provide continuity of expertise) and some minor contribution from the economic or political colonies as sources of raw materials.
In today's economy, the colonies are gone or going away, political power is shifting away from Europe and the US, technology is being used as a substitute for skilled workers (so far with mixed results), and over 50% of the economy at least in the US and Europe is "Service" - or at least NOT Manufacturing or Agriculture.
These changes came about due to various forces - and will likely continue to evolve. The virtually unfettered growth and power of multinational corporations and their ability to avoid responsibility and regulation that real people would not be able to avoid has been a big factor in these changes.
more ....
I’d think the current circumstances show the model must take the bro account spending on employment (numbers of employed x wage growth), not just the unemployment rate. Demand remains less strong because most are being paid less, at least at this moment in the cycle.
I believe the relationship between inflation and employment still exists - it is just a weaker relationship since the quality of jobs and wages has deteriorated over the last couple of decades.
I don't know if I agree or disagree. Seems this hypothesis ignores a critical point: Demand is local, i.e. in the national economy, but supply is globalized. Simply put, we buy cheap manufactured goods from China and elsewhere. But this sets up a dichotomy. Things that the local economy produces like higher education and healthcare (1/6th of the economy) are based on local supply which is bounded, and demand which is always greater. So we see great disparities in inflation rates between the two realms. Our inflation rate is a blend of the two. So, the Keynesians are right but the Kondratievs are more right. The low inflation/high employment behavior we are witnessing is the result of capital efficiency which is classic for the end of a K-wave. A new K-wave forming in sustainability will reverse things because we will have to purchase locally produced major infrastructure projects which will be naturally inflationary.
1
Why are we ignoring hysteresis, and the possibility it can be reversed? If it can, the output is not lost forever, if we choose to run a high-pressure labor market.
1
The Phillips curve still works, kinda. Running the economy "hot" through fiscal deficits will generate increased inflation. The Fed has no choice but to raise rates. Were fiscal policy in balance, we could stimulate demand through infrastructure spending while aiming to preserve a golden balance between unemployment and inflation.
There's no reason why stimulating demand would necessarily mean increasing deficits.
If you tax the wealthiest Americans a bit more in order to pay for a fiscal policy stimulating demand or increased infrastructure spending), you can pass such a stimulus without adding a dime to the deficit.
I would start with a more basic explanation. Consumption equals production, right? You therefore can't have inflation without wage growth regardless of the unemployment rate. In theory, a low unemployment rate should tighten the labor market and increase wages. This in turn results in higher prices passed on through the increased cost to production. Aka: inflation. But that's not what's happening. Wages are stuck and therefore so is inflation. If you figure out this relationship, you'll understand the failure of the old assumption. Something is preventing wages from rising. The question is what?
4
This isn't hard.
Why aren't wages rising? Well, it's a sort of chicken and egg situation. People do not have enough money to buy stuff. We have just have 2 studies that showed if the typical American family had a real emergency & had to come up with some money, they couldn't do it. One said about half the people couldn't come up with $400 & the other that 2/3rds couldn't find $1,000.
Now businesses are not going to produce stuff people can't buy. So they have to keep prices low, & they can't pay workers well & still keep the big profits they have become used to. If wages we higher, people would have the money to buy stuff, but that's the chicken bit.
BUT we have a way to break out of this circle. Its called the federal government. It can create as much money as it needs out of thin air. It can then get the money to the people who need it & will spend it by simply doing stuff that needs to be done, e.g. fixing roads and bridges, helping with education, research of all kinds, a new power grid, efficient transportation, etc., etc., etc. Thus we can break the circle & improve our lives at the same time.
What about inflation? Prices are proportional to the amount of money in the economy (times its velocity), but INVERSELY proportional to the dollar value of the stuff we can produce. So if the money is spent doing good things, it will produce enough stuff to soak up the money. Excessive inflation is caused by something that prevents us from producing stuff, like shortages.
Most economists dislike low unemployment not because they are really concerned about runaway inflation. Most jobs in economics depend on funding or salaries dispensed by corporate managers, whose compensation in turn depends largely on pleasing wealthy shareholders. Those corporate managers and wealthy shareholders lose out, in relative terms, when unemployment is low, because a greater share of earnings goes to workers' wages, and a smaller share goes to the profits that reward managers and shareholders. Economists therefore have a strong professional bias toward the interests of wealthy executives and shareholders. They are eager to prevent low unemployment not because it will lead to inflation that damages the overall economy but because it will narrow the slice of the pie going to those at the top.
1
as a person who was "retired" in 2002 at age 56 from a Giant High Tech company primarily because that company was old and lost and didn't have any idea how to continue to grow, I have watched the prices of food and housing ( I live in Boston) increase dramatically - food DOUBLED between 2002 and 2010 or so, and housing prices, after a dip in the 2007-9 period resumed their relentless growth - with Boston responding by building a lot more units to appeal to young, childless couples who make up the information economy. Fuel has had its swings but nothing like the growth in food prices (which seems to be accellerating in the past year or so) and HOUSING prices... for anybody other than young (mostly childless) urban professionals. And then there is the rise of the gig economy where outsourcing work to 3rd parties or "independent contractors" is more and more the norm. AND finally, let's not forget the retirement (forced or otherwise) of the massive number of surviving Baby Boomers - with reduced incomes and less participation in the "Luxury" or "Boom Boom" economy than when they were workin and earning the higher salaries that they earned through loyalty, increased experience (valuable to their employers) and accumulated knowledge, Finally, let us not forget the rise of the "Third World" economies, the empowerment (in part through technologies) that have lifted hundreds of millions out of the 18th century and into the 21st century.
continued....
2
My take on this is that central banks and governments are nearly always worried about keeping wages low and will error on high interest rates and lower government spending to achieve that goal. "Inflation" is a code word for wage rate increases. This serves the interest of capitalists who control the system and whose interests are opposite those who labor for a living.
Krugman has consistently and accurately warned the EU about its monetary and fiscal policies that to this day result in high unemployment in southern EU countries.
2
'We should not let policy be driven by ideas that haven’t worked for decades.' Of course this matters. One problem: there is no 'we.' What 'doesn't work' for me, an upper-lower class (maybe lower-middle -- I can dream!) worker bee 'works' very well, indeed, for some others. I have helped many bosses 'earn' salaries much beyond my own. My rent payments have helped many landlords live in large houses which they own. These internal stresses will exist until one of two impossible cases occurs: everyone has everything, or all have nothing. Maybe we could settle for something in between: nearly all have enough.
4
As usual, clarity for the semi-educated. (That be me.). Read right after the Leonhardt commentary on bookstores and Amazon. Could it be that monopoly power figures in the wage side? Everyone needs a job, even a marginal one. So, as the economy comes back, demand rises, jobs become available, but most wage rates are held down.
2
All other factors being equal, Your model would work, but after years of stagnation, wages are very slow to rebound. New jobs are in new industries, so a lot of workers are starting over at starting level wages. Oil prices are reasonably low, as are consumer prices. I guess what I'm saying is wait for it & low unemployment will eventually raise salaries, increase consumer spending & inflation, but a myriad of other factors is delaying the inevitable. The whole process is just slowed down a bit.
2
Excellent analysis Paul but as I mentioned numerous times before it is the baby-boomer factor that is not taken into account some ~70 million plus have, are or will retire soon and replacing the retirees creates a whole new economics previously unseen in the history of this planet.
Take a look at the old-age pension and the social welfare, you will soon develop a new send of economics.
This is not a Trump factor or Obama but after effects of WWII.
Respectfully
Paul
Retired CEO
2
Inflation has decoupled from the unemployment rate because an ever increasing share of wealth and income is held by those at the top. And the top uses both in ways that often do not benefit the real economy and therefore do not have inflationary effects – the exceptions being the toys of the rich and famous such as art, mansions….. One sure way to reverse the decoupling would be through the tax code. However, the recent changes do the complete opposite and will only further solidify the decoupling.
5
I am not equipped to opine on Dr. Krugman's theories here. However, there is something I have consistently wondered about as we have watched an economy show less growth (and inflation) than "expected" as unemployment has fallen in the past decade. My question is, what is the impact of the "terrorism tax" on the world economy post-9/11? We have overlaid an entire security structure onto the economy that did not exist before then, whether it be airport screening or more detailed recordkeeping by banks, creating and funding the NSA or increased security at all public events. This has to have been a drag on productive economic activity, no?
