Paul Krugman defends Bush appointee Ben Bernanke from what he sees as a misguided conventional wisdom alleging that Bernanke has been too lax about inflation. Not only do Krugman's arguments seem convincing to me on their own terms, but in the all important personal case there's been no wage-price spiral as political blogger nominal salary growth has fallen short of the rate of inflation over the past twelve months.
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Inflation: Eh
02 Jun 2008 11:13 am
Comments (33)
That wasn't necessarily directed at you, Matt. I had other whiners in mind. Really. Fer sure.
I agree that in some sense the Fed isn't really to blame for dollar devaluation, since they can't really do anything about the fiscal part of the equation.
Get a second job. Get a better job. Do something about it and quit your whining.
Yeah, that's great advice on the brink of a recession when people are losing their first jobs and new ones are hard to find.
Please, seriously, be quiet.
Krugman is veering into "let them eat cake territory" here.
The problem with analyses of inflation, is that there are many, many different definitions of inflation. When people are arguing about inflation, they are often using different definitions.
The classical definition of inflation is monetary inflation, not price inflation. That is measured by the M3 that the Fed won't even report anymore because it is so crazy. That is 100% the Fed's fault, and it is largely responsible for dollar deflation right now. We didn't notice the effects of the M3 over the past decade because we printed enough to counteract the dollar appreciation that should have happened from all the foreign investment. But now those countries understand that the US is a bad, bad financial investment, and they have stopped investing (just wait until they starting unwinding and getting out).
Wage inflation is a separate issue. This is held down by global arbitrage. Given that countries like China peg to the dollar, there is nothing that the Fed can do to control this.
Then there is price inflation. Even that is not uniform, and the governments statistics have become so muddled that it is hard to tell anything. What we are seeing is massive inflation in necessities and deflation in discretionary spending. Expect more of this.
I'd expect that interest rates will go up drastically after the presidential election, in order to reduce inflation.
If Obama wins the presidency, this will allow a resurrection of the misery index.
Yeah, Steve Duncan is right, I mean, why not just cut back your sleep from 8 hours to 6? That's 14 more hours to work at your second job! And if you start doing speed you could stop sleeping altogether--think how much money you'd make!
This lack of moral fiber is all the fault of those dirty union organizers from back in the day: "eight hours for work, eight hours for work, eight hours for what we will"? What a bunch of whiners! After all, the nineteenth century English working class worked twelve hours a day, six days a week, and they're legendary for their good health and joyful lives.
The only thing the Fed could do to fight inflation is shrink the money supply and cause a recession. Not sure why everyone has been so gun ho for that.
And Steve, leisure is a normal good. Meaning having to work a second job is a decline in living standards.
Yeah, Steve Duncan is right, I mean, why not just cut back your sleep from 8 hours to 6? That's 14 more hours to work at your second job! And if you start doing speed you could stop sleeping altogether--think how much money you'd make!
This lack of moral fiber is all the fault of those dirty union organizers from back in the day: "eight hours for work, eight hours for work, eight hours for what we will"? What a bunch of whiners! After all, the nineteenth century English working class worked twelve hours a day, six days a week, and they're legendary for their good health and joyful lives.
As I said in a comment on that post that Krugman (or his assistants) did not approve, economists often underestimate or ignore the effects of political power or lack thereof. When unions were strong, they could demand raises sufficient to keep up with inflation, or even a bit more. Now inflation is just a convenient way to cut salaries. Sorry, times are tough, we can't give you a raise this year. So there's no spiral.
Also, inflation hurts creditors and helps debtors. The Fed represents banks. But now that so many banks are insolvent, they have the economic incentives of debtors and inflation doesn't look so bad.
My detractors are correct, of course. With increased competition from other nations willing to extend themselves we have to have a logical strategy to counter their thrift and fortitude. If we all demanded the abiltity to live just as we do now (and even further demanded an increasingly enhanced standard of living) and needed in trade only 6 hours a day of our time to accomplish it what a great nation this would be. Also of course 6-8 weeks vacation, a 4 day work week, generous family leave, flex time, universal comprehensive no deductible no contribution health care through our employers or the government, employer subsidized child care and a few other perks are all needed. Then, finally, we'd be able to live life like it should be lived. There would be the added bonus of totally dominating the world's economy, too! And Matt Stevens would never, ever have to visit Monster.com and be confronted with the hundreds of thousands of available jobs across the breadth of our land. He'd be too busy shining his Benz for that day trip into the country.
Re: But now those countries understand that the US is a bad, bad financial investment
Well, yes,-- except for all the rest. The US remains a good place to park money, though not as good as it was ten years ago. Very few other major countries are better deals, though Canada next door fits that bill.
Walker:
"Krugman is veering into "let them eat cake territory" here.
...
What we are seeing is massive inflation in necessities and deflation in discretionary spending. Expect more of this."
