'Canada is the new Pakistan': Shekar Gupta

 

A Level Economics 86: Zero or Low Inflation?

Governments target low levels of inflation instead of aiming for zero inflation (no inflation) for several reasons:

1. Price Stability: Low levels of inflation provide a degree of price stability, allowing businesses and individuals to plan and make economic decisions with more certainty. Moderate inflation encourages spending and investment, as consumers and businesses are motivated to avoid holding onto cash that loses value over time.

2. Avoiding Deflationary Spirals: Targeting a low, positive rate of inflation helps prevent deflation, which can be harmful to the economy. Deflation can lead to falling demand, reduced business profits, and negative expectations about the future, triggering a deflationary spiral that can be difficult to reverse.

3. Interest Rate Management: Having a small positive inflation rate allows central banks to use interest rates more effectively to control economic conditions. When inflation is too low or negative, central banks may reach the "zero lower bound," limiting their ability to further lower interest rates during economic downturns.

4. Nominal Wage Flexibility: Moderate inflation helps facilitate nominal wage adjustments in the labor market. Wages are typically sticky downward, meaning that employees are reluctant to accept nominal wage cuts. With moderate inflation, real wages (wages adjusted for inflation) can adjust downward more smoothly without actual cuts in nominal wages, allowing labor markets to respond to changes in economic conditions.

5. Balancing Debt Burdens: Low inflation helps reduce the real burden of debt. In economies with significant public and private debt, moderate inflation allows debtors to pay back loans with money that has lower purchasing power, easing the overall debt burden.

Winners of Low Inflation:

1. Savers and Lenders: Savers and lenders benefit from low inflation as the real value of their savings and lending returns is better preserved. They avoid the erosion of purchasing power that occurs during periods of high inflation.

2. Debtors: Borrowers benefit from low inflation as it reduces the real burden of their debts. They can pay back loans with money that is worth less in real terms, effectively reducing the real cost of borrowing.

Losers of Low Inflation:

1. Fixed-Income Earners: Individuals with fixed incomes, such as retirees living off pension funds, may struggle to maintain their purchasing power during periods of low inflation. Their incomes do not keep pace with rising prices.

2. Central Banks in Deflationary Situations: When inflation is too low or negative, central banks may face challenges in stimulating the economy through conventional monetary policy tools. This can limit their ability to address economic downturns effectively.

3. Economies in Deflationary Spirals: Low inflation can increase the risk of deflationary spirals, which negatively affect businesses and consumers. Falling prices can lead to postponed spending and reduced investment, perpetuating economic stagnation.

In summary, governments target low levels of inflation to maintain price stability, avoid deflationary risks, and enable more effective monetary policy management. While low inflation benefits savers and lenders and reduces the real burden of debt, it may adversely affect fixed-income earners and pose challenges for central banks and economies experiencing deflationary pressures. Striking a balance between price stability and supporting economic growth is essential for achieving sustainable economic performance.

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Yes,in theory, zero inflation would offer more price stability than a low level of inflation. With zero inflation, the general price level of goods and services would remain constant over time, providing the most stable prices for consumers and businesses. However, achieving and maintaining exactly zero inflation can be challenging and may not always be the most desirable target for central banks and governments. Here's why:

1. Deflation Risk: The pursuit of zero inflation can increase the risk of deflation, which is a sustained decrease in the general price level. Deflation can be harmful to the economy, as it can lead to falling demand, reduced business profits, and negative expectations about the future. Deflationary spirals can be challenging to reverse and can result in economic stagnation.

2. Nominal Wage Stickiness: Wages in the labor market are often sticky downward, meaning that employees are reluctant to accept nominal wage cuts. In a scenario of zero inflation, real wages (nominal wages adjusted for inflation) could be more rigid and unable to adjust downward. This may lead to higher unemployment, as businesses may not be able to adjust labor costs efficiently during economic downturns.

3. Interest Rate Management: In a low-inflation or deflationary environment, central banks may face difficulties in using interest rate policy effectively. Interest rates already near or at zero, known as the "zero lower bound," can limit the central bank's ability to further lower rates to stimulate economic activity during downturns.

4. Avoiding Economic Stagnation: A small positive rate of inflation, often targeted by central banks (e.g., 2% inflation target), can provide some buffer against deflation and help avoid stagnation. Moderate inflation encourages spending and investment, as consumers and businesses are motivated to avoid holding onto cash that loses value over time.

