Friday, June 23, 2017

Edward Harrison — Baumol’s cost disease, aging societies and inflation expectations

I have been banging on about lowflation, repeatedly suggesting it is here to stay. The Fed, on the other hand begs to differ and is pre-emptively normalizing rates, as a result. No matter how you look at this, there’s a rub though: We all consume different products, so we each experience a different individual inflation rate.

Even as the statistics say inflation is dropping for you and me, it’s not dropping for everybody….


Dan Lynch said...

Partly agree and partly disagree with Edward.

Something has happened in Japan that standard macro really doesn’t explain.

Depends on whose standard macro you're looking at. If you accept that most inflation in our lifetime has been driven by oil and if you accept that since the 1976 Doha agreement between Kissinger and Saudi Arabia -- which was a secret, unofficial agreement so hardly anyone has heard of it let alone fully understands its implications -- the Sauds agreed to sell oil for moderate prices and in dollars in return for the U.S. protecting the not-so-popular Saud regime. Other than a blip in oil prices when the Shah was overthrown, the Doha agreement has held and inflation has been a non-issue.

The gist is that wages rising across the economy put so much pressure on labour intensive industries that they are forced to pass costs on to consumers. This causes inflation rates in those sectors to be higher

Yet wages have not risen across the economy. Workers have little bargaining power.

I suggest that inflation in health care has at least as much to do with rent extraction as Baumol's cost disease.

Likewise the inflation in higher education is due to rent extraction, not due to the wages of adjunct professors.

Matt Franko said...

I don't believe in inflation....

Ralph Musgrave said...

Edward, like many so called “professional” economists (i.e. twits) seems puzzled as to how to get inflation up. I’m sure Robert Mugabe will be splitting his sides at this. Here’s how to do it:


The “Robert Mugabe theory” is essentially the same as the point made by MMTers, namely that the more “Private Sector Net Financial Assets” (i.e. government debt and base money) there is in private sector hands, the more the private sector will spend. I mean what do people do when they win a lottery? They don’t by any chance spend more do they?

I’m starting a campaign to have Mugabe made professor of economics at Harvard. He couldn’t possibly be worse than the existing idiots there: Rogoff, Reinhart, etc.