So you want THESE GUYS to run stabilization policy?
Lots of people aren’t happy with Federal Reserve policy, which has led to a call for use of fiscal stimulus. Of course ad hoc policies don’t work, if we are serious about fiscal stabilization policy, we need a coherent rule, not a set of sporadic actions. Even Keynesians like Eggertsson and Woodford have now accepted the rational expectations view that it’s the future expected path of fiscal stimulus that matters, not spending this month. So how much coherence could we expect from Congress in the area of stabilization policy?
Start with a few facts:
1. Congress raised the minimum wage by roughly 40% between 2006 and 2009. How’s that working out for youth employment?
2. The past 3 1/2 years saw the slowest NGDP growth since Herbert Hoover was president.
Looks like it wasn’t exactly the best time for a huge rise in the minimum wage, doesn’t it? Not according to this New York Times story, indeed the 40% increase was far too small, it should have been closer to 100%:
As the nation’s economy slowly recovers and income inequality emerges as a crucial issue in the presidential campaign, lawmakers are facing growing pressure to raise the minimum wage, which was last increased at the federal level to $7.25 an hour in July 2009.
State legislators in New York, New Jersey, Connecticut, Illinois and elsewhere are pushing to raise the minimum wage above the federal level in their own states, arguing that $7.25 an hour is too meager for anyone to live on.
Massachusetts lawmakers are pushing for a big jump, with the Legislature’s joint committee on labor approving a measure last month that would raise the minimum to $10 an hour, which would leapfrog Washington State, whose $9.04 minimum is the nation’s highest.
Voters in Missouri may be asked to vote on a minimum wage referendum in November.
These moves are giving momentum to an effort to persuade Congress to embrace a higher national minimum wage. Some liberal and labor groups, capitalizing on the energy and message of the Occupy Wall Street movement, are urging Senator Tom Harkin, Democrat of Iowa and chairman of the Senate Labor Committee, to head a Congressional effort to raise the federal minimum to $9.80 an hour by 2014.
Why stop at 100%, why not go for 200%? I suppose the argument against 200% is that it would be too inflationary. And the argument for 100% is that businesses would just pass on the increases to consumers, with no loss of jobs. Of course that assumes the Fed isn’t targeting inflation, and unfortunately the Fed is targeting inflation at 2%. So if we don’t get inflation, what do we get? Hint; the current rate is 8.2%.
Of course things look a little different when you are actually responsible for governing a state:
Jack Mozloom, a spokesman for the National Federation of Independent Business, an advocacy group for small businesses, said: “On this issue, our members tell us overwhelmingly everywhere they hate it.”
“It’s interesting that the Democratic governors of New York and Connecticut are ambivalent, even cool to the idea,” Mr. Mozloom said. “They seem reluctant to create an additional burden for small businesses in their state.”
For those Republicans who bemoaned Chris Christie’s decision not to run for President, consider this chilling report:
In New Jersey, the Senate and Assembly leaders, both Democrats, support raising the state minimum to $8.50 an hour from $7.25, and Gov. Chris Christie has urged them to sit down with him to discuss the issue.
I would have felt a bit better if he’d just said “Hell no!”
Tags:
10. April 2012 at 05:18
“How’s that working out for youth employment?”
Bravo! And before anyone accuses me of not being concerned about the fate of the lower classes, see if you can beat me out the door with an actual plan for them, a plan that is real and not something being held up as a someday fantasy. (okay Morgan yours is more ready than mine but you know what I mean)
Scott I know you’re a bit burned out, but you’ve still got plenty of fight left in you.
10. April 2012 at 05:33
Just an aside – “these guys” are democratically elected representatives, and generally are doing exactly what voters want them to do, unless they are being bought off by special interest groups (unlikely in this case).
I’m not seeking to agree or disagree with your position, but you are essentially saying:
“So, you want THE MASSES to run monetary policy?”
Your answer to this is clearly no. Your go-to case for a “well run” regime is Singapore. And even there – where the “masses” are significantly better educated than in the US – policy is basically run by a benevolent dictatorship.
The only reason I’m making this observation is that you have in the past seemed to support democracy, but it’s hard to see how the position in this post aligns with that.
10. April 2012 at 05:52
Statsguy,
I didn’t get the same message that you got, let me explain. For me there is a bigger message in that some people do not want to use NGDP as a measure, because it points to the place that income actually holds in the economy as a whole. What I am saying is that in order for people to have a real and productive voice in monetary policy, they need to understand their role in the economy itself, that is what I call circles of sustainability. In other words, how can ‘the masses’ intelligently use economic policy if they think their only strategy or role is to constantly impel government to raise wages, one against the other?
10. April 2012 at 05:57
Stats,
Monetary policy is not a social good. It is not another lever of Democracy. It cannot swing with changes of the guard.
Note also: Morally, the MOMENT you make it such, you justify any and all political means to use Fed policy to game liberals from office.
10. April 2012 at 06:25
Must… resist… obvious… troll…
10. April 2012 at 06:26
Eggertsson and Woodford just came round to rational expectations? C’mon Scott. Don’t conflate Old Keynesians like Krugman and DeLong with the New Keynesians. The Old Keynesians, in many ways, have far more in common with the monetarists than they do with the New Keynesians (which is why Nick and Krugman found so much common ground last week). Don’t think of the New-Keynesians as “Keynesians.” The New-Keynesian literature is solidly in the Lucas critique tradition and has been ever since Mankiw and Romer 20 years ago (which, BTW, contained Woodford’s “Self-Fulfilling Expectations and Fluctuations in AD”: “The model is an example of an equilibrium business cycle theory of the kind called for by Robert Lucas (1980)…”). There’s no point in even discussing Eggertsson.
Honestly, you can do better than this.
10. April 2012 at 06:40
Becky – the position in this post is quite similar to Dornbusch’s position on democracy in his work on macroeconomic populism in lat am. It’s a well structured position, well argued, and clearly defined – it’s just not consistent with other views Scott has shared.
It’s interesting, BTW, that the current populist position is ANTI-Fed-printing, because from their view “it seems to help the banks, not me…” They don’t seem to buy the economist argument that “the best way to help you folks is to lower your wages” when they see monetary policy benefits flow almost exclusively to asset holders.
If monetarists really want political support for their position, they need to clearly answer this question: “How should we share the distributional impact of monetary policy in a way that is acceptable in a democracy?”
Monetary policy has a huge legitimacy gap right now. If I had to guess at Bernanke’s single most challenging problem, it’s the legitimacy gap facing the Fed.
10. April 2012 at 06:57
StatsGuy – Your comments remind me of Milton Friedman’s comment that “Money is too important to be left to the central bankers.” – a paraphrase of the famous “War is too important to be left to the generals.”
I think that’s the appropriate way to look at it. The generals answer to the elected civilians who answer to the voters. They don’t decide when to go to war. But we don’t have a referendum over which specific target to bomb. Just like we don’t have a referendum over the number of parts per million of emissions a power plant is allowed.
Monetary policy should be the same. We debate policy – probably Congress votes to have a 5% NGDP level target. But the Fed (or maybe a computer) buys and sells the bonds to hit that target. We don’t have a national referendum every month to decide how many bonds the Fed buys. If the voters aren’t happy with the results, they can “throw the bums out” at the next election.
10. April 2012 at 07:21
‘”these guys” are democratically elected representatives, and generally are doing exactly what voters want them to do, unless they are being bought off by special interest groups (unlikely in this case).’
