That’s the title of my new column in Independent Australia. I plan to write fortnightly from now on.
Now that quantitative easing is no longer needed, the problem is how to manage the huge increase in money balances that is driving demand. This is not a new problem; it arises every time a lot of spending is needed to handle an emergency, and we know what works and what does not. In the aftermath of World War I, governments in the UK and Australia sought to unwind the inflation created by wartime spending and return to the gold standard. The result was a long period of economic weakness, culminating in the Great Depression. By contrast, after World War II, wages and prices were allowed to rise, as wartime rationing ended and reconstruction gradually removed constraints on production.
As long as the real value of wages is maintained, a once-off increase in the price level is a small price to pay for avoiding economic disaster during the pandemic. The reconstruction of supply chains, along with the underlying increases in productivity generated by technological progress, will allow a gradual return to lower rates of inflation. We can also hope for some additional gains arising from the experience of the pandemic with remote work, telecommunications and home delivery of goods and services.
Once the current upsurge in prices is past, we need to reconsider whether the inflation targeting regime introduced around the world in the 1990s, based on frequent small adjustments to the central bank interest rates, is still appropriate. Inflation targeting, failed to prevent the Global Financial Crisis, and was abandoned during the pandemic. Even though interest rates are rising in the short run, there’s still very little capacity to cut them in the event of a new emergency. It might well be better to target growth in the money value of GDP, and to accept inflation somewhat higher than the 2-3 per cent range that has been aimed for, though not always reached, under inflation targeting.
But this is a question for another day. The inflation we have observed in the last year was not caused by low-wage workers, most of whom did not see much benefit from the big expenditure during the pandemic. They should not be asked to bear the costs of a misconceived program of deflation.
John Quiggin 
Falato, Kim & von Wachter said “…suggesting that shareholder power mainly reallocates rents away from workers.
“Our results imply that the rise in concentrated institutional ownership could explain about a quarter of the secular decline in the aggregate labor share.”
JQ said “The inflation we have observed in the last year was not caused by low-wage workers, most of whom did not see much benefit from the big expenditure during the pandemic. They should not be asked to bear the costs of a misconceived program of deflation.”
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“Shareholder Power and the Decline of Labor”
Antonio Falato, Hyunseob Kim & Till M. von Wachter
WORKING PAPER 30203
DOI 10.3386/w30203
ISSUE DATE July 2022
“Shareholder power in the US grew over recent decades due to a steep rise in concentrated institutional ownership. Using establishment-level data from the US Census Bureau’s Longitudinal Business Database for 1982-2015, this paper examines the impact of increases in concentrated institutional ownership on employment, wages, shareholder returns, and labor productivity.
“Consistent with theory of the firm based on conflicts of interests between shareholders and stakeholders, we find that establishments of firms that experience an increase in ownership by larger and more concentrated institutional shareholders have lower employment and wages.
“This result holds in both panel regressions with establishment fixed effects and a difference-in-differences design that exploits large increases in concentrated institutional ownership, and is robust to controls for industry and local shocks. The result is more pronounced in industries where labor is relatively less unionized, in more monopsonistic local labor markets, and for dedicated and activist institutional shareholders.
“The labor losses are accompanied by higher shareholder returns but no improvements in labor productivity, suggesting that shareholder power mainly reallocates rents away from workers.
“Our results imply that the rise in concentrated institutional ownership could explain about a quarter of the secular decline in the aggregate labor share.”
https://www.nber.org/papers/w30203
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JQ: “The cost to employers would reduce their profits. But over the past 20 to 30 years the share of national income going to the owners of capital as profits (instead to labour as wages and salaries) has increased considerably. This cost would be just a fraction of those gains.”
https://theconversation.com/theres-never-been-a-better-time-for-australia-to-embrace-the-4-day-week-176374
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“The Rise of Institutional Investors”
July 2019
DOI:10.31235/osf.io/2u6pg
Projects: The Routledge International Handbook of Financialization
Re-concentration of corporate ownership and control through large passive asset managers
Authors: Jan Fichtner
University of Amsterdam
Abstract
“During the last decades, institutional investors gained an ever more important position as managers of assets and owners of corporations. By demanding (short-term) shareholder value, some of them have driven the financialization of corporations and of the financial sector itself. This chapter first characterizes the specific roles that private equity funds, hedge funds, and mutual funds have played in this development. It then moves on to focus on one group of institutional investors that is rapidly becoming a pivotal factor for corporate control in many countries – the “Big Three” large passive asset managers BlackRock, Vanguard and State Street.”
https://www.researchgate.net/publication/334268680_The_Rise_of_Institutional_Investors
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While China, if following this study, opens the door to “the “Big Three” large passive asset managers BlackRock, Vanguard and State Street.”. And then wage share declines.
