It's A Mistake To Worry About Inflation

TBI - Project Syndicate ^ | 6-8-2013

[blam]

It's A Mistake To Worry About Inflation

Kenneth Rogoff, Project Syndicate
June 8, 2013, 3:30 PM

CAMBRIDGE – The world’s major central banks continue to express concern about inflationary spillover from their recession-fighting efforts. That is a mistake. Weighed against the political, social, and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about. On the contrary, in most regions, it should be embraced.

Perhaps the case for moderate inflation (say, 4-6% annually) is not so compelling as it was at the outset of the crisis, when I first raised the issue. Back then, against a backdrop of government reluctance to force debt write-downs, along with massively over-valued real housing prices and excessive real wages in some sectors, moderate inflation would have been extremely helpful.

The consensus at the time, of course, was that a robust “V-shaped” recovery was around the corner, and it was foolish to embrace inflation heterodoxy. I thought otherwise, based on research underlying my 2009 book with Carmen M. Reinhart, This Time is Different. Examining previous deep financial crises, there was every reason to be concerned that the employment decline would be catastrophically deep and the recovery extraordinarily slow. A proper assessment of the medium-term risks would have helped to justify my conclusion in December 2008 that “It will take every tool in the box to fix today’s once-in-a-century financial crisis.”

Five years on, public, private, and external debt are at record levels in many countries. There is still a need for huge relative wage adjustments between Europe’s periphery and its core. But the world’s major central banks seem not to have noticed.

In the United States, the Federal Reserve has sent bond markets into a tizzy

(Snip)

[Perdogg]

It is sort of like telling people who are not addicted to heroine to shoot up because the worries of heroine addiction are premature.

[InterceptPoint]

Perhaps the case for moderate inflation (say, 4-6% annually) is not so compelling as it was at the outset of the crisis, when I first raised the issue. ++++++++++
Let’s re-write that in terms we should all understand.

Perhaps the case for a moderate (say, 4-6% annually) decrease in the buying power of both our savings and our salaries is not so compelling as it was at the outset of the crisis, when I first raised the issue.

In fact, 4 years of this would only result in theft by the central banks of about a fourth of our savings.

What’s not to like?

[palmer]

“V-shaped” recovery

It is impossible to recover when there is no possible faith in the long term value of the currency. What the author wants is not recovery but releveraging. The deleveraging of 2008 needed to continue to eliminate the bad debt (along with many large banks) so we could start over. Instead the Fed propped up the banks with carry trade proceeds which further undermined the economy. The debt bubble economy has not roared back with a V-shaped "recovery" nor have had a real recovery. We have simply wasted time with fruitless Keynesian spending and economic stagnation.

[DannyTN]

I agree that dealing with unemployment is more important than inflation. But easy money is not making a noticeable dent in unemployment.

If we want to fix the economy we need to shut off the imports from China and put our own people back to work. That will cause inflation too as Americans cost more than Chinese. But the end result is that Americans will be back to work, our economy grows, our industries rebuild, we become less entangled with foriegn countries and we become a much stronger wealthier nation.

I've become a broken record on tariffs, because it's the most important issue facing our country. That is unless eavesdropping Barry really is planning a coup. And even then putting people back to work diminishes the Black Spy's power.

[BfloGuy]

I've become a broken record on tariffs

Yes, you have. And you still can't seem to understand that Americans would be perfectly competitive if the federal government's monetary policies, tax policies, and regulatory policies were fixed.

It isn't our wages that cause companies to move operations overseas -- it's the taxes, regulations, and inflation. But they are unable to control those, so the only thing left they can control is wages.

Thus, they leave. Your call for tariffs just adds another bad policy on top of the others. Capitalism works if you let it.

[expat_panama]

bttt

[DannyTN]

"Yes, you have. And you still can't seem to understand that Americans would be perfectly competitive if the federal government's monetary policies, tax policies, and regulatory policies were fixed. "

Because we wouldn't. You could eliminate all taxes and regulations and we still couldn't compete with Communist China's wages.

And while I hear a lot of complaints about taxes and regulations. I don't see hardly any specific plans. What regulations are you going to cut?

Our taxes do however add a burden to the product costs of domestic producers. FIT, SS & Medicare tax adds about 10% to product costs. But we let foreigners import goods and only pay a 1% tariff. How is that fair? Low tariffs relative to domestic taxes create an incentive to offshore production.

The wage differential is still the bigger incentive. But the tariff/tax difference adds to the problem. So raising tariffs would help correct this problem. It would help reduce the budget deficits and it would put Americans back to work.