Not at all unlikely, as labor unions generally favor a high minimum to keep competition out of the market. But, as Mencken said, democracy is the political philosophy that the people know what they want, and deserve to get it…good and hard.
There is, sadly, much ruin in a nation.
10. April 2012 at 07:26
StatsGuy, you are right. There is a wide-spread anti-FED sentiment. The FED is equated with inflation and inflation makes them poorer. Most people seem to think that deflation would make them richer. The idea of secondary effects is beyond most people. Raise the minimum wage and poor people have more money–end of story. We really don’t want those folks directly controlling monetary policy. I don’t even want them to vote.
–DonG
10. April 2012 at 07:27
Statsguy,
“How should we share the distributional impact of monetary policy in a way that is acceptable in a democracy?” You’re right, we need better social infrastructure from the ground up to the Fed in order for this to happen. Even when the Fed tries to tend to problems that clearly no one else is trying to fix, they are accused of doing what they are not supposed to be doing. It is important to distinguish where people can be active parts of planning processes (knowledge-based activity) and where scarcity only makes the problem worse, such as monetary redistribution. The fact that people will always react to uneven distributions at some level means that knowledge-based services need to be created in ways that 1)human needs and aspirations can be met, and 2)We are not constantly comparing (largely nominal except for actual product) service sector economies with real production and manufacturing economies because they absolutely can be measured differently.
10. April 2012 at 07:37
Stats wrote: “It’s interesting, BTW, that the current populist position is ANTI-Fed-printing, because from their view “it seems to help the banks, not me…” They don’t seem to buy the economist argument that “the best way to help you folks is to lower your wages” when they see monetary policy benefits flow almost exclusively to asset holders.”
This is a horribly unfortunate view. I listened to Rogoff last weekend say “real wages need to fall” and I cringed, because he sounded like a tin-eared wonk.
My view is that monetary policy flows initially to asset prices *IN A DEPRESSED ECONOMY*, but higher asset prices send a signal to business owners to stop cutting and/or start expanding. Asset prices don’t grow to the sky; once asset prices are full, stimulus will flow to wages and other prices.
Businesses make decisions based on the return on capital vs. cost of capital trade-off and monetary stimulus gets transmitted by improving both sides of the trade-off. Corporate earnings growth stalls out once businesses begin to compete to expand, rather than compete to cut.
Back in 2008, people were literally cheering the demise of Wall St. Even the WSJ Editorial page said the Lehman bankruptcy and Fed hard money were a victory for Main St. Incredible, but the same sentiment people had in 1929.
Now in 2012, we are on the cusp of corporate profits beginning to pass through to improved labor markets. It would be a tragedy if monetary authorities aborted that process out of distributional jealousies.
10. April 2012 at 07:41
‘I would have felt a bit better if he’d just said “Hell no!”’
In which case the NJ legislature would almost certainly overridden his veto and Christie would look like Simon Legree. Every successful politician knows the voters are ignorant.
10. April 2012 at 08:13
Rogoff is a better economist than I realized and a worse salesperson than I ever could have imagined.
Businesses expand when its cheaper to build than buy.
In a strong economy, businesses get resumes from intelligent hard-working and drug free candidates and hire them on the spot. Then they train those employees to do the job, because the cost of unfilled business exceeds the cost of training a good employee. It’s been so long people have completely forgotten what a strong economy is like.
In a weak economy, businesses get a stack of 100 resumes, and shred them all because no one matches the exact college degree or technical skill they want. Then they piss and moan about structural unemployment, but mostly they were non-plussed about hiring in the first place. Then clowns like Bullard and Lacker run around preaching structural unemployment and zero marginal product workers, and the need to tighten monetary policy. Bullard and Lacker have done *immeasurable* damage to the workforce in this country, and they aren’t even the number one or two villians on the Fed.
10. April 2012 at 08:32
I don’t want the Fed to go down in flames. I don’t want Congress to go down in flames. Neither one are capable of solving these issues but I hate blame. Some years ago, “The Postman” was a movie that made me realize how much was really at stake. Business has been trying to tell us for some time that they cannot solve the problems of the day, but no one really listens to what they try to say. However, when government tells us they can’t solve our social problems, everyone listens and has a large opinion.
We want our government to prosper. We want business to prosper. Most of all we want to prosper as individuals But government and business cannot do the job all on their own. They have to do it with our help. And no one will be able to help if we can’t find new constructs and perimeters for wealth and knowledge utilization. Charles Handy was hopeful for this when he wrote The Hungry Spirit – Beyond Capitalism: A Quest for Purpose in the Modern World. But that was back in 1998 when he and everyone were still optimistic, before 9/11 destroyed that optimism. We need to get that optimism back.
10. April 2012 at 08:52
Negation of Ideology,
“If the voters aren’t happy with the results, they can “throw the bums out” at the next election.”
This just isn’t acceptable. And won’t happen.
The notion people are bandying about here immediately kills off arguments based on expectations.
Investors EXPECT the Fed to be run without interference, that’s the whole construct of the Fed.
And I’ll say it again, a MAIN POINT of a rule based NGPLT is that it further removes Monetary Policy from human political hands.
So, the moment you all argue about “yea democracy! voters are in charge monetary theory!”
You don’t WIN.
You just invite those who oppose this notion of money, to play political football to keep progressives out of office.
BUT if you take monetary policy off the table, there is natural fiduciary check on social Democracy… now those who care about MP, they stay home.
Think of it like Gun Laws.
Note: though counter-intuitive, this is a super positive thing for the left, when they can do nothing radical, they instead have to focus on making gvt. operationally exceptional.
Fix gvt., deliver 2% productivity gains a year in public sector, don’t try to prop up wages, and leave monetary alone, and voters / taxpayers will TRUST and LIKE gvt.
The ones in the safety net WILL BENEFIT most.
Eventually real progressives have to throw public employees overboard and automate govt. to best help the poor.
10. April 2012 at 08:54
Thanks Becky.
Statsguy, The idea that preferring monetary to fiscal stabilization makes one anti-democracy isn’t just a stretch, it’s bizarre.
And I don’t recall ever praising Singapore’s political system–show me where I did so if you can find it. Indeed I don’t like the US political system either, which is hardly democratic. I like the Swiss system, the only truly democratic country in the world. I also like the Swiss economic system, the most successful in Europe. Does that make me anti-democratic?
As for special interest politics not involved in the Dems bringing up a higher minimum wage in 2012, that’s just not credible.
And finally, are you claiming that anyone who ever opposed any initiated brought forward in Congress is anti-democratic?
K, Eggertsson and Krugman recently co-authored a paper.
Case closed?
BTW, Krugman often assumes ratex in his research.
Steve, Rogoff should have said “real incomes need to rise.”
Patrick, How many supporters does Christie have? If not enough to sustain a veto, why is he respected by many Republicans?
10. April 2012 at 08:57
Still, the federal minimum wage is well below levels of the 1960s, adjusted for inflation.
That means 50 years of economic growth have resulted in lower wages for our least skilled workers. That is not what I expected when John Kennedy spoke of a “rising tide lifting all boats.”
Well, except for the guy who got “C’s” in slow class. His boat was never lifted.
Yes, now is not the time to raise the minimum wage, or deploy a health plan that raises costs.
Still, there is a side of me that says that if a people put in an honest 40 hours of work a week, they they also partake in certain minimum benefits of a wealthy country (Sumner was pointing out that the USA has far higher per capita incomes than even other advanced nations such a germany and Japan).
Really? We want to say to someone you work 40 hours a week, but no health care for you, and your wage is $6 an hour? If we go further down this line, we wipe out public schools, and such a wage earner would not even be able to afford to send his kids to K-12?
