A graceless and petty reply to Tyler Cowen

No, I’m not referring to Krugman’s latest, that’s a dog bites man story. I’m referring to this post, which relentlessly nitpicks a Tyler Cowen argument with which I sort of agree.

It’s not very glorious or motivational, but here goes: the costs of inflation, within reasonable ranges, are not very high.

There are no costs of inflation.  What is widely believed to be the costs of inflation is actually the cost of excessive NGDP growth.  (Otherwise I agree.)

I am more agnostic about the gains from monetary expansion than are many of its advocates.  I think we do not know where the point of “potential output” lies, I think sticky nominal wages (especially for new labor market entrants and the unemployed) are overrated as a problem, I doubt the ability of the Fed to make credible commitments at this point, and often I view “hiring” as more of an multi-dimensional investment and longer-term commitment, which requires various variables to be set at the right places, not just the short-run real wage in spot markets.

I agree that we don’t know where potential output is, but I don’t think that has any bearing on monetary policy, which should promote 5% NGDP growth regardless of potential output.  I also agree that sticky wages for the unemployed and new market entrants are not much of a problem (although as Paul Krugman showed with his $160,000 lawyer example a few days ago, they are a bit of a problem even for new entrants.)  But even if there was zero wage stickiness for the unemployed, aggregate wage stickiness would be a huge problem.  It’s a game of musical chairs, and given the current level of NGDP all the chairs are currently occupied by “insiders.”  As far as credibility, no fiat money central bank has ever tried to inflate and fail.  Given the massive market responses to trivial Fed and ECB signals, imagine how markets would react if they did something bold.

A bit more personally or perhaps psychologically, the contrarian in me gets nervous when I read the ongoing ritual excoriation of Ben Bernanke in the blogosphere, every time the Fed decides to take no further major action.

I get very nervous when I read the ongoing ritual excoriation of Ben Bernanke in the stock market, every time the Fed decides to take no further major action.  That’s because I believe the stock market is much smarter than me, and even a bit smarter than the wisest economist in the blogosphere.

Still, at the end of the day if we try further monetary expansion and it fails to stimulate employment, I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate.

If we’d had 2% inflation over the past 4 years, I believe the recession would have been far milder.   I don’t favor a 2% target, but we aren’t failing because the Fed is targeting inflation at 2%, we are failing because they are running 1.1% inflation at a time when the dual mandate and the Taylor Principle suggest they should be temporarily overshooting their 2% flexible inflation target.

How’s that for ingratitude!  Seriously, I believe that nitpicking over even small points is a good way of advancing the discussion.

Off topic:  Tyler complained about the following:

Let’s put it this way.  Paul Krugman is a great economist.  But of all the people in my RSS feed, in terms of his quality and skill as a reader, he is not in the top 90 percent.

It seems to me that Krugman is sort of sitting up on Mt. Olympus, occasionally throwing clever barbs at the rest of us.  The usual pattern is that we say something and then he misinterprets what we say and mocks what he thinks we said.  Then we have a rejoinder and essentially win the debate.  And then he ignores the rejoinder.  I’m not quite sure why he operates this way.  He’s a very talented debater and would win most debates.  It would be interesting to see him get off Mt. Olympus and actually engage with the blogosphere, instead of taking potshots at caricatures of the argument actually being presented.  But that’s for him to decide.

PS.  Arnold Kling has the following to say:

It would be much better if the Fed were buying less debt. But the inflationary threat, in my view, is the amount of debt being issued. What worries me is not the debt that the Fed buys today, but the debt that the Fed will be forced to buy in the future, even if inflation picks up. Eventually, the government is going to find a way to default, and high inflation is one way to do it.

I would add that if the Fed bought much more debt, then the Treasury would be issuing much less debt.  So easier money today greatly reduces the long term risk of high inflation generated by monetizing the excessive Treasury debt.

PPS.  Ryan Avent has a great post on the central importance of NGDP. Ed Dolan also chimes in.  It seems to me that NGDP is gradually becoming more widely accepted as a useful indicator of Fed policy.  As I noted in my previous post, even Krugman is now using NGDP as a way of explaining the problem.  Maybe I was unfair when suggesting he doesn’t read my blog carefully.

PPPS.  I didn’t realize until now that today would have been the 100th birthday of my favorite economist.  So I don’t have a post prepared.  My favorite Friedman comment was in response to someone asking him what sort of schools would be provided under a voucher system.  I believe he replied something to the effect; “If I knew the answer, I wouldn’t favor vouchers, I’d just instruct the public schools to operate that way.”  Sometimes people ask me what sort of QE would be necessary to hit my NGDP target.  My response is that if I knew the answer I wouldn’t favor NGDP futures targeting, I’d just instruct the central bank to set the base at that level.


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79 Responses to “A graceless and petty reply to Tyler Cowen”

  1. Gravatar of Wonks Anonymous Wonks Anonymous
    31. July 2012 at 07:17

    “What is widely believed to be the costs of inflation is actually the cost of excessive NGDP growth”
    So if real GDP was growing at 10%, with price inflation at 0%, you would conclude that we’d be better off with less real GDP growth?

  2. Gravatar of Major_Freedom Major_Freedom
    31. July 2012 at 07:42

    There are no costs of inflation

    Egads man, there are ALWAYS costs to EVERY action! It’s an economic law for crying out loud. If you do X, then that action makes all other alternative actions impossible. You sacrifice everything else when you choose X, at that time, in that place, and you make impossible all other goals that could have been achieved using the scarce means you used up in action X (even if it’s just your body and time!).

    Then there are the costs incurred by others NOT the central bankers themselves, who incur the costs of the benefits the initial receivers of money receive, due to being forced to accept US dollars for taxation and legal tender laws. These costs seem to always be ignored/evaded/denied/belittled/hidden whenever monetarists talk about the costs of inflation.

    Even if there is 99% idle resources and 99% unemployment. A single printed dollar in the existing monetary regime (which is socialist, by the way) that benefits the person who received it, comes at not only the cost of what was given up in the actual action of inflation, but there are also costs incurred by every single person in the country who owns dollars and dollar denominated assets, whose cash and incomes are depreciated in value from what it otherwise would have been.

    No, you can’t say that because one printed dollar gets one idle resource to be used, such that everyone else’s cash and incomes now accompany 98% idle resources, that their real incomes grew. You can only say real incomes grew if the entire process was voluntary, for that is the only way that actual valuations of real goods and of money can be known by you and me and everyone else.

    This isn’t rocket science.

  3. Gravatar of Catherine Catherine
    31. July 2012 at 07:43

    But even if there was zero wage stickiness for the unemployed, aggregate wage stickiness would be a huge problem. It’s a game of musical chairs, and given the current level of NGDP all the chairs are currently occupied by “insiders.”

    Yes! Yes! Yes!

    I’ve left this comment elsewhere, but from where I sit (in Westchester County), the idea that sticky wages aren’t a problem is crazy.

    In New York state, thanks to the Triborough Amendment, we have not only sticky wages but sticky raises: the existing step and lane increases in public sector contracts remain in effect after a contract expires.

    Operationally, this means you can never roll back contracts negotiated during a boom because most provisions of the old contract never actually expire.

    My very well funded, tiny district ($29K per pupil; 1756 students) has been laying off approximately 8 employees each year since the crash because the union contract guarantees far-above-inflation raises, and that contract remained legally binding after it expired. (Annual raises prior to the crash were around 8% as I recall.)

    The new contract, signed just this year, guarantees roughly 4% annual raises under a tax cap of 2%, which means more layoffs. I assume the board agreed to the new contract because it was actually better than living under the expired old contract (although I don’t know).

