As inflation in the United States reaches new heights, economists are debating how high the Federal Reserve will need to hike interest rates to curb demand and rein in price growth. Some commentators believe that the Fed will need to be as aggressive as Fed Chair Paul Volcker in the early 1980s, who ended up raising interest rates to as high as 20%.
Such figures understandably raise concerns that the effort to contain inflation will result in a recession and a sharp increase in unemployment. As a recent Peterson Institute for International Economics policy brief observes, reductions in job vacancies engineered through contractionary policies empirically go hand in hand with increases in unemployment.
Worse, while interest-rate hikes would likely increase unemployment over time, they will be insufficient to rein in inflation in the short run. Recent price increases may have been triggered by extraordinarily high demand following the pandemic, but supply-side factors – especially labour shortages and the energy crisis caused by Russia’s war in Ukraine – have also played a significant role. Inflation cannot be contained unless these factors are addressed, too.
The situation calls for three supplementary initiatives. First, the conflict in Ukraine must be de-escalated. Although the war did not “cause” inflation, it has certainly contributed to rising prices – especially in the food and energy sectors – by exacerbating shortages that were previously expected to recede as COVID-19 restrictions were lifted.
As long as the war continues, energy and food prices will remain high, and uncertainty will keep rattling markets. Trade flows may be reoriented to phase out energy imports from “unfriendly” countries (to use the current jargon); but such realignments cannot happen fast enough to ease the current food and energy shortages. While diplomacy could still de-escalate the conflict (given that all sides have strong incentives to do so), time is running out. With each passing week, a face-saving settlement becomes harder to reach.
Second, America needs to move past COVID-19 in order to address labour shortages in specific sectors. Vaccines are widely available and have been shown to prevent serious illness in most cases. It is past time to abandon rules requiring workers to take multiple days off if they test positive, even when they are asymptomatic. Such policies have resulted in severe bottlenecks in key sectors, with the airline industry being a prominent example.
Third, the US urgently needs policies to push its labour force participation rate back up to its pre-COVID level. Many commentators have drawn parallels between the current economic environment and the stagflationary 1970s. But one feature that is unique to our time is the “Great Resignation.” The pandemic has left Americans tired, demoralised, and unwilling to accept work that doesn’t meet a higher standard of job satisfaction.
People are increasingly demanding “good jobs” with decent pay, benefits, and security (which often means that they are sheltered from unbridled foreign competition). But these are not the kinds of jobs that many firms offer. Plenty of essential jobs are neither particularly lucrative nor satisfying – whether it be loading and unloading trucks or container ships, washing dishes and bussing tables in restaurants, or working in construction or heavy manufacturing. Moreover, even high-paying finance and tech jobs in New York and San Francisco may fall short of workers’ expectations if they require long daily commutes.
In a tight job market, it is not surprising that more Americans are saying “no” to work they perceive as unpleasant. But someone has got to do it, and for every American who upgrades their job or drops out of the labour force, there are several immigrants who would be happy to do the work that has been left behind. These immigrants, by definition, do not take work away from Americans; rather, they provide a net benefit to the economy. And the same goes for international trade, which can ease production bottlenecks and supply-chain shortages – effectively “importing” labour without immigration.
Unfortunately, US President Joe Biden’s administration has stuck with much of the protectionist rhetoric used by its predecessor. Promising American workers well-paid, secure jobs, the administration has done little to increase immigration or permit more foreign competition, thus contributing to today’s labour shortages. We have been reminded once again that protectionism ultimately harms the very people that it is supposed to help – especially during periods of supply-side shortages.
This cool-headed economic logic may sound inconsistent with progressive ideals and the Biden administration’s commitment to empowering American workers. But we need to remind ourselves what is at stake here. High inflation undermines the entire progressive agenda. It makes the average worker worse off, and when it shows up in food and gasoline prices, it is deeply regressive. Because poorer households must spend a larger share of their limited incomes on basic needs, they fall even further behind the well off.
