The three-step test for inflation

David Leonhardt writes about the irrational inflation fears of the Federal Reserve and the enormous human toll of policies driven by such fears. The New York Times headlined his piece “As Economy Sputters, a Timid Fed,” but it may as well have been titled, “Why Do Federal Reserve Officials Hate Working People?

The recovery looks uncertain, and the job market remains weak. Even if job growth were to accelerate sharply in coming months, the economy would be years away from so-called full employment. But never mind that, the hawks say — rampant inflation is just around the corner.

So let’s ask this directly: Should we be worried about inflation?

Conveniently, there’s a simple three-step test to find out if inflation worries are founded or unfounded.

Step 1: March into your boss’ office. Don’t bother making an appointment, just open the door, walk in and tell him to listen up because you’re in charge here.

Step 2: Inform your boss of the substantial amount of the raise you will be receiving and that this figure is not optional.

Step 3: When your boss blinks in shock at the large figure you just quoted, remind your boss that you have plenty of options. Remind him that you could easily find another, better-paying job by late afternoon. Remind him that in this job market your boss knows very well that he would be hard-pressed to find anyone who could possibly replace you — that you have all the power in this negotiation and he has no choice but to do what you demand.

Now, please note that I don’t think it would be prudent to attempt this simple test at this time. But the convenient thing about this test is that you don’t even have to actually do any of these steps to determine whether or not worries about inflation have any merit at all.

All you need to do is think about doing it.

Perhaps your boss, your workplace, your industry and the economy it operates in are different than mine, but it would seem unwise to try any of the above steps where I work. I don’t need to ask for a raise to know what they’d say.

The point of this test — or of just thinking about trying the three steps of this test — is to gauge how much leverage you have, as an employee, to push wages upward. That’s a function of the number and quality of other options available to you and of the number and quality of other options available to your employer.

When things are clicking along at full employment and companies are desperate to fill multiple job vacancies then you can feel secure in giving your boss an ultimatum — if you don’t pay me more, I’ll go work for someone who will. But when unemployment is high, you and your boss both know that you’re not going anywhere — unless you get laid off, which you’re desperate to avoid because you realize you might never find another job. When unemployment is high, you’re not going to make waves by demanding or begging for or even mentioning a raise.

If you feel like you have all the leverage and that you could demand a raise, then fears about inflation might be valid.

If you feel like you have no leverage and that talk of raises would be reckless and self-destructive, then concerns about inflation make no sense at all.

With unemployment still hovering around 9 percent and nearly 14 million Americans still seeking work without being able to find any, it’s foolish to be worrying about inflation. And it’s cruel. Because the fools shaping policy based on fears of phantom inflation are acting — deliberately acting — to ensure that unemployment remains high so that employees do not come to behave like the worker in our little three-step experiment above.

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  • Froborr

    Why, it’s almost like their inflation fears are a cover for class warfare!

    But that couldn’t be the case. Our friends at Fox News have assured us that it’s only class warfare when the lower classes try to rise up.

  • Anonymous

    Of course, you can have both skyrocketing inflation and crushing unemployment; see Zimbabwe, for instance. But you won’t have record business profits at the same time as we do here.

  • What! An upper crust of extraordinarily wealthy people– & non-human people, lets not forget our new friends the corporate persons!– are using fear as a bludgeon to destroy the middle class in an ultimately self-destructive orgy of greed?

    Frustrating to see it working.

  • I’m afraid I just literally fell on the floor, rolling around around laughing. Because the ad being given for this article is Rand Paul, one of the biggest inflation hawks in the country, fighting for the “Right to Work.”

    And Froborr, that couldn’t be the case. It’s not like the Fed and businesses are directly preventing people from working, and as we all know, it’s not an attack on someone if the immediate goal isn’t specifically to harm them (see also: why “defining marriage as being between a man and a woman,” is in no way an attack on gay people; why BofA can use predatory lending and it is profit-seeking and it’s totally the fault of the lendees; etc; etc; etc)

  • Anonymous

    Well, that’s one kind of inflation – and we’re certainly not in any danger of having that. BUT, because we have fiat currency, you can have another kind of inflation, where you have both a stagnant economy and high inflation. Stagflation! Yay 1974!

