The drumbeat for a higher inflation target is picking up. The Chicago Fed’s Charles Evans recently advocated a less hawkish Fed stanch on maintaining the 2 percent inflation target with few signs of inflation even on the horizon.
Elizabeth Sawhill, a Senior Fellow at Brookings in a New York Times Op-ed, on the heels of February’s almost record 313,000 job creation number, is also saying that higher inflation would be desirable after many years of too low inflation.
“In fact, a high-pressure economy, with wages and prices a little higher than we’ve become used to, might actually do a lot of good for the people who need it most,” said Sawhill. “Working families need a tight labor market — and higher wages — to get ahead. It would be a costly mistake to raise rates too much or too soon.”
I have been saying this for years, as we know that higher growth and higher inflation go hand-in-hand, which in turn boosts wages. The Fed’s preferred PCE and retail CPI indexes have largely remained below 2 percent since 2008, while the GDP growth rate has also averaged 2 percent.
Why don’t we have higher growth? Because higher GDP growth requires that corporate profits reach those that will invest or spend them, including governments, working folk, and corporations have been better at buying back their own stock rather than investing their profits, as I’ve also been saying in past columns. While governments have been living on austerity budgets since the Great Recession.
“We are in the midst of a big fiscal and monetary experiment, says Sawhill. “And as with any experiment, the consequences are unknown. What we do know is that the costs of the Great Recession were enormous — at least $4 trillion in lost income, or about $30,000 per household, according to my calculations. The biggest losses were experienced by those in the bottom and middle portions of the income distribution who lost jobs and saw much of the equity in their homes destroyed.”
The best way to boost growth and wages is to boost labor productivity, which is a measure of the amount produced per hours worked, and largely depends on capital investment. The productivity chart above portrays it’s fluctuations over the years with Q4 2017 showing no change in labor productivity at all.
How do we improve productivity? It is very basic economic theory–improve capital investment. Taxing those that don’t invest their profits in productive uses—the wealthiest among us and corporations—would allow governments to spend more on education, infrastructure, environmental protection, R&D, health care; need I go on? By doing so, we boost extremely low labor productivity, and even a slight boost in productivity can boost everyone’s standard of living.
So it really means reversing the politics du jour in Washington that is paid for by Big Business lobbyists, and the Fed policy of raising interest rates before there are any real signs of inflation.
Harlan Green © 2018
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