Good post. Yeah, often the media just reports on "inflation" when there are different kinds and it's often difficult to keep the different kinds straight, especially for the non-specialist.
What Krugman is hinting at, without directly coming out and saying it, is that in a way it's good that the workforce isn't as unionized as it was in the 70s. To me this talk of unions vs. inflation seems like another false trade off. In truth they are part of an equation which has more variables.
Walker,
I don't think it is fair to say the Fed is 100% to blame for the increase in M3. The recent fiscal policies of the federal government have put the Fed in a bind: if they hadn't allowed M3 to increase to meet the demands of the federal government for money to spend, the amount of money available for the private sector would have been constrained to the point it would have caused a private sector recession.
there's some significant misreadings going on here by some of the commenters (and joe buck, neither krugman nor his nonexistent "assistants" screen postings; that's an nyt editorial function, which krugman explains on a regular basis).
what krugman is saying, pure and simple, is this: given that there's no question that the economy is weakening whereas there is a question whether inflation is becoming embedded in the system or is merely showing up in areas that fed policy doesn't control (such as oil prices), the fed should focus on the certain problem and not the potential problem.
he is most assuredly not saying "let them eat cake:" who is it, after all, that will suffer the most in an economic slowdown - high net-worth and high income households or everyone else?
howard,
Well, what do you make of this passage?
"And since there isn’t a wage-price spiral, we don’t need higher interest rates to get inflation under control. When the surge in commodity prices levels off — and it will; the laws of supply and demand haven’t been repealed — inflation will subside on its own."
In a nutshell, he is saying commodity prices will eventually level off because if wages aren't keeping up with commodity prices, people won't be able to afford to keep buying commodities at ever-higher prices, so eventually a new price equilibrium will be reached at the lower demand point. But among other things we are talking about food commodities, so that does seem to be a pretty cold commentary on the fact that as a result of inflation combined with stagnant wages, some people won't be able to afford things like food.
Incidentally, I have a working theory about why people such as Krugman are trying very hard to discount the importance of dollar devaluation. As I noted above, the real underlying cause of the current dollar devaluation is an extremely lax fiscal policy. But people like Krugman have quite a shopping list of new government spending planned on the assumption of Democratic Party success in the upcoming election, and what they don't want is inflation serving as a side-constraint on fiscal policy. Hence, I suspect that is why Krugman et al are trying to get people to stop worrying about inflation.
"In a nutshell, he is saying commodity prices will eventually level off because if wages aren't keeping up with commodity prices, people won't be able to afford to keep buying commodities at ever-higher prices, so eventually a new price equilibrium will be reached at the lower demand point. But among other things we are talking about food commodities, so that does seem to be a pretty cold commentary on the fact that as a result of inflation combined with stagnant wages, some people won't be able to afford things like food."
This is the inevitable result of people who refuse to understand what Malthus was saying. There is only so much stuff available (especially when that stuff is food or oil), and increasing the collection of people with claims against that stuff means less stuff per person.
But economists (and most of the rest of society) didn't want to hear this in the late 60s, and they don't want to hear it now.
Instead of saying "there won't be enough food", let's stick with the much more innocuous "food prices will rise until they equilibrate". Likewise for fresh water, oil, or whatever other commodity you prefer.
Of course the economists' back up dodge is demand will generate alternatives. This is the great advantage of not actually knowing any hard science --- you can postulate whatever magic you want. All the demand in the world hasn't generated 3 hr flights from NYC to Tokyo; you can't repeal the laws of thermodynamics and materials science just by wanting something really really hard. And so it goes with commodities.
DTM, i make of it exactly what krugman said: the fed has bigger fish to fry right now than inflation.
as maynard implies, the prices that are rising the most right now are not especially sensitive to fed "inflation-fighting" efforts.
i'm no fan of 3.5% inflation, but given a choice of 3.5% inflation and a more robust real economy and 1% inflation and a less robust real economy, i favor the more robust (especially because "more robust," in this context, could mean "actually growing a little" and "less robust" in this context could mean "contracting").
now, if and when we get to a point where inflationary expectations are becoming embedded into wage packets, we can talk about what's good and bad about that and possibly enter into "let them eat cake" territory, but that's not where we are. krugman is saying that absence of inflationary expectations becoming embedded in wage packets means the fed absolutely shouldn't be worrying more about inflation than about growth....
People are now criticizing Bernanke for not being tough enough on inflation? I remember when he was appointed, people (probably the same people) worried he'd be too tough.
I'm all for even irrational Bush hatred, but even I have my limits.
Maynard,
Actually, a variety of technologies over the last few decades have radically increased the available food supply. And while petroleum in theory is limited, in practice there are large reserves of petroleum which have not yet been economic to tap, but could be if scarcity drives prices high enough. And finally, technology is also making it possible to produce the functional equivalents of petroleum products (e.g., biodiesel), and in ways non-competitive with food production.
