Inflation Chicken Littles

Dean BakerIf there is one thing that binds all the rich together it is their obsession with inflation. The situation is very simple. If you work for a living, you need a job. Modest inflation is good for the job market. But if you own for a living, then inflation is bad. That’s because the stuff you own loses value. A reasonable society would balance those two interests. Indeed, the Federal Reserve is explicitly supposed to keep both inflation and unemployment low. This is its “dual mandate.” But in practice, as long as unemployment isn’t ridiculously high, the Fed doesn’t seem to care. Effectively, they have a single mandate and that is to keep inflation at 2%.

Given that the power elites want low inflation, there is a whole pundit industry that is constantly searching for any signs that inflation is on the rise. What’s especially awful about this is that the Fed has almost magical powers to stop inflation. So there is no real need to stop inflation before it starts. But to listen to these people, we will go from 2% inflation to Zimbabwe overnight and all the bonds of the rich people will be worthless.

This actually demonstrates what’s going on. If inflation is allowed to tick up one percentage point for a couple of months, it will cost bond holders a bit of money. But that doesn’t even begin to offset the huge damage done to workers when the Federal Reserve slams the breaks on the economy to head off the rich losing a few pennies. I think it is really important to remember this the next time you hear someone ranting about inflation being just around the corner.

Recently, Dean Baker has been highlighting a new set of arguments, most recently, The Quit Rate, the Fed, and Braindead Employers. It’s about the fact that the rate at which people quit their jobs has gone up slightly. Generally, people rarely quit jobs when the economy is bad because it’s hard to find another. So these people argue that an uptick in the quit rate means that inflation is just around the corner. But as Baker points out, even with the uptick, the quit rate is still below its level during the worst of the 2001 recession.

More important, Baker made an interesting observation. Maybe people are quitting just because employers are being particularly awful during these bad times. After all, high unemployment is great for employers: they get to choose the very best workers and they get to pay them less. Baker goes on to provide a fanciful mechanism by which this might happen: employees feeling mistreated by wage stagnation.

I’m sure you have seen one or more stories about this or that company or industry that just can’t find skilled employees. But the truth is that these complaints are all nonsense. If companies really were desperate for skilled employees, wages would be rising. And we aren’t seeing it, except in a few rarefied areas like sewing machine use. So Baker concluded:

Maybe employers really don’t understand that if they offered higher wages they would get more workers applying for jobs. After all, no one gives you a test in basic economics to become a boss. If that is the case, we would expect the failure to raise wages would lead to more unhappy workers and more quits. This would be true even if the labor market is weak.

So maybe the answer to the riddle of a higher than expected quit rate is a change in behavior among employers rather than a change in the labor force. It’s at least as good as the other theories out there.

Most likely the uptick in the quit rate means nothing at all. If you sniff around employment and financial data enough, you are bound to find some random bit of information to make your case that the Fed must raise interest rates to slow the economy. That’s what these people do. But they should never be listened to. We should start fighting inflation when the inflation rate really does start to rise. Personally, I think the Fed’s inflation target should be 4%, not 2%. So I think the Fed ought to allow inflation to get quite high before pulling back. But the inflation Chicken Littles really want deflation. They are looking out for their “clients” and not at all for the economy as a whole. And they should be treated accordingly.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

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