Really, do we want to wipe out health care, public schools and the minimum wage while others make $1.5 billion a year in hedge funds?
And how long will such a country survive? If it is a democratic country, how long until voters think socialism looks better?
Be careful what you wish for.
10. April 2012 at 09:28
The City of San Jose will be voting on an initiative to raise the minimum wage in the city to $10 and index it to inflation. It will now have the second highest minimum wage in the world (second only to San Francisco). I expect the initiative to pass easily. I weep for the youth of the city.
OT: At the Kaufman conference, there was some talk about the what is the Fed’s reactionary function. It seems pretty simple. As soon as gasoline prices reach $4/gallon, the Fed begins to tighten. Kind of a stupid way to do monetary policy, but it seems to explain a lot. You could have made a lot of money shorting the market for 60 days as soon as national gasoline prices approach $4/gallon.
Look at this graph: http://www.gasbuddy.com/gb_retail_price_chart.aspx?time=60
That’s the average retail price of gasoline. It hit $4/gallon in summer of 2008. We know what happened shortly after that. We almost hit $4/gallon in April of 2011 and the Fed passively tightened after that. Now we are close to $4 again and as you can see by Bernanke’s recent leaked speech and comments from the Fed governors, they seem to be taking QE3 off the table. The market’s reaction to this the past couple weeks has been predictable.
We are not on a gold standard. We are on a quasi-gasoline standard. So, it seems that the fate of our global economy is dependent on big new oil discoveries being made. Sad.
10. April 2012 at 09:42
“We are not on a gold standard. We are on a quasi-gasoline standard. So, it seems that the fate of our global economy is dependent on big new oil discoveries being made. Sad.”
The voters have spoken.
See here again: progressives who adopt a Drill Baby Drill + Geo-engineering GW insurance, suddenly they get a Fed who is more likely to print money.
Too many wants, not enough compromise.
10. April 2012 at 10:15
“We are not on a gold standard. We are on a quasi-gasoline standard. So, it seems that the fate of our global economy is dependent on big new oil discoveries being made.”
Well, if we replaced Fisher, Lacker and Bullard with Ahmadinejad, Chavez and Putin, we’d probably have a more pro-growth pro-American monetary policy.
10. April 2012 at 10:54
Scott: “Eggertsson and Krugman recently co-authored a paper.
Case closed?”
Uh, no. But, way to go for the guilt by association. How about reading the papers, and criticizing the actual content. The fact that Krugman understands that he needs to be serious in academic journals doesn’t taint his co-authors with the Old Keynesian psycho-babble he sometimes peddles in his blog. Krugman gets to write papers with serious, mathematically talented people because he is a very famous smart guy whose name as co-author is extremely valuable to an ascending academic superstar like Eggertsson. Don’t tarnish a brilliant young academic with your sloppy brush. And what’s your beef with Woodford? How about Mankiw?
There are two major economic schools of thought which took up the cause of the Lucas critique: RBC and NK. Tragically, and despite Lucas’ hopes, RBC has been an empirical failure; the economy just isn’t that optimal. Perhaps one day, in a better world, all those models will come in handy. For now, the real heros in advancing the Lucas project have been the New-Keynesians, what with their rationally-expecting-intertemporally-optimizing-infinitely-lived-agent DSGE models *and* their econometric successes. The New-Keynesians *never* were Old Keynesians. They are generally brilliant academics who take seriously the work of theoretical rigour *and* empirical consistency and who, as a result, arrived at the NK framework: carefully and precisely specified and subject to empirical verification. And unlike the more popular Old-Keynesian, Post-Keynesian, Austrian or Market Monetarist blogonomists, cautious and respectfully uncertain towards absolute truth. Such is the progress of actual science. The Keynesian part of “New-Keynesian” has nothing to do with the scientific approach, but rather comes from the fact that despite the “Lucasian” underpinnings of the model, many of the predictions are remarkably “Keynesian.”
I look forward, by the way, to see the Market Monetarist ratex DSGE model (no, you don’t do interesting ratex in a one- or two-period model – though it would be a start). I’m not holding my breath.
10. April 2012 at 12:41
Liberal Roman:
I’m pretty sure Australia has a higher minimum wage…
10. April 2012 at 15:37
Please not the minimum wage again, at least not without a few facts.
Only slightly more than 2% of all workers earn the minimum wage a percentage that’s been falling by 50% a decade since 1980.
The 2008 minimum wage was 58% of the poverty level. This is below the 1960 percentage of 66%. Since 1986, it’s been bouncing around between 50% and 60% with a low of 50% in 2006 and a high of 62% 1n 1997.
Expressed as an annual wage, it’s the same as it was in 1950 when it was almost doubled to a bit over $13,000. After spending all of the radically socialist 1950s and 1960s over $15,000, it then dropped on a straight trend to $12,00 from 1978-1989. Since then it’s bounced around between $12,000 and $14,000, with the high in 1998 and the low in 2005. [all in 2010 dollars]
There’s a 90 consecutive day $4.25 under age twenty minimum wage, and it might no be a bad idea to make it 1 year and age 21 or 22.
The real problem isn’t the salary, it’s paperwork, regulations, cost of benefits (more paperwork and regulation), and the draconian penalties for violations. This leads to temporary agencies extracting enormous rents for assuming the risks and overheads. The independent contractors rule(sometimes known as the temporary agencies relief provision) that Moynihan slipped in 30 years ago doesn’t help.
It’s easier either not to hire, hire temps or pay in cash off the books hoping not to get caught. I have no idea how many of the “discouraged workers” are working off the books. From my experience, I’d say the government’s estimates in this area are much too low.
10. April 2012 at 17:02
@ssumner
At no point did I mean to imply you supported Singapore’s politics, though I could see how it read that way. My point was that your example of a well run economic system is Singapore, but it’s quite possible that the only reason it’s so well run is because it’s a benevolent dictatorship.
It’s not preference for monetary vs. fiscal stabilization that is anti-democracy. It’s the wholesale distrust of THESE GUYS. Nor did I accuse you of being antidemocratic. Indeed, I wrote “you have in the past seemed to support democracy”.
My point is that the policies that you are supporting could be very difficult to achieve – perhaps impossible – in the US democratic system, whereas higher minimum wage was the direct output of our current democracy.
In short, your desired economic system may not be perfectly compatible with the politically feasible manifestation of your desired political system (democracy) in the US. If so, you would not be the first to encounter this dilemma. It’s the entire reason why the economics profession argued so hard for independent central banks – fundamentally, it does not trust democracies to handle the monetary supply.
10. April 2012 at 17:04
LiberalRoman
“We are not on a gold standard. We are on a quasi-gasoline standard.”
That’s the most quote worthy statement I’ve read all week.
10. April 2012 at 17:11
“Now in 2012, we are on the cusp of corporate profits beginning to pass through to improved labor markets.”
Sounds a lot like trickle down tax cuts… and we know how well that worked out for the middle class. The distributional benefits of monetary policy need to flow more transparently to the middle class for them to be convinced that monetary policy is not rigged to favor the wealthy. Because if you look at the past 30 years, it certainly looks that way on the surface.
10. April 2012 at 17:39
Scott,
The empirical research suggests that under certain circumstances a minimal wage increase may be desirable.
However, even I don’t think this is the right time to do it.
Let’s loosen monetary policy first.
10. April 2012 at 17:53
Stats wrote: “Sounds a lot like trickle down tax cuts… and we know how well that worked out for the middle class. The distributional benefits of monetary policy need to flow more transparently to the middle class for them to be convinced that monetary policy is not rigged to favor the wealthy.”
