Krugman says the pain in Spain was mainly due to excessive real wages.

It’s good to know that Krugman has retained some of his 1990s views:

We — that is, the United States — have a floating exchange rate. Spain, however, being part of the euro zone, does not. Its wages are too high compared with those of other eurozone members, now that the housing boom and massive capital inflows are over. If Spain still had a peseta, I’d say devalue it; since it doesn’t, wages have to give.

I imagine Krugman’s left wing fans might have choked on their lattes when reading this paragraph.  Wages need to be lowered to reduce unemployment?  That doesn’t sound like Krugman.  But at least he assured them that his conclusions do not apply to the USA.  Or do they?  Here is my argument in a nutshell:

We — that is, the United States — have an independent central bank.  The Fed insists that “price stability” is its goal.   Because of the sharp fall in NGDP, and sticky nominal wages, we need to cut real wages to restore full employment.  If Congress had control over monetary policy, I’d say raise the inflation target for a few years (as would Krugman); since it doesn’t employment costs have to give.  Cut the minimum wage and the employer share of the payroll tax.

Here’s the problem with Krugman’s analysis.  We both accept Eggertsson’s model, which says “depression economics” only applies to situations where the Fed is not inflation or price level target.  Krugman say that describes the current situation in the US.  I say it doesn’t.  Both Krugman and I were highly critical of Bernanke’s response to DeLong’s 3% inflation target proposal.  Krugman seems to think the response was a rejection of inflation targeting.  I saw it as Bernanke saying something to the effect; “We already have a price stability target.  It is so important to us that we aren’t willing to even move up to 3% in order to deal with severe unemployment, even though in theory the proposal would work.”  Read the answer yourself and see who you think is right:

The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

And Krugman has one more problem do deal with.  Earlier in the year you may recall there was a big debate over multipliers.  I argued that if the Fed had an optimal policy, or indeed if the Fed was targeting any sort of inflation/NGDP variable, then the multiplier was zero.  This is because for fiscal policy to “work” it must boost AD.  But higher AD will raise inflation and NGDP.  If the Fed is targeting those variables then it would offset the expected impact of fiscal policy by tightening monetary policy.  Krugman never addressed my specific post, but definitely did address that general worry.  He said something to the effect that it was absurd to think Bernanke would sabotage fiscal stimulus with tighter money policy.  (If someone can find the link I’ll add it.)  This was when Bernanke still seemed kind of progressive.  I never denied that Krugman’s interpretation was plausible, although I also argued that the Fed probably would not let the recession get much worse than it did without taking extraordinary measures, and I think most fiscal proponents overlooked that counterfactual in their multiplier estimates.

Why do I bring up this old multiplier argument?  Because it is highly relevant to the wage debate.  In the spring Krugman was arguing that fiscal policy would work because the Fed would let it raise inflation expectations.  Now Krugman is saying wage cuts won’t work, because the Fed will respond by letting inflation expectations fall.  Either of those monetary policy responses are possible, but how likely is it that they are both correct?  In Krugman’s posts the Fed seems like a very schizophrenic institution.  When faced with a fiscal stimulus package, the Fed puts on its progressive hat and adjusts its implicit inflation target in a way that accommodates the extra government spending.  But were Congress to pass a minimum wage or payroll tax cut, the Fed suddenly becomes a Mellon-like liquidationist, cruelly lowering its implicit inflation target to prevent the wage cuts from creating any jobs.  My goodness, can both of these views be correct?  I scratched my head looking for something in common.  Something that could reconcile these two views of the Fed.  The only commonality that I could find is that in both cases the Fed adjusted its policy in such a way as to validate Krugman’s opinion about the desirability of alternative policies.

Part 2.

In a follow-up post Krugman criticizes Tyler Cowen and Bryan Caplan in his usual civil fashion:

I feel like I’m arguing with a dining room table.

I know the feeling; I get it every time Krugman fails to respond to my posts.  :)

Krugman complained that Cowen and Caplan failed to respond to his assumption that a nominal wage cut might simply depress prices, leaving real wages unchanged.  That may be true, but Caplan clearly used another set of assumptions, which seem equally plausible to me.  To use my terminology, Caplan basically assumed that nominal wage cuts would not impact nominal GDP:

1. Cutting wages increases the quantity of labor demanded.  If labor demand is elastic, total labor income rises as a result of wage cuts. 

