Minimum Wages and Macroeconomic Silliness

Mark Perry has a silly argument against raising the minimum wage, which thankfully David Cooper has ably addressed. The gist of Perry’s argument is captured by his title:

In Western Europe, the average jobless rate is twice as high in countries with a minimum wage vs. those with no minimum

Cooper replies:

First of all, as we learned in Statistics 101, there’s a difference between correlation and causation. Even if there appeared to be some pattern between minimum wages and unemployment, that wouldn’t mean that one is in any way causing the other. The only way to try to identify causality is to isolate as many—ideally all—other factors that might play a role in the suspected relationship through statistical regression methods … take a look at the countries that do have minimum wages. If minimum wage laws do lead to higher joblessness, as Perry suggests, one would expect that the higher the minimum wage, the higher the jobless rate. According to this table, that’s not the case in Western Europe. The figure below is a simple scatterplot of the minimum wage rates and the jobless rates from the table. As you can see, under the superficial approach that Dr. Perry is viewing these data, higher minimum wages actually imply lower jobless rates.

Note that Greece’s minimum wage is quite low and it has a 27.2% unemployment rate. On the other hand, Luxembourg has a very high minimum wage but its unemployment is quite modest. If we are playing this game, we could also look at the real minimum wage in the U.S. over time comparing it to our unemployment rate. After all – the real minimum wage peaked in 1968, which was also a year where the unemployment rate dropped to 3.4%. David Cooper is not suggesting that higher minimum wages tend to lower unemployment rate, but we are saying that Dr. Perry’s little exercise is silly.

Taylor Rule Follow-up: Core CPI Is Not Biased

Paul Krugman made a valuable contribution on measuring inflation in light of my post on the latest from John Taylor:

Or at least it seems to be a new rule — namely, pick whatever price index makes the point you want, even if it’s not at all the price index you would normally use … Um, the inflation rate for the “GDP price index”? That’s the GDP deflator, which the Fed very carefully does not use as a policy indicator. Why? Because it contains things like grain and oil prices, which fluctuate a lot, so that it’s an unstable measure that is highly unreliable as an indicator of underlying inflation. The Fed prefers the consumption deflator excluding food and energy.

Taylor has a heated reply but alas it is all heat and no light:

Rather than taking out food and energy price inflation I controlled for price volatility in that rule by averaging overall inflation over time. Simply taking out food and energy price inflation can lead to policy errors especially when such inflation lasts for more than a short time. And it is not only the overall GDP price level. The CPI inflation rate was also rising, not falling, during this period. In any case, the increase rather than a decrease in overall inflation was only one part of my assessment that this was not a slack period. I also discussed the unemployment rate—which got quite low (4.4%) rather than high as in slack periods—and the huge housing boom with high housing price inflation.

OK – inflation rose but only slightly. A 4.4% unemployment rate was certainly not low in comparison to what we witnessed in the late 1990’s. And it is odd that Dr. Taylor refused to acknowledge my point that the FED had already been increasing interest rates before the labor market got moderately over the Bush recession. As far as the housing boom – which President Bush used to brag about – a lot of the blame should go to unwise financial market deregulation – but I guess it would be political suicide for a Republican economist to acknowledge that. In my view, Krugman reader JCB had a more interesting – albeit invalid (as I will explain) – set of comments:

Does eliminating the most volatile categories of consumer expenditure such as food, energy, and home prices from the calculation of the year-on-year rate of inflation make it possible to ignore them as important elements of the long term standard of living? I mean, why tacitly assume that the most volatile prices will sum to zero in the long run? ... The cumulative divergence between all-consumer prices and "underlying inflation" increases between 2000-2013

JCB provided us with his evidence, which was a chart showing how core CPI rose by a cumulative amount of 32% over the 2000 to 2013 period whereas CPI (including food and energy) rose by a cumulative amount of 38% during this same period. This period has often been described as the great commodities boom as noted by Pedro Conceição and Heloisa Marone:

The trough, since when the 21st century boom started, took place in late 2001. In real terms (using the US CPI to deflate the nominal price series), the boom remains impressive, with indices more than doubling in real terms. However, real prices were still below the average prices of the 1970s and earlier decades (Figure 2).

If one compared core CPI to overall CPI for the period from 1979 to 2001, core CPI rose faster than the overall consumer price index. Over the entire period, both series have increased by about 228%. If JCB was trying to suggest a long-term bias in the use of core CPI, I don’t see it. Rather – I just see more volatility in the use of an index that includes food and energy prices.

