Zero holds a bizarre place in policy debates. In the United States we have many policy types who seem to worship a balanced budget. At the start of the last decade there was a modest clamoring on the right for a monetary policy targeting zero inflation. In the same vein we continue to see assertions that deflation would pose some inordinate problem, as though something awful happens when the change in the aggregate price level turns negative.
The culprit today is the NYT, which has an article on the European Central Bank’s decision to leave its short-term interest rate unchanged. At one point it told readers that deflation is:
“a broad decline in prices that, by discouraging consumer spending and business investment, can be more economically destructive than runaway inflation.”
Actually, a moderate rate of deflation (e.g. less in absolute value than -1.0 percent) would have only a very modest impact in depressing demand. The inflation rate is an aggregate of hundreds of thousands of price changes. When the rate is near zero, many of these price changes are in fact negative. (Some are negative because of imputations of quality improvements by government statistical agencies, as has often occurred with new cars and computers. Actual prices in the market may be increasing.)
The shift from a low positive inflation rate to a low rate of deflation simply means that the price change is negative for a larger share of these items. It is not remotely plausible that this shift can have disastrous economic consequences.
There is a story where falling prices lead to more rapidly falling prices, which would have a devastating impact on the economy, but this acceleration downward is no more likely (and probably less likely) than a sudden acceleration upward. As a practical matter, the economy would benefit from a higher rate of inflation, since that would reduce real interest rates and thereby spur growth. In this sense, a 0.5 percent rate of deflation is worse than a 0.5 percent rate of inflation in the same way that a 0.5 percent rate of inflation is worse than a 1.5 percent rate of inflation. There is no magic to crossing the zero line.
Zero holds a bizarre place in policy debates. In the United States we have many policy types who seem to worship a balanced budget. At the start of the last decade there was a modest clamoring on the right for a monetary policy targeting zero inflation. In the same vein we continue to see assertions that deflation would pose some inordinate problem, as though something awful happens when the change in the aggregate price level turns negative.
The culprit today is the NYT, which has an article on the European Central Bank’s decision to leave its short-term interest rate unchanged. At one point it told readers that deflation is:
“a broad decline in prices that, by discouraging consumer spending and business investment, can be more economically destructive than runaway inflation.”
Actually, a moderate rate of deflation (e.g. less in absolute value than -1.0 percent) would have only a very modest impact in depressing demand. The inflation rate is an aggregate of hundreds of thousands of price changes. When the rate is near zero, many of these price changes are in fact negative. (Some are negative because of imputations of quality improvements by government statistical agencies, as has often occurred with new cars and computers. Actual prices in the market may be increasing.)
The shift from a low positive inflation rate to a low rate of deflation simply means that the price change is negative for a larger share of these items. It is not remotely plausible that this shift can have disastrous economic consequences.
There is a story where falling prices lead to more rapidly falling prices, which would have a devastating impact on the economy, but this acceleration downward is no more likely (and probably less likely) than a sudden acceleration upward. As a practical matter, the economy would benefit from a higher rate of inflation, since that would reduce real interest rates and thereby spur growth. In this sense, a 0.5 percent rate of deflation is worse than a 0.5 percent rate of inflation in the same way that a 0.5 percent rate of inflation is worse than a 1.5 percent rate of inflation. There is no magic to crossing the zero line.
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The Post has a nice piece pointing out the disparities in life expectancy by income. As a result of these differences, proposals to raise the age of Social Security eligibility would disproportionately hit lower income workers.
At one point the piece tells readers:
“Advocates of raising the retirement age say only a relative handful of older workers would be harmed and that the vulnerable could be protected by enacting hardship exemptions.”
It would have been worth noting that this practice of creating “hardship exemptions” was one of the policies that won Greece much ridicule in recent years. Its social security system allowed workers in many occupations to retire at younger ages. For example hairdressers were allowed to start collecting benefits at age 50, ostensibly because they worked with hazardous chemicals.
