Why is inflation so low?

I have a new piece on low inflation in US News and World Report:

Surprisingly, the recent undershoot of inflation had occurred during a period when the Fed has been raising interest rates, a policy that is normally aimed at slowing, not increasing, inflation. It’s as if a ship captain responded to persistent headwinds by turning the rudder in the wrong direction.

Off topic, a couple National Review pieces caught my attention:

In Rome in 1973, a grandson of the richest man in the world, J. Paul Getty, was kidnapped. In All the Money in the World, director Ridley Scott’s bizarre take on this story, Getty is the villain, while the kidnappers are simply dutiful professionals tasked with carrying out their unfortunate mission as best they can despite Getty’s intransigence about paying them ransom.

They don’t use the term ‘nepotism’, but that’s what this is all about.  Nepotism is frowned on in the US and Northern Europe; indeed favoring your relatives at the expense of society is viewed as completely unethical.  In most of the world things are exactly the opposite; it’s viewed as unethical not to favor the well being of one’s grandchildren over the best interest of society.

I doubt that many Sicilians would agree with me, but my utilitarian value system forces me to view Getty as a hero, not a villain.  The world would be a better place if everyone viewed things as I do, and no one paid ransom to kidnappers.  (That doesn’t mean I’d refuse to pay ransom, just that I’d be a hero if I did.  I never claimed that I’m a hero.)

Hollywood often promotes utilitarian values, but this is less true in the case of economic issues.  In those cases, Hollywood focuses on the “seen”, not the “unseen”.

Here’s the excellent Ramesh Ponnuru in the National Review:

Many Republicans credit Trump for presiding over a strong economy, too. It’s a point that requires some context. Job growth has not been quite as fast as it was in Obama’s last year, but you’d expect it to slow after an expansion this long.

That’s a defensible argument, but only if you assume that the entire alt-right/Trump campaign was built on a pack of lies.  Recall the economic “carnage” that Trump referred to in his inaugural address.  Recall the claims of 30% to 40% unemployment.  Recall the claims that downtrodden unemployed workers in West Virginia, Wisconsin, Pennsylvania and Michigan voted for Trump out of desperation.

So yes, it’s possible that job growth slowed in 2017 because Obama left Trump with an American job market that was already “Great Again.”  I’m not going to take a position either way on this issue; just point out that Trumpistas can’t have it both ways.

US News has a new article pointing out that the legalization of pot in Colorado did not lead to the total disaster predicted by drug warriors:

Over at Econlog I have a recent post discussing Portugal, which has decriminalized the use of all drugs.  Heroin addiction has fallen sharply, again just the opposite of what the drug warriors predicted.

I’d have a tad more respect for conservative Republicans like Jeff Sessions if they spent less time gloating over tax cuts for corporations, and instead expressed a bit of remorse over the millions of lives they have ruined with their punitive policies.  Policies that we now know were ineffective.  Here’s one example from Reason magazine:

About a year later she was picked up in another undercover sting.  This time, having turned 18, she was arrested for prostitution (a misdemeanor) and possessing a small quantity of marijuana (a felony).  The conviction shattered her dreams of someday becoming a nurse.

Now, she says, “I’m a single mother with a felony and I will be labeled a loser and a whore for the rest of my life.”  Mere months ago, she was being exploited.  Today, for the same behavior, she’s a criminal.

HT:  Ben Cole


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17 Responses to “Why is inflation so low?”

  1. Gravatar of Daniel R. Grayson Daniel R. Grayson
    26. December 2017 at 12:02

    In the US News column: “If the Fed wants to hit its 2 percent inflation target, then need to…” — insert “they” or “it”.

  2. Gravatar of Dan W. Dan W.
    26. December 2017 at 12:52

    If wages don’t rise to match or exceed the rate of inflation then an inflationary monetary policy results in making workers poorer. Maybe that concern weighs on the Federal Reserve.

    https://www.bloomberg.com/news/articles/2017-09-21/why-wages-aren-t-growing

    “The dearth of wage increases is a serious problem for the global economy. Economists have proffered all sorts of complex explanations for the glacial pace of recovery from the Great Recession, including insufficient fiscal spending and excessive government regulation. Some have even argued that the world has slipped into a long-term cycle of meager growth. But one often overlooked factor is the plight of the wage earner. Employees working 9 to 5 have simply not benefited as they should have from improvements in economic performance or corporate profitability. Without fatter paychecks, the average household can’t spend more, and that’s bad for growth. Yes, it’s really that simple.”

  3. Gravatar of Randomize Randomize
    26. December 2017 at 13:05

    Dan. W.,

    Is there any reason to believe that could happen?

    From Econ. 101, NGDP = Average Hourly Wages x Hours. As we reach full employment and Hours can no longer increase, Wages MUST rise if NGDP is going to continue to rise.

  4. Gravatar of E. Harding E. Harding
    26. December 2017 at 13:24

    “Recall the claims that downtrodden unemployed workers in West Virginia, Wisconsin, Pennsylvania and Michigan voted for Trump out of desperation.”
    Yeah; there never was any evidence for that. The richest Obama-Trump district (Peter King’s) was richer than GA-06. Trump got the support of the working class; the elite and the lumpenproles voted for Clinton.

