Work From Home, Technology, and the Singularity

    In response to the pandemic, businesses and consumers were forced to adopt technology at unprecedented speeds. In an article by Enda Curran, he emphasized that the adoption of technology paired with work from home will lead to increases in labor productivity and economic growth. The normalization of WFH has reduced time lossed from commuting while increasing the time for more productive tasks. While employees shifted to working from home, businesses  automated routine tasks through increased investments in robotics and other technologies, allowing workers to focus on less repetitive tasks and work on higher value output. A company that comes to mind that is a reflection of the automation trend is UiPath. The company's products are an example of Robotic Process Automation, which detects what's on screen to perform routine computer tasks across desktop applications. The positive outlook of these trends, however, are not widespread. Robert Gordan, a professor at North western university said, “it’s going to take a long time for the economy to adjust in the areas that are being severely damaged by working from home, like public transit and the downtown office buildings.” Research from a survey of more than 30,000 Americans indicates that 20 percent of full work days will continue at home after the pandemic ends, compared to just 5 percent before the pandemic (Berrero et al.). Additional results from the survey are captured in figures 1, 2, 3, and 4.

Figure 1-4: Source (Berrero et al.)

According to Blanchard, “it is useful to think of technological progress as increasing the amount of effective labor available in the economy.” Effective labor is labor multiplied by the state of technology (AN). Similar to Chapter 11, capital per effective worker and output per effective worker converge to constant values representing the steady-state. Part of the growth story discussed by Cullen could represent an improvement in effective labor (AN), captured in part by an increase in A, the state of technology. Another aspect of the pandemic is a sharp increase in the savings rate seen in figure 5. We can see significantly higher levels of saving and a near recovery of real gross domestic product per capita. Noticeably, an increase in the savings rate would have a negative effect on output in the short run as consumption decreases. However, an increase in the savings rate would over time increase the steady-state levels of output, raising output per effective worker and capital per effective worker. Figures 6 and 7 capture the effects of an increase in the savings rate. Will the higher savings rate persist post-pandemic remains to be seen, but if it remains on average higher than before there could be long-term increases in the steady state leading to more growth.

Figure 5: Personal Savings Rate (Right), Real GDP p capita (Left)

Figure 6: An increase in the savings rate (Blanchard)

Figure 7: The higher savings rate increases to a new level, but growth remains the same. (Blanchard)

                            

        

      

    Blanchard discusses the “age-old worry that research will become less and less fertile” where most discoveries have been made and technological progress slows down. This has yet to become the case, the improvement of technology over time, particularly in computing power and artificial technology has led some to think about the Singularity theory. The cost per computation per second has fallen dramatically captured in figure 8. When computer intelligence matches and surpasses human intelligence. Experts often are quick to predict what computers cannot do only to be proved wrong later. The rollout of machine intelligence can be seen in three stages: calculation, control, and innovation. Nordhaus in a journal article sought to investigate the effects of the Singularity on the economy and developed tests to indicate whether it has occurred. Of the six tests two returned a positive signal, but the trend shows that the singularity is greater than 100 years away. 

Figure 8: Decline in cost per computation per second

Works Cited

Berrero, Jose Maria, et al. “Why Working from Home Will Stick.” Working Paper No. 2020-174, Apr. 2021. Becker Friedman Institute.

Blanchard, Oliver. “Technological Progress and Growth.” Macroeconomics, Boston, Pearson, 2017, pp. 241–258.

Curran, Enda. “Productivity Is Finally Looking Up, and the Gains Could Lift Growth.” Bloomberg.com, 4 May 2021, www.bloomberg.com/news/articles/2021-05-04/productivity-surge-during-covid-could-mean-gdp-growth-around-the-world. Accessed 10 May 2021.

Mischke, Jan, et al. “Will Productivity and Growth Return after the COVID-19 Crisis? | McKinsey.” Www.mckinsey.com, 30 Apr. 2021, www.mckinsey.com/industries/public-and-social-sector/our-insights/will-productivity-and-growth-return-after-the-covid-19-crisis.