2. Even if labor demand is inelastic, moreover, wage cuts reduce labor income by raising employers’ income.  So unless employers are unusually likely to put cash under their mattresses, wage cuts still boost aggregate demand.

I have frequently argued that inflation is the wrong variable for almost all its applications in macro.  Instead, we should use NGDP growth.  The Fisher equation should be nominal rates minus expected NGDP growth.  Here’s an example.  Krugman is worried that the wage cuts might give you 2% deflation, and that puts you deeper into a liquidity trap.  But suppose that instead it is expected NGDP growth that matters.  Assume Japan has 1% RGDP growth and China has 10% RGDP growth.  If both countries have 2% deflation, then Japan has negative 1% NGDP growth and China has 8% NGDP growth.  Who’s more likely to be in a liquidity trap?  My intuition here is of course based on the notion that the Wicksellian equilibrium real rate is strongly correlated with the RGDP growth rate.  So I think Caplan’s right.  It’s not obvious why wage cuts lower NGDP.  And it’s not obvious how you go deeper into a liquidity trap without expected NGDP growth falling, even if inflation falls.

I have to admit that I absolutely hate working through the sort of mathematical model that Krugman can handle with ease.  So I may be wrong in this analysis.  But even if I am, everything I wrote in part one of this post remains valid.  I think all these “depression economics” analyses are silly.  They assume a Fed policy reaction function that is simply far too ad hoc.  I’m not saying the Fed doesn’t mess up at times.  And I’m not even going to argue that there aren’t short periods (like late 2008) where they let expectations become unanchored in response to shocks.  But I do deny that we can make sober, long term fiscal decisions based on the sort of bizarrely dysfunctional Fed assumed by Krugman.  A Fed that seems to have an inflation target, and then arbitrarily raises that target in response to deficits produced by government spending, but cuts it in response to deficits produced by payroll tax cuts.

When all is said and done, there is no reason to banish microeconomists from the fiscal policy debate.  It is reasonable to hold NGDP constant in these analyses, and that makes all the micro assumptions valid.  But should they ever stick their nose into monetary policy . . .


Tags:

 
 
 

30 Responses to “Krugman says the pain in Spain was mainly due to excessive real wages.”

  1. Gravatar of Doc Merlin Doc Merlin
    20. December 2009 at 12:40

    A lot of micro guys don’t exactly believe in macro either. Really we need a good way to link modern macro and micro. Austrian theory has a method it uses, but the quantitative methods lack a good way to link macro and micro.

    A good gap theory would help get quantitative macro on good micro footing.

  2. Gravatar of Best Of George Galloway VS the Mainstream Media + US | Super Hot Topics Best Of George Galloway VS the Mainstream Media + US | Super Hot Topics
    20. December 2009 at 12:56

    […] TheMoneyIllusion » Krugman says the discompose in Espana was mainly cod … […]

  3. Gravatar of marcus nunes marcus nunes
    20. December 2009 at 14:01

    The Spain reference reminded me of My Fair Lady and the line “The rain in Spain falls mainly in the plain”. But that´s true of all plains, not only in Spain. That´s how they became plains to start with.

  4. Gravatar of TheMoneyIllusion » Krugman says the pain in Spain was mainly due … | Your Local News TheMoneyIllusion » Krugman says the pain in Spain was mainly due … | Your Local News
    20. December 2009 at 14:02

    […] the rest here: TheMoneyIllusion » Krugman says the pain in Spain was mainly due … Share News being-part, euro, eurozone, housing, massive-capital, other-eurozone, […]

  5. Gravatar of ssumner ssumner
    20. December 2009 at 14:23

    Doc, I hope you are right, but I wonder if we will ever be able to unit micro and macro–the macroeconomy just seems too complex.

    marcus, This is the first time I’ve strongly disagreed with you. I think the clouds hit the mountains, and drop their rain there. But at least we agree on macro. :)

  6. Gravatar of Jon Jon
    20. December 2009 at 15:21

    Many people I know assume that it is preferable for the incomes of low wage workers to rise than it is for the employers income to rise. This was the theory behind giving everyone an extra seven dollars a week stimulus plan. These same files would deny that a wage cut that transfers income to the capitalist helps AD. Doesn’t the capitalist just save the income?

