"If reduced labor supply is a big part of the inflation story, then shouldn't real wages be rising?"
I am surprised not to see the phrase "compositional effect" in Dr. Nakamura's reply here. I thought there was starting to be consensus in the center-to-left econ world that the apparent decline in average real wages had to do with a reversal of what we saw at the start of the pandemic, where average wages spiked because the low-paid people became unemployed, and we _don't_ include all those people as zeros when calculating the average. With low wage workers flooding back into the active labor force, _of course_ the average wage appears to decline. If you only look at the population that was employed continuously since 2019, or you look sectorally, real wages are mostly flat or slightly rising.
This is very good, especially her quite accurate and relatively concise explanation of current inflation. She's the kind of practical academic macroeconomist that financial-sector economists appreciate: someone who is trying to better document with more data how the economy behaves to various changes, rather than blathering dogma based on ridiculously simplistic models. Perhaps in academia she would be remembered for refuting "freshwater theory", but that was always more of a dogma than a theory, popular in conservative academia and politics, never gaining any traction in financial markets. Since time immemorial, when governments have boosted spending relative to taxation, working economists employed in the financial sector have modeled that as a factor boosting growth.
The point on the historic shift of demand from services to goods is a very important one. There is more to it though than just pandemic: we are also seeing the proof of a largely forgotten point from old Austrian theory, before it turned into a kooky bury-your-gold dogma: stimulus never affects the whole economy evenly; it always flows into some sectors and activities more than others. In the pandemic, stimulus flowed into sectors that were already seeing strong demand and did not much help those seeing weak demand. With cars especially, fiscal stimulus plus low rates accentuated the contrast between booming demand and constricted supply. People desiring to upgrade homes need savings to make down payments, so the combination of stimulus checks and pandemic-forced saving was powerful fuel. And surging home-prices generate more home-owner savings, and make debt seem more worthwhile.
Re: inflation expectations, I don't think we should stop paying attention. The US is a unique case, with a very large amount of cash and cash-equivalent savings that has in recent history been more responsive to asset-price inflation than to consumer-price inflation. So the old maxim that higher inflation equals higher real rates as expectations and risks to expectations rise doesn't hold well here. That doesn't mean the expectations don't matter here - it just means they matter differently. Certainly expectations that housing prices will rise does self-stimulate US housing-price inflation. What I would reject is the idea/model that inflation is normally mainly driven by private expectations with government passively automatically adjusting fiscal spending and the central bank passively accommodating increased lending. Generally around the world the fiscal authority is the 800-pound gorilla in the room and it is never passive.
That said in this current US case I don't think aggregate fiscal spending levels have been excessive. Too much of the stimulus was untargeted cash to the middle class, and that's largely to blame for price distortions in housing and automobiles, but them's politics (R and D) for you. My feelings would be different in a normal, financial-cycle recession when I think the government needs to be more cautious not to bail out uneconomic bubble activity.
This interview is highly rational based on "Efficient Market" views, but it is far from clear that "Efficient Market" views are broadly applicable.
In particular, the use of T-bill and T-bond rates as a proxy for anything is highly suspect. The Federal Reserve has deployed all manner of tools to influence these rates - so why exactly should these rates be useful objective indicators?
I am also highly leery of the "supply shock" argument behind the present inflation. The largest components to the present inflation, at present, are energy and housing. While food and so forth have gone up in price - the amount people spend on food is frankly very low in developed nations. Oil demand in particular - supply has clearly been impacted by (lack of) investment - whether due to ESG or COVID or whatever is irrelevant. Natural gas demand has been affected by government decisions to shut down nuclear plants in Germany and Japan, and also has supply issues; like oil, natural gas supply is flowing towards China as it continues to grow its per capita wealth and thus standard of living.
In neither case is there a mystery as to why demand or supply is a surprise, nor should recovery from COVID demand lows be shocking.
