inflation

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Beating Dead Horse?

I am not sure I understand the point of Alexander Kaufman’s column in the Huffington Post. In it he takes Paul Krugman to task for being repetitive and talking about just there things: austerity is bad, inflation fears are overblown, and Keynes was right.

Well now.

Whether or not we have disagreements with Krugman – and I know many of you do – those disagreements pale in comparison with those we all have with the arguments of the people Krugman is targeting in his columns. Yes Krugman can be annoying with his emphasis on his version of the Hicks version of Keynes. But if it serves to get a vital message across to a public largely unaware of the internecine struggles within economics, so what? I don’t care. Nor should you.

And if he sounds repetitive, then we should ponder the reason: far too policy makers are still stubbornly clinging to disproven theories. Yes, disproven. So are far too many academics.

Policy makers, I think, may be less culpable because they are trapped within the political whirl that constrains rapid movement. That is, by the way, as far as I would go. Professional ethics have to come into play sometime. In a profession unique for its disavowal for the adoption of any formal ethical standards – the market will sort out the unethical? – we have to rely on the personal standards of the people involved in policy making. We thus remove from the public’s arsenal one very important weapon in ensuring that the economics profession serves it well.

And we are left with a more public version of the academic bun fight that characterizes economics more generally.

Economics doesn’t exist in any coherent form. It is simply a long established and ongoing discussion about various ideas many of which have been kicking around for centuries. Indeed many of the profession’s core ideas were established long before our contemporary economy emerged, and sometimes they have to be bashed into shape to remain relevant.

Given the enormous egos involved it is thus hardly surprising that economists whose ideas have suffered defeat in the real world don’t abandon them, but simply crank up the volume and shout loudly about those ideas they don’t like.

Worse, since economics supports many and often diametrically opposed narratives, and since we appear to be stuck in a long war of deep ideological significance, it cannot shock anyone that the many sides of economics are played and replayed many times. These the repetition that Krugman is accused of.

I have often used World War I trench warfare metaphorically when talking about economics. The entire enterprise seems stuck in trenches lobbing diatribe back and forth determinedly with no side going much ground if any at all.

But perhaps a better version would be that economic ideas are part of the ammunition being flung across the field from trench to trench. Economics is just one aspect of the great ideological battle. And economists are driven, not by a sense of science, but by their own ideological perspectives.

Thus the quaint libertarian refrain: “markets good, governments bad”. Or the willingness of the Marxists to see the world in terms of a teleological historical narrative despite the modern emergence of democracy and the apparent error at the center of their vision.

Pragmatists will always be squeezed from either side by their more zealous peers. They don’t, after all, subscribe as deeply to the various utopias that so motivate the zealots, and they can be called craven for daring to change their minds periodically. I put Krugman in this more pragmatic category. He seems quite comfortable with slipping from idea to idea depending on the circumstances. That’s his strength. Quite a few people don’t like it because it smacks of a lack of ideal or principle. But flexibility is a principle. One that I quite like.

So when someone like Krugman gets stuck in a rut and appears to be repetitive in his commentary, I think it quite likely that it is because the context for his thinking remains similarly stuck.

And so it is.

Even after all these years since the great crisis, and even after the evident failure of so much policy, we are still mired in the same debate.

 

It is juvenile to think that we need to stop saying the same things just because the public might get tired of listening. What else are we supposed to do?

When we are stuck in the trenches we have to keep slogging away. Because to stop is be defeated. Yes I would prefer more movement and progress. But given the stubborn and committed nature of our opponents all we can do is match their stubbornness with ours.

And so it goes.

Austerity is still wrong. Inflation fears are still overblown. And Keynes is still right.

So why not keep repeating that?

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After Bernanke

It is fairly well accepted now that Ben Bernanke will decide not to stay at the Fed next year when his current term is up. By and large I fall into the neutral camp when assessing his tenure. He was woeful at identifying the likelihood of crisis. He has been pretty good at reacting and doing what he can to solve it.

He needs to go back to Princeton and work on upgrading orthodox economic theory in light of its errors, general lunacy, and current irrelevance.

