THE BLOG

'Juicing' Employment Is Good

01/22/2013 02:25 pm ET | Updated Mar 24, 2013

The subject of juicing is in the air with Lance Armstrong's confession that he and his cycling teammates injected various stimulants to win races. Yet he told Oprah on her show he didn't think he was cheating. "Scary, huh?"

But when it comes to 'juicing' the U.S. economy after a recession, there shouldn't be any debate on its benefits. Yet bond vigilantes and other austerity advocates think governments are cheating in some way by spending to stimulate economic growth, and create jobs.

My goodness, we have such huge budget deficits, say the deficit hawks and bond vigilantes (who sing the same basic tune). Because deficits continue to grow, inflation is just around the corner. This means their thinking is even scarier. It's as if the Great Recession never happened. Because some inflation is good during an economic recovery. Recessions mean falling prices, after all. Fed Chairman Bernanke has even said we could tolerate 3 to 4 percent inflation -- instead of the current 2 percent -- and it wouldn't hurt economic growth.

2013-01-20-unemployment.jpg

Graph: BLS

In fact, we can't have real inflation until the unemployment rate drops back to 6 to 6.5 percent. One Fed Governor, Narayana Kocherlakota, even wants to wait until it falls to 5.5 percent, which is closer to the historical norm for inflation to kick in. This is why the Fed Governors set such a target before beginning tighten credit.

2013-01-20-inflation.jpg

Graph: USBLS

History has shown there isn't sufficient demand to drive up prices when unemployment is high, which is the same as saying not enough money is in circulation that would drive up inflation. A good recent example is in the 1990s as the accompanying graphs show. When unemployment rose, inflation fell at the same time. Inflation then remained in the 2-4 percent range in the 1990s when unemployment was between 4-6 percent, which seems to be the norm.

Some inflation is good because it not only means companies can raise their prices, but also their profits. Employees' wages will also rise. Younger, faster growing countries generally have higher inflation rates -- such as China with its 7 percent inflation rate -- because their populations are growing faster, so that incomes are rising sharply as they enter a growing middle, consumer class.

We call it austerity when inflation hawks hold sway as they are doing in Europe at the present. This is the lesson that Bernanke's Fed has learned, at least, and why they continue to pump money into our economy by buying up bonds and mortgage-backed securities with successive Quantitative Easing (QE) programs.

The other lesson is Japan, which has had at least two decades of outright deflation, where prices and incomes have been falling and economic growth has stagnated. The U.S. has also been on the brink of a deflationary spiral of stagnating wages and prices. The Japanese lesson of too little stimulus too late has been Bernanke's lesson, who has extensively studied Japan's growth malaise.

So Lance Armstrong's cheating does teach us something. Using monetary stimulants to boost economic growth when unemployment is high is good, because it creates a healthier economy, more jobs, and yes, a winning mentality for the right reasons.