A missed opportunity

It was even worse than I expected.  I expected one good thing (an employer-side payroll tax cut) and lots of ineffective demand stimulus measures.  The actual plan botched the payroll tax cut, and was heavily focused on demand-side measures.

The original stimulus failed because the Fed sabotaged it.  The Fed has only allowed 4% annual NGDP growth during the recovery.  That’s not enough.  But the Fed also seems reluctant to allow an outright collapse in AD—which opens the door to supply-side measures.  Christina Romer recommended an employer-side payroll tax cut, which would help overcome the problem of sticky nominal wages.  It would shift the short run AS curve to the right.  Because the Fed seems reluctant to allow a fall in AD, any increase in SRAS should boost employment.

But Dems don’t seem to understand the principle of incentives, of thinking at the margin.  No matter how hard they try they can’t escape the mindset where only demand matters, or perhaps I should say only demand and “fairness.”  They can’t imagine that business would hire more because their wage costs fall slightly.  “Aren’t they already sitting on a mountain of cash?”  “Isn’t more demand what they really need?”  Yes, but a 2% wage cut is basically equivalent to 2% more AD.  And that’s a lot.  The mistake is to use common sense.  Common sense tells us that if we cut the wage cost for single firm by 2%, that firm wouldn’t be likely to hire many additional workers.  But that thought experiment has no bearing on the impact of an across the board 2% fall in labor costs.  It ignores the indirect effects of the action on other firms.  Ford might hire more workers because their wage costs fall, but also because other firms would respond by hiring more workers and those extra workers would demand more cars.  That’s what common sense misses.

Some will argue that Obama proposes cutting the payroll tax for 98% of firms, and that Fortune 500 firms don’t create many jobs.  But how many firms are there in America?  I’d guess something on the order of 10 million.  The Fortune 500 may no longer be an important part of the US economy, but the biggest 200,000 firms most certainly are.

Even worse, the proposed tax cut is needlessly complicated, especially for small firms that are not computer savvy.  The once simple payroll tax is on the way to becoming as complex as the income tax.  The proposal also includes benefits for firms that pay higher wages, even though (hourly) wage increases will shift SRAS to the left, and thus lower employment.  Now the payroll will have to be divided up in all sorts of complicated ways, with different marginal rates for different categories.  K.I.S.S.

No wonder stocks plunged today. 

The GOP should either kill the entire bill, or pass an across the board payroll tax cut.  The problem is that while the GOP does understand incentives and marginal analysis, they’ve also publicly stated that their “number one priority is defeating Obama,” not bring millions of jobs to suffering Americans.

Back in the real world the dollar is soaring as the euro crisis worsens.  And inflation expectations fell again today.  The Fed is now our only hope.

PS.  I checked and there are about 27 million firms, about 6 million of which have payrolls.  If the latter number applies then the biggest 120,000 firms are excluded.  This census link suggests there are about 109,000 firms with more than 100 employees, and they employ about 2/3 of all workers.  That’s a big deal.


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58 Responses to “A missed opportunity”

  1. Gravatar of effem effem
    9. September 2011 at 08:43

    Does “fairness” not matter to you?

    Why should corpororate profits be at record highs, while corporate taxes are at record lows, and labor share of income is at a record low? Is the right answer really to push things further in this direction?

    Why should the US be ambivalent about the value of labor but fiercely defend the value of capital (bailouts, etc)?

    Why should the US be comfortable allowing China to peg its currency, which is essentially equivalent to letting China dictate the value of labor?

    I understand you have a nice academic answer for each. But this is the real world. I fear if we push harder down this same path we will have people in the streets and the potential for radical, unpredictable change.

  2. Gravatar of Benjamin Cole Benjamin Cole
    9. September 2011 at 08:44

    Please Ben Bernanke, please, please, please read this blog.

    My sentiments exactly–and, in effect, we are following a watered-down Bank of Japan approach. After a real estate bust (commercial value about one-half pre-bust).

    Next, we can start applying leeches to anemia victims. After all, Galileo was wrong, until the Church agreed he was right.

  3. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    9. September 2011 at 08:55

    I think most small firms simply contract out their payroll to specialists, so I don’t know how important the complexity really is. But, most economists recognize that the employee bears the whole burden of the payroll tax, so any cut might pretty quickly become 2% higher wages (at least in unionist firms) with no incentive to hire the unemployed at all.

    And, as to ‘pass this jobs bill now’, what jobs bill? All Obama offered is talk of a jobs bill, not actual legislation.

    And, back on the Republican ranch, Romney (Harvard MBA) is assuring everyone that Social Security can’t be a failure because in the past millions of people lived off of it. Should be some consolation to Bernie Madoff’s investors.

  4. Gravatar of B B
    9. September 2011 at 08:59

    effem wrote:
    “I understand you have a nice academic answer for each. But this is the real world. I fear if we push harder down this same path we will have people in the streets and the potential for radical, unpredictable change.”

    Translation: Before you give reasonable counter-arguments, I’m going to preemptively ignore them. My unfounded fear of some phantom civil war outweighs any argument you will make.

