I tend to think so. It seems to me that it's effects are double edged-some positive and negative effects among them. However, it seems that Woj of Bubbles and Busts-he regularly reads and comments here for which I'm certainly grateful-seems to take a considerably dimmer view of it.
"Lower inflation is better for the median American if food and energy prices fall
while wages steadily increase. I'm not saying this could be engineered but that
would be positive."
http://diaryofarepublicanhater.blogspot.com/2013/02/sumner-on-difference-between-mmers-and.html?showComment=1360726825125#c2084724757441422820
His point is as I read it that in the last 30 years we've seen wage stagnation while prices have continued to rise. I lament the wage and income stagnation as he does.
The difference is about how we fix the problem. I don't think the solution is lower inflation-it's pretty low already and has been over the period with lower wages. The problem hasn't been prices that rise too much but wages that don't raise at all and even take a step back.
The cause of this stagnation are conscious monetary and fiscal policies meant to freeze wage growth. The Volcker disinflation was the big move. Then Reagan's crushing of the unions exacerbated it. For this reason even during the 90s, wage growth was very quiescent.
This enabled Greenspan to tamp down on growth much less than he otherwise would have. Overall, the problem is not inflation-actually inflation was about the same during the "Great Moderation" and the rate between the end of WWII and the late 60s. So the problem isn't inflation. If we were to force lower inflation this would further tamp down on spending but it would also further tamp down on wages.
You would have to hope that prices would be pushed down even harder and tighter than wages. I don't see this as optimal. What we need it to raise wages rather than restrain prices. The President's proposed raise in the minimum wage, indexed to inflation, is an important step in this direction.
"During his State of the Union address last night, President Obama called for raising the minimum wage to $9 an hour, up from its current $7.25, and indexing it to inflation so that it rises as the economy grows. If the increase were to happen, it would give the minimum wage its highest purchasing power since 1981, lifting millions of families above the poverty line."
http://diaryofarepublicanhater.blogspot.com/2013/02/boehners-new-gop-populism-opposition-to.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
P.S. Woj I hope you take my commentary here in the spirit that it's given. I have a high regard for your knowledge of econ and understand you're an honest guy who like me is just trying to understand the econ world-I hope if I disagree or question something you say you don't think I'm picking on you. I see that we seem to disagree a little about inflation so I'd like to explore these differences further-in the interests of further knowledge for myself certainly, and hopefully others as well. Intelligent and honest people can have an honest disagreement.
I say this just so we're clear
You clearly are beyond me on many matters of econ. That piece you did on the "currency floor" monetary regime is fascinating. I note that it's totally at variance with Sumner and friends who believe that IOR is a dilution of monetary stimulus.
P.S.S. Woj I see that you actually clarified your position on inflation a lot more in another comment you left today.
"Sorry for being unclear. I don't think low inflation is necessary or even
helpful for raising nominal wages. My point was that depending on what is
driving changes in the price level, low inflation or deflation could be
consistent with rising real wages for most workers.
Changes to the price
level (inflation) certainly was not the dominant cause of diverging wages and
prices. That is precisely why it seems crazy to think engineered changes in the
price level (inflation) will reverse that trend
So it may be that there's much less disagreement here than I was thinking. I think it's possible that higher inflation might be beneficial right now in terms of lowering debtors' burdens. However, inflation is certainly no panacea and it depends on other factors whether it's a good or bad thin in any particular economic context.
Overall, though, this post wasn't mostly about Woj but the debate over inflation: what I care about are ideas not persons though some people seem to have trouble differentiating this. For me it seems that so many bad policy ideas are due to inflationphobes that while I don't agree that inflation is a panacea, it seems to me that an inordinate hatred and fear of inflation is a major cause of so many problems.
I wasn't sure if Woj was suggesting that nominal wages could be raised by low inflation-if he was I'd really disagree with that. There are many Austrians on steroids like Major Freedom who claim that low inflation or even deflation necessarily benefits the poor and that idea is horribly wrongheaded and harmful.
