American Consequences - June 2019

have begun to look beyond their existing toolkits (traditional and unconventional) for new ways to spur economy-wide price increases, such as by raising the inflation target, either directly or by pursuing an average and allowing for deviations over time. But today’s surprisingly low inflation also appears to be linked to larger structural forces, which means that it’s not rooted only in insufficient aggregate demand. Technological innovations – particularly those related to artificial intelligence, big data, and mobility – have ushered in a more generalized breakdown of traditional economic relationships and an erosion of pricing power. Taken together, I call these structural forces the Amazon/Google/Uber effect. While the Amazon model pushes down prices by allowing consumers to bypass more expensive intermediaries, Google undercuts companies’ pricing power by reducing search costs, and Uber brings existing assets into the marketplace, further eroding established firms’ pricing power. The Amazon/Google/Uber effect has turbocharged a disinflationary process that began with the acceleration of globalization, bringing far more low-cost production online and reducing the power of organized labor in advanced economies (as has the gig economy more recently). But while these trends will most continue for now, they are likely to confront countervailing inflationary influences that have yet to reach critical mass: The slack in the labor market is diminishing every month, and increased industrial concentration is giving some companies,

Owing to the persistence of low inflation, monetary policies have remained ultra- loose for an unusually long time, raising concerns that the U.S. or Europe may succumb to “Japanification” as consumers postpone purchases and companies reduce investment outlays. So far, that risk has led to protractedly low or negative (in the case of the European Central Bank) policy rates and bloated central-bank balance sheets, despite the potentially deleterious effects of such policies on the integrity of the financial system.

Technological innovations –

particularly those related to artificial intelligence, big data, and mobility – have ushered in a more generalized breakdown of traditional economic relationships and an erosion of pricing power.

In fact, some economic observers favor the ECB not just maintaining negative interest rates, but also restarting asset purchases under its quantitative-easing (QE) program. Likewise, there are those who want the U.S. Federal Reserve to implement an “insurance cut,” despite indicators suggesting that this will be another year of solid economic growth and job creation. Meanwhile, central banks

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June 2019

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