Most countries have been moving away from policies that vary retirement ages by occupation in favor of uniform retirement age. It is striking that we have people in policy positions in the United States that are advocating the old Greek model.
The Post has a nice piece pointing out the disparities in life expectancy by income. As a result of these differences, proposals to raise the age of Social Security eligibility would disproportionately hit lower income workers.
At one point the piece tells readers:
“Advocates of raising the retirement age say only a relative handful of older workers would be harmed and that the vulnerable could be protected by enacting hardship exemptions.”
It would have been worth noting that this practice of creating “hardship exemptions” was one of the policies that won Greece much ridicule in recent years. Its social security system allowed workers in many occupations to retire at younger ages. For example hairdressers were allowed to start collecting benefits at age 50, ostensibly because they worked with hazardous chemicals.
Most countries have been moving away from policies that vary retirement ages by occupation in favor of uniform retirement age. It is striking that we have people in policy positions in the United States that are advocating the old Greek model.
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I hate to spoil the party over the big February jobs numbers, but I guess I’ve always been more of a data geek than a party guy. Yes, 236,000 is better than expected and not a bad number in the scheme of things. But folks with a little bit of memory would be slower to bring out the champagne bottles. We created 271,000 jobs last February and 196,000 jobs in February of 2011. That makes the average for the prior two years 234,000, almost exactly the same as yesterday’s job number.
Last year the story, as I said at the time, was that unusually good winter weather gave a boost to the February numbers. We didn’t see snowstorms shutting down major cities across the Northeast and Midwest as we would in a typical winter. That story probably applies to some extent this year as well, even if Boston did take a hit over a mid-February weekend.
The 48,000 new jobs in construction would certainly be consistent with this story. You can believe that construction employment is growing at a 10 percent annual rate or that we saw a weather driven fluke in February. I vote for the latter, but we will have more information in another month.
Btw, if we take the 191,000 average rate of job growth over the last 3 months, we would not make up our 9 million jobs deficit until well into 2020. Things certainly could be worse, but that is not a terribly bright picture.
I hate to spoil the party over the big February jobs numbers, but I guess I’ve always been more of a data geek than a party guy. Yes, 236,000 is better than expected and not a bad number in the scheme of things. But folks with a little bit of memory would be slower to bring out the champagne bottles. We created 271,000 jobs last February and 196,000 jobs in February of 2011. That makes the average for the prior two years 234,000, almost exactly the same as yesterday’s job number.
Last year the story, as I said at the time, was that unusually good winter weather gave a boost to the February numbers. We didn’t see snowstorms shutting down major cities across the Northeast and Midwest as we would in a typical winter. That story probably applies to some extent this year as well, even if Boston did take a hit over a mid-February weekend.
The 48,000 new jobs in construction would certainly be consistent with this story. You can believe that construction employment is growing at a 10 percent annual rate or that we saw a weather driven fluke in February. I vote for the latter, but we will have more information in another month.
Btw, if we take the 191,000 average rate of job growth over the last 3 months, we would not make up our 9 million jobs deficit until well into 2020. Things certainly could be worse, but that is not a terribly bright picture.
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The Washington Post just loves the trade agreements that recent administrations have been pursuing. It is willing to abandon all journalistic standards to help promote them. Post fans may remember back in 2007 when a lead editorial claimed that Mexico’s GDP had quadrupled over the prior two decades in an editorial touting the benefits of NAFTA. (Mexico’s actual growth over this period was 83 percent.)
Anyhow, it’s back in the trade agreement promotion business with a front page article that touts the trade agreements being pursued by the Obama administration as a way to create jobs. The hard sell begins in the very first sentence where it tells readers that these are “free-trade” agreements.
This is of course not true. Formal trade barriers are already very low between the United States and most of the countries with whom we are negotiating trade pacts. These deals are in fact about imposing a set of standardized commercial rules, some of which, like increased patent and copyright protection, are the direct opposite of free trade. It undoubtedly sounds better to call a deal a “free-trade” pact, since most Serious People then think they have to support it, but it does not reflect reality.
