Yesterday I wrote about inflation in general. My two-post idea has morphed into three, though. Today I’ll write about the current situation. Tomorrow, I’ll write about what happened during the last bout of runaway inflation the US experienced, in the late 1970s.
why are the money taps wide open?
It’s partly because we’re wrapping up the fourth year of recovery from the economic lows of 2009 and still have about three million people (2% of the workforce) unemployed. In those workers lives, today is a repeat of the depression of the 1930s.
As Fed Chairman Bernanke has been saying in testimony to Congress with increasing force, the Fed is not well-equipped to prevent them from becoming part of a European-style permanent underclass. That’s a job for fiscal policy shaped by the administration and for Congress–stuff like reforming the tax code to stimulate new business formation, or infrastructure spending, or retraining.
But Washington has no interest, leaving the Fed money policy, which is legally obligated through its “dual mandate” to try to maintain full employment, as the only option. (The Fed’s other mandate, by the way, is to try to create the highest sustainable–meaning non-inflationary–level of GDP growth.)
unemployment is a bigger economic threat than inflation,
in the Fed’s view. Therefore it feels justified in maintaining its massive money stimulus.
can the situation change?
Inflation in a developed economy starts up when there are more job openings than there are people to fill them. Companies then begin to headhunt workers away from rivals with large wage increases. Fast-rising wage levels–together with newly-flush workers’ relative indifference to paying more for things–are what creates overall inflation to spring up.
monitoring the unemployment rate
One way of keeping an eye out for incipient inflationary impulses is to keep track of changes in working hours and wages. The Bureau of Labor Statistics does this. The Fed also uses the unemployment rate as its key leading indicator of wages. The rationale is that it’s hard for a worker to ask for a big raise while there’s a long line of qualified unemployed eager to do the work for the current wage–or less.
one big assumption
Over the past few years there’s been a continuing debate among economists as to how much of the current unemployment is cyclical and how much is structural.
“Cyclical” means that the workers have skills employers want but business in general isn’t strong enough to justify adding staff. “Structural” means that a potential worker is unemployed because he doesn’t have the skills employers want. Maybe he can’t use a computer, for example.
The Bureau of Labor Statistics tries to help measure the difference between cyclical and structural through its JOLTS (Job Openings and Labor Turnover Survey) reports. These show the number of job openings in the US that are currently unfilled. A new JOLT report comes out at 10am Eastern time today. The previous one, from May 24th, shows 3.5 million unfilled jobs in the US. That’s about 10% below the pre-Great Recession highs. It’s also 75% above the mid-2009 lows of 2.0 million.
to my mind, the JOLTS reports suggest at least part of the unemployment problem is structural–something loose money can’t do anything about. But no one knows exactly how much this might be.
What if all the open jobs are from tech firms that want to hire college graduates with IT backgrounds, while the three million “extra” unemployed are all high school grads who used to work in construction and have limited computer literacy. If that were true, we’re already at full employment. Continuing Fed easing would already be in the process of igniting an inflationary upward wage spiral.
I’m not aware of anyone who is saying this is the case. But how close are we? No one really knows.
That’s the risk the Fed is taking–not because it wants to, but because it sees Washington as giving it no other choice. It’s the reason the Fed is talking about taking its foot off the monetary gas pedal when the unemployment rate is at 6.5%, even though full employment more likely means 5.0%-5.5%.
It’s also the reason, I think, that the financial markets have decided all by themselves in recent weeks–as they typically have in the past–to start to do the Fed’s tightening work for it.