Of course there is some theoretical limit out there to "stuff" (if nothing else, the total mass/energy available in the universe is a limit). But talking about the supply of something as specific as food or liquid fuels being fundamentally limited makes little sense. In that sense, Malthus was not entirely wrong, but the truly fundamental supply limits are just much farther away then (and now) than he suggested.
howard,
As noted above, I agree that there is little the Fed can actually do about the current dollar devaluation. But as I also noted, I think that is precisely the problem for someone like Krugman: the current dollar devaluation ultimately has a fiscal, not monetary, cause, but Krugman doesn't want the future Democratic government operating under fiscal side-constraints. So that is probably why he not only makes the point about the Fed not being able to do much about inflation, but then also argues that inflation isn't really something to be concerned about anyway.
DTM, i have no idea why you would think that krugman has no interest in fiscally responsible behavior regardless of who occupies positions of power.
that said, i would take him at his word: he's writing about whether bernanke can be justly criticized for ignoring inflationary risks, and his (and my) answer is he shouldn't be.
end of story: he's not taking a position at this moment on fiscal policy but it is perfectly clear from a very large number of examples that krugman wants the next administration (like the current one) to be fiscally responsible....
Out in my neck of the woods, most people already hold that second, or third, job.
Guys, pseudo-expert here:
The issue is should Bernanke have kept interest rates higher to combat inflation. The answer is no. Why? Because most of the price inflation has come from food and energy--food prices are higher because of a worldwide famine, and also our ethanol mandate that turns 30% of our corn crop into 3% of our gasoline. Energy prices are higher because oil etc... prices are up so much. The Fed can't make those prices go down by raising rates--neither food nor oil prices are controlled by US demand, which is what raising rates could help shrink. Raising rates would, however, cause the economy to slow even further.
I'll add one thing: no index of inflation includes the price of homes or real estate, which if anyone's noticed lately, have been going down enormously. I call that deflation, and I consider it a much greater problem than price inflation in food and petroleum. You can't borrow against a big mac or a full tank of gas--you can borrow against a house etc... that's why the huge decrease in housing prices, and the damage that's done to the banks who issued mortgages that it no longer makes financial sense to pay back.
If anything, Ben Bernanke spent far too long worrying about inflation and not cutting rates--the whole housing crisis could've been averted if he'd made his recent round of rate cuts six months earlier than he did. But back then he thought inflation was the problem.
I read that the Fed is loaning money to banks at a rate below the current level of inflation.
Sounds like the good ship Cheapening Dollars to me.
Cliff said:
--the whole housing crisis could've been averted if he'd made his recent round of rate cuts six months earlier than he did.
I don't think so. We already had relatively low rates while the "one house per family" pyramid scheme was playing itself out. The market had run though just about everyone who could reasonably afford a house in early '06. Most of the rest of the year was spent creating and packaging bad loans to keep the money men in fat bonuses and commissions.
cliff, it's worth spending a moment on the technical details here.
the reason that the cpi doesn't include the price of homes is that the index rightly considers the "price" to be what is called the owner's equivalent rent; anything above that is speculative asset valuation, not "cost of living."
this is a perfectly reasonable way to think about this: in the scheme of things, everyone is paying "rent" every month, but only a small number of people are buying houses each year.
so what's going on is most properly called "asset deflation;" its linkage to the real economy is primarily in the way that households have used HELOC loans to liquify and spend the now-proving-speculative rise in the home's asset value.
the recent spike in credit card debt may well be reflective....
Re: food prices are higher because of a worldwide famine
"Famine" is way too strong a term. Food prices are high because of the usual combo of bad weather events, higher fuel costs, and stupid governmental policies in many countries.
Re: Raising rates would, however, cause the economy to slow even further.
Which would have the effect of reducing demand, at least for fuel. It worked that way in the early 80s, though obviously no one wants a serious recession in an election year.
Re: You can't borrow against a big mac or a full tank of gas--you can borrow against a house etc
You can, but you shouldn't. Exceptions are allowed for home improvements and home repairs. You should never borrow against your house to fuel consumption or even emergency expenses. At the far extreme declaring bankruptcy on a bunch of credit cards leaves you with a bad credit rating but you usually keep everything you own, including your house (Yes, I know exceptions exist).
Re: --the whole housing crisis could've been averted if he'd made his recent round of rate cuts six months earlier than he did.
No way. Housing prices have gotten so far out whack with rents, median income etc. that they were bound to come crashing down to Earth. Bubbles alawys burst.
howard,
As the quote from the article I provided above indicates, that was not in fact "end of story" with respect to Krugman's discussion of inflation.
