The WSJ says the lowest inflation since the mid-1950s is killing the middle class
Here’s the latest from the WSJ:
In the past four years alone, since the Federal Reserve started aggressively expanding its balance sheet, the declines in the middle class’s real income have been particularly severe. With American median household income unchanged at roughly $50,000 since 2008, inflation has been steadily chipping away at middle-class earnings. Adjusted for inflation, the real income of the average American household has fallen each of the past four years, resulting in a cumulative real decline of 7% since the Federal Reserve embarked on its experiment in money printing.
The standard textbook AS/AD model says that if AD growth slows sharply, but not quite sharply enough to cause outright deflation over 4 years, then you will experience slightly rising prices and falling real incomes. Which is exactly what has happened. Inflation over the past 4 years has been lower than at any time since the mid-1950s. So what inferences can we draw from these facts? The Journal suggests that if only money had been tighter, if only AD had grown even more slowly, if only inflation had been still lower, then real incomes would have done better. First we see Forbes carrying columns by John Tamny, and now this.
HT Ramesh Ponnuru
PS. Saturos sent me an excellent post by Ryan Avent, which addresses the issues raised by Eli Dourado.
PPS. There’s a lot of talk about whether the 5% NGDP growth we’ve had is sufficient, or whether we need more monetary stimulus to get back to the old trend line. In fact, NGDP growth hasn’t be 5%, it has averaged less than 4.1% over the last three years. Over the last year growth slowed to 3.88%. And the most recent quarter was just downgraded to 2.77%. Europe’s already in recession (depression in some cases), the BRICS are slowing, and 2.77% NGDP growth is pretty close to recession territory. The question is not whether we need QE3, it’s whether QE3 is enough.
Off topic: Paul Krugman gets it exactly right:
Mitt Romney is catching a lot of flack from his own side now, which seems premature; although the odds are now against him, this is by no means over. But let me say that even if he does spend election night weeping in his car elevator, his critics from the right are being unfair. Yes, he’s a pretty bad candidate “” but the core problem is with his party, not with him.
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27. September 2012 at 08:52
Mitt Romney doesn’t seem genuine on stage. He had the same trouble when running in 2007 for the nomination. In trying to be archconservative, he just isn’t being genuine to what his past would suggest are his true beliefs.
All politicians do have to sacrifice some of their own beliefs in order to appeal to the broader electorate. But it seems Romney sacrifices too much.
27. September 2012 at 08:57
If he runs as a moderate (which he is) he doesn’t get he nomination. If he runs as an archconservative he loses the general election. So he’s screwed either way.
27. September 2012 at 09:30
The standard textbook AS/AD model says that if AD growth slows sharply, but not quite sharply enough to cause outright deflation over 4 years, then you will experience slightly rising prices and falling real incomes. Which is exactly what has happened. Inflation over the past 4 years has been lower than at any time since the mid-1950s. So what inferences can we draw from these facts? The Journal suggests that if only money had been tighter, if only AD had grown even more slowly, if only inflation had been still lower, then real incomes would have done better. First we see Forbes carrying columns by John Tamny, and now this.
…so repeating the argument being made is sufficient to refuting it?
Fieler is right. If inflation was lower, then there would have been a smaller reduction in purchasing power, and real incomes would have been higher.
Why does inflation have to be greater? Why is it so wrong that price inflation is REPORTED as being lower than at any time since the 1950s? You keep referring to times of the past as if the mere distance between then and now is a rational basis for arguing against the now. “NGDP growth has been the lowest since the Hoover administration.” Yeah, so what? What if NGDP growth was the lowest it has been since last week? People don’t care what NGDP was in the 1930s. They don’t even care about what is now. They care about the future, and they care about their individual markets.
What is so wrong about half the country expecting a 2.5% reduction in sales next year as opposed to this year, while the other half expects a 2.5% increase? According to the “expectations” framework, the market is expecting next year’s NGDP growth to be 0%. But if the expectations are correct, who cares if NGDP growth is 0%? The market will make current decisions accordingly.
It is rather silly to believe that individuals are like robots who have individual demand expectations the sum of which is always growing at a constant rate, such that if the Fed doesn’t print whatever quantity of money is necessary to result in a constant growing aggregate spending, that there will be so many incorrect decisions having been made that the subjective fuzzy and vague terms “recession”, and “collapse”, and “crisis” are used to describe the times so as to politically rouse for more money printing.
