Saturday, June 24, 2006

Reich is always right on

Robert Reich has an interesting post up on inflation. I love this guy, because he's so straightforward and his critics come as much if not more from his own side of the fence, as the other. Here's some excerpts.

The fact is, this economy is not at all like the economy of the 1970s. Labor unions don't have nearly the power they did then to demand wage increases. Big companies don't have nearly the power they did then to raise prices. Globalization and computer software have radically increased wage and price competition. So the inflation genie won't get out of the bottle. The price rises we're seeing now are due to energy and raw-material commodity price increases, which are NOT being driven by excessive demand by American consumers and NOT being driven by inflationary expectations. They're the result of soaring increases in demand for energy and raw materials by China and India, and by uncertainties over energy supplies from the Middle East, Nigeria, Russia, and Venezuela.

In addition, productivity has grown enormously in the US during the last five years. Wages have not. Wages comprise 70 percent of the costs of business. One last thing: There's still lots of unemployment in the US. The payroll survey shows only small increases in hiring. A smaller proportion of adults are employed now than in 2000. The ranks of people too discouraged to look for work are very large.

So forget the inflation genie. Worry more about the 1930s. I don't mean to suggest a full-fledged depression is on the horizon. But I do worry that the economy is slowing. Consumers are reaching the limit of their capacity to go deeper into debt. Their one cash cow -- the value of their homes -- is in poor shape. To make matters potentially worse, not only is the Federal Reserve Bank raising interest rates too high, so are central bankers all over the world. Take a look at long-term interest rates and you see how worried lenders are about the economy overall. If the Fed keeps raising short-term rates we're heading for a major downturn.

Me thinks Bernanke wants to show Wall Street he's a tough guy. But tough guys often over-estimate the importance of acting tough.

In the end, the people who get clobbered when the Fed raises rates and the economy slows are those at the end of the job line -- people who need jobs, or are in low-paying ones. They're the first to be let go. At a time when the number of working poor in America are already ballooning, and the ranks of the impoverished are growing, it's not only economically wrong for the Fed to go on raising rates. It's ethically wrong.
I forget where the paragraph breaks are, but read the rest for yourself. It's short and the comments are always interesting. He has a lot of critics. He's a lot like me. He's way smarter but he goes against the conventional wisdom most of the time.

I'm especially glad to see someone of his caliber make the point that the low unemployment figures discount the large numbers of Americans who have simply stopped looking for work and dropped off the charts. Otherwise how would you explain, what was it 60,000 people or something that came out looking for a job at some Walmart a few months ago?
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