Labor shortages, productivity, and monetary policy
My mom lives in an apartment complex that caters to older people. Because many of the residents are frail, the facility provides meals in a dining room. Or at least it used to do so. Now the residents often have to make do with boxes of food delivered to their room, despite still paying a hefty rent for the formerly available restaurant style dinners.
This is just one of the many ways in which labor shortages are reshaping our economy. I see numerous similar examples when I travel and stay in hotels. A few implications:
1. Labor productivity is lower than suggested by official government data. “Output” is being credited that does not exist.
2. Real GDP is lower than the official figures suggest.
3. Inflation is higher than the official figures suggest.
Monetary policy has made this problem worse. The Fed overstimulated the economy when it foolishly abandoned its FAIT approach, and this led to labor shortages that drained workers from senior living apartments. Restaurants can lure these workers away with higher wages, and then raise restaurant prices. In contrast, residents of these senior living facilities have signed long-term contracts and the prices are extremely sticky.
PS. Timothy Taylor has a very good post discussing the current labor market. One of his graphs shows that it has never been tighter. (That’s also my impression when I travel.):
PPS. Have I ever mentioned that really bad things happen when the Fed let’s NGDP fall sharply below trend, or rise sharply above trend? So why do they keep doing it?
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12. June 2022 at 23:48
You’ve said many times that the Fed follows the consensus views of elite macroeconomists. While you may have been focusing on the framework or regime for monetary policy, I think it’s also often true for the stance. Partly this is a good thing in that paying attention to external macroeconomists’ implicit forecasts represents a move towards forecast targeting but it’s not good when macroeconomists’ views are out of step with the market. That’s what happened in Q3 2021 when, as we’ve previously discussed, people like Jason Furman (albeit not an elite macroeconomist but a prominent voice in Democrat policy circles) used the impending approach of NGDP to its level path as almost a reductio ad absurdum to argue for looser policy.
13. June 2022 at 05:21
Now that inflation is finally a major issue, it’s hilarious to watch pundits try to discuss it. Most are completely focused on how changes in fiscal policy will affect inflation, although I suppose Larry Summers does this as well. The Fed is either an afterthought or not even a thought.
Just as Obama had the opportunity to replace an incompetent Fed chair but passed on it, Biden did the same. It shows how far the Fed is from the minds of his top advisors.
Scott, if you were given control of monetary policy (both the regime and the concrete steppes) how fast could inflation be brought down to target?
13. June 2022 at 05:36
Rising asset prices as the path to prosperity has been Fed policy since the financial crisis, something I have pointed out several times here and have expressed often elsewhere. It made the investor class very happy indeed. And the investor class has made it very clear, whenever the Fed threatened to tame rising asset prices, the consequence would be immediate and painful, which created a trap for the Fed: tame rising asset prices and risk falling asset prices and a return to an under-performing economy or worse. If one wishes to place blame for our present predicament, blame the Fed for its policy of relying on rising asset prices for prosperity. Are we headed for a hard landing? Asset bubbles always result in a hard landing. Will it occur in 2022 or 2023? Even with the correction in asset prices since December, investors continue to believe they have the upper hand and the Fed will revert to its policy of rising asset prices. Don’t count on it. Hard landing ahead, likely in 2023. Here’s an essay by Christopher Leonard on who’s to blame for inflation: https://www.nytimes.com/2022/06/11/opinion/fed-federal-reserve-inflation-democrats.html
13. June 2022 at 05:56
Isn’t #1 part of the real effects of COVID? Because of spacing, cleaning, etc. requirements, it takes a lot more people to do what used to be doable when there wasn’t a deadly disease floating in the air. So the real output can only remain the same when real inputs increase dramatically – or alternatively, real output drops at the same level of inputs.
It’s like the opposite of the invention of a labor saving device. It’s a natural “un-innovation” making labor less efficient.
13. June 2022 at 06:05
“In contrast, residents of these senior living facilities have signed long-term contracts and the prices are extremely sticky.”
Some of them have signed contracts for long-term care insurance, and in that case (depending on the details of the insurance) there’s some room for the the facilities to raise wages by inflation, except that it will hasten the inevitable bankruptcy of the long-term care insurers. (There’s a big known problem in that people spend a lot more time in senior homes than they did when many people bought the insurance. At least some of it is the moral hazard that when you have insurance, you’re a lot more likely to go into a home than get your kids to care for you in their house, but there’s other reasons.)
I tend to view at least of the inflation as inevitable as a result of the COVID supply shock, which causes changes that really did reduce productivity and supply and real GDP, just the suppression of demand by COVID policies and the various checks pushed out the day of reckoning into the future. There was no free lunch. That doesn’t mean that some relief package wasn’t warranted, since some people were a lot more affected by COVID than others, but it was all going to be paid for eventually and was more in the nature of a transfer than real stimulus. (The extra ARP demand stimulus was surely less justified than the initial relief package, in any account).
The monetary authority always moves last, but only when it wants to move.
13. June 2022 at 06:22
What is the total dollar value and term structure of fixed nominal contracts in the economy?