    Just a hunch, but I bet effem mocks conservatives for their unfounded fears of hyperinflation. Oh the sweet delicious hypocrisy.

  5. Gravatar of William J McKibbin William J McKibbin
    9. September 2011 at 09:00

    Let’s face it, the nation’s “too big to fail” banks, military-industrial complex, Federal and state workers, and unionized manufacturing have already received the lion’s share of the Federal recovery dollars to date — that effort has failed — now is the time to put dollars in the hands of Main Street firms and workers, which excludes employees at “too big to fail” banks, Federal and state workers, the defense industry, and unionized manufacturing — a Main Street recovery is the way forward, and that means excluded all of the beneficiaries of the interest groups just described specifically from future recovery plans — now is the time to end the discussion about how to make life easier for “too big to fail” banks, the military-industrial complex, Federal and state workers, and unionized manufacturing — now is the time to talk exlusively about the needs of Main Street, Main Street, and Main Street — – the solution to America’s economic woes will be found along Main Street USA…

  6. Gravatar of Andrew Andrew
    9. September 2011 at 09:01

    can’t really say that stocks are plunging in response to the speech.

    There is likely to be a default on Greek debt this weekend and the markets are preparing for a run on European banks starting next week. Europe and its problems are much more significant for the markets right now than Obama.

  7. Gravatar of bill woolsey bill woolsey
    9. September 2011 at 09:02

    Scott:

    I don’t think it is a matter of “incentives” exactly.

    Once you accept that the law of demand applies to labor, so much leftwing ideology collapses.

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    9. September 2011 at 09:27

    ‘Once you accept that the law of demand applies to labor, so much leftwing ideology collapses.’

    Which hasn’t happened in Seattle yet:

    http://seattletimes.nwsource.com/html/localnews/2016150236_sickleave09m.html

    ———quote———
    Seattle appears poised to become the third city in the country to require businesses to provide paid sick leave to their workers.

    Six of the City Council’s nine members signed onto a plan Thursday that mandates businesses with at least five employees to provide at least five paid sick days, and that, based on a sliding scale, larger businesses provide more time off — up to nine days per year.

    Advocates say the law will enhance public health by allowing workers to stay home when they or their children are sick. The city estimates that as many as 190,000 workers in Seattle, many in professions such as food service with regular contact with the public, receive no paid sick leave
    ———-endquote———

    Pass this anti-jobs bill now!

  9. Gravatar of MikeDC MikeDC
    9. September 2011 at 09:36

    I don’t see any wisdom in another payroll tax cut. Perhaps I’m too unsophisticated to see the way around these obvious problems I see everyone collectively ignoring:

    * It further balloons the structural deficit, bringing what was once described with unintentional hilarity as a “long-term” problem and is now described as a “medium-term problem that much closer to term.

    * It creates further inevitable fighting over whether it’ll become permanent.

    * By virtue of being temporary, it loses a big chunk of its supposed stimulative oomph.

    * It sets up yet another ridiculous political fight, whereby, at their most sensible, the Republicans would argue for a cut on the business side, and then be pilloried by Democrats for turning a tax cut on “workers” into a tax cut on businesses”.

    * Even notwithstanding all of those show-stopping problems, it’s extremely doubtful to me that the empirics are on its side. It won’t help employ “millions” of currently unemployed workers. Certainly not in the current monetary policy environment.

    * Bonus: consider where the labor market is really slack. Unemployment among highly skilled workers is about 5% and among low skilled workers is something like 15%. Over the last few years, we’ve driven up the minimum wage by over 20%, and the looming effects of the Obamacare legislation are projecting to add another 50-75% on top again over the next couple years. In that context, I don’t see how anyone can think a 2% reduction in the payroll tax, obtained at expense to in terms of regulatory, political, and long-term economic costs, makes any sense at all.

  10. Gravatar of W. Peden W. Peden
    9. September 2011 at 09:45

    effem,

    “I understand you have a nice academic answer for each. But this is the real world. I fear if we push harder down this same path we will have people in the streets and the potential for radical, unpredictable change.”

    Would it be fair to translate that as “there may be a perfectly justifiable reason why I’m wrong, but there could be anger if we don’t do what I want, so we should do what I want”?

    What makes Barack Obama and Michelle Bachmann qualified to decide the share of income between workers (labour) and pensioners (capitalists)?

  11. Gravatar of W. Peden W. Peden
    9. September 2011 at 09:47

    I wouldn’t mind a payroll tax cut, if it was paid for by public sector layoffs/wage restraint. However, apart from the very low-wage end of the spectrum, what evidence is there that payroll tax cuts have a substantial effect at reducing unemployment?

  12. Gravatar of TravisA TravisA
    9. September 2011 at 09:48

    A theoretical question: if the Fed targeted NGDP levels at 5%, do regulations make any difference for employment over the long run? I understand that regulations could reduce our wealth and GDP, but if the gov’t imposes some work requirement, and if the Fed targets NGDP, I would guess that real wages would eventually drop so that full employment would soon be achieved.