In an era of rapidly rising interest rates, higher debt-servicing costs will inevitably lead to fiscal spending cuts, including to much-needed infrastructure investment. Policies to address climate change and foster green growth are already being abandoned as policymakers focus on alleviating people’s short-run pain (through performative gestures like a gasoline tax holiday). The Biden administration and congressional Democrats are right to be worried about this year’s midterm elections – which makes it all the more surprising that they haven’t embraced supply-side inflation-fighting strategies.
Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is Professor of Economics at Yale University. Copyright: Project Syndicate, 2022, published here with permission.
47 Comments
“It’s difficult for us to realize this now, but up until 2009, nobody seriously conceived of imposing negative interest rates. It just didn’t seem possible. But, and this is the crucial point: Everything was posited on the view that central bankers could behave this way because inflation was low. And why was it low? Because of their sound monetary policies. They referred it back to themselves! And now, the moment inflation goes out of control, they say: Oh, it’s not our responsibility, it has to do with Ukraine, or supply chains, or China’s lockdowns. I see inflation as a sort of resolution of structural imbalances. Inflation is a brutal and merciless way of resolving imbalances. But once everyone knows, that everyone knows, that inflation IS a problem, it all goes poof.”
https://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/TFTF_Jul_23_202…
Just stop your fighting, ignore the pandemic & open up immigration to remind citizens that their jobs aren't secure so they should stop complaining about low wages & poor conditions.
If it didn't state the author was a former economist at the World Bank I'd have guessed it.
Former economist or not, this person is not very bright. They seem to be unable to connect the dots. They argue that because Americans are no longer willing to do the 'unpleasant' jobs because they want 'good jobs' with decent pay, security and benefits 'by definition' importing immigrants to do it doesn't take a job away from an American. Conveniently forgetting that 'unpleasant' jobs like factory work used to be good jobs with decent pay, enough to support a family. That's what a surplus of labour does - drives down pay and conditions.
Exactly right. We have forgotten what a successful economy looks like. A parent working full-time should earn enough to house and feed their family in reasonable comfort. Sadly economists are brainwashed into being guard dogs for a system where wealth and power accumulate with the top few per cent.
Exactly. Why should people care about what's good for 'the economy'? The economy doesn't have interests - things can only be good or bad for people. Telling people that something is good for the 'economy' is cold comfort when what that means in practise is that most people are worse off apart from the very wealthiest.
Nah I don’t reckon. they have always been mundane horrible jobs, but people used to do them because they had to. When everyone else is doing it it doesn’t seem so bad. But now when there are so many better jobs available, why sit there counting the hours down watching a converbelt or picking fruit when you could be doing something at least slightly more interesting. Yes I guess someone would do it for lots more money, but that just means they are not doing one of the better jobs, it’s not really a win.
Rubbish
America has thousands of towns that used to have a large few plants making something. These would sustain the towns employment and ancillary supply companies, and be a sense of pride.
But they closed many and moved the production abroad.to replaced by an opioid crisis and the disenfranchised.
we have only the done same here….but replaced by meth and gangs
look at the social problems exploding in our face now
Economists are finally moving past the point where they think monetary policy is a powerful tool for shaping pricing. Sadly, their idealogically driven training means that the next solution on the list is get cheap labour in, or let people with COVID back to work!
Social scientists and anthropologists who spend their time studying actual societies (rather than crude mathematical models of societies) would generally take a different approach. For example, they might ask how do we ensure everyone can contribute to the success of their family, town, city, or country? When you start with this aim and marry it with the thinking of progressive economists, you get to different solutions - a job guarantee that sets the floor for salaries and working conditions (and smooths business cycles), a tax system that ensures a far more equitable distribution of resources / consumption, universal basic services, and a 21st Century Ministry of Works.
"Rate hikes alone won't Curb inflation"
Agree but no one can deny that is important and major tool. Ask the almighty bosses of RBNZ why were they persistent with Transitory Inflation theory despite data suggesting otherwise, as early as October/December 2020 (Just six months into printing and distributing money).