    Teachers, administrators, aides, and clerical staff are losing their jobs right and left here in New York state, and I assume the same is true of other public sector employees as well.

    Musical chairs.

    I’ve posted charts & data about my district here: http://irvingtonparentsforum.wordpress.com/2012/05/12/4-is-not-2/

    As far as I know, every other district is in the same boat.

  4. Gravatar of Catherine Catherine
    31. July 2012 at 07:46

    Another data point: one of my brothers-in-law tells me that since the crash he has had one pay cut of 5% and no pay raises.

    Meanwhile his company has laid off so many people that he says it won’t be able to function at all if anyone else is laid off.

    There is a zero bound for pay increases.

  5. Gravatar of Catherine Catherine
    31. July 2012 at 07:57

    Not your father’s bell curve

  6. Gravatar of Jj Jj
    31. July 2012 at 08:08

    Here’s the problem: if you level-target NGDP growth (or preferably, average wage growth) at 5%, you will soon see wages being “stuck” increasing at 5% per year. You may get an initial decade where wages are liquid, but over the long term, some amount of the 5% – if not all – is going to get baked-in to people’s wage expectations.

  7. Gravatar of ssumner ssumner
    31. July 2012 at 08:09

    Wonks, No, we’d be better off with less NGDP growth but the same RGDP growth.

    Catherine, That NY example is a good one. Thanks.

  8. Gravatar of Bill Ellis Bill Ellis
    31. July 2012 at 08:10

    Jj

    Is that a bad thing ?

  9. Gravatar of ssumner ssumner
    31. July 2012 at 08:16

    jj, Actually 4% (due to population growth.) And that’s desirable. Indeed I’d prefer a 4% wage target to a 5% NGDP target

  10. Gravatar of Doug M Doug M
    31. July 2012 at 08:19

    ssumners says,

    “I get very nervous when I read the ongoing ritual excoriation of Ben Bernanke in the stock market, every time the Fed decides to take no further major action.”

    based on what data. Over the last year stock market has rallied more often than not of FOMC days and the trend has generally been up.

    As far as Krugman goes, I don’t know why anyone reads him. I can barely tell the difference between Krugman and Limbaugh. Different parties, equally entrenched.

  11. Gravatar of Catherine Catherine
    31. July 2012 at 08:21

    There is a zero bound for pay increases.

    Sorry – I mean “a zero bound for pay cuts.”

  12. Gravatar of Bill Ellis Bill Ellis
    31. July 2012 at 08:22

    Matthew Yglesias goes all righteous on Tyler Cowen and his hint of sympathy for Bernanke. From today…

    (Cowen)…”A bit more personally or perhaps psychologically, the contrarian in me gets nervous when I read the ongoing ritual excoriation of Ben Bernanke in the blogosphere, every time the Fed decides to take no further major action.”

    (Yglesias) …”Everyone’s entitled to be as contrarian as they like, but I think that if you’re siding with all the relevant decision-makers then you’re not really being much of a contrarian.
    It seems to me that even in circles that are favorable to looser money, I read much too much personal sympathy for Ben Bernanke on the grounds that he’s an official member of the Smart Economist’s Cool Kids Club. People seem to put a lot of time into explaining the political pressures and constraints he’s under, as if we’ve completely forgotten the decades-long conventional wisdom in which there was thought to be an inherent inflationary bias to monetary policy that had to be combatted with strict policies of central bank independence. Whether or not that was a good idea, the impact of central bank independence is to put an awesome level of power and responsibilites onto the shoulder of the Federal Reserve Chairman. The moral stakes are high. Nobody forced Bernanke to take the job. Sharp business cycle downturns lead to, among other things, large spikes in suicide rates. Lets explain to those families about the difficulties central banks face in making credible commitments.”

    http://www.slate.com/blogs/moneybox/2012/07/31/monetary_poicy_complacency_is_the_conventional_wisdom.html

    Ouch…if you don’t beat up on Ben you are contributing to an increase in suicides !
    Hyperbolic ? Sure sounds that way…But in reality, IMO, not really.

  13. Gravatar of Philo Philo
    31. July 2012 at 08:45

    A number of bloggers’ tributes to Milton Friedman lament that he is no longer among us. Fortunately his mantle has fallen upon the shoulders of one worthy to bear it. Let us pray that we do not soon lose Scott Sumner!

  14. Gravatar of John hall John hall
    31. July 2012 at 08:50

    “I agree that we don’t know where potential output is, but I don’t think that has any bearing on monetary policy, which should promote 5% NGDP growth regardless of potential output.”

    I’m not sure you really believe that potential output should have no bearing on monetary policy. I believe I’ve heard you say how you got to a 5% target two ways. One was looking at NGDP during the Great Moderation, while the other was noticing a 3% real GDP growth over history and added 2% as a reasonable inflation rate. That 3% real growth is consistent with the whole potential GDP argument (I feel this argument would be stronger if I could actually find an occasion of you saying this, but a quick google search didn’t bring up anything).

    If potential GDP does not matter, then what would be wrong with a theoretical 10% or 100% or 1000% nominal GDP level path? The growth path of NGDP would be stable, which is one of your (and many others’) concerns. However, inflation would be either high, very high, VERY VERY high. I refuse to believe that expected 997% inflation would exert zero costs on the economy.

    I think I find the distinction on the marketmonetarist blog somewhat helpful when they used a simple technique to split inflation into demand and supply inflation (http://marketmonetarist.com/2011/12/17/a-method-to-decompose-supply-and-demand-inflation/). Targeting a 2% demand-side inflation path could be applied to every country, whereas a 5% NGDP path would be most appropriate for countries with closer to a 3% long-term real growth rate.

  15. Gravatar of Ryan Ryan
    31. July 2012 at 08:57

    My response is that if I knew the answer I wouldn’t favor NGDP futures targeting, I’d just instruct the central bank to set the base at that level.

    I think this pretty much sums up what I don’t like about this whole NGDP model.

    At first, I used to think the problem was that it called for a perpetual debasement of the value of money. That’s still a problem, but it’s not the real problem.

    The real problem, as I see it, is that the better I understand it, the less all this stuff appears to mean anything. What is a policy suggestion that doesn’t suggest anything specifically? Target NGDP how by doing what? What does it actually mean if in Wonks’ economy RGDP grows by 10% but NGDP doesn’t?

    They sound good, because you can define them as different concepts, but I keep going back to what I think was one of the first questions I ever asked on this blog: How do I know if what I am spending is real or nominal? Whenever I ask this question, everyone quickly insists that I don’t get it.

    But I do get it. Real versus Nominal GDP in the Sumnerian sense is a purely intellectual construct. It doesn’t actually exist. It’s not like price elasticity, which is an artifact of actual behavior. It’s just this big haze of nothing. It’s a giant slack variable.

    It’s like saying, “Define variable X to equal 0 when monetary expansion is required and 1 in all other cases. Then, when variable X is 0, monetary expansion is required.”

    Well, yes. Of course. If you define a tautology, then it will behave tautologically.

    I don’t know about this stuff anymore. I know I’m simplifying the argument a bit in order to criticize it, but this is just a blog comment, after all.

    I like my economic concepts to actually mean something. Maybe the reason the Fed isn’t targeting NGDP is because they actually sat down one day to figure out how to do it and realized that none of their computers have a “target NGDP growth” button.

  16. Gravatar of Bill Ellis Bill Ellis
    31. July 2012 at 09:00

    Catherine,

    In Germany government policy encourages cutting hours across the board rather than lay offs.
    They even offer “Part time” unemployment benefits.
    Say a firm has to cut payroll cost by 10%. Instead of firing 10% of the work force they cut back hours by 10%. The 10% cut is then offset by the government.

