Saturday, September 13, 2014

Yellen and inflation

Janet Yellen as head of the Federal Reserve has refused to give in to the inflation Chicken Littles and is declining to raise interest rates the way they would like.

One of the zombie ideas of conservative economics is the "natural rate of unemployment," which is normally taken to be a percentage point or so below the actual rate of unemployment at a given time. Not that anything besides the raw materials in the economy is actually "natural."

But this allows conservatives who think high unemployment is either good or, at worst, a minor inconvenience too insignificant to have national policies aimed at lowering it, to argue that we're almost at the level of employment that will set off INFLAA-AATION!! Germany! Hyper-inflation! Hitler! It will hurt the old people! Aiii-eeee!!!

Peter Coy and Matthew Philips in How Much Surplus Labor Do We Have? Bloomberg Businessweek 08/21/2014 articulate a sensible view of Yellen's decision:

To Yellen’s credit, an inflationary spike in wages is nowhere in sight. Given current inflation and productivity growth, workers should see wage gains above 3 percent, says Ethan Harris, co-head of global economics research at Bank of America Merrill Lynch (BAC). Wage growth has been closer to 2 percent, no higher than overall inflation. It’s possible, as the hawks worry, that wage pressure is building up unnoticed. But Yellen has said that a little bit of above-target wage growth is OK as long as the public continues to believe that inflation will remain low over the long term. For now, the slackers at the Fed are running the show.
Not that Businessweek is immune from spouting the conventional wisdom in the face of realities that fairly obviously contradict it on other occasions.

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