    And wouldn’t this same reasoning apply to all regulations, whether environmental, safety or whatever? Wealth and real GDP can drop as a result of the regulations, but full employment should be achieved if the Fed does its job.

  13. Gravatar of StatsGuy StatsGuy
    9. September 2011 at 10:13

    Scott:

    “Yes, but a 2% wage cut is basically equivalent to 2% more AD.”

    OK my friend, you just jumped the shark. That statement is patently and demonstrably false. It’s sloppy thinking at best, and undergrad thinking at worst. You are usually better than that.

    If the AD curve is vertical (totally inelastic), then a reduction in cost goes directly to the bottom line without any increase in production. It’s, essentially, a completely distributional activity which takes money from workers and puts it into the hands of employers, who MAY OR MAY NOT spend it or invest it. Dems argue it’s unlikely they would invest it because they ALREADY have cash to invest (and access to collateralized credit, if they want) and are choosing not to invest.

    Your assertion (1 to 1 relationship) only works if the demand curve has an elasticity of ~1. If – as republicans claim – it’s COST of business that is preventing investment, then one would think the AD curve is very flat. A small decrease in cost to supply (say, removing regulations) would generate a big increase in output (and therefore demand). Forgive me for being HIGHLY skeptical. I suggest you leave Waltham, indeed the Boston area (which is an island of not-too-sucky in a see of suck). People are PAYING DOWN DEBT, FINALLY. AD is relatively inelastic (at current NGDP and monetary expectations). This is good, true, but then where’s the investment? Savings? Yes. Investment? No. It’s not happening, and the only way we seem to be able to drive investment is by creating AD through credit expansion, but this is limited due to creditworthiness (something explicitly missing in your model).

    You’ve been on a roll lately, but today’s post is swiss cheese.

    Don’t believe any of the arguments about relatively inelastic AD are credible? The CBO just published a report on the efficacy of different pieces of the 2008 stimulus in generating jobs.

    http://money.cnn.com/2011/09/08/news/economy/stimulus_jobs_record/

    “The nonpartisan Congressional Budget Office estimates that the parts of the program that got the most criticism — actual spending on projects and aid packages — was the most effective in creating jobs. Tax cuts for middle income workers were less effective while tax cuts for the wealthy were deemed the least effective.”

    And you want to know why Dems don’t trust the arguments made by economists on the right? Ugh.

  14. Gravatar of W. Peden W. Peden
    9. September 2011 at 10:16

    TravisA,

    It depends on whether the regulations change the natural rate of unemployment. If the Federal Government set and enforced a minimum wage of $50 an hour, then monetary policy is not going to be able to prevent a (huge) increase in the trend rate of unemployment.

  15. Gravatar of John John
    9. September 2011 at 10:22

    I think one thing economists and the public at large tend to ignore is the amount of wasteful complication introduced by the Obama administration. The Dodd-Frank bill is already spawning a massive cottage industry of regulatory compliance firms (see “Feasting on Paperwork” in CNBC today). These firms don’t produce anything or help direct capital, they simply help companies avoid lawsuits by the government. Ditto for the supposed “tax relief.” It requires an army of non-productive lawyers and accountants to sort through this stuff. This highly dampens the recovery and kills jobs in the long run.

    The same waste applies with creating “green jobs.” These economically non-viable and half-hearted efforts to create a green economy really just suck resources away from firms that actually move the economy forward. Cut the wasteful spending, simplify the tax code, roll back regulation, and the problem of “insufficient aggregate demand” will solve itself without having to resort to unfair and instability introducing inflation. Good economic policy encourages maximum production rather than jobs digging and filling ditches.

  16. Gravatar of Lars Christensen Lars Christensen
    9. September 2011 at 10:43

    Scott, any attempt at fiscal stimulus in my view will always fail and the drop in the US stock market today in my view is completely unrelated to the US news flow. Its all euro zone trouble…

    I have that 1931-feeling…to quote a friend of my mine: “Make a note of today, Friday 9 September 2011. In years to come this will be remembered as the day, when the Euro entered its terminal phase…”

  17. Gravatar of Alex Godofsky Alex Godofsky
    9. September 2011 at 11:15

    If the underlying cause of the non-neutrality of money is downward sticky wages, and you reduce all wages without reducing income by cutting the employer-side tax, shouldn’t that basically fix the problem? If all of the ‘stuck’ wages that should have adjusted downwards, are reduced below the market-clearing rate (again, WITHOUT reducing income!), that should allow employers to adjust wages back up and the labor market should clear.

    How does this fail?

  18. Gravatar of Alex Godofsky Alex Godofsky
    9. September 2011 at 11:15

    Sorry, the previous comment should have been @StatsGuy.

  19. Gravatar of malavel malavel
    9. September 2011 at 11:43

    Why not do a revenue neutral payroll tax shift from employers to employees?

  20. Gravatar of bill woolsey bill woolsey
    9. September 2011 at 11:50

    Godofsky:

    I think you are right, but 2% is only a small fraction of the needed reduction in nominal wages.