    There had been real economic carnage in the rust belt during the Bush era, but state policy has had more to do with its (still fairly mild) alleviation than anything Obama or Trump have done.

    “Mere months ago, she was being exploited. Today, for the same behavior, she’s a criminal.”

    I don’t have a problem with this per se. Libertinism is a scourge. However, police resources are finite, and it’s best that they be directed toward more serious crimes.

    Also, Sumner, linking to paywalled articles is generally poor form.
    http://reason.com/archives/2018/01/01/the-feds-keep-arresting-sex-wo

  5. Gravatar of E. Harding E. Harding
    26. December 2017 at 13:28

    “The dearth of wage increases is a serious problem for the global economy. Economists have proffered all sorts of complex explanations for the glacial pace of recovery from the Great Recession, including insufficient fiscal spending and excessive government regulation. Some have even argued that the world has slipped into a long-term cycle of meager growth. But one often overlooked factor is the plight of the wage earner. Employees working 9 to 5 have simply not benefited as they should have from improvements in economic performance or corporate profitability. Without fatter paychecks, the average household can’t spend more, and that’s bad for growth. Yes, it’s really that simple.”

    Please do not bring such stupidity here; the whole thing made my eyes burn.

  6. Gravatar of Mark Mark
    26. December 2017 at 15:45

    You continue to baffle me with your definition of utilitarianism. If anything I’d expect a hardline Kantian deontologist would object to paying ransom. Perhaps you’re referring to the concept that one should not value the life of one’s kin more than any stranger, but that just seems like radical universalism or egalitarianism, and nothing to do with utilitarianism.

  7. Gravatar of Iskander Iskander
    26. December 2017 at 18:09

    Scott, I was hoping you could do a post about/explain
    When you find the wicksellian natural rate framework useful and when you don’t. I’ve seen you say that you would rather relegate interest rates to the sidelines when discussing monetary policy, yet you occasionally talk in terms of the natural rate.

  8. Gravatar of Benjamin Cole Benjamin Cole
    26. December 2017 at 20:54

    Not only does the Fed genuflect to the Phillips Curve, they still kneel before the NAIRU totem. But why?

    For fun, here is a chart from the CBO, plotting out NAIRU until the year 2027. It never gets below 4.6%. (I wish I was making this up.)

    https://fred.stlouisfed.org/series/NROU

    The Fed has internal NAIRU charts, but evidently a few years back they went underground, I guess preceding the recently and abruptly terminated Labor Markets Conditions Index (just as it appeared to show labor markets in summer moving into the absolutely loosening range).

    In brief, the Fed wants a higher rate of unemployment than the US has now, and Tim Duy says they are in fact targeting higher unemployment rates in their forecasts. How nice.

    But why has the Fed made labor markets the crux of inflation-fighting? And why an inflation target at 2.0% rather than, say a 2% to 3% band?

    My late Uncle Jerry used to refute arguments by stating, “Even if that is true, I still don’t believe it.”

    So perhaps the Fed is just ossified, which describes many public agencies. And of course, Fed staffers live in a bubble world, insulated from the economy. In fact, I guess Fed staffers, with automatic step increases and the like, find economic stagnation works for them, personally. A roaring economy means Fed staffers get outbid for housing, services. Recessions are a great time to buy housing (for Fed staffers).

    I find Marxist medicine is poison, but vulgar Marxism often explanatory.

    The Fed is a creature of the propertied-financial class, that is their milieu. HIgh Fed officials and staffers do not end up working at 7-11, once their stints are up. Even Bernanke went Wall Street.

    Vincent Reinhardt, the Fed economist said to be so influential on Bernanke, is now Chief Economist for Standish Mellon Asset Management. Okay, so Bernanke and Reinhardt end up on Wall Street. And Jerome Powell is from Wall Street. One should not jump to hasty conclusions.

    Just by chance, of course, the Fed says the problem is wages, and even when it is not a problem, it is still the problem that must be contained by seeking higher unemployment rates.

    BTW, loose labor markets are a great way to usher in socialism. If Bernie Sanders had a scintilla of charisma…

  9. Gravatar of Benjamin Cole Benjamin Cole
    27. December 2017 at 01:37

    Add on:
    Nikkei Asian Review

    December 27, 2017 2:35 am JST

    The time is ripe for wage hikes, BOJ’s Kuroda says
    Japanese central banker urges businesses to do their part to spur growth

    TOKYO — Japanese business leaders were urged to provide pay raises in a pitch Tuesday from central bank Gov. Haruhiko Kuroda, who made a case for wage hikes contributing to economic growth.

    —30—

    I wonder if a US central banker ever spoke this way….

  10. Gravatar of Scott Sumner Scott Sumner
    27. December 2017 at 09:23

    Thanks Daniel.

    Dan, You said:

    “If wages don’t rise to match or exceed the rate of inflation then an inflationary monetary policy results in making workers poorer. Maybe that concern weighs on the Federal Reserve.”

