Bad theories never die.
For example, please recall the Phillips Curve economic theory states that decreased unemployment correlates with higher rates of inflation.
Unemployment has plunged, but wage growth and inflation (the latter as measured by the Fed) are nowhere in sight.
Instead of tossing absurd theories onto the ash heap, economists and writers repackage the same bad ideas in similar ways.
Here’s the newly revised theory courtesy of the Wall Street Journal: Anemic Wage Growth Restraining Economy.
“Years of solid job gains are failing to produce a breakout in wages, suppressing the spark needed for a sustained pickup in economic growth,” says Wall Street Journal writer Eric Morath.
Let’s put that theory to a simple test.
Wage Growth Minus CPI Growth
Wage growth in relation to price growth actually looks pretty good.
Wage growth is certainly far better now than the period between the mid-1980s and mid-1990s when the economy was generally booming.
Of course, this comparison is only valid if one believes the CPI, and most economists do.
Wage Growth and Recessions
High wage growth in the 1970s and early 1980s produced four recessions in twelve years.
Sustained wage growth was a predecessor to the last seven recessions.
Yet here we are. Economists and writers are begging for higher wages and big increases in minimum wages.
Inflation Does Not Produce Growth
Please repeat after me “Inflation does not produce growth, nor is it desirable“.
If inflation produced growth, Venezuela would be a glowing beacon of light instead of the cesspool of shortages we see today.
Mike “Mish” Shedlock
Please repeat after me “Inflation does not produce growth, nor is it desirable“
If inflation produced growth, Venezuela would be a glowing beacon of light instead of the cesspool of shortages we see today.
——
I agree – for the average working person.
But Venezuela is a glowing beacon of light for:
The progressive/liberal/socialist dictators and their top level supporters have become very rich (as in billions of dollars in bank accounts outside Venezuela).
Those that had a significant amount of debt at the beginning of crisis has had that debt wiped away.
Pensions have been wiped out. Bad for pensioners but good for the people paying the pensions.
Criminal organizations, illegal narcotics production/shipments and smugglers.
The people voted for big government to take care of them. And they got exactly what they voted for.
It is too bad the supporters of Hillary, Bernie and the GOPe can see the connection.
“Wage growth is certainly far better now than the period between the mid-1980s and mid-1990s when the economy was generally booming.”
True …. but those were pre bubble days in vehicles/education/health care/homes … no matter what CPI says.
We bought our house in 1999. While riding around looking at properties I asked the RE agent how much prices have gone up in our locale. He responded 10% … for the entire decade.
10% over the entire decade or 10% per year? Here in the Northeast (at least in the NYC metro area, most of CT, and in eastern Massachusetts — home prices (and rents) have been increasing on just either side of 10% per YEAR since at least the early 2000s with only a few years (2008 &2009 ) when they have not.
Since 2008 I have paid just under or just over (as much as $2150 a month from 2013 & 2014 ) $2,000 a month in rent for an average 2 bedroom apartment. These were not in trendy areas by any means (except for Stamford CT back in 2008 & 2009) but the suburbs where public transport is non existent and you won’t see a person on the street at any time after 7pm
From the 1991 recession to 1999 10% total
Well well well …. Construction spending (March) out today.
prior … -0.5%
expected … +0.5%
prior revised … +1.0%
actual … +0.3%
Bullz do their dance and “stick it” bears.
Not so fast … not that anyone bothers to read reports and compare to priors … but I do.
Prior report … $$s are SAAR
January … $1.150059 trillion
February … $1.143971 trillion
Today
January … $1.121975 trillion
February … $1.133627 trillion
March… $1.137488 trillion
So, LARGE downward revisions to January and February … coupled with BIG miss for March means Q1 GDP +0.5% likely revised NEGATIVE*
*at the moment … this number and others still face revision(s) … Q1 GDP could very well end up higher than +0.5%.