John Taylor on Monetary Policy and Inflation

If you were expecting John Taylor to address what Barry Ritholtz noted about that 2010 prediction of inflation, stop holding your breath. Taylor instead tried a rebuttal to the latest from Lawrence Summers. Taylor’s summary of Summer’s argument starts with this:

In the years before the crisis and recession, easy money and related regulatory policies should have shown up in demand pressures, rising inflation, and boom-like conditions. But the economy failed to overheat and there was significant slack.

Taylor of late has been saying that our current mess was created by a deviation from the Taylor rule. Here’s his evidence:

Inflation was not steady or falling during the easy money period from 2003-2005. It was rising. During the years from 2003 to 2005, when Fed’s interest rate was too low, the inflation rate for the GDP price index doubled from 1.7% to 3.4% per year. On top of that there was an extraordinary inflation and boom in the housing market as demand for homes skyrocketed and home price inflation took off, exacerbated by the low interest rate and regulatory policy. Finally, the unemployment rate got as low as 4.4% well below the natural rate, not a sign of slack.

Wow – hyperinflation! No one during the Bush Administration – its advisors (which included Taylor) nor its critics – were saying back then that the employment to population ratio had become dangerously high. The 4.4% unemployment rate – which corresponds to a 63.4% employment to population ratio – was not reached until late 2006. By then, we had seen two years of rising short-term interest rates. Now had Taylor and his fellow Bush economic advisors were very concerned about excessive aggregate demand – why did we not seen calls for fiscal restraint back then? If Taylor thinks this is a serious rebuttal to what Summers said, it is no surprise he has yet to acknowledge that 2010 forecast of inflation from QE.

The Consol Solution To The Debt Ceiling Crisis

Yeah, I know.  It is not currently a crisis.  That is Obamacare, blah blah blah.  But that website will get fixed and those who lost their crappy insurance policies will get them extended, blah blah blah.  The remaining serious crisis that could still plunge the world economy into a massive economic plunge, even with the very wise and capable Janet Yellen at the helm of the US Fed, would be a US default on its debt following a failure to raise the debt ceiling in time, with the most likely scenario for this being increasingly delusional Congressional GOPsters out to destroy the economy so they can get elected blaming it all on socialist Obamacare, blah blah blah.  Probably wise heads, or at least not completely delusional ones, will prevail, but the fury and delusions in the weird sub-media bubble of the teabags seems to be intensifying.

Now quite a few of us, including such folks as Bill Clinton, Bruce Bartlett, me, and a lot of others, have said that how Barack Obama should deal with this once and for all for all future presidents and the US and world economies, is to declare this motherfucker of a debt ceiling unconstitutional, which it is, even if a GOP dominated SCOTUS might disagree.  But one of them might realize the threat and support reason on it, if faced with the prospect of a massive global economic collapse as bad as anything ever seen.  In any case, Obama has not followed our advice, and given that he pulled off the latest crisis with only the most minor of market blips may be making him complacent, as well as his enemies, who likewise given the lack of market fear (for once ratex worked; they forecast the ceiling would be raised and it was), may not be held back and may take us over the brink.  It is much more likely than most today think.

So, in yesterday's (Nov. 15) Washington Post in its Friday forum, there is an innovative and interesting column on this issue by James Leitner and Ian Shapiro, "A new tool to avert a debt crisis," and I completely agree with them and wish to publicize this alternative tool to those that Obama has rejected (there is also the goofy trillion dollar platinum coin alternative, which both the Treasury and Fed have publicly declared they will not go along with).  This solution is to issue consols if the Congress foolishly refuses to raise the debt ceiling in the nest round of this silliness coming up early next year.

The column taught me things I did not know.  The term "consol" is short for "consolidated," and sometime in the 1700s the UK consolidated a bunch of long-term bonds. Then in the 1800s they began to issue the actual consols, bonds with infinite maturity, public "annuities" if you will.  They just pay interest forever.  Quite a few were issued in the heyday of British domination of the world economy in the Pax Brittanica of 1815-1914.  Some were retired, but according to Leitner and Shapiro some still exist in the UK government portfolio, still paying their interest.  Of course in fin econ textbooks they are the real world example for that nice simple back of the envelope formula that is also relevant for real estate that says that PV = NR/r, where PV is present value, NR is a constant real net return forever, and r is the real interest rate or discount rate for this most basic of present value calculations.