Nordhaus, William D. “Are We Approaching an Economic Singularity? Information Technology and the Future of Economic Growth.” American Economic Journal: Macroeconomics, vol. 13, no. 1, 1 Jan. 2021, pp. 299–332, 10.1257/mac.20170105. Accessed 10 Jan. 2021.

UiPath Inc. “What Is Robotic Process Automation? - RPA Software | UiPath®.” Uipath.com, 2017, www.uipath.com/rpa/robotic-process-automation.

Who is Really Better Off? Calculating Standard of Living for Northern Ireland and the Republic

Marissa Aulgur and Sadie Brownlee

 

Map of the United Kingdom of Great Britain and Northern Ireland and the Republic of Ireland

Since the final steps of the United Kingdom’s withdrawal from the European Union, conversations have arisen surrounding the possibility of a united Ireland. The leadership of the United Kingdom and the European Union both asserted that the Good Friday Agreement would continue to be upheld through the United Kingdom leaving the European Union. Still, breaches to this peace treaty have already begun to occur with the development of checkpoints for commerce entering the Republic of Ireland from the United Kingdom. The inability to uphold EU laws regarding trade now that Northern Ireland no longer remains part of the European Union has resulted in calls for a referendum to unify Ireland into one nation, with complete independence from the UK. This calls into question the economic differences between Northern Ireland and the Republic of Ireland and what the unification of these territories would mean for the populations of both of these territories. 

            A paper by Graham Gudgin, published by Queen’s University, asserts that Northern Ireland (a part of the UK) has 20% higher living standards than the Republic of Ireland (independent country, member of the European Union). It is essential to note the connection between Gudgin, Queen’s University, and the UK: the bias of the UK in potentially supporting propaganda pertaining to the importance of Brexit is not to be overlooked. The claim of Northern Ireland being 20% better off is pulled from a report that found the per capita spending is 20% higher in Northern Ireland than in the Republic of Ireland. This report was later revised to be a 4% difference amongst the territories, not accounting for differences in price (Gudgin claims if it did, the difference would remain the same) (Burke-Kennedy). Blanchard explains how consumption can be faulty in explaining quality of life. While it is easy to compare consumption between countries using exchange rates, this does not reveal quality of life because living costs are not accounted for, prices are not leveled out. In the example of Russia and the United States in the textbook on page 202, using only nominal consumption and converting rubles to dollars, Russia’s consumption is 10% of the United States. However, using Purchasing Power Parity and computing consumption relative to prices in both countries, Russia’s consumption is actually 53.5% of the United States. This new figure completely changes the perception of Russian consumption (Blanchard). Another study found, by GDP, that the Republic of Ireland is 50% better off than Northern Ireland. Additionally, poverty is found to be 8% higher in Northern Ireland than in the Republic of Ireland (Burke-Kennedy). This problem shows that determining which territory has a higher standard of living is nearly impossible because there is no agreed-upon way to measure this. 

In their paper “Income or Consumption: Which Better Predicts Subjective Well-Being,” Carver and Grimes investigate how best to measure quality of life through subjective well-being. Subjective well-being in this study was determined from a survey that asked respondents to evaluate their life satisfaction overall and in specific aspects. Carver and Grimes compared measurements of the Economic Living Standard Index (ELSI), a consumption-based measure that relies on self-rated questions, versus income for the population of New Zealand. Their study found that ELSI is a better way to assess subjective well-being than mere income, indicating that while there may be a correlation between money and happiness, income is inadequate in explaining quality of life. In regressions where both income and ELSI were included, income was almost always insignificant while ELSI was always significant. A key finding is the importance of the subjective factors of ELSI. When subjective aspects of ELSI were included in surveys, income was always insignificant. When income was compared to just the objective parts of ELSI, it was significant but only at the 10% level. Standard of living is a complex idea that requires qualitative and holistic measurements to attempt to explain it (since even ELSI has its flaws) (Carver and Grimes). Without uniform and effective ways to measure living standards, it will be challenging to assess countries like the Republic of Ireland and Northern Ireland and this will continue to fuel misconstrued conclusions that further political agendas rather than empirical analysis.  