    Say that a “bunch of fucking bond traders” (Bill Clinton) decided that the US dollar wasn’t worth as much as they thought previously thought and started giving Italy THREE US dollars in order to get Euros. (About double the current exchange rate.) Now, in order to get something from Europe, what previously cost you $1.50 now costs you $3.00 – and since that’s across the board inflation, your boss raises his prices (and cuts your salary) in order to preserve his margins (or maybe to keep you employed, depending on how generous you’re feeling.) His money is now worth less on the open market. Stagnation. Inflation. Voila. In the long term this is almost always caused by excessive money supply, but in the short term if food, gas, and medical care go through the roof (uhhh….) there is price-inflationary pressure upwards (on everybody) but ALSO wage-deflationary pressure as people try to preserve capital.

    So, I suspect THIS is what they’re really worried about rather than “real” inflation, the “bond-market vigilantes” – but the thing that most people don’t realize is that a moderate amount of inflation is a GOOD THING. You don’t want money to be worthless – but you want inflation to happen – especially if your economic “problem” is too much debt load. See – the US of A. Let’s say for instance, that over the next 10 years a 2010 dollar becomes worth .50 in 2020. If you borrowed $1.00 a dollar at below inflationary rates in 2010, you really only owe people .50 in 2020. Of course, it’s almost impossible to borrow at below inflationary rates (unless you’re the US Government.) but the principle still holds. If you borrow just a couple of points above inflation, over the ten year term, you might play $1.50 in mathematical terms, but only $1.15 in terms of value.

  • Anonymous

    Off Topic, but I couldn’t find a way to email Mr. Clark. I saw this on another website, and thought about your posts on ‘Team Hell’. All I could think was, poor lady, to have been so twisted…

  • Anonymous

    I hope this test is tongue-in-cheek. The inflation hawks are worried about inflation caused by oversupply of money, not upward pressure on wages.

    In any case, it’s true that fears of inflation are overblown right now. The Fed would need to announce QE3 and probably QE4 before I started emptying my savings account.

  • Anonymous

    You know when I first read artemis fowl I thought that asking gold as ransom was kinda dumb.
    But you know he had a point for asking something stable for the future.

    That’s why he is the evil mastermind not me.

  • Desperate people are highly profitable. Business loves profit. Politicans love business.

  • Well, here in Australia we’re very worried about housing inflation, with house prices having skyrocketed well ahead of incomes for about a decade and a half. Your example highlights just how afraid of that sort of inflation most of us should be – since unlike the parasites in the real estate industry, we can’t possibly increase our prices at the rate they (in combination with investors determined to get some of that boom action) have managed.

    This generation of Australians is effectively locked out of ever owning their own home – unless they’re very rich, or they inherit one.

  • That’s because the upper classes already won. They’re already well past class warfare – this is Occupied Workerstan now.

  • Froborr

    Well, of course, Ravanan. As we all know, Intent Is Fucking Magic, amiright?

  • There’s one teensy problem with your test, Fred… the very people most concerned about inflation are the ones who *can* pass your three-step test. (Or, at the very least, command large bonuses on the strength of past performance no matter how disastrous that performance was.)

    As for those concerned about the money supply spurring inflation, well, that’d be a much more reasonable concern if interest rates weren’t hovering near 0% anyway. When there’s enough competition for money in the general public to move those interest rates off the “empty” peg, that’s when I’ll start worrying about deficit-spurred inflation.

    — Steve

  • Froborr

    Gold is not actually inherently more stable than anything else. If large amounts of gold suddenly flooded the market, its value could plummet. This happened with silver when the Spanish started colonizing Latin America, which in turn caused the Ottoman economy to collapse.

  • G123

    Although I like this blog I have to disagree with this post. Inflation and high unemployement levels are unfortunately not mutually exclusive. There are some famous examples where those two social disasters went hand in hand: the German Weimar Republic and Zimbabwe spring to mind. It’s also a bit simplistic to say that people that want a strong coin with low inflation, automatically see high unemployment as a nescesary evil. The European Central Bank for example officially has no role in keeping unemployment low, only in keeping the Euro strong. The countries that followed the rules of the bank (an obligated low defecit and balanced budgets) like the Netherlands and Germany have lower unemployment levels then other Euro-nations or the USA. Stimulating job-growth can be done better and with more lasting effects trough investement in education and infrastructure then with the artificial deflating of coin.

  • @Froborr: A similar thing happened with Japan. Little-known fact: Japan was once the world’s leading producer of silver (because when you think “Japan,” the first thing that comes to mind is mineral wealth amirite?).

    That’s just one more part of the problem: the deficit hawks are also the same people who want to cut infrastructure and it seems like there’s hardly a politician who DOESN’T cut education. Many of them fight for creationism to be taught as equally valid to any sort of evolutionary theory; they propagate that science and religion are mutually exclusive; and they just plain cut education spending; and then they lament and ask why our competitiveness in science and technology is going down (obviously this also has to do with other countries improving their own systems). And when was the last time you heard a politician discussing public renovations other than to remove murals and/or tape reisidue? (I’ll admit this last is considerably more likely if you don’t live in the US) It’s been a coupe years for me, living in California, and that was when they announced the mandatory retrofitting of government buildings with solar panelling.

