Menzie Chinn Explains it All for You: Demand Inflation Now!
Whether it’s Market Monetarist NGDP targeting (a.k.a. Damn The Inflation Rate; We Need Growth!) or Menzie’s recommendation of Conditional Inflation Targeting with a notably higher target, everything tells us that somewhat higher inflation is the current path to greater and more widespread long-term prosperity.
Raising the expected inflation rate will lower real interest rates and spur investment and consumption. It will also make it difficult for the de facto dollar peggers, such as China, to sustain their policies. The resulting real depreciation of the dollar would stimulate production of U.S. exports and domestic goods that compete with imports, boosting American production. The United States would get faster growth, an accelerated process of deleveraging, a quicker recovery, and a firmer foundation upon which to address long-term fiscal problems.
Like the market monetarist approach, Chinn’s proposal is basically for an automatic stabilizer based on unemployment levels, that anchors expectations (emphasis mine, both above and below):
a policy that would keep the Fed funds rate near zero and supplemented with other quantitative measures as long as unemployment remained above 7 percent or inflation stayed below 3 percent. Making the unemployment target explicit would also serve to constrain inflationary expectations: As the unemployment rate fell, the inflation target would fall with it.
As I said a while back:
Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen. Could be fiscal or monetary, largely a question of where you inject the money.
You say something here that i really like:
Automatic stabilizers are the key to effective 1) policy and 2) expectation-setting. Because 1) They happen, and 2) People know they’re gonna happen.
This is a prescription to take targeted action, with clear measurables that will identify success or failure. Contrast managing expectations, per se, which is all the FED can do, according to some. I say expectations unmet become disappointment which leads to loss of credibility. then what do you do?
Contrast also NGDP targeting, which its proponents say will be effective through an NGDP futures market. Setting aside the problem that 5% NGDP growth with 5% inflation = 0% real GDP growth, how could a futures market in an abstraction ever be a lever on aggregate economic activity, unless you really believe that expectations feed back into reality in a forceful way? How is this different from “wishing can make it so.”
JzB who occasionally really does believe in fairies – at least when under the influence of granddaughters.
The problem with inflation targeting once you’ve already hit the zero boundary is that you’re then pushing on a string when you’re talking about monetary policy, i.e., any money you pump into the system just backs up in the system and ends right back in the Fed’s (virtual) vaults rather than circulating out there in the economy where it can, like, actually create economic activity. Milton Friedman once proposed helicopter drops in this situation, and Ben Bernanke actually mentioned Milty’s proposal favorably. So why doesn’t it happen? Well, because any helicopter drops *would* create inflation — in China, where virtually everything we buy is made. Which does nothing to solve the problems mentioned above.
There is also the issue of, “how do we define unemployment?”. Right now we have a situation of active DIS-employment, where a large number of people have been knocked out of the workforce entirely due to lack of jobs. Should they be simply “disappeared” like some hideous denizen of one of Stalin’s gulags, such that they will not mess up our beautiful employment targeting? But if we un-disappear them — i.e., view those kicked out of the workforce (as measured by the decline in labor force participation over the past four years) as actually unemployed — how do we insure that the definition of “unemployed” doesn’t just keep spiralling upwards over the years, especially as the Baby Boomers age out of the workforce and *really* are “not in workforce”?
And finally, there is the elephant in the room: Peak Oil. There is good reason to believe that any inflation that occurs will occur solely in the price of oil, and that the money printed will simply disappear under (virtual) mattresses at the oil companies due to lack of anything that they’re interested in spending the money on. I.e., once again we’re causing inflation in some location that won’t employ Americans because it won’t put any more money in the hands of American consumers to consume, it’ll just put more money into the hands of non-Americans or into the hands of people who will simply shove it under a (virtual) mattress where it effectively disappears from the perspective of contribution to economic activity.
In short: I believe this would have worked back in the day of Milton Friedman, but the facts on the ground in today’s internationalized oil-limited world economy don’t make me optimistic that this approach could work today. Maybe if we had non-zero interest rates right now, but since we’re at the zero bounds…
I am not sure I believe in economics by remote sensing. I think both Bad Tux and Jazz are pointing at some of the difficulties inherent.
I don’t think “growth” per se is a good indicator of a healthy economy. Too much growth takes the form of excess — degenerate — consumption, while “employment” takes the form of dehumanizing toil… whether white collar or gray.