Works Cited

Burke-Kennedy, Eoin. “Which Has a Higher Standard of Living – Northern Ireland or the Republic?” The Irish Times, The Irish Times, 18 Apr. 2021, www.irishtimes.com/business/economy/which-has-a-higher-standard-of-living-northern-ireland-or-the-republic-1.4540629. 

Carver, Thomas, and Arthur Grimes. “Income or Consumption: Which Better Predicts Subjective Well-Being?” Review of Income and Wealth, vol. 65, Nov. 2019, pp. S256-80. EBSCOhost, search-ebscohost-com.ezproxy.plu.edu/login.aspx?direct=true&db=ecn&AN=1834521&site=ehost-live&scope=site.

Blanchard, Olivier. Macroeconomics. 7th ed., Pearson Education Inc., 2017. 

“Map of the United Kingdom of Great Britain and Northern Ireland and the Republic of Ireland.” EveryCRSReport, 14 Mar. 2017, www.everycrsreport.com/reports/RS21333.html.

COVID-19 and the Standard of Living in Developing Countries

Mac Hiller and Emily Larson

The negative effects of the COVID-19 pandemic have been experienced by communities worldwide. One of the concerns of the pandemic is how it has impacted living standards in different countries. In the long run, the standard of living can be measured by real gross domestic product (GDP) per person. We can use this measure to gauge the well-being or happiness of people across countries. To compare various countries and their respective level of standard of living, differences in prices of goods, currencies, and consumption patterns must be accounted for when determining differences in purchasing power of similar goods. Adjusted real GDP, therefore, measures the differences in purchasing power across countries, often called purchasing power parity (PPP) numbers. The purchasing power parity method accounts for similar prices of the same currency across different countries and their respective consumption bundles. For explanation purposes, suppose two countries, A and B, consume two distinguished goods of different markets called Food and Transportation that make up their entire per capita consumption. Country A can buy (adjusted to US dollars) Food at $1 per unit and Transportation at $2 per unit while Country B can buy (also adjusted to US dollars) Food at $0.90 per unit and Transportation at $2.50 per unit. At these prices, Country A consumes 1,000 units of Food and 2,000 units of Transportation while Country B consumes 1,000 units of Food and 1,800 units of Transportation. To find the purchasing power parity per person of Country A in terms of Country B’s price level we consider:

PPP(Country A's bundle w/Country B's prices)=$5,900=($0.90 *1,000) + ($2.50 *2,000)

Compared to the unadjusted per capita Country A consumption bundle with its own prices; 

Country A GDP (PPP own price) = $5,000=($1*1,000)+($2*2,000).

In this example, Country A’s purchasing power parity is less than Country B’s ($900 less) according to their relative prices and consumption bundle of Food and Transportation. These differences in purchasing power among countries are important when considering if money can buy, or promote, happiness. In rich countries, like the US, the large growth of real per capita GDP since the 1950s has largely been the result of advancements in technology. In economics, technology is anything that helps produce things faster, better, or cheaper, thus improving our quality of life by allocating time and resources towards other more important things. Over time, per person income will increase in correlation to the increasing “average life satisfaction” from more technology being implemented. This strong correlation of higher income and life satisfaction (or happiness) has been shown to occur in both high- and low-income countries. However, the correlation between increasing per-person income and average life satisfaction is stronger in poorer countries due to disparities in relative income levels.

         COVID-19 has created a shock to these income levels in lower-income countries. A recent study looked at measurements of unemployment, income, and even food access to see how COVID-19 has impacted the living standards of countries classified as low and middle income. The study, which surveyed over 30,000 households across 9 countries in April 2020, found significant drops in income, employment, and access to food (Egger et al, 2021). For example, during the crisis period, the median drop in income was around 70% and the median drop in food access was 45%. A news article published briefly before the journal elucidated many of these concerns. It stated that there are long-term impacts to developing countries due to economic shocks. This is because low-income households are more likely to adopt coping strategies such as reducing food consumption, and this nutritional deprivation in the long term leads to a lower accumulation of human capital (Hill and Narayan, 2021).

