Even a decade into the recovery from the Great Recession, GDP and employment were still far short of their earlier trend. After all, workers are not going to accept the lower wages the Fed thinks price stability requires unless they are sufficiently scared of the alternative.Īt the macroeconomic level, a major lesson of the past 15 years is that shifts in demand have much longer-lasting effects than we used to think.
(To hear some hawks talk, this was a mistake they now would like to correct.) A weaker labor market means more people experiencing severe material deprivation. During the pandemic, by contrast, the fraction of food-insecure families actually fell. The fraction of Americans experiencing very low food security-this means literally not getting enough to eat-rose by 50%. The economy faced a sharp fall in demand in 2008-2010. This tilting of the scales toward employers tends to get talked about in an antiseptic way, but these policies have real consequences. One of the main ways that tighter monetary policy works is by weakening labor’s bargaining power, so people will accept lower wages. Indeed, this is precisely the central banks’ goal. On one side, the most obvious danger is the slower growth in employment and wages that go with weaker demand. Any decision to prioritize one objective above the others needs to seriously weigh the costs and benefits on both sides. No one likes rising prices, of course, but full employment and growth are vitally important too. Federal Reserve and the European Central Bank, the message is that they will do whatever it takes to achieve price stability. But we do face a similar choice between two economic dangers. Central bankers have made clear which they fear more: They are ready to sacrifice full employment in order to bring down inflation.
In 2022, we don’t face outright deflation-at least for the moment.
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