It is also absurd to describe these deals as part of a job creation strategy in a period where the economy is operating way below full employment. Incredibly, the article holds up the prospect of opening up Vietnam’s economy to trade — in the same way that China’s economy was opened up in the 90s — as a goal of current negotiations. Needless to say, trade with China has not been a net creator of jobs in recent years.
However the whole idea of trade agreements as a way to create jobs is ridiculous on its face. There is an argument for reducing trade barriers to increase economic efficiency (increased patent and copyright protection go in the opposite direction), however this will have minimal impact on job creation.
This would be comparable to selling electricity deregulation as a job creation strategy. If it worked, electricity deregulation would lead to lower electricity prices which would provide clear economic benefits, but the impact on employment would be trivial.
The same is true with trade agreements as every intro textbook shows. It is understandable that the Obama administration would want to mislead the public to better promote its trade agenda. But real newspapers are not supposed to assist in this effort.
The Washington Post just loves the trade agreements that recent administrations have been pursuing. It is willing to abandon all journalistic standards to help promote them. Post fans may remember back in 2007 when a lead editorial claimed that Mexico’s GDP had quadrupled over the prior two decades in an editorial touting the benefits of NAFTA. (Mexico’s actual growth over this period was 83 percent.)
Anyhow, it’s back in the trade agreement promotion business with a front page article that touts the trade agreements being pursued by the Obama administration as a way to create jobs. The hard sell begins in the very first sentence where it tells readers that these are “free-trade” agreements.
This is of course not true. Formal trade barriers are already very low between the United States and most of the countries with whom we are negotiating trade pacts. These deals are in fact about imposing a set of standardized commercial rules, some of which, like increased patent and copyright protection, are the direct opposite of free trade. It undoubtedly sounds better to call a deal a “free-trade” pact, since most Serious People then think they have to support it, but it does not reflect reality.
It is also absurd to describe these deals as part of a job creation strategy in a period where the economy is operating way below full employment. Incredibly, the article holds up the prospect of opening up Vietnam’s economy to trade — in the same way that China’s economy was opened up in the 90s — as a goal of current negotiations. Needless to say, trade with China has not been a net creator of jobs in recent years.
However the whole idea of trade agreements as a way to create jobs is ridiculous on its face. There is an argument for reducing trade barriers to increase economic efficiency (increased patent and copyright protection go in the opposite direction), however this will have minimal impact on job creation.
This would be comparable to selling electricity deregulation as a job creation strategy. If it worked, electricity deregulation would lead to lower electricity prices which would provide clear economic benefits, but the impact on employment would be trivial.
The same is true with trade agreements as every intro textbook shows. It is understandable that the Obama administration would want to mislead the public to better promote its trade agenda. But real newspapers are not supposed to assist in this effort.
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Matt Yglesias is on the money when he points out that when progressives want workers to get more money, they must implicitly want someone else to get less. Now there is a real real big exception to this point, that being the current economic slump. In a context where the economy is producing at a rate that is around 6 percent (@ $1 trillion) below its potential, then we can literally talk about a situation in which we expand the pie and there is more for everyone.
This is why the concern about waste in the stimulus was so absurd. If the issue was whether we had spending that was partially wasteful or no spending, then the answer is spending that is partially wasteful. Otherwise the resources would just sit idle (meaning more workers are unemployed) and we get to celebrate that we didn’t put people to work on partially wasteful projects. (Of course less wasteful is always better than more wasteful.)
But if we envision one day being back in a world where the economy is operating near its potential, the good guys getting more means the bad guys getting less. The right eats, breathes, and sleeps with this logic. They understand that when they push down autoworkers’ or school teachers’ wages, there is more for them. They understand that cutting Medicare or Social Security means more for them.