This sounds like the McKinnon vs. Stiglitz debate from last year. The Republicans think monetary policy benefits the government and is awful because it helps fund social programs for the people. The Democrats think monetary policy benefits business and is awful because the rich make money.
If monetary policy, and indeed all government policy, is going to be based on spite, we as a society are screwed.
10. April 2012 at 18:02
Steve,
Good point. Money knows no party. It knows no class. It flows clear and even like mineral water. Let it flow!!!
10. April 2012 at 18:56
Scott,
I’m watching “Les yeux sans visage” tonight.
For those of you not familiar with foreign film it is a 1960 French-language horror film adaptation of Jean Redon’s novel, directed by Georges Franju, and starring Pierre Brasseur and Alida Valli.
Fortunately my French is good enough that I do not have to pay too much attention to the subtitles. I share this as you are just about the only macroeconomist blogger I know who is familiar with foreign films.
10. April 2012 at 19:03
‘The 2008 minimum wage was 58% of the poverty level. This is below the 1960 percentage of 66%. Since 1986, it’s been bouncing around between 50% and 60% with a low of 50% in 2006 and a high of 62% 1n 1997’
All of which is irrelevant. All that matters is whether the minimum is below or above the market clearing wage for low skilled labor.
‘Sounds a lot like trickle down tax cuts… and we know how well that worked out for the middle class.’
It seems to have made them richer, contrary to Piketty and Saez;
http://www.econtalk.org/archives/2012/04/burkhauser_on_t.html
‘We looked at this distribution–and it’s kind of a Bell curve. There are two tails and a bunch of people in the middle, a little hump there; and we did it for 1979, which was the start of the 1980s business cycle; and we did it for 1990, which was the end of the business cycle; and we put those two distributions on top of each other. And we found this really kind of interesting thing. It was absolutely true that when you put the 1989 distribution on top of the 1979 distribution, the middle shrank. It disappeared. But where did all those people go? Well, they disproportionately became richer. So, we actually could see that you ended up with a very small portion of the tail that got poorer, about 10%, and of the mass that you pushed down from the middle, moved to the left and became a little poorer. But 90% became richer. So, this whole business that was talked about, about the middle disappearing–if you think about it mostly as the middle mass, where most of the people are–it is true that that disappeared. But most of it disappeared by people getting richer. So, I’ve always been suspect of people who make these claims just using the simple statistics that the government provides us.’
10. April 2012 at 19:16
Patrick,
Regardless of the official reasoning the original poverty level was set at 50% of the median income based on Michael Harrington’s recommendations. Needless to say it is now far short of that measurement.
Consequently the minimum wage measurement is now even more short.
10. April 2012 at 19:26
Moreover, it’s important to remind people that Patrick is quoting Burkhauser, not Piketty and Saez, who disagree profoundly with Burkhauser’s misinterpretation of their research.
10. April 2012 at 19:32
There should be a minimum wage, architected through a negative income tax…what else will we do with all the humans when the non-human-AIs are doing all the jobs..
10. April 2012 at 19:48
c8t0,
We can always eat them a la Soylent Green:
http://www.youtube.com/watch?v=StoSRQOvMyI&feature=player_embedded
10. April 2012 at 20:03
i am surprised at how many people think raising the min wage does any good.
employee costs cannot rise faster than revenues, and most companies have little pricing power in a recession. CFOs will enforce labor costs by cutting the workforce. some employees marginally attached are most likely to lose their jobs and the rest get hours cut. its worse than doing nothing because it gives false hope.
a more effective long term strategy is to incentivize skill-building, training, education, training, to help employees move into better paying jobs.
10. April 2012 at 20:25
dwb,
There’s actually a good body of recent research that suggests that under certain circumstances minimum wage increases my be beneficial. I recommend reading this if for no other reason you can better argue against it:
http://www.amazon.ca/Myth-Measurement-Economics-Minimum-Wage/dp/0691048231
In my opinion there are market failures at the lowest level of wages that make a minimum wage law desirable.
P.S. I’m mostly a libertarian but I’m nuanced.
10. April 2012 at 21:15
“Of course that assumes the Fed isn’t targeting inflation, and unfortunately the Fed is targeting inflation at 2%. So if we don’t get inflation, what do we get? Hint; the current rate is 8.2%.”
If this has the same effect as a negative supply shock, why just focus on the minimum wage? Certainly, there are specific things I agree are wrong with it, but if the Fed is inflation targeting, aren’t all the other things government does in that respect equally bad for the employment/wage picture? I agree that we should care about youth unemployment, but I also think we need to get jobs for everyone else who needs one while we’re at it. If the Fed isn’t willing to increase NGDP growth, working on the AD curve, and basically sabotages fiscal AD boosts, then the only other option for congress, and all other levels of government for that matter, is to work with the AS curve. I’m not talking about tax cuts, per se, although there is probably room for flattening out and simplifying the tax code. It’s more challenging to do right than just throwing huge amounts of money at a problem, but it would likely work better than what we’ve been doing, at least according to AS/AD.
10. April 2012 at 22:08
‘Moreover, it’s important to remind people that Patrick is quoting Burkhauser, not Piketty and Saez….’
Everyone here seems reasonably alert, Mark. I’ll bet most understood my ‘contrary to Piketty and Saez’.
Burkhauser’s analysis doesn’t have to explain the contradictory evidence of increased (and improved) consumption, while P&S have that little problem.
10. April 2012 at 22:56
K
NK and monetarism are not that incompatible at all. To get a good example of someone merging the NK style theorizing along with a fundamentally monetarist view of the world, look no further than Buiter (or even Svensson). Or, read Mankiw/ Ball from about 20 years ago when they claim that they could just as well be called ‘New Monetarists’.
Also, that NKs think of monetary policy as setting interest rates does not mean that they understand/model banking/finance (not sure if you’re arguing this as well). Woodford says as much multiple times in his latest stuff from the past 3 odd years.
The ‘way forward’ *should* probably be some mongrel child of Leijonhufvud, Buiter, Goodhart, Kashyap, Kiyotaki, Svensson, Howitt. Compliant with all – Lucas critqiue, debt, default, monetary aggregates, interest rates, uniqueness of money, non-uniqueness of money, mechanics of central banking, agent-based modelling, etc.
10. April 2012 at 23:08
Scott, Germany does not have a minimum wage (perennial debate but no action) and most surrounding countries do. In those (Benelux, France) there is a link between the minimum wage and several components of the social safety net (state old age pension, welfare, etc).
As far as I know, no systematic unemployment differences between those countries have been successfully attributed to the presence or absence of a minimum wage. Possible explanation:there are of course all kinds of ways around minimum wages. Maybe the key to this debate is to what extent there is a segment of the labour market where people work for less than the existing or envisaged minima. In Holland, for instance, individuals who opt to work as single private contractors receive no benefits employee benefits and set their own rates. Similar privileges exist for
similar situation exists for part-timers who have most of the week off. Both are usually associated with the relatively favorable levels of unemployment in Holland. So there people can sell their labor for less than the minimum, but until now they tend to do better than that (they pocket the employer share of social security costs and hence outcompete employees) I am sure that now the Dutch economy is shrinking again (due to brilliant policymaking targeting consumer confidence and hence consumption), we will see where the “market” minimum wage lies. Maybe below the official minimum. No doubt that will hardly be an unambiguous result (locations, professions, gender, age)
But I think that an effect on unemployment of any minimum wage rule can only be observed when that minimum wage is (a) unlinked to other/alternative income opportunities (welfare, unemployment) and (b) the official minimum wage is above the counterfactual “market” minimum wage. As to the US: It is probably impossible to feed a family of four with even the WA minimum, even if that family could mysteriously do its shopping in, say, Arkansas.