Evolution of key indicators over time.

Food Insecurity in Bangladesh and Nepal.

            A stark difference between developing and developed countries is their ability to respond to the negative shock. In developed countries, output losses can be mitigated by government programs, employer adjustments to hours or work, or household savings. The issue in low- and middle-income countries is they may not have these protections (Egger et al., 2021). We have seen this play out during the pandemic. In the US, we have observed several rounds of stimulus checks to Americans. Conversely, in developed countries, the journal article comments that in the 9 countries surveyed, the proportion of respondents who reported benefiting from government or non-profit help was a median proportion of 11% (Egger et al., 2021).

This evidence indicates the stark difference in the support that consumers of developed countries experienced versus developed countries in response to the pandemic. In discussions about changes in the standard of living, economists often talk about the force of compounding, which refers to how output per person can compound over time (Blanchard, 2017). The level of investment in sectors like education and technology affects the rate of growth countries experience over time. In richer countries, the level of investment in education and innovative technology is often higher compared to poorer countries. The long-term concern about COVID-19 is its impact on the long-run economic growth of countries. The negative economic shock to these countries can result in years of loss of growth (Blanchard, 2017). These shocks were perhaps exacerbated by the fact that many of these countries did not have the same government assistance in comparison to developed countries.

References

Blanchard, O. (2017). Macroeconomics (7th ed.). Pearson. 

Egger, D., Miguel, E., Warren, S. S., Shenoy, A., Collins, E., Karlan, D., … Vernot, C. (2021). Falling living standards during the COVID-19 crisis: Quantitative evidence from nine developing countries. Science Advances, 7(6). https://doi.org/10.1126/sciadv.abe0997. 

Hill and Narayan. (2021). What COVID-19 can mean for long-term inequality in developing countries. World Bank Blogs. https://blogs.worldbank.org/voices/what-covid-19-can-mean-long-term-inequality-developing-countries. 

The Effects of OPEC+ Oil Prices

  Last spring, the COVID-19 pandemic hit the oil industry particularly hard, but it has since recovered. Much of the changes which took place within the industry were changes in the amount of output, as well as shifts in the prices of oil. As we (hopefully) are moving out of the pandemic, more price and quantity changes may arise as demand in some countries is decreasing due to higher infection rates, increasing in others, all the while OPEC+ is trying to target a certain price for its oil. In order to analyze this situation, we can use the IS-LM-PC model.

To start this investigation, we should first understand exactly what the IS-LM-PC model is. For this, we will use our textbook as our main source. To begin, the model is first an extension of our previously defined IS-LM model. What is added here is that in addition to the IS-LM graph, another graph is derived below it, showing output, rather than compared to the real interest rate, compared to the change in the inflation rate. This allows us to see whether the economy is above, at, or below potential output, which would have at (1) a 0% change in the inflation, (2) the natural rate of unemployment, and (3) the natural amount of output, when given a PC curve and an amount of output.

(Blanchard 178)

This is important to be able to derive as the three are quite interconnected: when output rises, the inflation rate tends to increase, whereupon unemployment tends to decrease. As such, given the change in one variable, we can arrive at a semi-accurate prediction of how we should expect the rest of the economy to change in effect, all else equal. The IS-LM-PC model also however connects back to our previous WS-PS model. Should the real wage decrease due to higher markups, this means that for a given output, inflation has increased, causing the PC curve to shift up. This means, that in essence, the IS-LM-PC model is bringing together what we have learned about the IS-LM and WS-PS models, in order to allow us to better understand how the concepts of output, real wage, markups, prices, real interest rate, and unemployment, all are interconnected and help us to explain what we should expect when one variable changes. As such, with the comprehensiveness of the model, we should use it in any situation where a change in one of its variables takes place.