    Wage stickiness is a problem that the government can help ameliorate.

  17. Gravatar of Saturos Saturos
    31. July 2012 at 09:10

    I was going to ask Scott for a reply to Tyler, but this is great. However, there is something missing. I would have liked a comment on how discretionary changes in the inflation target ought to be avoided; conservatives are right to fear them, and Bernanke is correct in dismissing the option (presented that way). (This was my main objection when reading the Tyler post.) However, a better rule would require the Fed to target the forecast so as to keep the economy on a stable level path (preferably an NGDP level path). If we were to do it now then it would be optimal to target a path halfway up to the old trendline; however even if that has to be sacrificed to the conservatives it would still be a massive improvement on policy now and in the future to follow a level target.

    Indeed, why hasn’t anyone asked Bernanke why he hasn’t taken Woodford’s advice (the official recommendation prior to 2008) of level targeting, ever since the weak performance of the economy for the past few years associated with the ZLB, and the tug-of-war between those thinking policy should be more stimulative or less? Why hasn’t Bernanke recommended this option? And why do they not target the forecast? What are the “costs and risks” of doing these things?

    While we’re nitpicking, if Krugman reads this post carefully, let’s hope for Scott that he doesn’t come up with a “rejoiner” which reveals him to be “smart than” him. (As a Keynesian perhaps he thinks he’s “smart than” stock markets. Or perhaps we’ll eventually see him incorporating asset market reactions into his posts to evaluate policy. Then we’ll know he’s arrived.)

  18. Gravatar of Saturos Saturos
    31. July 2012 at 09:13

    But even if there was zero wage stickiness for the unemployed, aggregate wage stickiness would be a huge problem. It’s a game of musical chairs, and given the current level of NGDP all the chairs are currently occupied by “insiders.”

    This still doesn’t seem clear to me. What prevents managers from threatening to replace incumbents with cheaper (flex-wage) outsiders? And iterating until all incumbent wages are cut?

  19. Gravatar of Catherine Catherine
    31. July 2012 at 09:18

    Bill –

    Thanks! I’ve been very curious about their program.

    (There’s a name for it, right?)

    I think I’ve read (maybe here) that there was actually a fair amount of ‘job sharing’ in the Great Depression.

    I’ve lived the reality of ‘missing knowledge’ throughout this minor depression. Maybe I’m wrong, but it seems to me that during the Great Depression ordinary people as well as Senators had a bit more basic comprehension of ‘musical chairs’ and what might be done to help.

    Here in my tiny town, the concept of cutting raises so that everyone could stay on the job was never raised (by anyone other than me), to my knowledge, although one resident proposed one- or two-day furloughs.

    This is a town filled with highly educated residents, many employed in math-related fields, and yet we have just one person even using the expression ‘sticky wages.’

    It’s crazy. My district’s only budget problem at this time is the fact that we are committed to 4% annual raises under a tax cap of 2%. Every employee could easily stay on the job if raises were capped at 2%.

    Instead, we are laying teachers off — and we are doing so in the name of raises, not wages.

    I realize other states don’t have the Triborough amendment (though CA apparently has something similar). But that just means other states are likely to have sticky wages instead of the sticky raises we have here.

    For my money (and it is my money, unfortunately) the fact that New York state could have sticky raises during a prolonged slump is strong evidence of just how powerful the money illusion actually is.

  20. Gravatar of ChacoKevy ChacoKevy
    31. July 2012 at 09:20

    @Catherine
    http://en.wikipedia.org/wiki/Kurzarbeit

  21. Gravatar of Doug M Doug M
    31. July 2012 at 09:20

    Bill Elis,

    “In Germany government policy encourages cutting hours across the board rather than lay offs.
    They even offer “Part time” unemployment benefits.
    Say a firm has to cut payroll cost by 10%. Instead of firing 10% of the work force they cut back hours by 10%. The 10% cut is then offset by the government.

    Wage stickiness is a problem that the government can help ameliorate.”

    This is a program to enforce wage stickiness.

  22. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2012 at 09:21

    Bill don’t get excited under a 4% wage target, you’d still see the top 20% earning 10% more and hte bottom 80% getting 1%.

    The “baked in” wage assumption would not be 5%, unions, particularly public employee unions are done.

    Bill, Germany is trying to become the US, whatever they do know they will change sooner than later…. pretty soon the PIGS are gong to go South Carolina on them.

    Ryan Avent hits the nail on the head:

    “We can put this differently. There is no case (or no realistic case) in which a central bank loses the technical ability to adjust demand, but there are situations in which the central bank can only raise demand in ways that reduce the welfare of a critical constituency. In such cases, demand can only be raised through programmes which adjust the distribution of the returns to more demand across political interest groups, which requires fiscal action.”

    The PROBLEM is that MM does a shit job at courting the deciders.

    IF MM could convince the GOP, say Paul Ryan and Newt Gingrich and maybe Ron Paul, to adopt a 4.5% NGDPLT target – it would become policy in short order.

    It would give Mitt Romney the cover he needs to adopt it, and BAM, Ben is out, and Scott someone is installed at Fed who will adopt it.

    BUT, you have to convince the radical right that speaks for the Top One Third and Ron Paul (for good measure), and to do that you have to SPEAK THEIR LANGUAGE..

    ——

    On this day we celebrate Uncle Milty’s 100th, how can you eggheads not grasp the one clearest part of what made Friedman into Uncle Milty???

    The man HATED GOVT. He railed against it, he screamed about it, he took loud publicly obnoxious positioons against it.

    And THUS, when he SPOKE MONETARY he carried along the Tea Party crowd.

    The DECIDERS, the Top 1/3, the Hegemony.

    MY GOD, I tilt at you windmills, and mins is a thankless job.

    In end end, Matty and DeKrugman will NEVER support a 4.5% or 5% NGDPLT target – it does their side mortal harm and the know it.

    It isn’t an honest discussion you are all having, you refuse to get down to brass tacks.

    Say what this thing really is. Stop beating around the bush.

  23. Gravatar of Catherine Catherine
    31. July 2012 at 09:22

    What prevents managers from threatening to replace incumbents with cheaper (flex-wage) outsiders? And iterating until all incumbent wages are cut?

    Oh gosh — I know this answer! Or I did.

    I’m not going to remember the term, but there is a term for this phenomenon. It has to do with management — with keeping workers productively on task.

    Basically, cutting people’s wages means cutting people’s productivity.

    Apparently, threatening to replace your existing employees with cheaper employees isn’t a great management technique, either.

    Beyond that, a lot of people don’t like to fire other people, and they avoid it if they can!

  24. Gravatar of Catherine Catherine
    31. July 2012 at 09:23

    chako – thanks!
    (I bet you know the term for intentionally paying workers above-market rates, too—)

  25. Gravatar of JL JL
    31. July 2012 at 09:33

    Scott,

    Another fine post. Loved the anecdote on Friedman.
    Nothing graceless or petty about it.

    It’s frustrating to me that smart people like Tyler don’t seem to get it.

    Krugman is politically biased; I can understand political bias.
    But Tyler seems contrarian for the sake of being contrarian.

    I think it’s time to revisit helicopter Ben:
    “Dear American,
    Inflation has been hovering around 1.1% lately and unemployment is much too high.
    In order to achieve this years inflation target of 2% we are providing you with this fresh, crisp Benjamin.
    Enjoy.
    Yours truly, B. Bernanke”

    That would be $40 billion of QE that would convince the public of the virtues of QE.
    By golly, it might even restore the peoples faith in their government!