Of course the politicians discussing this must have political reasons, but maybe a $7-9 minimum is not a lot more than what employers would have to pay anyway. Assuming there is a demand for the specific labor on offer at the specific place where people that people can reach profitably without losing their residence, with petrol prices as they are…
10. April 2012 at 23:23
Becky
You said
” In other words, how can ‘the masses’ intelligently use economic policy if they think their only strategy or role is to constantly impel government to raise wages, one against the other?”
Why would you expect the masses to intelligently use…They are sovereign. And what is intelligent use of economic policy by masses?
One of the key problems of pluralist democracy (the model that I think describes the US situation most adequately) is that it requires an underlying consensus about what is out of bounds policy-wise “populism”), among active politicians/candidates or widespread apathy among inactive ones (voters). What we see presently is a much higher level of political mobilization around topics that are (close to) out of bounds. It remains to be seen in how far this is going to persist in the election season and especially once the season is over.
11. April 2012 at 03:00
Ritwik: We can debate all that, but it’s probably OT here. Scott said “Eggertsson and Woodford have now accepted the rational expectations view that it’s the future expected path of fiscal stimulus that matters”. That’s what I took issue with here. Do you want to defend that?
11. April 2012 at 03:31
Front page, bloomberg:
http://www.bloomberg.com/news/2012-04-10/the-fed-needs-a-new-simpler-mandate.html
11. April 2012 at 05:13
While I was disappointed that almost no one here supports lowering the minimum wage, nonetheless that goes a long way to support my own work to recreate economic access for everyone which takes valuation out of external and money-based terms. Some believe an informal money economy takes care of the marginalized but I have not seen that, apparently one needs to know or have lots of local friends for that to work. While money is still a valuable arbiter of value for the middle to upper classes in the use of physical resources and actual product, it simply does not do the job all the time for the rest of us.
Now I’m going to admit something that will definitely be a knock on my reputation but what else is new! I have not been able to capture a real job since the wages started rising in the first place. Some of you would say ‘you’re not trying hard enough’. I begged and pleaded to keep my last jobs, but my health wasn’t good and because of cataracts I had practically lost my eyesight. By the time I got the three surgeries I needed, I found myself living in an isolated place where jobs were few and far in between. The good news here is that my eyesight is so good now I don’t need glasses for up close reading as of 2003, when I started my studies of economic issues. I have also been fortunate to keep a roof over my head in these years, which many without economic access cannot say. At some point, people have to put a stop to constantly raising the bar. I do not expect people such as myself to be let back in, in monetary terms. But I hate to see the same thing happen to the middle classes, and we cannot allow the monetary links between all these groups of people to be completely broken.
11. April 2012 at 06:19
Ritwik: “NK and monetarism are not that incompatible at all.”
I don’t like to abuse his extremely liberal comment policy, but maybe Scott will give us a bit of leeway…
The New-Keynesians could have been called the New-Monetarists. The purpose, after all, was to understand the role of nominal effects in macroeconomics. And some of them probably still imagine the transmission mechanism as some sort of hot potato like it used to be (though it’s really hard to see why since central banks will take back any undesired non-interest bearing money and give you government bonds in exchange). All New-Keynesians see a very direct effect of the real rate on investment, and find the nominal rate to be largely a distraction (except to the extent that it can’t be negative). But the real point is, there *is* no medium of exchange in the NK model. It doesn’t feature in there as a variable, *because* it provides no additional explanatory power. If it features in the mental model of some theorists, so be it. It has no actual consequences in the model.
“Also, that NKs think of monetary policy as setting interest rates does not mean that they understand/model banking/finance (not sure if you’re arguing this as well).”
I wasn’t arguing that. Many of them (Woodford and Eggertsson included) happen to understand banking extremely well. As to whether they model it, Eggertsson and Krugman (2010) is a start on debt-deflation, but there’s a long way to go.
As to the way forward, I agree with most of your list though off the top of my head I’d add capital assets, a good growth model, agents with subjective measures and Bayesian learning, and critically, the role of implicit/explicit guarantees in distorting incentives, *but* I’d remove money and monetary aggregates. The quantity of non-interest bearing money (the rest is just debt) is of inconsequential proportions in a modern economy. The part that we do have left (paper money) is not controlled by the CB, but merely adjusts according to changes in NGDP and paper money demand. The CB creates and destroys it at the wish of agents in the economy. If it wasn’t for criminals and tax evaders it would be essentially gone already. Its one last macroeconomically relevant role is to prevent nominal rates dropping below zero.
11. April 2012 at 07:54
Rien,
I am working on a response. You are making me think hard this morning.
11. April 2012 at 08:49
@Mark A. Sadowski
I read the AER paper and did not find it hugely persuasive. I think one can say at best, small changes have small effects. If the change was .01 or .05, sure, the effects might be small and difficult to measure. The problem I have is that many of these these are small local studies, and the effect of a big change (say, tripling the min wage) would be clearly counterproductive. In aggregate I doubt the effect is positive, but for a small change it might be not noticeable compared to all the other things happening simultaneously that are difficult to control for.
To get from A (a bunch of small changes that might be positive) to B (a really big change) where have I crossed the threshold? Somewhere there is an optimum, where is it? Why can’t I repeat this every year with a bunch of small changes? these are things I would need to know to be persuaded because when you extend the analysis to the logical endpoint (a really big change) it breaks down.
anyway, as a long term plan it does not work. At some point, you have to help people become more productive and help them get the skills to move into better paying jobs. It really should not surprise people that inequality has risen as our emphasis on math skills has gone down (and those that DO have good math skills are going to Goldman Sachs making 300k / yr coding nanosecond trading platforms). Yes Virginia, Financial Engineering sucks a lot of math and physics talent out of the labor pool. hmmm.
11. April 2012 at 08:50
Rien,
I will begin with Einstein: “No problem can be solved from the same consciousness that created it”. For me, the fundamental problem is that we are presently struggling to capture wealth in ways that no longer work. Instead of coordinating their efforts and recognizing what is actually possible amongst those efforts, special interests and economic actors of all stripes pose their activities against one another. Historically that has always been a given, of course. But a new wrinkle in the present makes it more difficult to overcome: the fact that we can’t indefinitely use the wealth of the asset-driven real economy to drive the more nominally based service economy. It can be done up to a point and of course it has, by expansion of physical resources beyond what people actually need. But now people need greater expansion in the use of their minds and skills. This is something that both leaders and followers of nations must understand, because when they don’t, the efforts of special interests continue to distort the overall equilibriums that exist.
Before service economies became so important, leaders could coordinate between opposing factions without too much trouble. But the problem is that the wealth of the service economy is a different form of wealth and has to be structured along different lines of production efficiencies. This is why it is so important for citizens to come to the aid of their countries, because reacting to the new economic realities only works against representative (or pluralistic) democracy in the present. Having said this, nations have to give up something so their citizens can help them: the zillions of rules that say their citizens can not actively help one another and their own community in real time. We have buildings sitting empty when people cannot agree on the ways they might be used. But empty buildings are not near as bad as empty people, when they get the message that no one needs them.
11. April 2012 at 11:47
“The quantity of non-interest bearing money (the rest is just debt) is of inconsequential proportions in a modern economy.”
