Althouse: "The relationship between the slack in the economy or unemployment and inflation was a strong one fifty years ago ... and has gone away."

July 11, 2019

"The relationship between the slack in the economy or unemployment and inflation was a strong one fifty years ago ... and has gone away."

"At least twenty years ago, that period was over and the relationship between unemployment and inflation became weak. And it’s become weaker and weaker and weaker...[W]e are learning that the neutral interest rate is lower than we had thought and... the natural rate of unemployment rate is lower than we thought. So monetary policy hasn’t been as accommondative as we had thought.... At the end of the day, there has to be a connection because low employment will drive wages up and ultimately higher wages will drive inflation, but we haven’t reached that point. In many cases, that connection between the two is quote small these days," said Federal Reserve Chairman Jerome Powell, testifying to the Senate Banking Committee today, reported by CNBC.

And then, "Dow jumps more than 100 points to break above 27,000 for the first time ever."

125 comments:

Bay Area Guy said...: And one wonders why they call economics the "dismal science"

Powell spins a whole lotta grammatically correct gibberish there.; 7/11/19, 10:08 AM
rehajm said...: Nope. Growth doesn't cause inflation. Inflation is a monetary phenomenon. Too many fogies left that believe the system is inherently unstable and 1970s style inflation will result without constant tinkering. Nope.; 7/11/19, 10:09 AM
rehajm said...: Not entirely the fault of the folks at the Fed. The dual mandate doesn't help things. They do what they can given what they're charged to do.; 7/11/19, 10:12 AM
buwaya said...: Powell has been talked to.
There is always an argument under the covers, that we cannot hear.
The reasons given sound like a pretext.
A plausible pretext, but such models are not overturned so easily.
Nor for that matter is labor slack accurately measured by interest rates.
Plenty of economists would argue with Powell about that.
Labor force participation rarely comes up in these (public) discussions.; 7/11/19, 10:18 AM
stevew said...: Was this a simple cut and paste post? It's all in quotes but some of it appears to be typos rather than misspeaking.

rate of unemployment rate
accommondative
low employment will drive wages up
connection between the two is quote small these days; 7/11/19, 10:18 AM
Chuck said...: I am liking Fed Chairman Jerome Powell a lot these days; he seems to be making a lot of sense at least to me. I wish I could have watched all of his testimony, since CSPAN carried it in its entirety. (What a wonderful resource CSPAN is!) Maybe I will go back and look at it online.

But having made seemingly (to me) good sense about the modern disconnect between full employment, productivity and inflation, I was curious if the Chairman addressed the inverted yield curve that is seen by many as ominous? Anybody know?

{#9}; 7/11/19, 10:18 AM
Sebastian said...: "there has to be a connection"

But whether "the connection" shows up depends on lots of things, which the models don't account for.; 7/11/19, 10:18 AM
rhhardin said...: It's not gibberish. It makes sense. We don't know why, but what we thought applied doesn't seem to apply. He listed what they thought applied, and said it didn't.

So he's saying they're aware of this but it doesn't seem to be the problem at the moment.; 7/11/19, 10:21 AM
rhhardin said...: I think the unknown is the effect of quantitative easing and unwinding those securities from the Fed's portfolio.; 7/11/19, 10:23 AM
Ignorance is Bliss said...: I suspect the link between low unemployment and inflation is being broken by advances in automation. If you are near the break-even point where it costs the same to hire more employees or to invest in more automation, then an increase in the cost of labor does not increase your cost of doing business. You just shift to greater automation. You might even replace some of your existing labor with automation, freeing up those workers for jobs that are less conducive to automation.; 7/11/19, 10:23 AM
rehajm said...: I am liking Fed Chairman Jerome Powell a lot these days; he seems to be making a lot of sense at least to me

I shall take this opportunity to recognize my agreement with with New Chuck™ on this point.

(I shall also lament the return of Chuck Classic when the count reaches {20}.); 7/11/19, 10:23 AM
Achilles said...: Ron Paul was right about the fed. Everyone out here sees it.

Quintupling the monetary supply causes inflation.

The feds job is to blame inflation on wages and to keep wages down.; 7/11/19, 10:24 AM
rhhardin said...: Conventional Fed operations described brilliantly here, for comparison with today.
http://ecomnemonics.blogspot.com/2012/12/money-is-not-wealth.html; 7/11/19, 10:25 AM
Craig Howard said...: There can be no inflation -- whatever the employment rate -- unless the Fed is allowing the money supply to expand. If the money supply is held stable, inflation is an impossibility.

And that's a good thing, despite what our Keynesian-addled elites would tell you.; 7/11/19, 10:25 AM
rehajm said...: I suspect the link between low unemployment and inflation is being broken by advances in automation.

Yes! More broadly perhaps, we're better at both product and process technology. We're better at and satiating changes in demand and more efficiently moving finished goods to market due to innovation and technology.; 7/11/19, 10:28 AM
Temujin said...: I wonder how both automation and the heavy influx of cheap immigrant workers have affected the labor market and rising prices/wages.

Also- many more remote, entrepreneurial workers now, not affected by old trends. I'm not affected by my local market having a slack economy if my business market is national, or global, from my home office. None of this was the case 30 years ago.; 7/11/19, 10:31 AM
Wince said...: As pointed out a couple of months ago (below), what is really changing is the relationship between employment and inflation. There is still correlation between employment slack and wages, which if you think about it tends to support Trump's view of immigration.

Notice that "defenders" of the Phillips Curve (like Greg Mankiw at Harvard) are now reverting to emphasize the employment-wage relationship as the essence of the Phillips Curve. Good for Powell coming clean on the general inflation side.

http://gregmankiw.blogspot.com/2019/05/the-phillips-curve-is-alive-and-well.html

Althouse headlined...
I liked this headline and assumed it would be bloggable, but it's really too obvious to bother with.

"Economists often don’t know what they’re talking about" (WaPo).

EDH said...

