Don’t talk about wages and incomes

Here’s a particularly maddening paragraph in a post by Edward Hugh:

And there are plenty of people in Japan who have been pointing this out all along. Seki Obata, a Keio University business school professor for example, who in 2013 published a book “Reflation is Dangerous,” argues exactly this, that “Abenomics” is exposing Japan to considerable risk without any clear sense of what it can accomplish. Obata also makes the extremely valid point that there is simply no way incomes can rise across the entire economy because the baby boomers are now retiring to be replaced by fewer young workers with post labour reform entry-level wages. Japan’s overall consumer spending power will therefore fall, rather than rise as Abe hopes. “Individual companies may offer wage increases, but because of demographics it is simply impossible to increase the total amount that is paid out in wages,” says Obata. “On the contrary, that amount will shrink.” Simple logic you would have thought, but logic in the face of irrational exuberance scarcely stops people in their tracks.

Not only is Obata’s point not “extremely valid” it’s pretty much meaningless.  I really don’t have any idea what Hugh is talking about in this paragraph, because he uses terms like “wages” and “incomes,” which don’t have any clear meaning.  It might as well be written in Korean.  Now the term “nominal wages” has a very clear meaning.  And “real wages” has a very clear meaning, which is totally, completely, entirely different from the meaning of nominal wages.  Nominal wages are as different from real wages as cucumbers are from nuclear power plants.

Now before you say “come on Sumner, the meaning is clear from the context,” read the paragraph again.  The paragraph makes no sense under either interpretation.  Obviously he can’t mean “nominal wages,” because then Obata’s comment would be “extremely invalid.”  But he can’t mean real wages either, because he is talking about demand-side factors.

What makes this Hugh post so frustrating is that just a few days a go I read an excellent post by the same blogger, discussing how a lack of NGDP growth in Italy was worsening the debt situation. Unfortunately this very long post is riddled with confusion from beginning to end.  After each paragraph you scratch your head wondering whether he is talking about real or nominal problems, and when he does make it clear, you wonder whether he has confused the two problems.

Japan has a public debt problem comparable to Italy’s and an even worse NGDP performance over the last 20 years (essentially no growth in NGDP.)  And yet he cites with apparent sympathy a Japanese commentator who fears Japanese monetary policy is too expansionary.  Elsewhere the opposite concern is expressed; Abenomics is failing to generate inflation:

The Bank has had more success with inflation since core inflation was up 3.3% over a year earlier in June. But that number soon shrinks in proportion when you strip out the estimated impact of the recent tax hike. According to the Bank of Japan the ex-tax number for June was 1.3%, down from 1.4% a month earlier. And even this inflation isn’t demand driven: it is largely a carry over from the earlier yen devaluation. As such it is quite likely to disappear with time.

Then later inflation is so high that it is depressing real wages:

Nominal wages have been rising again in Japan.

Average total wages, consisting of base pay, overtime and bonuses covering both regular and part-time workers, grew 0.4% on year in June, following increases of 0.6% for May and 0.7% for April and March. Four straight months of year-on-year rise is the longest stretch since total wages grew for six straight months between June and November 2010. But real wages – which take into account inflation and matter much more to consumers than nominal wages, declined 3.8% on year in June, the fourteenth consecutive month of decline, and the biggest drop since December 2009.

Reading this post you have no sense of what Abenomics is trying to do, or what would constitute success.  And yet it’s clear to me that the “three arrows” are aimed at boosting both AS (economic reforms) and AD (monetary stimulus.)  Here’s another maddening comment:

Part of the reason they might not see it in the same light as the central bank dependent investment community is that there is a solid body of opinion in Japan that recognizes that a large part of the country’s issue is demographic and that simply “jump starting” a bit of inflation won’t make the problem go away..

The question I would ask is this: given all the doubt which exists about the real roots of Japan’s problem, and the fact that it may well be a permanent structural problem and not a temporary liquidity trap one, is it really justified to run such a high risk, all-or-nothing experiment?

What does that even mean?  Clearly Japan has both AS and AD problems.  There is no single “real problem;” there are multiple “real problems.”  One arrow of Abenomics is aimed at the nominal problem, and one is aimed at the real problem (not ‘real’ as in “actual” but real as in not nominal.) And somehow the specific policy that is aimed at the nominal problem is misguided because it doesn’t address the real (i.e. supply-side problem.)  So what?

Monetary policy has its limits. As Martin Wolf so aptly put it, “you can’t print babies”.

I guess in the blogosphere that’s what passes for a profound comment.  Who would have ever guessed that monetary stimulus cannot solve all problems?  (BTW, tight money in the US clearly did reduce the birth rate after 2008.)