Anything that serves as a store of value, a unit of account and a medium of exchange within a particular ambit is money within that ambit to the extent it so serves.
Interest bearing instruments are usually inferior money because they are more cumbersome as a medium of exchange and there is a difference in opportunity cost with non interest bearing securities.
Given a conversion between monies of 2 different ambits, the the efficiency of ambit 1 money as ambit 2 money is roughly the efficiency of the ambit 1 money in ambit 1 multiplied by the efficiency of roundtrip conversion (which can be a function of quantity converted).
For instance for Linden Dollars (legal tender only within the on line virtual environment Second Life), for instance, current rates are:
L$/EUR 308.0 332.4
L$/USD 243.8 263.2
L$/GBP 372.9 402.4
L$/CHF 253.7 286.2
L$/DKK 41.0 46.2
L$/NOK 40.1 45.2
L$/CAD 231.4 262.4
L$/AUD 239.1 271.1
L$/JPY 2.9 3.3
a loss of around 23%.
There is no perfect money, since the it is impossible for anything to fully satisfy all 3 criteria. In fact an instrument’s ADDITIONAL utility as a store of value (that it yields a return) weighs against its use as a medium of exchange (with certain exceptions).
As for debt, a distinction should be made between securitized debt, which is money (though inferior to dollars for most purposes).
The difference between the relationship between dollars and short term treasuries at the lower bound and away from the lower bound is one of degree, not kind. Treasuries do undergo some sort of phase change between money and non-money.
Given this, the best monetary aggregate we have is the new Divisia M4, and it would be foolish to reject the importance of monetary aggregates without a careful evaluation of its past behavior.
It may also be important to look at the effects of different moneys from different ambits having different velocities. If we were talking about two different countries, we would say one had a better investment climate than the other, but ambits needn’t be countries.
“If it wasn’t for criminals and tax evaders it would be essentially gone already.”
Pray that day never comes. If you think it would be a good thing, you haven’t thought things out.
A country where every law could be enforced 100% would be a model dystopia.
For example:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1029151
11. April 2012 at 11:50
Too much emphasis these days is put on the democratic elements of our government and not enough on the republican. Note those are small case, not upper case.
Neither an Athenian mob nor a Hobbesian sovereign (either constituted as legislative or executive)are very good models for well-functioning government. They are democratic, but without republican forms, they fail. Time and again. Republican government, on the other hand, can still be broadly democratic without turning everything over to the masses.
In that sense, the Fed could certainly be made a more accountable institution democratically. For instance, I bet I could make a very strong case for direct election of Federal reserve members, and even expansion of their power over the government purse. On the other hand, turning over the Fed’s power to Congress, essentially eliminates the republican form, and would clearly be a disaster.
11. April 2012 at 13:07
johnleemk: I’m pretty sure Australia has a higher minimum wage… Yes, and every business cycle our unemployment rate would end up higher than the cycle before. Until we started reforming our amazingly complex labour market laws and had a prolonged period (20 years) of effectively uninterrupted economic growth. And we can still only get the UE rate to about 5.2%.
I would also point out that raising the minimum wage when unemployment is 8.9% and teenage unemployment is 25% is madness.
11. April 2012 at 13:14
Peter N: Only slightly more than 2% of all workers earn the minimum wage a percentage that’s been falling by 50% a decade since 1980. I can think of a reason why the share of workers on the minimum wage has fallen so steadily, and it’s not a good reason …
But it is always good to have the empirics …
11. April 2012 at 18:11
“Anything that serves as a store of value, a unit of account and a medium of exchange within a particular ambit is money within that ambit to the extent it so serves.”
If you want. But the quantity of it can only affect the price level to the extent that it earns less than the risk free rate. Otherwise it’s not a “hot potato.” So the hot potato effect is proportional to the total seignorage earned by the CB, a fairly inconsequential quantity. M4 is totally irrelevant for the purposes of this conversation.
“Pray that day never comes. If you think it would be a good thing, you haven’t thought things out.”
I’ve thought about it a little bit… here are my thoughts:
1) With nothing more than a court order the US government can find out a) what you’ve been thinking about every waking hour for the last two years (Google) and b) what kinds of people you’ve been associating with since somewhere between 2007 and 2010 (Facebook) c) any bank or credit card transaction for the last five years. If, with a court order, they were able to find out which things you spend your cash on I don’t think that’s much of an incremental difference.
2) I don’t need currency to make anonymous payments. I can buy a prepaid credit card at the corner store. If the Fed stops printing paper money, I assume Mastercard will pick up the slack. If rates are negative, they’ll have to charge fees on outstanding balances. No big deal, technologically speaking.
I never said that eliminating Fed currency would eliminate crime. All I said was that criminals and tax evaders are the principal beneficiaries.
11. April 2012 at 19:15
Scott, I’ve gotta hand it to you, you do empiricism well. And here I thought maybe the the wholesale import of thousands of indentured servants could be having some impact on youth unemployment. I think where I went wrong was in not ruling out the obvious a priori, as per the approach pioneered by Master Friedman.
The truth dawned on me when I realized that, if such a thing were indeed relevant, we’d have a far stronger recovery than we’re having, at least according to those monetarist models that have proven so presc… errr…. adaptable to post hoc legitimation over the decades of being embarrassingly discredited (or perhaps that’s just their faithful devotees). Ergo, and given that actual thought or analysis is verboten when a model hangs in the balance, high teen unemployment must be a consequence of the minimum wage.
All of which to say, I finally stopped worrying and learned to reason like a monetarist. Speaking of which, I’m off to delouse. Keep up the good work here.
11. April 2012 at 22:03
@Majorajam,
Let’s take your conjecture that immigrants hurt the economy by, as that great South Park line put it, “They took Errr Jerbs!”, to its logical conclusion.
If we put morals aside, we can fix our entire economy by killing off or deporting all of the unemployed? Right?
The problem Majorajam is the economy is not about who has what job. The growth of the economy is about producing goods & services of most value with our limited resources. By keeping out those evil immigrants (BTW, they are human who deserve a chance to earn a living), you are reducing our productive capacity and hurting our economy.
12. April 2012 at 03:26
Becky,
Not quite sure I understand what you mean , but maybe you infer the need for a different political economy (more communautarian?) than the present one because the economy is moving away from industry to services.
In the past we would have said from a capital intensive to a labor-intensive one. And labor intensive economies tend to have productivity problems and it is much more difficult to link output to inputs (s just imagine we would have a country with no investment (apart from residential), no workforce growth, no natural resources, etc yet growing at %%% per annum. All TFP? But that is a residual and does not explain anything..
More normal would be a low-capital expenditure economy stuck with slow growth and wage levels as an important international political economy issue (like currentlly in the EUR area). Of course in the recent past technologies have emerged that can make service industries more structurally productive but the mainstream managerial thinking there is still focused on clever purchasing management (labor, inputs, facilities) than the sort of technological development you see in the goods/manufacturing sector. Not that it is absent: retailers have become very good at logistics for instance. But areas like health care, finance etc are still in the dark ages, manufacturing-wise.
That move does present challenges. Not for a market monetarist who is mainly interested in demand but for the simple folks like me who believe that events on the supply side are what drives business cycles (and more importantly, fluctuations in the stock of physical and human capital that a society needs to compete for prosperity) and that those require gvt attention (you do not want your team to have all its star players injured on the bench just when a new round of innovation is up).,
People whose political preferences are more traditionally western than , for instance Singapore, where the supply side competitiveness of the country/location is the State’s #1 concern, have to accept that their political system has a different cost-benefit structure. No one is going to worry about the whole country being employed by Walmarts who, mysteriously, buy their merchandise from a bearded man living on the North Pole and accepts IOUs, until the situation has become a real problem. And maybe, no one should worry. States are usually not very good at running supply sides.