This is mostly a critique of macro economics, which I've always regarded as part hubris and part fraud.

Much of this relates to the centrality of the Philips curve in economic thought: the supposed trade-off between employment and inflation.

Institutionally, accepting the Philips curve means you need to have a "Great and Powerful" Fed when in many ways it's a dumping ground for bunch of academic economists behind a curtain turning knobs and pushing levers like the Frank Morgan in the Wizard of Oz. (Many think L. Frank Baum was using the Yellow Brick Road as an allegory for the gold standard when he wrote Oz.)

As I pointed out before, notice the vehemence and nastiness of N. Greg Mankiw of Harvard in opposing Trump's nominees to the Fed Board. You'd think Caligula nominated his horse to the senate!

Keep the Federal Reserve I Love Alive
https://www.nytimes.com/2019/04/11/business/mankiw-moore-cain-federal-reserve.html

And just yesterday Mankiw links to a WSJ piece asking why the Philips Curve doesn't hold as previously thought.
http://gregmankiw.blogspot.com/2019/05/the-fed-should-monitor-wage-trends.html

The U.S. economy, fresh off another strong report, has created an average of 205,000 new jobs a month in 2019, far more than the roughly 100,000 needed to keep up with population growth. The official unemployment rate has fallen to 3.6%, the lowest in 50 years. Historically, such low unemployment has signaled that the economy is at full capacity, which causes wages and inflation to accelerate as employers compete for scarce workers. Yet wage growth has increased modestly, to about 3% a year, and inflation is still running at 1.5%, below the Fed’s 2% target. What’s going on?

Of course, the supply-side critique of this is that employment in the production of more goods and services should not necessarily result in the higher cost of goods and services since there is more output, especially if productivity is increasing...

5/13/19, 7:29 AM; 7/11/19, 10:32 AM
Caligula said...: " the natural rate of unemployment rate is lower than we thought."

Or maybe this "natural rate" changes over time?

If physics were as mutable as economics then things like the gravitational constant, the speed of light, Planck's constant (etc.) would change at least monthly and, over time, might be found to be ar "lower than we thought." Or perhaps higher? But likely quite different.

There was a time when many had considerable faith in the ability of government economists to fine-tune national economies for optimum outputs, yet today (I can't imagine why) it's become all too apparent that when The Fed (etc.) does something it can have but little confidence that what it did will produce any hoped-for effect.; 7/11/19, 10:35 AM
Earnest Prole said...: Our cognitive problem is that we use a definition of unemployment that includes only those actively seeking work at the moment instead of also factoring in employable people who choose for the moment not to work. It’s a little like judging baseball players by their batting average rather than by far more accurate measures such as on-base percentage plus slugging.; 7/11/19, 10:35 AM
rehajm said...: Mankiw is yet another victim of TDS. Either that or he's grumpy about losing his plum appointment in the Jeb! administration...; 7/11/19, 10:36 AM
Achilles said...: Powell kept interest rates at zero and printed trillions of dollars during the Obama presidency.

Then after Trump is elected he immediately jacks interest rates and tries to tank the economy.

He made the political and manipulative nature of the fed obvious to everyone. The only job of the fed is to keep the wealthy wealthy. It drives wages down and supports globalist tool politicians.

Powell realizes that the fed could be abolished and there would be a party.

.; 7/11/19, 10:38 AM
Achilles said...: It is time for the fed to go.

They are as good at reading the economy as the Supreme Court is at reading the constitution; 7/11/19, 10:39 AM
sykes.1 said...: Open borders and free trade must have something to do with this. Both allow unemployment to be exported invisibly.

As to the natural interest rate being lower than the Fed thought, that is an illusion. Rates today are historically low. That we do not have inflation or excessive growth implies that the underlying economy is deflationary, and low interest rates and extremely high budget deficits is keeping away price collapse and depression. The European Central Bank is using negative interest rates to keep the EU afloat.

Long term, low interest rates are a disaster for pension funds. They all budget on 8% return on investment to barely breakeven. With T-Bills at a little over 2%, pension funds must reduce payouts to remain solvent. Ohio's funds have already ceased cost of living adjustments, and they are among the best funded funds in the country.; 7/11/19, 10:39 AM
rehajm said...: Or maybe this "natural rate" changes over time?

Interesting anecdote: On the plane yesterday I watched the Nat Geo series on the Apollo missions. There was voice overlay from the news from shortly after Apollo 8 talking about how harmful the NASA budget cuts were to employment, pushing it towards 4 percent! The horror!; 7/11/19, 10:40 AM
Original Mike said...: Economists don't know jack.

That's a fact.; 7/11/19, 10:44 AM
Howard said...: Inflation is hidden in the enormous and accelerating debt.; 7/11/19, 10:44 AM
Mark Jones said...: Inflation is caused by more dollars chasing the same amount of goods. You know how you get more dollars? The Federal Government PRINTS MORE DOLLARS. End of story.

Also, the story can be boiled down to, "The rules are different now because Trump." This is battlespace prep for fucking with the economy to hurt Trump, because his booming economy (created with the "magic wand" Obama claimed didn't exist) is good for him. That it's also good for millions of deplorables, and screwing with it will hurt those millions, well--that's just icing on the cake.; 7/11/19, 10:44 AM
rhhardin said...: Long term, low interest rates are a disaster for pension funds.

Fixed payout funds. They were betting on inflation to reduce the value of future dollars they'd have to pay. Now they have to pay with more valuable dollars.