Housing in turn - population growth is significantly retarded due to COVID deaths and COVID related impacts on births. This is clearly not a supply issue - and demand in turn is far more easily explained by negative real interest rates.
All in all, a not very satisfactory explanation on what is going on - from a profession that, overall, continues to fail to be able to predict massive macroeconomic changes.
Re: Friedman and pool, I don't think his point was that "we don't need macro models to fit micro data, only aggregate data." I think his point was that we don't need to understand why the economy reacts in certain ways to certain actions, we only need to know how it reacts. Which is an ironic thing for him to have said given that his main contribution to the field was a wrong explanation of the why that consistently failed to predict the how.
A) Thanks for not paywalling this. HIghly interesting stuff.
B) I noticed someone on your Twitter feed mentioned something about the implications of a consumption shift back to services. I've been wondering about this myself: I've been cautiously optimistic such a shift might help ameliorate current inflationary pressures. But, then it occured to me we might well see problems on this front as well, due to capacity constraints (presumably we can't undo a couple years' worth of supply-of-services contraction overnight; for starters there are likely to be heaps of workers who have abandoned the services sector). So, I'm worried we'll switch from tangible-goods-driven inflation to services-driven inflation.
Do you have thoughts on this, or, have you heard what (if anything) colleagues in the field have to say?
Can we learn anything useful about macroeconomics by studying MMOs? Many games are divided into "servers" with totally separate populations, and it seems like in principle you could run controlled experiments by tweaking things in one server but not another.
Absolutely disgraceful and disingenuous that in this entire interview, she didn't even mention QE and money printing as causes of price rises. That's why nobody trusts the establishment anymore. She is effectively lying to everyone in order to support the Federal Reserve's policies, in the hope that one day she will get one of those fat-cat gravy-train jobs.
Judy Shelton being rejected from appointment to the Fed due to historic comments about "sound money" was a lesson to economists in future that you have to be dishonest for politicians to give you the top jobs.
"If reduced labor supply is a big part of the inflation story, then shouldn't real wages be rising?"
I am surprised not to see the phrase "compositional effect" in Dr. Nakamura's reply here. I thought there was starting to be consensus in the center-to-left econ world that the apparent decline in average real wages had to do with a reversal of what we saw at the start of the pandemic, where average wages spiked because the low-paid people became unemployed, and we _don't_ include all those people as zeros when calculating the average. With low wage workers flooding back into the active labor force, _of course_ the average wage appears to decline. If you only look at the population that was employed continuously since 2019, or you look sectorally, real wages are mostly flat or slightly rising.
This is very good, especially her quite accurate and relatively concise explanation of current inflation. She's the kind of practical academic macroeconomist that financial-sector economists appreciate: someone who is trying to better document with more data how the economy behaves to various changes, rather than blathering dogma based on ridiculously simplistic models. Perhaps in academia she would be remembered for refuting "freshwater theory", but that was always more of a dogma than a theory, popular in conservative academia and politics, never gaining any traction in financial markets. Since time immemorial, when governments have boosted spending relative to taxation, working economists employed in the financial sector have modeled that as a factor boosting growth.
The point on the historic shift of demand from services to goods is a very important one. There is more to it though than just pandemic: we are also seeing the proof of a largely forgotten point from old Austrian theory, before it turned into a kooky bury-your-gold dogma: stimulus never affects the whole economy evenly; it always flows into some sectors and activities more than others. In the pandemic, stimulus flowed into sectors that were already seeing strong demand and did not much help those seeing weak demand. With cars especially, fiscal stimulus plus low rates accentuated the contrast between booming demand and constricted supply. People desiring to upgrade homes need savings to make down payments, so the combination of stimulus checks and pandemic-forced saving was powerful fuel. And surging home-prices generate more home-owner savings, and make debt seem more worthwhile.