  26. Gravatar of Saturos Saturos
    31. July 2012 at 09:41

    Great – so now our intrepid 18 year old genius is honobbing with the world’s most famous economists #slightlyjealous

    https://twitter.com/esoltas/status/230166968639037441

    Catherine, yes, but efficiency wages & morale effects don’t seem strong enough to account for all the stickiness. You’re not seriously going to tell me that 3 million people are out of work because of freaking efficiency wages.

  27. Gravatar of dwb dwb
    31. July 2012 at 09:55

    re: school vouchers

    you know, it would be interesting if you posted ideas based on your vast experience on measuring productivity and performance in a classroom, this is a big part of the school voucher debate. My own thoughts are kind of mixed on this. i have very mixed feelings about using standardized tests as a way to measure teacher performance (teachers clearly teach so that their students outperform on exams, but what these exams are measuring is dubious in higher level classes – and we all have vast experience with them).

  28. Gravatar of Greg Ransom Greg Ransom
    31. July 2012 at 10:37

    More proof that Friedman learned his Hayek well:

    “My favorite Friedman comment was in response to someone asking him what sort of schools would be provided under a voucher system. I believe he replied something to the effect; “If I knew the answer, I wouldn’t favor vouchers, I’d just instruct the public schools to operate that way.”

    But I actually don’t believe Friedman would have said this.

    Friedman know that what you tell a bureaucracy to do is NOT what the bureaucracy produced.

    Friedman was once a government employee.

    He wasn’t just an ivory tower guy.

  29. Gravatar of ChacoKevy ChacoKevy
    31. July 2012 at 10:47

    @Catherine again:
    Not sure if I’m right this time; are you talking about firing aversion?
    http://econlog.econlib.org/archives/2012/02/firing_aversion.html

  30. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2012 at 10:57

    This is genius

    http://www.technologyreview.com/news/428440/when-crowdsourcing-gets-outsourced/

  31. Gravatar of Saturos Saturos
    31. July 2012 at 11:38

    Lorenzo’s latest (monetary) post is actually sort of a masterpiece: http://skepticlawyer.com.au/2012/07/30/broken-by-the-fix/

  32. Gravatar of Saturos Saturos
    31. July 2012 at 12:02

    Scott, does Bryan’s argument make sense? http://econlog.econlib.org/archives/2012/07/nominal_rigidit_1.html

  33. Gravatar of Matt Waters Matt Waters
    31. July 2012 at 12:15

    Sticky wages are a big issue even for new market entrants. Here’s how.

    Tyler and many others are stuck on the concept of the market for labor being like any other market. All other markets continually find the cheapest and best provider. The AD curve shifting down therefore does not lead to a bunch of gas sitting idle in tankers. The price of gas sitting in those tankers due to lower AD goes down until the market buys up that gasoline.

    The typical view of sticky wages is the issue lies with the gas sitting in tankers not accepting that low market-clearing price. Actually reservation wages have very little to do with sticky wage issue.

    Instead, the main issue lies with the inherent economies of scale of firms in industrialized economies. Even in the most dynamic economies, most industries have a limited number of firms which take years or decades to build up to their appropriate scale.

    When a sector’s nominal revenue goes down, firm owners have to either reduce headcount or reduce nominal wages. Firms always reduce headcount while keeping nominal wages steady and thus real wages above market-clearing levels.

    Theoretically, both the laid-off workers and new entrants would be able to undercut the incumbent employees. Here is where the issue of economies of scale comes in. There may be only a handful of firms who, say, build bridges and some new engineers can’t just go out and start a bridge-building company. They have to work at one of the incumbents.

    ALL of the incumbents, however, are paying the remaining their remaining employees higher-than-market wages. For an incumbent to hire a new entrant at the market wage, they would have to have unnecessarily lay off a current employee to make revenue room for a cheaper new entrant.

    For the cycle to complete itself when no current employee takes a wage cut, you would basically need complete, 100% turnover in the labor market. This happens in the market for gasoline every day, but for common sense reasons it takes up to a decade or more for such turnover in the labor market.

  34. Gravatar of Bill Ellis Bill Ellis
    31. July 2012 at 12:21

    Doug M,

    This is a program to enforce wage stickiness.

    Ha! I get that. Good point.

    I guess what I was trying to say is sticky wages are a real thing. But the way we deal with them is to fire people. But there is an alternative.
    The Germany way has the benefits of not wasting the investment that business make in training their employees, and the employees are ready when the business cycle turns around. Plus it is just way more humane.

  35. Gravatar of Morgan Warstler Morgan Warstler
    31. July 2012 at 12:31

    Matt,

    you are explaining exactly why we need to push laid off workers into a program that immediately prices their value day to day.

    When you are laid off, we want you to work tomorrow and earn less… see my plan here:

    http://pegobry.tumblr.com/post/21427545322/morgan-warstler-via-steve-randy-waldman

    In such a system, the barriers to entry for new firm creation go down.

    You see this happen very aggressively in ad agencies.

    You know you can peel off a big client that loves you, you quit, you incorporate, and start stealing guys who carry their client roster with them.

    A couple years in your firm is acquired by the global players, you get you big pay day, and the cycle starts again.

    The NET EFFECT is that the competent top 10% of the workers have a far easier time of drawing blood from the incumbents.

    —–

    The point being that FORCING the NEW FIRED to be auctioned, encourages NEW FIRM CREATION, by allowing the competent to more quickly spin up and compete.

    This environment in turn will force the incumbent system that you are talking about to REJIGGER, since the barrier to entry are lower, you will be forced to how you structure contracts and pay int he first place.

    That’s the real policy goal, to TRY and make wages less sticky, not to accept it as an ugly fact.

  36. Gravatar of Matt Waters Matt Waters
    31. July 2012 at 12:36

    “This still doesn’t seem clear to me. What prevents managers from threatening to replace incumbents with cheaper (flex-wage) outsiders? And iterating until all incumbent wages are cut?”

    My post above answers this point.

    To expound some more on that post, there is really a microeconomic, oligopolistic game theory problem when firm managers face a choice of:

    1. Cutting headcount (or hours) to make wage costs below revenue.
    2. Cutting wages for current employees.
    3. Cutting current employees PAST what’s needed to cut wages below revenue, and then replacing them with cheaper unemployed workers or new entrants.

    Employers can’t really control their employee’s productivity directly like they could machines. I am posting this at work, after all. The relationship has to be built somewhat on trust or the employer becomes uncompetitive as the costs of monitoring and control of employees outweighs the gains.

    Furthermore, only the lowliest positions are commoditized to where employees can be hired and fired with little costs. For all other work, there are substantial costs to turnover which outweigh the possible wage savings. For this reason, no firm maximizes their profit with option #3.

    The choice is then between #1 and #2. In theory, the firms who choose #1 could lose out to some hardass managers who choose option #2. But remember there are limited firms in every industry due to economies of scale. As the firms become more limited, the hardass manager that chooses #2 gains less in terms of extra profits. In the real world, managers are fine with #1 as long as everybody else chooses #1, and so everybody chooses #1.

    With every incumbent firm choosing option #1, both new entrants and laid-off workers can only get jobs with natural attrition in incumbent workers. This happens very slowly and then only the best entry-level or laid-off workers get jobs, which just happens to be *exactly* what we have seen with unemployed workers or college graduates.

  37. Gravatar of UART UART
    31. July 2012 at 13:42

    “The usual pattern is that we say something and then he misinterprets what we say and mocks what he thinks we said. They we have a rejoiner and essentially win the debate. And then he ignores the rejoiner.”

    Exactly.

