Some respected economists are talking as if the US economy is in serious inflationary trouble. However, the current rebound in price growth is most likely a largely benign consequence of the post-pandemic recovery.
BERKELEY – Over the past three years, technological advances have provided about one percentage point of guaranteed US real wage growth each year; it’s true, only half the rate of earlier times, but it’s still something. However, real wages are currently 4% below their guaranteed value by adding the underlying fundamental trend in productivity to the pre-pandemic employment cost index (ECI) of real wages. Does that sound like a “high pressure” job market?
Those who believe that the US labor market is in some sense “tight” point out that the ECI rose 3.7% in the year to September, well above its annual growth rate of 3% in the pre-pandemic years of the administration. former President Donald Trump, but because consumer prices in the United States increased 5.4% over the past year, the ECI-based real wage fell 1.7% in that period.
In a high pressure economy with a tight labor market, workers would have enough bargaining power to get real wage increases. The immediate forecast is extremely difficult and dangerous. But the “now” I see today is what I predicted two or three quarters ago.
Certainly the recovery of the American economy, like a driver suddenly accelerating, is leaving inflationary tracks on the asphalt, but, as I stated in May, these should not worry us, because “burning a tire to join the traffic of the highway is not the same to overheat the engine. “
The United States is not currently in a situation where too much money chases too few goods, resulting in excess demand for labor and likely triggering an inflationary spiral. This is despite the fact that the ongoing Covid-19 pandemic and its associated outages continue to cause a substantial shortage of manpower.
Today, the overall employment-to-population ratio of the US economy is three percentage points below what we used to think of as its level of full employment. The proportions of women, African Americans, and workers without a college degree are, respectively, five, 4.5, and four percentage points below this level.
However, the economists I respect speak as if the economy is in serious inflationary trouble. Jason Furman, former chairman of President Barack Obama’s Council of Economic Advisers, believes that “the original sin was a large American Rescue Plan,” the $ 1.9 trillion recovery package that President Joe Biden signed into law last March. . In Furman’s view, it would have been better to have less aggressive policy measures and thus a slower recovery in employment and growth this year, because Biden’s plan “contributed to higher production, but also higher prices. “. And according to the same information from the New York Times, former US Treasury Secretary Larry Summers believes that “now inflation runs the risk of getting out of control.”
Those concerned about inflation then argue that the Covid-19 crisis has permanently damaged the supply side of the economy by causing a large number of early retirements, as well as a prolonged disruption of the tight and medium supply chains, of the that a great deal of productivity and prosperity had depended on. Perhaps, but similar arguments, in the early 2010s, in the wake of the 2008 global financial crisis, were intended to justify policies that did not step on the gas and quickly attempted to re-employ so-called “zero marginal product” workers. . One consequence of this shyness was the election of Trump, whose rise was fueled by the fury of those who thought that the “elites” cared more about immigrants and minorities than about blue-collar workers whose economic opportunities had never recovered to their levels. prior to 2008.
Finally, some claim that regardless of whether the labor market is tight or not, inflation, whether driven by supply-side or demand-side factors, is high enough and prominent enough for firms and homes quickly build it up to their expectations. Therefore, the inflationary snake has to be eliminated now, while it is small, before it grows and devours everything of value.
However, so far the increase in inflation has not been incorporated into any of the “sticky” prices in the economy, according to the measure constructed by the Atlanta Federal Reserve. It is true that the current equilibrium inflation rate of the 30-year financial market, of 2.35%, is more than half a percentage point above where it was established in the second half of the decade of 2010. But the current rate is similar to that of the first half of the decade, and slightly below the level that would be consistent with the inflation target of the United States Federal Reserve of 2% per year.
The current spike in US inflation is most likely simply tire rubber on the road, as a result of the post-pandemic recovery. There is no indication that inflation expectations have been undocked. The labor market remains weak enough that workers cannot demand substantial increases in real wages. Financial markets are indifferent to the possibility of an increase in inflation. And a substantial fiscal contraction is already underway.
Given these facts, why would anyone argue that the “original sin” was the “large American bailout plan,” and that tightening monetary policy from now on is the right way to atone for it? I, for my part, simply cannot follow their logic.
The author
J. Bradford DeLong is a professor of economics at the University of California, Berkeley and a research associate at the National Bureau of Economic Research. He was deputy assistant secretary of the US Treasury during the Clinton administration, where he was heavily involved in budget and trade negotiations. His role in designing Mexico’s bailout during the 1994 peso crisis placed him at the forefront of the transformation of Latin America into a region of open economies and solidified his stature as a leading voice in economic policy debates.
Copyright: Project Syndicate, 2020
Reference-www.eleconomista.com.mx