It is very hard to convey the messed up state of economics to outsiders. Economists, after all, speak with such utter conviction and litter their ideas with tons of clever looking math. Most of them know the foundation is rotten and needs replacing, but that is a major upheaval none want to undertake, so they plod along perpetuating the errors while hoping no one notices.  Bernanke typifies this part of the profession – self-referential, vaguely aware of its fatal flaws, yet determined not to get out of line lest he appear apostate. To paraphrase an eminent economist of the past: Bernanke is one of those economists who would prefer to be wrong with precision rather than right with a degree of uncertainty.

Anyway, the silly season is upon us as the chatter builds about ‘after-Bernanke’. Who will take his place?

Larry Summers is shamelessly canvassing for support. Summers is one of those people who jumps about, never stays anywhere long enough for us to assess his impact too clearly, is good at networking in the circles of power, and can be relied upon to join whichever team looks like it’s winning. His abiding sin, in my opinion, was his wholehearted advocacy of bank deregulation. It was a catastrophic policy straight from the free market Milton Friedman playbook, and led directly to the crisis. Yet here is Summers running around town trying to be Fed Chairman.

The succession discussion will also give us insight into the way in which our economic elite protects its self interest and ignores the rest of us. Today’s Financial Times offers up a good example of this. Philipp Hildebrand, a BlackRock bigwig, and former head of the Swiss National Bank, writes that the imperative for Bernanke’s successor is to pursue ‘price stability’. This means that fighting inflation is paramount. Of course this is what Hildebrand wants. His constituency consists of bankers and other creditors who fear inflation – they lose money when it rises. So damn the unemployed, and look after the money lenders. This is despite the lack of inflation, and in face of chronically high unemployment. When you read his article you get a great insight into the divergence that bedevils economic policy making. The elite lives in a different world – the current spate of record profits at the big banks is testimony to that – and its issues are not those of the 99%. So, naturally, the policies they advocate are focused on what ails them not us.

Actually, if you read the article carefully you will identify a nod to the 99%. This shows that Hildebrand is aware both of his elitism, and his indifference to the ordinary folk. Here it is:

Therefore Mr Bernanke’s successor must bring to the job rock-solid credentials as someone who will be a central banker committed to price stability. There must be no doubt in the minds of those in company boardrooms, on trading floors and on main street that whatever else happens, the Fed will keep inflation low and stable.

Notice it?

Apparently boardrooms, trading floors, and main street, are all in this together. Not. Main Street tends to be in debt. And debtors benefit from mild inflation – it makes paying debt back cheaper. The banks lose by the same token. So they are not in the same boat. Plus one of the reasons that we’ve had such low and stable inflation over the past three decades is that wages have been squashed. Profits, though, have soared. Boardrooms, trading floors, and main street do not always have the same policy goals. In fact, right now, they are have very different needs.

Bernanke, to his credit, has helped stave off deflation, which would have hammered main street relentlessly, but his successor, according to Hildebrand, needs to plot his or her way (Janet Yelling would get my vote to chair the Fed) away from that and back to old fashioned anti-inflation policy. Even if there isn’t any inflation.

The single minded pursuit of ‘price stability’ is killing Europe, I hope that Bernanke’s successor ignores Hildebrand and doesn’t fall into that same trap. Unemployment matters. Indeed it matters more.

I wonder how many articles the FT will print with that sentiment in mind?

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Inflation

Lost in all the hyperventilation last week was news of our rate of inflation

There isn’t any. Or, rather, what inflation we have is small and getting smaller. Consumer inflation fell 0.2% in March largely due to falling energy and clothing prices. Even if we eliminate energy and food prices – notorious for their volatility – inflation only edged up 0.1% The biggest factor in the overall number was a 2.6% decline in energy costs, with gasoline leading the way with a 4.4% decline. Clothing costs fell 1.0% – the biggest fall in that category since April 2001. Food prices were unchanged largely because dairy prices fell, and the only substantial increase came in the used cars and trucks category.

The March figures bring inflation over the past twelve months to 1.5%, the lowest rate of change since last July. With the global economy generally slow, with US fiscal policy restrictive, and with the economy showing signs of slowing down, there is every reason to expect inflation to stay low. Indeed the more interesting question is why we haven’t experienced deflation – a period of falling prices.

