It’s fitting that director Baz Luhrmann chose contemporary artists like Jay-Z to provide the soundtrack in his new take on The Great Gatsby, because in many ways, the Gatsby story could easily be set in current times. (No, we don’t mean hipsters bringing back vests or flapper hairstyles.) Unfortunately, today’s economy shares many of the same sad qualities of the 1920s highlighted in the Gatsby story: increasing financialization, low socioeconomic mobility, and gross wealth and income inequality such that a privileged few live astonishingly well while a large portion of Americans are struggling just to get by.
EPI has been describing these trends for years. In fact, you might consider our flagship publication, The State of Working America, as a sort of modern-day Gatsby, in charts. The prose may not be as artful as Fitzgerald’s, but the economic descriptions are equally alarming.
The Great Gatsby’s protagonist, Nick Carroway, is drawn to New York by the promise of riches to be made on Wall Street. Indeed, the premium to working in the financial sector at that time was better than ever… until recently. As Figure A shows, at the beginning of the Great Depression, earnings per worker in the financial industry peaked at nearly 1.8 times the earnings per worker of all other private sector workers. After the Depression and the regulation that followed, earnings per worker in finance fell back roughly into line with the rest of the private sector. Beginning in the late 1970s, however, earnings per worker in finance again began to take off. By the onset of the Great Recession, they exceeded 1.8 times the earnings per worker of all other private sector workers. With such striking disparities in compensation, who wouldn’t be attracted to the green light of finance?
Happy Friday! Here are a few stories our experts read today:
- How the Case for Austerity Has Crumbled (New York Review of Books)
- My Two (Per)cents: How Are American Workers Dealing with the Payroll Tax Hike? (Liberty Street Economics)
- Poverty as a Childhood Disease (New York Times)
Though it didn’t get much attention, Democrats on the House Committee on Appropriations recently released a report on the effects of sequestration (pdf) and efforts to mitigate its impact. The report is a comprehensive look at sequestration cuts specific to the following areas: public safety, health, education and science, national security, judiciary and legal representation, commerce, housing, seniors, and foreign assistance. Some highlights in the report on the impacts of sequestration:
- NIH funding for research is cut by more than $1.5 billion, which the report estimates eliminates more than 20,000 jobs at universities, labs, and other research institutions.
- Funding for the Center for Disease Control and Prevention is cut by $285 million due to sequestration, inhibiting the CDC’s ability to—among other things—facilitate immunization, combat disease outbreaks, and manage and prevent both chronic and infectious diseases.
- The National Science Foundation loses $365 million due to sequestration, resulting in approximately 1,000 fewer research grants.
Happy Monday. Here’s what we’re reading today:
- Why Washington Saved the Economy, Then Permanently Destroyed the Labor Market (The Atlantic)
- Student Debt and the Crushing of the American Dream (New York Times)
- How Austerity Kills (New York Times)
- Who Can Take Republicans Seriously? (New York Times)
- Major Retailers Join Bangladesh Safety Plan (New York Times)
Various sources have reported on the intense lobbying efforts by industry representatives of the high-tech sector, who seek to influence the outcome of the Senate’s proposed comprehensive immigration reform legislation. The initial version of the Senate bill already grants the industry two of its key demands: an increased number of H-1B visas for university-educated temporary foreign workers (almost tripling the quota), most of whom work in the IT sector, as well as an unlimited amount of permanent resident visas (green cards) for recent foreign graduates of U.S. universities in STEM fields (and a fast track to receive them). So what is the industry hoping to achieve now? The industry is lobbying to remove the few improvements to the H-1B program that Senator Durbin (D-IL) managed to persuade the other seven members of the Gang of Eight to include in the bill. This week, a number of proposed amendments could make that happen.
Here are the simple, common sense rules and innovations included in the Senate bill that relate to the H-1B program:
The Brookings Institution issued a new report on Friday about the H-1B program—a temporary foreign worker program for “skilled” occupations, meaning those that require a college degree—and then issued corrections to it almost immediately afterwards.
The report claims to include a wage analysis on “new data” that, “suggests that the H-1B program helps to fill a shortage of workers in STEM [science, technology, engineering and math] occupations.”
There are two critical problems with the report’s analysis of these data:
First, the data are proprietary, meaning the data are exclusively held by the authors, thus no one can critique or review the study’s presentation of the data or its findings. (The authors obtained the data from two other researchers, who first obtained it through a Freedom of Information Act request.) This kind of approach, where researchers use data that are not available publicly, means that the data and subsequent analysis can never be checked, leaving out a critical step in the scientific process.