    Scott is assuming that nominal expenditure is given. If wages drop 2%, then prices drop 2%, then real expenditure rises 2%, and real output rises 2%. Or, at least, that is the way I see it.

    Scott may be going with an assumption that total spending on labor will be constant (really increasing slowly.) And if the amount that must be spent (wages) drop 2%, then employment rises 2%. But I am sure Scott recognizes that is just a rough estimate.

  21. Gravatar of W. Peden W. Peden
    9. September 2011 at 11:51

    Malavel,

    As far as new workers go, both are part of the same cost for the employer. The only difference I can imagine that making would be to counter sticky-wages somewhat (if one makes the safe assumption that employees aren’t currentely in a position to bid up wages to make up for the increased taxation).

  22. Gravatar of TravisA TravisA
    9. September 2011 at 11:52

    W. Peden, if the minimum wage were set to $50, there would initially be large amounts of unemployment, but if the Fed stuck to a 5% NGDP growth rate, that unemployment would be reduced through inflation until the real rate for the minimum wage dropped back to its original amount.

  23. Gravatar of MikeDC MikeDC
    9. September 2011 at 12:02

    @TravisA… in 40 years or so.

  24. Gravatar of W. Peden W. Peden
    9. September 2011 at 12:05

    TravisA,

    What if the minimum wage was indexed to the GDP deflator?

  25. Gravatar of Floccina Floccina
    9. September 2011 at 12:35

    I would look for a way to turn the unemployment benefit into a wage subsidy. There has to be a cheap way to encourage work.

  26. Gravatar of Morgan Warstler Morgan Warstler
    9. September 2011 at 12:45

    TravisA,

    What if we want people to KNOW they aren’t worth what they think?

    What if the whole point of making productivity gains is for every distant agent to have detailed information of the comparable value of every skill they have for might gain?

    What if what matters is knowing dishwasher beat dog walker by 27%?

  27. Gravatar of Floccina Floccina
    9. September 2011 at 12:50

    “Yes, but a 2% wage cut is basically equivalent to 2% more AD.”

    How can this be true if the Fed Gov needs to borrow money taking it out of the economy to make up the loss in FICA?

  28. Gravatar of Bob Dobalina Bob Dobalina
    9. September 2011 at 13:03

    Friends–

    Scott’s FAQ is fine but for a few friends I’d like to find definitive single-link “NGDP targeting for the relatively savvy person who is not a professional financial economist” page that explains why and how it would work. Bonus points if it explains the role of the “portfolio channel” and how the Fed actually creates the inflation.

  29. Gravatar of malavel malavel
    9. September 2011 at 13:08

    W. Peden, that was the idea, to counter the sticky wages. Sounds like a no-brainer to me.

  30. Gravatar of malavel malavel
    9. September 2011 at 13:11

    Dobalina,

    Here are a two links for NGDP by Sumner.

    http://www.adamsmith.org/think-piece/economy/the-case-for-ngdp-targeting-%E2%80%93-lessons-from-the-great-recession

    http://www.cato-unbound.org/archives/september-2009-monetary-lessons-from-the-not-so-great-depression

  31. Gravatar of malavel malavel
    9. September 2011 at 13:13

    Retrying with only one link…

    Dobalina, try this one.

    http://www.adamsmith.org/think-piece/economy/the-case-for-ngdp-targeting-%E2%80%93-lessons-from-the-great-recession

  32. Gravatar of bill woolsey bill woolsey
    9. September 2011 at 13:31

    Floccia,

    I probably was wrong above. if the Fed were doing as it should–targetting nominal expenditure, I would be right.

    But Scott, I imagine is assuming,realistically, inflation targeting.

    To keep inflation on target, nominal expenditure must rise.

    With NGDP targeting, the effect would be like a 2% increase in nominal expenditure with wages and prices on their current trajectory.

    Your intution of complete crowding out, the tax savings by employers being matched by reduced expenditures of those buying government bonds is a good starting place. Interest rates might change, the demand for money might change, and so keeping nominal GDP on target might require some change in the quantity of money. If an increase would needed, then when the government borrows (rather that tax employers,) it borrows newly created money.

    Anyway, under the scenario of NGDP targeting, the lower cost of employers results in them lowering prices, and with a constant flow of money expenditures on output, that is an increase in real expenditure. More stuff can be pruchased at lower prices. Real sales rise. Firms produce more. And they hire more.

    The effect is the same as a 2% increase in money expendituers with prices staying the same, which is what we can expect without the 2% reduction in labor costs to employers.

    Now, in Scott’s scenario, with inflation targeting, the Fed must expand the quantity of money (or something) to prevent the deflation. Rather than price falling, they are unchanged. The Fed causes an increase in nominal expenditure on output. It seems to me that it must generate a more than 2% increase in real expenditure on output.

    Of course, given the Fed’s attitude about things, perhaps the best way to see it is that we would be somewhere between. Probably inflation would be below target again, (Darn, says the Fed, inflation is a little low again,) but real expenditures and real output would grow somewhat more than 2%.