If progressives want to secure more income for ordinary working types and the poor then it will have to come at the expense of someone else. I have my list (CEOs and their friends, doctors and lawyers, Wall Street financial types, bringing corporate profits back to earth would also be a good idea). Others may have a different list. But if there is no one who is going to lose out in progressive policy post-full employment, then there is no one who is going to win either.
Of course at the speed we are getting to full employment many of us won’t have to worry about this problem in our working lifetime.
Addendum:
After reading the comments, let me make the point a bit more clearly. The right has found ways to use the market to kick our asses. Progressives should find ways to use the market to kick their asses. These ways are all over the place: opening up trade in health care, making it easier for foreign doctors and lawyers to practice in the country, make the financial sector pay the same sort of taxes as every other sector, ending too big to fail in the banking industry, etc. These are mechanisms that require the government to get out of the way (in the case of financial sector taxes — not privileging one sector over others). If Occupy Wall Street was saying these things they were not very effective in getting their message out.
Matt Yglesias is on the money when he points out that when progressives want workers to get more money, they must implicitly want someone else to get less. Now there is a real real big exception to this point, that being the current economic slump. In a context where the economy is producing at a rate that is around 6 percent (@ $1 trillion) below its potential, then we can literally talk about a situation in which we expand the pie and there is more for everyone.
This is why the concern about waste in the stimulus was so absurd. If the issue was whether we had spending that was partially wasteful or no spending, then the answer is spending that is partially wasteful. Otherwise the resources would just sit idle (meaning more workers are unemployed) and we get to celebrate that we didn’t put people to work on partially wasteful projects. (Of course less wasteful is always better than more wasteful.)
But if we envision one day being back in a world where the economy is operating near its potential, the good guys getting more means the bad guys getting less. The right eats, breathes, and sleeps with this logic. They understand that when they push down autoworkers’ or school teachers’ wages, there is more for them. They understand that cutting Medicare or Social Security means more for them.
If progressives want to secure more income for ordinary working types and the poor then it will have to come at the expense of someone else. I have my list (CEOs and their friends, doctors and lawyers, Wall Street financial types, bringing corporate profits back to earth would also be a good idea). Others may have a different list. But if there is no one who is going to lose out in progressive policy post-full employment, then there is no one who is going to win either.
Of course at the speed we are getting to full employment many of us won’t have to worry about this problem in our working lifetime.
Addendum:
After reading the comments, let me make the point a bit more clearly. The right has found ways to use the market to kick our asses. Progressives should find ways to use the market to kick their asses. These ways are all over the place: opening up trade in health care, making it easier for foreign doctors and lawyers to practice in the country, make the financial sector pay the same sort of taxes as every other sector, ending too big to fail in the banking industry, etc. These are mechanisms that require the government to get out of the way (in the case of financial sector taxes — not privileging one sector over others). If Occupy Wall Street was saying these things they were not very effective in getting their message out.
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The NYT has a good piece on new research that finds employers are being far more selective in their hiring. The research finds that employers are willing to interview more people and take longer in the process now than in the past.
This research is very useful because it helps to explain a seeming anomaly in the data. There had been a clear rightward shift in the Beveridge Curve in recent years, showing that there were more job vacancies at the same level of unemployment. This would often be taken as a problem of structural unemployment. However, we don’t see any of the other signs of structural unemployment, most importantly, major sectors of the economy with rapidly rising wages.
This research provides an alternative explanation. Because they are many qualified job applicants, firms can have the luxury of being selective. It is also likely that waiting will pay off, which is not likely the case in a period with low unemployment, where qualified applicants are few and far between.
This one also gives me some satisfaction since I had previously speculated that this could be the case.
The NYT has a good piece on new research that finds employers are being far more selective in their hiring. The research finds that employers are willing to interview more people and take longer in the process now than in the past.
