Productivity Pay for Mr Powell and the Congress

I had a few blog posts ready to go. But my heart was not really into it until today. I was reading an article that was lamenting that for sure we are headed for a recession in the USA and mostly because we waited much too long to pay attention to rising inflation. By "we" I mean our national economic policymakers. Any remedies for inflation for today will surely hurt the economy and will have proportional impacts on the stock market. 

Simple translation -- we have idiots in charge of national economic policy and most of us will pay for it. That seems right on one hand -- we voted for those morons. We should pay.  But let's not take all the blame. It was hard to see in advance how stupid our leaders would be about national economic policy. They are obviously very good at wearing nice suits and making lofty speeches -- not so good at actually doing anything. 

As I said, in this state of mind I was reluctant to bore you with another negative post. How do we have fun instead? And then it occurred to me that even if we cannot make the below solution happen, it is at least fun to talk about it and who knows, maybe the idea will catch on.  

If you screw up at work, your boss might penalize you by making you work more hours. She might even reduce your pay. Same thing at home. If you forget to take out the trash on Friday night, your spouse might cancel that evening's frivolity. You drop that pass, coach takes you out of the game.  If you are a professional athlete you might not get your bonus. You are getting the picture. In life, failure has consequences -- sometimes severe consequences.

Failure in life often hurts your wallet. 

Why not apply this idea to the Fed and to Congress? Why not directly tie their income to their failures? Why does that sound so outlandish? If the Fed let's inflation rage on, how many people are hurt by that? We measure that hurt in billions of dollars. If the Fed or Congress react to rising inflation by causing a recession, do they not do incredible harm? How many people lose their jobs? How many people lose income? How many people cannot make their dollars stretch to buy the necessities of life?

So it seems fair to me -- if Mr. Powell or members of Congress cause us all economic pain, then they should share in the misery.  How much money does Powell need anyway? Powell only makes about $200k per year as head of the Fed but somehow this uncharismatic individual has accumulated more than $50 million in wealth over his lifetime. Before adding benefits, Congressmen make a salary of around $200,000 per year. Wink wink. 

These people aren't super rich from their salaries but we all know the perks are pretty good. They do wear nice suits, right?

Anyway, they certainly are not poor so why not let them share in the people's misery. For example, we could gear their incomes to changes in the unemployment rate. If the unemployment rate goes up this year, then let's have a formula -- or a people's committee -- or some mechanism  that will lower their pay. I can imagine an interesting formula that is something like the below:

Income = $200,000 

                - .5* the increase in the unemployment rate 

                -.5* the increase in the inflation rate 

                -.5* the increase in the real interest rate

                -.5* the increase in the national debt

                -.5 * whatever else you believe is a proper goal of the Fed and the government

There might be some lower bound to their pay. Maybe we say it is okay if they earn the minimum wage as a floor to their salaries. At about $15 per hour that's about $600 per week or about $30,000 per year (50 weeks). Hopefully if Senator X made $30,000 per year for a while, we would vote him out of office. Or maybe he would quit. 

The thought that these goofballs might get paid according to their productivity might get their attention. If you guys mess up our economy, then we mess you up too. No, it doesn't matter that you tried. If you failed -- you are treated just like any other member of the labor force.  Seems fair to me. 

Janet Yellen: Dishonest or Ignorant?

Janet Yellen is probably the most powerful policymaker in the US today. She leads the Joe Biden team policy efforts. And yet, she is either incredibly dishonest or just plain ignorant. 

She was quoted* recently as saying that inflation in the USA is getting worse and that it has nothing to do with the policies of the Biden administration. When she was asked point blank if the historically high government deficits and loose monetary policy were the causes of higher inflation, she said No. It could not be US policy generating these increases in US inflation.

Why not, asked the reporter? Secretary Yellen replied that it could not be US policies causing US inflation because this inflation phenomenon is worldwide. Wow. Despite the fact that loose money and huge government deficits are known to cause inflation in a country, if these twin monsters occur at the same time as similar policies in other countries, then we must look elsewhere for causes? 

The logic is horribly inverse. Let's suppose for a moment that the EU also has inflationary policies. Would it be proper to blame the EU for US inflation? Surely EU inflation might influence US inflation. Surely. But would you argue that the EU policies are more important for US inflation than are US policies? Or maybe you want to argue that the EU somehow caused the US policy? Really?

Reminds me of kids and parents. Charles, you just punched your sister. I did that Mommy. But Jimmy punched her too. Nice going Ms. Yellen. The US can skate by with its horrible policies because the EU has similar horrible policies. Really? Where do we find these "leaders"?

She didn't say it but maybe she REALLY meant to blame the inflation increases on Covid and other supply-chain issues. That line of thinking is wrong, but at least it is more popular. It is wrong because it totally avoids the difference between very short-term changes in the price level and an ongoing process of rising inflation. But surely the supply shock excuse does not work when monetary and fiscal policies are so inflationary.  I am old but I cannot remember a time in my life when monetary and fiscal policies were so expansionary. And yet, according to madam secretary, they have nothing to do with high US inflation. Wow. 