Now, with an understanding of the IS-LM-PC model, we can discuss what the consequences might be if OPEC+ (OPEC member-countries plus a few other oil producers, such as Russia) takes measures to influence the price of oil. At the start of the pandemic, as demand for oil significantly dropped, OPEC+ drastically cut oil production -- by 8 million bpd, in fact -- in order to maintain price stability. However, with recent increases in global demand, OPEC+ has decided to ease these output cuts; between May and July, they plan to increase the current supply by 2.2 million bpd, leaving total output cuts at 5.8 million bpd (“OPEC+ to meet Tuesday,” 2021). This gradual increase in output may have to be done with caution, though, as COVID-19 outbreaks continue to spread across the globe.

The third-largest importer of crude oil is India, but recently, India has experienced an incredibly sharp rise in COVID-19 cases and deaths, leading many to believe that there may be a large decrease in global oil demand (“OPEC+ to Meet Tuesday,” 2021). However, others are less skeptical, and instead believe that global demand will stay on track with past predictions: U.S. demand for oil, as well as other nations that are easing restrictions and opening their economies, will outpace the loss in Indian demand for oil. This optimism has led OPEC+ to stick with their initial plan of gradually increasing oil production in the upcoming months, though they will do so at a rate that’s slower than demand. Altogether, with “‘only a modest production increase outside of OPEC+, and OPEC+ pursuing a cautious approach, we expect the oil market to be undersupplied by 1.5 million barrels per day this year’” (“Oil Rises as OPEC+,” 2021). As this quote suggests, OPEC+’s oil production will cautiously lag behind demand, implying that there will be an increase in the price of oil.

This price increase is equivalent to firms increasing their markups, which, in turn, lowers real wages and increases unemployment. At a given level of output, the increase in firm prices leads to higher inflation. This is equivalent to a shift upwards of the PC curve. To combat the increasing inflation, the central bank will raise the policy rate. On the IS-LM graph, this is equivalent to a shift upwards of the LM curve. With a higher real interest rate, output decreases -- in graphical terms, we are moving left along the IS curve. At the same time, inflation becomes stabilized until the output gap has closed and output is equal to potential output. This is shown by moving down along the new PC curve until we cross the line that signifies zero change in the inflation rate, and, as a result, attain a new lower level of potential output.  Ultimately, the IS-LM-PC model suggests to us that an increase in oil prices results in a decrease in output.

This is the relationship that economist Keith Sill wrote about in his 2007 article, “The Macroeconomics of Oil Shocks.” It’s important to note, however, that Sill is referring to large increases in oil price that result from major disruptions in oil supply (e.g., the Iran-Iraq War in the early 1980s). In this current situation, wherein OPEC+ is attempting to recover from the effects of the pandemic, the increase in oil price is unlikely to lead to a permanent decrease in output. As opposed to a price increase due to a dramatic drop in oil supply, this price increase is the result of an increase in oil supply cautiously lagging behind demand. Additionally, this price increase is occurring at a time when the economy is trying to recover from a recession, not while it’s about to move into one. So, while the IS-LM-PC model provides us a framework with which to analyze the effect that oil prices have on output, it’s necessary to bear in mind the context of our analysis.

Works Cited

CNBC. (2021, April 27). Oil rises as OPEC+ seen sticking to policy despite India COVID surge. CNBC. https://www.cnbc.com/2021/04/27/oil-markets-covid-in-india.html. 

CNBC. (2021, April 27). OPEC+ to meet Tuesday amid concern about rising virus cases. CNBC.https://www.cnbc.com/2021/04/27/oil-opec-to-meet-tuesday-amid-concern-about-rising-virus-cases-.html. 

Sill, K. (2007). The Macroeconomics of Oil Shocks. Business Review, Issue Q1, 21-31.

