inflation would leave many workers with permanently lower wages, as in essence the central bank would be giving them a wage cut that their own employers probably would not have dared. Maybe wages would adjust upward over the years, but workers would not be guaranteed this recompense.
I disagree with many of the views that are either explicit implicit in this column.
1. I do not endorse the view that economy-wide increases in prices help to increase employment by lowering real wages. To put this another way, I do not endorse the view that the real wage rate is countercyclical.
2. I do not endorse the view that the Fed can fine-tune the rate of inflation.
3. I do not endorse the view that higher inflation would be easier to live with. Prices are signals, and higher inflation creates more distortion in those signals.
Probably the biggest change I have had with Macroeconomics is how much the Fed can control price levels and any miss from 2% inflation is anything meaningful. Or whatever Scott Summer is complaining about! (Also the opposite is true that the scared inflationist have really been wrong sine 2008. The fall in gold in 2013 and oil in 2014 should be proof.) Anyway real wages are going up in the US but it has been a painful, long and focused on service related working class citizens. (Note this is one reason why Trump has done well with White Working Class in rural areas…These wage increases have not occurred.)
1) Oddly enough, the current economy is close to the 1950s which was a relatively slower but consistent growth with labor supply constraints.
2) The impact of global economy and increased automation in manufacturing will do a lot to control global inflation.
3) I still say we do have a low AD but not for Keynes reasons. It is because the low developed nation birth rate lowers the AD first. How do you grow the Japan economy if the birth is 40% less than it was in 1950?
The column was disappointing for not addressing the intergenerational aspect of inflation. Briefly, it would be bad for aging Boomers, most of whom are (at least partially) on fixed income, and it would be good for younger adults who are debt-laden, and who are facing decades of low returns in the bond and stock markets.
From my perspective, the Boomers have had a good run, let them eat inflation. But maybe that’s because I’m a youngish debt-laden adult who’s staring down the barrel of crappy investment returns for the rest of my working life. I’ll gladly take the risk of “re-negotiating” my wages in return for debt reduction and chance to earn a decent return in the stock market (stocks tend to rise with inflation).
I view any deviation from expectations as likely to cause problems, so this is less about higher or lower inflation than higher or lower than what was expected. Most of this operates through employment rather than wages. Lower than expected inflation means debtors are paying more than anticipated and have less free cash flow while creditors are gaining more than they should given the state of the economy and these depress growth.
I do not know how this fits into the “there’s-no-inflation” thinking, but since I just had my fall dental appointment yesterday, I went back into my records to see how the charges have changed over the past few years. My autumn dentist visit is simple oral exam and cleaning [so, apples to apples]. The cost [paid by me in cash from my HSA account, so no insurance “adjustments” or plan discounts] for the same services provided by the same provider for each of the following years:
2013 = $115.20
2014 = $128.00
2015 = $142.00
2016 = $157.00
If I’ve done the arithmetic correctly [of which there is no assurance, I’m challenged that way :-)], that is an increase in the price of one particular dental service of ~11% each year or, at $41.80, roughly 36% over the 3 years from and after 2013.
…I just thought that was interesting.
I should also note that over the course of those 3 years, my HSA [cash] account has continuously paid interest at a rate of <.05% per annum, and it charges me $3.00 per month to keep the account open (last I checked a few years ago, that flat fee was competitive for HSA accounts.)
How does one reconcile (1) with (3)? I take (1) as a rejection of nominal wage stickiness: real wages are not countercyclical because economy-wide price changes do not change the relative price of labor (wages) to goods. But, then how does inflation create the distortion in price signals in (3)? The price signals that matter are relative prices, right? If inflation lifts all prices equally, then there is no change in relative prices. If some prices are stickier than others, especially downwards, then increasing inflation can actually *undo* the relative price distortion caused by such stickiness.
Is the view here that it’s prices other than wages that are sticky? If so, then wouldn’t we see surplusses in these other goods, rather than in labor, during recessions? (Maybe, there are such surplusses; we just don’t notice them.) Even in this case, the inflation in (3) would actually undo the stickiness-induced distortions.