    Where does one even begin . . . .

    The Fed is targeting inflation at 2%. They are not targeting real wages. Real wages do not “weigh on” the Fed.

    Harding, I did not link to a paywalled article.

    Mark, It’s very simple. Kidnapping occurs because people pay ransoms. If people did not pay ransoms then kidnapping would not occur. Global utility would be higher if kidnapping did not occur. Ergo, global utility would be higher if people did not pay ransoms.

    Yes, I understand that people like their close relatives—that’s why we have nepotism.

    Iskandar, I never find it to be the optimal way of discussing monetary policy. I occasionally talk about interest rates because that’s the only language that many people understand, and it’s the tool used by central banks.

    Ben, The NAIRU should not be used for monetary policy purposes.

  11. Gravatar of E. Harding E. Harding
    27. December 2017 at 12:18

    Sumner, I’m sorry, but not linking to a paywalled article you quoted from is, frankly, even worse.

  12. Gravatar of Christian List Christian List
    27. December 2017 at 14:07

    Scott,

    what you call “utilitarianism” is just your Asperger kicking in.


    If people did not pay ransoms then kidnapping would not occur.

    If people did not pay for illegal drugs then drug dealing would not occur.

    You make fun of this position all the time (rightly so or not) and then you say stuff like “if people did not pay ransoms then kidnapping would not occur.” Now that’s ironic, isn’t it. Maybe you should make kidnapping legal, what about that? Problem “solved”.

  13. Gravatar of Christian List Christian List
    27. December 2017 at 14:27


    Over at Econlog I have a recent post discussing Portugal, which has decriminalized the use of all drugs. 

    I don’t see what’s so special about Portugal. Which European country punishes the users in a relevant way? Let’s take Denmark, Sweden, France, Spain, Italy, Germany as an example. I never met somebody, who was just a user, who got punished in a relevant way. What the users usually get is a therapy to battle their addiction. That’s also the case in the US – at least if you are white and rich enough.

    Portugal and all these other countries do what I say all the time: Don’t really punish the users but punish the dealers. But that’s not your position, if I remember correctly. So don’t take credit for a position that isn’t yours.


    Heroin addiction has fallen sharply, again just the opposite of what the drug warriors predicted.

    Who predicted this? When and where? Be a bit more specific. It doesn’t count if you can’t be specific. And by the way: Opioids like heroin are an extremely bad example. Do I need to be more specific? Even you should get this.

  14. Gravatar of Benjamin Cole Benjamin Cole
    28. December 2017 at 01:34

    From Nikkei Asian Review Dec. 27″

    “Xi resorts to cameras and clubs to ensure loyalty

    Surveillance and servility are hallmarks of China’s “new era” as president’s aura grows”

    —30—

    While all eyes are on the vulgar vaudeville act that is Trump…is the real threat from a man with a diffident exterior?

  15. Gravatar of Justin D Justin D
    28. December 2017 at 10:46

    –“But one often overlooked factor is the plight of the wage earner. Employees working 9 to 5 have simply not benefited as they should have from improvements in economic performance or corporate profitability.”–

    False. Employees have benefited exactly as one would expect. Wage growth has been slow because productivity growth and inflation are both much lower than prior experience. When productivity is 2.0%/yr and inflation is 2.5%/yr, the economy can produce wage increases of 4.5%/yr. However, when productivity is 0.8%/yr and inflation 1.6%/yr, suddenly wage growth falls to 2.4%/yr.

    I took quarterly data for nominal GDP, employment, and average weekly wages since 2010Q1. GDP rises from $14,681 billion to $19,501 billion, a 32.8% increase. Employment rises from 138.8 million to 154.3 million, an 11.2% increase. GDP per employed worker rises from $105.8k to $126.3k, a 19.4% increase.

    How much have average weekly wages risen? $763.64 to $912.63, a 19.5% increase.

    You can do the same analysis since 2006Q1, when the average weekly earnings time series starts, and it’s the same result: 33.1% growth in GDP/worker, 33.2% increase in average weekly earnings.

  16. Gravatar of Massimo Heitor Massimo Heitor
    30. December 2017 at 16:42

    “Trumpistas can’t have it both ways.”

    No political orientation can have it “both ways”.

    Normal political factions should be expected to spin facts to make their faction look good and rival factions look bad. And others should take such claims with a grain of salt.

  17. Gravatar of Rob too Rob too
    11. January 2018 at 06:48

    :chiming in:

    “In most of the world things are exactly the opposite; it’s viewed as unethical not to favor the well being of one’s grandchildren over the best interest of society.”

    Probably it is, although it is unlikely “most of the world” would look at the tradeoff that way. In terms of what the anthropologist Hall calls “context dependence,” the inner circles are the most reliable bases for trust. Under some belief systems this sort of trust is the micro-foundation of social harmony and economic stability.

    Of course, this kinship oriented model doesn’t jibe well with a modern, functionally inter-dependent economy. There’s the rub. That said, the “ethics” label may not be as useful for encouraging a more egalitarian view of trust. What could be best here is letting markets do the moralizing.

    :chiming out:

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