Tuesday, November 16, 2010

Hard Core GOP Economics

This month's core inflation numbers show -- surprise! -- continued deflation on big ticket items despite QE2.

The producer price index climbed 0.4 percent from the prior month, Labor Department figures showed today in Washington. Economists projected a 0.8 percent rise in October, according to the median estimate in a Bloomberg News survey. The so-called core measure, which excludes volatile food and energy costs, decreased 0.6 percent, the most since July 2006.

Companies have little scope to raise prices to recoup higher commodity costs as the expansion has cooled from the first half of 2010 and unemployment is stuck near 10 percent. The figures underscore the Federal Reserve’s decision this month to purchase another $600 billion in assets to help spur growth and reduce the risk of deflation, or a prolonged drop in prices.

“Wage pressure is very little and this has only limited potential for boosting price levels,” said Robert Dye, a senior economist at PNC Financial Services Group Inc. in Pittsburgh, who correctly forecast the gain in the PPI. “If you look at specific sectors like commodities, we are seeing some inflation.”

Producer prices were projected to rise 0.8 percent, according to the median of 76 forecasts in a Bloomberg News survey. Estimates ranged from gains of 0.4 percent to 1.4 percent, after a 0.4 percent rise in September.

Excluding volatile food and energy costs, economists in the survey had forecast a 0.1 percent gain for a third month. 

People aren't buying.  Demand will only be created by lowering unemployment and creating jobs.  And jobs will only be created if there's demand for products.  We're stuck in a spiral and the government's not going to be allowed to do much more of anything.

But think where prices would be without stimulus right now.  We'd be sliding down a deflationary slope if it wasn't for the additional money we've spent.  Meanwhile, companies continue to hoard cash.  Something's got to give, and soon.

So what does this mean politically?  There's no inflation.  There's plenty of speculation in commodities right now, just like 2 years ago (Remember $4 a gallon gas?) but that's being kept in check by the lousy economy.

Most importantly, it reveals what the GOP jobs plan is.

Rep. Mike Pence (R-IN) is so displeased, in fact, that he plans to introduce legislation today that would entirely remove the Fed’s mandate to ensure full employment:
Rep. Mike Pence of Indiana, a top House Republican, said he plans to introduce legislation Tuesday to end the Federal Reserve’s dual mandate, which requires the central bank to balance both employment and inflation concerns in its monetary policy…“The Fed’s dual mandate policy has failed,” Pence said in a statement. “For a record 18th straight month the nation’s unemployment rate is at or above 9.4 percent. It’s time for the Fed to be solely focused on price stability and not the recently announced QE2 which will monetize our debt and trigger inflation.
Pence is joined in his push by Sen. Bob Corker (R-TN), who released a statement today saying, “It is time that we work to clarify the mandate of the Federal Reserve. Providing our central bank with a clear and explicit focus on keeping inflation low will serve America better than the broader mandate approach we have today.”

The problem is inflation is so low that we're risking deflation, so the GOP argument is failing on its own numbers.  The argument is that inflation risk means we can't do anything for the unemployed...but there's no inflation.

Republicans just don't want to spend money on jobs.  That's their jobs program:  do nothing.  Refuse to do anything in Congress about unemployment, tie the Fed's hands so they can't do anything about unemployment, and then blame Democrats when unemployment fails to improve.

Keep that in mind.  No monetary policy, no fiscal policy, just tax cuts for the rich.  That'll solve everything.

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