Anyway, Leitner and Shapiro point out a curious detail of how the US legally measures the national debt: only bonds with finite maturities add to it.  So, if the debt ceiling is hit, the US Treasury could issue consols that will not legally add to the national debt.  The US Treasury will be able to continue to borrow money and pay bills and avoid defaulting while not legally adding to the national debt.

OK OK, there is a dark side, and I give them credit for recognizing it.  These consols may require higher interest rates than other US government securities, in violation of the usual pattern that longer term securities provide lower yields.  They suggest that if Obama is forced to issue these at higher than usual interest rates he publicize how much these are costing taxpayers and blame it publicly and loudly on the reprobate Congresstrolls.  The only further thing they suggest is that the Treasury get at issuing a few soon to get a target interest rate and prepare everybody.  I completely agree.

State & LocalAusterity – Is Christie Doing His Job?

Caitlin MacNeal must have watched Chris Christie yesterday too:

New Jersey Gov. Chris Christie (R) went on four morning talk shows on Sunday to tout his sweeping re-election victory as a model for the Republican Party nationwide, but the prospective 2016 presidential contender carefully refrained from staking a position on contentious issues such as immigration reform and deliberations over Iran's nuclear program. Throughout the morning, Christie left the door open for a 2016 presidential run while making it clear that governing New Jersey is his focus right now.

Christie has also been talking tough about doing his job and being honest with citizens. I’m happy to focus on New Jersey issues but first let me express my only frustration ever with the excellent posts from Bill McBride who suggests state & local austerity is over:

Now state and local governments have added to GDP for two consecutive quarters, and I expect state and local governments to continue to make small positive contributions to GDP going forward.

State and local government purchases have inched up for the past two quarters but only after a sustained period of decline. To be fair to Bill – his graph of government employment dates back for over a decade showing how deep the state and local government austerity has been. Governor Christie campaigned very dishonestly on the claim that he balanced the budget and had incredible employment growth. In truth, the New Jersey employment record sort of tracked the national record. At the end of 2007, employment was 4.3 million but dropped to 4.1 million by mid-2009. Its recovery has brought this figure only back to 4.2 million as of August 2013. In other words, employment is still 2.3% shy of where it was before the Great Recession. Nationally, employment is only 1.1% shy of where it was before the Great Recession. I say “only” here but you might protest that employment would have had to grow by almost 5.7% in order to get back to the old employment to population ratio. Christie was asked about this point from the Wall Street Journal:

Among the headwinds for the Republican as he sets an agenda for 2014: a state unemployment rate of 8.5% in August, compared with 7.3% nationally (and among the 10 highest of all states); a slower recovery from the recession compared with the nation; and a budget with a slimmer surplus than those in most of the rest of the country.

One of his responses was that New Jersey has created 144,000 new private sector jobs. Of course, that figure used as its starting point the bottom of the employment decline. But then how can I claim that total employment rose by only 100,000 new jobs since the bottom? Could it be that government employment was reduced by around 40,000 during Christie’s tenure in office? In other words, Christie sees his job as fiscal austerity which only makes the employment situation worse. And yet he brags about how he has somehow improved New Jersey’s employment situation? I guess the press thinks this is honest because Christie shouts when he says this nonsense.

Job Market Doldrums Continue

On this last Friday (11/8), the Bureau of Labor Statistics of the U.S. Department of Labor released its newest number on conditions in labor markets. The number that got the most attention was the growth of employment. To quote their website, “Total nonfarm payroll employment rose by 204,000 in October, and the unemployment rate [U3] was little changed at 7.3 percent...” (The full report is at http://www.bls.gov/news.release/empsit.nr0.htm.)

The news of 204 thousand extra jobs should be treated carefully. Nobody should be excited (assuming, of course, that anything in economics can be exciting). What really demands our attention is the changes that occur from year to year. After all, month-to-month numbers can involve all sorts of temporary changes that indicate nothing about the trend. So looking at the increase in employment from October 2012 to October 2013, the number is 194 thousand per month, which is slightly less exciting than 204 thousand.

More importantly, even though by this measure job creation has been rising since early 2013, the October-to-October increase in hiring was significantly slower than what we saw in early 2012. Job creation may catch up with what happened then, but when the demand for products is growing slowly that also means bad conditions for job-seekers. (According to the Bureau of Economic Analysis of the U.S. Department of Commerce, real GDP grew only 2.8% in the third quarter. It’s likely to turn out to be worse than that, once we see more accurate estimates. GDP must increase more than about 3% for an entire year to truly lower unemployment rate.)

