Spotted in Chinatown NYC
Welcome to Known Unknowns, a newsletter that will always worry about inflation, but never from an office.
Inflation is here to stay
Like many retirement economists, I have always been a bit of an inflation hawk. This is for many reasons; as retirees live on fixed incomes, we tend to spend a lot of time obsessing about yield curves (which legend has it, tells you what the future inflation will be). We base our risk assessments on several decades of data because the retirement problem also spans decades. Additionally, we think about risk a lot and assume that if something can go wrong, it will eventually.
However, the world has changed. The Fed got better at monetary policy, we traded more—especially with countries with very cheap labor—we got better at making things, we took advantage of that very efficient global supply chain, and pricing became more transparent because of online retail. All these things were deflationary and mostly structural (and I may have discounted that). Therefore, I suppose that it was reasonable to assume that inflation would never happen again. A lot of people believed that was true for all these structural reasons and because they had no memory of inflation. It is easy to assume that if you haven’t experienced something, it will never happen.
However, this belief was another example of the bad generalizations that have become the hallmark of this era. Even with all these deflationary sources, it didn’t mean that we could abandon sensible monetary policy (and use accommodative policy to reduce structural unemployment—I love how many people think that Central Bankers has never tried that before), enact a fiscal stimulus that was much bigger than the output gap, and turn the economy off and on again. There are always limits. Moreover, just because you can do something a little wrong and it doesn’t do any harm doesn’t mean that you can do it a bigger scale and cause no problems.
Looking forward, I wrote last week about what inflation will be when the world gets back to “normal.” Although the Fed and ECB assume that it will go back to 2%, I am skeptical. The new world may involve less trade, emphasize resilience instead of efficiency regarding production, all those cheap, young laborers abroad will age and get more expensive, and Fed credibility is shot to hell. In that case, inflation may be 4% going forward. That needn’t be terrible; after all, the level of inflation matters less than its volatility or unpredictability. Although things will get awkward with the whole Fed/ECB inflation target thing, as their target is still 2%. Even if they increase their target to 4%, that seems like a loss of even more credibility to me—not that deserve much credibility at this point.
I am becoming convinced that the best thing that the Fed can do is to stabilize inflation, rather than pick its level. That seems like a more realistic goal, and maybe we need a new framework—or to revive the old one.
A few people wrote to ask me about productivity enhancements. Could they be deflationary? Yes, they might. Although if you look to the past, they may not. More productivity tends to increase the cost of labor since it becomes more valuable and productive. Additionally, while it means that we can make existing goods cheaper, technology also brings new goods to market that may cost more. Inflation is based on everything that you buy. Therefore, I am not sure that we can count on productivity to lower inflation.
Now that I made a prediction, it probably won’t come true, and inflation will be 2% next year. That would be better for the world, so my 4% prediction is a good hedge for me.
Return to the office
Full disclosure: throughout my entire career, there was only a nine-month period where I went to an office every day and doing so was expected of me. I kind of liked the structure. However, it was a long time ago; I have been a gig/hybrid/work-from-home (WFH) person my entire adult life. Therefore, although I may not be the best person to say this, everyone needs to go back to work—in the office, most of the time.
Although I know that you can probably do your job just fine—maybe even better—at home, your job is not just the tasks that you do each day. You might have learned your skills and advanced your career because some senior person took an interest in you at some point. They mentored you and gave you assignments that stretched you and made you grow. Maybe they put you up for a promotion before you thought you were ready. All that stuff is part of what we call human capital accumulation, and it is important. If young, relatively unskilled people don’t have it, they don’t advance the way that they need to. It is hard to see how these relationships can form when senior people aren’t in the office very much. Your job includes passing on your skills and wisdom, even if younger workers don’t fully appreciate and understand why mentorship is so important.
Working together, in person, is important for culture. You like your co-workers more when you see them, and long, grueling tasks are better with people around—especially when you are junior and do lots of tedious grunt work. I wonder whether some of the elevated quit rates may have something to do with people being less connected to their co-workers. Teamwork is important for collaboration and innovation.
I spoke to economist and WFH expert Nick Bloom. He reckons that although there are productivity gains from WFH, long-term productivity may suffer. He thinks that hybrid is the optimal solution, such as three days a week in the office. However, optimal and a stable equilibrium are two different things. It is easy to see how WFH becomes the new not-answering-your-emails on the weekend, technically an option—but not really. The person who does show up every day will be seen as more dedicated, will get better assignments and form stronger connections. Therefore, eventually—maybe within five years—it will be hard to advance without showing up every day.
Unless you live in California. What is with them and bad economic ideas? Where do they think this is—France?
Until next time, Pension Geeks!