    But of course they have it backward. I have plenty of liquidity already. If I get more income my goal is some combination of consume and invest. The least favorable act is to hold further cash or accept a lower yield in exchange for liquidity.

    What matters most to the disposition of a temprary increase in income is the dimishing return to liquidity.

    I suspect Krugman does not see this point clearly.

  7. Gravatar of Alex Alex
    21. December 2009 at 07:39

    Scott,

    Krugman reminds me of the Bush followers that wanted lower taxes and argued that lowering taxes would increase revenue. Sure that can happen in models and in real life, but did they really think that the US was on the wrong side of the Laffer curve? We know that they didn´t want to pay taxes which is a pretty valid argument IMHO but that led them to come up with implausible arguments. Now Krugman wants bigger G and he will jump on any wagon that takes him there. He attacks macro guys for not understanding the micro. He then attacks the micro guys for not understanding the macro. He attacks people that think that prices are flexible, and then he attacks people that assume that prices are sticky. He writes that permanent monetary policy can work in a recession but then attacks people who advocate for QE. Sure QE need not be permanent but then he attacks people who root for inflation targeting. Anyway, luckily for us the economy is getting better but that drives him even crazier as he sees the opportunity of achieving a bigger G fade away…

    Alex.

  8. Gravatar of StatsGuy StatsGuy
    21. December 2009 at 07:58

    Spain is a useful object lesson in what happens when you don’t have an instrument to simultaneously renegotiate many types of contracts (e.g. value of money). True, wages in Spain are sticky/high. But so is debt.

    Many anti-inflation folks give a-priori precedence to keeping money stable at the expense of other assets. In an international context, Spain shows us the result – if the aim of policy is to keep assets that are linked to the nominal currency stable, but domestic consumption is supported by excess imports, then stabilizing the real value of a nominal currency against a basket of goods (which is overly weighted to imported goods) is like stabilizing the exchange rate.

    In international finance, this is called “Defending a Peg”.

    Thus, when Bernanke indicates that we’re going to target 2% inflation in spite of our import dependence, he’s essentially committing to defending the dollar peg. The cost of this is no longer measured in depleted gold reserves, but rather in debilitating interest rates and high deficits. There are many example in the world where this ends badly.

    Targeting NGDP, btw, is not stabilizing a particular asset (currency) class at the expense of others. It’s stabilizing a weighted value of the entire economy.

  9. Gravatar of Doc Merlin Doc Merlin
    21. December 2009 at 08:24

    @StatsGuy:

    “Targeting NGDP, btw, is not stabilizing a particular asset (currency) class at the expense of others. It’s stabilizing a weighted value of the entire economy.”

    While I would rather have competing private banks not insured by the Gov. That is a very good point.

  10. Gravatar of OGT OGT
    21. December 2009 at 09:04

    Statsguy- Good point on the international context of keeping money artificially stable, Adam Tooze’s ‘Wages of Destruction’ has a great examination of Germany’s contorted attmepts to this in the thirties.

    Also, I am constantly mystified by how blind modern economists are the effects of contractually nominal debt. The fact that none of these models pro or con-wage cut mention contracually nominal debt is stupifying.

  11. Gravatar of Doc Merlin Doc Merlin
    21. December 2009 at 11:31

    @OGT:
    Agreed, contractually nominal debt is imo the major source of stickiness in the economy.

  12. Gravatar of StatsGuy StatsGuy
    21. December 2009 at 11:54

    “contractually nominal debt is imo the major source of stickiness in the economy”

    Yup.

  13. Gravatar of ssumner ssumner
    21. December 2009 at 12:03

    Jon, I don’t know how the MPC of capitalists compares to that of workers. But I don’t think Krugman sees that as a problem, because he says his wage argument only applies to liquidity traps.

    Alex, I agree, except I’m not too sure about the economy getting better. I hope you are right, but I fear that unemployment may go still higher.

    Statsguy, Nice observation. I mostly agree, although I do regard the deficits as a separate issue. But if we focus on headline inflation, then when import prices rise you are forced to deflate the dometic economy. That is of course what the Fed did between July and November 2008.

    OGT, That’s a good point, and one reason why it is much better to fix unemployment with monetary policy, rather than a low wage policy.