    “I’m not quite sure why he operates this way. He’s a very talented debater and would win most debates.”

    That’s because you’re using the wrong metric. Sure, if his goal was to persuade economists who “[don't] provide analysis or information I need to take seriously”, to use his own words (http://goo.gl/lli7o), then losing debates in abstentia is a pretty poor approach. If, however, your goal is to pre-emptively delegitimise your opponents and maintain your own perceived nigh-infallibility among your readership (see e.g. http://goo.gl/rLxSs, http://goo.gl/Ekj5v), then “sitting up on Mt. Olympus, occasionally throwing clever barbs” is a far better way to go about it than engaging in lengthy exchanges which put said infallibility at risk. If you genuinely believe that your opponents are, almost to a man, bought-and-paid-for hacks who are intellectually scamming the public, then presto! Your personal and professional incentives align perfectly.

    A prime example: a few months ago, Krugman wrote the following (http://goo.gl/L1iVs): “What will it take for pundits to realize that if Veronique de Rugy, for example, cites a number you can pretty much assume that it’s wrong?” That would be questionable enough on its own, but their previous run-in had been during deRugy’s spat with Jonathan Chait over the progressivity of the US tax system. Chait had referred to her as a “ubiquitous right-wing misinformation recirculator”, a “lesser light of the intellectual world”, and (hilariously) proclaimed her “totally unqualified”; Krugman chimed in to endorse Chait while protesting that he was being too forgiving (http://goo.gl/EJhLI). The only problem was that deRugy was right (http://goo.gl/25Rcv), just as Mankiw had been about the same data a year earlier (http://goo.gl/x2RwN) when Yglesias accused him of misleading the youth of America and advised that he be blacklisted from teaching. But the fact that people who read deRugy would have a far better understanding of the issue than those who stuck with Chait/Krugman was irrelevant; she had been duly banished from Krugman’s tight circle of Really Actually Serious People.

    Similarly, 90%+ of Krugman’s readership will now reflexively react to any mention of Tyler Cowen by thinking, “isn’t that the maniac who wanted a caste system?” How could engaging in debate possibly be more persuasive than that?

    “… even Krugman is now using NGDP as a way of explaining the problem.”

    Indeed. It would be nice if he acknowledged the increasingly Sumnerian/MMT tinges in his writing over the past number of months. On the upside, if monetary policy is tried on the scale that you’d like and works, Krugman will now be able to point to these posts and say “look! I’ve been saying this for ages!”, despite the fact that he spent the crucial period in 2008/9 telling anyone who’d listen that fiscal policy was the only game in town. So that’s nice.

  38. Gravatar of Doug M Doug M
    31. July 2012 at 14:39

    Matt Waters,

    I would say your analysis is about right.

    Regarding 1) there is a difference between cutting headcount and cutting hours. Most companies will cut headcount.

    If you cut hours or wages the underemployed feel taken for granted and long for the good old days. The best people will leave for jobs where they can find full-time or better-paid work. Those who stay are the least motivated or least employable.

    So you cut personel. It is important for the survivors to beleive that bad news is over and there will not be more cuts down the line. Do not go through multiple rounds of layoffs. So, companies may cut slightly more than they think is necessary.

    If you do #3) there will be bad blood between the survivors and the scabs. If you go this way better hire the new people back in a different location (like Mexico). Even if you do this, how do you convince those people still employed at high-wage sites that there isn’t a giant target on their back, and their job is not about to go overseas as well?

  39. Gravatar of Krzys Krzys
    31. July 2012 at 15:15

    Why is he operating this way? Because he’s not trying to have a debate, but to deligitimize his opponents. HHe’s not an analyst. He’s political hack.

  40. Gravatar of Krzys Krzys
    31. July 2012 at 15:15

    Why is he operating this way? Because he’s not trying to have a debate, but to deligitimize his opponents. HHe’s not an analyst. He’s political hack.

  41. Gravatar of ssumner ssumner
    31. July 2012 at 17:02

    Doug, Stocks clearly rally on signs of easing, there are dozens of data points to support that claim.

    Bill, I saw that.

    Philo, Thanks. I certainly don’t plan to live as as long as he did.

    John, I don’t think you understand my argument. A 100% NGDP growth rate would be very harmful, for the reasons most people think high inflation is harmful.

    And you said:

    “One was looking at NGDP during the Great Moderation, while the other was noticing a 3% real GDP growth over history and added 2% as a reasonable inflation rate.”

    No, I don’t think RGDP matters. My point was that the Fed had seemed to arrive at 5% during the Great Moderation, for that reason. Inflation and RGDP growth don’t matter to me.

    Ryan The issues of what to target, and at what rate of growth, are entirely different.

    Saturos. GOD I HATE APPLE COMPUTERS! I had those words spelled correctly and my computer changed it. Does anyone else have this problem? In the last few weeks I’m finding the computer changes my spelling over and over again. To something I didn’t type.

    You said;

    “This still doesn’t seem clear to me. What prevents managers from threatening to replace incumbents with cheaper (flex-wage) outsiders? And iterating until all incumbent wages are cut?”

    Wow! Things must be really different in Australia. Try doing that here and see what happens.

    Thanks Jl.

    dwb, I don’t think the purpose of education is to make students good at passing tests, rather it’s making the parents (customers) happy. If they think high school football is more important than evolution, then schools should stop teaching evolution and put more money into high school football.

    Saturos, I believe that’s a real rigidity, not a nominal rigidity.

    Matt Waters, Very good point.

  42. Gravatar of Benjamin Cole Benjamin Cole
    31. July 2012 at 17:37

    Nice blogging by Scott Sumner.

    I don’t understand the sentiments of those who say the Fed should not do more—at the risk of being to cynical, I suspect it is simply politically motivated at this point. They want Obama to lose. Why keep pondering or debating?

    Actually, I hope Market Monetarists move to the challenges that lay ahead. What to do with increasing central bank balance sheets? Can we monetize debt and deliver tax cuts to taxpayers, and still avoid inflation? I think so. The experience in Japan, and the brief experience in the USA, suggest that QE at zero bound is not inflationary. (I hate that word too, btw).

    And into the even more controversial territory: Is the much ballyhooed central bank independence a good idea, if they are directing hundreds of billions of dollars back into national Treasuries? Has central bank independence produced good results since 2008? Better than if they might have been voted out of office?

    Was Don Regan wrong (Reagan’s Treasury Secy) when he suggested moving the Fed into the Treasury Dept?

    We say central banks need to be independent to avoid the excesses of populism or some other panderings. Really?

    But we trust democracy when it comes to using the vast lethal powers of the Defense Department? Why not an independent Defense Dept? I could argue we have been in a few wars due to calculated pandering and fear-mongering, and recently too. But no one calls for an independent military.

    In short, what was once orthodoxy is becoming dogma.

    I think voters would have done a better job at Fed policy since 2008 than Bernanke and Co.

  43. Gravatar of Bill Ellis Bill Ellis
    31. July 2012 at 19:37

    Scott says…

    dwb, I don’t think the purpose of education is to make students good at passing tests, rather it’s making the parents (customers) happy.

    I agree. So what will make the customers happy ?
    This is a point I try and make when I argue against school vouchers.

    Are the bulk of parents going to send their kids to school where they get an excellent education but get B’s and C’s? Or are they going to send their kids to schools where they get A’s ?

    Consumers choose the sweet, quick, easy and cheap.

    Junk food dominates our restaurant biz.
    Junk entertainment crowds out quality programing.
    Junk news leaves thoughtful offerings relegated to obscure corners of the media.

    Unless the private schools are highly and effectively regulated by the government, something the proponents of vouchers find repellant, then vouchers will lead to a Junk Education industry.

