TE_Summary; Jun 24th '17; Free exchange; The Federal Reserve risks truncating a recovery with room to run
TE_Summary; Yeouido-talk
Free exchange
The Federal Reserve risks truncating a recovery with room to run
Pessimism about productivity growth may prove self-fulfilling
Print edition; Finance and economics; Jun 24th, 2017
Summary
1. Some critics reckon that the Fed's 2% inflation target is constraining, but the Fed's problem is not its target but its pessimism about the US productivity growth.
2. Conventionally, the productivity growth has been regarded as "real factors", so outside the Fed's control, but it's cyclical and it changes whether the economy is booming or busting. Thus, the Fed can have more influence than they are ready to acknowledge.
3. Population and productivity determine a speed limit on economic growth. When unemployment is high, the economy can grow faster than the speed limit without accelerating inflation, but as it goes closer to full employment level, for firms to poach other firms' workers, wages would rise causing strong inflation. This was the traditional assumption or pessimism over the productivity.
4. Nevertheless, before that happens, firms may have other options.
1) make current workers work longer; push them to work harder (to increase output)
2) outsource work to foreign workers; automation by robots (to decrease cost)
3) rising wages don't always have to cause inflation
3-1. lower margins instead of price increases and market share reduction
3-2. wage rising can be paired with investment in training and equipment
Only when these options have already been used completely, strong inflation comes. Thus, as long as the current inflation is stable, it is also possible to think that those options have been used well enough.
5. A change that, after the mid-1980s, the productivity growth peaks in recession and drops at recession suggests that other options may not have been fully utilized before the Fed's intervention. This change can be explained by structural changes such as increased labor-market flexibility and technological progress.
Routine procedures
6. Jobless recoveries were caused by eliminating routine jobs through reorganization, outsourcing and automation for firms to implement labor-saving structural changes which raised productivity. Firms can cope easily with rising demand when the recovery comes without hiring new workers.
7. The shift to a low-inflation world made firms not cut wages but gave no opportunities for firms to get profits by keeping the wage constant when inflationary phase comes. Thus, they have no other options but to fire workers and make remaining expensive workers more productive.
8. Also, technological advance itself can be contractionary by reducing labor demand and inflation in the short turn. If the Fed observed this was happening, they could have prevented it by keeping the accommodative policy, but it rarely succeeded.
9. One rare exception that both productivity and real wage growths happend at the same time was in 1997s. Mr. Greenspan didn't increase interest-rate and when the inflation is a little bit over 2%, the unemployment rate even declined from 5.2% to below 4%.
10. To identify whether the US economy can tolerate the same situation or not, there is no option but to increase its target inflation rate and see.
Words and expression
1. hell-bent: determined to achieve something at all costs
2. cutting short: terminate or abbreviate something before its proper end or its full extent; clip; curtain; shorten
Permalink: http://eoesociety.blogspot.com/2017/06/tesummary-jun-24th-17-free-exchange.html
Free exchange
The Federal Reserve risks truncating a recovery with room to run
Pessimism about productivity growth may prove self-fulfilling
Print edition; Finance and economics; Jun 24th, 2017
Summary
1. Some critics reckon that the Fed's 2% inflation target is constraining, but the Fed's problem is not its target but its pessimism about the US productivity growth.
2. Conventionally, the productivity growth has been regarded as "real factors", so outside the Fed's control, but it's cyclical and it changes whether the economy is booming or busting. Thus, the Fed can have more influence than they are ready to acknowledge.
3. Population and productivity determine a speed limit on economic growth. When unemployment is high, the economy can grow faster than the speed limit without accelerating inflation, but as it goes closer to full employment level, for firms to poach other firms' workers, wages would rise causing strong inflation. This was the traditional assumption or pessimism over the productivity.
4. Nevertheless, before that happens, firms may have other options.
1) make current workers work longer; push them to work harder (to increase output)
2) outsource work to foreign workers; automation by robots (to decrease cost)
3) rising wages don't always have to cause inflation
3-1. lower margins instead of price increases and market share reduction
3-2. wage rising can be paired with investment in training and equipment
Only when these options have already been used completely, strong inflation comes. Thus, as long as the current inflation is stable, it is also possible to think that those options have been used well enough.
5. A change that, after the mid-1980s, the productivity growth peaks in recession and drops at recession suggests that other options may not have been fully utilized before the Fed's intervention. This change can be explained by structural changes such as increased labor-market flexibility and technological progress.
Routine procedures
6. Jobless recoveries were caused by eliminating routine jobs through reorganization, outsourcing and automation for firms to implement labor-saving structural changes which raised productivity. Firms can cope easily with rising demand when the recovery comes without hiring new workers.
7. The shift to a low-inflation world made firms not cut wages but gave no opportunities for firms to get profits by keeping the wage constant when inflationary phase comes. Thus, they have no other options but to fire workers and make remaining expensive workers more productive.
8. Also, technological advance itself can be contractionary by reducing labor demand and inflation in the short turn. If the Fed observed this was happening, they could have prevented it by keeping the accommodative policy, but it rarely succeeded.
9. One rare exception that both productivity and real wage growths happend at the same time was in 1997s. Mr. Greenspan didn't increase interest-rate and when the inflation is a little bit over 2%, the unemployment rate even declined from 5.2% to below 4%.
10. To identify whether the US economy can tolerate the same situation or not, there is no option but to increase its target inflation rate and see.
Words and expression
1. hell-bent: determined to achieve something at all costs
2. cutting short: terminate or abbreviate something before its proper end or its full extent; clip; curtain; shorten
Permalink: http://eoesociety.blogspot.com/2017/06/tesummary-jun-24th-17-free-exchange.html
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