The interest rate and the future value of dollars are a wash, just a unit change in the value of the dollar.; 7/11/19, 10:45 AM
rhhardin said...: Inflation is the way out of enormous and accelerating debt. The U.S. promises to pay in a currency it can print.; 7/11/19, 10:46 AM
LA_Bob said...: In economics, as in psychology, climate "science", metabolic "science", social "science", and so many other "sciences", cause and effect are grossly oversimplified and grossly overrated.; 7/11/19, 10:49 AM
Bay Area Guy said...: Here's my dissertation on economics:

1. Stock Market - UP
2. Unemployment rate - DOWN
3. GDP - UP

They should let me teach at the London School of Economics.; 7/11/19, 10:50 AM
walter said...: stevew said...
Was this a simple cut and paste post? It's all in quotes but some of it appears to be typos rather than misspeaking.
--
Like: "..low employment will drive wages up and ultimately higher wages will drive inflation.."; 7/11/19, 10:51 AM
tim maguire said...: That's been obvious for a long time. Glad to see the Fed has finally noticed a basic feature of our economy.; 7/11/19, 10:51 AM
tim maguire said...: Ignorance is Bliss said...
I suspect the link between low unemployment and inflation is being broken by advances in automation

That's my thinking--automation opens up a whole new category of efficiency.; 7/11/19, 10:55 AM
gilbar said...: rhhardin said...
Inflation is the way out of enormous and accelerating debt. The U.S. promises to pay in a currency it can print.

Which TOTALLY Explains Why the democrats keep wanting to
a) raise the minimum wage
b) tie further increases to inflation; 7/11/19, 10:55 AM
rehajm said...: I overheard a better CNBC quote, paraphrase and I don't recall who said it, but something along the lines of I'm old enough to remember the only thing we looked at coming out of the Fed was M1.; 7/11/19, 10:55 AM
Francisco D said...: Long term, low interest rates are a disaster for pension funds.

The only people I know with pensions are government and university employees.

I saved for retirement with equity-heavy IRAs and investing extra cash in annuities that provide income stability.

The Trump presidency has afforded me a wealthier retirement than I expected.; 7/11/19, 10:57 AM
Stephanie Delmonico said...: I like how Chuck is dancing to another's tune in order to get some free alcohol.

And once he gets the free booze he may need to disappear for a few days...

Win/Win situation.; 7/11/19, 10:58 AM
Chuck said...: rehajm said...
I am liking Fed Chairman Jerome Powell a lot these days; he seems to be making a lot of sense at least to me

I shall take this opportunity to recognize my agreement with with New Chuck™ on this point.

(I shall also lament the return of Chuck Classic when the count reaches {20}.)

I thought that my requirement was {50}. I recall that I volunteered that. But I will do as Bay Area Guy requires me. It was his deal. 20 or 50?

And I'm not even counting this one.; 7/11/19, 11:03 AM
n.n said...: There is a strong link between inflation (e.g. credit emission) and unemployment, which is reset with a decadal periodicity. Supposedly, they can outsource, insource, and subsidize to mitigate its progress.; 7/11/19, 11:07 AM
Bruce Hayden said...: Not sure how long this is going to last. We are maybe two years into the Trump Boom after the eight year Obama Recession. If wages being bid up is inflationary, it really takes people willing to switch jobs to really drive that, and a lot of people, happily safely employed in a good job for the first time in eight years may still be hesitant to risk jumping employers.

(BTW - What is hilarious about the Dems is that so many of the party of the smart people are still pretending that Obama’s policies are driving the recovery instead of the reality that Dem policies are why we just survived the longest and slowest recovery since the last time they faced the problem - under FDR in the Great Depression)

Part of the problem here is a misunderstanding about inflation and price levels. There is a saying in economics that “Money Is A Veil”. Monetary economics says that there is a tautology that mv=pq (m=money supply, v=velocity of money, p=price level, and q=quantity of goods and services produced). During the 1970s, inflation was fought by printing a lot of money (m) in order to bring inflation (p) down, on the theory that inflation was caused by too few dollars in circulation essentially driving up the cost of borrowing. Econ 101 supply and demand. Except that you ended up with too much money (m) chasing too few goods (q), and the only way to balance the tautology was for price level (p) to rise, esp since it turns out that monetary velocity (v) is positively correlated with price (p) (because the higher the inflation, the shorter time you want to hold onto money, since it is a depreciating asset). Which is to say that printing money to bring down inflation is counterproductive, since interest rates necessarily rise to compensate for the inflation generated by creating too much money. What they were doing was looking at interest rates, trying to drive them down by printing money, but the new money was cycling back through the system causing price levels, ultimately including interest rates, to rise, thus necessitating the printing of more money. And hence why inflation that started with LBJ trying to fight a real war and a war on poverty at the same time, was raging by the time that Carter was readying for running for re-election, esp after Nixon cut our money supply off from gold. (The Carter era Fed had figured this out before the end of his term, but their corrective actions were too late to save his re-election bid).; 7/11/19, 11:08 AM
Francisco D said...: Inflation is hidden in the enormous and accelerating debt.

Yes. That is the national debt that Obama doubled in eight years.

Trump and this Congress seemed determined to outdo Obama on that score.; 7/11/19, 11:13 AM
Ralph L said...: What happened to the millions who went on SS Disability after their unemployment benefits ran out?

The government is and has been rejiggering the CPI lower and lower so they can inflate SS benefits away when more Boomers retire.; 7/11/19, 11:15 AM
Bay Area Guy said...: @Chuck,

I thought that my requirement was {50}. I recall that I volunteered that. But I will do as Bay Area Guy requires me. It was his deal. 20 or 50?

It is 50. And you're doing fine.

Also, Go pick up that Gin. Holiday Market tells me its ready.; 7/11/19, 11:18 AM
gilbar said...: Our (beloved) Professor Althouse doesn't like us making posts about or towards a person (we're supposed to only respond to statements, not people); but

When a person's posts aren't predictable anti-trump form letters, i read them instead of just glancing at them

I too would like to know if Chairman addressed the inverted yield curve; anyone?; 7/11/19, 11:23 AM
Dude1394 said...: IMO we are quickly cooking to the point that inflation has pretty much been whipped. With our technology on an asymptotic rise, we will technologize our way out of most scarcities. EXCEPT oil. Oil is the essential commodity, more than any other resource. With fracking technology we have technologized our way out of that shortage as well.

