Innovation ist ein positiv behafteter Begriff. Erneuerung und Überarbeitung von Bestehendem wird in vielen Fällen mit Verbesserung assoziiert, doch hält diese Assoziation einer Konfrontation mit der Empirie stand? Ist es für die gesamte Bevölkerung erstrebenswert, unaufhörlich nach Innovation zu streben? Der von Schumpeter nachhaltig geprägte und oftmals mit Innovation assoziierte Begriff der schöpferischen Zerstörung weist deutlich darauf hin, dass die erfolgreiche Anwendung und Diffusion von Neuem Altes zerstört oder verdrängt und somit auch mit negativen Auswirkungen einhergeht. Die wesentlichen Fragen sind also, ob die positiven Auswirkungen überwiegen und ob jeder von uns in gleicher Weise von Innovationen profitiert oder Teile der Bevölkerung verstärkt mit den negativen Konsequenzen konfrontiert sind.
Goos et al. (2014) state that the middle wage segment decreases in favour of the high and low wage segment. The corresponding hypothesis of job polarization refers to the assumption that technological change allows the automation of routine-based tasks, which may be strongly found in the middle wage segment and therein pursued tasks. The IHS apparently was not very happy with these results as well as with the way they were generated. Therefore, they provide their own ones, partly presented today by Gerlinde Titelbach. According to this presentation not only the middle wage segment shrank by about 6% in favour of an increase of the high wage rate segment, but the low wage segment also shrank by about 2%. Based on these results they refuse the hypothesis about job polarization for Austria.
I am very critical about this conclusion. First, even if their results are correct, the qualification of workers displaced in the middle wage segment probably does not suffice for a large part of jobs in the high wage segment. In the first place, therefore, a decrease of labour demand in the middle wage segment still intensifies the competition among vacancies in the low wage segment. Secondly, as they look at the workload in total hours, their results do not directly refer to the number of employees affected within the individual wage segments. Assuming that part-time agreements are more common in low wage rate segments, the latter may still have grown in terms of people. Thirdly, the investigation rather focusses on occupations as a whole instead of tasks, like the elaboration on routine-based technological change would let expect. Fourthly, their data reaches back to 1994, while the increase in the technological potential for the automation of tasks rather increases over time and may reach a new peak in the course of digitalization.
Finally, it is very likely that Austria does not face job polarization in the same intensity as other countries (cf. Peneder et al. 2016, Eichhorst/Buhlmann 2015) – due to, for example, the dual education system, the comparably successful preservation of industry as well as industrial safety. However, the results presented today do not suffice to reliably refuse the hypothesis as a whole. I am looking forward to the final publication.
- Eichhorst, Werner, Buhlmann, Florian (2015): Die Zukunft der Arbeit und der Wandel der Arbeitswelt. IZA Standpunkte Nr. 77, Bonn.
- Goos, Maarten; Manning, Alan; Salomons, Anna (2014): Explaining Job Polarization: Routine-Biased Technological Change and Offshoring. The American Economic Review 104: 8.
- Peneder, Michael; Bock-Schappelwein, Julia; Firgo, Matthias; Fritz,
Oliver; Streicher, Gerhard (2016): Österreich im Wandel der Digitalisierung. WIFO, Wien.
- Titelbach, Gerlinde (2016): Job Polarisierung in Österreich?, IHS, presentation at Workshop Arbeitsmarktökonomie, Wien.
Caution: wandering mind and thoughts in process of clarification.
After reading through Max’s useful feedback in the comment section to my post on the possible effects on inequality of raising the inflation target I was forced to rethink the whole issue somewhat. First of all let me start by saying that, in the bigger scheme of things, the effects of raising the target inflation rate by 2% on inequality are indeed likely to be small, so how much this even matters is a question of debate in and of itself, but I hate to leave loose ends untied. To recap a bit, clearly there is a big difference between expected inflation and unexpected inflation. A central bank increasing its target inflation rate would have the effect of moving the value at which inflation expectations are anchored.
Yet even if fully expected this would have real effects due to what is generally known as the Mundell-Tobin effect – essentially the fact that, due to cash always paying 0% nominal interests, portfolio choices would change. More precisely, people would want to move away from cash and into bonds (or whatever you want to call the financial product used in your model). This move into bonds would raise the prices of bonds while lowering their yields, and it is this switch in portfolio compositions that would also cause the real interest rate in the economy to fall compared to where it was before. It would also change the distribution of income and wealth through various channels. As an example, it might be possible that there are constant entry costs when it comes to entering the bond market. Clearly this would mean that poorer households would be less able to protect themselves from the higher inflation rate as participating in the bond market would involve decreasing average costs, thus increasing inequality. At the same time the literature on the topic generally assumes that poorer households are net-debtors in the economy, and lower real interest rates would mean lower real interest payments, reducing inequality. In short, it seems to be anyone’s guess which effects dominate. Inflation is also generally referred to as a regressive tax on cash holdings, which would again drive up inequality somewhat.
But enough of that: to the main point of the post: from a perspective regarding the most direct effects on inequality, is a higher inflation target or a higher NGDP target preferable? Clearly my first post implied that I consider the answer to be the latter. I am not so sure anymore. As Max correctly pointed out, the change in inflation rate (a one-off effect) affects inequality, but within the moderate levels of inflation we’re talking about, there seems to be no reason to assume that inequality would be meaningfully affected beyond this initial movement. The big difference now between a higher inflation target and an NGDP growth or growing level target would be the degree to which inflation changes over time. Ideally, in the first case it would not change at all, while in the second case inflation would fluctuate as RGDP fluctuates.
