At the site Wired in the business section, there is a rather crazy article that proposes that inflation has been defeated by technology. Prices that should have risen under the twentieth century parameters have stagnated instead, and the author credits technology for keeping those prices down.
It's an interesting idea, but it is based upon a faulty premise. Here's the key sentence from the author:
But when Yellen acknowledges that the Fed may have misjudged, she is speaking to the fact that over the past eight years, economic output has picked up and employment has grown, but neither wages nor prices have risen much. Inflation has barely nudged 2% in the past decade.
Think about what those sentences really indicate. The key line is "economic output has picked up and employment has grown." These are the words of a committed liberal economist who now accepts that economic growth of less than 2% per year accompanied by a huge decline in the percentage of the population that is working is the "new normal". It isn't.
Through the century preceding the Obama years, economic growth in the USA averaged about twice the level of the Obama years. That century included the Great Depression with its major contraction in the economy, so in the rest of those years, growth was substantially more than twice the rate in the Obama years. Indeed, Obama is the only president in modern American history who presided over an economy that never once achieved 3% growth in any year. It wasn't a that economic output "picked up" but rather that it stagnated and barely grew. On top of that, employment did grow, but at such a paltry rate that it took nearly the entire 8 years under Obama just to get back to the same number of jobs as was the case just prior to the recession of 2008. In other words, the economy staggered along with wholly substandard growth for all of Obama's term in office. The unemployment rate went down, but mostly because people left the work force rather than due to the creation of a great many jobs. On top of this, the Obama refusal to enforce the immigration laws led to a giant influx of illegal aliens who worked for less than legal wages and kept American workers from getting raises.
Under the actual conditions, it is not surprising that neither wages nor prices have risen much. On the labor front, there is a vast pool of potential workers who have given up looking for employment. That doesn't mean that as conditions become more favorable they won't take jobs, but only that they stopped looking for a while. Then there are also the millions of illegal workers who do all sorts of jobs for extremely low wages, thereby drying up employment opportunities for low skilled American workers. With all this available labor, there is no reason for wages to rise. That eliminates one of the two main causes of inflation, namely rising wages. The lack of rising incomes is also coupled with the rising aggregate cost of health insurance to eliminate the other main cause of inflation, rising demand. The average family has seen its costs for health insurance rise, sometimes dramatically, under Obamacare. This rise has exceeded any rise in incomes, so the average family actually has less to spend on other goods and services than it did prior to the 2008 recession. Less income means less demand which means less inflationary pressures. Indeed, the only large items in our economy which have seen soaring prices are health insurance and health services. That, however, is mainly a product of Obamacare.
None of the events of the last eight years indicate that the rules governing inflation have changed at all. Technology has certainly reduced the cost of some items and it has created whole new industries and products as well. That technology has not altered the basic laws of economics. Only by first accepting that 2% growth and huge numbers of underemployed people is the new normal could one ever conclude, however, that inflation has been beaten.
It's an interesting idea, but it is based upon a faulty premise. Here's the key sentence from the author:
But when Yellen acknowledges that the Fed may have misjudged, she is speaking to the fact that over the past eight years, economic output has picked up and employment has grown, but neither wages nor prices have risen much. Inflation has barely nudged 2% in the past decade.
Think about what those sentences really indicate. The key line is "economic output has picked up and employment has grown." These are the words of a committed liberal economist who now accepts that economic growth of less than 2% per year accompanied by a huge decline in the percentage of the population that is working is the "new normal". It isn't.
Through the century preceding the Obama years, economic growth in the USA averaged about twice the level of the Obama years. That century included the Great Depression with its major contraction in the economy, so in the rest of those years, growth was substantially more than twice the rate in the Obama years. Indeed, Obama is the only president in modern American history who presided over an economy that never once achieved 3% growth in any year. It wasn't a that economic output "picked up" but rather that it stagnated and barely grew. On top of that, employment did grow, but at such a paltry rate that it took nearly the entire 8 years under Obama just to get back to the same number of jobs as was the case just prior to the recession of 2008. In other words, the economy staggered along with wholly substandard growth for all of Obama's term in office. The unemployment rate went down, but mostly because people left the work force rather than due to the creation of a great many jobs. On top of this, the Obama refusal to enforce the immigration laws led to a giant influx of illegal aliens who worked for less than legal wages and kept American workers from getting raises.
Under the actual conditions, it is not surprising that neither wages nor prices have risen much. On the labor front, there is a vast pool of potential workers who have given up looking for employment. That doesn't mean that as conditions become more favorable they won't take jobs, but only that they stopped looking for a while. Then there are also the millions of illegal workers who do all sorts of jobs for extremely low wages, thereby drying up employment opportunities for low skilled American workers. With all this available labor, there is no reason for wages to rise. That eliminates one of the two main causes of inflation, namely rising wages. The lack of rising incomes is also coupled with the rising aggregate cost of health insurance to eliminate the other main cause of inflation, rising demand. The average family has seen its costs for health insurance rise, sometimes dramatically, under Obamacare. This rise has exceeded any rise in incomes, so the average family actually has less to spend on other goods and services than it did prior to the 2008 recession. Less income means less demand which means less inflationary pressures. Indeed, the only large items in our economy which have seen soaring prices are health insurance and health services. That, however, is mainly a product of Obamacare.
None of the events of the last eight years indicate that the rules governing inflation have changed at all. Technology has certainly reduced the cost of some items and it has created whole new industries and products as well. That technology has not altered the basic laws of economics. Only by first accepting that 2% growth and huge numbers of underemployed people is the new normal could one ever conclude, however, that inflation has been beaten.
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