Take a quick survey of any major florist’s website and you’ll find that having flowers delivered for Mother’s Day can be a non-trivial expense. With a middle-of-the-road arrangement, service and delivery fee, you can expect to pay upwards of $70. That may be a pittance compared with the gratitude owed to mom, but here’s another way to consider it: for millions of mothers in low-wage jobs, those flowers would cost more than an entire day’s earnings.
Earlier this year, Senator Tom Harkin (D-IA) and Representative George Miller (D-CA) introduced legislation that would raise the minimum wage to $10.10 per hour by 2015. The number of mothers that would be affected by increasing the minimum wage is staggering. As shown in the table below, there are over 22 million mothers with children under the age of 18 working in the United States today.1 If the federal minimum wage were raised to $10.10 per hour, 5.5 million working moms with children under the age of 18—roughly 25 percent of all these working mothers—would see a pay increase.
This week, the seemingly never-ending fiscal policy skirmishes on Capitol Hill revolved around proceeding to a conference committee to hammer out an FY2014 joint budget resolution compromise. Unlike recent years, this budget season has seen both House Republicans and Senate Democrats produce and pass budget resolutions. Now Congressional Democrats are interested in moving forward on discussions toward a budget for FY2014. The problem? After haranguing Senate Dems for not having produced a budget resolution since 2009—before Senator Patty Murray (D-WA) was chairwoman of the Budget Committee—and maligning President Obama for being late in producing his budget alternative, Republicans are refusing to appoint conferees and commence a budget conference committee. Instead of moving forward with the budget process, the GOP has insisted on conditioning the appointment of conferees with an insistence that any conference report not include any new revenue or raise the debt ceiling. In other words, a non-starter.
Given how broken the budget process has been of late, it’s worth a reminder on what a normal spring budget season should look like. Each year, Congress is supposed to develop a joint budget resolution that sets limits on spending, particularly appropriations, as well as targets for federal revenue. After the Office of Management and Budget publishes the president’s budget request in early February, the House and Senate Budget Committees draft and mark-up budget resolutions, which then go to their respective chamber floors for votes (assuming they make it out of committee markup). If adopted in both chambers, a conference committee is then convened between the two bodies to resolve differences between their budget resolutions. (While this notionally is supposed to take place by April 15, it often takes longer.)
As part of the sequester, roughly $2.4 billion is being cut from emergency unemployment insurance compensation (see page 40 of this OMB report (pdf)).
These cuts cause damage in two ways. Most obviously, they mean that unemployment insurance benefits now provide a weaker lifeline to the long-term unemployed and their families, despite the fact that job opportunities have improved very little since the unemployment rate peaked near the end of 2009.
Less well understood is the fact that cutting unemployment insurance benefits will reduce spending in the economy and thereby cost jobs. While the cuts save an estimated $2.4 billion in government spending on unemployment insurance, the loss to the economy is much greater because these cuts have a large “multiplier” effect. Long-term unemployed workers, who are almost by definition cash strapped, are likely to immediately spend their unemployment benefits. Unemployment benefits spent on groceries, clothes and other necessities increase economic activity, and that increased economic activity saves and creates jobs throughout the economy. For this reason, economists widely recognize government spending on unemployment insurance benefits as one of the most effective tools for generating jobs in a downturn. The flip side of this is that cutting spending on unemployment insurance benefits during a period of economic weakness is one of the most costly tools available for reducing the deficit. Reducing spending on unemployment insurance by $2.4 billion will pull about $3.8 billion in economic activity out of the economy—economic activity that would have been supporting around 30,000 jobs.1 In an economy that is generating jobs at a pace that won’t restore full employment for at least another five years, this is incomprehensible.
Here’s what we read today and throughout the week.