Capitalism works if it has a good supporting regulatory environment in which to operate. The recent banking crisis was to a large part the result of de-regulation of the banking industry. Not too much regulation. Capitalism doesn't work when your market isn't protected from predatory foriegn countries or when you create incentives to offshore by having too low of import tariffs.

[expat_panama]

we still couldn't compete with Communist China's wages.

We could because we do and the market works and can't be ignored. 

Americans are paid more not because our government protects us but because our work is worth more.  Gov't force seems big but it's helpless in the face of simple supply and demand. The facts speak for themselves-- American workers produce more than ten times the value of a Chinese worker:

• 
• The labor productivity of BRICs countries: Russia was best at $38,638 and 46th, China was $11,612 and 82nd

[DannyTN]

"Americans are paid more not because our government protects us but because our work is worth more."

China has huge number of people engaged in manual farming. Of course their "average" productivity numbers are low. But when you transfer machinery to China and teach them how to use it and they work 12 hour days, their productivity is higher.

We are at 23% unemployment. Keep doing the same thing and watch our productivity numbers shrink.

If China's productivity is so low why is everything in Walmart made in China?

[DannyTN]

"Americans are paid more not because our government protects us but because our work is worth more."

China has huge number of people engaged in manual farming. Of course their "average" productivity numbers are low. But when you transfer machinery to China and teach them how to use it and they work 12 hour days, their productivity is higher.

We are at 23% unemployment. Keep doing the same thing and watch our productivity numbers shrink.

If China's productivity is so low why is everything in Walmart made in China?

[expat_panama]

China has huge number of people engaged in manual farming...

About half of China's workforce is in agriculture compared to less than two percent of America's workforce.   Now understand also that China still has to import about $17,250,000 ,000 worth of food from the US every year along with three times that amount from the rest of the world.  Things like this are why we see such outrage on these threads when US productivity is mocked.

why is everything in Walmart made in China?

Not everything,

Walmart's becoming one of China's top retailers and the store is still 100% made in Arkansas.

[1rudeboy]

It’s perfectly natural that a discussion about inflation in the U.S. should turn to a discussion of wages in China. The connection is clear . . . wait a minute.

[expat_panama]

huh.

It happens so smoothly I didn’t even notice the subject change...

[VideoDoctor]

If China's productivity is so low why is everything in Walmart made in China?

If you've been to Walmart lately you will see the rising cost of production in China is causing product prices at Walmart to become higher and higher.

One example: No less than 2 years ago I could buy a package of socks ( 6 pair ) for $6.99... That same brand and number of socks today are $13.99. Granted some inflation and cotton costs are involved.. but the greater cost increase is that China is paying workers MORE so they can spend more. China is developing a consumer economy and higher wages is a necessity if they're going to sell those Chevrolets that are being produced in China.

[BfloGuy]

You could eliminate all taxes and regulations and we still couldn't compete with Communist China's wages.

Well, if we eliminated "all" taxes and regulations, wages wouldn't be much of an issue. Taxes and regulation comprise a much higher percantage of most business's costs than do wages.

But that unlikely scenario aside, the U.S. has high wages because of our high capital base. More capital enables production with fewer people. With equal economic climates, our high wages would comprise [on average] the same percentage of sales as in a low-wage country.

Wages don't rise because of the goodness of the entrepreneur's heart; they are a result of higher productivity.

It's true that high wages are almost always given as the reason for moving production abroad, but, as I said, that's because wages are the biggest cost that entrepreneurs can control. That does not mean they are the biggest cost.

[DannyTN]

"Now understand also that China still has to import about $17,250,000 ,000 worth of food from the US every year along with three times that amount from the rest of the world. "

Fine when we get to the point that China only sells us $17 billion worth of goods to pay for the food they import then we can start lowering the tariffs.

But right now China sells us $400 billion a year and only buys $100 billion a year. And it's getting worse every year. And it is the primary cause of our 23% unemployment, the destruction of many US industries and our increasing dependence on foreign states.

[DannyTN]

Wages don't rise because of the goodness of the entrepreneur's heart; they are a result of higher productivity.

Tell that to the 23% of Americans who aren't counted in the productivity numbers anymore because they are in the unemployment line, their job having been offshored.

U.S. Real wages have stagnated.

The U.S. Productivity Farce

[DannyTN]

"Taxes and regulation comprise a much higher percantage of most business's costs than do wages."

That's just not true. Give me a source.

[DannyTN]

"Taxes and regulation comprise a much higher percantage of most business's costs than do wages."

That's just not true. Give me a source.