Labor will no longer drive prices as we will robotize anything we need to do.

Now the problem is and has become political. How to keep folks motivated and giving to society when there is less and less work. Republicans “learn to code and rent uhauls” won’t do it. Nor will the democrats “give money” do it.

It is a challenge.; 7/11/19, 11:25 AM
mockturtle said...: The comments here show far better understanding of the situation than those of many 'economists'. And yes, let's toss Keynes into the dustbin with Freud!; 7/11/19, 11:26 AM
Achilles said...: Howard said...
Inflation is hidden in the enormous and accelerating debt.

This is backwards.

The debt is being hidden by inflation.

But taking your lack of critical thinking skills into account we get what you are saying.; 7/11/19, 11:26 AM
Bruce Hayden said...: “There can be no inflation -- whatever the employment rate -- unless the Fed is allowing the money supply to expand. If the money supply is held stable, inflation is an impossibility.”

You actually don’t want to hold the money supply (m) stable, because the quantity of goods and services (q) normally expands. Holding it constant would, thus, result in deflation.

“And that's a good thing, despite what our Keynesian-addled elites would tell you.”

And that is always the problem. They make their money and garner their power, through increasing government spending. One consequence of that is that the Fed ends up buying too much of the resulting debt resulting from deficit spending, and that ends up increasing the money supply, diving up inflation.

Above, I mentioned the Obama Recession. A good part of why we had the slowest recovery since the Great Depression was that the Dems were, again, using Keynesian economics. Rewind history a decade, and we had the Democrats essentially trying to outbid themselves with how high they promised that the Keynesian multiplier would be. I knew things were going to get really bad when Speaker Pelosi was promising a 5x multiplier. Despite that economic research over the previous 3/4 century showed that the long term Keynesian multiplier has empirically, repeatedly, shown to be less than one. This should, of course, be obvious, since the government doesn’t actually create wealth, but just redistributes it, with some frictional loss (essentially the difference between the multiplier and one).

These are the elites who think that we should trust them to run the country because they are so smart.; 7/11/19, 11:27 AM
Original Mike said...: "IMO we are quickly cooking to the point that inflation has pretty much been whipped."

I'll have to dig up the old WIN button.; 7/11/19, 11:29 AM
dreams said...: The important thing about the fed is that they're not going to raise the interest rate, rather they are more likely to lower the rate possibly by .25%, maybe fairly soon.; 7/11/19, 11:29 AM
gilbar said...: S&P over 3000
GOD DAMN! this Trump!!! Does he have any idea what this is going to cost me in Capital Gains Taxes?; 7/11/19, 11:29 AM
Achilles said...: The fed took food and gas prices out of the inflation index.

hmmm...

Just like the Supreme Court took the 10th amendment out of the constitution...

It is almost like these institutions have been corrupted somehow and no longer serve their intended purpose.; 7/11/19, 11:31 AM
WisRich said...: Low inflation because the labor participation rate is still historically low.; 7/11/19, 11:33 AM
Bay Area Guy said...: I studied Economics in college. And I got a degree.

I think the first course Freshman year taught us that the price point is where supply meets demand.

Everything afterwards is a bit foggy........

Oh yeah, Keynes and Hayek would debate stuff. I tended to side with Hayek, but Keynes had the bigger influence.

I really shoulda paid much more attention. I coulda been a real Economist.; 7/11/19, 11:34 AM
dreams said...: "Low inflation because the labor participation rate is still historically low."

The unemployment numbers aren't coming down because the labor participation rate is rising as more people seek employment.; 7/11/19, 11:38 AM
Michael K said...: Just like the Supreme Court took the 10th amendment out of the constitution...

The Civil War pretty much gutted it, which is too bad. We will lose more in the coming Civil War. Starting now.; 7/11/19, 11:38 AM
dreams said...: "I really shoulda paid much more attention. I coulda been a real Economist."

Or you could just pretend to be one like Paul Krugman and most of the other liberal economists.; 7/11/19, 11:41 AM
rehajm said...: Everything afterwards is a bit foggy........

Oh yeah, Keynes and Hayek would debate stuff. I tended to side with Hayek, but Keynes had the bigger influence.

I really shoulda paid much more attention. I coulda been a real Economist.

Based on this CV you are a real economist.; 7/11/19, 11:41 AM
Original Mike said...: "Or you could just pretend to be one like Paul Krugman and most of the other liberal economists."

You mean Paul "Dow 27,000" Krugman?; 7/11/19, 11:44 AM
johns said...: "low employment will drive wages up and ultimately higher wages will drive inflation"

wow. I thought cost-push inflation theories were dead, but Powell never got the memo, maybe because he was in law school, where disproven economic theories never die (Keynes said something like that).; 7/11/19, 11:51 AM
JohnAnnArbor said...: The Dow was under 19,000 when Trump got elected. Krugman said markets would never recover.

Remember, he's got a Nobel Prize in economics so he's a Real Authority™.; 7/11/19, 11:52 AM
johns said...: Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.; 7/11/19, 11:54 AM
bagoh20 said...: I think what hes's trying to say is: "I have no idea what works and what doesn't, so I'm gonna do as little as possible with these levers, but thanks for the job, and the checks." I think that's the best way to handle that job. In fact, why not just take a vacation, and take the Congress with ya.; 7/11/19, 11:55 AM
cubanbob said...: Achilles said...
Howard said...
Inflation is hidden in the enormous and accelerating debt.

This is backwards.

The debt is being hidden by inflation.

But taking your lack of critical thinking skills into account we get what you are saying."