- The Next Priority for Health Care: Federalize Medicaid (The Century Foundation)
- Congress Mentions Jobs Dramatically Less (Huffington Post)
- It doesn’t add up (Columbia Journalism Review)
- Suicide Rates Rise Sharply in U.S. (New York Times)
- Perverse advantage (The Economist)
- Bangladeshis turn rescuers after building collapse (AP)
- How Van Halen Explains the U.S. Government (Bloomberg)
- Budget Cuts Devastate Meals On Wheels: Enrollment Slashed, Services Cancelled (Think Progress)
Recently, barely-perceptible cracks have started to appear in the political foundations of austerity. Prominent Democrats on Capitol Hill—not just progressives but moderates and those who have embraced the administration’s pursuit of a “Grand Bargain” on deficit reduction—have recently called for an implicit time-out on fiscal tightening. Some European policymakers have similarly argued that austerity has gone too far. And prominent financial market players have warned that the United Kingdom should reverse its rapid drive towards austerity. Perhaps most surprisingly, even John Makin from the conservative American Enterprise Institute has called for an end to tightening.
It’s about time. The intellectual foundations for austerity have always been fragile. The recent controversy that erupted over a group of University of Massachusetts economists highlighting the extreme weakness of an oft-cited justification (pdf) for keeping debt ratios below 90 percent is just the latest demonstration of this. The UMass paper was important, but is only the latest and most well-known of the many refutations (pdf) of the case (pdf) that contractionary fiscal policy would produce (pdf) anything but contraction in today’s economy.
The latest issue of the Boston Review features a thought-provoking essay by MIT Professor Richard Locke entitled “Can Global Brands Create Just Supply Chains,” as well as a series of responses (including one I authored that this blog draws from). Locke surveys several decades of efforts to improve global labor standards. Using Nike as the primary case study, Locke concludes that private, voluntary regulation—the leading approach he says has emerged to address working conditions that fall short of basic labor standards—has essentially failed.
My response notes the many parallels between the Nike case study and the current situation regarding Apple. As with Nike, Apple’s elevated commitment to improving labor standards has been largely driven by the desire to mitigate what had become a public relations nightmare undermining its brand—in Apple’s case a series of New York Times and other high-profile stories describing the brutal living and working conditions faced by the workers making its products. As with Nike, Apple’s primary response has been private regulation, another way of saying that the company is pushing for reforms itself, through its Supplier’s Code of Conduct, expanded audits of its suppliers and conversations with its suppliers.
Since late 2010, the U.S. economy has been adding an average of around 175,000 jobs per month. Because this pace has persisted for so long, there is a real danger that it’s beginning to be considered the “new normal,” the pace of growth people assume is the best the economy can do. It’s important to demonstrate just what this rate of job-growth implies for restoring the U.S. labor market to even conservative standards of health.
As of March, I estimate that the U.S. economy needs 8.8 million jobs to get back to the labor market health that we had in December 2007.
This estimate takes into account both how far we are below the Dec. 2007 jobs level (we’re still 2.8 million jobs short of what we had before the Great Recession hit) and the number of jobs we should have added since Dec. 2007 just to keep up with growth in the potential labor force (6 million jobs). Conceptually, this measure is what it would take to restore the labor market to the Dec. 2007 unemployment rate (5.0 percent) at today’s “structural” labor force participation rate, meaning it fully takes into account the fact that demographic shifts since 2007—like baby boomers hitting retirement age—and other “non-cyclical” factors mean that a somewhat lower share of the overall population should be seen as potential workers today than in 2007.1
As Congress pursues comprehensive tax reform, policymakers have made numerous references the 1986 Tax Reform Act, which has been the principle framework for overhaul to date.
The 1986 reforms are revered because they succeeded politically, passing a divided Congress and enacted by a lame-duck president. Comprehensive reform today similarly would have to overcome major political hurdles, particularly Republican intransigence over raising revenue. Yet many policymakers today seem unaware that 1986-style reform is no longer viable.
The 1986 model was designed to be both revenue neutral and distributionally neutral—meaning that average tax rates would remain roughly unchanged across incomes. Replicating these objectives today would imprudently disregard shifts in the economic and budgetary landscape. The Bush-era tax cuts enacted a decade ago violated the spirit of the 1986 reforms by lowering revenue and shifting the burden of taxation further down the income scale. In so doing, they contributed to sizable structural budget deficits and revenue levels inadequate to support the baby-boomers’ retirement (an outlook essentially unchanged by the lame duck budget deal). And today, rising income inequality—exacerbated by reductions in top tax rates—has surpassed Gilded Age levels.
