A few interesting comments and posts

Today I’ll link to a post by Bryan Caplan, and then a couple comments from my previous post.  Here is Tyler Cowen discussing wage flexibility:

Keep in mind that unemployment rates today are disproportionately concentrated in low-income and low-education workers.  Haven’t we been told, for years, that these same individuals are seeing some mix of stagnant and eroding wages?  That they are experiencing downward mobility?  That the real value of health care benefits has been falling and that more and more jobs don’t offer health care benefits at all? 

Doesn’t that mean…um…their wages aren’t so sticky downwards?  And thus Keynesian economics is not the final story?

And here is Bryan’s response:

The obvious responses:

1. The erosion we’ve been told about for years is supposed to have taken years to happen.  Three or four decades, actually.  Even staunch Keynesians probably think that the labor market could right itself over such a long timespan.

2. This erosion took place alongside positive inflation, year after year.  It’s perfectly consistent with complete nominal rigidity.  Consider: Between January 1978 and January 2008, the CPI (set to equal 100 for 1982-4) rose from 62.5 to 211.1 – enough to reduce constant nominal wages by over 75% in real terms.  Tyler mentions the real-nominal stickiness distinction later in the post, but it doesn’t enter into his analysis.

Overall, I think Tyler’s completely wrong here.  Ticker-tape flexibility in the labor market wouldn’t solve all our economic problems overnight, but would quickly solve the unemployment problem.

This  is pretty close to what I would have said.  I’m not sure complete wage flexibility would eliminate cyclical unemployment, but I think it would greatly reduce it. 

BTW, the sticky-wage theory of business cycles does not predict that industries with flexible wages will have lower unemployment during recessions.  Rather industries that produce acyclical goods will tend to have lower unemployment.  Surprisingly, if the wages of factory workers are quite flexible, and the wages of health care workers are quite sticky, it is still likely that factory workers will suffer higher unemployment during a recession.  To see why just consider a thought experiment where money and NGDP fall by 10%, and the economy is 50% health care and 50% manufacturing.  If health care wages are sticky, and output is stable, then nominal spending on factory goods will fall by about 20%.  Unless factory workers accept a 20% nominal pay cut (i.e. 10% lower real wages) they will suffer higher unemployment.  A more plausible outcome is that both prices and output fall in the manufacturing sector.

In my previous post I suggested that Obama erred in allowing two Federal Reserve Board seats to lie empty for a year and a half.  A commenter named Ted finds a plausible explanation for this mistake:

I’m wondering if Larry Summers is telling Obama nothing can be done on the monetary front. I remember in a paper he wrote at least two decades ago where he argued against a long-run zero inflation target partially on the grounds that we needed to avoid a “zero interest rate trap.”

He appears to be pushing that view recently as well too:

May 2010: http://www.whitehouse.gov/administration/eop/nec/speeches/fiscal-policy-economic-strategy

“In settings where an economy’s level of output is constrained by demand where the Federal Reserve is unable to relax that constraint, fiscal policy will through the multiplier process have significant impacts on output and employment. … Moments like the present – when the economy faces a liquidity trap and when the Federal Reserve is constrained by a zero bound on interest rates, and when the financial system is functioning imperfectly because of credit problems in financial intermediaries and because of overleveraged borrowers – are moments when these conditions, for fiscal policy to have an expansionary impact, are especially likely to obtain.”

Or here July 2009: http://dyn.politico.com/printstory.cfm?uuid=8991C732-18FE-70B2-A8410DAF98025BEC

“Economists in recent years have become skeptical about discretionary fiscal policy and have regarded monetary policy as a better tool for short-term stabilization. Our judgment, however, was that in a liquidity trap-type scenario of zero interest rates, a dysfunctional financial system, and expectations of protracted contraction, the results of monetary policy were highly uncertain whereas fiscal policy was likely to be potent.”

Assuming he’s as influential and overbearing as the press reports him as (as if I can trust that?), then he might have already convinced Obama there is nothing that the Fed can do and any argument to the contrary is silly because the effects of monetary policy may be, in Summers words, “uncertain” where as fiscal policy is “potent.”

I don’t think I even need to comment here.  Even Krugman, DeLong and Yglesias have called on the Fed to raise its inflation target. 