Japan needs more NGDP growth to reduce the debt burden and create jobs. It’s that simple.  Japan just instituted a tax increase that if tried in the US would cause a violent revolution—3% more on the national sales tax. The largest sales tax increase the US adopted in my entire life (that I can recall) was a 4 cent gas tax increase under Clinton, and that was highly controversial.  The Japanese tax increase was probably 50 times worse.  So the Japanese people are frustrated with taking a sudden 3% hit to their standard of living from an adverse supply shock?  No kidding.  And this tells us what about monetary stimulus?

BTW, I reluctantly supported the excise tax increase because . . . well because Japan is going broke if they don’t change their ways.


Tags:

 
 
 

29 Responses to “Don’t talk about wages and incomes”

  1. Gravatar of benjamin cole benjamin cole
    19. August 2014 at 15:39

    Excellent blogging. Moreover, I contend sustained demand and price signals create supply. The private sector creates, adapts.
    Even public policy becomes more flexible in good times—interest groups can afford to give a little.

    Market Monetarists might be making a PR mistake. We talk about inflation as a positive, as if that alone is a goal of monetary policy. We should talk about increases in demand that lead to growth and a price signal that stimulates supply. Yes, sticky wages but downplay that.

  2. Gravatar of Bababooey Bababooey
    19. August 2014 at 16:21

    Japan’s sales tax bumped to 8%? Boo hoo. Try ~9.5% sales tax coupled 13.3% income tax rates (+13%) and 11% utility tax. And California is still going broke if they don’t change their ways some more.

  3. Gravatar of Major.Freedom Major.Freedom
    19. August 2014 at 18:07

    The best approach to economic problems is yes, to keep nominal and real factors separate, but not, as MM theory assumes, to believe nominal problems exist when NGDP doesn’t grow at an arbitrary rate.

    Real and nominal factors are more interconnected than MM theory is even capable of addressing. Neither the article nor the response to the article right.

    This comment:

    “Japan needs more NGDP growth to reduce the debt burden and create jobs. It’s that simple.”

    Is just simple fallacy. First, the money supply which is the primary engine of NGDP is created mostly by debt expansion, since most of the money supply that is created is created by bank credit expansion, a form of debt. More NGDP does not solve the problem of too much debt. More NGDP adds to debt. Second, jobs are a means, not an end. Inflation that redirects job allocation can and does put strains and stresses on real activity. An economy is not healthy if everyone is tricked into working as coal miners as aggregate job numbers increase. Healthy economies need to have healthy job allocation, which socialist monetary systems hamper by their very existence.

    NGDP is just a new false prophet, nothing more.

  4. Gravatar of ssumner ssumner
    19. August 2014 at 18:23

    Bababooey, I will give it a try—soon! Yes, at the state level things are different, but the Federal government is quite timid about sales taxes.

  5. Gravatar of Don Don
    19. August 2014 at 19:55

    I hate when people argue against action because it is “risky”, while ignoring all risks with *choosing* inaction. As if choosing not to ask is always safer.

  6. Gravatar of Don Geddis Don Geddis
    19. August 2014 at 20:07

    @ssumner: “I will give it a try””soon!

    Wait … what?! This sounds like the hint of some major news. Do tell!

    (Or are you just overselling some short visit?)

  7. Gravatar of Nick Nick
    20. August 2014 at 03:42

    ‘BTW, tight money in the US clearly did reduce the birth rate after 2008.’

    Apparently it caused the TEEN birthrate, specifically, to plummet:

    http://www.vox.com/2014/8/20/5987845/the-mystery-of-the-falling-teen-birth-rate

    Feature or bug? I meant to ask this when professor sumner was posting about utilitarianism a few weeks ago–don’t otherwise organized, logical policy wonks seem to get awfully confused when we start to talk about population growth? What kind of utility are we trying to maximize? How high a priority should it be to increase utility through increasing the world population?

  8. Gravatar of ssumner ssumner
    20. August 2014 at 04:31

    Don, I shouldn’t have said “soon.” Let’s just say I hope to retire in LA someday.

    Nick, The best analysis I’ve seen is Eliezer Yudkowsky, who says the “Many Worlds” interpretation of quantum mechanics implies we should aim for the highest average utility—as there are plenty of us in other universes.

    But it is a difficult question (except for the Catholic Church, which finds it easy to answer.)

  9. Gravatar of Walter Wessels Walter Wessels
    20. August 2014 at 06:53

    I can understand why a country might want to target nominal income growth to be X% a year. But what is the underlying reason for X = 5? Why not 4, 2, or even 0? What is the model? In particular, in Japan’s case, it would seem that the long-run growth rate is zero and markets should have, after 20 years, adjusted to this. So, if this is the case, in the long run, why is X = 0 bad?