“Institutional investors and cost of capital: The moderating effect of ownership structure
…
“Secondly, the innovation and development of fund management companies should be vigorously promoted. It should broaden industry access and encourage all kinds of qualified private capital and private funds to invest in public funds. Fund management firms should be encouraged to carry out the reform of mixed ownership and optimize the ownership structure. In addition, the Chinese government, policy makers and developmental agencies should formulate support plans for eligible institutions to independently develop public offering fund products to meet market demand, and encourage them to innovate in investment scope, marketing and strategy.
“Thirdly, institutional investors should be encouraged to participate in the reform of state-owned enterprises to exert their positive regulatory and governance effects. Based on the analysis of this study, institutional investors have better governance effects on state-owned companies. Therefore, relevant policies in China should be taken as an opportunity to attract more non-state capital–including institutional investors–to participate in the development of the mixed ownership economy. Furthermore, the Chinese government should also guide institutional investors to establish a long-term investment philosophy concept, accelerate the construction of flexible financial market infrastructure, improve the long-term shareholding system of institutional investors, and promote institutional investors to properly establish the long-term value of the portfolio.”
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0249963
“As long as the real value of wages is maintained”
I assume that will occur either through the productivity changes you mention following the easing of supply constraints or through inflation targeting that seeks to stabilise prices so real wages don’t fall. The first mechanism is standard – increases in productivity will drive increases in real wages that can potentially offset reductions due to price increases as firms respond to higher wage costs. That is the soundest way of ensuring higher sustainable real wages in my view. The second mechanism is more problematic. Already forecast inflation this year of 7% will dominate the minimum wage increase of 5.2%. And unions are already asking for compensation due to current and past price increases. Moreover, under your proposal to loosen monetary targeting, there will be still higher inflation rates than we have observed in the past so prices will tend to rise reducing (not sustaining) real wages. If monetary policy was made more restrictive (rather than less) then price increases could be moderated at the expense of higher unemployment – higher interest rates will choke off aggregate demand and this will reduce prices and employment/output.
So I think the conventional wisdom is restored. The best way of fostering real wage growth is through fostering increased productivity. You mention removing supply chain constraints but there are also other routes such as training and retraining and investing more in education. I am less confident that real wages can be improved by tribunals fostering large nominal wage increases and then using monetary policy to prevent prices from rising – particularly with respect to the latter, if you want relaxed monetary targeting.
JQ: ” … the problem is how to manage the huge increase in money balances that is driving demand.” HHear, hear. This is a classic “too much money” inflation à la Milton Friedman, not a wage-price spiral.
Kevin Drum has some nice charts for the USA: https://jabberwocking.com/retail-spending-was-down-in-june/ . The crucial one is the second, clearly showing the massive savings bubble built up during the pandemic, currently being unwound. Let’s try a direct link:
Drum goes on about adjusting for inflation. But to get a handle on the pressures, for once it’s nominal that counts.
JQ does not mention the redistribution from creditors to debtors. Investors in highly leveraged wind and solar farms like Warren Buffett are making out like bandits.
Harry, Joseph Stiglitz releasing;
“Profits Causing Inflation in Australia, Not Wages: European Central Bank & ABS Data Reveal
…
” “Australia isn’t experiencing a wage-price spiral, it’s at the beginning of a price-profit spiral,” said Australia Institute Chief Economist Dr. Richard Denniss.”
https://johnquiggin.com/2022/07/18/monday-message-board-563/comment-page-1/#comment-253993
KT2, You repeat John’s claim that wages are not causing the current inflation. I am yet to find a single person in Australia who claims anything to the contrary so I wonder why this claim is made. Wages growth has been very modest up to the present recent minimum wage increase and could not possibly be responsible for the 7% inflation we are currently in the midst of. Concern is obviously with the future, with unions trying to play “catch up” with the highest inflation we have experienced for decades.