So I am simple minded… I don’t actually know if all the high falutin economics gets us anything worth having. The evidence I see is that it does not. So maybe just a little tuck in the back of your minds how we go about creating an economics that gives people lives worth living. I am inclined to think in terms of actually creating jobs or fixing real needs, whether by direct government action or by just enough regulatory pressure to “encourage” private entrepreneurs to think in terms of clean water, say, rather than “credit default swaps”…
Economic controls (control theory is something developed when a guy with a stick needed to know what happens when he moved it to control his cloth covered wings) are needed because there are no markets.
Knowledge being the intersection of truth and belief, the problem is truth.
No truth to intersect with belief and no markets.
Knowledge of “costs” accrued……………..
Based on your earlier posts. Would not a quick way to start inflation would be to eliminate all personel income taxes? Or all taxes for that matter? That would not only start inflation but place money in everyone’s pockets immediately?
Even if you kept the SS payroll tax and had some nominal tax on incomes over say $5M you would still generate lots of inflation.
So why would that solve the problem of low inflation? Or just have the fed cut a check for $50K to everyone over the age of 18?
I know you are not trying to go there, but your arguments keep supporting the tax-cutters….and run up the deficit.
(BTW, in any case, housing prices still need to come down back to historical trends lines – 2.5 to 3 times mediam annual income in an area should equal median home price). We still have some bubble left in some markets)
Islam will change
Um, Buffy old duffer, Steve was talking about ramping up printing presses, not lowering taxes. The Fed has numerous mechanisms to print money, of which replacing taxes with printed money via the Fed financing large Treasury deficits (the one you inadvertantly proposed though I’m sure you intended nothing of the sort) is just one. The core issue in the *current* economy (as vs. the ones models predict) is the one that I mention above — any printed money simply disappears from the economy either via China or via the oil companies or via people putting the money under (virtual) mattresses under the expectation that it will be worth more to them at some later point in time, leaving us right back where we started. I suppose the notion is that people will eventually stuff so much money under their mattress that they’ll start spending it again, but that’s a notion that relies on wishful thinking, and as a manufacturing type I’m always suspicious of wishful thinking.
I do agree that housing costs need to come down relative to wages. The easiest way to do this would be wage inflation, since this would result in both bank and mortgage payer being solvent at the end of the day, as vs. price deflation when the mortgage payer is already stuck with the house, which hurts both the mortgage payer who can no longer sell a house that is too expensive for him to afford, and the bank who ends up having to take a massive mark-down. In short, your housing market statement actually *is* an argument for inflation, though I’m sure you didn’t intend it that way. But again, the question is, *how do we get inflation via monetary policy once we hit the zero bounds?* And my answer, given current conditions, is that *you can’t* — the only way to get inflation under *current* conditions is via *fiscal* policy that directly employs slack resources and thereby forces capital out from under mattresses in order to meet the new demand, and I’m not seeing that anybody in our current political system is willing to understand Keynes 101 or able to do anything about that understanding if they do understand Keynes 101. Keynesian models have failed under a number of conditions, but one condition in which they’ve always worked quite well is in explaining why, at the zero boundary, fiscal policy is necessary in order to create new “facts on the ground” that can cause monetary policy to become effective again — and furthermore, in explaining the *scale* of the fiscal intervention needed, which is far larger than any fiscal intervention thus far tried during the Great Recession (indeed, we basically had no fiscal intervention — expansion of federal spending was offset by reduction of state and local spending, for a net intervention of ZERO).
“Steve was talking about ramping up printing presses, not lowering taxes.”
What’s the difference? The idea was to create more debt and thus cause inflation. He even mentioned that this would work. The idea is to cause inflation by greatly expanding the money supply (and he specifically declared that taxes just destroyed the supply). By eliminating all taxes you would finance all government expenditures through the printing press – ramping them up. Money would be available to the tax-payers immediately to spend.
The one point about this way is it allows little or no Fed government control or graft. Maximizes freedom and still gets you your inflation.
I see we agree with the price of housing coming down – I just don’t see wage inflation happening anytime soon. Yes if you overbought a house in 1975 with a fixed interest loan, the Volker induced 20% inflation rate did you wonders. It also forced one of my fixed income grand-parents into selling her house for a trailor becuase she could keep up with the rising prices (her income was fixed, except for the SS, and she couldn’t hold on to a paid off house.)