2
I must confess that this concepts discussed in the column are beyond me. I will send a copy of your column to President Trump and Larry Kudlow. I'm sure that they will understand the concepts discussed and heed your suggestion : " We should not let policy be driven by ideas that haven’t worked for decades."
5
There are other factors that are somewhat new (in our times) to the equation of inflation:
- the seemingly unending supply of cheap goods from Asia that is costed by those countries' economic systems, not ours
- the huge income gap that means ordinary people still don't have spending money to buy more than cheap overseas goods
- the downward pressure on real wages that technology has created. Management and white collar positions used be protected even as automation began to change the blue collar workforce. Now both groups are seen as more costly than they are worth and replaceable, if not now, soon. Even people jobs like teachers and healthcare practitioners have felt devalued by the tech driven information age. banks don't need well trained finance people on the phone or in an office, just use an app.
- last - we produce or import way too much cheap junk food, gas and consumer goods than the population can use. The supply far outweighs demand.
What does show the true strength of the economy is the cost of housing. The only thing that does not grow is land. Inflation numbers are more meaningful when measured in pockets, The out of reach cost of places to live near enough to lobs has created spirally housing inflation.
Dollar Stores and Walmart stock prices show us how well the Asian economies are doing. Housing costs show us how well we are managing our own.
24
@MKKW
I largely buy the first parts of your argument as an explanation for the phenomena but the housing picture is more spotty if for no other reason that there are lots of different housing markets in the US.
1
The difference in real estate prices show the divergence in wealth and income. The arrogance is claiming your own success is all of America's.
Let's consider the absolute destruction of collective bargaining in the U.S. as the key to a lack of inflation and the growing wealth gap: There's Capital,Labor and wealth. Capital's nature (in our form of the concept) is to retain and/or increase it's percentage of wealth. If Labor has no power to demand higher wages (or taxes), Capital has no incentive to raise wages to a level that would threaten it's percentage of the total wealth. Inflation is the response mechanism by Capital in retaining it's percentage of wealth through price increase. Since Labor is so weakened, there is no threat to Capital's relative position and thus no inflation.
FDR figured this out 80 years ago and Capital has been trying (successfully) to obfuscate those findings ever since.
8
Add to that the following:
Inflation is used to help to melt domestic debt and wages. We have very low wages now for variety of reasons and mostly everyday people are in debt. In old days, people saved and theses savings are borrowed by companies and governments; so inflation was helpful in reducing the the value of the money hold by ordinary people. Now, banks and rich people are the lenders and naturally they do not want to see reduced value of their money. In my view, inflation will be low as long as American people are in debt.
The decoupling of inflation from unemployment isn't difficult to understand if you recognize that labor - from unskilled and highly skilled - is now nearly borderless. Decades ago as the domestic economy reached near-full employment, companies were forced to compete for labor, driving up labor costs, product and service prices, and fueling inflation. Today companies large and (relatively) small employ where they recognize the best value.
We may be at full employment using traditional measures but employment security is still shaky and there seems to be considerable underemployment. Employers are in no hurry to raise wages because they have no good reason to raise them.
5
The burgeoning global economy is the reason these curves appear to defy, and the Fed is right to be cautious. Inflation is being held down by the developing international economy where rapidly increasing productivity at very low wages is competing away any incipient wage aspirations in the developed economies. U.S. unemployment doesn't boost U.S. wages, because we are still in a period when our high wages are being competed away by third world leaps in employment (and local wages, from their low base) devoted to supplying the developed world as well as its own burgeoning demand. Cutting interest rates will boost demand but not for U.S. labor, just for goods and services from low wage countries, and more debt and inflation.
2
A second curve-disrupting force is the "creative destruction" of entire industries as technology transforms the products and services that Americans buy. This also destroys the livelihoods and wages of legions of workers. Many do not have the education or ability to change to the new jobs created by these technologies, and suffer deep drops in their wages as they move to lower-paid careers. Those who do take the new jobs created by these technologies also lose wages as many of the new jobs are streamlined to require less skill and also crafted to be moved overseas to lower wage workforces.
Thank those who commented on my posts. The word limit of the NYT prevents me from going into the details but I have responded, in replies, to their follow up comments.
Unfortunately, the NYT only has a comment section, not a discussion forum.
You cannot find out that your own arguments are wrong if you can't have a real discussion with someone who disagrees not because of political affiliation but because he's convinced to have better and more fact-based arguments.
A discussion forum allows people to exchange arguments, go fact-checking them, and them coming back to the discussion. That's how comments on newspaper articles can change minds and make us collectively more intelligent - and less vulnerable to fake news.
That's almost impossible when you constantly have to go back to your inbox clicking on the link to your own original comment, just to see whether the Times already published a reply on it or not.
I understand the Times' priority of civility and as a consequence the need of moderation (and often hours between the time of submitting a comment and seeing it published ... hidden on page 5 of the comments published at the same time, which means that nobody will actually read what you wrote).
But if at least we'd receive an email notification not only when comments are published, but also when a reply is published, that would already enhance real debate a bit more ... . Of course that implies modifying the reply system, so that people can visually see a reply to a reply on a comment, rather than having to mention the name of the reply you're replying to in your comment, if not notifications can't be sent automatically...
I think there are problems with a model that tries to isolate 2 factors to explain events. (I am a physician and this model is like physiology which we get wrong as well. There is a different curve for a normal heart and a weak heart.) First of all the first curve excluded food and fuel. So demand is based on wants more than needs. In the middle part of the first graph, we had a period with increased use of credit, poor saving and acquisition of "stuff" that lead to a reduction in household reserve saving. The Second graph explains the correlation but in a much more severe way, so the hypothesis is correct but only if it is so severe other factors don't influence it. If economists were doctors they might argue about how much diuretic or vasodilators to give to the failing heart but both would be given. Policy is made by Uncles Loudmouth, Dopey and Foolem who want to use leeches and bloodletting. Oh whoa is us.
4
There were only 84 comments when I read this article. This one was the most interesting to me. It addresses oversimplification and correlation v. causality. Others rightly address impact from weaker unions and a large pool of low cost international labor. I think it should also mention the phase delay of heavy personal debt on consumption. Also note recent price increases for services ahead of new purchases that further decreases consumption.
"Is the natural rate hypothesis dead?"
even if it is not dead, it leads to different results in different countries. the US is not japan is not spain is not brazil. different societies and legal systems can function differently. labor markets and financial (monetary) markets are parts of society and are governed by (different national) laws.
n.b. the phillips curve was originally based on data from the UK. how is the rule working there today?
1
Economics is one of those areas that like psychiatry seek to predict future behavior based on a combination of observation and explanatory statistics. This analysis is always helpful in guiding our actions, but we should not confuse these 'laws' with basic physics -- if I drop a raw egg on the floor it will break. Such certainty does not apply to economics. That having been said, I agree with Dr. Krugman that demonstrably failed policies should not be re-applied. Trying the same failed action in the belief that this time the results will be different is a demonstration of insanity.
1
The force (F) required to fracture an eggshell is equal to mass (M) times acceleration (A). (F = MA). If the egg in dropping falls a short distance, A will be small. The necessary force to break the eggshell will not be realized.
Hi Paul,
The Federal Government is the monopoly issuer of the currency. And, as you know, the monopolist is price-setter, not price-taker.
Now, virtually no one in the Federal Government knows this anymore, but that doesn't make it any less true.
The whole business about "expectations" was always obvious nonsense. Inflation in the 70s was due to OPEC raising the price of oil and Volcker not knowing what he was doing.
One wonders how many lives have been ruined due to the dogmatism of mainstream economists.
3
Volker was the one who stopped the inflation, not the one who created it.
1
63, no Koala is correct in everything he writes. The inflation stopped when the price of oil went down. From Marc Kagan's comment:
note that by 1983 the price of a barrel of oil had fallen 40% to $60 and by 1986 it was less than $30.
Volcker didn't have a clue.
2
Anyone who gives a loan that is not completely secured with reserves creates currency.