5. Monetary Policy Flexibility: A low, positive rate of inflation allows central banks to use interest rates more effectively to manage economic conditions. They can implement conventional monetary policy tools to adjust interest rates in response to changes in the economy.

In practice, many central banks aim for a low, positive rate of inflation rather than zero inflation. They typically target inflation rates around 2%, which allows for some price stability while providing a buffer against deflationary risks. A moderate and stable rate of inflation can facilitate nominal wage adjustments, allow for more flexible interest rate management, and avoid the adverse effects of deflation. Striking a balance between price stability and supporting economic growth is a key consideration for monetary policy and inflation targeting.

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The definition of "low inflation" is not fixed and can vary depending on the context and the specific economic conditions of a country. It is not a scientific term with a standard numerical value universally applicable to all economies. Instead, what constitutes "low inflation" is often a normative judgment made by policymakers and economists based on the desired economic outcomes and the prevailing economic circumstances.

Subjectivity of Low Inflation: What may be considered low inflation in one country or at a particular time may not be deemed as such in another context. Policymakers, central banks, and economists typically consider various factors, such as historical inflation trends, long-term economic growth objectives, and the overall stability of prices, when determining the target level of inflation.

Examples of Target Inflation Rates:

1. United States: The Federal Reserve, the central bank of the United States, has a dual mandate of promoting maximum employment and stable prices. It has typically targeted an inflation rate of around 2% as conducive to economic growth and stability.

2. European Central Bank (ECB): The ECB, responsible for monetary policy in the Eurozone, aims to maintain inflation below, but close to, 2% over the medium term. This target is based on the belief that a moderate level of inflation is beneficial for economic activity and helps avoid deflationary risks.

3. Japan: The Bank of Japan (BOJ) has had difficulty achieving its target of 2% inflation amid decades of deflationary pressures. In response, the BOJ has implemented aggressive monetary policies to combat deflation and boost inflation expectations.

Evaluating the Normative Nature of Low Inflation: The normative nature of low inflation means that there is ongoing debate and differing viewpoints on what the ideal inflation rate should be. Some arguments in favor of low inflation include:

1. Price Stability: Low inflation contributes to price stability, making it easier for households and businesses to plan and make economic decisions without significant concerns about rapidly changing prices.

2. Wage and Price Stability: A moderate and stable inflation rate allows for nominal wages and prices to adjust more smoothly, facilitating labor market flexibility and resource allocation.

3. Avoiding Deflation: A target for low inflation helps avoid deflationary pressures, which can be harmful to economic growth and can lead to negative expectations and delayed spending.

On the other hand, some economists and policymakers argue that there are potential drawbacks to persistently low inflation:

1. Deflationary Risks: If inflation consistently falls too close to zero or turns negative, it can increase the risk of deflationary spirals, leading to economic stagnation and challenges in policymaking.

2. Monetary Policy Constraints: Extremely low inflation can reduce the effectiveness of conventional monetary policy tools, such as lowering interest rates, especially when interest rates are already close to zero (zero lower bound).

3. Real Debt Burden: Very low inflation can increase the real burden of debt, making it more challenging for borrowers to service their debts.

In conclusion, the definition of "low inflation" is subjective and varies across countries and economic circumstances. It is typically a normative judgment based on the desired economic outcomes and the prevailing economic conditions. While low inflation is generally viewed as conducive to economic stability, there are ongoing debates on the ideal inflation rate and the potential drawbacks of persistently low inflation, such as deflationary risks and limitations in monetary policy effectiveness. Striking the right balance between price stability and supporting economic growth remains a key challenge for policymakers.

We say we value key workers, but their low pay is systematic, not accidental

If those who care for us are to be first, not last, we have to look at the conditions that drive wage stagnation and insecurity writes Zoe Williams in The Guardian  

 

Military personnel help administer Covid-19 tests for NHS workers at Edgbaston cricket ground in Birmingham. Photograph: Jacob King/PA


This weekend brought the news that two workers at London’s Pentonville prison, Bovil Peter and Patrick Beckford, had died with symptoms of Covid-19. “Symptoms” is nowadays a euphemism for “they weren’t tested”, and a grim reminder of the hundreds of thousands of key workers we are asking the world of, but whose selflessness is not being reciprocated.