Personally, with my mortgage sitting at 4% I would love a few years of 20% inflation if my wages kept up. It would be like printing money at a rate of 16% per year to me as I pay back my debt with far less valuable cash. Do that for 3 years and I would be paying off the loan near the end of the 4th. But I have absolutely no wish to relive the late 70s-early 80s no matter how good I would come off. (Especially if that meant reliving disco….)
I just don’t see any wage inflation with U6 sitting north of 15% with a large chunk of people not even counted in the labor force. Way to much supply of labor right now.
Islam will change
and you can’t see anything all that surplus labor could be doing that would be useful.
better to just give money to those who already have more than they can spend or invest.
or “print” it so those who have market leverage can prosper at the expense of those who don’t.
Yeppers, as I noted, monetary policy is useless right now. Putting more money into the pockets of Americans will simply cause inflation — in China and in oil company’s coffers, not in America. It won’t put a single American back to work, because any additional money pumped into the economy *SANS FISCAL POLICY* will simply get plucked straight out of American pockets and put into oil company or Chinese pockets at which point it disappears under gigantic (virtual) mattresses and effectively is gone from the viewpoint of the economy. Which helps America and Americans… how?
Buffy apparently completely missed my point, which is that PRINTING MONEY UNDER CURRENT CONDITIONS IS USELESS. It doesn’t matter whether you print it via tax cuts or via helicopter drops, it will simply disappear under (virtual) mattresses once it hits the real economy, just like Keynes (and Krugman) said happens at the zero bounds. Buffy apparently believes that reducing government activity will somehow magically cause economic growth via application of the magic wand of the Austerity Fairy, who apparently creates economic growth out of application of Magic Austerity Dust to the posterior of the undeserving masses (said Magic Austerity Dust application looking suspiciously like a good ole’fashioned a$$ whuppin’), whereas Keynes says that when you are at the zero bounds with massive unemployment economic growth won’t happen until you have massive fiscal spending employing those masses of unemployed that Buffy so accurately noticed, at which point then, and *ONLY* then, will monetary policy have the effect of creating wage and price inflation and thereby start motivating people to bring their capital out from under mattresses and put it to some productive use. Who’s right? Well, let’s just say that the magical Austerity Fairy (and her sister, the Confidence Fairy) hasn’t exactly rung up a great track record these past four years, yo. It turns out that, like unicorns and cotton candy trees, the Austerity Fairy (and her sister, the Confidence Fairy) *ARE NOT REAL*. Duh!
– Badtux the Snarky Edconomics Penguin
I didn’t say reducing Government activity anywhere in my posts. The size and scope of the Federal Government is at all time highs in the US. Yet, I never once mentioned the Austerity Fairy – nore was I rude. But I assumed we would keep the Fed going as is – just print money to cover all expenses vs. currently just printing to cover 40% of expenses. Eliminating taxation does not mean we reduce government a bit. Just where you get the money from, the printing press or taxpayers.
I do notice that you beleive that the faceless beuracrats that administered the last ‘stimulous’ are more qualified to handle my money than I am.
But, OK, I get the point, but you were not very clear what the printing was suppossed to accomplish except generate inflation. Now I understand you disagree with Steve and don’t want to print money (except as below)
So now we actually get to what you want to do. Print money and start workfare (WPA redux) for all the millions not employed. Get half digging ditches and the other half filling them in (for I assume more than they get in UI otherwise why work?). This will suck up the excess labor and cause wage inflation as employers compete for scarce labor. At this point we get inflation that will magically cause people to get their savings out from the mattresses and invest (in CDs/Stock market) to keep up with inflation. This then provides the capital for business expansion, which needs more employees and the circle is complete. Eventually the growing economy sucks up all the workfare types and we end that program (like the WPA ended for example).
I get it right this time? (BTW – if all the businesses just offshore jobs to China how exactly do you plan to sustain these jobs?)
I have issues with workfare and the record of the Democrat Obama administration on handling the last stimulous was abysmal. I don’t remember many bridges getting fixed/built or miles of road resurfaced/built, etc etc. I do remember lots of state employees kept on a bloated payroll for a few more years, and don’t forget episodes like Solyandra. We through a trillion dollars down the drain for very little results. What I did get was Democratic President gutting SS.