I seem to remember from my very brief exposure to economics in school that the assumed answer was “small and brief” and so doesn’t weigh very highly in the costs of inflation, but perhaps that isn’t so — or at least that those obligations are highly concentrated in particular sectors like housing and elder care?
13. June 2022 at 07:39
The private corporation Federal Reserve that like the Vatican sits on its own private land and is immune to US laws(1) follows the directions of the controllers of the private corporation operating BEHIND AN INFORMATION FIREWALL.
(1) thanks Milton Friedman for creating a ‘story’ that justifies why secrecy totally doesn’t breed corruption, but is needed to stop a future corruption from ‘without’ the information network of the Fed, secrecy in not just how much, but how, ‘new’ currencies are introduced into circulation, all based on a PREJUDICIAL ACCUSATION against the public for allegedly being too evil and dangerous and stupid to handle the truth that is to be retained by an unelected multi-generational crime family, all of that the world is supposed to believe is a logic better than transparency and no prejudicial smears until action proves guilt.
It’s not enough to smear our children as incapable of handling transparency, but the ‘select’s’ children can grow up and instantly handle it and so must be protected with secrecy and immunity from public detection.
Secrecy in printing money, and the Fed’s unsoliciting ‘advisors’ keep the con going by ensuring there is always a dialectic of {“what Fed should have done”, “What Fed did right/wrong”} -> kick can, fix implemented in future, but keep ‘advising’ dependency and prolonging of idiocy for the sake of what ironically turned out to be purely political expediency, Biden policies cause, Fed turned a blind eye and ‘predicted’ the right thing as political cover, but reality is showing and world supposed to forget mistakes and ‘move on’ dot org, forget about past, fix policy and ‘we promise never to make THIS mistake ever again.
Circular logic, projecting its own flaws on other systems, firewalled from the people it impacts, in secret create new money out of thin air by adding more digits to ‘select’ account numbers, and the public is supposed to believe, ‘don’t worry folks, the Fed does what we economists tell them to do, but don’t ask how the ‘elite’ are selected, they just need to be politically aligned and willing to lie.’
13. June 2022 at 08:19
Rajat, Good point.
Danny, It “could” be brought down within weeks, but it “should” be brought down somewhat more gradually. I’d focus on quickly getting NGDP growth down to the 3% to 4% range.
Rayward, The past year has pretty clearly discredited your view that inflationary monetary policies are good for asset prices. But we already knew that from the 1970s . . .
Njnnja, That has some effect, but I suspect the effect today is rather small.
Grant, The most common long-term nominal contracts are bonds.
George, It’s now safe to take off the tinfoil hat.
13. June 2022 at 09:05
But real wages are falling. Doesn’t that suggest that labor is less tight than most other goods & services?
13. June 2022 at 09:20
Effem, I actually did a paper on this in 1989 (JPE). The supply shock has the much bigger impact on real wages, so a demand shock can create an overheated labor market even as a supply shock lowers real wages.
13. June 2022 at 09:42
Sumner conveniently ignores the over 12-year period since the financial crisis during which the Fed did its absolute best to inflate asset prices and he focuses only on the inevitable consequence of the Fed’s policy of inflating asset prices. How many billionaires did the Fed create? I didn’t hear the investor class complaining until now. Ignoring history guarantees it will be repeated. Again and again and again.
13. June 2022 at 11:04
Sumner,
Perhaps ignorant question, but what about a monetary policy like FAIT that targets the five year breakeven rate. If the average is rising, then you raise rates, if the average is falling you cut rates. Use QE if necessary or tighten if necessary. Would something like that work?
13. June 2022 at 11:09
Labor shortage? Young people don’t work today as they did in my younger days. Ever bailed hay or worked the night shift?
13. June 2022 at 15:53
economist manque sumner has the rayward dog on his leg. perhaps sumner forgets “the wealth effect” touted by the bernank and all his disciples since lehman? they got just what they wanted and the fall off the top was written back before diocletian imposed price controls. hang it up.
13. June 2022 at 16:39
i do wonder exactly how the will fed address the supply chain crisis (yes, it was started by COVID, but the impact had more impact because of just in time production (just means plants dont have much if any supply of parts on hand) which basically collapses in a supply chain crisis, where good have a hard time being created/mined and then shipped (where ships were either scrapped or moth balled (with the hope that demand for their services will return some day). so exactly how does the Fed address the supply chain crisis, or does it ignore what it cant do (national governments have little control senses this crosses borders. and any plant starting building will take about 2 years to build
14. June 2022 at 11:21
Rayward, How’d financial asset prices do during the Great Inflation of 1966-81?
InvestorMkt, Targeting inflation alone is a bad idea because the response should depend on whether it’s supply or demand side inflation.
18. June 2022 at 11:55
“Restaurants can lure these workers away with higher wages, and then raise restaurant prices. In contrast, residents of these senior living facilities have signed long-term contracts and the prices are extremely sticky.”
That’s a risk of long-term contracts. What’s the assurance that the facility will continue providing good services, or will go broke?