These are tragedies laced with guilt for all of us: plainly, the most dangerous place to be during this epidemic is in a densely populated care environment, whether a hospital, school or prison. People work in them because they have a passion, but also because there is no alternative, and they do so on all our behalves.

Prison officers have always been the unsung heroes of public duty: never quite macho enough for the people who glorify the armed forces; always a bit too authoritarian for those who valorise nurses. They are some of the most inventive and diligent people working anywhere in the business of caring for others, but they have generally done so without much credit. 

This crisis is forcing an urgent re-evaluation of that, along with all those other jobs that were previously classed as low-value yet now turn out to be the most important in the country. Words are not enough, and nor is clapping; you can praise care workers to the skies, but if you’re paying them the minimum amount in 15-minute segments, without security of hours or of employment, without sick or holiday pay, then the praise is hollow.

You can wax sentimental about the holy vocation of nursing, but you cannot then bring second-year students on to the frontline to fight coronavirus and still expect them to pay their tuition fees. You cannot claim, as the health secretary, Matt Hancock, told Andrew Marr on Sunday, that this isn’t the right time to talk about pay rises; it is the best and only time to talk about pay rises, when we have finally realised, with a jolt, just how much we rely on people who put their jobs ahead of their own safety.

Yet this is about more than money: Keir Starmer accepted the Labour leadership on Saturday with the rousing Old Testament statement about all key workers, cleaners, paramedics, carers, porters: “For too long they’ve been taken for granted and poorly paid. They were last and now they should be first.” But what would it actually mean to put these jobs first? Money is some of the answer, but we also have to look at the conditions and assumptions that drive wage stagnation and the steady erosion of security.

There is nothing radical in the observation that jobs are often described as low-skill, when actually they are just poorly paid. More radical, yet still accurate, is the assertion that they are characterised as “low-skill” deliberately. Caring is a job of tremendous skill, hard as well as soft. And while there is a huge amount of bolt-on expertise that employers require, from administering medicines to dealing with dementia, this is not reflected in any career progression. It is not unusual for a carer in her 40s to be on the same hourly rate, adjusted for inflation, that she was on at 18.

This has been systematic, not accidental. Without progression, the wage bill can remain reliably static, which is the only way the financial architecture of the sector makes sense.

There is often better progression in public sector work, but the combination of the austerity-years pay freeze and a new normal (extending even to the police) of people at the start of their career being expected to work voluntarily, which itself erodes starting salaries, has had a striking effect on these jobs.

Ironically, Theresa May was right when she famously said that a nurse might use a food bank for “complicated reasons”. Of course there’s a very simple reason – that nurse is not being paid enough. But the feedback loop between the private and public sectors – low pay, insecurity and poor conditions legitimised in one sector and migrating to another – is actually quite complicated.

And there’s an overarching fallacy, that a job many people could do must be inherently low in value. By these lights, huge numbers of people – cleaners, drivers, shop assistants – are without prospects, being so replaceable. The times are testing this assumption to destruction – when you’re looking for the people whose courage we need in order for civilisation to survive, you don’t have to look much further than the postal worker or the hospital porter.
In the immediate term, putting key workers first means personal protective equipment; it means collective and determined effort to strip as much risk as possible out of essential jobs that simply wouldn’t get done if everyone looked out for themselves. But there will be an era after coronavirus; and one thing to carry into it will be a determination never again to think, talk about or treat people as though logic demands they should be screwed down to their lowest possible price.

Low interest rates revived the economy, but now we're all suffering for it

A 35-year-old needs to invest £125,000 to earn a pension of £35,000 when the interest rate is 5 per cent. If it's 2 per cent, they'll need to save £400,000.

Andreas Whittam Smith in The Independent

I could hardly believe that a politician would blame low interest rates for the success of a far right political party. Least of all that it would be the eminently sensible Wolfgang Schäuble, Germany’s minister of finance, who has held office since 2009. Yet earlier this month he publically blamed the cheap money policy of the European Central Bank (ECB) for contributing to the rise of the country's right-wing anti-immigration party, Alternative for Germany (AfD).

“I told Mario Draghi (president of the ECB),” said Mr. Schäuble, “be very proud: you can attribute 50 per cent of the results of a party that seems to be new and successful in Germany to the design of this policy.”

Founded only in 2013, the AfD has recently gained representation in eight German state parliaments.

