January 8, 2018


Economist James K. Galbraith isn't celebrating Dow 25,000 (Market Watch,  Jan 8, 2018)

The Fed seems to be stumped by the lack of inflation.

There hasn't been inflation in the economy since the early 1980s. It collapsed with the end of the Soviet Union and with the rise of China as a supplier for consumer goods. So the Fed has been patting itself on its back for decades [of] holding back a phenomenon that doesn't exist. [The Fed is like] the little Dutch boy with the finger in the dike who never troubles himself to look over the levy to see that the lake is dry. Economists have fed into that with this completely made-up view that it is the central bank that drives the inflation process -- it is not.

The Fed is trying to inch up interest rates. It this wise in your view?

What they're doing now, I think, is driven by their sense that it is historically normal to have a higher short-term interest rate. The problem is that having had the short rates low for such a long time, the long rates have come down. So what was historically normal before is no longer relevant. As they raise the short rates, they are going to cause trouble. The main trouble they've been causing is the rise of the dollar with respect to everything else. And that is going to make imports cheaper, exports harder. It is going to diminish the internal competitiveness of the economy, diminish internal employment. I suspect the Fed will be reluctant to cause too much chaos because they recognize that, once you have a very flat yield curve, you destabilize the financial markets. But to the extent that they pursue this particular line, they are going to run into that difficulty.

The central bank thinks the long-term unemployment rate is 4.6%.

There is no Phillips Curve, and there hasn't been for decades. The supply of labor is not a constraint. If you wish to pay people higher wages, you could lure people back out of retirement. Net immigration has basically stopped. If you needed more workers, it would start up again. So we don't have a real labor-force constraint. We are not going to get inflationary pressure from the labor markets. It has been 40 years. Economists are slow learners, and central bankers are a slow-learning subset. They should recognize that things did change in the 1980s.

Workers cannot bargain for higher wages?

There is none of the bargaining power that existed in the 1950s and '60s when you had a union-driven manufacturing sector that could negotiate steady increases in wages. That hasn't existed since the 1980s.

Posted by at January 8, 2018 5:59 PM