Achilles, forget Howard. He takes WMD strength stupidity pills like PB&J and a few others here. Simple fact is this, there is no desire by either party to reign in government spending. Not one politician has spoken out cutting as in spending less in real terms total government spending. Democrats will increase spending and taxes and running deficits. Republicans will lower tax rates and increase spending. Between the two, I rather pay less. That said, interest rates have to stay low just to make the borrowing even possible. You will know when the politicians are serious about spending and inflation when the following occur: the tax exemption elimination of state and muni bonds and the elimination of COLA's. Anyone who thinks full employment is inflationary is talking foolishness.; 7/11/19, 11:59 AM
johns said...: "Anyone who thinks full employment is inflationary is talking foolishness." --cubanbob.

i agree completely. I think economists have been scratching their heads for years because the enormous increase in debt fueled by the Fed's creation of high powered money has not created inflation. Since the Fed mainly influences short term interest rates, the real issue is why the longer-term rates, mainly the 10-year Treasury, have remained low.

the only answer that makes sense to me is that world demand for holding U.S. Treasuries is increasing fast enough to absorb the increase. I hope that doesn't change. IOW, the US continues to benefit from the dominance of the dollar.; 7/11/19, 12:06 PM
Jaq said...: “wow. I thought cost-push inflation theories were dead,”

Unlimited immigration just sucks in more labor to take the stiffness out of the string of wage increases your pushing.

Plus, productivity is just going up and up. Don’t tell me about numbers, with my own eyes I can see the UPS guy and Amazon servers doing the work of countless workers. Every week new computer programs are being published that do reduce the amount of work required to do this job or that, and reduce the amount of workers.

If it weren’t for regulations, how many administrators today, with modern software, would it really take to run a college? Every regulation requires workers to enforce it. Their salaries tacked on to your student loans. Trump is reducing regulations, which is also driving up real productivity. Again, i don’t care about obsolete metrics.; 7/11/19, 12:06 PM
dreams said...: I can remember when the liberals worried about inflation when the unemployment numbers got down to near 6%. The Philips curve, the liberals kept obsessing over the Phlilips curve, always wrong but never in doubt.; 7/11/19, 12:07 PM
Jaq said...: “he only answer that makes sense to me is that world demand for holding U.S. Treasuries is increasing fast enough to absorb the increase.”

Ditto. The rest of the world is a complete mess and foreigners figure that there is a lot of scope to increase taxes on Americans.; 7/11/19, 12:08 PM
Jaq said...: https://twitter.com/paulkrugman/status/960606206174707712

Well that aged well!; 7/11/19, 12:12 PM
bagoh20 said...: I'll tell you what is inflationary - Democrats and their taxes. I drove from Nevada into California last week and the price of gas inflated from $3.00/gal to $5.00/gal instantly. Something about that invisible line in the desert - very mysterious.; 7/11/19, 12:16 PM
Jaq said...: Since California doesn’t believe in borders, Nevadans should open gas stations in California selling $3 gas.; 7/11/19, 12:21 PM
Jaq said...: Maybe cities could decare themselves “sanctuary cities” for Nevadans for that purpose.; 7/11/19, 12:22 PM
johns said...: Aunty Trump: yes, the rest of the world is a mess, and I hope we can hold it together here. i just checked on the Fed's website, and the numbers are pretty scary. The Fed's holdings of Treasuries, i.e. money creation, went from $487 billion in June 2008 to $4219 billion in June 2016: an increase of almost $4 Trillion. yikes. Since 2016 they have been slowly selling securities; they now hold $3668 billion. Since interest rates are steady, that means the Fed's reduction in holdings plus the new issues by the Treasury to cover the deficit are finding new owners.; 7/11/19, 12:24 PM
Ralph L said...: The fed took food and gas prices out of the inflation index.

It seemed like housing was out of it in the Bush years, disguising the Bubble.; 7/11/19, 12:25 PM
bagoh20 said...: Aunty Trump said...

https://twitter.com/paulkrugman/status/960606206174707712

"Well that aged well!"

The comments over there are hilarious. It's really a lesson to all of us to not try and predict or explain the stock market, especially with a partisan approach. The direction of the stock market is like a drunk on a unicycle. Even if he knows where the bar is, he may not take the straightest route there.; 7/11/19, 12:26 PM
Ignorance is Bliss said...: Craig Howard said...
There can be no inflation -- whatever the employment rate -- unless the Fed is allowing the money supply to expand. If the money supply is held stable, inflation is an impossibility.

I think this is wrong. Inflation happens when too many dollars are chasing too few goods. That can happen by the government printing too many dollars. But it could also happen with a fixed money supply if something causes reduced productivity, resulting in too few goods available for purchase. For example, massive government regulation. The sort of New Deal that is ever Green on the left.; 7/11/19, 12:26 PM
Ralph L said...: massive government regulation

In the 70's, we got both, plus higher tax rates on capital gains.; 7/11/19, 12:35 PM
Michael K said...: interest rates have to stay low just to make the borrowing even possible. You will know when the politicians are serious about spending and inflation when the following occur: the tax exemption elimination of state and muni bonds and the elimination of COLA's. Anyone who thinks full employment is inflationary is talking foolishness.<

Yes. There are not that many things good about getting old but missing the consequences of Lyndon Johnson is one.; 7/11/19, 12:49 PM
Gospace said...: As seemingly said before- money supply drives inflation, period.

When Spain was getting boatloads of silver from South America- the price of everything in silver went up because there was more silver. If the money supply were fixed to the amount of gold the government held- prices would be way down because there would be more goods and services- but only the same amount of dollars to chase them. Deflation in economist terms- which they say is bad.

Inflation is good for some, bad for others. Deflation, OTOH, is good for others, bad for some. The feds goal defined by law is to hold inflation to zero. The feds goal, according to the fed, is to limit inflation to .5-1%.

