Paul Krugman has an op-ed on why this is not your father's inflation:
Here’s an example of the way things used to be: In May 1981, the United Mine Workers signed a contract with coal mine operators locking in wage increases averaging 11 percent a year over the next three years. The union demanded such a large pay hike because it expected the double-digit inflation of the late 1970s to continue; the mine owners thought they could afford to meet the union’s demands because they expected big future increases in coal prices, which had risen 40 percent over the previous three years.At the time, the mine workers’ settlement wasn’t at all unusual: many workers were getting comparable contracts. Workers and employers were, in effect, engaged in a game of leapfrog: workers would demand big wage increases to keep up with inflation, corporations would pass these higher wages on in prices, rising prices would lead to another round of wage demands, and so on.
Once that sort of self-sustaining inflationary process gets under way, it’s very hard to stop. In fact, it took a very severe recession, the worst slump since the 1930s, to get rid of the inflationary legacy of the 1970s.
But as I said, this time around there’s no wage-price spiral in sight.
The inflation hawks point out that consumers are, for the first time in decades, telling pollsters that they expect a sharp rise in prices over the next year. Fair enough.
But where are the unions demanding 11-percent-a-year wage increases? (Where are the unions, period?) Consumers are worried about inflation, but you have to search far and wide to find workers demanding compensation in the form of higher wages, let alone employers willing to accept those demands. In fact, wage growth actually seems to be slowing, thanks to the weakness of the job market.
There's a conundrum here: people really value job security and predictible wage increase. But job security makes the economy much more rigid. When labor prices are calculated over three year periods, it takes a really nasty adjustment to wrench the economy around in the event of a shock. That's what Paul Volcker provided in the form of interest rates that briefly topped 20%, and the deepest recession since the Great Depression. Those kinds of long term coontracts ease the initial shock, but make the adjustment more jarring in the long run.
This is probably a good metaphor for life, actually. The longer you remain in denial, the harder it becomes to face reality.
Megan, didn't you get that memo? The one that says arguing against guaranteed union jobs is anti-American and neoconish? You wouldn't want to be called a neocon now would you?
A few years ago I realized that Paul Krugman was only reputable "visible hand" economist I'd ever seen.
Just because they don't show up in highly visible, dramatic, front page events, doesn't mean that inflation expectations driven wage increases won't happen. It's still a matter of what employers expect to be able to get for their products and what potential employees expect other employers to be willing to pay them.
To be sure, the reduction of union inspired inflexibility in the labor markets will probably make the employer and employee reactions speedier in both directions. But it's still the same dynamic, whether negotiated by two 7 figure negotiating teams working for monster organizations or decided roughly on the fly in the center conference room.
When people are faced with highly uncertain conditions, they band together and demand hazard pay. That was pretty much what living in a large portion of the US amounted to by the late 1970s, due to the combination of high inflation and general social unrest.
Despite the present economic faltering, staples like food, fuel, and clothing take a historically small chunk out of incomes, plus there is no broad anxiety about whether or not people will be able to buy them tomorrow at any price. As one example, $4/gallon gas is producing plenty of carping, especially from people who remember the last time it dipped below $0.90/gallon, but it remains available at every pump and there are no lines stretching for blocks to get it. So people grumble, fill up like they always do, and then make the budget or lifestyle changes necessary to mitigate the impact.
Thus, people generally aren't completely uncertain as to the future. They already have an idea that it will look about like it does now, but somewhat more expensive. Risk that someone can plan for does not drive broad unionization and demands for 11% wage increases.
What we call "inflation" reflects two different phenomena.
1. True cost increase: It's taking more effort to achieve the same level of output.
2. Currency devaluation: The same or less effort is required but declining currency value causes nominal costs to increase.
Those 1970's labor contracts assumed model 2. In recent times model 1 may be more representative due to important scarcities (such as of petroleum and other raw materials). Perhaps the laboring public generally "gets" this distinction and behaves accordingly.
Ken
The longer you remain in denial, the harder it becomes to face reality.
You just had to get in a dig at Hillary, didn't you?
So now that Hillary is just about done, can we expect more columns like this from Krugman? Because suddenly I'm reminded of how worthwhile a read he can be when he writes about what he knows.
Wow. It appears that Krugman has recovered from BDS several months ahead of schedule. Quite a surprise--though of course a welcome one!
What planet is Krugman living on? The California Teacher's Association has been getting some pretty big pay and benefit increases for its members in the past few years; many of the construction unions have gotten pretty big increases in the past few years, too. Non-union employees have been getting big wage increases lately, too. I personally had my salary increase by about 40% from 2003 to 2006.
Krugman is right that this isn't like the Nixon-Carter inflation; this time around, the wage push came much earlier in the cycle.
One big difference I see in inflation now vs. the 70s: housing isn't in the mix. Back then, housing was moving right along with the rest of prices and a big reason why many of us wanted double digit raises was to be able to afford a house.