I once heard a (possibly apocryphal) story, which goes as follows:  Sometime around 1978 Jimmy Carter asked his economic advisors if there was any downside from the dollar’s recent depreciation in the foreign exchange market.  No one spoke up.  Can anyone confirm that story?

This is a comment made by Luis Arroyo:

Is not J Taylor a cheat?
See http://johnbtaylorsblog.blogspot.com/where he use Zolti/$ data To prove that it has not depreciated in 2009. But REER and Zolti/euro data say clearly that it does depreciate.
see the true data in my blog.

No, John Taylor is not a cheat; I don’t doubt he is sincere in the views he expressed.  But unless I am mistaken, Luis is correct.  I wasn’t able to find the graph in Luis’s blog, but just looking at the graph in Taylor’s post, it seems obvious to me that the zloty must have depreciated substantially against the euro, which I presume is Poland’s most important trading partner.  I must say that I find Luis’ explanation to be far more plausible that Taylor’s.  Yes, it’s good that Poland had its house in order when the crisis hit.  But surely there were other Europeans countries that also had sound macro policies in 2008.   

PS.  If Luis or someone else can find the graph he refers to, I’ll provide a link.

Update:  Indy sent me this link.   The zloty clearly depreciated against the euro during the key period of late 2008 and early 2009.  (And this occurred despite the fact that the euro depreciated against the dollar in late 2008.)


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34 Responses to “A few interesting comments and posts”

  1. Gravatar of Indy Indy
    26. June 2010 at 17:48

    Here’s the equivalent of John Taylor’s chart, except in Euro vs. Zloty (instead of in dollar terms).

    http://www.google.com/finance?chdnp=0&chdd=0&chds=0&chdv=0&chvs=Linear&chdeh=0&chfdeh=0&chdet=1277603246256&chddm=1744203&q=CURRENCY:EURPLN&ntsp=0

  2. Gravatar of Declan Trott Declan Trott
    26. June 2010 at 19:27

    “I’m not sure complete wage flexibility would eliminate cyclical unemployment, but I think it would greatly reduce it.”

    Is this based on anything other than theory and gut instinct? It’s not clear e.g. that cyclical unemployment has gotten worse since the 19th century, or that the cross country pattern supports this view either (the effect of hiring & firing costs seems to swamp it anyway).

    These aren’t ideal sources of variation, but if the historical range doesn’t make itself felt through the noise, it doesn’t seem much to get excited about. Especially if you are focusing (like Caplan) on government policy as a source of the stickiness.

    And surely, as long as we are not level targeting, some nominal stickiness is good to anchor LR expectations!

    I mean that at least half seriously.

  3. Gravatar of Benjamin Cole Benjamin Cole
    26. June 2010 at 19:53

    I read the whole Summers May 2010 speech, and it is clear he thinks monetary policy right now can do nothing, we are in a liquidity trap.

    I do have a question: Anthony Downs (Brookings), among many others, notes that high global savings rates are creating “capital gluts.” Niagaras of capital.

    I know in Thailand banks are complaining they have surplus capital, and that will depress interest rates, Recently in the WSJ there was a report of private equity managers unable to place all their funds. China seems to have capital coming out its ears, and of course, Japan is notorious for savings. I am not sure about Europe, but it has an older population, so I expect it has ample savings.

    In theory, lower interest rates should discourage savings. But if you are middle class you have to save for retirement, regardless of interest rates. And if you are in the upper class, or the plutocracy, you may find even conspicuous consumption doesn’t dent the income you earn every year. You are saving by default (Can A-Rod spend that much?).

    I contend that high global savings rates going forward will mean negative real interest rates for anybody who wants security (US Treasuries). This may happen even if the money supply is tight.

    It may also mean we have periodic busts as frustrated investors search for yields–such as investing in MBS-US home mortgages (although they were rated AAA, and sold by blue-chip investment banks–a false signal if there ever was one).

    BTW, if anybody looks at the price of gold and tells you that says something about the Fed, I think they are living in the past. China is expanding its money supply at a 20 percent rate, and Indians and Chinese are buying gold heavily–the are the market. The price for gold is being set by demand in China and India. The gold bugs need to find something else to fret about.