Happy Tuesday! Here’s what we read today:
- The Myth of America’s Tech-Talent Shortage (The Atlantic)
- How the Mainstream Media Broke Up With Austerity (New York Magazine)
- GOP’s debt limit threat goes off the rails (Washington Post)
- Six In The City: More Car Washers Vote To Unionize (Labor Press)
Last week, The Century Foundation hosted a Twitter chat forum in which Mike Konczal of the Roosevelt Institute, TCF fellow Mark Thoma and I discussed the Reinhart and Rogoff kerfuffle and its implications for the policy debate over austerity (here’s the Storified “transcript”). Nearly every facet of this incident has been thoroughly covered in the blogosphere—see Mike’s post for a summary of the Herndon, Ash, and Pollin (2013) paper debunking R&R; Arindrajit Dube’s post on reverse causation; my colleague Josh Bivens’ post on R&R’s response to reverse causation criticism; Paul Krugman on R&R’s obfuscating rebuttal; and Dean Baker’s post on R&R’s purported role in the policy debate.
But what’s gone entirely missing, as far as I can tell, and what I struggled to explain in sub-140-character increments, is that R&R’s reported finding—that “median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower [and slightly negative]”—couldn’t justify austerity even before it was debunked.
Back in early 2010, pundits and policymakers immediately seized on R&R’s now-invalidated results to justify austerity policies, so the paper’s methodological debunking has been correctly interpreted as a major defeat for the austerity movement. But the Beltway interpretation of R&R was based on a false premise from the get-go. Robert Samuelson’s predictably unhelpful addition to the R&R debate—his half-hearted defense of R&R’s “minor mistakes” is scattered with objectively inaccurate revisionist history—perfectly encapsulates this widely propagated false dichotomy: “It’s ‘austerity’ versus ‘stimulus.’ If debt exceeding 90 percent of GDP is hazardous, then the case for austerity seems stronger.” (Emphasis added.)
Jim Tankersley at the Washington Post and Ben Casselman at the Wall Street Journal are in a “wonkfeud” about labor force participation. It started when Casselman estimated that there are currently around 3 million “missing workers” in the US (workers who are not in the labor force but who would be if job opportunities were strong). Tankersley did not dispute that figure, but pointed out that because it only counts workers who are missing due to the weak labor market in the Great Recession and its aftermath, it is a substantial undercount of the total number of missing workers because labor force participation was also weak in the decade leading up to the Great Recession.
To Tankersley’s point I will just add that while I don’t have an estimate of the number of missing workers from the 2000-2007 business cycle, it was indeed the weakest full business cycle in terms of job growth in at least three generations, and the labor market had not yet come close to regaining the health of the late 1990s before the Great Recession began at the end of 2007. It is an important reminder that estimates like the one below of how many jobs we need to get back to the labor market health of 2007 are conservative indeed, since while 2007 was the last year before the Great Recession hit, it was no labor market paradise by any stretch.
John Schmitt and Janelle Jones have written an excellent paper on what it would take to improve job-quality in the U.S., backed with actual data, rather than hand-waving about training-this and skills-that. I would, however, slightly tweak one line in the press release for the paper: “The authors note that restoring the link between economic growth and job quality will be a heavy lift.”
I think a distinction is in order between things that are a heavy economic lift versus those that are a heavy political lift. Schmitt and Jones, for example, show that increasing the share of U.S. workers represented by a union by 25 percent would have a larger impact on boosting good jobs (and reducing bad jobs) than would boosting the share of U.S. workers with a 4-year college degree by 25 percent.
But boosting the share of workers with a 4-year college degree is indeed a heavy economic lift—it takes real resources (books, labs, classrooms and most expensively teachers) to provide the skills and education needed to qualify for a college degree. But boosting the share of workers with union representation really doesn’t cost much at all—there is really no serious research linking economy-wide productivity declines to increased unionization. Instead, boosting the share of union workers in the U.S. would redistribute money, but would not cost the U.S. economy anything in the aggregate. And given that so much of the decline in unionization seems to be policy-driven (PDF), the real lever to make this increase happen is essentially the costless act of changing the policy stance towards unionization (there is no CBO score, for example, for the Employee Free Choice Act because it doesn’t cost anything).
But of course we’re not going to see a more hospitable policy/legal environment for unionization anytime soon—it’s too heavy a political lift.