Apologies for this rant. But I have no idea how and to what extent anything resulting from the shift to services should entail citizens caring more for their countries (or “coming to the aid” of them). Is it possible to use mainstream economics or mainstream political science terminology? Otherwise I am afraid it would be difficult to argue.
12. April 2012 at 06:33
Rien,
Lots of ideas here, let’s see what is possible. The ‘caring’ part is a reference to the fact that at some point nations are going to have to strike substantial bargains in order to move ahead with their citizens, for the alternative is failure due to the complexity of excess rule and regulation. I have some more ‘nuts and bolts’ about my ideas in the Nick Rowe post that follows this one, in a response to Mike Sax.
Like you I am very focused on supply side. But it takes time for a retailer to ask ‘why is no one coming in the door’, and come up with a substantive answer. Perhaps I’m fortunate that happened to me well before the recession hit. You mentioned finance as being in the dark ages. For a while they were excited about the profits to be made by large expectations, but the reason for those profits were also the reason for their decline: the labyrinth of rule and regulation that (also) created tremendous profits for the biggest retailers meant that everyone else had to jump really far to be part of the economic mix. Finance wanted everyone to be able to jump really far and for a while they did.
Now we need ways in which we don’t have to jump so far to be part of economic life. But how to get there? We can’t easily juxtapose such new economic realities against other current realities for the one could destroy the other. Yet the fact remains that the money which works for the middle to upper classes no longer works for the lower classes. They have to find new ways to survive that don’t present economic threats for everyone else.
Some quick thoughts on service sector production. Lower income can measure knowledge services by time parallels to avoid the monetary production dilemma. However, external valuation (snapshots of present skills) is only shoddy barter. This is better done through community coordination of work/education for needed and desired knowledge and services through the course of our lifetimes (I’m working on this most difficult aspect). We gain greater productivity over time by constantly increasing our skills and knowledge. The monetary economy continues as now, only with greater focus on physical resources and actual product offerings. Here is where local and global reinforce one another, by dual (tradable) monetary and (non-tradable) knowledge-based economies.
12. April 2012 at 06:50
“‘Anything that serves as a store of value, a unit of account and a medium of exchange within a particular ambit is money within that ambit to the extent it so serves.
If you want. But the quantity of it can only affect the price level to the extent that it earns less than the risk free rate. Otherwise it’s not a “hot potato.” So the hot potato effect is proportional to the total seignorage earned by the CB, a fairly inconsequential quantity. M4 is totally irrelevant for the purposes of this conversation.”
Divisia M4 is weighted for opportunity cost which is the best estimate of how hot its potato is. This is not just my personal opinion.
http://marketmonetarist.com/2012/01/04/divisia-money-and-a-subjectivist-approach-to-the-demand-for-money/
http://monetaryfreedom-billwoolsey.blogspot.com/2012/01/divisa-measures-of-quantity-of-money.html
Moneyness is also affected by opportunities to exact rent and peculiarities of the financial markets that favor certain types of financial assets for purposes for which there is a high demand.
Consider the case of an asset that pays 2% where the net present value of its use as money is 103%. You can turn non-money into money by subsidizing the opportunity cost.
12. April 2012 at 07:29
Ben, The way to raise the income of low productivity workers is with wage subsidies, not rules that make it illegal to hire them.
Liberal Roman, Good point.
K, You completely misunderstood my post, there was no guilt by association, I think Krugman and Eggertsson are both fine economists.
You won’t get any DSGE models from me, what would be the purpose? What could such a model “show?” I favor targeting NGDP futures prices. DSGE models CANNOT show if NGDP targeting is optimal or not.
Lucas is not a RBC economist, he buys the Friedman and Schwartz explanation of the Great Depression.
Peter, Good point about the underground economy. See my response to Ben.
Statsguy, You said;
“It’s the wholesale distrust of THESE GUYS.”
Fine, but have you ever met an intellectual who liked Congress? Who thought Congress took the long view? Ultimately in a democratic system Congress will make the decisions. But that doesn’t me we should ask them to make decisions that are best left to others, like say battlefield strategy, or discretionary stabilization policy. It’s better when Congress delegates some decisions to others.
Mark, I agree about the research being ambiguous. I have a poor memory, and don’t recall whether I saw that film.
Patrick, Interesting quotation.
C8to, I much prefer wage subsidies to a negative income tax. Subsidize work, not sloth.
Bonnie, Yes, we should focus on other supply-side issues, not just minimum wages.
Ritwik, Good comment.
Rien, The purpose of minimum wages is not to provide enough to raise a family. I have no intention of paying a bag boy at a grocery store enough to support of family–I’d rather bag my own groceries.
Becky, Let’s eliminate it entirely.
K, You said,
“All New-Keynesians see a very direct effect of the real rate on investment, and find the nominal rate to be largely a distraction”
Please name one NK in the entire world who was paying attention when the 5 year risk free ex ante real rate soared from 0.57% in July 2008 to over 4% at the end of November 2008.
Even if they were doing so, they were making a mistake. Never reason from a price change. It depends why real rates rose. Higher real rates can reflect easier monetary policy.
You said;
“And some of them probably still imagine the transmission mechanism as some sort of hot potato like it used to be (though it’s really hard to see why since central banks will take back any undesired non-interest bearing money and give you government bonds in exchange).”
That’s a complete non-sequitor–I’d suggest looking at Nick Rowe’s posts on that topic. Whether the Fed pegs the interest rate in the short run or not has no bearing on the HPE, which is a long run effect assuming the central bank controls the stock of base money in the long run.
You said;
“The quantity of non-interest bearing money (the rest is just debt) is of inconsequential proportions in a modern economy.”
Not true, and it makes no difference whether the economy is “modern” or not. What matters is whether the central bank can control the base, and whether the base is the medium of account.
MikeDC, Even better is letting the market determine the money supply.
Majorajam, Immigration has dropped sharply in recent years.
And I have no idea whether you are talking about old monetarist models (which have done very poorly) or market monetarist models, which have gotten this recession exactly right.
12. April 2012 at 08:55
The way to raise the income of low productivity workers is with wage subsidies, not rules that make it illegal to hire them.
maybe, but in any population of 100 employees there are 10 stellar ones, 10 deadbeats, and 80 in betweem. I just dont see subsidies as a long term solution. those 10 will remain low-productivity until they obtain better skills. Now, if they can’t afford it I’m ok with subsidizing that…
12. April 2012 at 10:19
“Higher real rates can reflect easier monetary policy.”
Sure. It depends on the difference between the real rate and the natural rate. Given the path of stocks in the period you mention, there can be little doubt as to what was happening to the natural rate. The NK model says that under those conditions a *massive* tightening just occurred. I.e. the real rate minus the natural rate shot up. The idea that you can’t tell the stance of monetary policy from the absolute level of the real rate is quite clear in the NK model, and is not a novel insight. The stance of policy is explicitly the *difference* between the real rate and the natural rate. Only RBCers, news paper “economists,” and right wingers like Taylor and Williamson worry about the absolute level of rates.
