Where Is the Inflation?

If you’re not interested in macro, go ahead and skip this one. I am by no means an expert in macroeconomic policy, but I do try and consume a wide variety of macro literature. Recently, we’ve seen the rise of MMT or “Modern Monetary Theory”. At its core, MMT advances the idea that since the government has a monopoly on currency creation, the government can create as much money as it needs to in order to achieve policy goals such as full employment, so long as the government doesn’t become insolvent. In other words, MMT advocates would say that in a period of economic recession or slowdown, the government can inject cash into the economy via direct purchases of goods and services, and is ultimately only limited in this respect by rising inflation.

I would like to point out that MMT appears to be a reaction to a unique macroeconomic environment we have found ourselves in since the great recession of 2008-2009. According to macroeconomic precepts from schools like Neo Keynesianism, our record low unemployment rate we are experiencing should be a strong driver of inflation. This has economists from all walks of life extremely vexed. Why, in an era of record low unemployment and an empirically strong economy, are we not seeing “normal” levels of inflation associated with that environment? Well, MMT advocates are in part claiming that perhaps those two factors were not all that strong of a driver of inflation after all. In fact, perhaps the government has been handicapping itself all these years by not increasing the money supply aggressively in periods of economic downturn, or even periods in which we could stand to lower the unemployment rate.

The question of why inflation hasn’t risen in recent years is a valid question which ultimately impacts every American. Despite low unemployment and a strong securities market, the Federal Reserve continues to struggle with the choice of whether or not to raise interest rates, an orthodox action in a thriving market. The Fed raises interest rates in the rapidly expanding economy to ward off, you guessed it, inflation. If inflation is plodding along, what need is there to raise interest rates?

My immediate instinct is to look to wage growth as an explanatory factor. I won’t go so far as to say I’m a staunch proponent of the Labor Theory of Value, but I do think its tenets merit consideration in this conversation. Basically the Labor Theory of Value says that things are valued not by the utility, or the value derived from the consumer which owns or purchases the product, but rather by the value of the labor required to produce it.Where this comes into this conversation is this: If wages are suppressed or stagnant, and prices are contingent on the value of the labor, prices will accordingly remain suppressed. Ergo, suppressed prices hold down inflation. Could it be that because wages have not recovered from the recession that it is also causing downward pressure on inflation?


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