    Right now, private high schools do not have to meet government standards. They are often run by religious institutions and overall their graduates are not as prepared for collage as public school students. (Many, but not most, Catholic schools are among the best though.)

  44. Gravatar of Bill Ellis Bill Ellis
    31. July 2012 at 19:47

    Scott,
    I love my mac. I am very dyslexic and very dependent on spell checkers. When I have had problems like you describe is was because of my browser.

    IE always gave me fits. Firefox was great for a long time and then stared failing me about six months ago. Safari was too slow.
    I use Chrome now.

    Hope you work it out.

  45. Gravatar of Don Don
    31. July 2012 at 20:13

    In an interview with Bloomberg, John Taylor said the recovery was poor because the Fed’s easy money was causing uncertainty. Yikes!

  46. Gravatar of Jim Glass Jim Glass
    31. July 2012 at 21:12

    What prevents managers from threatening to replace incumbents with cheaper (flex-wage) outsiders? And iterating until all incumbent wages are cut?

    1.) Quality employees are not fungible commodities. If businesses could replace current employees with better ones on better terms “off the shelf” they already would have.

    Simply recruiting new quality employees that fit the task they are to do is a costly and time consuming task — with high training costs and a high error rate.

    2.) *Threatening* current employees is very destructive for a business. Not only for the threatened employees, but for everyone — what’s happening to some spreads throughout the business like lightning, and *everyone* gets the message that the business is against the wall and that they may be at risk, at a minimum they can’t expect any raises/advancement. Morale goes in the dumpster.

    In that case the best employees start bolting, they are the ones who can easily get good jobs with advancement opportunities elsewhere. It’s the bottom-level employees who hang on and remain. This is an endemic problem in businesses going through cost-cutting restructuring, IBM famously suffered a flood of its best people leaving during its big reorganization.

    Compound the problems of #1 and #2, and this is not often high on the list of a firm’s preferred options.

  47. Gravatar of Bonnie Bonnie
    31. July 2012 at 22:07

    “Still, at the end of the day if we try further monetary expansion and it fails to stimulate employment, I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate.”

    The whole argument gets dragged down the inflation confusion rat hole, as if a temporary rise in prices from recovery would have anything to do with Fed action. I am not saying that further Fed action isn’t desirable, but wouldn’t be the initial cause of a temporary rise in prices during recovery – it’s the recession itself and the fact that production capacity is reduced to meet demand in a downturn and isn’t brought back online until it is profitable to do so that would be the cause. No one really knows how much of the capacity loss we’ve had is semi-permanent after such a long recession, and the longer it takes the Fed to at least bring a hint of real price stability to the table the more aggravated price increases due to production constraints will be.

    That 2% PCE ceiling is very destructive because it doesn’t even allow for recovery by natural price adjustment, in the absence of monetary stimulus, by capping price increases that would come with a start toward recovery on top of pared back capacity. There’s nothing like being left to wait out and then get kicked back down once we start to get somewhere simply because of production constraints from long term artificially suppressed demand – and that is exactly what this awful policy does. These people who cry ‘ Fed inflation boogeyman’ at every price increase don’t understand simple concepts of supply and demand, and apparently don’t understand the opportunity cost involved to themselves or their kids as more and more people get lost to social programs as a matter of survival all because these whiners don’t want to pay an extra dime for a pack of gum.

  48. Gravatar of doug M doug M
    31. July 2012 at 22:12

    I get very nervous when I read the ongoing ritual excoriation of Ben Bernanke in the stock market, every time the Fed decides to take no further major action.

    based on what data. Over the last year stock market has rallied more often than not of FOMC days and the trend has generally been up.

    Doug, Stocks clearly rally on signs of easing, there are dozens of data points to support that claim.

    Sorry, I am confused…
    Are you suggesting that the Fed has been easy this past year. While some would agree, it is an about face from your earlier posts.

    Ben Bernanke is not being excoriated in the stock market. The stock market seems to be satified.

  49. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 00:54

    Prof. Sumner you’ve written here:
    http://tinyurl.com/cwneren
    “Debt can be a problem in some cases”

    Could you precise when the debt can be a problem, and if there is no dependency: ” I don’t think debt matters for inflation or the business cycle in the US”

    so what’s the mechanism that cause the fact that: “Debt can be a problem in some cases”, what are dependencies?

    Do you think that the situation in which the US private debt constantly increases faster than GDP is sustainable or it must have its end??? And eventually when that end would come???

    Figure 1.
    http://tinyurl.com/cxm6yy7

    You can often hear that narration, that slump in consumption is caused because people want to pay off theirs debts. Falling consumption causes falling NDGP, you written:

    http://tinyurl.com/cwneren
    “it doesn’t affect NGDP or RGDP.”

    So you think that, that narration is totally false, that’s not the cause of the falling consumption???

  50. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 01:06

    @dwb

    Dear DWB,

    what’s your answer to the question:

    Do you think that the situation in which the US private debt constantly increases faster than GDP is sustainable or it must have its end??? And eventually when that end would come???

    Figure 1.
    http://tinyurl.com/cxm6yy7

  51. Gravatar of Morgan Warstler Morgan Warstler
    1. August 2012 at 02:32

    Here we see Jim Glass supporting my plan…

    “1.) Quality employees are not fungible commodities. If businesses could replace current employees with better ones on better terms “off the shelf” they already would have.

    Simply recruiting new quality employees that fit the task they are to do is a costly and time consuming task — with high training costs and a high error rate.”

    As an intellectual exercise, we need to stop talking about what is, and actually see what hacks change what is.

    When all the unemployed are databased and auctioned, new firm creation is easier.

    Think of minor / major league baseball, except imagine that EVERYONE has a space, suddenly Money Ball economics are in play EVERYWHERE ALL THE TIME, because you get the same TOTALLY TALENT AWARENESS of all buyers.

    I shouldn’t have to keep pointing this out….

    You aren’t really in the discussion by stating the obvious, I have a an alternative improvement to status quo.

    Sticky wages are not a fact, if you argue them you have a moral obligation to TRY AND DESIRE to end them.

  52. Gravatar of RebelEconomist RebelEconomist
    1. August 2012 at 02:44

    “the costs of inflation, within reasonable ranges, are not very high” (or zero, if you prefer Scott’s provocative version). Maybe, but it’s the costs of raising inflation (ie the unanticipated wealth transfers) that bother me.

  53. Gravatar of Michael Michael
    1. August 2012 at 02:47

    “Maybe, but it’s the costs of raising inflation (ie the unanticipated wealth transfers) that bother me.”

    It’s funny, no one complains about wealth transfers that work in their favor…

    http://www.interfluidity.com/v2/3359.html

  54. Gravatar of Vivian Darkbloom Vivian Darkbloom
    1. August 2012 at 04:07

    “GOD I HATE APPLE COMPUTERS! I had those words spelled correctly and my computer changed it. Does anyone else have this problem?”

    Well, at least the CapLock is working.

    The fix is simple. Go to Edit at the top menu screen. You should find a sub-menu item “Spelling and Grammar”. Here, you can disable “Check Spelling While Typing” and/or Grammar.

    Unfortunately, there is no Check Logic option. But, perhaps they’re working on one.

  55. Gravatar of Morgan Warstler Morgan Warstler
    1. August 2012 at 04:27

    “Unfortunately, there is no Check Logic option. But, perhaps they’re working on one.”

    Why,m so they can remove that too?