Overall, I guess my point is this. It's not that inflation is an unmitigated good-far from it. However, it's not the unmitigated bad that the Austrians and many Supply Siders and other conservative econ guys think.
Haha. I appreciate the caveat but definitely did not think any of your comments were incorrect/offensive/out of line. I had actually been considering this topic more recently so I'm glad you added a post on the matter.
ReplyDeleteAs you mention, I think we're closer in agreement than initially perceived. I certainly hold no hatred for inflation and, in fact, have never even experienced inflation beyond a few percent. My concern is, however, related to the Austrian view of capital.
Contrary to MMers and most of the mainstream, I think it's important to recognize that our world encompasses heterogeneous capital. A policy to create inflation will affect different goods and different industries in ways that are unforeseen. These changes in relative prices will affect the distribution of labor and investment. IMO this is highly unlikely to result in a more productive allocation of capital.
Now it's perfectly reasonable to say the potential benefit of higher wages outweighs the potential (expected) costs of altering relative prices. Since I view the former as having a significantly lower probability (especially if attempted through monetary policy), I tend to side with not experimenting.
This is certainly a worthwhile topic given today's policy debates, so hopefully others will engage as well. My views on this subject are not strongly held, certainly relative to other subjects, so I'm more than happy to hear counter arguments for where/why I've misjudged the policy.
"I think it's important to recognize that our world encompasses heterogeneous capital. A policy to create inflation will affect different goods and different industries in ways that are unforeseen. These changes in relative prices will affect the distribution of labor and investment. IMO this is highly unlikely to result in a more productive allocation of capital."
ReplyDeleteI'm not entirely sure what my view is on this just yet! LOL. LIke I said, the Major Freedoms of the world do a lot to make most people never hear anything from anyone "Austrian."
Yet I do see that there are Austrians who are very thoughtful at leat like Steve Horrowitz. The idea of realitve prices makes some sense-I may even agree with it. Don't the Post Keynesians also believev something like this?
Part of it is I have to game out the implications of it-which I haven't quite done yet. I do think that one implication of it is it contradicts monetary neutrality and that already makes it an attractive idea if true. I think that MN is a really bad idea.
I would also add though that by the same token hetereogenuous capital also means that a policy maker who aims at lower inflation will hit the same problem-it will hit different industries, their prices and wages, differently.
There may well be some very good reforms of that-just as Minsky reccomdended doing the same with Glass-Steagall.
DeleteAs Krugman himself recently noted there's probably no monetary regime that will be optimum forever but just in certain epochs.
This comment should have been in the other thread
Deletehttp://diaryofarepublicanhater.blogspot.com/2013/02/sumner-on-difference-between-mmers-and.html?showComment=1360843720098#c8668662758409662643
The internet Austrians (and even many professors) frequently do a disservice to the theory by obscuring the important aspects. There are certainly many Austrians who agree with monetary non-neutrality, even in the long run.
DeleteAs for changes in relative prices, I think PKers agree with the general implications but don't view the consequences as a priority for study. This is one area where I think PK misses the mark. At the same time, most Austrians focus on capital misallocation and ignore the bigger questions about the monetary system, which is a failing on their part.
You are definitely right that policies trying to drive inflation in either direction will alter relative prices in unforeseen manners. Were the CB not to target a positive inflation rate, I suspect the average rate over the past 20-30 years would have been closer to zero.
How does that work-an inflation rate closer to 0-and do you think that woudd be preferrable?
DeleteJust so I'm clear Woj, are you saying that the inflation rate would have been 0 if not for the Fed action and that this would have been optimum?
DeleteI thought you just agreed that 0 or very low inflation is not optimum, at least for employment...
Sorry, thought I had an handle on where you;re coming from and am now not sure again-LOL.
DeleteNot sure I quote understand the first part of your question about how it works. Could you clarify?
DeleteAs for preferable, I'm inclined to say yes although I acknowledge it would take time for Americans to adjust expectations. When you consider the increases in productivity and technology, the price of many goods falls fairly rapidly especially if quality is accounted for.