  4. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. June 2010 at 04:39

    What proportion of the US workforce is in some form of self-employment? The reason I ask is because almost one-fifth of the Australian workforce are in some form of self-employment. This reduces the effect of economic shocks (since lots of people can take a temporary income hit without losing their jobs), reflects the rise of two-income households (since fluctuations in income can be covered more easily) and the regulatory burden placed on permanent, full-time employment (which imposes costs in wasted resources or blocked opportunities that can be captured by moving to other forms of employment). In Australia, we have a long history of REALLY regulating permanent full-time employment, with some of the highest (and specific) minimum wages in the developed world: though we regulate less than we used to.

    I am also sceptical about how much wage flexibility in ordinary employment is achievable. There are real contractual and trust issues with cutting base wages to do the same work, as I posted about here. To put it another way: even in a completely unregulated labour market, I suspect there would still be a lot of nominal downward stickiness.

  5. Gravatar of Doc Merlin Doc Merlin
    27. June 2010 at 05:01

    @Lorenzo
    As of the last census, we had ~10M completely self employed people. Also roughly 20M firms have no payroll (these people are partially self employed). We have total employment of ~140M people.

    This is roughly 7% “complete self employment.” The number of people with partial self employment is probably much, much larger.

    How does Oz break down the numbers?

  6. Gravatar of scott sumner scott sumner
    27. June 2010 at 06:16

    declan, I have several responses:

    1. The nominal shocks were much larger in the old days. In 1921 prices fell around 20%. Today that would produce a massive depression, yet by the end of 1922 we were booming again. Alternatively, back in the 19th century a mild deflation such as we had in late 2008 would have produced a short, mild recession. Having said all that, I’m not sure how much wage stickiness has actually changed. It is an open question. For instance, unions are far weaker than in the 1950s, and not that much stronger than 100 years ago.

    2. Both price and wage stickiness play a role.

    3. I haven’t studied international comparisons, but in some countries it’s hard to fire workers in recessions. In other countries the government subsidizes employment in recessions (which may be a smart policy.).

    4. I was not making Bryan Caplan’s argument. I was talking about private sector stickiness. Some government policy changes have made wages a bit more sticky in the past three recessions (extended benefits). Is that why the last three recessions have been progressively less V-shaped and more U-shaped than normal? I don’t know.

    I wouldn’t say “surely” some wage stickiness is better. Some have made that argument, but I don’t find the underlying Keynesian model to be very plausible. If big wage cuts slowed the recovery, then why was the economy deeply depressed in 1931 (when wage cuts had been discouraged), but booming in late 1922 (after steep wage cuts.) Not saying you are wrong, but I’m not convinced.

    Benjamin, Once again, you and I tend to think alike. I was thinking about doing a post someday on the high savings/low interest rate question. If you are right, then Keynes’s prediction is coming true, but 80 years later than he expected.

    I am a bit puzzled why there isn’t more demand for savings, given the rapid growth in much of the developing world. But in your favor we had fairly low real interest rates even during the mid-2000s decade, when all countries were booming. One implication (unless I am mistaken) of permanently low real interest rates should be permanently high P/Es on equities. I seem to recall that stocks have been well above Shiller’s benchmark formula for most of the past 20 years. Is that right?

    And I completely agree on gold. I have been telling other commenters about Asian demand, but no one seems to believe me.

    Lorenzo, I don’t know the percentage of Americans that are self-employed. But I recall reading that it is relatively low (compared to other countries.)

    You said;

    “I am also skeptical about how much wage flexibility in ordinary employment is achievable. There are real contractual and trust issues with cutting base wages to do the same work, as I posted about here. To put it another way: even in a completely unregulated labour market, I suspect there would still be a lot of nominal downward stickiness.”

    I completely agree. I hope people didn’t infer that I thought wage stickiness was a “problem” that needed to be fixed. I think it is a characteristic of free markets, which must be taken into account when trying to set monetary policy. The ideal monetary policy is one that leads to a situation where most workers don’t need to cut their pay.

    There are some government policies that make nominal wages a bit stickier (minimum wages, extended benefits) but I would change those policies for reasons that have nothing to do with business cycles.

    Doc Merlin, Thanks, that’s what I thought.