Even more importantly, the unemployment situation has not been improving much at all. U.S. labor markets cannot be said to have recovered from the "Great Recession" of 2008-2009. As the graph shows, it's true that the official (U3) unemployment rate has edged downward since early 201. At its height, it was at 10% and now it's down to 7.3%. This is still high by most economists' standards.

As anyone who's studied macroeconomic should know, this number misses the fact that a lot of unemployment people can -- and do -- stop being counted as unemployed by the BLS if they stop actively looking for jobs. And that kind of discouragement can hit in a big way if the job market is miserable month after month. The most likely to be discouraged from further job-seeking are the long-term unemployed (which the BLS defines as those who have jobless for a half year or more) was about 4.1 million in October, about 36% of the unemployed. Again, if these folks stop looking for jobs, they're no longer counted as unemployed.

To correct for this effect, I calculated the "gross unemployment rate." It's simply a reflection of the employment/population ratio that labor economists often use to help figure out what’s going one but it's designed to be easy to compare to the official U3 rate. (My ratio is simply 100% minus that e-pop ratio). Note that the one I calculated this time is only for people between the ages of 25 and 54, so it doesn't reflect retirements or college graduation very much if at all.)

The gross unemployment rate mostly moves in step with the official unemployment rate. This is seen most dramatically during the Great Recession (the gray stripe in the graph). But in its stagnant aftermath, notice that my gross unemployment rate has generally stayed high, being about 24% in 2013. The improvements in these numbers occurred in the past, i.e., during 2011 and early 2012.

Notice also that if we look at the gross unemployment rate, the numbers jumped in October. It's only a one month leap, but it reflects the government's temporary shut-down. The fact that it rose much more than the official rate reflects the way that a lot of people have stopped looking for jobs. It’s quite possible that this event will continue to keep the growth of GDP slow. Of course, it could just be a one-time event that will be reversed.  -- Jim Devine

Last Call: The Unconventional PetroleuMLM Pyramid

Robert Litterman, a former partner at Goldman Sachs and co-developer of the Black-Litterman Portfolio Allocation Model, argued this week that divestment from fossil fuel companies makes economic sense:

It is well known that emissions markets have not yet priced climate risk appropriately, but what is not well understood is that today’s equity markets build in expectations that climate risk will not be priced rationally for a very long time. The market expects a slow increase in emissions prices over the next several decades. But what the market does not yet realize is that this expectation, sometimes referred to as the “slow policy ramp,” is irrational — it does not appropriately take risk into account.

Back in March, Marc Lee and Brock Ellis of the Canadian Centre for Policy Alternatives presented a similar, much more detailed analysis of the financial risk of stranded assets arising from "irrational" pricing of carbon emissions that ignores climate reality.

Update: At New Scientist, Jeremy Leggett agrees "An oil crash is on its way and we should be ready":

It is because of the sheer prevalence of risk blindness, overlain with the pervasiveness of oil dependency in modern economies, that I conclude system collapse is probably inevitable within a few years.

So much for "rational expectations"?

Perhaps. But as I reflect on Canadian government policy promoting pipelines and tar sands development and industry hype about tight oil and shale gas I get another impression: fraud. Equity markets are not merely failing to build in expectations about climate risk; they are being gamed. They are being gamed by policy manipulation at the highest levels. The unconvential "carbon bubble," as Lee and Ellis call it, is not just a bubble but is THE bubble -- successor to the housing bubble that was the successor to the dot.com bubble. It is a policy-induced pyramid, a Ponzi scheme and a multi-level marketing scam all rolled up into one.

The "last call" in a tavern is also a marketing opportunity. The customers may even load up on more drinks then they might otherwise order. After all, what the heck, it's... closing time.

and I lift my glass to the Awful Truth
which you can't reveal to the Ears of Youth
except to say it isn't worth a dime
And the whole damn place goes crazy twice
and it's once for the devil and once for Christ
but the Boss don't like these dizzy heights
we're busted in the blinding lights,
busted in the blinding lights
of CLOSING TIME

No need for jobs - everything's built!