The lack of deflation is perplexing. The economy has experienced a major contraction followed by an anemic recovery. Unemployment remains high by recent historical standards, and long term unemployment especially has emerged as a major concern. The economy still has significant slack in it and investment, while it has grown, is still insufficient to absorb corporate cash balances. Consumer demand remains weak, and private sector balance sheet adjustment continues, albeit it at a slower pace. These are the ingredients for a period of falling prices, but we haven’t yet seen such a phenomenon. Why not?

The answer probably consists, as is often the case, of many parts. The Federal Reserve Board has been pursuing what is, in  most opinions, a very aggressive monetary policy. Right wing economists and their austerity advocating allies are stunned that the Fed’s activity has not produced rapid inflation – the fear of inflation has paralyzed policy makers for way too long – and so any discussion of deflation must appear surrealistic to them. Yet it seems clear that with the economy in its present semi-crippled state, and with demand so quiescent, no amount of ‘pump priming’ would cause an inflationary spiral. After four long years of loose money by the Fed accompanied by low and sometimes falling inflation, I think it reasonable to assume that right wing theories of inflation need to be tossed aside, or at least revised.

Then there is the phenomenon known as wage/price ‘stickiness’. This is a rather clumsy way of saying that regular folks have a hard time with lowering wages. That is, wages unadjusted for inflation. Since wages account for the most important aspect of the economy’s price structure, any movement in wages is often what triggers inflation – or deflation- overall. And, as we all know too painfully, wages are mired in a long term rut. So it is unsurprising that wage pressures are minimal, with the result that inflation is also minimal. But with long term unemployment remaining so high, and with the labor market remaining very difficult, it would be reasonable to expect wages to have fallen somewhat. That would make it easier for employers to hire workers, and would thus alleviate unemployment. Workers resist this adjustment. And this resistance results in downward ‘stickiness’ – workers are all too happy to see wages rise, but not at all happy to see them fall. Interestingly this resistance is to what are called ‘nominal’ wages – that is to say wages unadjusted for inflation. It applies less to ‘real’ wages – that is to wages after inflation is taken into account.

This downward stickiness in wages is a major psychological barrier to the onset of deflation. It is an example of the real world economy defying the rational thought processes that right wing economists like to assume drive economic activity. Don’t forget that economists examine the economy through the lens of relative price points, not absolute price points. That is they think in terms of ‘real’ prices not unadjusted or ‘nominal’ prices. So the models some economists use assume smoothly adjusting prices in both directions – both up and down. After all that is the ‘rational’ thing to expect. The evidence suggests that workers aren’t rational in this way, and thus, even in an economy with significant slack – high unemployment for instance – wages may not fall as those models assume, and we end up with prolonged very low inflation and not deflation.

Of course all this assumes that there is significant slack in the economy. This is another possible reason why we don’t see deflation. Perhaps there is less slack than we imagine. If so the downward pressure on prices that those economic models predict would be absent, and that absence would explain our inflation experience.

In any case expected inflation remains low, and possibly lower than the annual rate we saw through March.

 

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Economic Update

We ought, briefly, to catch up on the latest news, most of which points to the ongoing sideways movement of the economy.

Yesterday’s numbers on new claims for unemployment assistance was pretty much in line with expectations. Claims fell by 29,000 to 343,000 which is still a relatively high level but much closer to healthy than where we were a year or so ago. So progress has been made in the labor market. Just not enough. Making this week’s figures difficult to place on the scale of good to bad is that at least part of the decrease is simply due to the unwinding of the hurricane Sandy effect. So this is yet another of those occasions when we have to take a longer term view. If we do that the we see a steadily improving trend at a slow rate. I suppose this is not news. It fits right into the well established pattern.

Today’s inflation numbers are a little more interesting. The CPI dropped 0.3% in November. This was largely due to declining gasoline prices. When we exclude food and energy from the index it actually rose by 0.1%. Either way this is evidence of negligible inflation. Clearly, with the economy languishing deep in a rut, and with activity slowing around the entire globe, there is no pressure on prices at all. This ought to allay any and all fears of hyperinflation stemming from recent Fed stimulus activity, but I doubt it will. One of the most tenacious errors we have suffered through in this crisis has been the constant cries of imminent inflation from right wing analysts and economists. They stick determinedly to their discredited opinion that the Fed’s support of the economy has created a flood of money that – nay day now – will send prices surging. This position is so out of line with the evidence that is now hopelessly exposed as purely ideological and without a trace of support from actual events. While our economy lingers in the shadows as it is the Fed’s activity will have no impact on prices. Not, at least, an inflationary impact. So to base policy recommendations on the fear of imminent inflation is both dangerous and cruel. Such policies would compound rather than mitigate our problems.