Stagflation and the current economy -Thomas piwonka, Kristin Moniz

     The current times we live in are some of the most tumultuous in recent decades, barring the great recession, and this has come with a great deal of uneasiness when it comes to the future of our economy.  There is an arising worry that because of the unsettled nature of the world, we may see stagflation in the future.  In “Why Stagflation is a Growing Threat to the Global Economy” by Nouriel Roubini, Roubini outlines several key points regarding the future of our economy and our current practices. His main point is that Stagflation would come from the increased inflation caused by the “surplus” stimulus bills passed to ease the economic damage caused by the Covid19 pandemic.  While this on its own would not lead to a stagflationary event, when combined with events that may occur in the future, we may see large unemployment and high inflation which was seen in the ’70s.  The arguments against this are 1, that people will save much of the money, as they always do, and invest into infrastructure which will increase supply as demand increases, and 2 that banks can soak up the excess liquidity caused by the larger portion of liquid, or spendable money in people's pockets as a result of overcompensation for the covid crash.  A central bank would do this by raising interest rates and forcing the liquidity of money to raise, however, with this second option, banks may not be able to soak up the liquidity, as the economy may demand a low interest rate to maintain stability.  This seems to be backed up by Fed statements claiming that there are no plans currently or for some time to raise the interest rates. The third counterargument would be that the monetization of fiscal deficits will not be inflationary, rather it will only prevent inflation.  What Roubini brings up regarding these is that we are recovering from a supply shock, much like the oil shocks of the 1970s.  Our shock is a negative aggregate supply shock, as we have seen with the loss of many usually supplied goods because of covid.  Problems that would deepen this potential stagflation (ie, supply shocks) would be deglobalization, rising protectionism, post-pandemic supply bottlenecks, deepening Sino-US cold war, and the balkanization of global supply chains and reshoring of foreign direct investment from low-cost China to higher-cost locations. (Roubini, 2021)  More domestic sources of stress could be rising inequality, with more power given to producers in recent years, giving them more pricing power.  While these looming problems may affect the macroeconomy eventually, currently the slack in markets for goods will prevent a sustained inflationary surge, however, loose monetary and fiscal policies will start to trigger persistent inflationary or stagflationary pressures, owing to the emergence of any number of persistent negative supply shocks.  

I feel that it is important to quickly summate stagflation, as it is the centerpiece of this post. Stagflation is the name for when an economy experiences high inflation, and high unemployment at the same time. This would seem counter to what we have been learning about with the Phillips curve, and I will touch on that more later. On a typical Phillips curve, we would expect unemployment and inflation to have a negative relationship, with one going down and the other going up. A prime example to look at when thinking about stagflation would be the oil shocks to the US in the 1970s.  This was a culmination of many different factors, but mainly it was caused by the embargo of the United States by OAPEC, because of their decision to resupply the Israeli military during the Yom Kippur war.  OAPEC limited oil shipments to the US, and other countries.  This increase in the cost of oil had several impacts on the US economy; first, it raised the cost of transportation for almost every good in the US, causing prices to rise, as gas naturally became more expensive,  and secondly, it caused production to become more expensive, slowing economic growth.  This raised inflation, and unemployment, leading to Stagflation.  One US response was to devalue the dollar and declare wage and price freezing.  During this time period, the US implemented many expansionary policies, and this helped lead to the rapid inflation of the time.  Because the US was so liberal with allowing money to become more liquid, they were in the perfect position to go into a recession given a supply shock.  The only way for the US to get out of this trap was to increase interest rates to double-digit levels, which caused a recession.  (Neilson 2020)  What this shows is that our current expansionary/reactionary policies toward the covid19 pandemic may have adverse ramifications regarding stagflation in multiple ways, and the only way to get out of it may be to cause a recession caused by increased interest rates.  This would be extremely worrying currently because we are already experiencing large amounts of unemployment, and even though we are seeing growth, it is not backed up with equal or continued hiring of workers.  There is also much liquid policymaking in the US as a means of support for those affected by the Covid19 pandemic.  

The mention of stagflation brings into question the validity of the Phillips curve, which we have recently become familiar with.  The core tenant of the Phillips curve is that you trade off unemployment for inflation, meaning that the higher your unemployment, the lower your inflation, and vice versa.  This theory dominated US policymaking during the 1960s and led to inflation increasing from 1.2% in 1962, to 5.8% in 1970. (Dorn, 134) Unfortunately during the 1970s, we experienced shocks to the oil supply, which caused high unemployment and high inflation, which would seem to contradict the Phillips curve. Another theory which disputes the Phillips curve would be that of Milton Friedman, who theorized that there were three stages to the Phillips curve, with the first being the one we are most familiar with.  This would be the curve in the short run and shows a simple negative relationship between unemployment and inflation. (Dorn 2021)

