A Benjamin Cole post
The Federal Reserve must end its “excessively easy monetary policy [that] can no longer achieve a sustained increase in employment.”
So says (again) Martin Feldstein, renowned Harvard econ prof, old Reaganaut, writing on June 29 for the Project Syndicate.
Of course, Feldstein has been soap-boxing an inflationary doomsday since at least April 19 of 2009. Writing for the Financial Times, under the banner Inflation Is Looming On America’s Horizon, Feldstein said then only lower commodity prices were keeping inflation at bay, and stripping food and energy, that the CPI was already at 1.8%. “That is the good news: the outlook for the longer term is more ominous,” warned Feldstein.
The Fed was monetizing federal deficits, observed Feldstein, who literally concluded, “It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation.”
We can hope Feldstein did not follow his own investment advice. In 2009, or all the subsequent years in which he has constantly rung the inflation klaxons.
Evidently having given up on the QE-scaremongering, Feldstein now is running with a tight-labor markets argument. Rising wages will mean higher prices.
And indeed, average hourly earnings in May were up 2.3% YOY, and productivity has been weak. However, Feldstein ignores that for seven years, unit labor costs have been nearly dead in the water. From 2007 to 2015, unit labor costs are up about 7%, or less than 1% a year.
So, any increase in productivity going forward will tend to counteract higher wages, as has happened in the past. Really, a 2.3% annual wage increase is a reason for the monetary noose?
An Interesting Question
Suppose that the United States develops tighter labor markets, and official unemployment rates shrink.
In the 1990s, inflation ran between 4% and 1.5%, generally sinking as the decade went on. The unemployment rate shrank also, finishing the decade at 4.2%, well below the current 5.5% rate. So, based on recent history, the U.S. may not see that much of a budge in inflation.
But even if the U.S. did see some inflation—would it be a calamity to have tight labor markets and, say, steady 4% inflation? I mean, to anyone except central bankers and inflation-mongers?
How would the voters feel about free markets and capitalism if the U.S. had sustained tight labor markets and constant real wage growth? Or, conversely, lots of unemployment and wage stagnation?
Dudes, like I always say, print more money. When it is boom times in Fat City, voters will love making money the American way.
Feldstein made good, if right-wing PC, suggestions for structural reforms of labor markets. Sure, bring ‘em on. But the Fed should print lots of money too.