First, a long piece on collapsing commodity markets. I'll just leave that for you to peruse at your leisure. No, this missive is all about Neil Irwin and me. Yum.
More than once, I've referenced pieces by the esteemed Mr. Irwin because they provide reportage proving (or, at the least, demonstrating) certain themes of these endeavors. Most often, as this one, they deal with quant (data) issues in macro-economics. Always a thorny problem. Most macro data is generated as sample surveys of business and labor.
Today's piece deals with a subject near and dear to my heart: Dee Feat is in Dee Flation. Not been a missive under that title in some time. Not that there's been a dearth of data, of course, just that the tune remains the same: we're headed down the rabbit (or, rat, as you prefer) hole of deflation. The cash hoarders look likely to get their return on idle moolah. Sigh.
Irwin takes a new path. One I haven't discussed since, I'll guess, grad school. Perhaps undergraduate. The dreaded Phillips curve. He explains, a bit.
How much faith should be placed in a line on a graph first drawn by a New Zealand economist nearly six decades ago, based on data on wages and employment in Britain dating to the 1860s?
The answer, of course, is not much. Phillips, as many macro-economists (esp. of the Right Wing, labour hating, branch), assigns only that sole cause to inflation. But, as the first piece so clearly shows, flation isn't just about wages. Far from it. Just ask your local greasy spoon proprietor why s/he's exploded the price of your 2 over easy.
As the Fed's chairwoman, Janet L. Yellen, put it in a 2007 speech, the Phillips curve "is a core component of every realistic macroeconomic model."
Except it doesn't work. Or at least, it hasn't worked very well in the last few decades in the United States. And it has proved particularly problematic to try to use that historical relationship to predict where inflation is going.
What he neglects, shamefully, is tell the reader about other drivers of flation. That's my task. Again.
To refresh, there are three ways flation (either direction) happens:
- wage push
- cost push
- demand pull
The first happens when workers get paid more than their marginal product (wiki), at least according to even Right Wingnuts who worship at the feet of classical economics. Otherwise, it's just Social Darwinism with capital compressing wages to subsistence, i.e. slavery without the chains. Which worked fine, in a macro sense anyway, during pre-industrial and even early industrial regimes. These days, with such heavy capital requirements, the The Tyranny of Average Cost™ makes it a fool's enterprise. Irwin goes on a long discussion of why Phillips and actual inflation are disconnected, beyond the simple arithmetic.
The second happens when there's not enough widgets to satisfy needs. Petro goes through cycles, which we're always experiencing. And, for the nonce, your 2 over easy. Why the likes of Irwin can't point out this obvious fact is puzzling. Over the decades, and centuries, I'd wager that material shortage is the number 2 cause of inflation.
Finally, that third is what the Right Wingnuts prefer to call "debasing the currency", and why they hate QE and fiscal policy and every other tool used to resurrect an economy. Argentina in the 1980s. But even Left Wing economists know that dropping moolah from airplanes will, if long enough and large enough, cause inflation. This is particularly true when an economy:
- is largely non-self sufficient
- lacks surplus capacity in desired widgets
In other words, the USofA today. Financialized economies, Bermuda is my favorite whipping child, are more susceptible to demand pull inflation, since the moolah dropped from airplanes won't be spent on domestic production. Spent on domestic production, the point of dropping moolah from airplanes, we find more demand for home grown widgets; thus more employment, more investment, more profit and so on. The point of dropping moolah is simply to get folks buying stuff. However, if the stuff isn't created domestically, the follow-on benefits don't occur. And so it was in Argentina.
Simply relying on naive` Phillips is foolish.
If you simply look at the unemployment rate in the United States versus the Consumer Price Index, excluding volatile food and energy prices for every year since 1958, there is nearly no statistical relationship at all, just a jumble of dots. (A best-fit line actually points the wrong direction, correlating higher unemployment with higher inflation, albeit very weakly.)
To the rescue comes a Freshwater Economist, Robert J. Gordon of Northwestern. Yes, another nerd who sees the future as distinct from the past. The link is an interesting read, for nerds anyway, but on to the day's topic:
Robert J. Gordon, an economist at Northwestern University, has his own version that he argues explains inflation levels throughout recent decades. But it is hardly simple. Its prediction for inflation relies not just on joblessness but also on measures of productivity growth, shifts in food and energy prices and overall inflation over the six preceding years.
or by factors that policy makers have little control over (like what happens to oil prices)
In other words, the sum total effect of those two other, oft ignored, forces. It ain't just the greedy 47%.