DTM, we are obviously talking past each other.
krugman set out to write a column defending bernanke against charges that he has been soft on inflation. that means that he talks about the only factor that bernanke can control: monetary policy.
when krugman, in the oped, talks about how the wage-price spiral got embedded into the economy in the '70s and how that is absent today, all he is doing is defending why bernanke is making the correct call about inflation in his monetary policy.
when he doesn't discuss fiscal policy, it's because all is he doing is defending why bernanke is making the correct call in his monetary policy.
that is the topic of the piece. i can't really tell what else you think is in there, but it ain't.
Thank God wages aren't rising. That was the message Greenspan delivered dozens of times before the peoples representatives who strangely agreed. Their constituents didn't seem to mind that the entirety of the political and economic elites were in total agreement that rising wages were bad. For all practical purposes rising wages are the definition of inflation, now. People evidently don't want wages to rise. Go figure.
When stocks went up, and up and up and up, then down then up and up again, that wasn't inflation. The down bit was deflation however so Greenspan cut rates to 1% for two years.
When housing doubled or tripled that wasn't inflation either. Just as with stocks, when any asset rises in price that is an increase in value, not inflation. That decrease however is seen as deflation so heaven and earth are being moved to try to get them to stop falling and begin inflating, oops I mean rising in value again.
(One caveat. What is being worked on first is keeping mortgage asset prices from either falling or for the most part keeping the falling value of said assets off the books of the giant banks. If you don't have to admit their price, their value, has fallen then the accounts look pretty good. It's all about apperances don't you know. That and 'creating a new reality'.)
You see 80% of all assets in the US are owned by the top 10%. So when asset prices rise that is good. When corporations retain an endlessly growing portion the total income pie as 'reatined earnings', that is good too. When business keeps less of all income and people get it that is bad. All they will do is sit on the porch and drink beer all day. They won't invest in stuff like CDO's sqared which makes America strong.
http://www.npr.org/templates/story/story.php?storyId=89732499
Wages for who have not increased?
Because it seems to me they have increased. A LOT. Only they have increased for a very small portion of the population.
Indeed that is essentially the problem with US economy. Income equity has fallen as wages have dramatically increased (for those at the top). Wages have stagnated for everyone else so they have relied on debt to make up the short fall. Sometimes that debt has been backed by asset inflation, sometimes not. But at this point no matter how much the fed tries to hose the consumers down with debt they have borrowed far more than they can pay back.
Some of that debt was no doubt frittered away. But anyone who knows anything about income inequity should know that for a huge chunk of the population, debt encouraged by asset inflation, was spent on housing, food, health insurance. And unless the sharing of the income pie changes or the banks are willing to lend money to people who cant pay it back I believe the US is in for a very ugly ride. Too bad unions have been so completely beaten. Say I wonder who has been behind that push...
howard,
I've already quoted the relevant passage. I don't see what else I can do to point out its presence in the linked article.
Inflation is always a monetary phenomenon. The rolling bubbles we have had since the mid eighties were fueled by the quantity of money. From the day Greenspan took over till the day he left the S&P rose at a 9.7% annual rate. During that same exact period M3 rose at a 9.7% rate.
Now is not the time to discuss the meaning of various monetary agregates or what money is. Just know that the quantity of money has exploded worldwide. This explosion is intimately tied to Americas trade deficit and the Wall Street Paradigm. That is Wall Street taking over as the major systematic supplier of credit, and then the worlds adoption of those techniques and attitudes.
When mainly asset prices were inflating everyone was happy. As was inevitable however when the last asset bubble burst, residential real estate, the money began leaking out finally into the world of real goods. I have seen numbers saying the world money supply has doubled or even tripled since 2001. The phenomenon of exploding money is as I said a worldwide one and it's beyond the ability of the Fed to effect it much at all. The inflation genie is not going to be put back in the bottle just by the Fed alone.
Bernanke has done less than meets the eye. He has given a semi bailout to the major commercial banks, the investment banks which he actually has no legal standing to do, and the smaller banks throughout the nation. However while doing this he has been starving the system by reducing the monetary base. Hats off to him for this I suppose but it's a very very dangerous game.
He is acting exactly opposite of his Helicopter Ben name and a massive disinformation campaign saying that the Fed has been 'adding liquidty to the system at a record setting pace'. The Fed can add liquidty to the system but they have no control over where it goes. He knows that now it will likely go into the crack up boom in commodites and things so he has put on the brakes. A shame he won't tell the truth about it. The Fed can inject liquidity but they cannot inject capital into the system and it is capital the financial system needs now.
Comments closed June 16, 2008.
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Heads in the Sand
Whatever happened to augmenting your main job with a second income when inflation, an additional child, unexpected bills or other money eating events in your life cropped up? Inflation discussions relative to the impact on people's lives always seem to imply a resulting lowered standard of living. Get a second job. Get a better job. Do something about it and quit your whining.
Posted by steve duncan | June 2, 2008 11:28 AM