This appeared in the OMFIF bulletin 11 April 2014
Chicago central banker’s medicine to get US economy moving
By Denis MacShane
The normal duty of central bankers (especially in Europe) is to denounce inflation as the work of the devil and call for labour market flexibility as a barely disguised code for reducing wages.
But a gathering of academic economists at the annual Minsky Conference this week in Washington heard an impassioned plea from one of America’s top central bankers that it was time to increase wages and let inflation rise again.
Charles Evans is president of the Federal Reserve Bank in Chicago, where he has worked much of his professional life, in addition to stints as an economics professor and author of heavyweight academic articles on monetary policy.
Evans, currently a non-voter, is among the more dovish members of the Federal Open Market Committee. In his paper at the Bard College Levy Institute’s Minsky Conference, commemorating the work of depression-fighting economist Hyman Minsky, Evans said the US economy now needed a serious boost in wages to help business demand.
Evans used moderate, cautious language. However, the message was clear: Deflation and low wages are the new dragons to be slain.
‘Low wage increases are symptomatic of weak income growth and low aggregate demand. Stronger wage growth would likely result in more customers walking through the doors of business establishments and leading to stronger sales, more hiring and capacity expansion,’ Evans said.
He suggested a target wage growth figure of 3.5%, which he argued ‘is sustainable without building inflation pressures.’ This compares with the current range of 2-2.25 in compensation growth, coinciding with labour’s historically low share of national income.
Evans is right to underscore the dramatic change in the amount of US added value that goes to employees. Until 1975, wages normally accounted for more than 50% of American GDP, but this fell to 43.5% by 2012.
Evans said fears about inflation which have hovered over monetary policy-making since the 1970s have been exaggerated. Evans argued: ‘No one can doubt that we [the Fed] are undershooting our 2% [inflation] target. Total personal consumption expenditure (PCE) prices rose just 0.9% over the past 12 months; that is a substantial and serious miss.’
‘Below-target inflation’, said Evans, ‘is a worldwide phenomenon and it is difficult to be confident that all policy-makers around the world have fully taken its challenge on board. Persistent below-target inflation is very costly, especially when it is accompanied by debt overhang, substantial resource slack and weak growth.’
‘Despite current low rates, I still often hear people say that higher inflation is just around the corner. I confess that I am somewhat exasperated by these repeated warnings given our current environment of very low inflation. Many times, the strongest concerns are expressed by folks who said the same thing back in 2009 and then in 2010.’
Denis MacShane is former UK Minister for Europe and a member of the OMFIF Advisory Board. He was a speaker on European politics at the Minksy Conference.