In explanation, the transport minister, Alexander Dobrindt, toldDie Welt newspaper: “The ECB is following a very risky course. The disappearance of interest rates creates a gaping hole in citizens’ old age preparations.”

There is the connection. The older generations, who often dislike immigration, have also found that a lifetime of careful saving has brought them little reward. No wonder they make their protest by voting for an anti-immigration party.

Note that Mr. Dobrindt referred to “the disappearance of interest rates”. That hasn’t yet happened here. But it is still a shock, however, to discover how meagre they are. Go into Barclays, for example, and you will find that the bank will give you 0.25 per cent per annum on sums of less than £25,000. So you place £20,000 for a year and you earn – £50 in interest.

At least this is a positive rate. But if you are a citizen of the Eurozone, or of Japan, or of Sweden, or of Switzerland or Denmark, a group of countries that account for one quarter of the world economy, the situation is even worse. There the banks are actually charging customers for the privilege of depositing money with them. In other words, interest rates are negative. You don’t get your £20,000 back, but a mere £19,950.

It isn’t only German politicians who are concerned about low or negative interest rates. This week Larry Fink, the chief executive of the investment managers Blackrock, which looks after more funds than any other firm, revealed his disquiet in an annual letter to shareholders.

Fink said that the adoption of negative interest rates was “particularly worrying”. He commented that investors were being forced to take on more risk in order to obtain higher returns. And this often meant that they had to sacrifice the certainty that they could find buyers when they wanted to sell their assets. Fink rightly calls this ‘a potentially dangerous combination for retirement savers’.

But what about people, for instance, in their thirties and saving up for retirement. Fink gives this chilling calculation. A 35-year-old looking to generate an income of £35,000 per year for a retirement beginning at age 65 would need to invest £125,000 today in a 5 per cent interest rate environment. In a 2 per cent interest rate environment, however, that individual would need to invest £400,000 (3.2 times as much) to achieve the same outcome when he or she stops working.


If the disadvantages of low interest rates are so daunting, what then are the supposed advantages? That is matter that will be debated at the IMF’s annual spring meetings this week in Washington.

Three officials have written a blog that seeks to balance the pros and cons. They “tentatively” conclude that, overall, negative interest rates help deliver additional monetary stimulus and easier financial conditions, which support demand and price stability. But, they add, “there are limits on how far and for how long negative policy rates can go.” I call that lukewarm support.

In fact, taking together the reservations expressed above and the analysis presented by the IMF paper, the drawbacks of low or negative interest rates fall into three groups.

First, savers may prefer physical cash to bank deposits, which is bad for economic activity. The IMF paper discusses using bank vaults or non-bank vaults for holding cash safely. Second, the policy may encourage excessive risk taking both by banks and by individuals. And third, as the IMF comments, if low or negative rates persist they could undermine the viability of life insurance, pensions and other savings vehicles.

The truth is that governments no longer have the means to revive economic activity. Gimmicks such as negative interest rates could easily do as much harm as good.

The cost of our habits

By Ardeshir Ommani

 

Altria Group is the leading cigarette maker in the United States. The stock of the company rose 20% in 2011's depressed markets and it's up 50% over the past two years, nearly four times the market's average gain. About two weeks ago, the stock of the company, which is the parent of Philip Morris USA and that of the Marlboro brand hit a 52-week high of $36.40.

The rise in its stock price is influenced by the company's stable cash flow and a dividend yield of 5.5%. At the time when money market rates are less than 0.5%, and the 10-year Treasury is 
yielding less than 2%, the stocks of Altria Group attracts all the attention of the investors who do not ask how many smokers would die this year because of addiction and succumbing to lung cancer. It is worth noting that on December 23, 2011, from Richmond, Virginia, Altria's operating companies launched "Citizens for Tobacco Rights", a nation-wide website to assist the tobacco companies in promoting lowering taxes on cigarette sales.

Although US cigarette sales have been in a severe long-term decline, to be exact, its shipments dropped by a third over the past 10 years, the industry has been able to offset the volume decline with increases in wholesale prices. Naturally after addicting a large segment of the youth around the world, the owners of Altria Corporation are led to raise the cost of their habits and suffering.

