How hard is it to stimulate demand?

Recent studies have shown prices in some sectors—such as housing—do indeed rise faster when growth is in full swing, unemployment low and markets frothy. But a large chunk of the economy, from health care to durable goods, appears insensitive to rising or falling demand.

paper published last month by economists James Stock of Harvard University and Mark Watson of Princeton University found prices accounting for nearly half of the Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, don’t respond to changes in economic activity. In 2017 economists at the Federal Reserve Bank of San Francisco found such “acyclical” goods and services made up a whopping 58% of that index.

And:

The cyclically sensitive components of core inflation, which excludes food and energy, have accelerated to 2.33% in the 12 months through May from 0.41% in mid-2010, according to the San Francisco Fed, just as falling unemployment would predict. But that has been offset by falling inflation in acyclical categories—such as health care, financial services and most goods—which has slowed to 1.04% from 2.26% in the same period.

Of course, this also casts doubt on the whole meaning of a single “real” interest rate.  And it seems to imply that monopoly power in the American economy is not so universal.

Here is the whole story from Paul Kiernan at the WSJ.

Comments

'And it seems to imply that monopoly power in the American economy is not so universal.'

Finally, a subject has appeared that seems to match the previously noteworthy (if somewhat inexplicable) Piketty obsession.

However, if monopolies need to be defended in the name of economic freedom, Prof. Cowen is apparently available to answer the call.

I am not sure this conclusion on "monopoly" power is true. Say for instance I have a natural monopoly on making razor blades due to my strong marketing. I set the price low enough that people don't want to seek out cheaper alternatives, but because I have a quasi monopoly this is well above my input cost. Demand for razor blades then increases, but don't increase my price even if my inputs are rising in cost (due to increased demand) because I still don't want people to switch. So I maybe take a bit less profit per unit, but volume increases, so overall I am happy.

I generally don't follow Tyler's comment about monopolies. All IO models predict that monopolists price higher or lower depending on elasticity of demand, suggesting that exogenous demand shocks matter for monopoly markets just as they do in other markets.

That's correct. All firms maximize profits where marginal revenue equals marginal cost. This is true for monopolies as well.

In fact, if demand is low enough, even monopolies can have negative profits and shut down.

Competitive pressures are not the only thing creating sticky prices.

That's not a natural monopoly.

Concur. The situation posited is not a natural monopoly.

To borrow from Barro, maybe we are doing it all wrong. I refer to the calculation of "inflation". I recall a celebrity economist's Okun Lecture given as the financial crisis was unfolding. He faulted the Fed for missing the "inflation lurking in the background". I don't know if monopoly has anything to do with it (Cowen seems to find a reason to defend monopoly whatever the economic circumstance), but he does have a point about the "real" interest rate. And related, the "real" inflation rate.

There certainly seems to be mounting evidence that economists' understanding if inflation is much poorer than previously believed. I would be leery of declaring yet whose policy views are likely to benefit, though.

Inflation is extremely high, but it's called wealth creation..

Just remember, your rent going up is not inflation, but wealth created at zero labor cost!

The rent going up is creating wealth?

And here I thought that was just rent seeking ...

For example, if you look at Figure 8 on p.16 of the paper, the graph shows an inflation rate for housing excluding gas and electric utilities that is *lower* than core inflation rate for all but a few years since 1990. Either we’ve been in a 30-year housing bust without realizing it, or the “housing” inflation is computed in a very strange way.

BEA does indeed calculate housing costs in a strange way. Instead of basing it off house prices they use average monthly rents and mortgage payments.

How is it the duty of those other than suppliers to "stimulate demand"? Doesn't business spend large amounts of money on advertising and marketing to encourage demand? Is it really the job of government and the Fed to use the taxpayer's money to stimulate the sales of I-phones and lingerie?

I'm not defending the practice, but fiscal and monetary policy are predicated on the notion that if prices dont immediately adjust to decreases in aggregate demand, that government must in some way close the output gap. They do this generally by increasing government expenditures, lowering interest rates, or cutting taxes. None of these methods specifically target individual goods for stimulus. However, the last stimulus package did directly target political allies for gains. The GDP multiplier for most of these expenditures was close to 1 if not below 1. Very ineffective.

Targeting stimulus conveniently aids allies while claiming to be good planners.

The nice thing about macroeconomics is no one is ever wrong.

The only wrong statement in macro is the one to just made :)

To = you

All generalizations are incorrect including this one.

George Bernard Shaw, "If all the economists were laid end to end, they'd never reach a conclusion."

I'm so old. I remember the dire days when America suffered with "stagflation."

reliance on Federal "inflation" measures is a big mistake here -- those numbers are always erroneous.

and does anyone honestly believe the government can measure inflation to a hundreth-percent accuracy?

Red China plans to invade Hong Kong. Is it Munich all over again?! Will it be peace for our time again?! Will we allow the dominoes to fall and crush civilization and democracy around the world?

And thanks to Trump we'd get the lion's share of billionaire ex-pats.

But it is not about money. It is about freedom and civilization. Our country can pretend it is not happening.

Não fique preocupado! Vou matar todos a mão!

A good officer knows one needs planning and an Army. Rugged individualism won't lead us to victory, only unbending discipline and devotion to victory.

Tenho tudo isso!

So it is a time for action. For crushing the serpent with one's heel.

Isso mesmo.

Now or never.

If 58% of the goods on the index are acyclical then maybe we can finally explain why inflation isn't going anywhere. My instinct is that we will continue to see sub 3% real inflation during the mid term and sub 4% over the long term.