Essentially it would seem RGDP, for different reasons including exogenous shocks, would fluctuate under both targets. The main advantage of an NDGP target would be to reduce this fluctuations since, much like the Taylor rule, it includes both output and inflation, while a strict inflation target (like the one of the ECB) does not. Clearly, however, the variance of inflation would, if the central bank does its job, be bigger under an NGDP target. That’s pretty much the feature of it. But, and in line with the thoughts outlined above, this would also mean that constant (essentially central bank-induced changes) in the inflation rate would, even if fully expected, also lead to constant (therefore also essentially central bank-induced) changes in real interest rates. Again, of course this is part of the idea – if RGDP falls, inflation would rise to meet the NGDP target, and real interest rates would fall (not only all other things equal but despite all other things adjusting), which would boost the economy causing RGDP to rise again – the whole point of the exercise.
Now, the general assumption is that variance in RGDP is bad for welfare – we would much rather have a constant real growth rate of, say, 2% per year than growth that is all over the place yet, over a certain period of time, averages 2% as well. Yet what does variance in RGDP do to inequality? I honestly would not know. In general, people with lower qualifications (i.e. on the lower end of the income spectrum) would get fired first in a downturn, but then again they also get hired first in an upturn. Is this process symmetric? That would seem to depend on the costs of hiring and firing people. If they are similar, the process would probably be symmetric, and the impact on inequality unimportant on average. But it would not seem farfetched to argue that, due to e.g. transaction costs and other market imperfections, variance in Inflation hurts the poor more than the rich. Again, if the technology for “inflation protection” (i.e. switching from cash to bonds) has decreasing average costs, as is likely, every switch would be more costly for poorer households than for richer ones. In short, the costs of protecting against inflation, which arise particularly when inflation changes, seem to be higher the poorer you are. So on these isolated grounds, a higher inflation target may be more desirable from a strict inequality standpoint.
Again, probably fairly trivial and not even I’m sure this really matters, but just sayin’.
The nomination of Janet Yellen to the chair of the FED seems to be as good an occasion as any to bring this blog back from the dead. No real comment on that other than it’s awesome, so let’s get back into some general monetary economics.
Following the Great Recession there has been a lot of talk about the adequacy of the monetary policy response in its aftermath. Particularly the issue of the zero-lower-bound, well-known to Japan but often treated as something akin to an exotic decease that would never concern countries such as the United States, has been hotly debated. One of the most common calls to try and avoid the issue in the future, or at least make it’s occurrence more unlikely, has been to increase the inflation rate targeted by central banks. In the case of the United States the talk is often about raising it from 2% to 4%, whereas Japan has stopped talking and finally moved to do something about its long-lasting problem by increasing its target from 1% to 2%. And for all it’s worth, it seems to have worked fairly well. The two opposing views on this issue usually range from some weird notions of the “danger of inflation”, of “unanchoring inflation expectations” and everyone dying (or something) on the one hand to an essential no-brainer with little down-side risk on the other hand.
There is not much to say about the first notion other than there seems to be no compelling reason that central banks would have a harder time stabilizing inflation at 4% than at 2%. Even the lowest threshold value found in studies regarding the level at which things start spiraling out of control is around 8% and 4% certainly seems far enough away. Also, fear of inflation in general is essentially the view held by Niall Ferguson, which alone is a pretty safe indication that it is almost certainly wrong. The second view, however, is much more interesting. Indeed, in a perfectly nominal world (i.e. one where everyone and their dog is protected from the effects of inflation), increasing the inflation target by 2 percentage points would seem like the closest thing to a free lunch one might find.
However, and even if it is often downplayed, it would not seem to be that the issue of what a permanently higher level of inflation does to an economy over a longer period of time is as trivial or well-understood as is often portrayed. At least from my review of the somewhat limited literature on the topic it does not seem to be the case that we have all that good of a grasp of what would actually happen. My list of possible channels through which (either directly or indirectly) a higher level of inflation could affect income and wealth distribution, for instance, is solid two pages long and probably more than just incomplete. It also includes a lot of ifs and buts’, necessary assumptions regarding the distribution of creditors and debtors within the society, the nature of government institutions, the nature of different types of contracts and the bargaining power distribution between e.g. workers/unions and companies, just to name a few examples. Changing any of those assumptions flips the entire outcome.
It also does not seem entirely certain to me whether the effects this inflation would have on income distribution and wealth distribution would tend to be pointed in the same direction. And most importantly, the time frame used to make such analysis is vital. In times where the higher level of inflation boosts output back to its potential through monetary stimulus this would seem to almost certainly lower both types of inequality as measured by conventional inequality measures. What happens to the middle class is another entirely different story. It is unlikely to be the case anytime soon that we can declare that the “central problem of depression-prevention has been solved” (as Robert Lucas infamously declared back in 2003), so there will probably be another occasion where we could very much use the higher level of initial inflation. Krugman is also essentially correct in claiming that “one of the dirty little secrets of economic analysis is that even though inflation is universally regarded as a terrible scourge, efforts to measure its costs come up with embarrassingly small numbers”, yet as far as I can tell Friedman’s finding that “Inflation is always and everywhere a monetary phenomenon” is about as much as we can say with real certainty.
Overall, systematic changes in inequality are generally a long-run issue, and despite price stickiness and whatnot money remains essentially neutral in the long run for the levels of inflation we’re talking about. Further, inflation most likely impacts inequality mainly through its effect on output to begin with, and from this point of view there is little reason to believe there would be any difference at all between 2% and 4% inflation during normal times. Yet maybe the fact that we would like to increase the inflation rate target says more about the nature of the target itself than about its fairly arbitrary numerical value.