*https://www.wsj.com/video/watch-yellen-expects-inflation-to-remain-elevated/471F8909-AAE7-4248-A534-4D4752C8F02F.html

Alan Blinder -- Inflation Not Transitory and Not Permanent -- What?

Alan Blinder was cute with his words, but he wrote one of the best pieces I have seen about inflation. It is good writing because it is very clear about defining inflation and discussing its causes. My only rub with his June 1 Wall Street Journal article* is his conclusion.

His title is cutesy. He says inflation is not transitory but is is also not permanent. If not transitory and not permanent, then what is it? I guess it is is something in between. Inflation will hang around for a little while. Maybe that's what he is saying. He didn't say how long it will remain elevated but let's not get too picky.

Blinder does an excellent job of explaining why higher inflation isn't going to last a long time -- Covid and food and energy price impacts are expected to diminish.  And he argues that inflation isn't here forever because, if anything, monetary policy is now aimed at reducing inflation --- not increasing it. 

He is very clear about the analytics. He teaches us about the difference between temporary shocks to the price level that can be caused by many things -- and how monetary policy is the sole cause of longer term or sustainable changes in the rate of inflation. Blinder should get a "best teacher award" for his clarity about causes of inflation. I am not being sarcastic. This is a really good piece of writing and should be required in all macro courses. 

My issue with his article has to do with his policy conclusion. Let's be clear. Like most macro liberals, Blinder has a bias toward fixing output and unemployment. Inflation might catch his attention now and then but he is driven by fixing economic weaknesses. So I don't think he really means it when he concludes that inflation increases are not permanent. By this he implies that shocks will dissipate but even more importantly, monetary policy will not contribute to higher inflation.

And that last point is where I think he is being disingenuous. Should the Fed's anti-inflationary policy succeed, it will do so by causing economic growth to slow and by increasing the unemployment rate. If Blinder is true to his guns, he will not tolerate that. He will turn in an instant and fire his six shooters at the evils of recession and unemployment. Blinder wants to join the crowd and ask Mr Powell to stop inflation. But it really isn't in him. Once the unemployment rate starts to tick up he will get ticked off. 

*https://www.wsj.com/articles/inflation-isnt-transitory-but-it-isnt-permanent-either-federal-reserve-interest-rates-oil-energy-costs-prices-11654113873?cx_testId=3&cx_testVariant=cx_4&cx_artPos=1&mod=WTRN#cxrecs_s

Changing Course?

Is it possible that I might have nothing to say? 

Here's my dilemma. This blog is mostly about the economy -- the US economy. That's my thing. I studied macroeconomics and I taught macroeconomics. That's where my economic interests have been and that's what I love to write about. My mother's influence on me was to be optimistic. And that's my dilemma. Aside from the 1970s when we coined the term stagflation, I could always find a silver lining in the economy. 

But now, the macro-skies seem dark. It seems impossible to think about the usual macro topics without getting sad or angry. Inflation is roaring out of control. And while we are not in a technical recession yet, there is a realistic probability that a recession is around the corner. And those yahoos in the federal government are reacting to all this as if today was a Three Stooges episode. 

I just read an article that said that federal tax revenues are reaching a peak never seen before. And yet despite taking gobs of money from us for taxes, they promise to bring us historically high government spending, deficits, and debt. Why? Because they are not satisfied with spending the increased tax revenues. They want to spend much more than that. 

It doesn't much matter what they want to use the extra cash for. What matters is their total lack of courage when it comes to financial management. Hey mom, I just got a raise. Great honey. Mom, can I borrow a thousand dollars? But honey I thought you just got a big raise? I did, but I really want a new sailboat and a motorcycle. 

What makes matters worse is that no one seems to care. Maybe its that we still don't understand what a trillion means. We see the word so often now. Like mass shootings. Our reaction today is more like, well, how many  kids got killed this time? Mass shootings, like trillions of dollars of deficits, gets spoken so often that they don't really register anymore. That's the effect of frequency. But frequency does not mean unimportance. We can and should do something about politicians who whistle their way to the bank -- with our money and our economy at stake. 

The above is meant to be a last time. I am tired of writing bad news. There is so much going on around us that impacts us more than macroeconomics. Good health is a big one that we ignore until we lose it.  If you are my age, you have your share of health concerns. But if you are reading this, you are alive and so am I. My parents checked out at much younger ages. Wow. I just got another day. How sweet. 

And what about family and friends? How great is that! Okay, relationships are not always perfect. But would you rather have no relationships? I won't bore you with how lucky I am to have people in my life every day. 

Back to my main point. With little fun writing about macroeconomics these days, I need to find better topics to write about. Since that is new to me, I will need your help. Aside from health and friends, what should we be yacking about? 

Is it Happy Hour yet?