Also where was their thinking when they were removing LVR restriction (Can understand that the need was to support existing house owner but....). Russia Invasion which everyone is talking (Should talk) but happened recently/two years after and by that time damage was already done but helped likes of Orr's and Robertson's to pass the blame everything on the conflict.
If not conflict this almighties would have found some other excuse - bureaucrats and politicians - time for change.
How hard was it to understand that emergency steps are for emergencies only. Do we not remove sick person from ICU immediately when not required for if we put him for longer, will he not die or make condition worse.
Elementary my dear Watsons (of RBNZ and Politicians) and possible so called economist and experts.
"In a tight job market, it is not surprising that more Americans are saying “no” to work they perceive as unpleasant. But someone has got to do it, and for every American who upgrades their job or drops out of the labour force, there are several immigrants who would be happy to do the work that has been left behind. These immigrants, by definition, do not take work away from Americans; rather, they provide a net benefit to the economy. And the same goes for international trade, which can ease production bottlenecks and supply-chain shortages – effectively “importing” labour without immigration."
And there you have it....the deflationary effect of (effectively) unlimited labour in a globalised labour market....by design
A high point this morning was watching Jack Tame interview the newly appointed RBNZ economist. He identified that investors needed alternative opportunities other than housing. This has not been addressed for decades and is required to invigorate the productive side of our economy. At last!
https://www.bbc.com/news/business-62005360
"US stocks see worst first half drop in more than 50 years"
This is a blatant example of deep financial illiteracy. Judging the overall performance of share investments on the basis of a 6-month temporal horizon, and comparing it to other asset classes on the basis of this comparison, is so wrong and nonsensical that it does not even deserve a detailed rebuke - the knowledge gap is just too wide.
A high point this morning was watching Jack Tame interview the newly appointed RBNZ economist. He identified that investors needed alternative opportunities other than housing. This has not been addressed for decades and is required to invigorate the productive side of our economy. At last!
I thought it was dreadful. Same old tired descriptions, explanations and excuses. That being said, Paul is a nice guy. Just another bureaucrat though.
Lots of commodity prices way down. I filled up the car, in Auckland, for $2.80 a litre today. Don’t get me wrong, fuel prices are volatile and will rise again. But I maintain the view that CPI inflation will be much lower by May 2023 and we will start to see the OCR cut by mid 2023. Election year as well.
https://i.stuff.co.nz/business/129365737/commodity-prices-in-retreat-bu…
I think the writer underestimates the deflationary impacts. Significant falls in the price of steel will aid in reducing inflation in the construction sector, for example.
Agreed. A lot of price increases have been driven by futures prices (i.e. what traders / gamblers are betting things will be worth in the future) as well as the cost of insuring (hedging) against increases in prices. Traders are losing confidence as the world seems hellbent on throwing millions of people out of work and causing a recession. So, prices are coming down quickly. What a mad world we live in.
or 50 cents more than it was last year ( 75 if you add in the tax cut) ... sure its volatile -- but do you really see it back at $2.30 once the 25 cent cut goes ? i think not
In fact for all the drop in commodities - we wont see much if any passed on at the end product - retailers have had margins squeezed relentlessly and will simply let any drops in raw materials translate into increase margins again going forward.
To believe costs are going to go down and inflation stop -- you also have to believe the following
Council Rates and Water charges will go down Power, Gas Water and Insurance companies will be dropping their prices - building materials will drop in price, councils will open up massive tracts of land for development decreasing land prices
I will accept some food prices may drop, even building labour costs if there is a recession and slowdown - -and if the kiwi $$$ goes back up a little -- then it will limit certain increases in imports such as vehicles, whitegoods and fertalizer for farming etc -- but a lot of those wholesale cost increases are still working their way through -
You also have to factor in that the costs fo climate change are only going to increase -- and thats a steady 20 years minimum serious inflationary cost
I dotn disagree with you HM in your opinion on the economy and that these current rises in interest rates will stabilise soon -- but i dont see them being remotely effective in tackling some of the inflationary pressures that are out there -
well i am only 53 -- but never seen councils not put rates up -- never seen power gas or electric go down only up -- insurance only tracking up up and really up ( just one of the climate change costs) -- so to compensate for those things we know are going to continue going up -- others have to go down -- or we still have inflation -- maybe not as much as today - but still inflation --
not sure housing is balanced in term of supply and demand - and the borders will be kicked open -- so catn see rents going down -- and climate events will continue to see food prices push higher - so the list of goginto go down items is pretty small ?
