December 14, 2016

INFLATION IS ALWAYS AND ONLY A FUNCTION OF WAGE PRESSURE:

Will the Fed do something stupid today? (Jeff Spross, December 14, 2016, The Week)

The Fed's role is to strike a balance between maximizing employment and controlling inflation. The trouble is, as the job market improves, the overall dynamic in the economy flips: Instead of workers competing for scarce jobs, employers are competing for scarce workers. Employees thus gain a lot more leverage to demand pay and benefit increases. But business owners and shareholders still want their profit margins, and have to fight harder to prevent rising wages from pushing profits to zero. The obvious way to do this is by jacking up prices.

If this arms race between workers and owners spreads across the entire economy, prices everywhere rise -- thus, inflation.

This is where the Fed steps in. The way it "cools off" the economy is by raising interest rates: It makes credit harder to come by, which encourages businesses to either scale back or delay growing. Practically speaking, that means people losing their jobs, or not being able to find jobs when they need them.

It's up to individual businesses to decide how they respond to the credit squeeze. And it's not like they start by cutting upper management's pay. Instead, the first people to lose their jobs, and the ones most likely to be denied jobs to begin with, are the people with the least power. That means people with less education, or people with chronic disabilities or health problems, or workers who have suffered spells of unemployment before. It means the young and people with felony convictions in their past. It means racial minorities and female service workers.

These are the Americans we throw under the bus whenever we decide that inflation needs to be tamped down.

It gets worse. Mainstream economics has concluded that the way to keep inflation under control long-term is to not let the unemployment rate fall below a certain threshold. The 4.6 percent unemployment we're at now is already low compared to the 5-to-6 percent range the Fed has historically targeted. That's why Fed officials are itching to hike interest rates.

Think about that! It's the explicit purpose of American monetary policy to force joblessness on people who would otherwise work -- to maintain a pool of unemployed Americans by brute policy decree, when the unemployment rate could go lower.

Except that with 5.5 million job openings you can't make an intellectually honest argument that anyone who wants to work can't find any.  

Now you could plausibly claim that the increasing lack of interest in mere employment is destined to create wage pressure, as employers compete for the shrinking pool of people who will accept jobs.

However, technology, trade and immigration will quickly solve that problem.

It is a deflationary epoch in the long term and nothing the Fed does in the short can change that.


Posted by at December 14, 2016 8:44 AM

  

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