                [FIGURE 1]

This however only applies during the short run.  While a rise in inflation will bring down unemployment, during the short run, during the long run we would see employers and workers fully anticipate higher inflation, and they will revise their plans, causing unemployment to return to its natural level.  For example in figure 2 we can see that when inflation rises to i1, it temporarily lowers unemployment, however, it is adjusted to the natural rate of unemployment of Nu once workers and employers recorrect. (Dorn 2021)

                                                             [FIGURE 2]

This would indicate that the Phillips curve is vertical, and there is no tradeoff between unemployment and inflation.  The third stage which Friedman outlines would be the hypothesis that high and variable inflation lays the ground for higher future unemployment by distorting relative prices, producing a positively sloped long-run Phillips curve. This can be shown in figure3. (dorn 2021)

.     [FIGURE 3]

What seems to be concerning several economists today is that it appears that those in charge of monetary policy seem to still find the Phillips curve compelling, and influential to further policymaking.  Examples of this endorsement come from several different interviews with influential people, like Janet Yellen, and Fed Chairman Powell. (Dorn pg142)  Our response to the Covid19 pandemic has been quick and powerful, with many stimulus packages and granting easy ways for money to move around in the economy, and while this has certainly saved us now, it may cause alarm in the future, and lay the groundwork for stagflation in the future.  Essentially with our current predicament, we may see the beginning of a stagflationary period in the future.  The ease of access to liquid money, and the excess of stimulus money paired with uncertainty caused by the pandemic may lead to the perfect backdrop to a stagflationary event.  If these factors combine with a large shock to the economy, such as a further deepening of the trade war with China, or increased isolationism from countries globally, we may find ourselves seeing a repeat of the 1970s.  This also brings into question the continued use of the Phillips curve in monetary policy-making. Should this be something we still use to help guide policy or is its continued use a trap? Is the US heading towards a stagflationary event, or should we just coast on out of this danger zone without experiencing these negative effects?

Resources

Catalan Vidal, J. (2017). The Stagflation Crisis and the European Automotive Industry, 1973-85. Business History, 59(1–2), 4–34. https://doi-org.ezproxy.plu.edu/http://www.tandfonline.com/loi/fbsh20

Dorn, James A. "The Phillips Curve: A Poor Guide for Monetary Policy." The Cato Journal, vol. 40, no. 1, 2020, p. 133+. Gale Academic OneFile, . Accessed 21 Apr. 2021.

Nielsen, Barry. “Stagflation in the 1970s.” Investopedia, Investopedia, 31 Mar. 2021, www.investopedia.com/articles/economics/08/1970-stagflation.asp. 

Roubini, Nouriel. “Why Stagflation Is a Growing Threat to the Global Economy.” The Guardian, Guardian News and Media, 15 Apr. 2021, www.theguardian.com/business/2021/apr/15/why-stagflation-is-a-growing-threat-to-the-global-economy. 

Pandemic Pandemonium: Inflation and the Philips-curve

 t is clear that the pandemic has created unprecedented conditions which experts have tried to quickly find solutions and corrections to. In the economic sphere, the shock in demand and mandated closure/limiting of businesses lead to huge unemployment rates. As a solution, the government adopted giant expansionary fiscal policy, resulting in huge debates about inflation amongst economists and one of the biggest policies was President Biden’s $1.9 trillion Covid-19 relief bill (Stewart). Here we go over the phillips-curve's (PC’s) relationship between inflation and unemployment, it’s historical inaccuracies and potential improvements, the debate about inflation, and where all of this leaves us at the moment according to economic theory.