27. September 2012 at 09:36
I don’t think you can attribute the conclusions of op-eds to the WSJ itself. At least in this case, it is not the Journal that is suggesting that if only money had been tighter…
27. September 2012 at 09:44
There is the tacit assumption in NGDP targeting that no matter what expectations are made, no matter what investments are made, in US territory, unlimited quantities of dollars will be made available to sufficiently coax a volume of spending that profitably covers the aggregate of investment costs.
Even if the entire US capital structure is not physically sustainable vis a vis the rest of the world (we are in a world market don’t forget), which would, in a free market, have eventually resulted in a DECLINE in spending in the US as corrections are made vis a vis the rest of the world, that the Fed will print unlimited quantities of money so as to prolong the unsustainable US capital structure.
I implore market monetarists to consider: If you can understand the economics of single firms being over-extended, or badly constructed, in a country market, then there is NO reason whatsoever that would block an understanding of the economics of country level economies being over-extended, or badly constructed, vis a vis the rest of the world, in a world market!
I often see the point that NGDP growth 2008-2009 was the lowest since the Hoover administration. Well, is it possible that maybe the US economy as a whole was malinvested, and over-extended, the highest it has been since the 1920s before the Hoover administration? That this was due to an acceleration in the rate of aggregate money supply growth during the 1920s?
The reason Austrians focus so much on the boom period is because that is where they believe the problems arise. They don’t consider booms as healthy or desirable, but they do consider them avoidable from the perspective of money influences. Market monetarists, following Friedman’s plucking theory, view booms as healthy times, and the dips as periodic sub-normal sub-healthy times. Austrians flip Friedman on his head and say no, the booms are the problem, and the booms are what we should prevent.
This is difficult to accept because booms just feel so good, and in a society with a declining, if not bankrupt philosophical environment plagued by hermeneuticism, historicism, irrationalism, positivism, the dominant ideology becomes more about “pleasure and pain”. Whatever feels good is right, and whatever feels bad is wrong.
So we have market monetarists saying that the largest bond bubble in the history of mankind, the largest debt financed consumption binge in history, the biggest boom ever, is “normal” and “healthy”, because it felt so good, and it’s up to the Fed to print whatever quantities of money are necessary to get us back to those boom times.
Austrians are thinking the exact opposite. They are gloomily insisting that booms are not healthy, not sustainable, and they result in inevitable heart-ache, where the piper has to eventually be paid. Market monetarists reject that because they want to believe a free lunch is possible, that pure gains ex nihilo can be generated by NGDP targeting, i.e. by “proper” inflation.
NGDP at the country level would otherwise, in a free market, regulate the capital structure of a country vis a vis the rest of the world, through fluctuations of NGDP driven by world supply and demand conditions. A free market money standard would allow for individual, firm, state and country level demand fluctuations. NGDP targeting attacks this regulative function, and prevents investors from allocating capital in a sustainable configuration.
It is a bad idea to have individual, firm, or state level spending targeting, and it is a bad idea to have country, continent, or world level spending targeting.
27. September 2012 at 10:37
This is as popular line — about stagnating median wages and inflation — often presented over a longer time frame.
But it’s rarely made clear (or I rarely know) whether the numbers involved include the value of health care benefit provided as compensation. Is it in fact the case that total employee compensation has been stagnating?
27. September 2012 at 10:54
ssumner wrote:
“If he runs as a moderate (which he is) he doesn’t get he nomination.”
I thought you were talking about Jon Huntsman, the only electable candidate in the Republican field, but one who had no chance at nomination.
27. September 2012 at 10:58
Scott, did you know that Tom Dumont, the guitarist from No Doubt, follows you on Twitter? (They’re a pretty decent band, just got back together) https://twitter.com/MoneyIllusion/followers
27. September 2012 at 11:33
“But it’s rarely made clear (or I rarely know) whether the numbers involved include the value of health care benefit provided as compensation. Is it in fact the case that total employee compensation has been stagnating?”
No, nearly all arguments do two things:
1. Use only wages, not total compensation.
2. Use median wages, not average wages.
Median is better for certain things, but often the graphs compare median wages with average productivity. Average wages have done much better than median wages because wages have become more skewed toward the right. That’s a bad thing if productivity has not also become skewed, but if productivity has also become skewed, it means nothing.
As far as average, real total compensation, this is the best I could find:
http://research.stlouisfed.org/fred2/series/COMPRNFB
This graph gives some credence to the Great Stagnation argument. Outside of the second half of the 90’s and short periods in the mid-70’s and the mid-80’s, our real growth rate has not reached near the levels of the 50’s and 60’s.