  14. Gravatar of Greg Ransom Greg Ransom
    21. December 2009 at 12:58

    35,000 construction jobs have been lost in Orange County, CA in 3 years. 15,000 Real Estate and finance jobs have been lost in 1 year.

    Spain had a housing bubble / housing finance fiasco on an Orange County scale.

    Watching “macroeconomists” work is like watching a Platonist trying to explain
    the origin of species — everything at the level of causation is assumed not to exist by conceptual fiat. “Species” and adaptations for the Platonist are natural kinds, and they can’t evolve — just like for you Macro guys “capital” is a natural kind and “labor” is a natural kind and “aggregate demand” is an undifferentiated natural kind interacting with other fixed and homogenous “enties”.

    It’s a bogus Platonic relm completely inconnected with the causal processes of the real word — but it’s your world and you are stikomg to it and barring entry to anyone who sees the world for the actual causal system it is.

  15. Gravatar of jean jean
    21. December 2009 at 13:06

    Taking in account the fact that the Fed targets inflation (or NGDP growth) rather than level (either CPI or NGDP), Krugman position makes sense and wage cuts won’t help (nor deteriorate).

    (And as mentionned earlier, this does not address Fisher debt deflation)

  16. Gravatar of marcus nunes marcus nunes
    21. December 2009 at 13:11

    Mark Toma is lost. Please help him!
    http://moneywatch.bnet.com/economic-news/blog/maximum-utility/is-criticism-of-the-bernanke-fed-justified/356/

  17. Gravatar of LorenzofromOz LorenzofromOz
    21. December 2009 at 15:50

    The other factor in Spain is that it is very hard to sack people. This makes it much riskier to employ new staff. Which increases the wages-are-too-high effect since they are too high for the level of risk involved in employing people.

  18. Gravatar of Declan Trott Declan Trott
    21. December 2009 at 16:45

    “When faced with a fiscal stimulus package, the Fed puts on its progressive hat and adjusts its implicit inflation target in a way that accommodates the extra government spending. But were Congress to pass a minimum wage or payroll tax cut, the Fed suddenly becomes a Mellon-like liquidationist, cruelly lowering its implicit inflation target to prevent the wage cuts from creating any jobs.”

    I don’t think this is a fair characterisation of Krugman’s views – his argument is that the Fed has lost all traction at the zero lower bound (under current policy settings). That means that they (a) would not want to offset the effect of a fiscal stimulus on aggregate demand, but (b) don’t have any power to prevent the deflation that he assumes would follow from a nominal wage cut.

    Now you can disagree with this argument on many levels – the claim that nominal wages do not affect real wages is empirically pretty dubious, and having read your blog, of course I think the appropriate response is to change the policy settings! – but I don’t think it implies the kind of really contradicatory behaviour you describe. I think it follows pretty logically and consistently if you believe in the liquidity trap.

  19. Gravatar of Nick Rowe Nick Rowe
    21. December 2009 at 19:11

    Scott: Slightly off-topic:

    Assume:

    1. that nominal wages are sticky, but prices are flexible (or, at least, more flexible than wages), so that there can be an excess supply of labour but the output market clears,

    2. The Fed holds PY constant (or growing at a constant rate of 5%),

    3. a Cobb-Douglas production function, so that labour’s share of total output, alpha, is technologically-determined (for simplicity),

    then WL=alphaPY and we can draw the AD curve in {W,L} space, as a rectangular hyperbola.

    So, “your” labour demand curve looks just like “your” AD curve. It’s a rectangular hyperbola. The only difference is that if labour productivity growth is (say) 1%, then “your” labour demand curve is shifting right at 4% per year, rather than 5% per year.

    All I’m doing here is translating the Scott view of the world from {P,Y} space into {W,L} space, following up on a comment you made on my Micro-bashing post.

    Back on topic: But Paul Krugman could argue that the AD curve of an economy with flexible exchange rates (US) might be very different in slope from an economy with fixed exchange rates (Spain).

  20. Gravatar of Lord Lord
    21. December 2009 at 20:05

    As I replied to Bryan:

    No. If labor income is elastic, lower wage workers are substituted for higher wage workers. Lower wage workers being less productive mean more employment but not more labor income. There is no reason to expect an increase in labor income other than a greater propensity of low wage workers to spend than high wage workers. If labor income is inelastic, income is redistributed from labor to employers and to the assets they own and invest in. Labor income is reduced while profits and asset prices are increased. Unless there is a greater propensity to spend, no increase occurs.

