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Debate: Galbraith vs. Furman on Inflation

Aug 5, 2022

In a commentary published on August 2, Jason Furman of Harvard University notes that, “Recent price- and wage-growth data make it increasingly clear that the US economy’s underlying inflation rate is at least 4% and more likely to be rising than falling.” And that, he argues, justifies a continuation of “rapid interest-rate hikes until there is clear evidence that underlying inflation is slowing dramatically.”

But James K. Galbraith of the University of Texas, Austin, disagrees that today’s wage-price inflation is as persistent as Furman suggests, or that interest-rate hikes are what the US economy needs right now.

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Edward Randall Aug 10, 2022

According to Furman economic policy makers are trapped. What are they trapped by? Inflation expectations (which – in short - feed off of unwise and short-sighted monetary policy).

In Furman’s world it is really rather simple.

Employers accommodate higher wages – because they need to pay more to get the workers they need. Consumers accommodate higher prices – because they can meet higher prices when wages go up. This means that the only medicine that any reasonable person can expect to work - if productivity isn’t rising - is the medicine that makes money more costly.

Of course that will depress economic activity and result in unemployment – but there is no alternative.

How should saner and more worldly wise economic advisers, commentators and policy makers respond?

They should respond, just as James Galbraith does, by pointing out how much more complicated the US (and international) economy is than Furman supposes.

They should point out how readily Furman sets aside inconvenient and contradictory information.

They should focus attention on what intelligent tax design and better directed investment, both public and private, can achieve (for one an all).

And, they should insist that economic policy makers show rather more respect for the millions of people whose judgements about wages and prices aren’t corralled by a ridiculously simplistic model of what can be achieved by monetary authorities operating in splendid isolation from the majority of those whose expectations they’ve been appointed and invited to try and manage.
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Dawood Mamoon Aug 10, 2022

Both Professor Furman and Professor Galbraith agree on the basic cause of price hike and subsequently why US economy has found itself into an wage price spiral. Professor Galbraith further agrees with professor Furman that it is higher wages that is forcing the businesses to increase prices. According to Professor Furman, the solution to this is more involvement of the Fed by raising interest rates to curtail prices from increasing further and that would come with higher unemployment. On this Professor Galbraith is on the mark that we are talking about people who would be unemployed. Further Professor Galbraith also makes a convincing point that let the businesses cut their profit margins and refrain from transferring costs of higher wages to the consumers. However Professor Galbriath also very eloquently provides the answer that why would businesses wont refrain from transferring costs to the consumers and keep high profit margins and that is the speculative behavior of every large business in the US who shall keep transfering costs of higher wages to the consumers because all financial consultants and firms shall be already predicting that Fed is going to raise interest rates increasing costs of borrowing. The only alternative that Professor Furman suggests is that businesses can mitigate the negative effects of rise in interests rates by increasing productivity and that means producing more and increasing their sales through effective and productive business strategies and that would eventually mean that more of good jobs are to be created for the working class in the production units of businesses operating in the US. Productivity also leads to low costs and low prices. It seems that the Biden plan to revamp technology imprint of US economy with a heft 52 billion dollar package would be directed towards good jobs for both industry and services sectors. Further the good job mantra is where US businesses have been the best performers like in case of Tesla, Space X etc. Thus Professor Galbraith is right that inflation should not be the worry for Fed or Businesses because it is a right conjecture to keep unemployment levels low and provide more and more good jobs to American citizens. That should even prevent a looming recession if price and wage spiral persists without increase of productivity in American Economy.

'So far this year, the Personal Consumption Expenditures Price Index has risen at a 7.7% annual rate, well above the Fed’s 2% target. Some of that is fueled by external events, notably Russia’s invasion of Ukraine, which has driven up gasoline and food prices. And now that gasoline prices have begun to decline from their peak, headline inflation should fall sharply. Yet even if we exclude these volatile prices, “core inflation” is still running at an annualized rate of 4.8% and has been increasing recently.' Professor Furman
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Ayowande McCunn Aug 8, 2022

It would be useful to understand the basis on which the sacrifice ratio would be 5%. Laurence Ball’s work suggests an average of 0.8% and the highs were in the US and Germany at 2.2-2.5%. Is there more authoritative work to get a better handle on sacrifice ratios?
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William Sippel Aug 7, 2022

Furman totally ignores the fact that inflation is worldwide and for many of the same reasons. Germany's inflation rate is 7.6%. England's is 12.4%. France at nearly 6%.

As for changes in service industry wages, what Furman and others ignore is that the pandemic has caused service industry businesses to increase wages BECAUSE tip income declined. So, if a restaurant is half full a waiter who received a significant portion of income from tips has few customers...with fewer customers who give tips, the low wage is non-renumerative and the service worker gets a job at Home Depot. Finally, Furman fails to discuss how the wage increase have been increases from the unindexed $7.25 minimum wage, a wage below the poverty level. We should be looking at the workers who have received wage increases, not just the fact that wages rose. For example, using the same sources as Furman, you might be surprised to discover that government workers salaries increased only 3.2-3.4%.
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