Sorry didn't see the last two responses before responding. Let me try to clarify.
DeleteWithout the Fed setting interest rates to target a positive inflation rate, I think inflation would generally have been lower. This obviously assumes some degree of ceteris paribus and that the Fed's actions were not otherwise biased towards higher rates of inflation.
As for the general preference for lower inflation, there is no reason to believe that world is incompatible with low unemployment (i.e. Japan). As for the US at present, there would be issues related to expectations about inflation and the enormous amount of debt acquired based on those expectations. That's why shifting to lower rates of inflation is likely harmful in the short-term. It's also the reason why I suspect it will be hard to shift inflation expectations lower if we target higher inflation for a number of years.
Hope that clears up a bit of the confusion.
Yeah Woj I agree in principle low inflation is compatible with low unemployment. As you noted we haevn't had inflation in your lifetime and in fact the 70s was the only period in U.S. history with a protracted peacetime inflation.
ReplyDeleteSo for the most part inlfation hasn't been a problem. It wasn't a problem during the last 30 years that actually had a lot of problems that we've talked about like stagnant wage growh and income.
I don't see what the gain would be in aiming for even lower inflation. When you talk of heightend producitivity, I suppose you have in mind what we might call "supply side deflation", where the p[rice of stuff drops but its beneficial for capital investment and consumption
Indeed, I actually see one of the culprits of the staganation of the last 30 years as being a monetary policy focused on price stability above all and a neutreed fiscal pollicy that was relegated to "supply side" issues.
I think there are different ways to restrain inflation but the method that started with Volcker's harsh disinlfation and Reagan's coming down on the unions was not such an efficacious one and it had too much pressue on wages as opposed to prices.
I think in the mind of the policy makers wages were what was considered the problem. Prices were someting to let the market decide on.
I think if there's any confusion-on my part-it's that you have a rather original, idiosyncratic understading of many of these issues-as you borrow from both the Austrians and PKers and I have a hard time wrapping my head aroud
1). What your position actually is
2). How you arrive at it
3). Whether or not as best as I can figure I like the implications or not.
LOL. But it's not your fault. I'm just trying to gain better understanding. You said you had been thinking of writing about inflation, et. al sometime. That would be interesting.
I admit that for the most part Austrian ideas seem counterintutitive but that may be more me and of course my previous exposure to loudmouth Internet Austrians.
My response on another recent post I think clarifies my position a bit so I'll re-post here in case anyone else enters the conversation:
DeleteI don't know if higher inflation will or will not raise wages. Experience over the past 30 years suggests good reason to at least remain uncertain on this issue. Since the benefit of higher inflation is supposed to be higher wages, there is clearly good reason to be highly skeptical of this policy's effectiveness.
I agree that the goal shouldn't be any particular level of inflation, but I would go further and say that it shouldn't be higher or lower inflation either. The trouble is that mainstream economists increasingly favor higher levels of inflation and/or targeting higher levels. Based on my experience and understanding of economics/history, there is extremely insufficient support for the overwhelming optimism surrounding these policies.
On the whole I agree that worrying about inflation right now is silly. Personally I am very unconcerned about current or future inflation. What I am concerned about is trying to use inflation as a policy tool. I still don't think that fear is misplaced.
As for the confusion, these topics and macroeconomics, in general, are inherently difficult given the social and changing nature of our society/world. I appreciate your openness and effort in understanding these topics. Furthermore, I appreciate the opportunity to discuss these issue and clarify my own thoughts, which frequently remain jumbled in my head.
DeleteOk great. I feel the same way and am glad you recoginze that understanding is my goal. No doubt economics is by defintion difficult. I come at it as a layperson who's trying to catch up both as I'm very interested but also because there are social implications of it all.
DeleteIt goes to the heart of the kind of society we will live in and how to get there.
Thanks as always.
[...] On the topic of inflation, I have recently been engaging in a debate with Mike Sax (see here and here) about the potential benefits of targeting a higher inflation rate. [...]
ReplyDelete