    (Since total costs won’t drop exactly with payroll costs, this isn’t exactly right either.)

  33. Gravatar of W. Peden W. Peden
    9. September 2011 at 13:55

    Malavel,

    That might prevent people from going out of work, but it wouldn’t add jobs, as far as I can tell.

  34. Gravatar of Now it´s up to Bernanke and the FOMC | Historinhas Now it´s up to Bernanke and the FOMC | Historinhas
    9. September 2011 at 14:12

    [...] as Scott Sumner says: The mistake is to use common sense.  Common sense tells us that if we cut the wage cost [...]

  35. Gravatar of marcus nunes marcus nunes
    9. September 2011 at 14:14

    Illustrating the argument pro Payroll tax cut on employers in Pictures:
    http://thefaintofheart.wordpress.com/2011/09/09/now-it%C2%B4s-up-to-bernanke-and-the-fomc/

  36. Gravatar of cassander cassander
    9. September 2011 at 14:17

    Scott, what do you think would do more for the economy, this 400 billion dollar plan, or mailing each household a for 4000 dollars?

  37. Gravatar of Rick Perry Rick Perry
    9. September 2011 at 14:17

    At least they aren’t evil like me.

  38. Gravatar of Morgan Warstler Morgan Warstler
    9. September 2011 at 14:29

    Going back to when I got here… things Scott could do a far better job explaining:

    1. He doesn’t care about inflation, BUT he will often WANT inflation to raise NGDP.

    2. Forget the stupid hot potato, the Fed BUYS TBill #1, which means the guy who was going to buy TBill #1, has to buy something else – that’s the mechanism for printing money. Scott doesn’t care / or doesn’t believe Goldman-Sachs uses this to their advantage.

    3. Scott never ever, never ever, never ever talks about pissing on booms OR cheering for lower prices under his regime. As such the REAL answer to many questions about the current crisis, is that the current situation would never have been able to happen.

    4. Lastly, Scott should hap on how he thinks this leads to less government.

  39. Gravatar of MTD MTD
    9. September 2011 at 14:45

    Scott – Is there any way for pro-growth tax and regulatory reforms to boost V without the Fed having to commit to more M? Your AS/AD analysis suggests we would get more NGDP via the Fed resisting the disinflationary impulses set off by supply side tax cuts shifting SRAS to the right. We have highest ratio of money and spendable assets relative to nominal income since 1959, i.e. velocity has collapsed. Base velocity is at 70 year lows. Any chance of a Viagra pill for velocity via proper tax reforms? Or does BB have to shift the AD curve to make it work?

  40. Gravatar of Tomasz Wegrzanowski Tomasz Wegrzanowski
    9. September 2011 at 14:56

    I probably mentioned it a few times, but:

    Dear StatsGuy,

    Start a blog. It would be awesome.

  41. Gravatar of Scott Sumner Scott Sumner
    9. September 2011 at 16:13

    effem, You said:

    “Does “fairness” not matter to you?”

    No “fairness” does not matter to me. The scare quotes are meant to indicate what the Dems regard as fairness. But fairness does matter to me. I just don’t happen to think taxes levied on corporations are actually paid by corporations. I don’t think the poor are helped by tax breaks for employers that exclude the employers that actually hire most workers.

    You said;

    “Why should the US be comfortable allowing China to peg its currency, which is essentially equivalent to letting China dictate the value of labor?”

    China pegging its currency has nothing to do with the price of US labor. In any case, the China bashers want tariffs, which would hurt the poor, as China’s poor are far worse off than America’s poor. I can’t understand how any liberal could favor punitive actions against China.

    Corporate profits as a share of GDP aren’t that high, or that different from historical trends.

    “I understand you have a nice academic answer for each. But this is the real world. I fear if we push harder down this same path we will have people in the streets and the potential for radical, unpredictable change.”

    It has nothing to do with being an academic. It’s about seeing the real problem—UNEMPLOYMENT. We need monetary stimulus, not stupid tax and tariff policies.

    Ben, Bernanke has to see that the public is desperate for more stimulus. But it doesn’t want bigger deficits. That means we must have monetary stimulus. The Fed can’t keep arguing that there’s no problem. They can’t keep telling us they have lots of ammunition but don’t think it’s needed. We all agree we need more jobs, it’s just a question of whether fiscal or monetary policy will deliver the jobs. Now we know it won’t be fiscal policy. What options are left?

    Patrick, But if what you say about wages soon rising is true, then we really don’t need any stimulus at all, as our problems are 100% structural. I’m assuming that sticky wages are part of the problem. I may be wrong, but that’s my working assumption.

    William, I have no problem with cutting the wages of public employees.

    Andrew, Fair point, it wasn’t just the speech. But the market today shows what an irrelevancy Obama is. We have deep problems than can only be addressed with monetary stimulus. This action was pathetically inadequate to address the problem at hand.

    Bill, Good point.

    Patrick, We are making the same mistakes as the Europeans made in the 1970s. I’m increasing worried we’ll end up with French-style labor market.