…Gotta be stopped [this] working! …..  It’s made up by the ruling elite so we’re tired and bored and can’t rebel and or philosophise about our own existence and actually f..g evolve properly…

Says a particularly articulate non-working economist from Australia.  Steve Hughes

http://www.youtube.com/watch?v=A4-3TKy2A28

Also:  Steve Hughes on the Homeless

http://www.youtube.com/watch?v=Qm6kl17HH9s

Soaring Nominal Wages?

CNN/Money ran a story that makes me what to scream:

Over the last generation, pay for some professions has risen much faster than the overall rate of inflation.

Since they do note consumer prices have increased from 1983 to 2012 (by a factor of 2.31), how hard it would have been for them to express these increases in real terms? I guess it is no surprise that the median wage for doctors have risen over the last 30 years – nominally by 276% but that represents a real increase of only 63%. OK, I have no pity for these impoverished doctors. But when CNN/Money tells us that some professions have seen wages rise by 170% - that’s also in nominal terms and represents only a 17% real increase. I’m glad that hotel clerks and firefighters haven’t suffered real wage erosion like some professions, but stories that tout the allegedly enormous increase in nominal salaries are just stupid.

The Cooch May Win In VA

As of Friday, the Emerson poll shows Cuccinelli only 2 points behind McAuliffe.  I fear my piece on short term memory may be too real.  A week ago, MacAuliffe would have massively beaten Cuccinelli.  Now the Cooch may win.  He is running ads hard on the failed rollout of the Obamacare exchanges, which has totally dominated the news all week. No more government shutdown by Republican Tea Partiers in the public mind, now it is Obama incompetence, and the Cooch is running it hard.  That ACA will probably get straightened out eventually does not matter.  What matters is the perception right now, and that is not good for the Dems.

I also fear that all those  polls showing Mac so far ahead may induce complacency, while the Cooch's supporters are fired up and have momentum.  This is going to be very close in the end.

Oh, and of course this trend means that in the AG race Obenshain is probably well in the lead now, although I have seen no polls in the last few days on that one.  Heck, Jackson might even pull through, although that still seems unlikely.

Who Is A RINO?

The quick answer is that the real RINOs (Republicans In Name Only) are those accusing others of being RINOs, with those doing so doing so very loudly and repeatedly, much the way they make most of their half-baked to outright wrong arguments.  But I want to get into this a bit more based on sitting where I am sitting in Harrisonburg, VA, the home of the only VA GOP statewide candidate with a chance of winning this year, Mark Obenshain, their candidate for Attorney-General, 3 points behind Dem Mark Herring in the latest WaPo poll, within the error of margin, and as I argued earlier with a good chance to win with such a margin a week from today, given the higher energy of the teabag faction, although he is has greater acceptability to moderate Republicans and independents that gives him the chance to win, even though he is essentially as conservative as Governor candidate Cuccinelli.

So, besides that detail, why is where I am sitting so important in understanding this?  Because the older around here of those who shout about RINOs were themselves previously Democrats, over 40 years ago when the Byrd Machine was Democratic, the political machine that led the massive resistance to racial school integration in the 1950s in Virginia.  And what has that to do with Harrisonburg?  The local newspaper, the very conservative Daily News-Record, is owned by the Byrd family, with the dean of the family, former Senator Harry F. Byrd, Jr. recently dying at age 98.  It turns out that he was the personal overseer of the massive resistance campaign for his father, who then ran the machine.  On his death, the local paper spent pages and pages listing his achievements, and he had some genuine ones and was a notable example of the Old School Virginia Gentleman who had many virtues.  But a love of racial equality was not among them, and many noted how the local paper barely mentioned this awkward piece of his past.

As it was, the point got further hammered in when I was at a recent forum about the election, which was attended by both the city GOP chairman (who lives across the street from me) and the local Tea Party Chair, whom I had not previously met. After expressing various wacko views and her full support of truly wacko GOP LG candidate, E.W. Jackson, she bragged about how she used to be a Democrat.  When did she switch?  Oh, around 1970, about the same time the whole Byrd machine switched to the GOP.  This pointedly reminded me that these people are only skin deep Republicans.

So, who are the real Republicans?  As a former Republican I am painfully aware of making the opposite switch and for roughly the same reason but in reverse.  What fundamentally attracted the Byrd machine Dems to the GOP was the national Dems coming out for national civil rights laws, with the GOP after Goldwater opposing them.  I was a pro-civil rights Republican.

