Post by WarMachineRhodey on Mar 29, 2016 20:26:50 GMT -5
www.wsj.com/articles/radical-policy-ideas-resurface-amid-too-low-inflation-1458145280
"Four decades ago, governments desperate to tame double-digit inflation turned to the heavy-handed tool of wage and price controls. That once-discredited idea is getting another look, but this time to boost wages and prices, not restrain them.
Direct intervention is the sort of radical step policy makers take to boost too-low inflation when they’ve tried everything else. In Japan, they have.
Prime Minister Shinzo Abe and the Bank of Japan have already used fiscal stimulus, mass purchases of government bonds known as quantitative easing and, as of January, negative interest rates, all to spur spending, wages and prices. They’ve made some progress: excluding food and energy, inflation is now positive. But it’s still well below the bank’s 2% target, and this week the bank conceded the economic outlook and expected inflation had both weakened.
Low inflation is partly due to plunging oil prices. But more important is the puzzling failure of wages to rise much despite the lowest unemployment in 19 years.
The same puzzle prevails in Germany, Britain and the U.S., where unemployment is at or below prerecession levels but wage growth remains negligible. This frustrates the underlying mechanism of fiscal and monetary stimulus, which is to create so much demand that to attract workers, employers must pay more, then pass the higher costs along as prices.
Mr. Abe has in the past exhorted big companies to boost pay during annual negotiations with unions. Yet last year, the average base-pay increase of 219 companies in Keidanren, the Japanese employers’ federation, was just 0.44%, noted International Monetary Fund economists Luc Everaert and Giovanni Ganelli in a recent blog post. In this year’s just-ended negotiations, Toyota raised base pay by just 1,500 yen ($13), or 0.4%, half of what the union asked for and only a third of last year’s boost, despite expecting record profits.
But the movement of production outside of Japan, and the rise of contract employment at the expense of permanent jobs, have weakened the link between profits and wages. Unions now prioritize job security over pay boosts.
“Some kind of mechanism, a ‘visible hand,’ is necessary for wages to rise,” Bank of Japan governor Haruhiko Kuroda said in 2014. His plan that a 2% inflation target would serve that role in the place of coordinated wage bargaining hasn’t yet panned out.
How to restore the link between prices, profits and wages? In a recent article, Olivier Blanchard, former chief economist at the IMF, and Adam Posen, president of the Peterson Institute for International Economics, put forward several proposals for Mr. Abe’s government. First, delay a promised cut in corporate tax rates until companies raise wages. Second, increase public-sector pay, which would force private employers to do the same to hold on to workers. Third, raise the minimum wage and wages in government contracts and regulated sectors by at least 5%. And finally, index wages to inflation in those sectors over which the government has jurisdiction.
The IMF economists echo those suggestions and add a few more of their own, such as introducing tax penalties for companies for “not passing on excessive profit growth” or a “comply or explain” mechanism for companies to ensure “they raise wages by at least 2% plus productivity growth.”
If wages initially rise faster than prices, consumer spending should boom. Firms, though, would be encouraged to raise prices to maintain profit margins, since the point is to create “a wage-price spiral of the sort feared from the 1970s,” Messrs. Blanchard and Posen note. As higher incomes and prices raise nominal gross domestic product (that is, unadjusted for inflation), Japan’s crushing debt-to-GDP ratio, now nearly 250%, would drop.
While bondholders might spend less as their purchasing power declines, others should spend more as the Bank of Japan holds down real (that is, inflation-adjusted) interest rates. Inflation might shoot too high, but central banks have more experience solving that problem than fixing too-low inflation.
Despite its theoretical appeal, such a policy immediately raises practical and philosophical questions. How would “excessive profit growth” be defined? How would companies be forced to comply? Centralized wage bargaining has been eroding in Japan, as it has in Europe, as companies seek to adjust pay to their own competitive needs. Every company would have an incentive to evade the edict to raise wages and prices, in hopes of gaining market share when its competitors comply. In the U.S., where unions are even weaker, such a system would be even harder to implement."
Effective wage and price controls (which Europeans refer to as “incomes policy”) require bureaucrats to second-guess private decisions with invasive and distortionary oversight. Under U.S. controls in the early 1970s, politicians or their appointees decided who was subject to controls, what information they had to report, which costs a firm could pass through to prices, how much pay could rise and exemptions such as for fringe benefits and the working poor. “By encouraging men to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality,” Milton Friedman wrote at the time. Nor did they have any lasting benefit; it took drastically tighter monetary policy to defeat inflation.