The companies have raised cigarette prices by nearly 35% over the past 10 years, even as smokers shouldered huge jumps in federal and state cigarette taxes. Altogether retail prices and additional taxes hiked the cost of a pack to $5.95. This was more than double the rise in overall consumer prices.

This shows that the high rates of profitability in addictive substances is the ideal method of exploiting not only the workers, but also the consumers. The change in the demographics of cigarette addicts has forced the industry to intensify the rate of exploitation of those who can least afford the habit in a long period of economic stress and high rates of unemployment.

The captains of the stock market seem unshaken. The stocks look rich based on their double-digit price per earning ratios. The high rates of profitability in the industry have led the management to implement the strategy of stock buybacks and huge stock awards for management compensation.

Altria is by far the biggest US cigarette maker in both market weight ($61 billion ) and revenue-wise (over $16 billion a year). A substantial share of the company profits are generated outside the US. Philip Morris International, a subsidiary of Altria, sells Philip Morris brand lineups in about 180 countries around the world.

In other words, the men, women and more frequently, elementary-aged children - often at the cost of their lives - are providing these gentlemen in New York and Chicago with lavish life-styles. (Looking at just a few of the advertisements in major corporate newspapers as the Financial Times, New York Times, The Telegraph, etc. directed at this wealthy 1%, we see a woman's handbag selling for $4,000).

In 2009, Altria purchased the smokeless-tobacco producer UST, which makes Copenhagen and Skoal brands at the cost of $11.7 billion. The reason Altria shouldered such a high cost price is that smokeless tobacco is a much-less regulated part of the worldwide cigarette market. Lack of regulations leaves the smokers at the mercy of the tobacco industry. Altria generates in an average $3.5 billion a year in cash flow, most of which ends in the investor's bank accounts in the form of dividends and interests and conspicuous consumption.

As a group, cigarette smokers have lower household incomes than non-smokers and are nearly twice as likely to be unemployed, says a financial officer of Morgan Stanley, a banking corporation. Studies have shown that in communities with higher economic status, its members send their children to better-financed public schools and private universities where environmental sciences and healthier life-styles are emphasized in the educational curriculum from early grade school through university level.

Anti-smoking campaigns partially financed by higher city and state budgets are more predominant on expensive billboards in these higher income communities.

On average a member of this lower economic class spends more than $2,000 annually, smoking a pack a day, the amount that could be allocated towards the present and future sustenance. Smokers, in their attempts to halt casting a large amount of money to the rich, many have traded down to either cheaper cigarettes or bulk tobacco for rolling their own cigarettes.

For this reason, shipments of roll-your-own and pipe tobacco jumped 30% in the first half of 2011. In the brave new world, particularly the Facebook generation age 21 through 29 is no longer fascinated with that rugged cowboy who was for many decades the symbol of Marlboro.

Alongside Altria in the tobacco market stand such giants as Reynolds American, maker of Camel and Pall Mall as well as Natural Spirit brands selling the ugly and more hazardous chewing tobacco brands. To entice new smokers or keep the old ones in the loop, the cigarette companies constantly hatch out new names with new packets. Recently, Philip Morris USA came up with what it calls the "Marlboro Leadership Program" which puts a price cap on what the retailers can charge for a pack of Marlboro in return for promotional incentives, such as a free pack for every carton sold.

While in the US, after years of public pressure, the federal and state governments have imposed some restrictions on advertising and marketing tobacco products, the same companies in the markets of the developing countries promote and glamorize smoking among school children, going so far as to distribute free packs of cigarettes along the pathways leading to schools, the way they did just a few decades ago in the run-down parts of the big cities and the depressed small towns across the US.

Also, the ruling classes of the countries whose economies are dependent on the US and its partners benefit from such relations through providing lucrative markets for the tobacco products of the major international cigarette producers.

It is telling that the gains posted by these tobacco companies in 2011 was skyrocketing when few other stocks were thriving last year. A group of mutual fund managers who tried to avoid negative performance by the end of the year resorted to placing the shares of several tobacco firms among their top holdings.

Gains of more than 20% among the addiction enablers helped these funds outperform their rivals and attracted the moderate savings and the retirement funds of the employed and retired working class. Such is the political economy of the habit-forming industry, addiction of the oppressed and higher rates of profitability.

Ardeshir Ommani is a writer on issues of war, peace, US foreign policy and economic issues. He has two Masters Degrees in the fields of Political Economy and Mathematics Education.