As it is this history also  plays out in my local area, the Shenandoah Valley.  It was a part of Virginia historically with little slavery and many groups such as pacifist Mennonites who opposed slavery.  If Stonewall Jackson's army had not been sitting here in 1863, much of the valley, including probably the part Harrisonburg is in, might well have voted to secede from Virginia and become part of West Virginia. Personally I am glad that did not happen, but the fact of the matter is that there were many Republicans here, "Mountain Valley Republicans," who opposed slavery and supported Abraham Lincoln.  These were the real Republicans, and during the long rule of racist Democrats such as those in the Byrd machine, it was this part of the state where the Republican Party hung on and would occasionally manage to elect people to the state legislature.  These real Mountain Valley Republicans were moderate to liberal or progressive in their outlook, generally speaking, and anti-racist.

Unsurprisingly, since the Byrd machine switch, there has been a long campaign and effort by the right wing of the VA GOP to purge and eliminate the remnants of this faction of the party, including especially in their old home base out here in the Shenandoah Valley.  Ironically, one of the leaders of that movement over a long period was Mark Obenshain's late father, Richard Obenshain, who served as state Chairman, but died in a plane crash after having defeated moderate GOP former Senator John Warner for the nomination for that seat in a convention, Warner being a prime example of the Mountain Valley type, even though he was from Northern Virginia, and who was appointed to replace Obenshain after his death as the GOP Senate candidate.  Now, Mark Obenshain looks moderate by comparison to his running mates, but he is no Mountain Valley Republican.

Indeed, the breed is nearly extinct.  There are very few in the House of Delegates, and there may be just one left in the State Senate, although even a few years ago there were several.  But they have been Tea Party primaried intensively, often with this battle cry that they are "RINOs" echoing in their ears.  And the battle is on against the one left.  He is Sen. Emmet W. Hanger, Jr., who represents the district just southwest of here in the valley, Augusta County, with Mark Obenshain my district's senator.  Hanger has been frequently primaried in the past and has so far managed to hang on, the last of the Mountain Valley real Republicans in the evenly-divided-on-party-lines VA State Senate.

Why is the battle now fiercer than ever, to the point of receiving attention in the national media and blogs?  He is heading a panel that must pass on whether or not Virginia will extend Medicaid coverage as part of the Affordable Care Act.  He has reportedly been open to doing so, showing his progressive Mountain Valley roots, and instigating outrage among the teabaggers and others.  As reported nationally, outside money is flowing in from various right wing sources, and he has been hounded by hired demonstrators in his own district over this issue.  They want blood, and in particular, the blood of Emmet Hanger.  I hope that he not only makes the best decision for Virginia on the Medicaid expansion issue, but that he is able to hang in there as the last of the real Mountain Valley Republicans against this onslaught by this mob of hypocritical phonies.

Barkley Rosser

Still Confused About Inflation after All These Years

Woe to the economics profession, or at least the more responsible parts of it, which for decades has tried to explain the income-expenditure identity to any journalists willing to listen.  Every transaction has a buying side and a selling side; one person’s spending is another person’s income, and the sum of all the spending is the sum of all the income.  This needs to be adjusted for transactions that spill over national (and therefore accounting) borders, but otherwise it’s just an identity.

The immediate implication for inflation is that it makes no sense to wonder whether incomes will keep up with inflation.  Here are two ways to think about it, which of course are different versions of the same way.  First, the sum of spending is equally the sum of income.  If nominal spending rises by x% because of inflation, then nominal income does too.  Second, inflation is the average increase in prices, and wages are prices.  Naturally inflation can be accompanied by income redistribution, with some people coming out ahead and others behind, but there is no a priori reason why any particular group should benefit, or even why there should be any correlation between which group benefits in one period and which in another.

Journalists are supposed to know this by now.

But then we see pieces like today’s today’s New York Times/Economix post by Binyamin Appelbaum, and it’s right back to square one, or maybe one-and-a-half.  Granted, there is a paragraph of enlightenment:

To be clear, inflation by definition increases total income. Someone ends up holding the new money. The question is about distribution: Are workers able to secure the raises necessary to keep pace with inflation, or does the extra money simply pad profits?

Other than this, though, it’s all confusion.  Appelbaum keeps referring to wages as “income” and wonders whether income will keep up with prices.  He also throws out comments like

If the Fed drives up inflation, prices would rise first. Even if wages follow, the very people who most need help would feel the short-term pain most acutely. It would feel something like a temporary national sales tax.

Earth to Appelbaum: wages are prices.