  7. Gravatar of scott sumner scott sumner
    27. June 2010 at 06:17

    Indy, I forget to thank you, I added an update.

  8. Gravatar of Wage stickiness and Obama’s FED nominations « Economics Info Wage stickiness and Obama’s FED nominations « Economics Info
    27. June 2010 at 08:00

    [...] Source [...]

  9. Gravatar of Luis H Arroyo Luis H Arroyo
    27. June 2010 at 09:31

    Here, a graph in term of Zloti/euro & REER

    http://2.bp.blogspot.com/_UlqNAo7QxaA/TCZW2vETGgI/AAAAAAAABI0/nC2PUf5by0Q/s1600/zolt.jpg
    in any case, the Zloty fall from a REER of 116,8 in 2008 to 95 in 2009, From Eurostat data.
    PS:
    I don´t like to suggest that Taylor cheat; but months ago He accused Bernanke of treachery when Bernanke defended himself against the Taylor´s charge on Fed was the main cause of the crisis.
    In any case, the Zloti/$ is irrelevant, and the case for the depretation of Zloti as one of the reason of good performance of Poland´s economy in 2009 is strong.

  10. Gravatar of Benjamin Cole Benjamin Cole
    27. June 2010 at 11:30

    Scott-

    Thanks for your reply. I am glad that someone with such an interesting and well-thought out blog agrees with me, let alone your impressive academic credentials.
    I look forward to reading future blogs of yours, and hope you can “get the word” out to the policy-making community.

  11. Gravatar of Joe Joe
    27. June 2010 at 12:08

    All of this seems clearly like an argument for eliminating the minimum wage…

  12. Gravatar of Ted Ted
    27. June 2010 at 12:41

    Is John Taylor serious?

    Firstly, what is Taylor talking about. Doesn’t the cliff dive in the exchange rate around mid-2008 against both the dollar and the euro matter at all?

    Secondly, it’s mostly monetary policy. Reading their reports it’s very clear they are committed to a 2.5% target. They initially fell behind the curve (though less so than other European countries), but they have caught up with aggressive rate cuts and decrease in the reserve requirements. And, perhaps not surprisingly, inflation has come in reasonably well given their target (once you take out food and energy which are obviously transitory fluxes). I suspect confidence in the target is what’s driving their success. Also, it’s interesting, if you read between the lines of their report they appear to be blaming the government for the weak labor markets there, despite the growth. Apparently there was a “considerable rise” in the minimum wage (17% roughly) between 2008 and 2009. There minimum wage is probably also more burdensome because it’s a monthly-mandated wage. Also, I strongly suspect the increasing strength of the trade unions in Poland right now have imposed a lot of problems in Poland’s labor market. So, output is likely more sluggish then it otherwise would be because of burdensome labor market policies.

    Also, you’ll find it interesting they don’t actually use a Taylor Rule. Furthermore, if you read their more detailed monetary reports the bank appears to be much more forward-looking in their decisions than most central banks are.

    Thirdly, he’s wrong to say they didn’t use fiscal policy. They enacted permanent tax cuts. These should be expansionary since it should cause consumers to revise estimates of their permanent income upwards, which increases both current and future consumption. Of course, this assumes that the public believed these tax cuts were actually permanent, which may not be the case. They also have the traditional automatic stabilizers.

    By the way, I don’t think you can rule out John Taylor is a “cheat.” For someone who is a talented economist, he seems to be making a lot of elementary errors lately. One of his most egregious examples and misleading examples was in his paper concerning fiscal multipliers in New Keynesian models, he basically constructs the assumptions such that the multiplier will be small by making the assumption the stimulus will be permanent – which is just an absurd proposition to take as an assumption. He then goes on op-ed pages and touts this result, apparently without informing his readers it’s entirely contrived to match his a priori assessment (that’s the reason his result in the NK model differs so much from people like Christiano/Eichenbaum/Rebelo; Eggertsson; and Woodford). Now, I don’t think fiscal stimulus has as a large effect as their models suggest, but that’s because I disagree with the models assumptions about how the Fed reacts to fiscal policy and how the public interprets the interaction between the fiscal and monetary authority (I think the key problem in their models is they assume one big government, rather than separate fiscal and monetary entities that may be goal independent). Taylor could make that point, but he doesn’t. He instead comes up with a disingenuous analysis, which I have to assume is on purpose because that’s an outrageous assumption he makes.

