I recently encountered this thread where Paul Romer presents a case for the “secret success of Biden’s economic policy. Wages for workers at the bottom are growing faster.” Compared to most other countries, however, the U.S. continues to lag far behind. As we celebrate this incremental improvement, Romer calls Secretary of the Treasury Janet Yellen the “hero” behind this policy, whose “work on nominal wage rigidity tells you exactly why the only way to get a reduction in wage inequality is to have an increase in the rate of growth of average wages.” But why?
The “hidden and unnoticed true success” of the Biden administration, Romer says, is that we have “wages growing faster at the bottom end of the skill distribution.” But how real is this wage growth?
Typically, Romer would be correct—if Americans only saw increasing wages. But they aren’t. Coupled with rising wages is inflation, where spending power is decreasing as the consumer price index (CPI) is up 8.6%. In an ideal world, inflation would not be a variable, but because it is what is the theory behind the idea that it isn’t a concern?
In a conversation with Carrie Lam from Bloomberg, Romer argues that inflation is not steadily accelerating, but is only temporary. In the 1970s, we “thought it was out of control.” But it isn’t out of control, so instead of worrying about it, we should be worrying about slower growth and how to sustain it. In other words, we should be more concerned about a recession rather than stagflation, which is a combination of a recession (downward growth), inflation, and unemployment.
The reason inflation is not a concern, Romer argues, is because of what John Maynard Keynes calls “expectations.”
“Stagflation was a period of stagnation, meaning no growth or even a recession—a fall in output—combined with some inflation; and in the 70s people were surprised that you could have both. These days we are not surprised, you could easily have both…But the key thing is how do we respond? One of the key things to remember is what Keynes pointed out about expectations with his story about the beauty contest: if everybody thinks some person will be selected as the most beautiful then everybody will say ‘well, that’s the most beautiful…’ So, right now if everybody expects steadily increasing inflation, then you’re going to get actions that lead to steadily increasing inflation, but this is not what everybody expects.”
Bloomberg went on to show that core CPI expectations were lower than the rate of inflation.
The idea that expectations bring about reality is somewhat reminiscent of neoclassical economics where the individual is atomized into units of agency, corresponding to Adam Smith’s idea of what moves the “Invisible Hand.”
Assuming Romer is right that inflation will eventually wind back and reduce the cost of goods, Lam asks how do we sustain wage growth that might be a result of COVID stimulus’, the tightening job market, and even current inflation.
“I think we should set as our goal to return to the policies we had in the 1990s; wages were growing faster at the bottom,” where there were more adults in the job market than we have now, Romer continued, also suggesting that the Biden administration is not getting the credit they deserve.
“I think their strategy of aggressive stimulus and continuing to push for the infrastructure spending which could be an ongoing form of stimulus. They were determined, I think to keep the job market tight to keep it hot.” [sic]
Is increasing wages while regarding inflation as transitory actually the president’s intention? Even if it is, the administration is doing a horrible job communicating that transparency.