As for workfare. if you think todays unemployed/OWS types could handle a day of what the workers and families did to build the Florida Keys railway today, well I want some of what your drinking. Heck with 10+% unemployment Georgia farmers could even get convicts to harvest the crops. I live in Texas – try finding a home-building job that doesn’t require you to speak spanish.
But I’m getting away from the topic – which is to cause inflation.
islam will change
I think you got what I was saying correctly this time. Until that large number of unemployed are put to work, any attempt at triggering wage inflation simply isn’t going to work. And without wage inflation, price inflation merely causes widespread misery and *decreased* economic activity (since less stuff can be bought at the higher prices if wages haven’t increased). To fund fiscal activity that would employ the unemployed we can and should print money, but simply dropping money into the economy without any fiscal policy mandate that it be spent actually employing people will just fatten (virtual) mattresses, it won’t actually accomplish anything.
Regarding the Obama stimulus package, 1) the statistics show no bloat of local governments caussed by the package — state and local government staffing have declined steadily since the start of the Great Recession, the most that can be said about the Obama stimulus is that it temporarily offset that decline, and 2) if you saw nothing in your neighborhood, then blame your local government for not applying for the funds. Here in my area, a huge number of projects were financed by the Obama infrastructure package, ranging from a sewer line replacement project three blocks from my house in Santa Clara, to the re-paving of multiple major roadways. All of these had been on capital improvements lists for years with no funding to do them, and local governments jumped on the chance to finally get those things off their deferred maintenance list. If your local government somehow managed to not have a deferred maintenance list a mile long, congratulations — your local government is either utterly incompetent (as in, they don’t maintain a list of roads, sewer lines, etc. that require repair due to advanced age and/or condition), or so stupendously rich they had no projects left unfunded.
Regarding workfare and the unemployed and the Florida Keys railway, you would be surprised at what people will do if required to do so as a condition of being allowed to survive. If it’s do or die, human beings are surprisingly good at doing what’s necessary to avoid dying — we’re like cockroaches that way, thus why humanity is the most successful species (other than cockroaches) on the planet.
Regarding Georgia farmers and getting labor to pick their crops, that’s a problem of cost-effectiveness, not lack of labor. Georgia farmers *could* and did find Americans willing to pick their crops — the problem is that once they did so, their costs were way out of line compared to farmers in other states, since they then had to provide OSHA-mandated protective equipment, restroom and meal breaks, etc. that aren’t required if your workforce is illegal and thus unable to file OSHA complaints. According to my contact in the area, a coalition of Georgia farmers ran buses in to the central cities and found no shortage of people willing to work, the problem was one of cost — they found they simply couldn’t make money at current commodity prices if required to provide all the legally mandated workplace wages and conditions as well as transportation costs. Thus why the farmers gave up in disgust — it simply wasn’t possible, given that they were competing with farmers in other states whose workforces are still illegal and thus *aren’t* forced to provide the legally mandated workplace wages and conditions (since illegals aren’t going to file OSHA complaints because, duh, they’re *illegal*). But none of that has anything to do with the topic of this post, which is about inflation and whether it’s possible *under current conditions* to accomplish anything with inflation targetting / money drops… my answer to that question is that under *current* conditions only fiscal policy that actually puts […]
Here’s a good article on the history of money and gold:
Part of the reason I read this blog is to learn more about economics. Its a fun subject at times and since its basically a science in its infancy no one really knows what they are talking about. Glad I could figure you out.
I agree about the cockroaches. But I don’t see anyone (definitely not the Feds) putting people in that situation. There is just no way you would be able to simulate the conditions of the workers who built the Florida Keys railway, Hoover dam, or any of the WPA projects. People 1) are unable in most cases to do that kind of physical labor and 2) would not do that kind of physical labor. The Georgia case would be a good point. If the Government subsidized the farmers (across the country) so the labor cost were equal (and the cost of production stayed the same) do you still think we could get the current unemployed/OWS types out in the Georgia or Texas sun for 12 hours a day to pick the crops when they become ripe? That’s hard, back-breaking labor. How much would you have to pay them? 150% of UI? 200% How much a quart of strawberries? I may be cynical, but I bet you would get many takers until the entire idea became so expensive it would be cheaper to let the produce rot in the fields, import strawberris from China, and send checks to the unemployed.