    MikeDC, An employer-side cut makes sense, unfortunately they gave the cut to employees, which does nothing.

    W. Peden, I’m not an expert, but I think some countries have had success adjusting their payroll taxes in recessions. In theory, it should boost AS.

    TravisA, Most regulations don’t affect unemployment in the long run. Things like unemployment insurance and minimum wages may have some effect.

    Statsguy, I stated right in the post I was assuming the Fed was targeting inflation or NGDP. I agree that my argument rests on that assumption. NGDP targeting is a unit elastic AD curve, if you want to think of it that way. If the Fed reacts to lower business costs by reducing NGDP then I 100% agree that Krugman is right and I am wrong. But why would Bernanke do that?

    John, I favor low and stable rates of NGDP growth. There is nothing at all unstable or unfair about NGDP plugging along at 5% a year. Inflation is a number pulled out of the air by Washington bureaucrats. I can’t believe that conservatives still pay attention to it. NGDP is something that actually exists in the real world, the total dollar value of spending on goods and services.

    Lars, Good point–see my answer to Andrew.

    Alex, Nothing is a sure thing–it might just boost profits. But I think it would boost employment.

    malavel, That’s fine with me.

    Floccina, That’s fine with me.

    cassander, I have no idea what would happen if everyone was given $4000. It would certainly change expectations, but how? And how would the Fed react.

    Rick Perry, Did Morgan tell you about this blog? BTW, just because I think you are the devil, doesn’t mean I wouldn’t take a job in a Perry administration.

    Morgan, I have talked about how it leads to less government. No bailouts of GM. No big “stimulus” bills.

    MTD, I don’t know about taxes, but if Congress repeals IOR that would boost velocity.

    Tomasz, I agree about Statsguy.

  42. Gravatar of W. Peden W. Peden
    9. September 2011 at 16:33

    Scott Sumner,

    It should boost AS to some extent, but isn’t that extent determined by how many employees are at the margin? If the answer is “not many”, the general payroll tax cut could be a very expensive way of accomplishing what could be achieved more cheaply through more general means (including payroll tax cuts targeted at the low paid).

  43. Gravatar of StatsGuy StatsGuy
    9. September 2011 at 16:43

    @ Alex

    “If the underlying cause of the non-neutrality of money is downward sticky wages, and you reduce all wages without reducing income by cutting the employer-side tax, shouldn’t that basically fix the problem?”

    How, exactly, are we reducing all wages without reducing income in a macro context unless you are printing money (aka, running a bigger deficit)? When you offer a big worker tax credit without printing money, that means you either raise general taxes (depressing AD) or you cut government spending. The only way your argument works (if AD is inelastic) is if it’s framed purely in terms of supply side efficiency – your argument becomes a supply argument about whether govt. spending/investment has more impact than private savings, __but that is a separate debate__.
    If the goal is to merely run a bigger deficit to inject money and thus expand the money supply, there are plenty of ways to do that, and the big question should be which offers the biggest return on the investment.

    In the current environment, IMHO, the _primary_ cause of non-neutrality is a particularly sticky non-wage price called “debt service”. If wages earned drop, total nominal income drops, and a larger portion of that nominal income goes to debt service which is a perfectly inelastic expense(depressing AD further). Welcome to debt-deflation. If wages paid drop (due to a subsidy from general tax expenses that is paid for by a reduction in other spending) and AD is inelastic (and the expected return on expanding capacity via investment is thus low), we’ll just see a buildup in cash reserves at the expense of an increase in government debt. It’s a PURE TRANSFER from the public purse to wage-payers.

    If the expectation is that the govt. debt will be monetized, then yes, that will increase AD in a very inefficient manner, and wage-payers will reap the lion’s share of the benefit. However, TIPS do not suggest that the market expects govt. debt will be monetized… So we’re just bloating public debt to increase private savings (and yes, that’s _exactly_ what FRED’s data says is happening).

    The goal of the current regime seems to be to transfer as much real wealth to cash-owners as possible, which means printing just enough money that the system does not implode. Ich Bin Ein Nipponese.

  44. Gravatar of StatsGuy StatsGuy
    9. September 2011 at 16:51

    Tomasz, thanks, but the truth is Scott usually has more interesting things to say… and I have young kids which probably occupy more time than Scott’s broken plumbing. Occasionally, James Kwak at baseline lets me post. Last one on why money is a giffen good:

    http://baselinescenario.com/2011/08/15/money-as-the-ultimate-giffen-good/

  45. Gravatar of Morgan Warstler Morgan Warstler
    9. September 2011 at 17:53

    Scott,

    New jobs don’t come / won’t come from those old companies. That is just a fact.

    They will come from newcos that spawn out of the 2% of SMBs that make 50% of SMB revenue.

    New job growth is ALL ABOUT greasing the skids so newcos come out of the gate at a million miles per hour.

    You are focused on the wrong thing. That’s why Immelt sitting in the catbird seat during the speech was so retarded.

    But Obama is a retard.

    It is time to start making it clear that he is mentally defective.

    You can’t expect a moral party to aid and abet his mental deficiency.