Right on. Here’s the paradigm: Start with priors. Next gather lots of data. Apply arithmetic (averages, correlations, tricky cluster analyses — anything you can think of), Take all results that agree with your priors. Finally, publish the results with pithy explanaions. Get tenure — especially if the priors are same as your workplace peers/evaluators.
Hey, the GDP is what, about 70% consumption? Sooooo, just spend more to up the GDP. Simple!
Let me suggest that “wage growth causes recessions” is actually “wage growth causes the central bank to smite mightily the economy”.
Once upon a time, Technology Review published the Philips Curve…with the data points that Philips used. They did not sustain his interpretation.
The data showed “If inflation is low, unemployment can be anything” and “If unemployment is low, inflation can be anything”, including “by the way (0,0) or close thereto is allowed.”
He also did not have many points, so you might wonder whether he simply had not happened to see high inflation and high unemployment at the same time. The 1970s and 1980s answered that question.
I’m really not sure if any of this theory stuff matters. The Washington Examiner said that Obama had budgeted $17,600 for every unaccompanied child from central america crossing the border. So that is more than my just started social security and I worked and saved for 40 years. There seems to be no rules, no right or wrong and no way to plan for anything. Fairness is out the window and soon my taxes will go up to pay for all of this. I really have lost all faith in our leadership and the country as a whole. So my spending is going to be greatly reduced, I just do not trust the future. First time I have ever felt that way about this country and it affects what you spend. Any good books on bartering, gardening or living in a 3rd world nation? Mish thanks for pointing out the bad theories it is interesting.
why yes, yes there is… http://ferfal.blogspot.com
Of course inflation doesn’t produce growth. And wage increases will inevitably result in increased inflation…..unless of course you pair it with a macro-economic mechanism like a retail discount that automatically creates price deflation and yet, because the discounts are completely rebated back to participating merchants is not only perfectly consistent with a profit making system but also reflects its classical goals of balance, equilibrium and flow.
DSGE Finance Capitalism and Austrian economics are both fragmented theories that dramatize and fetish-ize a particle of economic truth when what we need is an integration of their particle of truth with the one concept that both humanizes economics and is the only valid economic and monetary answer to our system that has enforced austerity on the individual despite our being able to produce plenty with the accelerating minimalization of employment.
YOU’RE ALL NASCENT SOCIAL CREDITERS AND ADVOCATES OF WISDOMICS/GRACENOMICS!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
“Of course inflation doesn’t produce growth. And wage increases will inevitably result in increased inflation…..unless of course you pair it with a macro-economic mechanism like a retail discount that automatically creates price deflation and yet, because the discounts are completely rebated back to participating merchants is not only perfectly consistent with a profit making system but also reflects its classical goals of balance, equilibrium and flow.”
Any manipulated market will manipulate back. Nothing occurs in a vacuum. All mechanisms fail due to the existence of cycles.
There were depressions before the 1930’s. There was a depression in the 1930’s. We are in a depression, now. There will be depressions in the future. The bust balances out the boom.
Mish,
Your second chart “wage growth vs gdp growth” seems to show a ratcheting down of both wage and gdp growth over the decades. Of course, there is no discussion of causation. Does wage growth cause gdp growth or vice-versa?
And you concluded with a discussion of inflation. Not sure how that fits in with the title.
Steve Keen says:
What goes wrong in our version of capitalism is the finance sector grows too large by unproductive credit expansion which balloons bank (and shadow bank) balance sheets and so finance sector profits balloon to eat up workers share of output. Finance sector profits are about 40% of all private sector profits. That’s way too high and explains where the loss of wage growth is occurring.
Our status quo macro guys now blame technology on displacing workers income. In other words increased productivity is the problem. Yea. Right.
It seems we will twist logic into a pretzel to avoid shrinking our finance sector. We must let the world burn to save the banks it seems.
Nice article, Mish. I generally agree with everything you said. As for believing the CPI, I generally prefer the GDP deflator. The CPI used to be pretty overstated for a variety of reasons, but these days it is closer to the GDP deflator, so I am less reluctant to use it.