UGH! I have to admit, I can't make any sense of this after he writes, "I think we’re into the realm of bounded rationality/behavioral economics."
But at least before that, there is some real data in the first chart. If you try to to find a relationship between unemployment & inflation, the most obvious thing is the Krugman has the arrow backwards.
HIGH INFLATION CAUSES HIGH UNEMPLOYMENT. There are only two times on the chart with high peaks, the two on the left. In both cases the blue (inflation) peaks BEFORE the red (unemployment).
What this does not say is that low inflation causes low unemployment. Or to put it another way, although high enough inflation can cause high unemployment, there are other factors that can also do so.
So if we worry about unemployment, we should look at what really does cause high inflation. People who have been right more than Krugman, such as James K. Galbraith, have done so & concluded that high inflation is caused by a decrease in the dollar amount of the stuff, goods and services, a country produces. It could be caused by an increase in the amount of money in the economy (times the average frequency a dollar changes hands in domestic commerce), but although this can exacerbate inflation, this never seems to be the cause.
And let me be frank. Anyone who still maintains there is a high positive correlation between unemployment & inflation after look at that huge peak in the red graph on the right side of the chart just has to be nuts.
5
It's very unusual for Paul Krugman to write an article for the times that reminds us that he IS actually one of the most highly qualified economists in the world--but, such full blown analyses are usually in journals, where the short-hand and "code" is mainly comprehensible to other economists. In grad school, I struggled through many such articles.
What's interesting as that almost every commenting post here clearly has NO idea what Professor Krugman is talking about, whether they "agree" with him or not. Even with an econ background I can only sort of follow his argument, which seems to come down to:
Unemployment rates are very loosely, not tightly inversely related to inflation rates, but are still definitely tied to each other, and over-inflating the economy doesn't seem to work to off-set it. (Not sure how that fits with recent experience).
But a more important message that seems to be lost is that lowered demand costs an economy in all its productive elements and that loss is never made up.
At least that's what I'm able to infer from the density of the article.
3
I am sympathetic to Dadof2's arguments, but I note that there is only one real equation in the article: the so-called natural rate hypothesis. I do not have an economics background but I am familiar with how mathematics can be used to describe real-world systems. This hypothesis assumes that the instantaneous rate of inflation depends only on the expected rate of future inflation plus a term dependent only on the instantaneous rate of unemployment.
I am glad to see that the "confidence fairy" appears explicitly, as the expected rate of future inflation. However, whenever I think about the actual economic system, I see many delayed responses as well. Then f(U) would become f(U(t-tau)) where tau is a set of steps into the past. For example, in order for a company to make a substantial change in its hiring practices, it must first detect that it has a real problem meeting demand and that the current workers simply can't be driven harder. It must then advertise its new hiring push. Potential new employees need to see the new offerings and send in resumes. There need to be interviews and actual hirings. Often, the new hires need to be integrated into the workflow before they become fully productive. This can take weeks or even months, all in response to an unemployment rate in the past.
1
As an alternative hypothesis, suppose that the downward rigidity of wages is results in wages that are higher than expected after the recovery from the slump. So, if we use 2008 pre-slump as the base of 100, by 2010 the wages would naturally have been say 70, but in fact they were still at 90.
That provides a slack of 20 (90 - 70) that has to be overcome until the wages will start to rise at all, and they still have not gotten back to 100.
The second hypothesis is that the reaction to sudden inflation (the oil shocks of the 1970s) quantitatively differs from the reaction to a gradual inflation (after all, how many realize that 2% inflation means prices double in about 35 years).
Or, finally, perhaps the only price figure that the average American cares about is that on the gas pump.
3
The article points out that the causes of inflation may be different in different economic periods of time. The economists, like generals prepare for the last event in belief that this will protect the future. In the middle ages in Europe Inflation was caused by the black death. The 0.1% of the day, THE "nobility", tried to stem inflation by wage controls.
In the 1970s inflation was caused by the sudden scarcity and rise in price of black gold. One can add in the peak of power of Unions in the 1970s which demanded rise of wages in lock step with inflation.
Today the weathiest 0.1% control the economy by the percentage of the economy they own. Unions are of little importance and globalization plus the doubling of population living in the failed nation states of the world provides cheap labor, just like it did after the American civil war. However; tomorrow it could be different.
3
The Black Death (bubonic plague) caused deflation, not inflation. The survivors moved into more palatial houses as the residents of those houses died.
"Current inflation does depend on inflation, but it also depends one-for-one on expected inflation..." should be "Current inflation does depend on unemployment, but it also depends one-for-one on expected inflation..."
3
Ya think?
The policy implications of PK's analysis underscore the weakness of news media economics coverage, which, truth be told, has virtually become extinct.
The overwhelming majority of voters and politicians (of either party) watch one figure -- the unemployment rate -- and when it goes down, the party in power receives the benefit of incumbency, and when it goes up, the party out of power has the tacit authority to attack the incumbents without mercy.
You might call this the economic data weaponization quotient (EDWQ) that everyone misunderstands, misapplies and exaggerates with reckless abandon. The news media basically cedes the issue to the spinmeisters and local TV news anchors.
7
Printing more money is not a solution. We already have the inflation problem. It is evident in housing prices. Sadly, in the places where all the jobs actually are. More importantly where those more fortunate are driving up prices using the monopoly money. Health care costs are through the roof for everyone ( assuming you don't lose coverage). Car prices are too high and there is little public transportation to get the very people who need work to the places that jobs may be. Interest rates are not the issue. The issue is TAXES on the wealthy. They need to be much higher, not lower. The economic market can set rates and the Government should use increased revenues to level the playing field. Otherwise, we will become a third world country,.........................we already have the dictator.
23
We already have many of the economic characteristics.
P ~ (MV)/S
where P is prices , M is the amount of money in the economy, V measures the frequency that money changes hands usefully, and S is the dollar amount of the amount of stuff, goods and services, we can produce in some time period & ~ means is proportional to.
A word on V. If the government gives Scrooge McDuck a Billion for advice on the comic book market, M increases by a Billion, but if Scrooge puts the bucks in his basement, and forgets about it, that doesn't affect P at all. That Billion has a V of 0. Also, if Scrooge lose a bet to Daddy Warbucks, and the Billion moves from Scrooge's basement to Daddy's, that is a change, but the V does not change because it is not a useful change. It doesn't affect commerce.
Inflationistas like Mark cannot understand an equation with more than 2 variables. To them it looks like:
P = M.
You print more money, you debase the currency, prices go up. End of story. Of course this might happen if S and V remain constant, but in point of fact, the causes of most, if not all excessive inflations since WWI has been S getting too small--shortages, The anchovy harvest failed in 1972. There was a shortage of livestock feed. Then came the oil embargo. Prices rose.
In Zimbabwe, the farms were give to those who didn't know how to run them. S fell.
In Valenzuela, the price of oil fell. So did S.
In Weimar, the war caused shortages, mainly food. The the reparations in kind, caused more shortages, mainly steel & cattle. P rose.
I agree with you. The general population is feeling huge inflation. The costs of gas, food, medicine, rents and local sales taxes had added huge inflation in the lives of ordinary Americans. Economists ignore this very fact. And when asked about why this is not taken in consideration, the reply is always that these costs are too volatile to include in studies of inflation.
There is huge inflation right now. It just isn't counted because it does not fit the classic model.
It is time for economists to look at real life, not theory.
3
It's not really helpful to think about "unnatural" economics or "natural" rates in inflation or unemployment since the natural consequences of both inflation and unemployment are manipulated, often in order to produce a nice graph which you can show to the intended audience.
Unemployment would rise constantly if the capitalistic vision of supply and demand was not constantly butchered by greed, corruption or the need for a nice facade. It would rise simply because we keep replacing human resources with machines and because we abandon areas of employ that are no longer relevant in today's society.
So, to keep unemployment down, many governments simply put people to "work" doing things that actually have no demand, or have a demand that is artificially created.
Only way to go back to a "natural" flow is to tax the machines. Yes, tax the robots as if they were humans, use that to give the humans a basic pay that allows them to be creative, innovative, to save the earth, build space ships, invent clean energy, do art, be... happy.
