inflation

[Brad De Long]

>The May 1 issue of the San Francisco Fed's Economic Letter has an article
>by one J. Bradford DeLong (no space - I'm confused on this) called "The
>Shadow of the Great Depression and the Inflation of the 1970s. Formed by
>the Great Depression, a generation of policymakers and central bankers let
>inflation get out of control. "Only after the experiences of the 1970s were
>policymakers persuaded that the minimum sustainable rate of unemployment
>attainable by macroeconomic policy was relatively high, and that the costs
>- at least the political costs - of even moderately high one-digit
>inflation were high as well.... By the end of the 1960s, the U.S. had
>finished its experiment to see if it was possible to push unemployment
>below 4% without accelerating inflation. The answer was 'no.'"
>
>So, Brad, since you're here - is that "macroeconomic" a wiggle word? Are
>there other policies that could make it possible to push U below 4%? Or can
>the U.S. never get by with less than 5 million unemployed? What about that
>political cost of inflation: some people's political costs (e.g., rentiers)
>seem to carry more weight than others (e.g., the unemployed). And what
>about the 4.3% U.S. unemployment rate now? Is that too low?

I suspect that--given the current structure of the U.S. labor
market--inflation is going to start creeping upward at about 1/2 percent
per year per year if officially-measured unemployment stays around 4.5%,
and sooner or later the Federal Reserve is gong to react... (Although, as
Joe Stiglitz points out at every opportunity, there is no evidence that
economies do better with an inflation rate of 1% than with one of 5% per
year.)

Bob Reich as Secretary of Labor and his first chief economist, Larry Katz,
had what seeemed to me very nice plans to spend on the order of $5 billion
a year on extra job search assistance (roughly $40 per worker per year). It
seemed very well thought-out to me. (My guess was that it would clip about
1 percent off of the non-accelerating inflation rate of unemployment.) But
it vanished--along with all the rest of the Gene Sperling public investment
program--when its funding source, the BTU tax, cratered in mid-1993.

I don't think you can find any half-intelligent economist these days who
would deny that the NAIRU is at the very least *extremely* *malleable*: up
from perhaps 4.5%-5.0% in the U.S. in the 1960s to 7% in the U.S. by the
early 1980s, and now down well below 6% and possibly lower today. By
contrast, in western Europe the NAIRU appears to have gone from 3% in the
1970s to 9% today.

And, of course, the best thing to lower the NAIRU is a prolonged economic
boom that creates a high-pressure economy that leads firms to invest a lot
in upgrading the skills of their labor force; and the best thing to raise
the NAIRU is... a depression.


>
>(The FRBSF Economic Letter is available at <http://www.frbsf.org>. Note
>that the Fed branch banks use .org, not .gov, as their domain. This
>parallels their phone book listings - in the white business pages, not the
>blue government pages.)
>
They pretend that they are *banks*, not part of the "government"...

Brad DeLong