But you’ll never get anything passed that REQUIRES work to get a UI check. i.e. you work or starve (or at least no longer get a check). not.going.to.happen.
And I don’t see either side of the aisle actually doing anything to reduce the illegal population in the US. Even though they directly hurt the lowest rungs of the economic food chain in the US.
And actually I think my local area (DFW) accellerated some projects with the dollars. So we got something out of it. Just not any permanent jobs.
Islam will change
i could be wrong here, but i seem to remember that the blame for stagflation in the seventies was laid to the expectation of automatic stabilizers.
But you’ll never get anything passed that REQUIRES work to get a UI check.
Given that long-term UI benefits are expired or expiring, I think that’s a moot point, since the vast majority of the long-term employed aren’t going to be getting UI checks anymore. At that point we’re talking about workfare as a form of welfare, not as UI.
And what you say used to be true of receiving welfare benefits, it was held that the U.S. population would never agree to require work in exchange for welfare, but I’ll just point out that workfare has been quite common and popular (amongst the general populace, not amongst the recipients!) as a requirement for receiving welfare benefits for the past decade at least.
Regarding OWS participants, statistics from back in early November show that over 70% of the OWS protesters were, in fact, employed. The remainder were primarily recent college graduates having problems finding employment (unsurprising in the current economy). The small number of long-term homeless who will not be responsive to any sort of workfare agreement account for a very small percentage of that movement. So I’m baffled as to why you bring OWS into the conversation.
Regarding your notion that Americans hate hard work and won’t do hard work, a) all statistics show that Americans are the hardest-working most productive people in all of the modern economies, and b) there is no evidence to support such a notion, though there *is* evidence that there are employers who have a policy of not hiring Americans because Americans have this bad habit of expecting employers to comply with laws regarding wages and working conditions. Plus c) All the jobs in construction and agriculture that you claim are too hard for Americans were, in fact, done largely by Americans as late as the early 1980’s, what, you’re saying that America became a nation of pansies at some point in the last 30 years? Way to be a patriotic American, dude!
In any event, my core point remains. Monetary policy is not going to be effective at resolving the current situation unless in conjunction with fiscal policy that puts large numbers of Americans to work and thus creates the necessary conditions for wage inflation. Your argument appears to be that fiscal policy won’t put people to work because people don’t want to work. I.e., you appear to be channeling Hayek’s notion of the Great Depression as “The Long Vacation”, and ended apparently (if you believe Hayek) because people got tired of being on vacation. At which point I have to say, WTF?!
you have had it too easy too long. i would pick strawberries if i had to for a living. so would my kids. so DO my neighbors.
the problem is, much as Tux describes, but he isn’t clear, that the wages are too low and the conditions too bad, and some of the farmers… or labor contractors… too corrupt.
and i’d pay a good bit more for a quart of strawberries than i do now if they grew real strawberries and not those wooden ones developed my my alma mater for Big Agriculture.
oh, and the point of a UI check is to carry a skilled worker over bad times (caused by businessmen mostly) so they don’t have to relocate and take up migrant labor and be unavailable when the banks are ready to go back to work.
Indeed, the point of UI is to cover *temporary* job losses so that people have the time to find new permanent jobs in their preferred industry. Past a certain point, however, we have to say “well, these people aren’t going to find jobs in their preferred industry because those jobs are gone and they aren’t coming back” and do something else. We can’t just continue paying UI forever so people can look for jobs that are never coming back. Something else has to be done. If it means expelling the immigrant labor force and putting them to work in the fields picking strawberries, so it be. It beats dying of starvation, anyhow, and the only long-term unemployed that I know of who’d have a problem with that are those with health problems that preclude hard physical labor, the rest would be grateful just to have a job.
I agree Americans are the hardest working most productive people. No argument there.
But they are not the same people that manned the WPA in the ’30s. Back then a large chunk of the population had experience with hard, out-door work. On the farm or in industry. Now we have an obesity empidemic in the poor. Go look at those old pictures and you won’t see any fat people working the railroad in the keys. Maybe I’m just too jaded, but I just don’t see it. We can disagree.
