Yesterday was Fed Day, and tomorrow is Jobs Day. Fighting inflation and fighting for paychecks. It's important to remember what we lose if we lose jobs.
Hey Claudia, this is a good discussion as usual, but why stay boxed in!!! The Fed is not the only actor on the stage. One way to meet the labor shortage and lower inflation would be to have a responsible federal government. It could, among other things, create a rational immigration system or curtail rent making by health insurance companies instead of fighting transpeople and controversial textbooks and hyping a debt ceiling. Good macroeconomists may help civil society more by getting out of their lane and joining the rest of us (very) frustrated citizens.
I doubt that was intentional. It makes the Fed's job harder in cooling off the economy when markets are loosening. The Fed must work through financial markets and for now they are working against each other. It was puzzling to see Powell just shrug his shoulders on the tension.
Any Fed policy that deliberately causes people to lose jobs is deeply flawed, regardless of whether such a policy decreases "inflation." I put inflation in quotes because it's not like getting a fever. There are many measures of inflation. This allows the rate of inflation to be interpreted differently by different economists. And also by Jerome Powell, who is not an economist but an investment banker. A worker who gets laid off due to Fed policies is worried about survival, not inflation. Powell and his cronies aren't going to suffer. Many in the investment banking community will prosper when unemployment increases. Claudia posted a great video recently of an interview with Lawrence Summers, who appeared to be at a tropical resort somewhere, smugly saying that more unemployment is needed. It's obscene to see someone advocate policies that will destroy peoples' lives while basking in the tropical sun. I'm a statistician, not an economist, so I know about statistical models. Economists need to change their models of inflation so that they never require layoffs, except maybe to themselves. Why should even one worker be fired so that an economist can relax at a resort somewhere?
While I agree that models like the Phillips Curve when dogmatically followed can cause unnecessary harm, I do think some tradeoff between exists between inflation and jobs, though it's not the only tradeoff. Businesses are the ones that set the prices and as Vice Chair Brainard reminded us recently their profit margins are higher than usual.
The quick and easy path to the labor shortage is obviously to open the border to the people all over the world, but especially in Central America, who are ready, willing and eager to do the work that the folks in the US are ready to pay for. The post Covid decline in Visas has hobbled the US economy and exacerbated the huge income disparity between North and Central America to everyone's loss, except the coyotes who are now charging $10,000 and more for crossing the southern border.
The best way to solve a labor shortage is with labor. Immigrants would contribute to demand, but on net, if the skills line up, it would help businesses and consumers considerably. That said, I am deeply pessimistic about any immigration reform.
More generally, I wish everyone would not focus quite so much on the LABOR market for inflation. For one it is heterogeneous and is just a sub set of the price relations that need to find a new dynamic equilibrium
How convinced are we about this transfer mechanism: higher rates > less credit > fewer jobs, less pay and lower demand > mass downward pricing adjustment where supply meets the new lower demand?
And if it works - surely this takes no less than 18 months to ripple through the economy and appear on inflation readings? Sorry if this is a newbie question. Seems like logic prone to breaking down at various steps of the chain of reasoning, the lag will also allow other factors to enter the picture distorting the measurements of success – and also the harm done seems to not justify the whole goal which is to bring prices down.
I'd like to see the Fed add that it understand the costs of undershooting its inflation target and will also fight to raise inflation up to its target if that should become necessary, a situation that prevailed in most of 2008-2020 and that the TIPS market is currently expecting.
Given how long inflation has remained high, which is far longer than I had expected, I am wary to use "transitory" anymore. But it is clear that Covid and the war in Ukraine and shutting down the economy caused massive, longer lasting disruptions and inflation. Those are passing, but more persistently. (Not permanently.)
Interest rates should not have been as low as they were. Terrible trickle down fiscal policy settings since 1980 (along with a drop in union power and shite productivity groth) didn't give central banks any other option however as they only have 1 tool, interest rates. I am with you on team transitory, low interest rates didn't cause the inflation so why will high ones 'cure' it?