How to measure inflation or deflation is tricky. When I was a kid, candy bars were a nickel. Now, they're over $1.00 in most places. My first car in 1974, brand new, was $3,000 or so. (Candy bars by then were a dime or 12 cents) The car I bought a month ago was about $30,000, a ten fold increase. My car in 1974 didn't have air bags, 4 wheel disc brakes, ABS, lane keeping assist, adaptive cruise control- or cruise control at all, AC, Sirius XM, or onboard navigation and voice activated calling. So did my new car really cost 10 times as much? The candy bar costs 20 times as much- because a candy bar is a candy bar. The car now has much more than a car then. The minimum wage in 1972 was $1.60/hr. My first job then paid $2.50/hr- I've never held a minimum wage job. The minimum wage in my state now is $11.10/hr. Minimum wage has gone up by almost 7 times what it was.

Holding the monetary supply at a constant number per capita should result in no inflation. Holding interest rates as low as possible and constant helps plan the future. Should I by a house now or wait for interest rates to go down> Or should I buy now because rates are going up? If interest rates were held steady then the rational choice would be- buy when you're ready.

My house in El Cajon cost me $144,000. 2 years later, I sold it for $198,000. My house now in the middle of nowhere rural NY cost $90,000. It's assessed value now 20 years later is $110,000. Housing prices are dependent on location, location, location, and have everything to do with supply and demand, little to do with core inflation.; 7/11/19, 12:53 PM
Dude1394 said...: Blogger Original Mike said...
"IMO we are quickly cooking to the point that inflation has pretty much been whipped."

I'll have to dig up the old WIN button.”

Heh, well done.; 7/11/19, 12:54 PM
pacwest said...: "I was curious if the Chairman addressed the inverted yield curve that is seen by many as ominous? Anybody know?"

I haven't seen where he did, if he did. Not ominous, just something to be watched. The extended period of low interest rates over the past decade make an inversion a lesser gauge of recession than it has been historically.; 7/11/19, 12:57 PM
narciso said...: obviously, inflation hasn't gone down, but our long time depth profile, makes aggressive rate hikes, going forward, unsustainable,; 7/11/19, 1:04 PM
joshbraid said...: "Since 2016 they have been slowly selling securities; they now hold $3668 billion. Since interest rates are steady, that means the Fed's reduction in holdings plus the new issues by the Treasury to cover the deficit are finding new owners."

The Fed is papering over the debt by printing money. There is a lot of inflation. For example,I just bought a used car, the last ones three years ago. I assure that the increase in the price of used cars (same mileage, same model, same number of years old) is far, far greater than the official inflation numbers.; 7/11/19, 1:20 PM
gilbar said...: bagoh20 said ....
so I'm gonna do as little as possible with these levers, but thanks for the job, and the checks.

Well, it worked pretty good for President Coolidge; 7/11/19, 1:24 PM
hombre said...: “At the end of the day, there has to be a connection because low employment will drive wages up ....” Wh-a-a-at?

I’m not willing to watch the video to see if this is a misquote. Isn’t “low employment” the same as “high unemployment”? Admittedly, it has been 50+ years since Econ 1A, but wha-a-at?

If my recollection is flawed, I’d be grateful for a correction. Seriously.; 7/11/19, 1:26 PM
Bruce Hayden said...: Also, keep this in mind. The Fed doesn’t appear to actually engage in the print money to drive down inflation foolishness that was a big factor in Carter’s “stagflation”. Instead what they are talking about here is the rate at which they will lend, short term, to banks - the “Fed Funds Rate”. Controlling the quantity of money (M1), through buying Treasuries, and paying for them with Federal Reserve Notes, is their big tool. The Federal Funds Rate is a much weaker tool, and gets progressively weaker as inflation nears zero, which is where we have been for awhile. That is because it allows for very short term (typically over night) borrowing from banks, in particular to prevent them from violating their reserve limits. With higher inflation, it is more important for banks to be running closer to their reserve limits, in order to stay profitable. Lower inflation means that they can run further away from their reserve limits, and it won’t affect their profitability much. And, of course, they need to borrow from the Fed short term (traditionally over night) for changes there to have an affect.

BTW, the other big monetary weapon that the Fed has at its disposal is adjusting reserve requirements. Reserves are the amount of money that a bank has in deposits that it cannot lend out, but must keep on hand, to protect against an imbalance between cash inflows and outflows (including bank “runs”). The monetary multiplier, in a perfect economy, is the reciprocal of reserve requirements. Thus, a 20% reserve requirement results in 80% of deposits that can be lent out, and after working its way repetitively through numerous banks, results in roughly a 5/1 monetary multiplier. This then multiplied by the amount of money created by the Fed by buying Treasuries (M1) is the amount of money effectively in circulation (M2), which is the primary component to the “m” in the tautology mv=pq. The problem though with playing with reserve requirements is that it is an extremely crude tool.; 7/11/19, 1:32 PM
Jaq said...: “I assure that the increase in the price of used cars (same mileage, same model, same number of years old) is far, far greater than the official inflation numbers.”

Used cars are better now. Worth more. I remember when a car was lucky to dodge the junk yard at 80K miles. Cars have shit tons more features. Try and find an AMC Ambassador with 20 airbags, blue tooth, ABS, traction control, Nav, etc, etc, etc. If you took all of those things out, the cars would be cheaper, in real terms than the old ones.

Productivity.; 7/11/19, 1:33 PM
Jaq said...: “As seemingly said before- money supply drives inflation, period. “

I’m sorry, but if the economy keeps producing more stuff people want, more money isn’t inflationary.; 7/11/19, 1:34 PM
dreams said...: "Yes. There are not that many things good about getting old but missing the consequences of Lyndon Johnson is one."

Inflation was good for those who had already bought their homes and had significant mortgage loans because inflation devalued their loans making them a much smaller percentage of their home's value which boosted their net worth but not so good for younger people.; 7/11/19, 1:45 PM
Michael K said...: Housing prices are dependent on location, location, location, and have everything to do with supply and demand, little to do with core inflation.

I bought a house on 2 acres in South Pasadena, a suburb of LA, in 1972. I moved to Orange County in 1972, later in the . I paid $68,000 and, a year later sold it for $78,000.