  • Ironically, I am actually in Fred’s hypothetical situation right now. I’m trying to decide between Company A, which is lots of fun and which I’ve been employed at for two weeks, and Company B, who offers a lot more money and career advancement but won’t be as enjoyable. Any advice?

  • Anonymous

    More career advancement and money for a job you don’t want to be at sounds like a bad deal to me (when you have a choice). I had that at my last job, and it was hell on wheels–I hated every minute of it, and the money couldn’t possibly make up for that. Oh, and it was a dead end after all. YMMV.

  • LL

    I’m no economics whiz, but I’m kinda with G123. It doesn’t negate Fred’s point. Our government has demonstrated significant incompetence at “managing” the economy, so I’m sure Fred is right about the idiocy of their actions.

    But don’t worry, everybody. I heard a guy today on NPR say that the economy is already in recovery, despite the apparently crappy reports on housing. The NPR guy interviewing the expert guy actually asked why people aren’t buying more houses. I honestly can’t remember the response, but it didn’t include anything like, “Well, people who don’t have jobs or who are afraid they might be out of a job within the next couple years (like teachers, for example) tend to hesitate about buying big-ticket items like houses.”

    I thought that was pretty obvious, but then, I’m not an expert.

  • Yep, that’s me.

    All my parents’ friends are rather puzzled as to why I’m still renting, instead of trying to buy a house. I’ve given up explaining just how impossible that would be.

  • Gold is not actually inherently more stable than anything else. If large amounts of gold suddenly flooded the market, its value could plummet.

    Or the opposite, with Goldfinger taking a whole lot of gold off the market to make his more valuable…

  • “In the long term this is almost always caused by excessive money supply”

    Yup. I’m not looking forward to the point when the Fed discovers that “quantitative easing” turned out not to be quite as quantitative as they thought.

    Because, you know, having an incredibly low interest rate (nearly 0% for us), being the global carry-trade currency (which the USD is now), and expanding the money supply (check!) worked out so well for the yen.

  • Thalia

    I really don’t know this, but my smart-ass-sounding question is, “Ok, so not so good for the yen, so who did benefit?”

  • When the yen went south, Japan became less attractive as a global currency and more attractive to import stuff from. Along with other economic problems, it meant a lot of huge investors went to US dollars instead. We (America) are currently reaping the benefit of this position – even though we are making some truly bad budget / monetary policy choices, the market still trusts us.

    It’s not always that simple, though – China has been intentionally devaluing its currency for some time, precisely because they want the export benefits and their economy is growing fast enough for them to ignore the side effects.

  • PJ Evans

    Put it this way, instead: the people who talk the most about being concerned about the deficit are the people who will be least affected by the policies they want to follow and the economic measures they plan to impose.

  • I’ll admit, I’m a bit confused by this essay. Not saying it’s wrong – probably just my ignorance of economics at work.
    If a lot of people are hurting for jobs and money, wouldn’t THAT mean that a general rise in prices is going to be hurting them significantly? Why would the current economic climate make inflation LESS of a concern?
    Sorry if it’s a stupid question, I’m just puzzled.

  • If a lot of people are hurting for jobs and money, wouldn’t THAT mean that a general rise in prices is going to be hurting them significantly? Why would the current economic climate make inflation LESS of a concern?

    You’re right, a general rise in prices would be very bad for many people right now. Fred’s point isn’t that inflation wouldn’t hurt people, it’s that it’s not going to happen – putting up prices significantly when no one has any money is a good way of going out of business, so prices will remain fairly stable until more people can afford to pay more.

  • Ooooh. OK, yes, that makes sense. Thank you.

  • wendy

    Is Company A lots of fun because of the specific tasks you’re doing, or because of the people you’re with? Company B’s people might be just as fun. And if you’ve only been there two weeks, how sure are you that Company A is going to remain lots of fun?

    Then again, Company B’s apparent career advancement opportunities are not carved in stone; and you’d be stuck, because bailing after only a couple of weeks means you’d look like a flake if you do it again somewhere else.

    So in answer to your question… no advice. But factors to consider.

  • wendy

    And at the deepest point of the recession, *deflation* was a real concern. Great for those few people with cash on hand who’d been putting off purchases, but really really sucked for people who needed to sell their stuff since they’re out of work, and sucked even worse for homeowners. The point of quantitative easing was to stop the deflationary spiral.

