Kevin Erdmann Writes One of the Most Important Blog Posts of The Year

A Benjamin Cole post

Kevin Erdmann, of blog Idiosyncratic Whisk, has written extensively and persuasively about housing costs and inflation, but lately topped himself when addressing wages.

Erdman in his Sept. 9 post, Real Wage Rates and Tight Labor Markets, takes a look at “quit rates,” and concludes quitters, probably better referred to as “job hoppers,” get higher wages. The quitters move into jobs in which they are more valuable to the employer.

So wages in general can rise, but productivity rises too. “This is why the relationship between real wage growth and inflation is not strong,” says Erdmann.

Erdman further ponders the scene, and concludes, “In any case, it seems as though the overwhelming factor for positive outcomes [for both business and labor] is stability. That seems to be associated with inflation rates in the 2% to 4% range. Stability will be related to low unemployment and low risk premiums. The risk to our economy of wage growth, if there is any risk at all, seems greatly overshadowed by the risk of business cycle instability.”

Yeah, you know, snuffing out an economic recovery to fight minor wage growth is a bad trade-off.

Erdmann notes that present-day wage hikes are below 1990s levels even yet, btw. I note that Q2 saw unit labor cost deflation, as measured by the Bureau of Labor Statistics.

The Frantic Fed

The Fed, as widely observed, seems to be in a heightened, frantic, even hysterical state of prissiness regarding the possibility that inflation might migrate back up towards its 2% target (which evidently even Fed Chief Janet Yellen forgets is an average target, not a ceiling).

Even worse, the empirical evidence that 2% is a good IT is seriously wanting. As I have oft-noted, from 1982 to 2007 in the United States, the average inflation rate in the United States (CPI) was just under 3%, and real growth just north of 3%.

Question

Q: Given the historical record, and the observations of Kevin Erdmann, what makes a 2% IT attractive to central bankers?

A: They can undershoot it and be close to zero, their real goal.

Conclusion

What if a 3% average inflation is a better central bank IT (let alone NGDPLT)?

Could the Fed ever alter its IT? Could the Fed go to an IT-band, such as that of the Reserve Bank of Australia?

Have American policy-makers and central bankers become so inflexible, so hidebound, so PC, that a moderate increase in the IT is not possible?

And if a moderate increase in the IT is not possible with independent central bankers, is independence a good idea?

2 thoughts on “Kevin Erdmann Writes One of the Most Important Blog Posts of The Year

  1. I read yesterday in a CNN poll that 70% of Americans have never heard of Janet Yellen. I wonder what percentage know what a central bank is, or what the Fed is in particular? I wonder how many people in Canada know who Janet Yellen is? I wonder how many Germans know what the Fed is? I’m not sure what my point is… it’s just that I wonder what constitutes a “tipping point” in terms of society wide ignorance?

  2. If they are going to do IT, and that is not what I think they are doing btw, a band would be better than what is happening now. IT, however, is choc full of perverse incentives and political pitfalls regarding a nominal variable that itself has a nebulous definition. Nobody, for instance, asks the general public, “If you had a choice between 3% inflation and a job, or sub 2% inflation and no job, which would you choose?” Or the really big question, “Would you choose sub 2% inflation if your neighbor lost his job instead?” At least to me that false choice is what the topic of IT is all about. It’s a job killer with someone always benefiting from someone else’s loss in the price adjustment process. Forget trade agreements being presented as job killers, the Fed with this bastardized macro-prudential peevishness about never hitting the target is the biggest job killer on the planet.

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