HC says “so I wonder why this claim is made.”
I feel your wonder is not strong Harry… “I am yet to find a single person in Australia who claims anything to the contrary”. I have posted about 8, including now Australia Institute & Stiglitz.
Harry, I belive wages AND … cause inflation.
The way you respond is. .. whingers, and… “with unions trying to play “catch up” with the highest inflation we have experienced for decades.”.
If you were to engage with wages AND, you may not need to keep saying “You repeat John’s claim”.
You might then disagregate wages as the current primary driver and let us know how Econ 101 might deal with wages AND…
But I doubt it. Cheers.
KT2, Neither Stiglitz nor the Australia Institute assert that wages are causing the current inflation. To the contrary they claim that past wages exerted only a small influence on current inflation. My claim was that they are not rejecting the views of anyone by pointing this out. I don’t know a single person who claims that the current inflation is caused by past wage growth because, until recently, that has been negligible. My original claim is correct and your counterexamples are confused – you misread what I wrote.
I read the Guardian article today where the Australia Institute report is “discussed”. It seems Treasurer Jim Chalmers has joined the bandwagon in asserting the obvious proposition that wages are not driving the current inflation. Again this claim is being asserted as something surprising when, as I say, no one has asserted the contrary.
This is a political smokescreen designed to confuse. Maybe you are trying to do that too rather than to engage honestly.
Concern is not with the past but with the future and with current trade union messages suggesting that a wage price spiral is now on the cards. This is not academic theorising but in the past press (in relation to the NSW Teachers) and in the press today in relation to the AMWU:
“A key national union is threatening to pursue wage increases of 8% in response to rising inflation, as unions warn of more strikes by workers angry at employers for what they claim are “low-ball” wage offers.
Australian Manufacturing Workers Union national secretary Steve Murphy revealed to The Australian that his union would examine pursuing 8 per cent pay rises”.
Harry, you miss my request of your knowledgeable well written comments… AND
If your comments eg “with current trade union messages suggesting that a wage price spiral is now on the cards. This is not academic theorising but in the past press (in relation to the NSW Teachers) and in the press today in relation to the AMWU:”…
… were followed with AND …
you would seem to not be a single issue expert. ymmv.
Thanks for replying to me, even though I’m hoping you make argument toward overturning JQ & J Stiglitz, Australia Institute etc.
RBA? 4% Inflation Target?
“Stiglitz said the lower bound of Australia’s inflation target, 2%, had been “pulled out of thin air” and there was “no theory or evidence that 2% was the right number”.
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“Nobel prize-winning economist Joseph Stiglitz calls for windfall profits tax in Australia
“Tax is a ‘no-brainer’ after companies’ huge profits during Covid but corporate influence makes it ‘politically difficult’, Stiglitz says
…
“Stiglitz said the lower bound of Australia’s inflation target, 2%, had been “pulled out of thin air” and there was “no theory or evidence that 2% was the right number”.
“Stiglitz said there is a “strong theory” that during a high period of transformation, “it makes a lot more sense” to accept “a slightly higher rate of inflation if it facilitates that kind of transition”.
https://www.theguardian.com/australia-news/2022/jul/19/nobel-prize-winning-economist-joseph-stiglitz-calls-for-windfall-profits-tax-in-australia
JQ said; “The 2-3 per cent target adopted in the 1990s made sense as a way to break the inflationary expectations built up over previous decades, but is now clearly too low. If inflation targeting is to be retained as a policy, the target should be raised to 4 per cent.”
https://johnquiggin.com/2022/04/27/the-6-4-2-solution/comment-page-1/
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Yesterday Gregory J. McKenzie says: “Being in the pockets of the rich and powerful means that the RBA cannot see the wood for the trees. The announcement of a review into the RBA is timely. ”
https://johnquiggin.com/2022/07/18/sandpit-191/#comment-254005
AND…
Gregory J. McKenzie says:
…” Now wages and salaries get less than half of all national income and profits gets close to forty percent.
Australia National Accounts – growth moderates but wage share falls below 50 per cent”
Wednesday, June 1, 2022
http://bilbo.economicoutlook.net/blog/?cat=19
https://johnquiggin.com/2022/07/18/monday-message-board-563/comment-page-1/#comment-254004