Here’s what we’re reading and talking about this afternoon:
- Tears and Rage as Hope Fades in Bangladesh (New York Times)
- At chicken plants, chemicals blamed for health ailments are poised to proliferate (Washington Post)
- Austerity is hurting our health, say researchers (Reuters)
- Austerity undone (American Enterprise Institute)
- House Republicans Eyeing New Hostage Opportunity (New York Magazine)
- Heading the Wrong Way (New York Times)
- Budget Cuts, Minus the Inconvenience (New York Times)
As pointed out elsewhere, the claim that the UMASS paper actually supports R&R’s alleged core finding of a significant relationship between high debt and slow growth is flat wrong.1 Yes, the midpoint average growth rate of high-debt countries (over 90 percent of GDP) is lower than the average growth of lower-debt countries, but the differences are not statistically significant. Really, people should give up on this one.
More importantly, the real argument all along has been two-way causality: data showing that there is lower growth at high debt levels does not show that high debt causes low growth. A finding of statistical association between high debt and slow growth would surprise precisely nobody, but there is a better case to be made that slow growth leads to high debt rather than vice-versa. Arin Dube demonstrated this very well in his note on Reinhart and Rogoff’s entire data-set, and for the U.S. John Irons and I did the same with Granger causality tests on the U.S. data in July 2010, nearly three years ago. Paul Krugman kindly referred to our results in his blog saying “John Irons and Josh Bivens have the best takedown yet of the Reinhart-Rogoff paper (pdf) claiming that debt over 90 percent of GDP leads to drastically slower growth.” So the causality problem has been well known for some time. By the way, we compiled the data we used ourselves because emails to Reinhart and Rogoff requesting their data went unreturned. Perhaps if they had shared their data at that time their actual weighting procedure would have become clear much sooner and even their spreadsheet error could have been corrected. Kudos to the UMASS authors for being more persistent than us and for the work they did.
How many times have you heard business lobbyists and spokesmen say: “Regulations are killing jobs”? Or how about, “Excessive regulations are driving manufacturers overseas”?
Well think about what’s been happening in Bangladesh, where so many US clothing retailers and garment makers, from Wal-Mart to L.L.Bean, have gone to escape livable wages and regulation. That lack of regulations is killing workers, not in ones and twos, as happens here in the United States several times every day, but hundreds at a time. Factory fires as devastating as the Triangle Shirtwaist fire of a century ago have now been followed by a building collapse that has so far claimed 300 lives, the workers crushed, bleeding to death or suffocating.
Several stories I’ve read report that only one business (a bank) heeded the warnings of police that the eight-story factory building was so unsafe that it had to be evacuated. The other businesses shrugged off the warnings and ordered more than 2,000 people to work in mortal danger.
I noted a while back that the uptick in residential construction was a genuine bright spot in the economy, and one that would all else equal make one expect better GDP growth in 2013 than 2012. But just how much should we realistically expect from residential investment in driving growth?
Not much. Residential investment is only about 2.7 percent of the overall economy (as of the first quarter of 2013), so even extraordinarily fast growth in this sector would not be enough to drag the rest of the economy with it. As a demonstration, look at 2012—the most rapid growth of residential investment in the past two decades—in the figure below (which shows a rolling 4-quarter average of growth rates of residential investment since 1989).
Here’s what we read (and watched) today:
- Austerity’s Spreadsheet Error (Part 2) (The Colbert Report)
- The University of Massachusetts Econ Department: How We Know Reinhart and Rogoff Were Wrong (CEPR)
- Baucus retires, a grateful nation cheers (Washington Post)
- Self-Defeating Austerity? (National Institute of Economic and Social Research)
- TCS, Infosys and Wipro abusing H-1B visa system (The Economic Times)
- 2013 Preventable Deaths: The Tragedy of
Workplace Fatalities (National Council for Occupational Safety and Health)
In conjunction with its April 23 quarterly earnings report, Apple issued a separate announcement that it is doubling its “capital return program” and will return $100 billion to shareholders by the end of 2015. This decision reflects the enormous size of the company’s existing cash reserve and, according to Apple’s chief financial officer, the fact that “We [Apple] continue to generate cash in excess of our needs….”