18
...and I mean this seriously. We might think that by now we are past the "robot revolution," but it has hardly started. New tech makes it easier and cheaper to build the advanced robots, which make it cheaper to replace humans higher up on the skill scale, but the real change on the job market is the AI. It will change everything. AI will be involved in decision making at all levels, it will be more self sufficient in doing market analyses and stock trading, it will make drafts for Netflix scripts, comedy shows and music. It will play real instruments, it will drive cars, buses, trains and aeroplanes. It will write news articles, it will take over the shop clerks, the complain departments and street sweeping. Normal "jobs" will basically cease to exist.
If we let all the profit go to the corporations that "employ" the robots and the AI, there will be nothing that moves us forward anymore because nobody can afford to buy anything and there will be no taxes that can maintain, much less, expand, on any infrastructure.
Decisions must be made now because nobody want to give up power, nobody want to give up an advantage, and those who have it will have the means to grow faster than anything else.
Current regulations are reasonably sufficient for a world that is as our was in the sixties, but they are helpless now. They are helpless and to make it worse -- modern politicians, like those who back Trump, want them to disappear completely.
4
I've always been confused why one accepts the annual rate increase on a real estate lease. That is "man made" inflation, not inflation based on the real world.
2
It got pretty complicated about half way through. I will need a second read to lock down all the specifics. What is pretty obvious is that Congress made a crucial mistake at the beginning. Pure Keyesian thought/theory is that when there is extreme slack in demand (2008/9) government should step in and spend like crazy. They are the only source of demand that can pick up the slack. In ignoring this fact the Congress passed a puny ARRA program. Though it did help it wasn't enough. Then, they quit the playing field and preached austerity. Only now, when we are at a top has fiscal policy been loosened. However, it is targeted at wealth creation for those who don't need it. I tend to agree with one point the good doctor makes, we are in uncharted territory. But the one thing we can remain assured of, this will end badly for the working man/woman.
16
It was the Republicans that didn't want transportation/infrastructure spending because there was a black President!
2
Dr. Paul, "This matters. We should not let policy be driven by ideas that haven’t worked for decades."
That's the entire Ayn Rand, faus intellectualism Paul Ryan, Koch Bros, con theory of economics.
Some of Dr. Paul's theories are rooted in real world events. I can tell you when inflation died.
I watched and/or heard about meetings Rubbermaid had with Home Depot & Walmart. They had taken annual or semi annual price increases to the buyers for years. The major retailers stopped taking price increases and magically inflation slowed dramatically. They refused those price increases to corps like Rubbermaid for years.
Couple that with steady oil prices and other events and inflation goes away.
Today we find ourselves with several frictional events. Boomers like myself are retiring or at least slowing down (I've gone from the private sector after 40 years to teaching at a University Business School). That's about 1/2 of your declining participation rate. Add to that the removal of one parent working at the $25,000-$35,000 annual wage rate b/c of the costs of child care (do the math) and your participation rate comes more into focus.
In my experience Dr. Krugman's wonkish posts are rooted in my real world. Fixing our economy means rejection of con world's damage to our society. They have their own legal system (supreme court corp cheerleading), government (Kansas) and media echo chamber (see Fox, WSJ & talk radio). Tough to defeat in a world of alternative facts.
12
Hasn't our inflation of the past 20 -35 year been lowered by the increasing availability of inexpensive goods produced elsewhere? And aren't the only true beneficiaries of such production the wealthy producing owners?
3
While I don’t know much about a natural unemployment rate, the natural inflation rate seems to resemble the growth rate of trees.
About 2.5 percent, per year.
1
Maybe the real lesson is that while patterns exist for periods of time, that the underlying conditions truly do change, and so relying on something so specific as an equation ends up failing. For example, the period of "stagflation" also included the first major period of deindustrialization. By the 1980s it is likely that some of this first made unemployed were retired or on government paid disability, and that the youngest eligible employees were not old enough to work when the first big steel mills started to shut down.
Though not mentioned here, we continue to see some refer to our current growth rate as too low and they imagine that we can inject capital into the economy (by lowering taxes) and that somehow real growth with occur (and not just the asset bubble that is likely). But the conditions are - in the developed world simply different than they were before the 1970s.
Maybe the trouble is expecting permanence to laws. But unlike gravity and inertia, the laws in economics are really much less so.
2
Prisons enjoy full employment and experience no inflation because there is no possibility for wage competition among the prisoners. I'd say that's where we are today, with everyone eager to sell themselves to the workhouse out of fear, with the long term evisceration of unions as a countervailing force.
David Leonhardt has an article in today's Times lamenting the possible demise of Barnes and Noble at the hands of Amazon. The fact that municipalities are willing to condemn their inhabitants to a wretched but reliable wage slavery, courtesy of the bloodless, rational monster Jeff Bezos is emblematic of our current state. When we celebrate our low unemployment rate, what we are really celebrating is the creation of a new caste of worker, with no rights, no hope and an excellent chance of being driven to an early grave.
34
True, but Barnes and Noble was perceived the same way when they started putting every mom and pop bookstore out of business.
7
"...what we are really celebrating is the creation of a new caste of worker, with no rights, no hope and an excellent chance of being driven to an early grave..."
Would that be one of the results of unfettered capitalism?
3
@phil So the cycle of stupidity repeats? Until it can't?
What I miss in the analysis are some of the important change factors that may have to be controlled for: increasing economic share of tech which is deflationary by nature (Moore's law), the gradual crippling of collective bargaining (unions) and increased menace of outsourcing/offshoring, regulatory leniency towards market power consolidation and what that means in modern days (economies of scale can be so large that they offset monopoly pricing e.g. Amazon).
6
Stories like these ignore the effects of corporate power derived from monopoly, oligopoly and labor monopsony. Corporate profits are at an all-time high and the ridiculous Republicans voted to give them even higher profits. The fantasy that inspired this was that corporations would pay more to workers some day. Seriously.
Meanwhile the evidence mounts that higher profits come at the expense of the labor share. The Fed takes any sign of wage increases as evidence of coming inflation and raises interest rates, which increases unemployment. The effect is to hand more money to the financial sector at the expense of workers, and with little or no effect on non-bank corporations which simply use their market power to raise prices.
The single-minded focus on the Phillips Curve conceals the actual drivers of the economy. But that's today's economics for you.
20
The whole problem with economics as a "science" is that economists largely ignore political power a a variable.
3
The fact is that low wages are essential in a capitalist economy. Take Apple, for example. In order to sell iPhones at a mass market price point (~$650), while maintaining $300 billion in cash on hand as well as enabling a $100 billion buyback (essential to the investor class and thus the market), someone, somewhere must build those phones for $12/day. Raise the wage and either the profits fall - catastrophic for a company who’s rumors can move the Dow - or prices rise, leading to fewer sales, leading to falling share prices, again, negatively affecting the market. Imagine if GM had never paid more than $5/hr to its assembly line. What was the worlds largest corporation in the 50’s and 60’s would still be a powerhouse, not the remnant of its 2008 bankruptcy (a black mark on this country if ever there was one).
3
Isn't our lower unemployment rate now just more people working for less money? Wages have not kept pace with inflation for a number of years. More people working for less money just does not increase demand much.
lff
18
Wages at the lower end seem to have stayed pretty much in sync with inflation, but what about total wages across all jobs in the US? I suspect that if you look at the total personal income across the US then we'll find that it has increased as predicted by the models with the small losses at the lower end offset by increases at the upper end.
Minimum worker wage $7/hr, minimum management wage $500/hr.
Perhaps, but a good part of high wage earners earnings go to investment whereas low wage earners spend nearly all they earn. A greater proportion of total wages going to the low end creates more demand but since that has not been the case maybe it is too early to worry much about inflation in this recovery.
-
lff
In recent decades, wasn't the abundance of cheap Chinese labor and goods a major factor in diminishing the relationship between unemployment and inflation?
And now that Chinese demographics are in high reverse, might not the unemployment-inflation trade-off re-emerge with a vengeance?
6
This is interesting stuff, but unfortunately your analysis is based on massaged numbers. For example the unemployment rate is close to 8 percent on the U6 numbers, and shadowstats shows conclusively that it's much higher. The inflation rate has also been detached from reality because now they substitute cheaper versions of any given product instead of doing a straight comparison to determine inflation. This and other fudge factors are used to create an illusion of economic strength where there is none.
