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The ECB and the NYT’s Obsession with Talking about Deflation

This is a syndicated repost courtesy of New Economic Perspectives. To view original, click here. Reposted with permission.

Kansas City, MO: December 4, 2014

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In the last two days, the New York Times’ website has published a blizzard of six article about deflation, several of them focusing on the European Central Bank (ECB). Collectively, these article mention the word “deflation” seven times and the word “inflation” 75 times. Collectively, the same articles contain the word “unemployment” 10 times and the word “unemployed” zero times. “Unemployment” is the word one uses to provide a statistic. “Unemployed” is the word one uses to discuss who is harmed and how they are harmed because they lose their ability to find a job.

The word “demand” is used only twice and both usages are in the context of oil prices rather than the eurozone’s grossly inadequate demand that already inflicted a second, gratuitous Great Recession and threatens to cause a third. The word “austerity” – the form of economic malpractice akin to bleeding a patient to make him healthy – is mentioned only twice and solely in the article on the Bank of England.

 

The obsession with deflation is bizarre. The reason one should be concerned with deflation is that it can help produce long-term unemployment and cause great harm to those who lose their jobs and cannot find jobs. In the context of Europe, where 100 million people live in nations (Spain, Italy, and Greece) with Great Depression levels of unemployment six full years after the acute phase of the financial crisis struck, the danger that those unemployment rates could persist for many future years should be the nightmare that every European leader makes a top priority to prevent. The Eurozone is already in crisis. The periphery of the eurozone continues to be a catastrophe. As I explained, this discussion of “unemployment” can provide useful statistics, but to discuss the plight of the peoples of Europe one must discuss the “unemployed.” The NYT blizzard of articles studiously and stonily ignores their plight. Unemployment is wasteful to society and causes severe harm to the unemployed.

The only good news is that the NYT articles demonstrate a “crowding out” effect of obsessions. The word “deficit” never appears in the articles – the deficit hawks are in full flight. The word “debt” appears three times, but never in conjunction with the word “crisis.”

The new obsession is bizarre on multiple dimensions. First, the reason we are concerned with deflation is that we are concerned (1) that it is a symptom that indicates that overall demand is grossly inadequate, (2) that the combination of grossly inadequate demand and the consumer behavior induced by deflation can produce serious, long-term unemployment, and (3) the concern that this will cause severe harm to the unemployed and their loved ones plus enormous waste to society. But the NYT and the vast majority of the financial elites they interviewed demonstrate no understanding that deflation is a symptom of grossly inadequate demand and little or no understanding that nothing magical happens at the point that prices fall (deflation). Well before that point, where the rate of inflation is small and falling but still positive, it already indicates seriously inadequate demand and the likelihood that consumer behavior in response to the very low and falling rate of inflation will exacerbate the demand shortfall. The NYT writers and the financial elites they interview also demonstrate little or no concern for the unemployed. They are terrified of deflation, but for none of the reasons that either a competent economist or a human with normal empathy would fear deflation. They ignore the facts that (1) grossly inadequate demand leads to unemployment (and often deflation) and (2) austerity in response to a Great Recession is self-destructive because it reduces overall demand at the time when demand is already grossly inadequate. They ignore that which we know works – fiscal stimulus and ending the self-inflicted wound of austerity through the EU’s oxymoronic “Stability and Growth Pact.” While the ECB prates about deflation, it has failed to act to ensure that it meets its inflation target and to call for fiscal stimulus programs vital to meet the inflation target.

There were three articles focused on the ECB. Jack Ewing authored “Draghi Strives to Maintain Credibility of E.C.B.” on December 4, 2014. The title is an unintentional joke given the ECB’s lack of credibility due to the fact that it has studiously ignored its inflation target policies which required it to prevent the severe, continuing fall in inflation rates to levels that are ever farther below the ECB’s written target. As I explained in prior articles, Mario Draghi, the head of the ECB spent many months praising falling inflation rates – to levels well below the ECB target. Now, Draghi deplores the falling inflation rates he ignored or even praised.

Ewing’s article displays the economic incoherence that I explained above.

“If there was one thing that Mario Draghi wanted everyone to understand on Thursday, it was that the European Central Bank was determined to honor its prime directive: to keep a handle on inflation.

‘We have a mandate. We don’t tolerate prolonged deviations from our mandate,’ Mr. Draghi, the E.C.B. president, said at a news conference. Later, he was even more forceful. ‘Not to pursue our mandate would be illegal,’ he said.

But it has been almost two years since the eurozone’s central bank last achieved its inflation target of about 2 percent. Inflation has fallen steadily since then, this year to dangerously low levels. It is now close to zero — beyond which would be deflation, the economically dysfunctional condition that no central banker wants to let happen on his watch.”

Ewing ignores the part where Draghi not only “tolerate[d] prolonged deviations” from the ECB’s written inflation target but actually praised them as desirable. Ewing also claims, irrationally, that extremely low rates of inflation become harmful only at the point that the inflation rate becomes negative (deflation). Note also his failure to discuss the fact that such serious, continuous falls in already inadequate inflation rate are, like severe unemployment, caused by grossly inadequate demand.

Ewing then compounds Draghi’s economic propaganda by offering this strange claim as to why deflation is dangerous.

“Low inflation can make it difficult for companies to raise prices to cover their costs. That in turn can force businesses to cut wages and discourage them from hiring new people. Deflation can create a self-perpetuating stagnation of the sort that has troubled Japan in recent decades.”

The first two sentences are nonsensical. Firms’ “costs” are held down by “low inflation” so firms do not need “to raise prices” by any large amount in order to “cover” “costs” that are not increasing by any large amount.