  • Hawker40

    It didn’t do the Spanish Empire any good, either.

  • Anonymous

    You know one of the investors who actualy made money of the subprime crisis: Michael_Burry is investing in gold and farmland.

    I think that the difference between people who are actually INVESTING and those who just follow the crowd is that the former are looking for boring things that work, and the latter are just looking for some cool fads.

    So if you want to invest try to look for something stable and don’t put all your eggs in a basket.

    (and don’t listen what anybody else is saing just do what you think is best)

  • Wells

    The Economic problem I see currently is that merchants of goods sure enough can increase the price of goods. But workers cannot currently increase the price of labor. Actually, this might not be an ‘economic’ problem as generally thought because the playing field is not equal. The merchants of goods are backed by the state, while the workers are not.

  • Lori

    You know one of the investors who actualy made money of the subprime crisis: Michael_Burry is investing in gold and farmland.

    He’s not the only one, which is why there are now serious concerns that farmland is the next “bubble”. Probably the only thing worse for the economy than having a bubble housing market is a bubble market for farmland.

  • Consumer Unit 5012

    @G123: An interesting factoid I heard last weekend: according to this guy, the Weimar Republic deliberately inflated their money, so they could cut down the amount of real wealth they had to pay the French after the Great War. But it got away from them…

  • Consumer Unit 5012

    flat: You know one of the investors who actualy made money of the subprime crisis: Michael_Burry is investing in gold and farmland.

    I take my investment advice from Gremlins 2 “We’re advising all our clients to invest heavily in canned foods and shotguns.”

  • Consumer Unit 5012

    Wells: The Economic problem I see currently is that merchants of goods sure enough can increase the price of goods. But workers cannot currently increase the price of labor.

    That’s what unions are for.

    Have you noticed what the Republicans are doing to unions these days?

  • The phrase “a bubble market for farmland” has now lodged itself into my brain and detached from its surrounding context, like a key breaking in a lock, and is becoming the seed crystal for steadily more implausible imagery.

    I unfairly blame you.

  • Anonymous

    Why do you assume that inflation and high unemployment are mutually exclusive?

  • Lori

    Blame? Pshaw. When you write an award winning short story based on the imagines currently in your head I expect to be thanked in the acknowledgements. :)

  • Michael Cule

    Go for fun, every time. As long as you can live on what they’re paying you, you want to avoid the feeling the way I do when I mutter to myself (every day it seems like) “Why am I working for this Mickey Mouse outfit? Oh, yes… Money!”

  • Anonymous

    A A A.

    I have made that choice (in both directions, actually.) I much prefer a smaller wage and a job that I like to a heftier paycheck work environment that I dislike.

  • Your “factoid” is actually false; the Weimar Republic’s reparations were payable only in gold or foreign currency, not in paper marks, and therefore could not be reduced by inflation.

    However, one factor in the later phases of the collapse was the fact that the Weimar government would print money in order to pay workers who were not, in fact, working at all due to the general strike in the Ruhr, which had been occupied by the French in an attempt to extract payment in goods.

  • Thanks for all the advice! I ended up sticking with Company A, because I thankfully don’t need the extra money except to pay down debts, and so I might as well cash it in for a quality of life upgrade. (Not to mention the Company B commute would be a 150-minute round trip.)

  • Hawker40

    The reparations were also paid in coal, timber, steel, ‘intelectual property’, and food.
    The inflation was a indirect result, as the German government paid companies and workers for these products with fiat currency.

    Interestingly enough, the amount paid to France was based off of Prussian demands against France after the Franco-Prussian war… which was based off the amount France demanded in 1807 from Prussia in the Napoleonic period.
    What goes around, comes around.

  • Consumer Unit 5012

    Your “factoid” is actually false; the Weimar Republic’s reparations were payable only in gold or foreign currency, not in paper marks, and therefore could not be reduced by inflation.

    I stand corrected. Interesting to know.

  • Jay

    There’s a different type of inflation, called cost-push inflation, that results not from excessive demand for labor (demand-pull inflation) but from worsening terms of trade. For example, China has been selling us stuff cheaply for dollars, which it hoards. If China decided that they had less need for dollars, they could keep more of their stuff. We’d have less stuff coming in, and by the law of supply and demand prices would rise.

    Cost-push inflation tends to be associated with high unemployment, since rising import prices force people to cut spending on locally-produced goods. Some of that would be offset as local products become competitive substitutes for imports, but the overall effect is negative.