Adair Turner writes: As 2015 begins, the reality of deficient global demand and deflationary risks in the world’s major economies is starkly apparent. In the eurozone, GDP growth is slowing, and inflation has turned negative. Japan’s progress toward its 2% inflation target has stalled. Even economies experiencing more robust economic growth will miss their targets: inflation in the United States will not reach 1.5% this year, and China’s rate reached a five-year low of 1.4% last November.
In the advanced economies, low inflation reflects not just the temporary impact of falling commodity prices, but also longer-term wage stagnation. In the US, the United Kingdom, Japan, and several eurozone countries, median real (inflation-adjusted) wages remain below their 2007 levels. Indeed, in the US, real wages for the bottom quartile have not risen in three decades. And, though the US created 295,000 new jobs last December, actual cash wages fell.
The developing world is not doing much better. As the International Labor Organization’s latest Global Wage Report shows, wage gains are lagging far behind productivity growth.
Because real income growth is vital to boost consumption and prices, central bankers and politicians are now in the novel business of encouraging wage increases. Last July, Bundesbank President Jens Weidmann welcomed the fact that some German companies had raised wages above inflation. Japanese Prime Minister Shinzo Abe has gone a step further, repeatedly urging companies to increase wages – and encouraging them to do so by reducing corporate tax. So far, however, jawboning has had little effect.
This failure would not have surprised the monetarist economists who observed the high inflation of the 1970s. At the time, many policymakers blamed rapid price increases on “cost push” factors, such as pressure from trade unions for excessive wage hikes. Finance ministers and central banks frequently urged wage moderation, with many countries even introducing formal policies governing wages and prices. But these policies proved largely ineffective.
The result in many countries has been stagnant real wages, increased inequality, and a potential structural bias toward deficient nominal demand. Given that wealthy people have a higher propensity to save, increased inequality tends to produce sluggish demand growth – unless, that is, the savings of the wealthy are lent to the poor.
The best way to achieve that is not through the current mix of ultra-low interest rates and quantitative easing. After all, though this approach would eventually stimulate demand, it would do so by driving up asset prices – thereby exacerbating wealth inequality – and by re-stimulating the private-credit growth that fueled the financial crisis. Cost of Deflation