Great stuff as usual, Claudia. I miss you on Twitter not gonna lie but if it works for you, I'm glad :-)
Hey Claudia, this is a good discussion as usual, but why stay boxed in!!! The Fed is not the only actor on the stage. One way to meet the labor shortage and lower inflation would be to have a responsible federal government. It could, among other things, create a rational immigration system or curtail rent making by health insurance companies instead of fighting transpeople and controversial textbooks and hyping a debt ceiling. Good macroeconomists may help civil society more by getting out of their lane and joining the rest of us (very) frustrated citizens.
Powell sounded, at least based on market reaction, newly and fairly dovish on his conference call.
I doubt that was intentional. It makes the Fed's job harder in cooling off the economy when markets are loosening. The Fed must work through financial markets and for now they are working against each other. It was puzzling to see Powell just shrug his shoulders on the tension.
Any Fed policy that deliberately causes people to lose jobs is deeply flawed, regardless of whether such a policy decreases "inflation." I put inflation in quotes because it's not like getting a fever. There are many measures of inflation. This allows the rate of inflation to be interpreted differently by different economists. And also by Jerome Powell, who is not an economist but an investment banker. A worker who gets laid off due to Fed policies is worried about survival, not inflation. Powell and his cronies aren't going to suffer. Many in the investment banking community will prosper when unemployment increases. Claudia posted a great video recently of an interview with Lawrence Summers, who appeared to be at a tropical resort somewhere, smugly saying that more unemployment is needed. It's obscene to see someone advocate policies that will destroy peoples' lives while basking in the tropical sun. I'm a statistician, not an economist, so I know about statistical models. Economists need to change their models of inflation so that they never require layoffs, except maybe to themselves. Why should even one worker be fired so that an economist can relax at a resort somewhere?
While I agree that models like the Phillips Curve when dogmatically followed can cause unnecessary harm, I do think some tradeoff between exists between inflation and jobs, though it's not the only tradeoff. Businesses are the ones that set the prices and as Vice Chair Brainard reminded us recently their profit margins are higher than usual.
The quick and easy path to the labor shortage is obviously to open the border to the people all over the world, but especially in Central America, who are ready, willing and eager to do the work that the folks in the US are ready to pay for. The post Covid decline in Visas has hobbled the US economy and exacerbated the huge income disparity between North and Central America to everyone's loss, except the coyotes who are now charging $10,000 and more for crossing the southern border.
The best way to solve a labor shortage is with labor. Immigrants would contribute to demand, but on net, if the skills line up, it would help businesses and consumers considerably. That said, I am deeply pessimistic about any immigration reform.
More generally, I wish everyone would not focus quite so much on the LABOR market for inflation. For one it is heterogeneous and is just a sub set of the price relations that need to find a new dynamic equilibrium
Curious, time for MMT's "Job Guarantee"?
raymo SDSU & USD
How convinced are we about this transfer mechanism: higher rates > less credit > fewer jobs, less pay and lower demand > mass downward pricing adjustment where supply meets the new lower demand?
And if it works - surely this takes no less than 18 months to ripple through the economy and appear on inflation readings? Sorry if this is a newbie question. Seems like logic prone to breaking down at various steps of the chain of reasoning, the lag will also allow other factors to enter the picture distorting the measurements of success – and also the harm done seems to not justify the whole goal which is to bring prices down.
I'd like to see the Fed add that it understand the costs of undershooting its inflation target and will also fight to raise inflation up to its target if that should become necessary, a situation that prevailed in most of 2008-2020 and that the TIPS market is currently expecting.
BTW, I may be the last surviving member of Team Transitory. Actually not. Brad DeLong and Dean Baker are, mostly, publicly in there with me.
Given how long inflation has remained high, which is far longer than I had expected, I am wary to use "transitory" anymore. But it is clear that Covid and the war in Ukraine and shutting down the economy caused massive, longer lasting disruptions and inflation. Those are passing, but more persistently. (Not permanently.)
Oh, and Jamie Galbraith is solidly on TT. I follow Brad in watching the 5-year 5-year forward chart: https://fred.stlouisfed.org/series/T5YIFR
Nothing here showing persistence. Yup, its just markets, but this is imo the smartest market with really big money driving it.
Viktor Shvets as well
Interest rates should not have been as low as they were. Terrible trickle down fiscal policy settings since 1980 (along with a drop in union power and shite productivity groth) didn't give central banks any other option however as they only have 1 tool, interest rates. I am with you on team transitory, low interest rates didn't cause the inflation so why will high ones 'cure' it?