I will also stipulate your plan could work. If there was any political will to implement it. But Obama is not going to start a new WPA and ship ten’s of thousands out of the inner city to build roads in Montana or dams in Washington (or whatever). Heck, do you think anyone would propose a plan to clean up the bad-parts of the US inner cities by making people work for their UI check? The city unions would scream foul if you put them cleaning streets and removing graffiti.
My argument, backed from what I’ve read about jobs being filled and actual labor accounts is American won’t work for what the illegals or new immagrants will. They won’t work for minimum wage for 8 hours in the heat outside here in Texas picking strawberries. Even if you met OSHA standards. (Heck most migrant workers make way more than min wage since they are paid mostly piecework in the fields. – number of quarts/buckets etc they fill). There was a rancher, made a big splash in the news here , who offered $15/hour to bail and stack hay. He needed to get it in before it rotted in the fields. Not one white guy lasted a day. But he had a plenty of mexican-american labor who showed up and cleared the fields. And they worked with him into the night for a week straight. Each worker probably netted over $1000 in a week of hard work. (I’ve done this work as a kid – great incentive to get a college education and do something else). Yes, all anedotal but I see nothing on the other side….
There is also no political will, by Obama, the Dems or Reps in general, to actually inforce US immigration laws. None at all. Though I will give Obama credit for the most illegals sent home of any President ever. There is no political will to close the border nor round up people here illegally. There is little political will to enforce labor laws on businesses who hire illegals. Heck we have sanctuary cities!
As for construction – the tied turned in 1986 when the first amnesty went through, without any border enforcement. Yes, Americans can do the work, and I see them in the skill positions (electrical / plumber – and usually older guys) but the general purpose workers are all immigrants, at least here in TX. And how many people in your circle tell there kids to skip going to college and become a plumber? Then add the crippling downturn in the building industry to the mix.
I don’t agree with Hayek’s idea of a big vacation – your the first I heard of it BTW. I think your solution could work – just there is zero political will to actually implement it. Can you see Obama signing into law the requirement that after 12 months of UI you have to report to the nearest WPA induction center and be asigned manual labor of the local gov’s chosing if you wish to get another UI check? That you will be assigned to a barracks with 10 other guys (or a tent if conditions don’t permit it – like the Keys) and expected to work 8-10 hour days 5 days a week outside reguardless of conditions. I just don’t see it even if you get paid 50% more than min wage.
And coberly’s nonsense notwithstanding, the entire US farm growers are not corrupt evil people.
Islam will change
So our problem today as addressed by this proposal is that real interest rates are too high, resulting in too little investment and consumption? And we can export our way out of our sorry economic condition? Why doesn’t that ring quite right to me? Chin (and Evans) may be thinking constructively and their proposals may be sound under normal circumstances as a way to address unemployment as well as inflation. But my impression is that this may not be an especially promising way to dig out of our current hole. Maybe it would help a little, slowly, for some sectors of the economy? Also, under present circumstances, I what the assumed minimum wage policy will be, among other things related to the standard of living for the middle class and below.
So our problem today as addressed by this proposal is that real interest rates are too high, resulting in too little investment and consumption? And we can export our way out of our sorry economic condition? Why doesn’t that ring quite right to me? Chin (and Evans) may be thinking constructively and their proposals may be sound under normal circumstances as a way to address unemployment as well as inflation. But my impression is that this may not be an especially promising way to dig out of our current hole. Maybe it would help a little, slowly, for some sectors of the economy? Also, under present circumstances, I wonder what the assumed minimum wage policy will be, among other things related to the standard of living for the middle class and below.
The continued extension of UI benefits – now to 99 months – shows that their is no political will to do this:
“If it means expelling the immigrant labor force and putting them to work in the fields picking strawberries, so it be. “
Not going to happen. Which is my point.
Islam will change
Hey sorry all for not participating, other commitments impinging.
Quick comment, I’d like to see a lot more fiscal stimulus (even better, eventually, MMT job guarantee) since it’s not clear how much power the Fed has these days to stimulate inflation or job growth. On that, see latest bleg post on IOR.
I will admit I don’t know what your acronyms mean. So whats a “MMT job guarentee”? and what are you refering to with ‘IOR’?
Islam will change
ISLM will change
Investing and financing are key elements in the flow of the economy. It’s a little risk now for a more beneficial future.