The Fed should abandon its 2 percent inflation target and just be prepared to step in if some kind of disruptive phenomenon throws the recovery off course.
Economists — including the elves at the Fed — adhere to two theories of inflation, and both have failed real-world tests miserably.
The Quantity Theory of Money predicted that the $4 trillion the Fed printed to buy Treasury and mortgage-backed securities in the wake of the financial crisis should have pushed prices quite a bit by now. Stocks and housing prices have surged, but asset values have mostly recovered from financial crisis lows, and overall consumer inflation has been tame.
According to the Phillips Curve, inflation should increase as unemployment falls. All the major indicators of the latter are down and employers are posting record job vacancies, but annual wage gains remain stuck at 2.5 percent. Factoring in annual productivity growth at even 1 percent, inflation is limited to less than 2 percent.
Here are five reasons those theories have proved to be flawed.
First, many of those help-wanted signs are for low-paying jobs in restaurants and other consumer services. The surge in health insurance premiums, copays and the like are squeezing family budgets for discretionary items, and those establishments have to hold the line on prices or customers will find alternatives — for example, purchasing more pre-prepared meals at supermarkets.
Businesses must come up with strategies to do more with the staff on hand — better managing work schedules to accommodate traffic surges, computerizing work and robots — and that’s one reason for the increase in part-time work.
Second, the changing structure of the U.S. economy — greater dependence on domestic energy and the technology sector for growth — and globalization have left the U.S. economy with much underutilized factory, utility and commercial…