  56. Gravatar of RebelEconomist RebelEconomist
    1. August 2012 at 04:34

    Michael, that interfluidity post is not relevant. It is discussing the distribution of the benefits of maintaining price stability. If price stabilisation is maintained, then debtors and creditors can set their terms to share those benefits (if not equally, then according to their bargaining power). I am discussing the proposition that monetary easing should be taken to yet another unprecedented extreme – a deliberate increase in inflation. When is the last time monetary policy was unexpectedly tight? Not since at least 1994, if not the early 80s.

  57. Gravatar of dwb dwb
    1. August 2012 at 04:38

    @Wadolowski

    Do you think that the situation in which the US private debt constantly increases faster than GDP is sustainable or it must have its end??? And eventually when that end would come???

    I dont think i even agree with the premise of your question: debt tracks residential and commercial investment pretty closely because most long term investments (houses, factories, power plants) are financed (I am setting aside the fact that the tax code heavily favors debt over equity finance for such projects due to tax deductions etc.). I am also setting aside lending standards which at different times may require more or less equity for financing.

    Investment is counted in GDP, so what you are fundamentally asking is whether investment as a proportion of GDP is “sustainable” at a high level. The answer to that question is a function of productivity, technology change, population growth, converging living standards around the globe, and how fast existing assets depreciate. Houses are 30 year assets so people borrow to build them, and we will need more soon. If China wants to import shale gas and coal from us, and we allow it, then i expect there will be a boom in building infrastructure for commodity exports. We export tons of stuff, if they want more of it, we will need to finance new factories. As we find replacements for oil, like shale gas, we will need to build new gas-to-diesel refineries (several are planned in PA and LA).

    So guess the answer to your question is yes, no, maybe, depending on future economic activity. If debt is going up its mostly because people are building things we will need for future use, and financing it. that’s optimistic. Whether the tax code should favor debt over equity finance (it does) or whether lending standards against those projects are appropriate is a different issue though.

  58. Gravatar of Vivian Darkbloom Vivian Darkbloom
    1. August 2012 at 04:50

    “Why,m so they can remove that too?”

    It’s always nice to have options. If one’s reasoning ability would be better than the machine’s, you would logically remove it. Otherwise, it could be a plus. The trouble is, how would most people know?

    It’s a joke, Morgan.

  59. Gravatar of Morgan Warstler Morgan Warstler
    1. August 2012 at 04:50

    Waldman sounds horribly mis-guided.

    As I have shown over and over, money, monetary policy, and govt. itself is not a democractic social good driven alone by “votes.”

    These things were / are established by the hegemony only as much as they maintain ORDER, and certainly the hegemony.

    We cannot derive impose a morality on a system that wasn’t TACITLY designed to behave that way.

    That would be folly. That would be immoral.

    If the bottom half want Monetary Policy run for them, let them demand it with guns and see who wins.

  60. Gravatar of Michael Michael
    1. August 2012 at 04:52

    “then debtors and creditors can set their terms to share those benefits (if not equally, then according to their bargaining power)”

    This is not how the real world has been functioning, what with price level well below trend in recent years. It also means that price stability in the face of negative upply shocks is redistributive.

    “I am discussing the proposition that monetary easing should be taken to yet another unprecedented extreme – a deliberate increase in inflation. When is the last time monetary policy was unexpectedly tight? Not since at least 1994, if not the early 80s.”

    Monetary policy has been unexpectedly tight since early to mid 2008.

  61. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 05:03

    @dwb

    First of all, thank you for your answer, that’s a thoughtful explanation.

    You’ve written:
    “debt tracks residential and commercial investment pretty closely because most long term investments…”

    Another question to you. So you think that the real estate prices wont return to their long-term average that can be seen in Figure 4.

    http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/
    (that’s a figure taken form Robert Shiller, that’s not Keen’s estimates)

    If they will, how do you find an assessment that there is a lot of Ponzi-Finansing in this 260% private debt.

    As I understand it, you would predict that along with rising private debt, FIRE sector share will enlarge as well:
    Figure 16.

    And this rising private debt, enlarging FIRE sector are all a part of long term equilibrium that can be derive from fundamentals, like shrinking US trade balance (with China especially).

    Regards

  62. Gravatar of dwb dwb
    1. August 2012 at 05:36

    @Wadolowski
    i dont really understand what you are asking: are you asking if the Finance/Real Estate/Insurance (FIRE) sector share of GDP is sustainable? are you asking if home prices will return to pre-2007 levels (define in real or nominal terms)? are you asking if 260% debt to gdp is sustainable (i think i answered that – maybe, maybe not)?

  63. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 05:51

    @dwb

    Sorry, that question could be badly formulated. I’m assuming that as the share of private debt to gdp ratio is growing so the FIRE sector as well, somebody has to service all that debt and earn on it as well. Do you agree with that assumption? Or you do not see any dependency?

    What I’m asking is:
    “are you asking if home prices will return to pre-2007 levels (define in real or nominal terms)”

    Yes, will the home prices return to the long-term average in real terms (as seen on Figure 4.), obviously. If so, if that takes place, how much there is a ponzi-finaced debt in this 260% private debt? One is implication of the other. If prices will come back in real terms, a relevant part of the debt is ponzi-financed, so it cant be paid off.

    “are you asking if 260% debt to gdp is sustainable (i think i answered that – maybe, maybe not)”

    Yes, you did and I’ve understood your answer, you think it is sustainable and can rise further with no risk to the economy, as it is supported by fundamentals.

  64. Gravatar of Morgan Warstler Morgan Warstler
    1. August 2012 at 06:21

    Yes Vivian, I was pointing out that APPLE and APPLE USERS are numb nuts.

    Think Different means, even if everyone else is right, think different.

  65. Gravatar of dwb dwb
    1. August 2012 at 06:30

    @Wadolowski
    1- no dependency, FIRE sector of the economy (and profits) is a function of a lot of things, as i said, including competitiveness. debt to gdp can grow even if the profits shrink due to increased competitiveness (for example, if we eliminated the national association of realtors stranglehold on real estate sales). what you are asking is like asking whether exports as a share of the economy, health care as a share of the economy, or (apple+google) profits as a share of the economy is sustainable.

    the tax code favors a lot of financial professionals taking “labor income” as profits and dividends, so a lot of this has nothing to do with macro.

    2-home prices. no, i dont expect them to return in real terms. that has nothing to do with 260% debt to gdp though. If i allocate 25% of my income to debt service, my income grows at 2%, and i pay a 4% rate of return, and agree to pay it over 30 years, i could borrow 5x my current income. so what? if i borrow 260% of my income, i can pay it off over 30 years allocating 15% of my income. most of this debt is financing long term fixed assets like housing, etc with a life of over 30 years, so nothing strikes me as problematic with 260% debt:gdp even if home prices stay stagnant.

    in other words: the ability to repay debt is a function of expected future trend gdp growth.

  66. Gravatar of dwb dwb
    1. August 2012 at 06:36

    @Wadolowski
    just to be clear, i think its sustainable *conditional* on trend ngdp growth. If you told me the fed would let ngdp plummet 5%, then i predict another banking crisis. if you told me the fed would allow 30% inflation, then that changes the analysis similarly.

  67. Gravatar of Catherine Catherine
    1. August 2012 at 07:07

    Saturos writes –

    You’re not seriously going to tell me that 3 million people are out of work because of freaking efficiency wages.

    Efficiency wages

    That’s it!

    Thank you.

    Re: people out of work….

    We have sticky efficiency wages, sticky public sector union contracts, sticky private sector union contracts, and failed businesses laying off 100% of workforce who then can’t find jobs at still-living businesses that are laying off employees themselves while giving 0% compensation increases to employees who keep their jobs….

    I’m probably leaving something out.

