The December jobs report is out. At 223,000 new positions, the pace of growth has slowed a bit; November was 256,000 after a 7,000 downward revision and October went from 284,000 to 263,000.
But the pace is still strong and that’s good. People of working age who are without jobs also aren’t earning, making their economic lives more precarious. Consumers make up 68% of GDP. Why wouldn’t you want them to spend?
Because the Federal Reserve says that is bad and a driving force behind inflation, even though some at the Fed, like Neel Kashkari, president and CEO of the Federal Reserve Bank of Minneapolis, see differently. He wrote this week that the Fed’s economic models are simply not up to understanding and accounting for how inflation has been generated these days.
The principle the Fed has used is called the Phillips curve. As previously noted here, the relationship was originally seen as between wages and unemployment, but then extended more generally to prices. The latter relationship has fallen apart, with Federal Reserve Chairman Jerome Powell, in July 2019 testimony before Congress, having called it “‘weaker and weaker and weaker to the point where it’s a faint heartbeat that you can hear now.”
And yet, at the end of November 2022, Powell said, “Because wages make up the largest cost in delivering these [core services other than housing], the labor market holds the key to understanding inflation in this category.”
Maybe he should make up his mind.
Let’s turn things on their side for a moment. Members of the Fed and many economists and financial experts keep pointing to wage growth. “Too high,” they say. “Beyond the target of 2% inflation.” What does inflation look like on an ongoing basis? Here’s the Consumer Price Index (CPI) measure of inflation displayed as the percentage change year over year (you have to manually edit the graph on the site to see the display) from the Federal Reserve Bank of St. Louis based on data from the Bureau of Labor Statistics.
Notice that 2% inflation growth isn’t nearly a given. Maybe that’s what the Fed has decided is optimal; however, wanting something doesn’t necessarily mean that what you want is reasonable, possible, or even desirable.
The median year-over-year change — call it practical inflation — is 2.53. The mean or average is 2.48. That’s moving with market changes since 1990, which includes a whole lot. Maybe trying to manage inflation is like riding a cantering horse on an English saddle. You sit, knees gripping the sides to keep locked into the sides of the horse, and then recognize that things will move around under your backside. You can try to plant yourself deep in the saddle and not move, but it’s a fairly uncomfortable and unproductive approach.
Nevertheless, say for a moment that the Fed is right, that things should average out to 2% and when conditions deviate, it should use monetary policy to readjust things. (Partly it seems likely because Congress has rarely gotten off its duff in decades to undertake necessary fiscal policy in a timely and effective manner.) Is there anything else of economic note in which the annual growth tends to be far off this 2% target? Here’s a graph of nominal (not subtracting inflation effects) of annual changes in average weekly wages and in total corporate earnings.
Notice where the big growth tends to lie? Right, in corporate profits. Now, maybe the Fed doesn’t worry about that because it ends up being concentrated in relatively few hands and much of it gets put into investments, increasing the wealth gap. But those investments and speculations are making many things — stocks, housing, real estate in general, energy, and far more — unsustainably unstable.
Part of the instability is investment in commercial real estate, which includes apartment buildings that have driven up values of buildings, which means owners have pushed up rents at double-digit annual increases for the past couple of years because they’re paying more (there’s been lots of competition for real estate as an alternative investment). Shelter makes up about a third of CPI. In a very real sense, higher corporate profits as well as further upward wealth distribution are a much more significant contributor to inflation and are a bit reason why workers need to make more money.
Maybe the Fed should rethink where to cast its evil eye. And maybe the government and corporations should realize that if there aren’t enough people to do jobs, you either need to allow more in through smarter immigration policy or stop creating jobs that you can tell you won’t be able to fill, at least at the rates of pay you wish you could hold to.