Economists use a lot of jargon, and rightly so. When they refer to “comparative advantage,” or “total factor productivity,” or the “neutrality of money,” they are using that phrase to refer to a concept developed over decades of discussion and debate. Trying to spell that out in plain English every time you invoke the concept would be a huge waste of time and introduce much potential for confusion.
Yet jargon has its own dangers, most notably the dangers that it will be used in aid of pomposity, and/or that it will be misapplied and add to confusion rather than clarity.
So I read George Magnus’s Financial Times op-ed on China’s “structural deflation,” and while it’s innocent of pomposity, I worry that it suffers from the second sin. What, after all, does Mr. Magnus, an economic adviser to UBS, mean by “structural”? In this context, I do not think that word means what he thinks it means.
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Normally, what we mean by “structural” – usually as opposed to “cyclical” – is “something that can’t be cured with higher demand.” Structural unemployment is unemployment that results from a mismatch between skills and what employers need, or bad institutions, or something else, which makes an economy inflation-prone, even at fairly high unemployment rates. Now, there used to be a Latin American school of thought that saw inflation as structural, but I don’t think it ever made much sense. And I really don’t think structural deflation is a useful turn of phrase either.
Suppose China had entered its recent slowdown with 20 percent inflation, and with everyone in the country expecting inflation to remain at 20 percent. Would China have had any problem avoiding deflation? Surely not: Simply by cutting nominal interest rates, the central bank would have been able to cut real rates all the way to minus 20 percent if it wanted, surely enough to overheat any economy.
So what is Mr. Magnus talking about here? I think he’s actually arguing that China requires a substantially negative real interest rate to achieve full employment. This doesn’t mandate deflation; it does, however, mean that low inflation is unsustainable because demand will fall short, and the economy will tend toward deflation. This is pretty much what we mean by “secular stagnation.” Calling it structural deflation just muddies the issue.
And that’s too bad, because I agree with a lot of what Mr. Magnus says. Still, somebody has to act as the jargon police, and if not me, who?