You gotta hear it again today
The way to crush the bourgeoisie is to grind them between
the millstones of inflation and taxation. ~ Vladimir Lenin
The certified nation-builder, Vladimir
Lenin, mentions above that inflation can be the bane of many people, even the
bourgeoisie. He’s right. Milton Friedman, a certified Nobel-laureate economist,
but not at all a fan of Lenin, stated that inflation is taxation without
legislation. He’s right, too. They agreed about nothing political, but do agree
about the harsh effects of inflation that reduce the purchasing power of money.
Inflation is a general rise in a
nation’s prices. Not just the increasing price of fruit loops, Airbnb rentals
or window panes, but all prices in a country. Economists cite woeful, recent
examples of unchecked hyperinflation such as Venezuela’s 27,364% inflation in
2018, when prices doubled about every two weeks and Zimbabwe’s 66,000+%
inflation in 2009. The “winner” in my national hyperinflation hall of fame is
Hungary’s unfathomable 1946 general price increase of 9.63 x 1026 percent
(prices doubled in less than every one and a half days). Post-war periods and
inflation often coincide. Even here in the good ol’ USofA. Cliometricians
estimate that in 1779 the US had an inflation rate of 192%, mostly caused by
the Revolutionary War’s substantial costs.
Have you experienced noticeable
national inflation? Not unless you’re over 35 years old with virtuous long-term
memory. The last time the US core Personal Consumption Expenditure price index
(PCE), that our Federal Reserve Bank uses to measure official price
changes, reached 5% annual inflation was the third quarter of 1983. The
PCE has only been over 2% – the Fed’s target inflation rate – in merely two (2)
of the most recent 40 quarters (10 years). Long gone are those economically-stormy,
early 1975 days when inflation rose to 10.1%.
Thus, with perceptible inflation
thankfully being in a long-term coma it’s hardly surprising that last week
Federal Reserve chair Jerome Powell and his colleagues altered the Fed’s policy
priorities. Going forward, the Fed will re-emphasize its goal of minimizing
unemployment rather than its second goal, controlling macro prices (e.g.,
inflation). The Fed stated that low unemployment would no longer be a
sufficient reason to tighten monetary policy, in an attempt to head off
expected inflationary trends. In a remarkably truthful statement, the Fed’s wizard
vice-chair, Richard Clarida, stepped in front of the curtain to state that the
Fed’s macroeconomic models that have predicted inflation would always rise
significantly when maximum employment was reached were wrong.
Apparently, Senate leader Mitch
McConnell didn’t get this Fed memo, as he’s staunchly refusing to re-vitalize
expansionary fiscal expenditures – such as the former $600 unemployment
supplement – to ease the lives of too many people, and reduce unemployment. Mitch
dismisses the facts that unemployment is now 10.2% and folks are suffering.
For a long time, both the Fed’s
goals were nominally given equal policy priority. This dual prioritization was essentially
founded on the Phillips Curve. In case you’ve forgotten this slight theme
presented in Econ 101, here’s a recap.
The Phillips Curve is named after
Professor William Phillips, my favorite New Zealand economist. He gained my fancy
in part because he’s the only economist I know of who was a crocodile-hunter in
his youth. After fighting in Southern Asia during WWII, he headed for London
and enrolled in the London School of Economics (LSE). At the LSE he became captivated
by the then quite radical, newish view of macroeconomics created by John M.
Keynes and became an academic economist.
In 1958 Professor Phillips
published his seminal paper that described an inverse/indirect relationship
between a nation's wage-inflation rate and the unemployment rate using early-20th
century United Kingdom data. When either unemployment or inflation is low, the
other is high, as illustrated below.
The Phillips
Curve
Source:
Forex
When similar patterns of wage-inflation
and unemployment were observed in other nations at the time, the Phillips Curve
became accepted by both academics and policy-makers. If an economy was growing
with lower unemployment (higher employment), the Phillips Curve posited that higher
wages/inflation will happen. It displayed the short-run macroeconomic trade-off
between a strong economy (lower unemployment) and higher inflation.
This relationship has not held in
more recent times despite considerable efforts to defend the Philips Curve and
its shape. Some macroeconomists have differentiated short-term versus long-term
Phillips Curves, others have added inflationary expectations to no real avail. I’ve
believed the Phillips Curve has been a chimera for quite some time. But the
Congress and the Fed, as well as other nations’ legislatures and central banks,
still use the explicit Phillips Curve’s inflation-unemployment relationship for
justifying policy.
When inflation appears set to
rise, the Fed has typically tightened the money supply (by increasing interest
rates), generating a little more unemployment. When inflation is poised to
fall, the Fed has done the opposite. The result is that unemployment edges up
before inflation can, and goes down before inflation falls. Monetary policy
(and to a much lesser extent fiscal policy) is changed so that inflation will
not.
But inflation has appeared to be
less sensitive to differing employment levels, as mentioned above. Inflationary
pressures have been in a coma. This past February (a lifetime ago) when the macroeconomy
was quite strong with very low 3.5% unemployment, the PCE inflation rate
was a remarkably quiet 2.1%.
The Philips Curve has apparently
flattened over the past decade, so that a given change in unemployment, due to
variations in monetary and/or fiscal policy, has had a smaller effect on wages/inflation
than previously. This change is the basis for the Fed’s recent prioritization
of fighting unemployment with much less concern about eventual inflation.
Oh my, Professor Phillips, your curve
has broken down and metamorphosed over time to be far flatter, in spite of some
macroeconomists’ best efforts to explain this change and do something about it.
The Fed is going to focus now principally on promoting employment, downplaying
price-stability.
That’s perfect timing because we’ve
been in a significant recession for at least five (5) months. The Fed’s Board
of Governors now will “appreciate the benefits of a strong labor market,
particularly for many in low- and moderate-income communities.” After this Spring,
when the Fed began its sizeable efforts to reduce the pandemic’s recession, will
inflation awaken from its long, Ambien-induced torpor? A pro pos of the
well-known Niels Bohr quote, predicting inflation is very difficult, especially
about the future. But it appears that most economists and market analysts,
despite voluminous and contrary opinions, do not think noteworthy inflation is
anywhere near imminent.
I think the recent flatness of the
Phillips Curve has contributed to the rise and spread of progressively-liberal
economists’ Modern Monetary Theory (MMT). A simplified tenant of MMT argues
that countries which issue their own currencies, like the US does, can never
“run out of money.” The federal government is not financially constrained in
its ability to spend. MMT claims that the government can afford to buy anything
that is for sale in its currency with minimal concerns of resultant inflation.
Ironically, when Dems come into
full federal power on January 20, 2021 with enough of them subscribing to the
flatter Phillips Curve and MMT, they could embrace the Repubs own de facto
fiscal policy that has exploded the federal budget deficit with their specific,
pet fiscal initiatives like giant tax cuts for corporations and for the bluest
of the rich as well as ever-increasing defense expenditures, with no
discernible rise in inflation.
By brandishing the Phillips Curve’s
modern flatness, adopting MMT and pointing a fiscal mirror at #45’s and
the Repubs’ massive deficit spending, progressive Dems could justify, with
enough backbone, their own expensive, pet fiscal initiatives. Ones like the Green
New Deal, government-guaranteed $15/hr jobs and Medicare for All. It could be
the Dems’ way of stating, if you Repubs can do and have done it, we can too for
far broader benefit.
In my mind, it all started with
one clever, crocodile-hunting Kiwi economist.
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