9
Since the last significant bout of inflation in the 70s the labor pool has multiplied. Now we have 3.5 billion workers around the planet, which mostly subsist on precarious grounds. China being the exception in regards to actually lowering the level of poverty and where wages have actually increased. India and Brazil touted as the the other big GDP story have a different story. The level of consumption for the workers there has actually decreased. The paradoxical tendency then is to diminish the levels of individual consumption despite increased productivity. Unemployment is just a corollary of the tendency.
If we had a sane society, we would have the machines produce for the benefit of all. We would do our jobs in less time than we currently do (what Marx calls socially necessary time). With more time to educate ourselves and cultivate real friendships, we can consume what we strictly need and avoid the artificial wants created in our society. But in the irrational system of production for profit sake, the machines and the imperative to stay competitive control us, and we have no time for these edifying endeavors. On the contrary the person who does productive work (augmenting the corporations profit) is subsumed under the dictatorship of cut throat requirements and barely has time for herself and her children. Uber and Amazon drivers can tell you that
9
As a layman, I want to throw in another variable into the equation for explaining or predicting the relationship between unemployment and inflation -- income and wealth inequality.
Paul, wouldn’t rising inequality dampen inflation?
In the macroeconomic textbooks, including yours and Samuelson's, that I studied as an undergraduate and as a mature well educated person, I came across no mention of inequality as a factor influencing wages and therefore inflation.
Rising inequality, not a good thing in itself, may be keeping inflation low. Imagine if all the jobs were performed by slave labor, there will be no inflation. Inequality is the modern day version of slavery.
19
A lot of the issues that we're seeing now have to do with how corporate America responded to the recession. My employer closed 7 of the 8 US call centers for the client we supported and moved those jobs to Mexico, the Dominican Republic, and the Philippines to cut labor costs. Thousands of people lost jobs, couldn't find new jobs, which means we couldn't spend money in our local economies so small businesses started to go under. It was a never ending Cascade effect and a lost decade that many Americans still haven't recovered from.
Now we're at a point where unemployment is low but wages are stagnant and the cost of living just keeps going up. In order for the economy to fully recover corporate America needs to invest in American labor with higher wages. Minimum wage needs to be tied to inflation to ensure that businesses don't just raise prices and cause ballooning inflation. Unfortunately as long as trickle down economics is the law of the land we'll keep getting more of what we've seen this past decade.
6
If just 36% of jobs don’t require any education beyond high school, then 36% of employees cannot reasonably expect to be paid much, if at all. If you haven’t taken the risk of a $100,000-250,000 education, you can’t expect a shot at the reward of a decent job. That is, unless you’re an entitlement loving left winger.
Dr. Krugman: it's time to go there. There never was a relationship between unemployment and inflation. The reason economists have historically gotten it wrong is that they confuse levels of employment with wages.
The Crash of '08 caused a good deal of unemployment that had nothing whatsoever to do with inflation. People lost jobs the old-fashioned way. Companies laid off workers or went out of business in a cascade caused -- essentially-- by low demand. The crash produced neither inflation or deflation. If the demand for cars drops 20%, auto makers don't keep up production and lower their prices by 20%. Instead, they cut production (and lay off workers) and simply sell 20% fewer cars at the old prices. That's how the real world works. Inflation neither causes, nor is caused by, employment.
Today we're seeing the rebound. More people are going back to work but wages aren't rising. And until employers have to increase wages to attract workers, they won't. This results in a return to previous demand without affecting the labor costs of production. We see only prosperity because only a rise in WAGES (not number of workers) would influence inflation. Simply putting more people to work within an existing wage structure will never cause inflation.
In the last decade, we've seen both things predicted by this model: unemployment soared without any deflation, and then has fallen without a hint of inflation.
It's time for y'all to believe it, because this is the way it's always worked.
21
Inflation IS affected by employment. If the job market tightens, employers are forced to pay more. That means more dollars chasing the goods and services that the employee will spend on when they are able to. While production and sales will eventually pick up to meet demand, such action is a laggard to the demand A micro example of this in play is NYC high end real estate prices around the time Wall Street bonuses are paid.
Good comment. And very "Chicago School" ('more dollars chasing the goods'). However, it's still not true.
Real estate in an exception. More money in a local market will indeed drive up prices. That's because the housing supply is relatively fixed (especially in development-phobic California).
But a better example is to think of Black Friday Thanksgiving weekend. Every year, folks head out to the malls to buy. Every merchant knows that "more dollars chasing the goods' is coming. Yet, they NEVER respond by raising prices. Instead, they compete by holding sales!!
More people having more disposable income causes prosperity, not inflation. Except for houses, Friedman was never right about this.
There is one very simple answer to this, the cost of energy. The dual shocks of the Arab Oil Embargo and the later Iran/Iraq war increases oil prices five fold at a time when energy demand was much higher as a percentage of total economic spending.
3
Your view is of the national economy in which we have attained full employment again with low inflation set by fed policy. But what happens if you let the economy run hot? Then we lose our competitive ability in the world. If you desire more inflation, then not to worry; the universal solvent of our economy, oil, has exceeded the rate of inflation and I believe will inhibit economic growth shortly.
2
Cool stuff. It's good that economists can look at the evidence ... oh, I'm sorry ... empirical data ... and at least contemplate that what they thought was right might not be. I speculate that there is a long period of experimentation whenever a major change in economics and finance occurs, like coming off the gold standard/fixed exchange rate for good in '72. Maybe it took 40 years for the full impact to be observed and absorbed by consumers and policymakers alike.
I further speculate that the unveiling of information, through broadcast and the internet, has short-circuited much of what drove overcorrections in the past. And of course, the models that guide policy advisors have become more sophisticated (or at least more computationally intensive); together with the unveiling of information more responsive.
Finally, what people think and feel and expect matters more than any other factor. More than interest or inflation rates, more than total output, more than the exchange rate. In fact, all of those things arise from what people think and feel and expect.
As I've said, never ask a physicist or an economist a question about any topic that involved the participation of humans. Maybe the economists are getting ready to surprise me.
4
The effect of monetary policy in the late 70's and early 80's followed the huge inflation of the 70's most likely fueled by monetized spending on the Viet Nam war, ended the inflation. The reason perhaps you don't see a similar drop in inflation following the 2008 recession and huge uptick in unemployment is likely a result of Bernanke's quantitative easing policy. Why does understanding these things require a rethinking of old policy choices? In any case, what is the best policy course at present and is it policy choices of Congress/POTUS and the Fed coordinated and what should they be?
1
Wage gain is negative since 2017. Inflation is running at 2 percent and above and wage growth was two percent. The net effect is wage stagnation or degradation. A house in the bay area costs upto 10 percent more in 2018 than 2017. The unemployment figures can only offer cold comfort to the average worker
2
The obsession with interest rates as the major determining factor in economic policy sounds like the old saying that if all you have is a hammer, everything looks like a nail. To non-economists, it seems obvious that over the past few decades the economy has been influenced by the ongoing explosion in technology, by international trade and migration, by energy prices, by environmental considerations, by social changes, and many other interrelated factors. Perhaps it's time for the older generation of economists to retire and make way for a new paradigm.
6
I think everyone will agree that the quality of living and life expectancy of Americans improve when policies are formulated by Democrats.
The best example from my study of the economic history of the United States that changed the quality of life of our society for the better was passage of Social Security Insurance program. This is the main reason that I vote Democratic because the record is clear that the GOP has opposed Social Security from the get go.
The GOP opposed SSI. they wanted to impeach FDR for proposing the long standing solution to the miserable conditions in our society prior to passage of the social security insurance program.
Social Security did more to make this a decent society than anything I can cite. 2nd, all fair minded people will also agree that Medicare is a great program and there is a growing number of thinking people who believe that Medicare-for-All will improve our society.
I don't like the way that the cap on social security contributes to inequality and there are Democratic policy makers who know that the cap on earnings is totally unfair.
I am also very concerned that we are ignoring the evidence of global warming and the serious challenge to our national security that weakens our prospects for a decent future because our leaders are failing to use our industrial power to develop technologies to create non-fossil energy technologies to power our economy particular for the generation of electricity and transportation.