On a different note: retail sales rose slightly in November. The 0.3% increase offset exactly the decline in October, leaving us back where we started. There had been a hope that the undoing of the Sandy effect would produce a stronger uptick in November, but the usual suspects – poor wage growth, consumer uncertainty etc – conspired to keep sales relatively slow. Still at least sales recovered. That is something to keep in mind.

So. What do these numbers all mean?

I am afraid they send the same message as before: the economy plods along at an unacceptably slow rate. Growth is weak and insufficient to lift us out of the doldrums.

To put this in perspective: the Fed’s latest forecast is for high unemployment through to the end of 2015. Given that the Fed has been perennially optimistic in its forecasting since the crisis blew up, this paints a somber picture. It implies, amongst other things, that labor market will not return to its pre-crisis levels until a full decade has gone by. This is astonishing. It is testimony to our total lack of will power and to our extraordinary level of policy division. Our leadership has been utterly incapable of either grasping the extent of the damage, or being willing to act. The social cost of this intentional ineptitude is staggering.

Yet here we are.

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Explicit Fed

The Fed has shocked some people today. I don’t think it shocking at all. I see today’s announcements as the continuance of a trend, so the shock is not so significant as others seem to think. Still things are different now.

The shift people are focusing on is the explicit nature of the Fed’s targeting. From here on out we are all clearly aware of what will drive Fed activity: it’s goals are an unemployment rate of 6.5% or less, and an inflation rate of 2.5%. Not only this but the Fed has made it clear that it will work to keep interest rates at their current low levels until the unemployment rate gets to that 6.5% level, which is not expected to be until sometime in 2015.

From my point of view, the Fed has been edging towards this kind of policy clarity for while. I think Bernanke’s legacy at the Fed will be more about his willingness to be transparent than anything else. After all he was one of those mistaken about monetary policy and the economy before the crisis: his abject adulation of Milton Friedman is a fitting epitaph for a who generation of failed economists.

But the shock being expressed in some quarters, notably on Wall Street, is out of order.

In those circles the Fed is being seen as suddenly siding with the unemployed while abandoning its time honored pursuit of stable prices to boot. It’s as if the Fed were going to allow inflation to rise suddenly.

This is nonsense for two reasons.

First, the Fed has a dual mandate. It was always supposed to be pursuing full employment – however that is calculated, and it was always supposed to pursue stable prices. Both at once. In recent decades, though, the Fed, like most central banks, forgot the unemployed and focused relentlessly on inflation. This meant quite often that it looked as if it were ignoring half its mandate. So, by being explicit about its unemployment target, the Fed is merely being true to its charter. There is no news other than the Fed has finally woken up to its social mission.

Second, and this is more practical, there is no threat of inflation. This must be driving ‘austerian’ and orthodox economists nuts. In their world, all the Fed’s extravagant support of the economy ought to be showing up as inflationary pressure. All that new money is supposed to be causing hyperinflation. This is a common claim from the right and is often used to try to dampen down efforts to stimulate the economy. It is also laughable. At some point, no doubt, the endless cries of imminent inflation from this crowd will prove to be correct. Whether that is any time in this century I have no idea. But like the proverbial broken clock they’ll get it right at least once. At the moment, though, they lack any credibility. Their theories have been so thoroughly debunked by circumstances that it is a wonder they are employed at all. Still they infest Wall Street where, as we know, being incorrect or ignorant is no barrier to profit or career progression.

So the Fed hasn’t abandoned the fight against inflation because there isn’t any to fight against. Nor has it suddenly lurched into the arms of the unemployed because it as always supposed to be on their side anyway.

No.

The boldness of today’s Fed actions is simply that it’s being clear about its intentions, its actions, and its operations. It is thus  helping clarify the environment for business community, who as we all know, prattles on endlessly about how vague everything is and how that vagueness prevents them from doing anything –  like investing in America.

Calling that bluff is a good thing for all of us. Well done Fed.

Our newly explicit Fed.

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