Elephantstrunk

Lefties worried about over zealous central bank rate setting often appear to be putting great faith in the solidity of the Phillips curve and therefore also appear naive. Listen to pundits talk about wage settlements when guessing what a central bank is going to do next and it becomes harder to dismiss their concerns. There is an effective cap on the growth of average wages and it is impossible to imagine how labour’s share could grow in such an environment and indeed how it could fail to ratchet down.

My straw partisans are in want of a policy prescription because loosening monetary policy on its own won’t help. As elusive as the NAIRU is, there is clearly a real constraint lurking. But if a simple objective of full employment won’t work for monetary policy, where are the good goals? In the absence of alternatives a fixed level of inflation seems a far more humane target than does a fixed, non-zero, level of unemployment. Doing that has brought low interest rates and inflation and, in the long run, lower interest rates. On that basis it is hard to argue that the way central banks have gone about targeting inflation has been either ineffective or in itself responsible for raising unemployment.

If there isn’t much to be gained by managing the target differently and attempting to get directly to ful employment by correct setting of interest rates is either naive or dangerously optimistic, does monetary policy have anything to do with growing inequality and the decline of labour’s share of capital returns?

When monthly house price inflation figures often surpass annual annual consumer price inflation there is a problem. Assets and capital goods in general don’t count for much in inflation statistics. On the other hand if wages exceed inflation by much, central banks crack down. The central bank therefore sits very heavily on wages but not at all on capital gains. The likely consequencestatic wages and ballooning asset prices, is very much in-line with recent experience.

If asst prices were included in inflation figures, sometimes rising wages would offset falling asset prices and there would be more than one thing to squash in an overheating economy.

So why aren’t assets included in inflation figures? Obviously it could be a conspiracy but there are other reasons too.

• Calculating aggregated price indices is hard enough without asset prices.
• In the short term asset prices wouldn’t make that much difference to policy.
• Asset prices are too volatile.
• Assets are stores of future value which should be discounted at the real rate and the futue value should be independent of inflation.
• They are included anyway through their rental price.
• It’s hard to know what assets to include.

None of these points is entirely without merit but some are now needless labour saving, and all put together seem to me less compelling than the reasons for including asset prices.wrong but many of the objections ges, not fundamental objections. In contrast asset prices balloon. Especially where supply is relatively inelastic as with property and real estate, this amounts to a massive redistribution of wealth which is just as inefficient as when governments do that kind of stuff,

Ignoring asset prices in inflation figures systematically biases monetary policy in favour of capital. Not by much but over time the effects are enormous.