This research is very useful because it helps to explain a seeming anomaly in the data. There had been a clear rightward shift in the Beveridge Curve in recent years, showing that there were more job vacancies at the same level of unemployment. This would often be taken as a problem of structural unemployment. However, we don’t see any of the other signs of structural unemployment, most importantly, major sectors of the economy with rapidly rising wages.
This research provides an alternative explanation. Because they are many qualified job applicants, firms can have the luxury of being selective. It is also likely that waiting will pay off, which is not likely the case in a period with low unemployment, where qualified applicants are few and far between.
This one also gives me some satisfaction since I had previously speculated that this could be the case.
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This one should be mandatory reading for reporters as well as anyone else who comments on the topic.
This one should be mandatory reading for reporters as well as anyone else who comments on the topic.
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Glenn Kessler used his Factcheck column to take Senator Barbara Boxer to task for giving the Democrats credit for the budget surpluses at the end of the Clinton administration. Kessler rightly points out that the spending cuts and tax increases put in place by the Clinton administration would not have moved the budget to a surplus had it not been for the boom that was driven by the stock bubble. I have made the same point in other contexts.
There is one important part of the picture that Kessler leaves out. In the 1995 projections that he cites, it was assumed that the unemployment rate could not fall below 6.0 percent. The idea was that in order to prevent inflation, the Fed would slam on the breaks by raising interest rates. This would slow growth and prevent the unemployment rate from getting or staying below this target unemployment rate.
The budget projections might have been right if someone other than Alan Greenspan had been at the Fed at the time. Greenspan, who is not an orthodox economist, decided to let the unemployment rate fall below the 6.0 percent target because he saw no evidence of inflation. He had to argue with the Clinton appointees to the Fed who wanted to raise interest rates to head off inflation.
It was really due to Greenspan’s policies that the unemployment rate was allowed to fall to 5.0 percent and eventually to 4.0 percent as a year-round average in 2000. This allowed millions of people to work who would not have otherwise had a job. The tight labor market also allowed for large gains in real wages for workers at the middle and bottom of the wage distribution for the first time in a quarter century. Oh, and for the DC policy wonks, it also gave us a budget surplus.
Anyhow, if we want to give credit to someone for the budget surpluses at the end of the Clinton administration it really should be Alan Greenspan (who I trash every other day of the week). It was only because he was willing to ignore the dogma in the economics profession that we were allowed to see what the world looks like when we have something resembling full employment.
Glenn Kessler used his Factcheck column to take Senator Barbara Boxer to task for giving the Democrats credit for the budget surpluses at the end of the Clinton administration. Kessler rightly points out that the spending cuts and tax increases put in place by the Clinton administration would not have moved the budget to a surplus had it not been for the boom that was driven by the stock bubble. I have made the same point in other contexts.
There is one important part of the picture that Kessler leaves out. In the 1995 projections that he cites, it was assumed that the unemployment rate could not fall below 6.0 percent. The idea was that in order to prevent inflation, the Fed would slam on the breaks by raising interest rates. This would slow growth and prevent the unemployment rate from getting or staying below this target unemployment rate.
The budget projections might have been right if someone other than Alan Greenspan had been at the Fed at the time. Greenspan, who is not an orthodox economist, decided to let the unemployment rate fall below the 6.0 percent target because he saw no evidence of inflation. He had to argue with the Clinton appointees to the Fed who wanted to raise interest rates to head off inflation.
It was really due to Greenspan’s policies that the unemployment rate was allowed to fall to 5.0 percent and eventually to 4.0 percent as a year-round average in 2000. This allowed millions of people to work who would not have otherwise had a job. The tight labor market also allowed for large gains in real wages for workers at the middle and bottom of the wage distribution for the first time in a quarter century. Oh, and for the DC policy wonks, it also gave us a budget surplus.
Anyhow, if we want to give credit to someone for the budget surpluses at the end of the Clinton administration it really should be Alan Greenspan (who I trash every other day of the week). It was only because he was willing to ignore the dogma in the economics profession that we were allowed to see what the world looks like when we have something resembling full employment.
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