I’m still somewhat skeptical of Cowen’s argument that it is mostly an immutable force of nature. I think the main issue is that most of the employment growth from the 80’s to today has been in health care, education, defense and finance. While finance certainly has increased its “productivity,” almost no people in these sectors have done much work in increasing living standards.
27. September 2012 at 11:37
To relate that last comment to this blog post, there is nothing to the argument that somehow ultra-loose Fed policy has stagnated real total compensation. It’s stagnated since 2008 as much as it stagnated in the years before.
Now, real INCOMES are a different story, but real average incomes have gone down due to lower hours, not lower real wages. Policy to increase demand may decrease real wages slightly to clear labor markets while real incomes would increase. It’s not the fault of monetary policy if the equilibrium value of real wages has decreased. That’s a supply-side issue which won’t change with tight or loose monetary policy.
27. September 2012 at 12:13
Early signs of QE effectiveness?
http://www.csmonitor.com/Business/Latest-News-Wires/2012/0927/Unemployment-claims-plunge-to-two-month-low
27. September 2012 at 12:44
Scott
It´s St. Peters fault!
http://thefaintofheart.wordpress.com/2012/09/27/st-peter-doubles-down-on-bernanke/
27. September 2012 at 12:45
Saturos
Unfortunately no. Unemployment is a lagging indicator.
27. September 2012 at 13:09
Unanswered:
1. If NGDPLT has to have make-up to work, WHY is it so great?
2. If it doesn’t need make-up to work, how does the recovery happen?
—–
It’s the debates boys and girls. It’s either a Reagan moment or not a Reagan moment.
Obama’s not good off cuff, if Romney can’t beat him, its his own fault.
27. September 2012 at 13:10
Matt Waters:
This graph gives some credence to the Great Stagnation argument. Outside of the second half of the 90″²s and short periods in the mid-70″²s and the mid-80″²s, our real growth rate has not reached near the levels of the 50″²s and 60″²s.
http://i.imgur.com/TIJLk.png
Hmmm, what happened in the early 1970s that led to this sudden downward shift in real wage growth?
Is this graph the hard money advocate equivalent of this one:
http://i.imgur.com/AQJ3G.png
That market monetarists like to point to?
I got a plan. Every time we see a market monetarist pointing to their chart to justify inflation, people should point to my chart to justify hard money.
27. September 2012 at 13:11
Morgan, I don’t get it, I thought you wanted NGDP targeting. Why are you purposefully trying to expose its flaws?
27. September 2012 at 22:24
Marcus, but a move like this had been expected for some time…
27. September 2012 at 22:50
MF,
The oil embargo happened and there were other supply-side issues during the 70’s. At the time, monetary policy was far too loose to try to overcome structural unemployment. A 5% NGDP target would have meant 3% inflation instead of 10% inflation.
I’ve seen a few hard money commenters say that market monetarists somehow got their way in the 70’s, when that just isn’t the case. The inability to see this simple fact convinces me that most hard money types just do not have intellectual openness to what market monetarists actually say and believe.
As far as the similarity between the two graphs, there’s a funny thing. For real productivity, there was no doubling of unemployment when real productivity left its previous trendline. In general, you would see very little correlation between real productivity and unemployment. But it just so happens that the two times unemployment doubled, the early-80’s and late-00’s, nominal GDP left its trendline.
NGDP won’t fix things like, say, an oil embargo, but it will fix cyclical unemployment and would have kept inflation much lower in the 70’s.
27. September 2012 at 23:29
[…] – Killing the middle classes with low inflation. […]
27. September 2012 at 23:38
Important new post by Garett Jones:
http://econlog.econlib.org/archives/2012/09/how_much_do_99.html
28. September 2012 at 05:23
pct, I blame the WSJ for printing it.
Matt, Yes, the distinction between real wages and real incomes is crucial.
Saturos, Does No Doubt still have that blonde singer?
28. September 2012 at 09:37
MF, Scott has answer, he just won’t give it.
28. September 2012 at 21:01
Scott, yes, Gwen Stefani got the group back together! (I had a crush on her ten years ago.)
29. September 2012 at 07:20
I liked her first big video, but stopped watching MTV when then went to “reality” programs.
29. September 2012 at 07:33
Just a Girl, with No Doubt (good pop song)? or that Alice in Wonderland video?
Isn’t all of American television basically reality shows these days? Even in Australia, we have like three remakes of “Jersey Shore” airing right now, besides other franchises like Big Brother, MasterChef, Idol, So you think you can dance, Beauty and the Geek, etc. etc.