A Washington Post piece on the Fed and the presidential elections told readers:
“A strong economy tends to boost the party currently in power, which is why President Nixon installed confidante Arthur Burns as head of the Fed in 1970, urging him to keep interest rates low to stoke the job market. The result was a decade of runaway inflation that was tamed only by a painful recession.”
This is a very strong and implausible claim. The inflation in the 1970s was fueled in large part by two huge rises in the price of oil. The first was associated with an OPEC oil embargo directed against the United States, which led to a quadrupling in the price of oil between 1973 and 1974. The second was associated with the Iranian revolution, which essentially stopped Iran’s oil exports. At the time, Iran was the world’s second largest oil exporter. There was also a sharp surge in food prices associated with massive sales of wheat to the Soviet Union in 1973.
In addition, there was a sharp slowdown in productivity growth beginning in 1973, which persisted until 1995. This slowdown was completely unexpected and to this day there still is no agreed upon explanation among economists. With workers expecting wage growth in line with the prior rate of productivity growth (2.5–3.0 percent annually), it is not surprising that slower productivity growth would be lead to higher inflation.
Furthermore, there was an error in the official measure of inflation, the consumer price index (CPI), which added approximately 6 percentage points to its measure of inflation over the course of the decade compared to the way the CPI is calculated today. This overstatement of inflation in the CPI likely lead to higher actual inflation since many contracts, most importantly wage contracts, were explicitly tied to the CPI. This means that if mis-measurement caused the CPI to show a higher rate of inflation it would lead to higher wages and prices in many sectors of the economy.
Finally, inflation rose sharply in the 1970s not only in the United States, but almost everywhere in the world. Arthur Burns’ policies could not in any obvious way lead to greater inflation in Europe, Canada, and elsewhere.
A Washington Post piece on the Fed and the presidential elections told readers:
“A strong economy tends to boost the party currently in power, which is why President Nixon installed confidante Arthur Burns as head of the Fed in 1970, urging him to keep interest rates low to stoke the job market. The result was a decade of runaway inflation that was tamed only by a painful recession.”
This is a very strong and implausible claim. The inflation in the 1970s was fueled in large part by two huge rises in the price of oil. The first was associated with an OPEC oil embargo directed against the United States, which led to a quadrupling in the price of oil between 1973 and 1974. The second was associated with the Iranian revolution, which essentially stopped Iran’s oil exports. At the time, Iran was the world’s second largest oil exporter. There was also a sharp surge in food prices associated with massive sales of wheat to the Soviet Union in 1973.
In addition, there was a sharp slowdown in productivity growth beginning in 1973, which persisted until 1995. This slowdown was completely unexpected and to this day there still is no agreed upon explanation among economists. With workers expecting wage growth in line with the prior rate of productivity growth (2.5–3.0 percent annually), it is not surprising that slower productivity growth would be lead to higher inflation.
Furthermore, there was an error in the official measure of inflation, the consumer price index (CPI), which added approximately 6 percentage points to its measure of inflation over the course of the decade compared to the way the CPI is calculated today. This overstatement of inflation in the CPI likely lead to higher actual inflation since many contracts, most importantly wage contracts, were explicitly tied to the CPI. This means that if mis-measurement caused the CPI to show a higher rate of inflation it would lead to higher wages and prices in many sectors of the economy.
Finally, inflation rose sharply in the 1970s not only in the United States, but almost everywhere in the world. Arthur Burns’ policies could not in any obvious way lead to greater inflation in Europe, Canada, and elsewhere.
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Hey, can an experienced doctor from Germany show up and start practicing in New York next week? Since the answer is no, we can say that we don’t have free trade. It’s not an immigration issue, if the doctor wants to work in a restaurant kitchen, she would probably get away with it. We have protectionist measures that limit the number of foreign doctors in order to keep their pay high. These protectionist measures have actually been strengthened in the last two decades.
We also have strengthened patent and copyright protections, making drugs and other affected items far more expensive. These protections are also forms of protectionism.
This is why Morning Edition seriously misled its listeners in an interview with ice cream barons Ben Cohen and Jerry Greenfield over their support of Senator Bernie Sanders. The interviewer repeatedly referred to “free trade” agreements and Sanders’ opposition to them. While these deals are all called “free trade” deals to make them sound more palatable (“selective protectionism to redistribute income upward” doesn’t sound very appealing), that doesn’t mean they are actually about free trade. Morning Edition should not have used the term employed by promoters to push their trade agenda.
Hey, can an experienced doctor from Germany show up and start practicing in New York next week? Since the answer is no, we can say that we don’t have free trade. It’s not an immigration issue, if the doctor wants to work in a restaurant kitchen, she would probably get away with it. We have protectionist measures that limit the number of foreign doctors in order to keep their pay high. These protectionist measures have actually been strengthened in the last two decades.
We also have strengthened patent and copyright protections, making drugs and other affected items far more expensive. These protections are also forms of protectionism.
This is why Morning Edition seriously misled its listeners in an interview with ice cream barons Ben Cohen and Jerry Greenfield over their support of Senator Bernie Sanders. The interviewer repeatedly referred to “free trade” agreements and Sanders’ opposition to them. While these deals are all called “free trade” deals to make them sound more palatable (“selective protectionism to redistribute income upward” doesn’t sound very appealing), that doesn’t mean they are actually about free trade. Morning Edition should not have used the term employed by promoters to push their trade agenda.