In short, mandated limiting of in-person business shocked demand and led to a spike in unemployment which only exacerbated plummeting demand, and to remedy this the government enacted extreme expansionary policy measures in order to slow down this shock in demand and prevent further spikes in unemployment (see graph under blog). According to the PC, unemployment is inversely related to inflation; however, this has not held up well historically. Two salient examples of this are the stagflation which occurred in the 70s and recent low unemployment. In the first case unemployment and inflation were both high, and in the second case unemployment and inflation were both low (compare graphs under blog). This directly violates the PC in unemployment and inflation were directly related rather than inversely related. One question arises: How is the intuition that low-unemployment leads to higher inflation through higher demand and thus an increase in prices, and so to lower unemployment leads to lower demand causing prices to decrease, wrong? Bearing this in mind, we now turn to the inflation debate surrounding recent policy decisions.

Now, unemployment claims have dropped to 576,000, the lowest since the beginning of the pandemic began, a total of 16.9 million people are continuing to collect unemployment benefits, down from 18.2 million in the previous week as of April 15th 2021, and many indicators point towards business slowly picking up (KTLA, 2021). In light of this, and the rapid introduction of liquidity into the economy, some are alarmed that inflation may soon run rampant. Again, this liquidity was introduced through recent government spending, like the stimulus checks and is seen in the M1 money supply graph.

“Some economists and experts have warned that [the expansionary fiscal policy] is too much, and that once the economy recovers — perhaps rather quickly, thanks to the vaccine — the country won’t have enough capacity to meet demand and the economy will overheat, resulting in an increase in prices (Stuart, Emily 2021).”

However, there are many other economists, including Paul Krugman, that believe that if inflation were to come the FED has enough “easy” tools to help combat it (Stewart, 2021). This line of argument rests on interest rates, set by the FED, being near zero. Should demand spike after the recovery, not only will increased interest rates curb demand by disincentivizing debtors but also give the FED room to cut interest rates in the event of another recession. Concerning the PC relation, that is now that unemployment rate is going down the PC would predict inflation to go up,

“‘the consensus is still the Phillips curve isn’t dead, but the world has changed, so maybe the way it works has changed,’ said Raphael Schoenle, deputy director of the Center for Inflation Research at the Federal Reserve Bank of Cleveland. In a 2018 interview, [Jay] Powell said he believes the curve may not be dead, but it is at least ‘resting,’ (Stuary, Emily 2021).

In other words, the PC is not a great model for forecasting inflation as it stands, but with a few modifications it could be a useful tool. The journal we looked into took several variations of the PC and tried to determine which variation held best in its forecasting power, using historical data. The journal’s results are that the PC is more accurate with Time-Varying Coefficients and when it corrects for the business cycle and other activity measures, rather than just unemployment (Abdelsalam, Mamdouh, 2017). In other words, improvements upon the PC negate simple relationships between unemployment and inflation—answering the question at the end of the second paragraph with inflation having other factors outside of employment. Leaving us with no choice but to wait and see how the current economic environment will develop.

M1 Money Stock:

(Board of Governors of the Federal Reserve System (US), M1 Money Stock [M1SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M1SL, April 21, 2021.)

Unemployment 

(U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 21, 2021.)

Inflation

(Federal Reserve Bank of Atlanta, Sticky Price Consumer Price Index less Food and Energy [CORESTICKM159SFRBATL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL, April 21, 2021.)

Citations:

Abdelsalam, Mamdouh Abdelmoula M, “Improving Phillips Curve's Inflation Forecasts under Misspecification,” Romanian Journal of Economic Forecasting, v. 20, Iss. 3, (2017).

 

Board of Governors of the Federal Reserve System (US), M1 Money Stock [M1SL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M1SL, April 21, 2021.

Press, Associated. “Unemployment Claims Plunge to 576,000, Lowest in U.S. since Pandemic Began.” KTLA, KTLA, 15 Apr. 2021, ktla.com/news/nationworld/unemployment-claims-plunge-to-576000-lowest-in-u-s-since-pandemic-began/.

Federal Reserve Bank of Atlanta, Sticky Price Consumer Price Index less Food and Energy [CORESTICKM159SFRBATL], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CORESTICKM159SFRBATL, April 21, 2021.

Stewart, Emily. “How Much to Worry - and Not Worry - about Inflation.” Vox, Vox, 24 Mar. 2021, www.vox.com/policy-and-politics/22346376/inflation-rate-explained-federal-reserve. 

U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 21, 2021.