Inflation Hysteria No.2 (Slack-Edotes)

Macroeconomic slack is such an easy, intuitive concept that only Economists and central bankers (same thing) could possibly mess it up. But mess it up they have. Spending years talking about a labor shortage, and getting the financial media to report this as fact, those at the Federal Reserve, in particular, pointed to this as proof QE and ZIRP had fulfilled the monetary policy mandates – both of them.

A labor shortage would’ve meant full or maximum employment, the absolute best any economy can imagine. Given the huge economic hole the first Global Financial Crisis had created (How was it global, again? Why did this get so bad in 2008 of all years?), the inflationary pressures presumed from a sizable labor shortage were a welcome development.

The end of macro slack, meaning inflation as the definitive sign of full, complete recovery. Employment to its maximum possible. An economy so good, companies would have to robustly compete for workers.

And it never once happened. No matter how many times whichever high Fed official talked like it was a foregone conclusion, it was obvious at those times they were either wrong or being disingenuous (managing sometimes to be both). There never was a labor shortage as you could tell by the fact wages weren’t rising too fast, let alone in any danger of skyrocketing.

Instead, the media was filled with anecdotes about how businesses were being “forced” to “compete” for “scarce” labor using…piddly perks? Huh? Silly and stupid, no logic or rational analysis was behind any of this. It really deserved every last exclamation point in:


It was, of course, another key cog fitting out Inflation Hysteria #1. I wrote back in early July 2018 how it was never anything other than rationalizing:

That’s the second and largest problem about these anecdotes. They shouldn’t be necessary at all. If the unemployment rate was even close to a valid measure of the actual economic condition in the labor market, the data would be uniformly corroborating. That’s what would have filled out these stories instead of anecdotes. In the absence of data we are given stories that are blatantly reaching…The result is an explosion not in wages and income but stories about a labor shortage that doesn’t actually exist. Job growth over the last decade hasn’t even kept pace with the population.

As I’d written so many times, there never was any need to get creative to find workers. You want them, really want them because business is truly booming, you pay them. It really is that simple.

At times when labor is easy to come by because macro slack has made them plentiful since they are otherwise idle and waiting to find work, wages aren’t going to move much therefore deflationary, at the very least disinflationary, pressures predominate.

It’s not really about consumer prices.

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