Three Economic Things That Do Not Exist
May 08, 2011
And the nonexistence of which makes the substantive case for a shift to more expansionary fiscal and monetary policies stronger than at any time in my life:1) An inflationary wage-price spiral:
Paul Krugman comments:
3) Any loss of confidence in the long-term fiscal stability of the United States of America:
And more from Paul:
The Inflation Monster Under the Bed: I’m glad to see Greg Mankiw agreeing with me on the absence of any inflation risk in the current environment. Maybe he should have a word with everyone else in his party.... [W]ages have gone nowhere. Commodity prices, on the other hand, have gone up.... So here are a couple of questions.2) A recovering labor market:
The answer to all three questions is clearly no. So what we have is a rise in raw material prices, which will largely get passed on the consumers, but no hint that this is spreading into a wider rise in prices; and with labor costs flat, that means we get a one-time jump in consumer prices, but no persistent rise in inflation. If you want to insist otherwise, you have to tell me how this is supposed to work. And I haven’t heard any coherent explanations to that effect.
- Do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?
- Do you any sign that employers are getting ready to make more generous wage offers?
- Have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs?
3) Any loss of confidence in the long-term fiscal stability of the United States of America:
And more from Paul:
The Invisible Bond Vigilantes Have Resumed Their Invisible Attack: It’s truly amazing that Washington debate is dominated by fear of the bond market. And it’s also truly amazing that nobody is suggesting that a government able to borrow long term at a real interest rate of 0.7 percent really should be taking advantage of those rates to finance some much-needed infrastructure investment.
Update: On a related issue, Real Time Economics suggests that it’s not the bond vigilantes we need to be worried about, it’s the “dollar vigilantes”, who push the dollar down on perceptions that American policy is too weak. Lots of things to criticize there, but let me just point out one crucial difference. If investors push up U.S. interest rates, that hurts our economic recovery. But if they push down the dollar, that helps our recovery, by making US goods more competitive on world markets. So if we really face dollar vigilantes (which I doubt), we should send them a thank-you note (maybe written in invisible ink?).
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Comments
Robert Waldmann said...
Those facts also make the case for a unicorn cavalry charge as strong as it has been in your life time. They can only imply that the Fed should implement an expansionary monetary policy if it is possible for the Fed to implement an expansionary monetary policy.
At the moment the Fed is nearing the end of the second larges program of open market operations in its history. The graphs show no reason to fear expansionary monetary policy, but also no sign that current monetary policy is pushing much harder for expansion than it ever did until 2008.
You note that the labor market isn't recovering adequately and your third graph shows that from the time the Fed started trying harder than ever before 2008 to drive down long term safe interest rates, long term safe interest rates have gone up (to be fair the real interest rate is the one that matters and it has stayed the same).
You say the Fed can and should implement a more expansionary monetary policy. The data you present suggest that the Fed can't and should do so, and can't plus should adds up to can't.
The fact that the arguments of people who say Fed policy is too loose are clearly utter nonsense doesn't mean things would be much better if Fed policy were looser. The plain fact that the Fed shouldn't pull on its rope doesn't mean it will achieve much of anything by pushing harder.
You quote Krugman at length but you suppress two words
I see two feasible alternatives expansionary fiscal policy or persistently high unemployment. I see only one outcome which is economically and politically possible.
At the moment the Fed is nearing the end of the second larges program of open market operations in its history. The graphs show no reason to fear expansionary monetary policy, but also no sign that current monetary policy is pushing much harder for expansion than it ever did until 2008.
You note that the labor market isn't recovering adequately and your third graph shows that from the time the Fed started trying harder than ever before 2008 to drive down long term safe interest rates, long term safe interest rates have gone up (to be fair the real interest rate is the one that matters and it has stayed the same).
You say the Fed can and should implement a more expansionary monetary policy. The data you present suggest that the Fed can't and should do so, and can't plus should adds up to can't.
The fact that the arguments of people who say Fed policy is too loose are clearly utter nonsense doesn't mean things would be much better if Fed policy were looser. The plain fact that the Fed shouldn't pull on its rope doesn't mean it will achieve much of anything by pushing harder.
You quote Krugman at length but you suppress two words
I see two feasible alternatives expansionary fiscal policy or persistently high unemployment. I see only one outcome which is economically and politically possible.