    The trade off would be between minimum wage workers and sub minimum wage workers and even with high unemployment there is still a lot of employment churn. The problem is there is little if any increase in the propensity to spend due to this so no increase in labor income. At best there is no increase in labor income and most likely less. Falling wages would intensify deflationary expectations leading to even worse results.

  21. Gravatar of StatsGuy StatsGuy
    22. December 2009 at 05:55

    ssumner:

    “although I do regard the deficits as a separate issue”

    Yes, and no. Most of the increase in deficit in 2009, and certainly from 1010 through 2017, is due to decreases in tax revenue and “automatic stabilizers”. But, of course, the fact the deficit was so high even during the 2005/2006 boom…

  22. Gravatar of ssumner ssumner
    22. December 2009 at 07:46

    Greg, You said;

    “35,000 construction jobs have been lost in Orange County, CA in 3 years. 15,000 Real Estate and finance jobs have been lost in 1 year.”

    The art of macro is the art of learning what numbers matter. The US economy gains and loses over 30,000,000 million jobs a year. The numbers you cite have no cyclical impact. Real estate was in free fall for two years from mid-2006 to mid 2008. Plus we were being hammered by a massive oil shock. And despite all that the unemployment rate only rose by about 1% point. That’s small potatoes.

    Jean, I don’t agree. Unless you are implying the wage cuts cause monetary policy to miss its inflation target.

    Marcus, Thanks, I might do a comment, but I found it hard to understand where he was going with all that. The bottom line is do we need more AD or not? I think Thoma thinks we need more AD. I agree. So why doesn’t he want a more expansionary Fed policy? The Fed doesn’t directly raise inflation. They raise inflation by raising AD.

    LorenzofromOz, Yes, I was going to discuss Spain’s dual labor market, in which the better jobs are strongly protected by regulation. Thanks for pointing that out.

    Declan, You said;

    “I don’t think this is a fair characterisation of Krugman’s views – his argument is that the Fed has lost all traction at the zero lower bound (under current policy settings). That means that they (a) would not want to offset the effect of a fiscal stimulus on aggregate demand, but (b) don’t have any power to prevent the deflation that he assumes would follow from a nominal wage cut.”

    Sorry, but you and Krugman can’t have it both ways. Krugman was rightly outraged when Bernanke said he preferred a lower inflation target than Krugman and DeLong prefer. But his outrage would have made no sense if the Fed was powerless. They are not powerless, they are targeting inflation at a rate lower than what Krugman and I prefer.

    Nick, Thanks for translating my argument into mathematical terms.

    You said;

    “Back on topic: But Paul Krugman could argue that the AD curve of an economy with flexible exchange rates (US) might be very different in slope from an economy with fixed exchange rates (Spain).”

    Actually, I don’t think that would address my argument, even if true. If the Fed is NGDP or inflation targeting, they will move the AD curve in response to fiscal and wage policies, in order to keep inflation or NGDP on target. That is the weakness in Krugman’s argument.

    Lord, I’m not sure I agree, but even if you are right it would address Bryan’s argument but not mine. When you say profits would rise and asset prices increase, my response is that higher asset ptices tend to boost investment. But all of this is a moot point if the Fed is targeting inflation or NGDP–which I believe is the only reasonable assumption to use when considering fiscal and wage policy.

    Statsguy, I meant the CA deficit, not the budget deficit. Maybe I misread your comment–I thought you were discussing the CA deficit for some reason.

  23. Gravatar of Lord Lord
    22. December 2009 at 09:24

    I agree, the most critical factor is whether real interest rates are high or low relative to growth. I would say being at the zero bound, and for anyone other than banks, they are high, but the economy is apparently growing so perhaps not. If they are high, money will go into debt repayment, while if low will go into investment. About the only one borrowing these days is government though, so I would still be inclined that they are high.

  24. Gravatar of ssumner ssumner
    22. December 2009 at 17:29

    Lord, Yes, and the key point is that they are high relative to the needs of ther economy.