  10. Gravatar of Fed Up Fed Up
    20. August 2014 at 10:30

    “But he can’t mean real wages either, because he is talking about demand-side factors.”

    Someone makes $10,000 per year in wages. This person does not save and does not go into debt. Q’s = 100 and P’s = 100. P’s all go up by 3%. This person gets a 1% wage increase.

    $10,100 divided by 103 equals about 98 for Q’s. Q’s have fallen.

    “Japan needs more NGDP growth to reduce the debt burden and create jobs.”

    If RGDP is less than productivity growth, will hours worked fall? Yes/No

    “Let’s just say I hope to retire in LA someday.”

    What if you did not earn enough to save?

  11. Gravatar of dtoh dtoh
    20. August 2014 at 15:05

    Scott,
    A few comments.
    1. You are exactly right, low growth rates are causing the low birth rates (not the other way around).
    2. The only way out of the debt crisis in Japan is good monetary policy and lower tax rates. Yes… Laffer was absolutely right…. especially when you consider asymmetric returns on capital.
    3. Not only was the sales tax increased, capital tax (in the form of high estate tax rates and lower deductions) have recently been passed.
    4. Japan also required beginning in 2014 that taxpayers earning over $200k report their assets a liabilities.(A move designed to increase compliance on capital income… i.e. higher effective tax rates).

  12. Gravatar of dtoh dtoh
    20. August 2014 at 15:08

    And the top income tax rate was also raised from 47.5 to 55.9%.

  13. Gravatar of Fed Up Fed Up
    20. August 2014 at 17:24

    About real wages:

    http://www.advisorperspectives.com/dshort/updates/Employment-Wages-and-Hours-since-1964.php

    Plus, this assumes price inflation is being measured correctly.

  14. Gravatar of ssumner ssumner
    21. August 2014 at 08:15

    Walter, Two problems:

    1. Nominal wages cannot fall below zero, and hence don’t adjust even in the long run. That makes the debt ratio worse.

    2. Money illusion–workers resist nominal pay cuts, which raises unemployment.

    Fed up, You said:

    “What if you did not earn enough to save?”

    When I earned poverty wages I saved money. The Chinese save half their income earning only 20% as much as Americans. Please tell me precisely how much income would be too little to save?

    Most of that real wage data is wildly inaccurate, as many bloggers have pointed out.

    dtoh, That doesn’t look promising.

  15. Gravatar of Tom Brown Tom Brown
    21. August 2014 at 10:11

    “Don, I shouldn’t have said “soon.” Let’s just say I hope to retire in LA someday.”

    Scott, forget LA, move to Santa Barbara! If you live downtown, you can walk or bike everywhere you need to go, but it’s not cold and foggy (or as hilly) as San Francisco.

    I hate driving in or through LA, and driving in LA is a requirement. But to each his own I guess. Personally, I love it here in SB.

  16. Gravatar of Tom Brown Tom Brown
    21. August 2014 at 10:20

    … plus SB is way prettier than LA. 😀

  17. Gravatar of Fed Up Fed Up
    21. August 2014 at 11:11

    “When I earned poverty wages I saved money. The Chinese save half their income earning only 20% as much as Americans. Please tell me precisely how much income would be too little to save?”

    Did you have a mortgage then? Car payment? Kids? Health insurance? It also depends on prices. How about $20,000 to $25,000 with 2 kids?

    “Most of that real wage data is wildly inaccurate, as many bloggers have pointed out.”

    I believe all of those charts have FRED listed as the source.

  18. Gravatar of Fed Up Fed Up
    21. August 2014 at 11:30

    I’m pretty sure the first two charts are right.

    Google “st louis fred ahetpi” and “st louis fred awhnonag”.

    The charts are the same.

    I’m not sure how the chain was done, but it says based on CPI for All Urban Consumers.

    I did a rough graph of ahetpi vs CPIAUCSL with a year over year change for each at the St. Louis FRED (not the graph shown at the dshort link).

    I’d say say the third and fourth graphs are right too.

  19. Gravatar of Fed Up Fed Up
    21. August 2014 at 11:32

    Tom Brown, what do you think of “If RGDP is less than productivity growth, will hours worked fall? Yes/No”

  20. Gravatar of Tom Brown Tom Brown
    21. August 2014 at 15:02

    Fed Up, it sounds like I’m jumping into the middle of this one… I haven’t been following the conversation, but what the hay, I’ll say “No” and then I’ll read what it is you’re talking about (and perhaps change my mind). 😀

  21. Gravatar of ssumner ssumner
    21. August 2014 at 15:52

    Tom, SB is beautiful, but I’d be bored out of my mind living there.