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Eduardo Porter noted the rise in income inequality over the last three decades. He then suggests a few policies that could raise incomes for those at the middle and bottom, such as the wage insurance policy recently proposed by President Obama and the Earned Income Tax Credit. While these are reasonable proposals, it is also reasonable to suggest ending the protections that act to raise incomes for those at the top.
For example, we can use trade policy to provide more competition for doctors, dentists, lawyers and other highly paid professionals who occupy the top 1–2 percent of the wage distribution. There are plenty of very bright people in the developing world (and even West Europe) who would be happy to train to U.S. standards and work in the United States at a fraction of the wages of the people who currently hold these positions.
This would directly reduce inequality by eliminating the walls that now sustain the living standards of these highly educated workers. It would also raise the real wages of less-educated workers by reducing the cost of health care and the other services they provide.
We can also use trade policy to reduce the length and strength of patent and copyright protection. This would reduce the cost of drugs and software, further raising the wages of ordinary workers. This would also reduce the income of those at the top, like Bill Gates and the executives in the pharmaceutical industry.
We can also stop using the Federal Reserve Board as a tool to keep down the wages of ordinary workers, which thereby boosts the wages of those at the top. This means not raising interest rates at the first hint of any real wage growth by those at the middle and bottom of the wage ladder.
There are many other policies that could be introduced that would raise the wages of ordinary workers by reducing the income of those at the top. It is remarkable that such policies rarely seem to appear on the national agenda. It is not surprising that this leaves many working class voters resentful.
Eduardo Porter noted the rise in income inequality over the last three decades. He then suggests a few policies that could raise incomes for those at the middle and bottom, such as the wage insurance policy recently proposed by President Obama and the Earned Income Tax Credit. While these are reasonable proposals, it is also reasonable to suggest ending the protections that act to raise incomes for those at the top.
For example, we can use trade policy to provide more competition for doctors, dentists, lawyers and other highly paid professionals who occupy the top 1–2 percent of the wage distribution. There are plenty of very bright people in the developing world (and even West Europe) who would be happy to train to U.S. standards and work in the United States at a fraction of the wages of the people who currently hold these positions.
This would directly reduce inequality by eliminating the walls that now sustain the living standards of these highly educated workers. It would also raise the real wages of less-educated workers by reducing the cost of health care and the other services they provide.
We can also use trade policy to reduce the length and strength of patent and copyright protection. This would reduce the cost of drugs and software, further raising the wages of ordinary workers. This would also reduce the income of those at the top, like Bill Gates and the executives in the pharmaceutical industry.
We can also stop using the Federal Reserve Board as a tool to keep down the wages of ordinary workers, which thereby boosts the wages of those at the top. This means not raising interest rates at the first hint of any real wage growth by those at the middle and bottom of the wage ladder.
There are many other policies that could be introduced that would raise the wages of ordinary workers by reducing the income of those at the top. It is remarkable that such policies rarely seem to appear on the national agenda. It is not surprising that this leaves many working class voters resentful.
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Paul Krugman, who certainly knows better, referred to the “risk of deflation” receding in the euro zone in his blog today. The point is that it doesn’t matter if the inflation rate crosses zero and turns negative, the problem is that the inflation rate is too low. It’s more too low if we have -0.5 percent inflation rather than 0.5 percent inflation, but this is no worse than having the inflation rate fall from 1.5 percent to 0.5 percent.
As I pointed in my prior post: “The inflation rate is an aggregate of millions of different price changes (quality adjusted). If it is near zero then a very large number of the changes will already be negative. When it falls below zero it simply means that the negative share is somewhat higher. How can that be a qualitatively different economic universe?”
The reason why this matters is that we can get a false complacency over the fact that prices are not falling, just rising very slowly. We should want a higher rate of inflation. And we should not be congratulating the central bankers just because the aggregate measure of inflation is greater than zero.
Paul Krugman, who certainly knows better, referred to the “risk of deflation” receding in the euro zone in his blog today. The point is that it doesn’t matter if the inflation rate crosses zero and turns negative, the problem is that the inflation rate is too low. It’s more too low if we have -0.5 percent inflation rather than 0.5 percent inflation, but this is no worse than having the inflation rate fall from 1.5 percent to 0.5 percent.
As I pointed in my prior post: “The inflation rate is an aggregate of millions of different price changes (quality adjusted). If it is near zero then a very large number of the changes will already be negative. When it falls below zero it simply means that the negative share is somewhat higher. How can that be a qualitatively different economic universe?”
The reason why this matters is that we can get a false complacency over the fact that prices are not falling, just rising very slowly. We should want a higher rate of inflation. And we should not be congratulating the central bankers just because the aggregate measure of inflation is greater than zero.
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Folks,
I’m off on vacation, so I won’t be beating the press for the next week. I’ll be back Wednesday, March 9th. Just remember, in the meantime, don’t believe anything you read in the paper.
Folks,
I’m off on vacation, so I won’t be beating the press for the next week. I’ll be back Wednesday, March 9th. Just remember, in the meantime, don’t believe anything you read in the paper.
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