  25. Gravatar of Doc Merlin Doc Merlin
    22. December 2009 at 22:28

    @Lord,
    Yes, but the difference between 3% and 2% isn’t anywhere near the difference between say 9% and 8%. Because of the exponential nature of interest rates, at the low end, the differences mean very little.

    Imo, right now, a more effective alternative would be tax cuts, government spending cuts, and lowering the minimum wage.

  26. Gravatar of Greg Ransom Greg Ransom
    23. December 2009 at 21:11

    Scott, you’re deriving a false conclusion looking at the a shirt time slice of the tip the disaggregated labor / production iceburg.

    The forclosure nightmare is still underway, businesses are still going out of business — dozens right in my little suburb.

    The recession officially began in 2007. The effects of reduced wealth and lowered incomes and profits and reduced spending has slamming progressively from one disaggregated to another has taken time.

    Your easy dismisal of all this based on zero on the ground evidence is absurd — and this is my point. The evidence that matters, the facts that matter — are diaggragated and not studied or dealt with or even acknowledge by macro “platonists” who only conceive of causation in terms of aggrate on aggravate interaction. Again, as if speciation and adaptation could be explained by admitting only interation
    between Platonic natural kinds in biology — see Ernst Mayr for an account of how this type of thinking crushed scientific advance in biology, as I believe it does
    in macroeconomics.

    You wrote:

    The art of macro is the art of learning what numbers matter. The US economy gains and loses over 30,000,000 million jobs a year. The numbers you cite have no cyclical impact. Real estate was in free fall for two years from mid-2006 to mid 2008. Plus we were being hammered by a massive oil shock. And despite all that the unemployment rate only rose by about 1% point. That’s small potatoes.

  27. Gravatar of ssumner ssumner
    24. December 2009 at 08:06

    Greg, You said;

    “The recession officially began in 2007″

    2007 was a boom year, unemployment was the lowest of the past 8 years. So all those jobs lost in housing (and I agree tons of housing jobs were lost in 2007) didn’t seem to have much effect on the overall unemployment rate. Government dating of recessions is very misleading.

    Yes, housing continued to contract after the economy tanked in the second half of 2008, but most of the huge rise in unemployment was due to falling NGDP, and had nothing to do with the housing contraction.

    On the ground evidence means nothing. If I live in a town with a toaster factory, and it just down, I might assume the recession is due to the toaster industry. You need aggregate data to do macro, nothing else works.

  28. Gravatar of Greg Ransom Greg Ransom
    24. December 2009 at 10:03

    Platonists insisted you needed Platonic entites to do language and science.

    As Ernst Mayr points out, this blocked advance in biology for 2 centuries — you can’t do natural selection and the rest of biology with Platonic kinds.

    My neighbor lost his programming job with a builder in 2007. THIS year he lost his house and the lender took a bath. And it took him two years to find a lower paying replacement job.

    You macroeconomists live in a world of Platonic aggregate entities unconnected with real world micro causal agents and factors and relations — and with “data” that only has meaning within the context of these micro agents and factors and relations.

    Just as the aggrative Platonic entities assumed by pre-scientific “macrobiologists” were unconected to the real world of micro adaptive and selective causal
    agents and factors and relations.

  29. Gravatar of Greg Ransom Greg Ransom
    24. December 2009 at 10:11

    In Ladera Ranch, CA housing prices began to crash in 2007 — but the foreclosure crash is still well underway in 2009. Most people are cutting back big time on spending only this year. Business closures due to the bust have taken place over an extended period — the effects of job losses and reduced household wealth and reduced spending etc only now is really hammering local luxury end businesses — the ripple of the bust takes time, and if you look at the real micro causal data on the ground you see this.

    Stay in the Ivory Tower with a mere computer link to reality —
    then not so much.

  30. Gravatar of Greg Ransom Greg Ransom
    24. December 2009 at 15:19

    Scott wrote:

    “The art of macro is the art of learning what numbers matter. The US economy gains and loses over 30,000,000 million jobs a year. The numbers you cite have no cyclical impact.”

    When one food joint closes and another opens and the wait staff loses and then gains jobs, this has no structural significance.

    When skilled tradesmen and specialized finance people systematical are thrown put on the street with no hope of re-employment in the high skill work they have trained for, that is a systematic phenomena — once again the micro “data”, i.e. the micro causal relations matter for non-fake causal explanation.

Leave a Reply