The one thing that you don’t mention is the fact that the Phillips Curve is really kind of obsolete these days. Back when that theory was formulated, people didn’t have money to spend unless they worked. Thus, when people were unemployed their consumption dropped significantly. That is less true today, as many unemployed people are able to continue spending unabated.
Me thinks central bankers got it backwards. Inflation is the result of a booming economy, not the cause of it.
The Original Phillips Curve only refers to “money wage changes” aka wage inflation, not general price inflation, and its inverse relationship to unemployment. This relationship is simple, intuitive, and obvious.
This valid if simplistic idea has metastasized into the dangerous and unfortunately widely accepted idea that general price inflation drives unemployment down.
Allow me to elaborate:
Banks loan newly created money to house flippers. This non productive investment of new money drives up house prices. More house flippers appear. Banks lend to them too in an upward spiral.
Bank balance sheets expand. Bank profits from mortgage interest and mortgage servicing soar.
Output does not increase because the loans are unproductive. Houses are not factories. The pie does not grow.
So workers share of output goes evermore to banks paying interest on loans. But they think they’re making money on their house. Actually they are invested in a Ponzi scheme.
If true we should see:
Banks share of private profit grows too large. (Check)
Workers crushed under stress of debt service. (Check)
Workers share of total output falling. (Check)
Asset price inflation driven by bank credit money printing. (Check)
Asset prices falling or (unforeseen by Keen) central banks artificially supporting asset prices. (Check).
According to Keen all this happens first during the credit expansion phase. Only later, after credit expansion saturates, productive firms see demand collapse and their profits fall. That’s coming next to an economy near you.
Precisely. Except inherent cost inflation has been occurring throughout the entire process and is masked by the continual monetary stimulus. Keen has unconsciously rediscovered all of the things Douglas said 90+ years ago except he doesn’t have the integrative insight to suggest the correct policies at the correct time and place….to effectively equilibrate the system….and not insignificantly free the individual from the increasingly tyrannical system.
Uncompetitive high wages stifle economic growth.
We all know that most of the jobs generated in the past 7 years have been low wage, low skill jobs, yet the real cost of living for most folks has risen substantially. The inflation argument by the Fed is total BS. They know that as long as Asia keeps dumping and over producing product, there will be no price inflation on the products sold. Most Americans have watched our food costs, education costs, healthcare costs, business costs, etc jump substantially in the past few years, yet the Fed completely ignores these numbers.
Try pricing a truck or car from 2010 to today. The prices are up way more then the phony inflation rates that the Fed claims are real. Most people are now taking out 5 to 7 year loans in order to afford the payments with single digit interest rates. The math doesn’t lie.
“No (price) inflation”???
Why doesn’t the Fed include house prices, rents, college costs, medical care, stock prices, bond prices, taxes or food prices…
Printing takes resources away from the majority, and puts those same resources in the pockets of bankers and their economist allies. That is why they output endless propaganda about printing. Conflict of interest.
In reality, inflation is oppression of the people by bankers.
It is – and here’s why
Debt: The Key Factor Connecting Energy and the Economy
https://ourfiniteworld.com/2016/05/02/debt-the-key-factor-connecting-energy-and-the-economy/
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Firstly, I don’t accept the notion that wages cause recessions. It wasn’t massive wage increases that caused the last big debacle, it was fraud and reckless behaviour in the financial system. There hasn’t been any growth in real wages since the 1970’s but we’ve still had economic downturns anyway.
If people’s wages are doing so well, why do we have a burgeoning parasitic payday loan industry?
Do you think people are that generally incompetent with their finances that they would resort to using a loan shark even if their wages were rising or otherwise keeping up that well with the cost of living?
Inflation is only a problem if the wages and the purchasing power of the currency the person is paid in is stagnant or weak like in Venezuela.
Wait a minute, average wages can go up without most people making more. One quick check would be to determine whether the median is going up as much as the average is. Even better make two detailed histograms and look for differences.