I looked it up the other day. It is now valued at $ 3/7 million. It has dropped about $230,000 in the last 6 months as the California boom seems to be cooling off. It also looks like the owners sold off half the lot.; 7/11/19, 1:46 PM
dreams said...: I worked with people who had already bought their homes in the seventies and after a few years of inflation, their mortgage payments were a lot less than those paying rent for a comparable place to live. Timing was very important back then and those who were older benefited by already having bought their homes.; 7/11/19, 1:55 PM
DavidUW said...: No no no for 1000 times no

The tie between inflation and employment is 100% false

The claim supposedly worked in the 60’s. Except it didn’t.

1) inflation started rising with a rapid rise in government spending on Vietnam and lbj welfare. Employment was strong
That was the only time in history, literally correlation without causation

2) inflation accelerated, why? Nixon broke the gold standard.

3) oil embargo

During this decade plus currency and commodity adjustment to a devalued dollar, employment swung around quite a bit. But inflation was high and constant.

4) volker interest rates killed inflation.
5) subsequent decades had recessions and growth and a steadily dropping interest and inflation rate.

THERE IS NO CAUSATION. HIGH EMPLOYMENT DOES NOT CAUSE HIGH INFLATION. PERIOD.; 7/11/19, 2:02 PM
gilbar said...: Doc K wrote It is now valued at $ 3/7 million.

For those too lazy to check his link; Doc K typo'd: he meant to write 3.7 Million, not $428,571
I assume most of you just knew that; but i DID check the link ($3,766,207 !!!)
But, of course; a LOT of that price is the prestige factor of owning a famous surgeon's house :); 7/11/19, 2:03 PM
Birkel said...: Surely this means Trump is in trouble.
And don't call me Shirley.

Only Mueller knows what the DOW knows -- Royal ass Inga; 7/11/19, 2:12 PM
dreams said...: There was a big difference in someone buying a house in 1969 and someone buying a house in 1981.

"U.S. Inflation Rate, $1 in 1969 to 1981

According to the Bureau of Labor Statistics consumer price index, prices in 1981 are 147.68% higher than average prices throughout 1969. The dollar experienced an average inflation rate of 7.85% per year during this period, meaning the real value of a dollar decreased.

In other words, $1 in 1969 is equivalent in purchasing power to about $2.48 in 1981, a difference of $1.48 over 12 years.

The 1969 inflation rate was 5.46%. The inflation rate in 1981 was 10.32%. The 1981 inflation rate is higher compared to the average inflation rate of 2.76% per year between 1981 and 2019."; 7/11/19, 2:12 PM
dreams said...: Here is the link to my recent post.

http://www.in2013dollars.com/1969-dollars-in-1981?amount=1; 7/11/19, 2:15 PM
joshbraid said...: "Used cars are better now. Worth more."
I was providing a data point based on comparing the price of a three-year-old car, same model, same mileage, that I find today versus the prices I found three years ago for a three-year-old car, same model, same mileage (apples to apples). The exact same category (apples to apples). The price was at least 10% greater and often closer to 20%.; 7/11/19, 2:16 PM
Jaq said...: "HIGH EMPLOYMENT DOES NOT CAUSE HIGH INFLATION. PERIOD. “

Proving a negative is a pretty high bar but I will grant you that the idea sort of assumes that the economy is static.

A certain number of hamburgers will be eaten.
Hamburgers will be cooked in the same way using the same number of man hours to produce each burger.
As people earn more money with higher wages due to worker scarcity, they will buy exactly the same basket of goods.
Imports won’t change in response to changing economic dynamics.

This might have held true for Spain in the 16th century.; 7/11/19, 2:19 PM
rehajm said...: The big takeaway here is despite all the kings leftie horses and all the king's leftie men they couldn't break the economy or devise a plausible explanation as to why Trump doesn't deserve credit. That Obama's great policies thing rings hollow.; 7/11/19, 2:33 PM
Jaq said...: Every time it goes up, it’s Obama’s foresight and brilliant stewardship, every time it goes down, it’s Trump’s clownish ineptness. It’s all right there in the Krugman Twitter thread.; 7/11/19, 2:36 PM
Birkel said...: The yield curve is not inverted.
Old, not fake, news.; 7/11/19, 2:49 PM
Birkel said...: Milton Friedman argued a computer maintaining the money supply would be better than the Fed.
It seems Chairman Powell might soon agree.

Is our Lost decade going to be 10 years?
Unlike Japan's which started in 1989 and continues today?
Thanks, Keynes!; 7/11/19, 2:55 PM
mockturtle said...: Bagoh sez: I think what hes's trying to say is: "I have no idea what works and what doesn't, so I'm gonna do as little as possible with these levers, but thanks for the job, and the checks." I think that's the best way to handle that job. In fact, why not just take a vacation, and take the Congress with ya.

Yep! I think Powell has the right idea. ;-)

I do kinda miss the interest on my savings account, though...; 7/11/19, 3:04 PM
gilbar said...: AT mocks the idea that...
As people earn more money with higher wages due to worker scarcity, they will buy exactly the same basket of goods.

Here's a thought; one of THE BIGGEST PROBLEMS is that most people
Have high credit card debt
Have very little savings
Have put next to Nothing away for retirement.

Rather than pushing up the price of Big Macs, maybe (just Maybe!) people with higher wages will spend down their debt, and then increase their savings. I mean, maybe (just Maybe!) people aren't Completely Stupid?; 7/11/19, 3:04 PM
traditionalguy said...: This comment has been removed by the author.; 7/11/19, 3:13 PM
traditionalguy said...: This is FED gibberish that makes astrology look scientific.It is all smoke and mirrors for disguising its purpose to send the secret signals that the Bankers are always either pumping up the stock prices or are starting to dump the stock prices. That little nugget is all the insider billionaires need to steal every other investor's stake in the market. That MO used to have to be done on a cycle or it would not work as well. But the world's economy is so diversified now that doing it only a political clash of titans.