I don’t know why NKs weren’t screaming from the rooftops. Maybe some of them were. I think they tend to be more prudent, scientific types with healthy levels of respect for the practical shortcomings of current macro modelling, and as a result they are less likely to participate in public histrionics. Perhaps also, their model tells them that fiscal policy is very important under large demand shocks. The model certainly doesn’t approve of QE. Maybe they didn’t want to throw their weight behind likely-to-fail “monetary” policies, at the expense of compromising the political impetus for fiscal stimulus. But I don’t know. Just my $0.02.
As for the debate over the relevance of the base/medium of exchange, etc… it’s been debated so extensively especially, as you say, on Nick’s blog, I’m sure we wont settle anything here. It has unfortunately been futile so far… some day hopefully we’ll have it all out. I’ll try to stop bringing it up unless I really think we have an opportunity to make progress. Sorry.
At this point we’ve really deviated from my simple point which is that you unfairly accused Woodford and Eggertsson of being reformed Keynesians, who finally came around to the Lucas critique, when in fact they’ve been ratex DSGE guys from the very beginning; this in sharp contrast to the Market Monetarists whose analysis appears firmly rooted in the neo-classical synthesis (AD/AS, ISLM, etc) that Lucas so roundly criticised.
12. April 2012 at 12:37
Scott,
Market monetarism is an answer to a question no one had a reasonable basis to ask. What would make me not wrong?
In this case, part of that answer involves newfound emphasis on the tautological relationship between NGDP growth and monetary conditions, (not policy), as if semantics were capable of converting object variables into control ones. That’s not modeling, that’s desperation.
If market monetarism adds anything its by unwitting capitulation to the centrality of the Minskian framework- namely the interplay between asset prices, financing/debt dynamics, speculation and uncertainty in the context of predictable, if not naively rational, human behavior. This is what yields to NGDP its mojo.
And it’s clearly unwitting as you still manage, in 2012, to cling to absurd beliefs, e.g. about consenting adults in the age of official flows, about the real economy leading the financial one in the age where evidence could not be more overwhelming that the causality runs the other way, and about supply side impetus to the business cycle.
As to my point about youth unemployment, if you followed my link, you know the reference was to a corrupt/phony “summer work travel” program run by the State department. That’s got more to do with human trafficking than immigration. But immigration, legal and otherwise, is but one of the variables I would like to see actually accounted for before I would lend any credence to your cartoon theory that youth unemployment is a function of the miniscule minimum wage.
12. April 2012 at 12:42
PS I’d like to understand better how an infrastructure bank doesn’t meet this standard
You’ve constructed a strawman on fiscal policy, and are clinging to it for dear life.
13. April 2012 at 09:23
dwb, Wage subsidies allow low productivity workers to get jobs.
K, All I meant was that Keynesians adopted ratex after conservative economists like Lucas adopted ratex. When I was in grad school the only people who used ratex were those on the right–Keynesians hadn’t yet come on board. I don’t think I took a shot at anyone, I was merely showing that there is now widespread agreement that ratex modeling is useful–Keynesians use it too.
I don’t follow your comment about market monetarists. I always assume rational expectations, and don’t care for IS-LM at all. I don’t really see the AS/AD model as being very specific. Even Lucas’s views can be expressed in AS/AD terms, I’m not really making any restrictive assumptions about the model. I’d favor NGDP targeting even if the SRAS curve was vertical.
I don’t build structural models of the economy because those models are not convincing, and are not useful for policy determination.
Keynesians were screaming from the rooftops for fiscal stimulus, so perhaps there could have set one or two screams set aside for a complaint about soaring real rates. I’d guess most of them didn’t even know it was happening (based on many conversations I’ve had.)
Majorajam, I have no problem with an infrastructure bank, as long as the governemnt is not involved.
You said;
“In this case, part of that answer involves newfound emphasis on the tautological relationship between NGDP growth and monetary conditions, (not policy), as if semantics were capable of converting object variables into control ones. That’s not modeling, that’s desperation.”
People have been doing inflation targeting for decades, so doesn’t all this seem beside the point? I think you are also confusing NGDP expectations with actual NGDP.
13. April 2012 at 12:04
Scott: “All I meant was that Keynesians adopted ratex after conservative economists like Lucas adopted ratex.”
This is true, but I think still misleading. When you say “Keynesian’s adopted ratex” it sounds like they added it to some special Keynesian models. That’s not what happened. Woodford was a Chicago prof following the ratex DSGE program that Lucas advocated in “Methods and Problems in Business Cycle Theory” (1980). He (and others) took that framework and added the major macro market imperfections that we know exist: monopolistic producers of imperfectly substitutable goods and price/wage stickiness. That’s all. No special Keynesian sauce, and yet, out came Keynesian results. I don’t doubt for a second that some of the people working on the project were motivated to show that some neoliberal preconceptions were theoretically unjustified, and that their own Keynesian intuitions were rational. (Joe Stiglitz comes to mind). But that doesn’t change the validity of the model, which stands on its own.
If the model was rigged, somebody ought to have shown us a properly microfounded model with those known market failures that *doesn’t* produce those same results. Or, at the very least, a microfounded model that comes close to fitting macro empirical data without a Say’s law violation. I.e. the RBC project, but unfortunately it really has been an empirical failure. AD, as it turns out, is for real.
Lucas, BTW, was very clear about what he meant by “rational expectations.” In particular, he rejected verbal arguments about how one particular static macroequilibrium model might transition to another. Ratex is too complicated to know if you are actually satisfying it unless you explicitly ensure that it is enforced in a multiperiod *stochastic* framework. Anything else is just lip service, as it’s simply too hard given intertemporal optimization and general equilibrium. It’s just way too hard to know if you’re being consistent using hand-waving, and Lucas went as far as to demand that an acceptable DSGE model be specified as a “FORTRAN program.” And it was a really good point. Which is why I object when you claim to be ratex consistent. You can’t claim that in your static AS/AD framework.
13. April 2012 at 16:52
Seems to me one’s a useful way to muffle the echo of Keynes’s General Theory, e.g. ‘animal spirits’ and liquidity preference, and the other is a good way to actually measure those things. Perhaps it’s you that’s confused.
On inflation targeting, I assume you’re talking about policy, on which the record is an equally spectacular failure to the discretionary regime you rail against (which is not terribly surprising given the degree to which these things are distinctions without difference).
As to the infrastructure bank, aside from the specifics of the projects themselves, I see no reason why one could not be governed as systematically as any non-discretionary monetary authority. Can we put you down as supporting the idea then?
Btw, I find it ironic that people like yourself have empowered the opposition to stymie fiscal policy by plying them with arguments of questionable merit, but yet you blame Congress for that institution’s ineffectiveness (and what’s more, use it as an argument for taking decisions out of their hands). During the Bush administration, there was consensus on stimulative policy during recessions, if not its form. Maybe the problem here is different than the one you’ve prescribed.
13. April 2012 at 17:13
If you’re going to have rational expectations, I think the only intellectually defensible approach is to argue that it is emergent even with not (entirely) rational expectations on the part of individual micro agents.
In fact this could be an advantage, since the program of generating macro from aggregation of micro is mathematically suspect.
Having a subtler idea of what it means to aggregate and invoking emergent behavior, is harder to refute, yet it doesn’t cross over into the unfalsifiable territory of pure belief.
Note that the Friedman Darwinian argument is very weak without a great deal of close analysis, a mere invocation of emergent behavior isn’t enough to repair it.
Maybe, however, emergent behavior gives another avenue of attack. The math is likely to be hard, though.
It isn’t how you do rational expectations, it’s your justification for doing. BTW trying to justify ratex based on equilibrium is suspect without unrealistic preconditions.
27. February 2017 at 06:43
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