From today's morning briefing:
"the iron ore price has fallen -8%, copper is flat, but it had already fallen -27% since early June. Nickel fell almost -30% from early June. Wheat is down more than -30% since mid June. Soybeans are down -15%. Only coal is holding its new high price. Aluminium is down -15% from early June. And crude oil is down -18% from that early June peak."
https://www.interest.co.nz/business/116872/japan-gets-inflation-china-r…
Just putting it out there but things are getting bad in the USA with people racking up credit card debt and refinancing their houses. Just amazing what you can do in the USA that you cannot do here I guess that's why the GFC happened in the first place. You have been warned in advance it's turning to shit.
"we won't be going back to importing Russian oil or food for at least a generation"
NZ not directly importing Russian oil or fertiliser, 35% import duty/tax but I wouldn't be surprised if some enterprising individuals bought Russian oil and fertiliser for NZ consumption via the backdoor. Enough middlemen to clip the ticket and NZ would benefit by lower prices helping to contribute to lowering inflation.
What is not pushed enough by the govt. is that a large? contributor to NZ inflation is crude oil prices and fertliser as a result of the Russo-Ukraine war and NZ is doing it's bit to "starve" Russia via sanctions. Perhaps the govt don't do this as it may invoke a counter re-action of we are not part of Europe or the USA why should we bother about their problems. Let's look after number 1. India, Pakistan and no doubt others in Asia are already of that view.
Within a couple of decades one suspects Russia will have built the transport infrastructure to circumvent markets in which they are sanctioned (although, strangely, they haven't rushed to start?) In the meantime NATO and affiliates have effectively stranded production in Russia.
This is a really slanted and shallow piece - essentially ts a set of set of Republican (as opposed to conservative, pro-business or right wing) talking points, in the most part blaming workers for a lack of delight in returning to subsistence jobs. Productivity through innovation in technology seems to be missing, whereas it's the absolute key to improving wellbeing. I would like to see inflation tamed, but only as a means to improving wellbeing - it isn't and end in itself. In a low inflation environment, we should expect more investment in productivity, but we've seen a long period without it.
1. Russia will not be persuaded by diplomacy to end the war, it will only be persuaded by force. Joe Biden is too incremental to supply the weapons needed by Ukraine in a timely fashion so the war will continue until the oil price collapses along with the financial resources Russia needs to keep the war continuing. This could take some time for the necessary demand destruction to occur.
2. Covid may continue to mutate. People may be able to go back to uninterrupted work patterns only for limited periods of time.
3. Yes immigration is needed to fill gaps in the labour market but it seems to be an unpopular option with the general public.
Demand destruction is more and more likely the thing destined to bring supply and demand into balance.
Bureaucracy is seen by many as a protection against job destruction so it has a silent support within the country. However the govt's attempt to centralise the local bureaucracy so that it becomes a tool of the central govt and thereby a means to hack away at peoples livelihoods at all levels of society will mean that bureaucracy and govt in general will be seen to be more of a threat than a protection to more and more people within the society.
Bureaucrats and consultants are a core voting constituency for Labour but the attempt by Labour politicians to make it necessary to understand treaty issues from a Maori perspective to be a bureaucrat is going to make it more difficult for the European members of this constituency to vote Labour when voting Labour means that they will lose their jobs or their consultancy fees.
The Greens seem to be in the process of being captured by one wing of the party. 10% of the vote may turn into 7%. The Maori caucus seems to be still firmly in control of the Labour agenda and steering the govt straight into the electoral rocks. How long can the centre hold? How long before the govt falls?
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.