50
For as long as there is a limit to SS benefits, there needs to be a cap on wages subject to payroll taxes. Otherwise, a social insurance program becomes just another welfare scheme.
Unemployment data are only 1/2 of the picture. The other half is the labor participation rate. Without figuring it in, unnatural results follow
US Labour Participation rate
January 2000 67.3%
January 2008 66.2 %
January 2009 65.7 % (crisis begins, Obama takes office)
January 2017 62.9 % (Obama leaves, Trump enters)
April 2018 62.8 % (Latest available)
So there is still a pool of 5 million workers out there, compared to 2008, that are still NOT in the labour force
Why ?
The labour participation rate is high when the jobs are pay well and have good benefits. The labour participation rate is low when jobs are lousily paid and without benefits.
For comparison, the labour particpation rate is 78.1 % in Canada, 79.7% in the Netherlands, 80% in Denmark, 82% ins Sweden, 89% in Iceland.
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Woof, this is very important. Surely you are right about labor force participation: the causes include the desirability of jobs, e.g., height of pay, and the effect of lower participation is a lower measured unemployment rate.
Other causes of low participation are the loss of job opportunities in communities of people who can't or won't leave, possibly because they can't sell their houses and have no other money, or because they expect no better opportunity elsewhere. Think of towns that have lost their industry. Younger people can leave much more easily than older ones. Older ones may guess (correctly) that there's a lot of age discrimination, or that the low-paid jobs they might get elsewhere are not worth the cost of leaving. (I'm not making these up. I've read about them.)
I'm not sure whether the country comparisons are appropriate, but the U.S. history shows it doesn't affect the argument.
10
Please bear in mind that in the last ten years, the CPS percentage of seniors has climbed by four percent from 15.8 to 19.8. In that time our population (16 and up) increased by 23 million, but 13 million of that were senior citizens. Every year this should cause natural LFPR to decline by 0.4%. When an economy loses 10,000 workers to retirement every day, with almost no increase in population, it has a strong effect on LFPR. If anything, a high LFPR is a feature of marginal societies with short life expectancy, where even children are forced to work to survive.
10
Part of the explanation could be (from what I read) related to gains in productivity - which of course translates into fewer people producing the goods and services that drive the economy, people working forced overtime so that more workers are hired, etc. I've heard from more than one acquaintance from overseas that we work too hard due to employers' demands and the threat of lost benefits that dangles over our heads. Clearly if we disconnect, especially, health care from employment there will be more incentive for workers to seek new opportunities and for employers to consider more employees since the benefits millstone would no longer hang from their necks. Maternity (and paternity) leave, job sharing, and other modern takes on work create more opportunities for employment with very little additional cost to the employer.
12
It is interesting to see Krugman return to his earlier strong criticism of Summers on the day Summers rewrites history in FT.
I don't know Krugman and I do not understand him. He is wildly unbalanced and ad hominem in his partisan political attacks. Yet, he is too obscure in his serious writings.
Why not mention Summers, Bernanke, etc. and say one was right and the other wrong, etc.? I have reread Krugman at the end of 2008 and the beginning of 2009, and he was absolutely right. He said Obama had a chance to be a Roosevelt, but was blowing it with his choice of advisers.
On the substance, Krugman needs to be more real world. No serious person ever said low unemployment leads to inflation. They said low unemployment leads to wage increases, which leads to inflation.
The simple correlation is unimportant. It is the mechanism, and what has gone wrong is the wage link. Friday was obscene. The employment report was more or less in line with expectations, but wages were up only half of inflation. The market shot up nearly 400 points explicitly in response.
Also important was the Democratic donor, Buffett saying he bought a great deal of Apple, but not because the tax cut gave it the ability to invest at home, but because he trusted Trump's fiscal stimulus would go to stock buybacks and artificial inflation of the market--which Krugman inexplicably does not consider inflation.
We have to deal with wages and standards of living and not worry exclusively about profits..
3
It is, of course, outsourcing and unlimited immigration that destroyed the supply-demand relationship in labor that was behind the healthy wage growth from 1945 to 1980.
5
Wasn't it the change in Federal Reserve Policy under Chairman Paul Volcker that reduced inflation in the early 80's at the cost of higher unemployment until the expected rate of inflation by consumers and businesses was reduced? In effect equating a short run and long run Phillips Curve. That would appear to validate Milton Friedman's reasoning that there is no short run trade off between inflation and unemployment.
Also, why does any and all topics authored by Professor Krugman, wonkish or not, always conclude with more government spending, more government involvement, more government?
If your conclusion is correct, it's because the GOP has carried out savage cuts in essential spending while blowing up the military money balloon. Krugman hasn't paid enough attention to the de-distributive effect of grossly enlarged military spending but he has certainly paid attention to the cuts in social support and the redistribution of money to the wealthy in unjustifiable tax cuts.
1
No, as Marc Kagan earlier remaked:
" In this case, the Fed decided to act decisively, brutally, to squelch it. (I have no idea whether this was actually necessary - note that by 1983 the price of a barrel of oil had fallen 40% to $60 and by 1986 it was less than $30.) "
A recent book by a guy at John Hopkins (can't remember his name) who was working with Volcker said that they didn't have the faintest idea of what they were doing and were frequently dumbfounded at the results like when they increased short term rates and long term rates went down.
2
Agree that the oil price shock exacerbated the expected level of inflation but recall inflation had been rising throughout the 1970s. And that's the point, the expected level of inflation becomes embedded in pricing decisions. The Fed under Volcker used a contractionary policy resulting in increased unemployment and a ratcheting down of inflation expectations. I'll have to track down that John Hopkins book. Thanks.
Paul Krugman is still in the pre-globalization state of mind.
The price of TV's sold in Walmart has nothing to do with US employment. It is set by what the Chinese decide to sell it for.
More generally, this is applies to all products and services that are subjected to global competition. From Mexican tomatoes to includes IT services by IBM, see below ,that are set by wages in India.
The situation is different for products and services entirely produced inside the US, with US worker that are NOT exposed to global competition.
There you DO see inflation. Physicians salaries increased 35% between 2009 and 2015. ER is a) local and b) not subject to wage pressure as the AMA is doing a very good job of erecting hurdles to the immigration of foreign doctors willing to work for less.
A mixed case are cars made in the US, with US workers. Those can not increase their salaries (and that would transmit into increased car prices) because the response to wage requests is to move production overseas.
Mr. Krugman still does not understand the distributive effects of globalization he so eagerly promoted nor the damage it did to American workers's salaries.
================
A high tech service example (NYT , 2017)
IBM Now Has More Employees in India Than in the U.S
Key sentence: "The work in India has been vital to keeping down costs at IBM .
That means keep down WAGES.
"https://www.nytimes.com/2017/09/28/technology/ibm-india.html
60
Thank you, Woof. I just clicked over to comment that Dr. Krugman was ignoring the effect of globalization and saw your contribution. The addition of 3 billion workers to the labor supply and hundreds of alternative tax regimes has to be deflationary at the most basic level of economic theory.
11
Forgive me but your opening paragraph is dead wrong. The Chinese don't decide the cost of TVs, they just build them for American and Japanese and increasingly Korean companies who set the retail prices. Most Chinese contract manufacturers barely earn a living, the profit they earn on a $200 retail TV is in the $3-5 range. Wal Mart earns roughly four times as much, and that's an industry with very low margins. Apple earns roughly $400 per iPhone, Foxxcon (Taiwanese, operating in mainland China) earns about $10 per iPhone. So who determines price?
21
Yes and No. I know all those numbers as I worked on the economy of imports and have been in Zhengzhou were the Iphone is made by Hon Hai (Foxconn to Americans). YES, on the Iphone numbers. NO on solar panel - a good the PRC decided to sell for ecopolitical reasons below cost. The larger point is that the price of imported goods is determined not by wages in the US but by wages outside the US is still correct.
There is a major disconnect between our knowledge of economics, albeit imperfect, and our economic policy. Rather than policy being driven by science in economics, policy is driven by moneyed-interests who will define science the way they wish it to be. When reality hits, they simply lie and move on to their next policy disaster that hurts everyone but the wealthy. The cycle just goes on and on, with 40% of the population willing to sacrifice their own stability in order to keep playing a game they can't win.
34
Right you are !