Trump has faced the FED down and is about to replace it.; 7/11/19, 3:13 PM
Ralph L said...: The crummy 1950's house my brother and I sold in Alexandria 21 years ago went from $250k to $874k, still lower than all the neighbors. It's half a mile to the Metro but smack on Rt 7, where my parked car was hit and runned into the next lot when it was a year old. Strangely, my dad's nearby but much larger, newer, and nicer house is only a $ million, and it's in a less dense neighborhood half a mile from I-395.; 7/11/19, 3:17 PM
Michael K said...: LDoc K wrote It is now valued at $ 3/7 million.

For those too lazy to check his link; Doc K typo'd: he meant to write 3.7 Million, not $428,571
I assume most of you just knew that; but i DID check the link ($3,766,207 !!!)
But, of course; a LOT of that price is the prestige factor of owning a famous surgeon's house :)

Thanks for noticing that. I wish I still had it but I've done worse since,; 7/11/19, 3:19 PM
AllenS said...: Dow rallies 200 points to close above 27,000 for the first time ever

It's a nothing burger. We just call it winning.; 7/11/19, 3:36 PM
Jaq said...: I think that the way you push a string, that is cause inflation by raising worker’s wages is to stiffen the string by freezing stuff in place, as I noted above. Another way to look at this is if you are an auto maker, it seems self-evident that higher wages is a higher input cost, so the output must cost more, but that’s only if you have the government regulating your relations with workers and your workers are powerful enough to limit your ability to adjust to new realities.

As an automaker, you can’t reduce your workforce unless you are cutting production.
So you can’t automate jobs.
You can’t refactor production to make it more labor efficient
You can’t change the nature of workers’ jobs to make production more efficient
yada yada yada

It’s all about simplifying assumptions that hide realities. Like Einstein said, it’s important to make your model as simple as possible, but no simpler!
Bingo! Higher wages forces up the price of your cars!; 7/11/19, 3:42 PM
Jaq said...: Automaking has changed and the realities are far different today than they were when they were churning out ’73 Vegas.; 7/11/19, 3:44 PM
gilbar said...: Speaking of high unemployment....

CNN mired in a credibility crisis as ratings continue to collapse, experts say

The network lost 18 percent of its audience compared to the second quarter of last year. CNN also dropped a whopping 38 percent of primetime viewers among the key demo.

“Losing nearly 40 percent of an already third-place audience must be a primary topic in internal meetings, with immediate remedies not readily apparent,” Concha said.; 7/11/19, 3:50 PM
johns said...: Regarding the "inflation" of car prices, I hate to be the one defending the BLS, but if you look at the CPI for new vehicles, it has been pretty flat for 25 years. That is because the price of new cars rises, but adjusting for the content, prices are not going up.
https://fred.stlouisfed.org/series/CUUR0000SETA01; 7/11/19, 3:51 PM
Bay Area Guy said...: “Losing nearly 40 percent of an already third-place audience must be a primary topic in internal meetings, with immediate remedies not readily apparent,” Concha said.

One immediate remedy would be to hire Roger Stone for a prime time, newshour slot.

I'm just thinking outside the box.....; 7/11/19, 3:53 PM
Francisco D said...: I do kinda miss the interest on my savings account, though...

I put $100 in a savings account back in the sixties and got 4% and it was not taxable. Things change.

Now it is not worth my time to put my interest earnings on my taxes.

My bank writes the checks and stamps the envelope (or wires the money) for my monthly bills. For that convenience, I lend them my money basically interest free.; 7/11/19, 4:00 PM
Francisco D said...: Dow rallies 200 points to close above 27,000 for the first time ever It's a nothing burger. We just call it winning.

I call it having a comfortable retirement.; 7/11/19, 4:02 PM
rehajm said...: The Phillips Curve is Still Dead.; 7/11/19, 4:35 PM
SeanF said...: Aunty Trump: As an automaker, you can’t reduce your workforce unless you are cutting production.
So you can’t automate jobs.
You can’t refactor production to make it more labor efficient
You can’t change the nature of workers’ jobs to make production more efficient

You can't increase production without increasing your workforce?; 7/11/19, 4:52 PM
Jaq said...: I was talking about the ‘70s, and that might have been true, given the vast powers handed to labor unions by the government.; 7/11/19, 4:56 PM
Jaq said...: My brother used to run a large factory, well, he has run a few of them over the years, and he told me “As soon as I got a windfall like Trump's tax cut, I would spend it on a capital improvement designed to reduce my workforce in some way.”

So he would use it to increase the productivity of the remaining workers then? I didn’t have that rejoinder then, but it seems obvious now.

He also used to say that the quickest way to screw up a production line was for a worker, usually one with long experience, to fiddle with the controls to fix a “problem” that he notices. Which brings us back to the Fed.; 7/11/19, 5:00 PM
madAsHell said...: ""The relationship between the slack in the economy or unemployment and inflation was a strong one fifty years ago ... and has gone away.""

Let me ever so gently paraphrase.......

We didn't know what-the-hell we were talking about then, and we certainly don't know any more today!!; 7/11/19, 5:01 PM
madAsHell said...: As Francis Fukuyama would say..."This is the end of macro-economics!!"; 7/11/19, 5:03 PM
Murph said...: Economists so often seem to use the "ceteris paribus" approach to examination of this or that "cause" purportedly leading to that or this "effect."
That's not the real world, any more than there is one "cause" of climate warming/cooling/changing (if indeed, it's even happening, which is debated.)

The diverse content of all these comments reveals a perfect example of the multiple factors, all the moving parts, involved in a giant economic ecosystem like ours.

It's such hubris to believe that a certain manipulation of one or two factors would result in the desired effect, without altering, for better or for worse, any or all of the other interconnections, both seen and unseen.; 7/11/19, 5:26 PM
Original Mike said...: "Dow rallies 200 points to close above 27,000 for the first time ever"

Been a long time since we've heard from Once Written...; 7/11/19, 5:36 PM