Courtesy of Pam Martens.
Pam Martens and Russ Martens discuss The Cleveland Fed’s Puzzle on Future Economic Activity. The Fed is trying to predict where the economy is headed. With a weak labor force and flat wages, the Fed is aware of the danger of raising interest rates too quickly and triggering an economic downturn. But labor markets and wages are only one piece of a complicated picture.
Edward S. Knotek II of the Cleveland Fed
The Cleveland Fed’s Puzzle on Future Economic Activity
By Pam Martens and Russ Martens
Edward S. Knotek II and Saeed Zaman work for the Federal Reserve Bank of Cleveland. On August 19 they posted a paper at the Cleveland Fed’s web site that looked at causal relationships between wages, prices and future economic activity.
Knotek and Zaman have two Ph.D.s between them. Their paper arrives at this conclusion:
“…subdued wage growth is symptomatic of the existence of slack in the labor market. But given wages’ limited forecasting power, they are but one piece in a larger puzzle about where the economy and inflation are going.”
What Knotek and Zaman are pumping out as forecasting research at the Cleveland Fed is important because the President of the Cleveland Fed, Loretta J. Mester, is a voting member of the Federal Open Market Committee (FOMC) that sets monetary policy for the U.S. central bank. Mester will help decide when interest rates are hiked to help thwart future inflation.
If rates are hiked prematurely, the country could end up in the safety-net-enhanced version of the Great Depression (indeed, we already may be in just that) or in a Japan-esque multi-decade effort to climb out of the quicksand hell of deflation.
Saeed Zaman of the Cleveland Fed
What Knotek and Zaman have done here is to make an omelet and forget the eggs. One can’t have a cogent discussion today about where the economy is going without including the perhaps uncomfortable but essential ingredient – unprecedented wealth and income inequality.
Here’s an alternative analysis that includes the eggs:
Yes, there is slack in the labor market. Yes, that induces fear among workers who resist asking for wage increases. The fact one’s neighbor lost his job and has been unemployed for more than a year adds to that fear. The fact that the bright college graduate down the block is working as a waiter also adds to that fear. The reality that unions can’t negotiate for higher wages across a broad swath of the labor force because their ranks have been decimated to just 6.7 percent of private sector workers adds further to the downward bias on wages.
