Yellen! Where Is My Inflation!

Ok, that may be a little obscure. At Teutoburgwald Varus, a Roman General of limited skill and immense gullibility, was wiped out in a surprise attack by Germans and lost 3 whole Legions as in- no survivors. For the rest of his reign Emperor Octavius was observed at random shouting to nobody in particular, “Varus! Where Are My Legions!”

So now you get the joke.

The metaphor is that as I and many Economists not subscribing to Neo Liberal fantasies have been saying for quite a while, without Inflation there is no proof whatever that your Economy is at or near its Productive Capacity. The logic is straightforward and irrefutable- if Demand exceeds Supply, Prices rise. If Prices are not rising Demand has not exceeded Supply and your Economy is in a state of Overcapacity or, looked at another way, Underutilization- QED (appropriately enough, Latin).

Now you can have other goals than Maximum Efficiency (and some of them are quite good) but it’s generally uncontroversial as are the Laws of Supply and Demand. The problem for Neo Liberal Economists is that without Inflation there’s really no reason to artificially reduce Demand. Of course another name for “Artificial Demand Reduction” is Austerity.

My model is very simple and it’s true that Prices can rise (for a limited time) due to monopolistic practices and other nefarious forms of economic chicanery and skullduggery that manipulate the Market from its natural perfect efficiency (hey, I know that Markets are hardly efficient for certain trades and far from “natural” require constant regulation, but Neo Liberals think so). There can also be localized scarcity of critical productive resources.

One of those resources is Labor. The Federal Reserve points at low unemployment, postulates that Prices are about to rise and therefore action to reduce Inflation in the form of increasing Interest Rates which encourages Capital Accumulation (it used to mean Savings and still says so in the textbooks, in fact it means Financial Instruments like T-Bills, Acquisitions, and Stock Buy-Backs) is required to artificially reduce Demand.

You know, Austerity.

More Lefty Economists will suggest that the metrics used to measure Demand for Labor (unemployment rates) are flawed and that there is a reserve of people who are working at less than Maximum Efficiency (underemployment) or who are not participating in the Labor Market (discouraged workers) and statistics support that contention. The ratio of conventionally employed people to those who are casual Laborers (part time or gig) or engage in other activities is trending downward and hasn’t changed a lick except to get worse. Until wages (Price for Labor) actually show some Inflation they would argue (and correctly so) that the Economy is not operating at Maximum Efficiency for the benefit of the average Worker. That would be you.

Binyamin Appelbaum of The New York Times as usual misses the entire point but provides some useful statistics.

The Federal Reserve thinks modest inflation has important economic benefits, and it has aimed since 2012 to keep prices rising at an annual pace of 2 percent. The problem is that the Fed is on track to fail for the sixth straight year. Inflation has been stubbornly sluggish.

A little inflation can brighten the economic mood, causing wages and corporate profits to rise more quickly. Economists like to point out that this is an illusion. If everyone is making more money, then no one can buy more stuff. Prices just go up. But the evidence suggests people enjoy the illusion and, importantly, they respond to the illusion by behaving in ways that increase actual economic growth, for example by working harder.
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A little inflation helps the economy rebound from recessions. It gives the Fed more room to reduce borrowing costs, and it also eases necessary economic adjustments. Employers, for example, can cut costs by holding wage increases below the inflation rate.
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Fed officials began the year expressing confidence that inflation was finally rebounding as the economy continued to expand. But the Fed’s preferred measure of inflation declined in the last three monthly reports, from an annualized pace of 2.1 percent in February to 1.4 percent in May. The inflation gauge is published by the Commerce Department.

Job growth remains strong, but recent reports on cautious consumer spending and business investment suggest that overall growth remains tepid. A turn toward stronger growth again has failed to materialize. The Federal Reserve Bank of Atlanta, which predicted the economy would expand at an annualized pace of 4 percent in the second quarter, now estimates second-quarter growth was 2.5 percent.

The persistent sluggishness has convinced some Fed officials to revise their thinking.

“Low inflation has been the major surprise of the era,” James Bullard, president of the Federal Reserve Bank of St. Louis, declared last April. He said he did not support any increases in the Fed’s benchmark rate until 2018, to give inflation time to recover.
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One theory, popular among conservative economists, is that the Fed causes inflation by increasing the supply of money faster than the pace of economic growth. Kevin A. Hassett, President Trump’s nominee to lead his Council of Economic Advisers, was among the signatories of a 2010 open letter warning that the Fed’s plans to pump money into the banking system “risk currency debasement and inflation.” Seven years later, there is no evidence they were correct, although some of them continue to issue similar warnings.

Another theory, more popular among liberal economists like Ms. Yellen, holds that prices rise as unemployment falls. Companies compete for workers by raising wages, workers want to spend the money and businesses respond to the demand for their products by raising prices.

Ms. Yellen has attributed the recent weakness to declines in the prices of particular goods, like cellphone-service plans and prescription drugs, that are not likely to continue. She and other officials also have noted that the weakness of the global economy allowed the United States to import foreign goods at low prices.

This theory, too, is increasingly difficult to reconcile with recent evidence.

The unemployment rate, at 4.4 percent in June, was below the level that Fed officials regard as inflationary for the fourth straight month. Meanwhile, inflation weakened.
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“The public makes inferences regarding the inflation target based on our past performance, not just on our words,” Charles Evans, the president of the Federal Reserve Bank of Chicago, said in a June speech in New York. “When they see inflation below 2 percent for eight-plus years, they might logically think 2 percent is a ceiling.”
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Adam Posen, the president of the Peterson Institute for International Economics, says the bottom line is that the last few years have raised doubts about all of the standard explanations. Policy makers are sailing without the guidance of a convincing model.

“It’s reached the point where the only decision is how freaked out you want to be by how much this contradicts previous knowledge or previous theory,” Mr. Posen said.

The most Radical Economists might say that until it becomes more profitable to invest in Labor and Productive Capacity (that is, actually make things and sell them) than Financial Instruments our economic dysfunction will not change. They advocate taxes to directly reduce the profitability of Financial Instruments and increased direct Government purchase of things and stuff (Fiscal Stimulus) to increase Demand and reduce Overcapacity.

You know, paying people to bury money jars and others to dig them up, like Keynes said.

Note that the 2 parts of this program are separate and while either one will work they work best together. Also implied is the notion that moderate Inflation is desirable, acting as a hidden tax on unproductive (in terms of producing things and stuff) wealth.