    Fed Up, You asked:

    “Did you have a mortgage then? Car payment?”

    No, I don’t buy things I can’t afford.

    There have been many blog posts done explaining why real wage data constructed by the CPI is wrong. Living standards are obviously much higher than in the 1970s; real wage data that suggests otherwise is not to be trusted.

  22. Gravatar of Nick Nick
    22. August 2014 at 03:30

    Someone making 20k a year who has 2 kids, a car, and a mortgage is obviously the beneficiary of many govt programs. Now maybe those programs have incentivized an outcome for this person that you do not like–personally I’m liberal enough to believe that even though this hypothetical person is having trouble paying their debts these govt programs have still been very helpful on net. But its perverse to suggest that monetary policy should keep other people unemployed so that someone who already receives the benefit of many targeted government programs can get a ‘real’ wage increase. And it’s pretty odd to criticize prof sumner from this direction: I don’t think he favors any of the programs which help sympathetic low income people gain access to large amounts of credit. I’m pretty sure he’d like to replace them with cash and wage subsides.

  23. Gravatar of Nick Nick
    22. August 2014 at 03:45

    Scott,
    I’m ok with the many worlds response … But I think it leads down some strange roads. Even putting aside some of the more grotesque actions such a paradigm might justify. It would seem to imply, for instance, that in very high leverage decisions for the human race we should seek ‘all or nothing’ outcomes where as much risk to humans as possible is contained in an enormous fat tail of total destruction. After all, any timelines suffering catastrophe we are better off having pruned entirely. Survivors would be set back, and their continued timelines would forever be dragging down the utility average of human time. Think about the implications during the Cold War …
    But at least, viewed in this light, nassim taleb’s argument that GMOs pose a serious chance of causing the total destruction of all life on earth becomes a point in their favor.

  24. Gravatar of ssumner ssumner
    22. August 2014 at 07:40

    Nick, That sort of puzzle is above my pay grade.

  25. Gravatar of Tom Brown Tom Brown
    22. August 2014 at 08:09

    Nick, Scott,

    This Google Tech Talk presenter offers an information theory based alternative to the “many worlds” interpretation of quantum mechanics: he dubs it the “zero worlds” interpretation. Please explain it to me after you watch and understand it. 😀

  26. Gravatar of ssumner ssumner
    23. August 2014 at 04:40

    Tom, Not much chance that I’ll understand it. 🙂

  27. Gravatar of Fed Up Fed Up
    27. August 2014 at 11:03

    Tom Brown, Scott said: “Japan needs more NGDP growth to reduce the debt burden and create jobs.”

    I said: “If RGDP is less than productivity growth, will hours worked fall? Yes/No”

    I’m saying yes that hours worked will fall.

    Q potential = 100 with 100 hours worked, Q supplied = 100, Q demanded = 100, Q bought and sold = 100.

    Next period: Q demanded = 101 and Q potential = 102 with 100 hours worked. Firms figure out they will only sell = 101. Q supplied = 101 with 99 hours worked. Q bought and sold = 101.

    Q bought and sold = 101 vs 100 before. 1% RGDP growth.

    Q supplied divided by hours worked = about 1.02 vs 1 before. That is about 2% productivity growth. With this case, hours worked fall.

    I think that is all correct. I wrote this in a hurry.

  28. Gravatar of Fed Up Fed Up
    27. August 2014 at 11:26

    “Fed Up, You asked:

    “Did you have a mortgage then? Car payment?”

    No, I don’t buy things I can’t afford.”

    If you look at a lot of people’s monthly budgets, not many people can do that.

    Also, what happens if no one borrows from a bank or a non-bank?

    “There have been many blog posts done explaining why real wage data constructed by the CPI is wrong.”

    I suppose that medical costs/health insurance, other insurances, college, electricity, gasoline, food, housing prices, and cable tv don’t count.

    “Living standards are obviously much higher than in the 1970s; real wage data that suggests otherwise is not to be trusted.”

    That may or may not be true. It could depend on the person. If it is true, rising “living standards” do not have to mean real earnings growth. Real earnings growth could be flat or negative with debt being used to make up the difference. It seems to me that people “own” less of their homes and cars than they used to.

  29. Gravatar of Fed Up Fed Up
    28. August 2014 at 08:57

    See:

    http://www.epi.org/publication/why-americas-workers-need-faster-wage-growth/

Leave a Reply