Of course, the relationship between price inflation and nominal wage increases is a purely empirical matter, so let’s consult with uncle FRED:

The blue line is the quarterly year-on-year percentage change in the consumer price index (CPI); the red line is the corresponding year-on-year change in nominal hourly compensation.  As you can see, they move largely in tandem.  A few specifics:

• At first, the Volcker disinflation of 1979-82 had little effect on nominal wages; after a couple of years both plunged together, with the decline in prices somewhat outpacing the fall in wages.

• There was an extended period in the latter 1990s during which real wages (wage growth minus inflation) rose.  This was due to the low unemployment of the Clinton boom; inflation during this period was unchanged.

• Other than this, the relationship is mostly a wash.

If the public, as Appelbaum quotes Shiller as saying, is misinformed about the relationship between inflation and wages, it’s the responsibility of the press to set them straight.  You don’t do that by musing on whether incomes can keep up with prices or, as he does toward the end, whether global labor market conditions will cause inflation to “punish” workers.

The big distributional effect from unanticipated changes in inflation has been and always will be between net lenders and net creditors, and it is useful to explore who these people are and how big the impacts on them are likely to be.  It is also true that even anticipated inflation can affect financial flows if contracts are fixed in nominal terms over long enough time periods, as in some defined benefit pensions.  But wages?  There is neither a theoretical nor an empirical reason to think much of anything.

Now here is the real problem beneath the problem.  Net creditors, which means those sitting on a pile of financial assets whose value depends on real interest rates, suffer a one-off loss every time expected inflation goes up.  If the Fed decides to boost its target, that loss will be substantial, like a one-time tax of all credit market holdings of 1-2 percent.  If the runup in prices exceeds the target, which of course it could, the loss is that much greater.  We are talking about a very large sum of money, and it is perfectly rational for the high net worth crowd to try to avoid it.  One practical strategy is to pay or otherwise reward pundits, reporters and even economists who sew confusion.  Spread the rumor that prices are one thing and wages are another.  Repeat the mantra that “inflation is the cruelest tax of all”.  Fill economics textbooks with endless pages about whether households fail to see that nominal wage increases are offset by consumption prices but nothing about whether they understand that consumption prices are offset by nominal wage increases.  (You know: inflation is bad because I have to pay more, but my wage went up because my employer knows how valuable I truly am.)

We live in a sea of deliberate misinformation about the effects of inflation.  Journalism should be the rock that stands up against the waves, not the waves beating down on the rock.

Greg Mankiw and Lisa Myers on the Tale About People Losing Their Health Insurance

Greg Mankiw lectures the advisors for President Obama on the latest controversy surrounding the Affordable Care Act:

As someone who has previously worked for a President, I am fascinated by how the White House staff let the President so consistently and so publicly make a false statement. Presidential speeches undergo a painstakingly thorough review process.

I’ll skip the obvious retort about how the President that Greg worked for told the American people a lot of lies and simply note that Greg’s source was Lisa Myers. Rather than getting into the specifics, let me turn this one over to Josh Marshall:

It's been a long time since I've seen someone bend over quite so far backwards to mislead people about what's contained in a story. But it is Lisa Myers. So I guess we shouldn't be surprised? We were just discussing this amongst our ed staff: it's true that the White House did oversell how little change there would be in the individual insurance market. But saying that millions of people are getting 'cancellation notices' or 'losing their coverage' is deeply misleading.

The Economist on the Inflation Tax

Greg Mankiw has a problem with one aspect of something in this discussion:

Investors who bought Treasury bonds in 1946, when yields were around current levels, did not suffer a formal default. But over the following 35 years they lost money in real terms at a rate of 2% a year. The cumulative real loss was 91%. By that standard, Greek creditors, who recently suffered a 50% loss via default, were lucky.

Greg’s comment is simply this:

Answer: The second number is inconsistent with the first. Note that .98^35=.49, so we get only a 51 percent cumulative loss. In fact, the price level from 1946 to 1981 rose by a factor of about 5, so holding currency with a zero nominal return led to a real loss of only about 80 percent.