Missing from yesterday’s announcement, as well as from the last few months of discussion over what Apple should do with its cash reserve, was how those resources could also be deployed to make necessary improvements in the compensation and treatment of the workers making Apple’s products abroad, or selling its products in the United States. This neglect is unfortunate. These workers contribute directly to Apple’s enviable financial position, even though they frequently live and work under harsh conditions for meager pay. As I detailed in a previous analysis, Apple could also use its cash reserve to:
- Fulfill its promise to retroactively pay the factory workers making its products for previously uncompensated work time
- Boost the pay of the factory workers making its products to offset the reductions in excessive overtime Apple has (appropriately) helped spur
- Ensure that all the workers making its products are paid a livable wage, a step Apple is theoretically obliged to take as a member of the Fair Labor Association
- Reduce health and safety threats at the factories making its products
- Provide compensation for the labor rights violations the workers making its products have endured
- Narrow the gap between the pay of the workers at Apple stores and comparable college graduates
Last year around this time, I wrote a blog looking at the behavior of the unemployment rate over and after the Great Recession. I found that relative to its past historical relationship with output growth, the overall unemployment rate rose too rapidly during recession and then fell too rapidly between 2011 and 2012. I then approvingly quoted Ben Bernanke, who noted: “further significant improvements in unemployment will likely require faster economic growth than we experienced during the past year.”
In last year’s blog post, I noted that going forward the historical relationship between output growth and unemployment suggested that two straight years of 2.7 percent growth would be needed to reduce unemployment by even 0.4 percentage points. The growth rate for 2012 came in well under this at 2.2 percent. And what happened to unemployment in 2012? It fell by 0.8 percentage points.
So, another year has passed where the overall unemployment rate significantly over-performed relative to most other economic aggregates. The figure below shows the two-year change in unemployment, both actual and what is predicted from a simple regression of the two-year change on the two-year difference in growth rates of actual gross domestic product versus potential gross domestic product as measured by the CBO.1 What this captures is that the economy must grow faster than underlying trend growth (or growth in potential GDP) in order for unemployment to decline. The figure confirms that the actual unemployment rate rose more rapidly than predicted during the Great Recession, but then fell more rapidly than predicted in 2011 and 2012. By the end of 2012, the actual unemployment was a nearly 1.5 percentage points below what it would have been had the simple Okun’s relationship between output growth and unemployment continued to hold.
Here’s what our experts were reading today:
- Did a Spreadsheet Error Cost You Your Job? (Yahoo! Finance)
- Reinhart/Rogoff-gate isn’t the first time austerians have used bad data (Washington Post)
- Huzzah! The U.S. economy is 3 percent bigger than we thought. Thanks, George Lucas! (Washington Post)
- A Dose of Reality: Deficit-Cutting Right Now Is Extraordinarily Imprudent: Creating a Crisis Now To Forestall a Future Crisis That Is Unlikely To Come (Brad DeLong)
- Labor Force Participation and Monetary Policy in the Wake of the Great Recession (Federal Reserve Bank of Boston)
In a story headlined, “France Drowning in Rules and Regulations, critics say,” WaPo writer Edward Cody presents a caricature of a country with one of the highest standards of living in the world. Based on little more than interviews with disgruntled officials in one small town, Cody variously describes France’s regulatory regime as “strangling,” “smothering,” or “burying” the economy. For example:
“France and its southern European neighbors, such as Italy and Greece, are increasingly being buried in such norms, rules and directives. In the past two decades, the number of legal do’s and don’ts has become so great that businessmen and economists1 warn that it is smothering growth just as the continent tries to dig out of its worst slump in a generation.”
But France is not Italy or Greece, and the truth is almost the opposite of Cody’s claim that, compared with the Scandinavian countries, France discourages business. In fact, the World Bank measures the nations of the world on the ease of starting a new business, and France ranks well above all four of the Scandinavian countries. France also ranks about 80 places ahead of Europe’s economic powerhouse, Germany.
Paul Krugman has been writing (and linking to helpful pieces) about the “missing deflation” of recent years. Despite lots of hand-wringing that activist macroeconomic policy (especially the large degree of easing done by the Federal Reserve) is laying the powder for an explosion of inflation, it’s clear that this is the wrong worry and that the extraordinary degree of economic slack actually argues that disinflation is much more likely, and is actually a problem (by the way, Ken Rogoff is totally right about this one).
But Krugman notes it’s actually a puzzle that disinflation (a reduction in the rate of price-growth) has not been ongoing and has not pushed over into outright deflation (falling prices) like in Japan. And even in Japan, prolonged economic weakness has not led to accelerating deflation, instead their deflation has been slow and steady. So what’s happening?
Krugman and others have usefully pointed to downward nominal wage rigidity as the key reason—for whatever reasons, workers seem to really not like, and employers seem to indulge their preference for, outright nominal wage cuts. Wages holding steady while inflation reduces their purchasing power? That happens—and it’s happening a lot these days. But outright nominal wage reductions are rare, and this rarity could well be providing a (useful) floor to disinflation.