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Repealing A Foundation

What would happen if they repealed laws under cover of darkness and didn’t tell anybody?

When I learned economics, one “law” was that  there was a relationship between unemployment and inflation.  It was a trade-off.  If you wanted less unemployment, you had to accept more inflation and vice versa — if you wanted less inflation, you had to accept more unemployment.  (This was illustrated by the famous “Phillips Curve.”)

Since the crash of 2008/9, unemployment has dropped from 10% to 4.3%.  Inflation should have increased dramatically.  While there are always some examples of inflation, overall inflation has been dormant.  Has that economic law been repealed?  If so, why?

Here are the most often-cited reasons:

1.  That relationship between unemployment and inflation never really existed.  The many instances of it in history were all coincidental.

2.  Intuitively, it makes sense that employers would have to pay more for fewer available workers when unemployment is low.  With the percentage of workers belonging to unions has dropped from 20% in 1983 to only 11% now, workers no longer have enough bargaining power to negotiate higher pay.  Globalization has also decreased the negotiating strength of workers.

3.  Workers were so frightened of losing their jobs during the crash of 2008/9, they have learned to be happy living without raises.

4.  Workers are simply worth less.  This is probably not the fault of workers.  Productivity has dropped in four of the last six quarters — actually dropped, reflecting less capital investment in machinery and software to make workers more productive!  With corporate profits stashed offshore to avoid confiscatory taxes, there has been less money for capital investment in US workers.

5.  Wage growth is not correctly measured.  Employers have become creative in providing benefits like more vacation, as well as paying upfront signing bonuses, which are not normally counted as income.

6.  Wage growth can be expected to explode very soon.  It is a coiled cobra!

Now, all of this puts the Fed into a lawless state of confusion.  Should they raise interest rates to combat a non-existent problem with inflation?  NO!  This increases the cost of buying homes, as well the carrying costs of our national debt?  Should they raise interest rates just to be prepared to drop them the next time we have a recession?  YES!

I think the confidence level of most economists has decreased, with the realization that one of our most fundamental laws (the relationship between unemployment and inflation) has been repealed and nobody knew it.