    HE HAS NO INNATE RIGHT TO BE LIBERAL. No one does. being liberal is WRONG.

    As such, all of this is not the Fed’s fault. Or the GOP’s fault.

    Obama was ALLOWED to be Clinton.

    He chose not to.

    He is causing the human suffering.

    He is guilty.

  46. Gravatar of Why Aren’t More Companies Hiring? Here Are 8 Reasons | Real And Fun Why Aren’t More Companies Hiring? Here Are 8 Reasons | Real And Fun
    9. September 2011 at 20:53

    [...] imagine that business would hire more because their wage costs fall slightly,” Scott Sumner writes, who recommended a payroll tax cut for all companies regardless of [...]

  47. Gravatar of Alex Godofsky Alex Godofsky
    10. September 2011 at 01:06

    @StatsGuy

    How, exactly, are we reducing all wages without reducing income in a macro context unless you are printing money (aka, running a bigger deficit)?

    Isn’t the entire point of a stimulus bill to be deficit-financed spending and/or tax cuts?

  48. Gravatar of StatsGuy StatsGuy
    10. September 2011 at 05:18

    @Alex

    If the deficit is financed by printed money, it’s stimulative. Even if horribly mis-spent, it can help with the AD problem in the event of a liquidity trap. If the deficit is NOT financed by printed money (and/or we’re not in a liquidity trap), that’s not the case. Then a deficit will only be stimulative if it’s _spent well_ (it’s a good investment), which is a supply side argument. I have to say, that for a candidate who ran on a platform of competence, Obama has not impressed.

    Even if we are in a liquidity trap, that’s still no reason to waste money when there are plenty of things that need to be done. For example, 99 weeks of unemployment? There’s nothing better we can be doing with money than to pay people NOT to work for an extended length of time (thus erasing skills and making them damaged goods)?

  49. Gravatar of StatsGuy StatsGuy
    10. September 2011 at 05:42

    @ssumner

    “If the Fed reacts to lower business costs by reducing NGDP then I 100% agree that Krugman is right and I am wrong. But why would Bernanke do that?”

    1) Because the lowered business costs are not perceived to be permanent or sustainable, and come at a cost of increased future taxes (that will depress future AD)

    2) Because the Fed (as an entity) is really an inflation targeter with an asymmetric incentive function, and businesses know that, so they know that as soon as AD starts picking up the Fed will compensate (to avoid criticism) and the wage subsidies will likely disappear, so they don’t make long term investments – instead they save money

    3) Even if the Fed does target NGDP, recognize that it might take a LOT of Fed action if new money is being injected into a group where the marginal propensity to spend or invest is low. It will work ultimately, but it might require a Fed commitment that the Fed finds hard to follow-through with over a prolonged time. (Markets WILL test a Fed commitment to NGDP targeting, and the Fed needs to show it means what it says.)

    In the mean time, wage-payers are pocketing a lot of money, and class warfare resumes.

    In an ideal world, if we were going to implement this policy, BOTH THE FISCAL AND MONETARY AUTHORITY would NGDP target. The policy would go as follows: Over a prolongued period, the US would provide a hiring/employment credit that is linked to the NGDP target. That is, if NGDP came in too high, the wage credit would decline. If NGDP came in too low, it would increase. This would be built into long term policy, and the wage credit would be supported directly by Fed financing.

    Maybe you should suggest this? It might be something that get Krugman finally on board? It’s basically your NGDP scheme, but the mechanism for Fed action isn’t (just) buying and selling assets, but instead (in addition) subsidizing or taxing labor.

  50. Gravatar of Scott Sumner Scott Sumner
    10. September 2011 at 06:20

    W. Peden, That’s a much better argument. Of course the tax actually maxes out at about $100,000, so it already excludes super-rich people like me (at the margin.) Maybe it could be capped slightly lower.

    I’m not sure what you mean by “how many employees are at the margin”–it seems to me that what matters is how many potential employees are at the margin.

    Statsguy, I assumed the Fed is targeting income or prices, and they don’t need the government to run deficits to do that.

    Morgan, I said nothing about old companies. Middle size companies (often new) are where the jobs are–check out the stats in my census link.

  51. Gravatar of Alex Godofsky Alex Godofsky
    10. September 2011 at 07:43

    @StatsGuy

    If the deficit is financed by printed money, it’s stimulative. Even if horribly mis-spent, it can help with the AD problem in the event of a liquidity trap. If the deficit is NOT financed by printed money (and/or we’re not in a liquidity trap), that’s not the case. Then a deficit will only be stimulative if it’s _spent well_ (it’s a good investment), which is a supply side argument.

    But the purpose of a deficit-financed employer-side payroll tax cut would not be to directly increase aggregate demand, but to directly attack wage stickiness without reducing AD. If wage stickiness goes away (by assumption, after the cut all wages either don’t need to adjust, or only need to adjust upwards) then as far as I can tell there’s no reason for the recession to persist.