7
Is income and wealth inequality a factor in all of this? Yes, unemployment is now low, but what kind of jobs have people been able to find? If people are only making enough to survive or in other cases not even that much, how will they increase demand of goods? My impression today is that a large percentage of our population is watching their pennies and worrying about the future. This is not a situation where prices start taking off.
24
The equation still works, but the reality is that when workers become too expensive, the work moves overseas. So the jobs disappear from the American scoreboard and reappear in Mexico, India, China, or the Philippines. Inflation is nonexistent in the US but rapid in these easy-to-get-to markets. Example - wages are exploding in China - they have doubled since 2010. India's daily rate is up 13% in just two years. America is effectively exporting its inflation to these developing markets. At some point this will no longer be possible, but it could take decades to exhaust the global supply of labor.
4
Or, dare I say it, the import workers to the US to do the work at wages/salaries that Americans won't accept.
Isn't it the great monopsony power of firms that keeps wages, and then inflation, low? Concentration across sectors has increased mightily, keeping the return on capital elevated, even at full employment. El Erian's recent piece on the loss of real-world relevance of the economics profession is spot-on. The ongoing attachment of mainstream economists, particularly at the Fed, to their mean-reverting DSGE models has led to persistent sub-par growth and the rejection of expert opinion across a variety of fields, including climate science.
6
The most important point to remember is the context of the late '70s / early '80s double digit inflation and then the induced recession.
The inflation was initially caused by an unexpected outside event over which the United States and the Fed had absolutely no control - the massive rise in the price of oil. Regardless of a normal range of Fed policies, this was going to take years to ripple through the economy and smooth out. In this case, the Fed decided to act decisively, brutally, to squelch it. (I have no idea whether this was actually necessary - note that by 1983 the price of a barrel of oil had fallen 40% to $60 and by 1986 it was less than $30.)
In any event, this black swan event was also used to denegrate monetary policy as a tool, even for ordinary times.
6
Compelling fact.
We're in the midst of a historic transition from old power to new, in every aspect of society, including economics.
Old power does everything to preserve the status quo for as long as possible, because that's the source of its power.
When the speed, scale, and scope of change renders your decades of experience largely irrelevant, you fight even harder to preserve the status quo. Even when the evidence mounts with each passing day that your worldview is obsolete and that you have experience in a world that no longer exists, you fight. The past is all you know, and the future has no place for you. So you delay the future, for as long as you possibly can.
That's what economists did in their response to the financial crisis in 2008, which was a rupture in economic history that repudiated the vast majority of those elegant econometric models and economic theories in all those textbooks that economists had convinced themselves were actually valid.
Rather than do a root cause analysis after the profession had collectively committed a blunder of monumental proportions, they doubled down on their incompetence, and continued to view the 21st century economy through the lens of the 20th.
The opportunity cost to humanity of their stubborn refusal for the past decade to adapt their worldview in response to the crisis they helped to cause in 2008 is staggering.
It's rather late to be getting wistful about letting "policy be driven by ideas that haven't worked for decades."
6
"Mainstream" economists' attachment to mathematical models that sometimes, maybe often, seem to work but that have no foundation in realistic principle leaves them with theories that only apply to limited situations. Hence, current capitalist economics may crash and burn if the forces they ignore change. This is a consequence of dismissing political economy, which at its best looks at the real world realistically and tries to see what forces are at work at a given time and place.
Mathematical models based on a failure to find underlying causes, or worse on curve-fitting, are intrinsically limited. That's one reason physicists try so hard to uncover basic phenomena by deep thought based on facts and not merely on superficial observations.
These remarks should not be taken to recommend a different system of economics. No fundamental principles are yet known. Especially the "law(s)" of supply and demand; since we don't know why they work when they do, we can't know when they will or will not work.
2
Thomas, have a look at the MMT school of economics. Their theories are just based on simple arithmetic and appear to account for the entire economic history of the US and probably (I haven't looked at this) other countries also.
1
Thanks, Len. That is interesting but doesn't affect my general objection.
How can prosperity return to the average person when almost all the gains in the current capitalistic system goes to the one percent?
What about progressive taxation modeled after the 1950s and infrastructure spending and taxing hedge funds more significantly?
89
If I recall from my economics classes (way back when) Keynesian economics assumed, correct in that era, that increasing demand for consumer products here would increase production of those products here -- hence the demand for factory workers and higher wages. Today priming the pump to increase demand for consumer products here means stimulating demand for factory workers in Asia. Might not this be a factor? I have heard that wages are increasing in China.
17
I had the same thought. A wonkish column without considering the distortions caused by China does not seem right. This rejoinder does not mean I am for erecting indiscriminate trade barriers. Some avenue should be found to better incentivize the US savings rate which would impact both the trade deficit and enhance worker wages.
2
"In the long run" wages can be expected to even out globally. What level they even out at is unknowable, but it will be influenced by politics. Hence the importance of the maldistribution of wealth and political power.
And when does "the long run" arrive? We have no idea. It may be worse than what Keynes said. Civilization could be dead.
1
The idea of a "natural rate", like many ideas in conventional macroeconomics, is innocent of a fundamental reality: the economy evolves on a finite Earth.
Think about it: humans on a sparsely populated planet began to develop technology that enabled them to acquire and appropriate more energy, increasing their numbers and accelerating their technology. The fossil fuel bonanza quickened the process dramatically during the past couple of centuries.
The result has been a conquering of the biosphere so complete that the biomass of humans and their animals now vastly exceeds that of other terrestrial mammals. But there is a limit. With the proceeds of nature now so fully appropriated, the growth called for by our economy is more challenging to generate.
With barely profitable technologies such as fracking now responsible for the generation of humans' energy needs, wealth is harder to create. There is greater contention for resources that are increased with more difficulty. All the while the human population increases, and the per capita human footprint increases also, making the impact more severe.
We hate to think about peak anything, but natural resources, upon which our economy is based, are stretched to the limit even while being required to grow further. Populations of birds, fish, and insects are plummeting globally. Even the climate has been impacted by the human economy.
How could the "rules" of economics possibly *not* change on an increasingly depleted Earth?
38
Thanks for the excellent example of how the lack of basic understanding vitiates economic theory "in the long run".
2
Take your comment to the Kochs. They run the country now.
Is it possible that employment (and unemployment) aren't fundamentally real? If a large segment of the employed are working at a level that is barely above welfare or unemployment insurance rates, can that be compared to historical periods when that was not true, when employment was sharply different than unemployment? Is it possible in the current climate that if we suddenly had a $15 or $20-an-hour minimum wage, we'd get a heavy spurt of inflation?
3
Unequal distribution of wealth = unnatural economics.
Those with enough capital ride out economic downturns because they don't have to work or invest in the economy in some way.
Those with no capital wind up working - because they must - for peanuts. Cheap labor makes capitalists happy.
45
Eminence (as high priest of Keynesianism), we totally agree, as long as unions are not powerful enough to able to force sharing of profits by deregulated/unregulated capitalists.
As it is, we're late into an economic recovery cycle, but the spoils have been so trapped at the top of the economic pyramid - to be invested in hedge funds for pumping up stock prices with buyouts/buybacks, funding 4th & 5th homes for the 1%, and juicing the market for Lambo trucks - that there has not been sufficient investment in housing for hoi polloi to live in whilst serving the 1%:
https://www.huffingtonpost.com/entry/housing-crisis-small-cities-boise_u...
At what economic point do you think 'the invisible hand' will work its magic, wondrously munificently providing obviously needed affordable shelter, instead of being trapped and continuously re-invested in the snow-globe economic perpetual motion machine the 1% have constructed for themselves ?
44
The 'invisible hand' has become aggressively adept at picking the pocket of the hoi polloi (formerly known as We the People)...
1
Policy is now being crafted by the libertarian Koch network and their band of robbers like Pruitt, Zinke, DeVos and their likes.
R.Law:Sad to say. but if history is any guide, the invisible hand won’t work until you chop off the hands of those taking the bread from your mouth.
There is a brilliant book by James Forder, The Phillips Curve Myth, which shows the charges were wrong and Milton Friedman played quite a role in promoting the idea that postwar full employment economists were in favour of inflation. That was untrue.
