And the nonexistence of which makes the substantive case for a shift to more expansionary fiscal and monetary policies stronger than at any time in my life:
1) An inflationary wage-price spiral. Paul Krugman comments:
The Inflation Monster Under the Bed: I’m glad to see Greg Mankiw agreeing with me on the absence of any inflation risk in the current environment. Maybe he should have a word with everyone else in his party.... [W]ages have gone nowhere. Commodity prices, on the other hand, have gone up.... So here are a couple of questions.
Do you see any sign that workers are about to (or are even able to) demand higher wages to compensate for the higher prices of gas and food?
Do you any sign that employers are getting ready to make more generous wage offers?
Have you heard anything about companies feeling that they have room to raise prices by substantially more than the rise in their raw material costs?
The answer to all three questions is clearly no. So what we have is a rise in raw material prices, which will largely get passed on the consumers, but no hint that this is spreading into a wider rise in prices; and with labor costs flat, that means we get a one-time jump in consumer prices, but no persistent rise in inflation. If you want to insist otherwise, you have to tell me how this is supposed to work. And I haven’t heard any coherent explanations to that effect.
2) A recovering labor market:
3) Any loss of confidence in the long-term fiscal stability of the United States of America:
And more from Paul:
The Invisible Bond Vigilantes Have Resumed Their Invisible Attack: It’s truly amazing that Washington debate is dominated by fear of the bond market. And it’s also truly amazing that nobody is suggesting that a government able to borrow long term at a real interest rate of 0.7 percent really should be taking advantage of those rates to finance some much-needed infrastructure investment.
Update: On a related issue, Real Time Economics suggests that it’s not the bond vigilantes we need to be worried about, it’s the “dollar vigilantes”, who push the dollar down on perceptions that American policy is too weak. Lots of things to criticize there, but let me just point out one crucial difference. If investors push up U.S. interest rates, that hurts our economic recovery. But if they push down the dollar, that helps our recovery, by making US goods more competitive on world markets. So if we really face dollar vigilantes (which I doubt), we should send them a thank-you note (maybe written in invisible ink?).