Re: inflation expectations, I don't think we should stop paying attention. The US is a unique case, with a very large amount of cash and cash-equivalent savings that has in recent history been more responsive to asset-price inflation than to consumer-price inflation. So the old maxim that higher inflation equals higher real rates as expectations and risks to expectations rise doesn't hold well here. That doesn't mean the expectations don't matter here - it just means they matter differently. Certainly expectations that housing prices will rise does self-stimulate US housing-price inflation. What I would reject is the idea/model that inflation is normally mainly driven by private expectations with government passively automatically adjusting fiscal spending and the central bank passively accommodating increased lending. Generally around the world the fiscal authority is the 800-pound gorilla in the room and it is never passive.
That said in this current US case I don't think aggregate fiscal spending levels have been excessive. Too much of the stimulus was untargeted cash to the middle class, and that's largely to blame for price distortions in housing and automobiles, but them's politics (R and D) for you. My feelings would be different in a normal, financial-cycle recession when I think the government needs to be more cautious not to bail out uneconomic bubble activity.
This interview is highly rational based on "Efficient Market" views, but it is far from clear that "Efficient Market" views are broadly applicable.
In particular, the use of T-bill and T-bond rates as a proxy for anything is highly suspect. The Federal Reserve has deployed all manner of tools to influence these rates - so why exactly should these rates be useful objective indicators?
I am also highly leery of the "supply shock" argument behind the present inflation. The largest components to the present inflation, at present, are energy and housing. While food and so forth have gone up in price - the amount people spend on food is frankly very low in developed nations. Oil demand in particular - supply has clearly been impacted by (lack of) investment - whether due to ESG or COVID or whatever is irrelevant. Natural gas demand has been affected by government decisions to shut down nuclear plants in Germany and Japan, and also has supply issues; like oil, natural gas supply is flowing towards China as it continues to grow its per capita wealth and thus standard of living.
In neither case is there a mystery as to why demand or supply is a surprise, nor should recovery from COVID demand lows be shocking.
Housing in turn - population growth is significantly retarded due to COVID deaths and COVID related impacts on births. This is clearly not a supply issue - and demand in turn is far more easily explained by negative real interest rates.
All in all, a not very satisfactory explanation on what is going on - from a profession that, overall, continues to fail to be able to predict massive macroeconomic changes.
Re: Friedman and pool, I don't think his point was that "we don't need macro models to fit micro data, only aggregate data." I think his point was that we don't need to understand why the economy reacts in certain ways to certain actions, we only need to know how it reacts. Which is an ironic thing for him to have said given that his main contribution to the field was a wrong explanation of the why that consistently failed to predict the how.
Noah:
A) Thanks for not paywalling this. HIghly interesting stuff.
B) I noticed someone on your Twitter feed mentioned something about the implications of a consumption shift back to services. I've been wondering about this myself: I've been cautiously optimistic such a shift might help ameliorate current inflationary pressures. But, then it occured to me we might well see problems on this front as well, due to capacity constraints (presumably we can't undo a couple years' worth of supply-of-services contraction overnight; for starters there are likely to be heaps of workers who have abandoned the services sector). So, I'm worried we'll switch from tangible-goods-driven inflation to services-driven inflation.
Do you have thoughts on this, or, have you heard what (if anything) colleagues in the field have to say?
Can we learn anything useful about macroeconomics by studying MMOs? Many games are divided into "servers" with totally separate populations, and it seems like in principle you could run controlled experiments by tweaking things in one server but not another.
Hippie origins are the best origins!
Absolutely disgraceful and disingenuous that in this entire interview, she didn't even mention QE and money printing as causes of price rises. That's why nobody trusts the establishment anymore. She is effectively lying to everyone in order to support the Federal Reserve's policies, in the hope that one day she will get one of those fat-cat gravy-train jobs.
Judy Shelton being rejected from appointment to the Fed due to historic comments about "sound money" was a lesson to economists in future that you have to be dishonest for politicians to give you the top jobs.