Loose monetary policy has created bubbles elsewhere. The trick is to figure out where. ;)

I read a book 20 years or so ago. If I remember correctly, it was about how people like numbers, and how they especially like it when *one* number can describe a thing. Sometimes this works very cleanly. A temperature is a simple unambiguous number. It works. To name one that has been found to have quite of unanticipated complexity, the Calorie is not so good. It works, kinda, with more caveats added over time.

Economists, like everyone, like numbers to describe things, and especially one number, like "inflation." It's not at all surprising to me that numbers with complex formulas or data reduction behind them aren't going to be the clean kind. The higher the complexity the lower the usefulness.

I mean, look at yesterday's conversation about home prices. People mostly talked about the ownership *rate*, but that's not very revealing when it includes both $1 houses in St. Louis and $245 million houses in Los Angeles.

The "number" doesn't describe the situation.

The house in St. Louis costs $1 to get in but $245 million to get out.

Real economists NEVER look at a single number. There are many different inflation measures. There are many employment measures.

It is only journalists and politicians who rely on headline numbers.

Ok, I'll acknowledge that.

Rage against the facts?

Home ownership is stable over the last few decades. You, rightfully, have a problem with conservatives refusing facts that disagree with their priors (global warming, etc)

Have the integrity you correctly demand of your opponents. We can agree on facts.

The national rate of home ownership is the worst possible kind of "one number." It buries far more than it exposes.

" this also casts doubt on the whole meaning of a single “real” interest rate"

Could this be expanded into a full post of its own?

Post inflation!

My thumbnail would be "choose your business or lifestyle, choose your inflation."

Sure, the Fed needs to keep an eye on money supply and money supply driven inflation events. But they have to realize that they're just taking a stab at it with consumer or manufacturer indexes based on selected baskets of goods.

They are probably sophisticated and computer savvy enough now to be using some kind of "dashboard" rather than "one number."

Honestly, I think the primary reason why modern economies have trouble stimulating demand is very simple: Birth rates continue to drop and this long term decreases demand. (Note US savings is going up the same time US birth rates declining. I do think there is modest correlation here.)

It seems the modern economies are in a trap: The harder workers compete in global marketplace, the less they feel they can afford children. (Working class birth rates in the US, $25K - $50K have fallen below replacement levels although higher than upper middle class ones.)

Immigration, both legal and illegal, has more than compensated for low birth rates.

I'm guessing there might be different GDP implications between a newborn baby and a new immigrant, but I'm not sure in which direction. The immigrant is likely much more productive, but remittances could reduce consumption.

"Immigration, both legal and illegal, has more than compensated for low birth rates."

Yes, but the "r-selected intelligence" thingy.

The replacement population is dumber than the natives.

Do you enjoy pseudo-scientifically comparing other ethnicities to vermin and orcs? If you're such a pure bred, K-selected, intelligent being whose mother loves him, you'd be doing something more useful than spewing racism on an obscure forum.

Thread winner.

+10. Excellent takedown. Totally deserved that one.

Not an argument.

Do you really think people are fungible?

When the ordinary thought of a highly cultivated people begins to regard "having children" as a question of pro's and con's, the great turning-point has come. For Nature knows nothing of pro and con. Everywhere, wherever life is actual, reigns an inward organic logic, an "it," a drive, that is utterly independent of waking-being, with its causal linkages, and indeed not even observed by it. The abundant proliferation of primitive peoples is a natural phenomenon, which is not even thought about, still less judged as to its utility or the reverse. When reasons have to be put forward at all in a question of life, life itself has become questionable. , Oswald Spengler, The Decline of the West vol. 2, pg 104, Knof, 1961.

Other components, typically prices that are poorly measured or internationally determined, have weak and/or unstable correlations with cyclical activity.
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Weakly measured pricing results in global trade when trades carry insurance or hedge against currency risk. Hence the internationally traded goods change prices more slowly. The author is limiting the 'cycle' to the standard eight year recession cycle and skipping secstags effects from slowly changing global terms of trade.

Consider the exporters in China with all that savings. Those savings are excess profits from 30 years ago, reserved as currency insurance against future expected losses. Our foreign suppliers are betting the sec secstags. This research is not.
Over the entire spectrum, the way these leak proof models are set, then over the entire spectrum pricing goes to zero mean variance. If the author covered the secstags, difficult to do, then he would show some prices are Phillips curve over the 50 year period.

So will this be in future textbooks?

Perhaps now that the Mueller debacle is over demand will soar. Since the US is the dog that wags the tail, the rest of the world will follow.

The Mueller debacle is ongoing - you did know that, right?

''Attorney General William Barr had predicted earlier this year that Horowitz's investigation would wrap up in May or June.

Steele’s two-day interview, which lasted 16 hours, was attended by Steele’s American attorney and started out contentious, Politico reported. Investigators spoke with Steele about his "extensive work on Russian interference efforts globally, his intelligence-collection methods and his findings about Trump campaign adviser Carter Page,” and felt that he “offered new and important information.”

This seems to contradict recent comments made by House Judiciary Committee member John Ratcliffe of Texas, who said earlier in July that he’d met with Horowitz in late June and Horowitz had said his investigation had concluded.' https://www.washingtonexaminer.com/news/doj-inspector-general-interviewed-ex-spy-christopher-steele

And do note that it is our incoming DNI director that seems to be clueless about that investigation.

Monetary inflation is predetermined by monetary flows, volume X's transactions velocity. Both the lags for real-output and inflation have been mathematical constants for > 100 years.

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