Ewing makes only one reference to the eurozone unemployment rate.

“The eurozone has narrowly avoided slipping back into recession, but growth remains too weak to make a significant dent in the unemployment rate, which was 11.5 percent in October.”

Actually, growth is so pathetic that unemployment is growing in a number of EU nations. An 11.5% unemployment rate, six years after the peak of the crisis, is a catastrophe. It is so high that it means that several eurozone nations will likely suffer Great Depression levels of unemployment for over a decade. In these circumstances, fiscal stimulus offers an obvious win-win-win-win by providing the critically inadequate demand. Fiscal stimulus will increase growth, decrease unemployment, decrease inequality, and increase the current inadequate inflation rate toward the desirable target rate without risking harmful inflation.

Ewing published another column dated December 4, 2014 entitled “Draghi Says E.C.B. Will Reassess Stimulus in Early 2015.” Don’t let the article’s title get your hopes up. Draghi is not referring to real fiscal stimulus. Fiscal austerity will continue, but if the eurozone continues to stagnate Draghi hopes to avoid a German veto of “quantitative easing” (QE) by the ECB. QE’s effectiveness – as a complement to fiscal stimulus – is hotly debated. QE, when fiscal policy is used to reduce growth through austerity, cannot succeed in creating a robust recovery.

These two Ewing columns, while they have different titles, are really revisions of the same column. Both versions contain this (unsourced, for obvious reasons) clunker claim:

“Low inflation can make it difficult for companies to raise prices to cover their costs. That in turn can force firms to cut wages and discourage them from hiring new people.”

The third column on the NYT website discussing the ECB is entitled “Markets Claw Back Losses After E.C.B. Disappoints.” The column, dated December 4, 2014, is attributed to the AP. The column ignores demand, unemployment, and the alternative of fiscal stimulus.

The fourth column on the NYT website is entitled “Falling Oil Prices Create a Central Banking Conundrum” and dated December 4, 2014. The column tries to spread this myth about the ECB.

“[T]he challenge Mr. Draghi and his fellow central bankers face is that they are trying — almost desperately — to attain higher inflation, closer to the 2 percent they target.”

The reality, as I explained extensively in a prior article (link above) is that Draghi praised rather that “desperately” fought the rapid fall in inflation rates in the eurozone’s periphery.

The fifth column on the NYT website also has a European central bank focus is dated December 4, 2014 and entitled “Bank of England Keeps Rates on Hold at Record Low.” It is attributed to Reuters and this is its lead.

“LONDON — The Bank of England kept interest rates at a record low on Thursday as policymakers gave more weight to the risks from low inflation and a weak global economic outlook than to a strong recovery at home.”

The UK is under the thrall of austerity.

“Weak pay growth, inflation running well below the BoE’s 2 percent target and a poor outlook for the euro zone have convinced most of the MPC’s nine members to keep interest rates on hold.

Still, minutes from last month’s meeting showed that some of the seven members who have been voting to keep rates on hold were increasingly worried about the risk of inflation pressures building up.

Britain looks set for more fiscal austerity in the coming years that may pressure the BoE to keep monetary policy loose.

Chancellor George Osborne’s latest update to his austerity plans, delivered on Wednesday, are set to take public spending as a share of the economy to its lowest level in 80 years, the country’s fiscal watchdog said.

The Office for Budget Responsibility also forecast that economic growth is expected to slow from 3 percent this year – its fastest pace in more than a decade – to 2.4 percent in 2015 and 2.2 percent in 2016.”

The “Office for Budget Responsibility” is an oxymoronic title for an office dedicated to irresponsible budgetary policies that thrust the UK back into a gratuitous second recession and continue to weaken its recovery. It should be frightening that even this temple that worships austerity predicts that austerity in the UK and the EU will (again) materially slow EU and UK growth. While the Bank of England is worried enough to maintain “record low” interest rates, it too is devoted to the creed of austerity. Even with the EU stagnant, much of the eurozone’s periphery still suffering six years later from Great Depression levels of unemployment, and very low UK inflation rates “running well below the BoE’s 2 percent target” – “some” Bank of England members “were increasingly worried about the risk of inflation pressures building up.” That is significantly insane. The article notes, but does not explain that it is very bad news, that the UK’s growth is being driven by a strong increase in consumer debt.

The sixth column on the NYT website (dated December 3, 2014) is entitled “Q. and A. With Charles Evans of the Fed: Low Inflation Is the Primary Concern.”

“Charles Evans, president of the Federal Reserve Bank of Chicago, is nervous about inflation. His worry, however, is not the old Fed fear that prices are rising too quickly, but the new Fed fear that prices are not rising fast enough.”

The column reveals part of the cost of the premature end of federal fiscal stimulus in the United States compounded by state and local governmental austerity.

“A. If you go back to 2009, we’ve been underrunning our inflation objective virtually for that entire period. The average inflation rate over that six-year period is 1.5 percent. It’s been very hard to get inflation up. And I think it’s very important to get inflation up to our objective, and my outlook for inflation over the next three years is for it to be less than 2 percent — even in 2017 it’s just a touch below 2 percent in my outlook. And that’s an outlook that’s presuming a very high level of accommodative monetary policy that continues.”

It was inevitable that we would be well below the inflation target during the worst of the Great Recession, but the failure to meet the target in later years indicates that we could have substantially improved our recovery without creating any undesirable inflation had we adopted and maintained adequate fiscal stimulus. Even in the U.S., despite aggressive monetary policy, including aggressive QE, we have not reached our inflation target because we prematurely ended meaningful (but always far too small) federal fiscal stimulus.

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