5
I find it unhelpful to continue to apply economic models to situations that can only be likened to a putsch by the economic elites of this nation on our government.
Full employment, the gig economy, unemployment, the working poor - all of these states of economic unwellbeing have been foisted by plutocrats and oligarchs whose greed is insatiable. Following the Great Recession, for the most part, the banks got bailed out. The people, those for whom there were no longer any good jobs, they got the old heave-ho. The people, those whose homes were in jeopardy, for the most part, were left holding the bag. Then, under pressure (or not) Democrats made the Bush Tax cuts permanent. Under Trump, we have Bush on steroids.
How do oligarchs and plutocrats continue to earn untold riches as a nation's people become impoverished? Through the demolition of our fiscal institutions (Tax Scam bill), the removal of as many safeguards from our regulations, destruction of healthcare and safety net, the collection and sale of private information (facebook, twitter, Google) and the extraction of every last bit of wealth from our land and seas, without regard for our environment. Trump is doing what he vowed to do: Grab, grab, grab. https://www.rimaregas.com/?s=oligarchy
This is the age of the Ferengi. Scott Pruitt, Mick Mulvaney and Steve Mnuchin are its generals. https://wp.me/p2KJ3H-2PQ
This is only policy if pillage and plunder are policy.
---
https://wp.me/p2KJ3H-2Rw
179
It is indeed odd to go applying models derived from 20th Century data when the entire 20th Century might have been an aberration.
The Industrial Era gave workers/subjects anomalously strong bargaining power due to the nature of industrial production. Industrialisation replaced human physical power and human physical dexterity with machines while humans themselves retained cognitive superiority. Industrialisation increased the value of human workers because a properly trained human controlled a larger value of output. By going on strike (legally or otherwise) they quickly imposed on the owners of capital more pain than they themselves suffered.
The transition from industrial economy to services economy, and the current transition to AI/robotics economy must surely change everything.
The post-modern Elite now longer needs its "subjects" as much as it did in the 20th Century. Its position of power has been restored. And like Elites throughout history, it is acting accordingly.
Whether it be in a) distribution of wealth, b) undermining of elective government by moneyed interest, c) the relentless shift of taxation from the rich to the poor, d) expansion of concepts of "property" to expand the scope of private ownership, e) privatisation of strategic monopolies, essential services and critical databases, f) the end of widespread home ownership or g) the end of equal access to higher education and professions (without massive debt), we are seeing the end of the Modern Era.
79
Stephen,
Exactly.
The sooner prominent academics with a megaphone begin to couch this in these exact terms, the better voters will be equipped to reassess where we are going politically, economically, and socially as a nation.
Had we not taken such a wild swing to the right, we might have been talking about the next iteration of capitalism and how humanity fits into it. A world without work is coming and it need not look and feel the way it is depicted in the series, The Expanse, on SyFy. But we continue to hurtle into the futures depicted in the best-known dystopian novels, 1984, RoboCop, Minority Report, and others, when we know better and could be moving towards Star Trek.
You're right, though. It is the end of an era. The trillion dollar question is whether we still have it in our power to remove the possibility of a continuation of our dystopia from the next one. Looking at our dysfunctional politics, it is very difficult to see how we turn about. The failure of progressives to wrest control is the single largest indication of that. Neoliberalism will likely win.
---
When Neoliberalism is At Its Most Dangerous
https://www.rimaregas.com/2017/09/04/triangulation-when-neoliberalism-is...
I couldn't follow your arguments, Dr. Krugman, because you're an economist and much smarter than I ever was. I am a layman, if you prefer the term, and the only real take-away is that Republicans use the economy and unemployment and inflation as political weapons. These dynamics should be used as guideposts for intelligent governance, since government is upheld by the taxes paid by working citizens.
Perhaps I'm guilty of a childishly naïveté when it comes to economics and politics but since we have one currency and one Treasury Department, and since unemployment is a determining factor in wages and inflation (correct me if I'm wrong), why does one political party (Republicans) jump-start a completely irrelevant and ingenuous argument about which party is best able to preside over a national economy?
Barack Obama never crowed about lowering the unemployment rate to 4% when he left office after seeing it reach 10%. Unemployment is lower now under Donald Trump but he's just being carried by the final tug of the Obama years.
The recovery from the 2008 disaster took 7 1/2 years but the Republicans criticize the sluggish growth that accompanied the slow road back to respectability. Under Trump, Forbes (January 18,2 018) reports that "...job gains were lower than any of the past six years and wage growth was less than last year."
So I suppose economics is political but how does this square with Republicans' decades-long assertions that only they know how to manage money?
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" since unemployment is a determining factor in wages and inflation (correct me if I'm wrong)" Soxared You would be correct in relation to the past when unions had some power but unfortunately this is no longer true. The rich and the ultra-rich have decided that they want more so all big organisations agree to keep wages low so that they can get a larger share of the wealth that workers create.
Economics is religion not science and neoliberalisn whether that of Paul Ryan or Paul Krugman is simply a sect.
It is only the strength of the theology that matters and the current observations simply reinforce that economics has very little impact on the availability of goods and services.
Nineteen sixty five was the highwater mark for American workers but those of us who experienced 1965 know we are much wealthier now then we have ever been. One billion people have been lifted out of poverty in the last decade and our productive capacity far exceeds our demand.
Unemployment seems to reflect business and government design than it does any need whether real or spiritual.
The emergence of Jordan Peterson as a public intellectual discounts economic theory. Dr Peterson who grew up with Rachel Notley the Premier of Alberta under the tutelage of Grant Notley combines a solid background in Political Science with his life in Clinical Psychology.
Dr Peterson explains that political and economic theory is used to drive us apart even as these times cry for an understanding of theories and observations that pull us together.
* Grant Notley was the leader of Alberta's New Democratic Party in 1984 when he was killed in a plane crash. For myself and the many others Grant Notley was seen as the future Canadian Prime Minister who might change politics and economics forever and would help us understand that a strong and loyal opposition was essential to good governance.
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"Nineteen sixty five was the highwater mark for American workers but those of us who experienced 1965 know we are much wealthier now then we have ever been."
Based on what calculus, exactly? On a worldwide level I'd agree, but for the people of the US, I'd have to disagree, strenuously. The single income family is almost entirely a thing of the past, and the middle class as a whole is following. Wages have stagnated and entire sectors of employment have moved to a part-time model. Unemployment may not be high, but underemployment and reliance on multiple part time jobs are on a dramatic upswing. These are not the golden years for this country's working class.
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"Nineteen sixty five was the highwater mark for American workers but those of us who experienced 1965 know we are much wealthier now then we have ever been."
The range of goods and services in the US has changed from 1964 to 2018. To wit, in part, the expansion of the Interstate Highway System has brought fresh agricultural goods to market throughout the US. Electronic goods and services produce rapid communication and easy access to encyclopedic material (e.g., Wikipedia has no charge for use whereas Encyclopaedia Britannica in 1965 required a minimum five-hundred dollar layout and then was unpdated only annually at extra cost.)
In conclusion, we are "wealthier" in range of goods and services in a way that cannot be monetized for precise comparison.
From the Wikipedia entry on Jordan Peterson
His first book Maps and Meaning, The Architecture of Belief (1999) "a work which examined several academic fields to describe the structure of beliefs and myths, their role in the regulation of emotion, creation of meaning and motivation for genocide."
I fear it may be too late for the USA but Unnatural Economics should be way down the list of priorities for human survival. The GOP has mastered division to gain power but being dead and correct seems Pyrrhic at best.
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Mr. Paul Krugman, some small words on the Spanish disinflation...how I tend to perceive such currently. i) it was a very short term event. ii) there was an unemployment shock to be expected due to capital inflow difficulties during the financial crisis, so a : unemployment through such + b : unemployment as the result of disinflation. iii) as "ii" is pointing out an additional unemployment was the result of disinflation, not disinflation necessarily the result of unemployment. iv) roots of such very short term disinflation could have been the psychological reaction to crisis as a result of public perception which might have been a in the very short term available consumption behavior...(consumption shock.) summarized...I tend to think that the Spanish unemployment was due to capital inflow difficulties where the public psychological reaction to such crisis in the very short term made unemployment rate rise even more...With Kind Regards, Mehmet Cokyavas.
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