Nonetheless, with policy makers desperate for new ways to boost incomes and inflation, more “break the glass” options such as wage and price controls will be on the table.
"Four decades ago, governments desperate to tame double-digit inflation turned to the heavy-handed tool of wage and price controls. That once-discredited idea is getting another look, but this time to boost wages and prices, not restrain them.
Direct intervention is the sort of radical step policy makers take to boost too-low inflation when they’ve tried everything else. In Japan, they have.
Prime Minister Shinzo Abe and the Bank of Japan have already used fiscal stimulus, mass purchases of government bonds known as quantitative easing and, as of January, negative interest rates, all to spur spending, wages and prices. They’ve made some progress: excluding food and energy, inflation is now positive. But it’s still well below the bank’s 2% target, and this week the bank conceded the economic outlook and expected inflation had both weakened.
Low inflation is partly due to plunging oil prices. But more important is the puzzling failure of wages to rise much despite the lowest unemployment in 19 years.
The same puzzle prevails in Germany, Britain and the U.S., where unemployment is at or below prerecession levels but wage growth remains negligible. This frustrates the underlying mechanism of fiscal and monetary stimulus, which is to create so much demand that to attract workers, employers must pay more, then pass the higher costs along as prices.
Mr. Abe has in the past exhorted big companies to boost pay during annual negotiations with unions. Yet last year, the average base-pay increase of 219 companies in Keidanren, the Japanese employers’ federation, was just 0.44%, noted International Monetary Fund economists Luc Everaert and Giovanni Ganelli in a recent blog post. In this year’s just-ended negotiations, Toyota raised base pay by just 1,500 yen ($13), or 0.4%, half of what the union asked for and only a third of last year’s boost, despite expecting record profits.
But the movement of production outside of Japan, and the rise of contract employment at the expense of permanent jobs, have weakened the link between profits and wages. Unions now prioritize job security over pay boosts.
“Some kind of mechanism, a ‘visible hand,’ is necessary for wages to rise,” Bank of Japan governor Haruhiko Kuroda said in 2014. His plan that a 2% inflation target would serve that role in the place of coordinated wage bargaining hasn’t yet panned out.
How to restore the link between prices, profits and wages? In a recent article, Olivier Blanchard, former chief economist at the IMF, and Adam Posen, president of the Peterson Institute for International Economics, put forward several proposals for Mr. Abe’s government. First, delay a promised cut in corporate tax rates until companies raise wages. Second, increase public-sector pay, which would force private employers to do the same to hold on to workers. Third, raise the minimum wage and wages in government contracts and regulated sectors by at least 5%. And finally, index wages to inflation in those sectors over which the government has jurisdiction.
The IMF economists echo those suggestions and add a few more of their own, such as introducing tax penalties for companies for “not passing on excessive profit growth” or a “comply or explain” mechanism for companies to ensure “they raise wages by at least 2% plus productivity growth.”
If wages initially rise faster than prices, consumer spending should boom. Firms, though, would be encouraged to raise prices to maintain profit margins, since the point is to create “a wage-price spiral of the sort feared from the 1970s,” Messrs. Blanchard and Posen note. As higher incomes and prices raise nominal gross domestic product (that is, unadjusted for inflation), Japan’s crushing debt-to-GDP ratio, now nearly 250%, would drop.
While bondholders might spend less as their purchasing power declines, others should spend more as the Bank of Japan holds down real (that is, inflation-adjusted) interest rates. Inflation might shoot too high, but central banks have more experience solving that problem than fixing too-low inflation.
Despite its theoretical appeal, such a policy immediately raises practical and philosophical questions. How would “excessive profit growth” be defined? How would companies be forced to comply? Centralized wage bargaining has been eroding in Japan, as it has in Europe, as companies seek to adjust pay to their own competitive needs. Every company would have an incentive to evade the edict to raise wages and prices, in hopes of gaining market share when its competitors comply. In the U.S., where unions are even weaker, such a system would be even harder to implement."
Effective wage and price controls (which Europeans refer to as “incomes policy”) require bureaucrats to second-guess private decisions with invasive and distortionary oversight. Under U.S. controls in the early 1970s, politicians or their appointees decided who was subject to controls, what information they had to report, which costs a firm could pass through to prices, how much pay could rise and exemptions such as for fringe benefits and the working poor. “By encouraging men to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality,” Milton Friedman wrote at the time. Nor did they have any lasting benefit; it took drastically tighter monetary policy to defeat inflation.
Nonetheless, with policy makers desperate for new ways to boost incomes and inflation, more “break the glass” options such as wage and price controls will be on the table.