Interest rates on Treasury bonds reflect the expected inflation rate at the time a person purchases the bond plus the real interest rate at the time. Treasury bonds in 1946 were generally around 2.5% so if actual inflation over the period that the person held the bond exceeded expected inflation, then ex post real rates would be lower that the real rate expected when the person purchased the bond. But eventually the bond matures and the person is free to renegotiate based on market conditions and the expected inflation rate when purchases new bonds. So was The Economist referring to 10-year Treasuries or 30-year Treasuries? Simply put – it is not inflation but unexpected inflation that leads to the type of losses described in this discussion. To fair, the discussion later admits:

The answer to that conundrum may be that default happens suddenly, whereas inflation and depreciation are slower, giving investors more time to adjust by demanding higher interest rates to compensate for their losses. This is particularly true in the case of short-term debt, such as Treasury bills; inflation is unlikely to do serious damage to a portfolio in the course of a few months.

Alas, the discussion goes off track in my view with:

But by buying bonds in the name of “quantitative easing”, central banks are influencing interest rates of all maturities these days. By holding down bond yields, the authorities are employing a policy some have dubbed “financial repression”, in which real returns on government debt are reduced. The idea is to make investors buy riskier assets, such as equities and corporate bonds. In effect, the bond vigilantes have been neutered.

Doesn’t financial repression suggest that interest rates are low because the Federal Reserve has suppressed market forces creating a difference between the market demand for government debt and its supply? One would think the real story is the incredibly weak state of the overall economy has been the driving factor in keeping real interest rates so low.

Accelerating Inflation?

Today (October 27, 2013), the New York Times has an excellent page 1 story by Binyamin Applebaum indicating that more and more economists favor the encouragement of inflation as a way to fight the persistent stagnation that the U.S. economy has been suffering from since the Big Financial Flop of 2008 and the resulting Great Recession.  As Paul Krugman notes in his blog, this policy is what he's been advocating for awhile. This pro-inflation company includes even Kenneth Rogoff, the Chicken Little of government debt.

One argument against this view is that of economists who "warn that the Fed could lose control of price as the economy recovers." The idea is that inflation will accelerate (speed up) in a way that gets us back to the conditions that the U.S. last saw during the 1970s.The problem with this "Back to the 1970s" perspective is a key fact that was left out of the news story.

What's left out is the fact that the official (U3) unemployment rate is currently at 7.2%, which is significantly higher than almost all estimates of the inflation-barrier unemployment rate, also known as the NAIRU. (The initials stand for the Non-Accelerating Inflation Rate of Unemployment. This rate is known to ignorami as the "natural" rate of unemployment.) Worse, the ratio of paid employment to the potentially working population has stayed distressingly low since the Great Recession (even when corrected for the population's changing age profile). It's true that the official unemployment rate has edged downward, but this is largely an illusion: as unemployed people stop looking for jobs (discouraged by the bad job situation), the statisticians count them as having dropped out of the labor force and therefore as no longer unemployed. If all of those workers who left the labor force were counted as "unemployed," the unemployment rate would be much higher. Heidi Shierholz of the Economic Policy Institute has shown this by looking at real-world data.

Anyway, the point is that the NAIRU concept cuts both ways. In happier times, conservative economists could point to this minimum and use it to argue against people who want full employment. They'd say that "we can't go there because there be monsters," where of course the monsters are worsening inflation rates. If the Fed encourages inflation, people will begin to expect inflation and will act to protect the real purchasing power of their incomes (or to buy now, before prices go up). This means that inflation becomes built into the economy's normal behavior. If the unemployment rate stays below the NAIRU, the inflation gets worse and worse.

But nowadays, the U.S. economy has unemployment significantly above this threshold. In the current situation, the inflation rate should be falling and it is doing that, as Appelbaum's graph shows. Except for the usual barriers against cutting wages and prices (some of which were mentioned in the article), it could easily become negative, so that we would see deflation (as actually seen in Japan). People would expect falling prices, which would then lead to behavior that causes prices to fall further. In this case, we would see a vicious cycle that encourages depression.

That is, the "Back to the 1970s" scenario might have applied in 2006, when the job situation was significantly better, but it cannot apply now. Any inflationary surge that the Federal Reserve and the federal government engineer would be canceling out the current deflationary tendency. It wouldn't actually cause rising inflation.

Putting it a different way, those who are always shouting "inflation!"  are assuming that the economy is operating at the NAIRU, or what used to be called the "inflation barrier" or full employment.

The 64 thousand ruble question -- also not addressed by Appelbaum -- is how the Fed and the federal government are ever going to cause an inflationary surge. The Fed's stimulus as mostly created a lot of excess reserves in the banks' coffers rather than stimulating the economy and the inflation rate. The federal government has been going in the opposite direction, joining most of the state and local governments to encourage deflation.  -- Jim Devine