    The WSJ has the ultimate sticky-wage story today: Prison’s Guards Are Part Wolf, All Business:

    The wolf dogs, as they are called here, are the brainchild of Warden Burl Cain and his staff, and they were brought in last year in response to a steady decline in the prison’s annual budget from $135 million five years ago to $115 million today. The prison, which is known as Angola, has laid off 105 out of 1,200 officers, and 35 of the 42 guard towers now stand empty on the 18,000-acre prison grounds.

    The animals regularly guard at least three of the seven camps that make up the complex.

    Mr. Cain says the wolf dogs are a strong psychological deterrent. “The wolf ate Grandma,” he said.

    They also save money. The average correctional officer at Angola earns about $34,000 a year, a prison spokesman said. By comparison, the canine program, which includes about 80 dogs—the wolf hybrids along with other breeds for other tasks— costs about $60,000 annually for medical care, supplies and food.

    I’ve Googled a bit & I don’t find reports indicating that the prison cut wages or imposed furloughs before laying off people and hiring dogs. But even if they did, the fact that they have wolf dogs earning $750 a year working side by side with humans earning $34K (I assume that figure does not include benefits) seems like pretty strong evidence of sticky wages to me.

    I did learn that the warden is collecting his retirement salary along with his regular salary

    Sticky!

  68. Gravatar of Catherine Catherine
    1. August 2012 at 07:12

    Sorry for the formatting blunder:

    Prison’s Guards Are Part Wolf, All Business
    http://online.wsj.com/article/SB10000872396390444130304577561273226636482.html?mod=WSJ_hp_EditorsPicks

    ‘Retire-rehires’ collect checks from state jobs
    http://theadvocate.com/news/legislature/1797446-63/retire-rehires-collect-checks-from-state.html

    Efficiency Wages http://www.borooah.com/Teaching/Microeconomics/Efficiency%20Wages.pdf

  69. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 07:14

    @dwb

    Thank You for your answer.
    “no dependency, FIRE sector of the economy (and profits) is a function of a lot of things”

    For me there is a dependency. 9% of total wages, how high it can go? 20%? One in five on every dollar earned by Americans will be earned during “debt production” (?). (But that’s my personal view. Not an economics statement.)

    “2-home prices. no, i dont expect them to return in real terms. ”

    And that is a hard prediction. Why they would not if they were there for the last 110 years (1890 – 2000) what’s happened in the real economy so crucial that they will not return to the 110-average (?), that is a theoretic question. In Japan they had. (Figure 23.)

    Nevertheless thank you for your time spent on answering my doubts.

  70. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 07:17

    @dwb

    “in other words: the ability to repay debt is a function of expected future trend gdp growth.”

    Even if you lost your money on a Ponzi Scheme financed enterprise?

  71. Gravatar of Catherine Catherine
    1. August 2012 at 07:28

    ChacoKevy –

    Just saw your ‘firing aversion’ comment – thank you! I had no idea there was a term for that.

    I have firing aversion myself, and I’ve seen it everywhere in schools, colleges, and universities.

  72. Gravatar of dwb dwb
    1. August 2012 at 07:52

    @Wadolowski

    again, i dont understand you question but feel like i dont even understand the premise “Ponzi financed scheme” huh?? you lend money, some people dont pay it back, you price the risk accordingly. if nominal gdp is highly volatile, then *everyones* default risk is much higher.

    there is no natural law or economic reason for health care or technology or finance to be x% of the economy other than a) its what people want to spend and b) restrictions/subsidies on supply. There is no reason i can find 37 different kinds of toothpaste in the store, and 400 kinds of cereal, except that some kids like Spongebob flavor, and other kids want bubble gum, and i want minty fresh.

    I look at owner-occupied home prices in terms of the price/rent ratio. housing demand (owner-occupied+rental) and prices are driven by demographics and supply restrictions. i dont see how its a ponzi scheme. if people suddenly wanted to brush their teeth 47 times a day them toothpaste sales revenue as a share of gdp would go up.

  73. Gravatar of Wadolowski Wadolowski
    1. August 2012 at 08:09

    @dwb

    “but feel like i dont even understand the premise “Ponzi financed scheme””

    So you are asserting that there are no this third kind “investors” from Minsky theory – Ponzi borrower – there are no speculators in the world, that buy asset in order to sell it when it price will rise. All changes in assets are driven by fundamentals, Robert Shiller is completely wrong in his paper
    http://ideas.repec.org/p/nbr/nberwo/0456.html

    “prices are driven by demographics and supply restrictions.”

    All right that’s your view. Prices from Figure 4.
    http://www.debtdeflation.com/blogs/2012/01/03/the-debtwatch-manifesto/
    are driven by demographics and supply restriction.

  74. Gravatar of John hall John hall
    1. August 2012 at 08:40

    @ssumner I agree that I don’t understand your argument very well. For a x% NGDP growth path policy, suppose RGDP is rising (x-2)% per year in the long-run so that PGDP is only growing at 2%. That would not be the same as if RGDP is rising 3% in the long-run so that PGDP is rising (x-3)%.

    If a central bank adopts a NGDP path, then no matter how high a target they choose in the first case growth is strong enough in the long-run to keep inflation contained. That’s not very realistic. In the second case, a higher NGDP target results in higher inflation, but RGDP would not change in the long-run. The higher the NGDP target the more (expected) inflation you get. You would have to deal with welfare costs related to higher (expected) inflation. A higher target in this case is only bad to the extent that it results in higher inflation. If long-run RGDP were growing at a 100% rate, for instance, then a 102% NGDP target would only result in only 2% inflation. I don’t think that would be a bad thing. An NGDP rate that is too high is only bad to the extent that it results in elevated inflation.

    Hence, the appropriate NGDP target should be paired with estimates of long-run growth and how much of a cost of inflation you are willing to accept.

  75. Gravatar of dwb dwb
    1. August 2012 at 08:43

    @Wadolowski

    no, i am not asserting the lack of existence of speculative buyers. what i am asserting is that even granting the existence of testosterone-fueled trading, its very difficult for millions of people to coordinate their actions into a “bubble.” What I see is an abject failure by regulators to police the moral hazard in the industry. you cant do this halfway. you either need to say you are going to police it and then do it, or tell people you are not going to police it and caveat emptor. you cant create the false regulatory confidence that you are minding the store, and the Fed was definitely not minding the store.

    the only phenomenon i observe is a “price bubble” created by head-i-win-tails-you-lose incentive compensation.

    there is a huge difference between a speculative buyer paying cash and borrowing somebody else’s money and not feeling the sting of loss.

  76. Gravatar of MikeDC MikeDC
    1. August 2012 at 09:42

    I would add that if the Fed bought much more debt, then the Treasury would be issuing much less debt.

    But this is empirically incorrect. The Fed has already been buying “much more debt” than ever (both absolutely, and in proportion to the overall market) and the Treasury has followed suit by issuing more more debt, not less.

  77. Gravatar of dwb dwb
    1. August 2012 at 10:06

    ssumner,

    “dwb, I don’t think the purpose of education is to make students good at passing tests, rather it’s making the parents (customers) happy. If they think high school football is more important than evolution, then schools should stop teaching evolution and put more money into high school football.”

    right, good point.

  78. Gravatar of RN RN
    1. August 2012 at 17:51

    Krugman doesn’t have time to answer all the wannabe rockstar economists’ stupid arguments all the time. That you get noticed at all is good.

    When someone says something substantive, he comes at it substantively. That he doesn’t take you seriously says less about him and more about the substance of your argument.

  79. Gravatar of ssumner ssumner
    7. August 2012 at 18:21

    Thanks Vivian.

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