  52. Gravatar of Alexander Hudson Alexander Hudson
    10. September 2011 at 07:48

    Scott,

    I’m struggling to see the missed opportunity here. Was there any indication that if Obama gave a speech in which he advocated all the right policies (where by “right policies” I mean the ones you’ve suggested here) that Republicans would magically fall into line? If anything, the missed opportunity came during the debt ceiling showdown, when the administration suggested the employer-side payroll tax cut and Republicans trashed it. If Congress does pass it this time around, it will be because Obama specifically didn’t mention it in his speech to millions of Americans.

    A lot of people thought the administration blundered when they suggested the employer-side cut several months back, because then it became associated with Obama and R’s couldn’t support it. The R’s need some room if they’re going to pass anything.

    Yes, politics are a bitch.

  53. Gravatar of Why Aren’t More Companies Hiring? Here Are 8 Reasons – latest updates | B.log Why Aren’t More Companies Hiring? Here Are 8 Reasons – latest updates | B.log
    11. September 2011 at 01:39

    [...] imagine that business would hire more because their wage costs fall slightly,” Scott Sumner writes, who recommended a payroll tax cut for all companies regardless of [...]

  54. Gravatar of President Obama’s Job Speech – Kevin Caves, Paul Krugman, and Scott Sumner « Portrait of the Economist as a Young Man President Obama’s Job Speech – Kevin Caves, Paul Krugman, and Scott Sumner « Portrait of the Economist as a Young Man
    11. September 2011 at 05:51

    [...] http://www.themoneyillusion.com/?p=10704 [...]

  55. Gravatar of Full Employment Hawk Full Employment Hawk
    11. September 2011 at 13:31

    “HE HAS NO INNATE RIGHT TO BE LIBERAL. No one does. being liberal is WRONG.”

    There is a basic, unbridgable chasm between people who beliveve that societies should be based on:

    1. A dog-eat-dog, everyone should have to sink or swim on his own, winner take all, and the devil take the hindmost basis,

    or

    2. A compassionate, caring “we are all in this together” basis.

    Each side believes that the other side is wrong and, often that taking positions that are immoral.

    The best such people can do is to agree to disagree and rationally discuss their differences. But frequently when facing each other they react angrily with each other and engage in name calling.

    But arguing that in a free, democratic society no one has the right to be a liberal is totally inconsistent with the tenets of Libertarianism.

  56. Gravatar of Full Employment Hawk Full Employment Hawk
    11. September 2011 at 14:00

    “Once you accept that the law of demand applies to labor, so much leftwing ideology collapses.”

    When firms are unable to sell all they desire and are therefore sales constrained, they are off their notional labor demand curve. That is, the law of demand derived from standard microeconomics does not hold. This has been demonstrated using the disequilibrium theory derived from Clower’s dual-decision hypotheis. One major mischief done by the New Classical Economics is that this very promising approach was suppressed and by now has largely been forgotten. One minor exception is in Advanced Macroeconomics by David Romer, 4th. ed. pp. 246-249.

    The following three sentences are especially relevant. (Under such conditions) “Firms’ demand for labor is determined by their desire to meet the demand for goods. Thus as long as the real wage is not so high that it is unprofitable to meet the full demand, the labor demand curve is a vertical line in employment-wage space. The term effective demand for labor is used to describe a situation, such as this, when the quantity of labor demanded depends on the amount of goods that firms are able to sell.”

    A more complete coverage can be found in Chapter 5 of Macroeconomic Theory by Jean-Pascal Bennasy.

    When an economy is depressed and transactions take place and are finalized when markets to not clear, many of the relationships that are derived from the assumptions that markets are clearing do not hold. If macroeconomics is to be able to explain how an economy behaves when it is depressed this “this old Knowledge” from the 1960s and 70s needs to be recovered and reincorporated into mainstream macroeconomics.

  57. Gravatar of StatsGuy StatsGuy
    11. September 2011 at 16:30

    Alex, I don’t think the problem is wage stickiness at all, but rather debt (transaction costs associated with default and marginal changes to value of assets when wealth distribution causes ownership changes – aka, rich people don’t need 50 middle class houses for personal consumption). A lot of people would be willing to take lower paying jobs, IF they could find them and IF it was enough to cover debt payments. IMHO, in a deleveraging environment AD is relatively inelastic, unless as ssumner says the Fed NGDP targets (but then we might not be in a deleveraging environment anymore?). Yet if wage subsidies are just the mechanism by which the Fed NGDP targets – the argument for or against this mechanism instead of others depends on a lot more than restoring AD (since any of the NGDP targeting mechanisms could do that).

  58. Gravatar of Scott Sumner Scott Sumner
    12. September 2011 at 14:15

    Alexander, I don’t quite follow–surely what I propose is just as acceptable to the GOP as the Obama proposal–perhaps a bit more so. Maybe the GOP won’t pass anything, but one might as well propose something effective.

    Today I heard he plans to finance the proposal with tax increases on the rich–so there will be no stimulation from deficit spending. I have no idea what he’s trying to accomplish, he seems opposed to both supply-side and demand-side policies, and relies on gimmicks like income redistribution.

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