  13. Gravatar of 123 – TheMoneyDemand Blog 123 - TheMoneyDemand Blog
    27. June 2010 at 12:50

    BTW Evans-Pritchard’s latest piece in Telegraph is completely Sumnerian:
    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

  14. Gravatar of Greg Ransom Greg Ransom
    27. June 2010 at 13:08

    Sticky wages theory is not “Keynes”. The idea in macro predates Keynes, and is not central to his “General Theory”.

    Can’t you professional scholars clean up this bit of bogousity from the literature?

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    27. June 2010 at 15:32

    Doc Merlin: follow the first link im my original post. The table in the analysis linked to can be seen here. Basically, it is 975,000 other business operates plus 1,000,000 independent contractors (previously defined as ‘own account workers’ or ‘owner-managers of unincorporated enterprises’) for a total of 1,975,000 out of a workforce of 10.7m or 18.5%. Alternatively, 28% of the private sector workforce.

  16. Gravatar of Declan Trott Declan Trott
    27. June 2010 at 16:15

    Scott:

    “In 1921 prices fell around 20%.”

    How much of this is composition effects – a larger share of the economy was flexible commodity prices back then (as I think you have mentioned before)?

    And re your point 4. – the gold standard was much closer to level targeting than today’s monetary policy. I think the story Keynes told about wage and price cuts increasing expectation of future deflation is a lot more plausible today than in the 20s and 30s. We don’t have anything like the conception of the “normal” price level that they had.

    But after your reply to Lorenzo I (yet again) get the feeling I am just nit picking.

  17. Gravatar of Declan Trott Declan Trott
    27. June 2010 at 16:21

    This reminds me of the Phelps Brown & Hopkins paper of 1956 about bulders’ wages in England: from 1254 to 1954 real wages were all over the place, but the only time nominal wages went down significantly was immediately after WWI.

  18. Gravatar of Mikko Mikko
    27. June 2010 at 20:58

    I think the main problem is not wage inflexibility, but debt inflexibility.

  19. Gravatar of Doc Merlin Doc Merlin
    27. June 2010 at 21:39

    @mikko
    100% agreed.

    That is a point I have been trying to make for a long time. Nominal labor rigidities are insignificant compared to nominal debt rigidities. For comparison: a typical employment contract can be altered every year, sometimes sooner. While a 30 year fixed mortgage can only be altered in one direction amicably (refi to lower interest rate.)

    In fact, I will go one step further and say that debt contracts are the primary source of macroeconomic rigidity and of the money illusion.

  20. Gravatar of Mikko Mikko
    27. June 2010 at 23:02

    Doc Merlin: Funnily, here in Finland most people tie their mortgages into short term Euribor, e.g. 1 month, 3 month or 1 year. The interest rate then changes automatically with markets (every 1 month, 3 months or 1 year). This means that Finnish people holding a mortgage pay approximately 1-1.5% interest at the moment.

    But even if interest rates change as quickly as they do here, the debts are unchanged.

  21. Gravatar of Doc Merlin Doc Merlin
    27. June 2010 at 23:39

    @Mikko.
    Yah, the 30 year fixed is the American thing. Adjustable rate mortgages tend to collapse when we have a crisis.
    Your point about the size of debts is also true. In an adjustable rate mortgage, if expected rates are very low then people will accumulate much more debt than they would if expected rates were high. When the rates increase well beyond expected rates (something that happened here in 2007) a lot of people no longer can afford their debt.

    In other european news after G20, I am moving my european outlook to ‘less bearish than before.’ I think europe’s rejection of Keynesian fiscal stimulus and attempts to pay down their debts will do very well for them, economically.

  22. Gravatar of Bonnie Bonnie
    27. June 2010 at 23:41

    I read somewhere that wage stickiness involves higher skilled labor rather than unskilled because of training factors and individual firm knowledge. But also involved in this is a willingness to sacrifice some workers to preserve wages of those who remain. (I wish I had a link or notes as to who said this). If it’s true, I’d like to offer a rather nonconventional observation that some may be underestimating the role of near recent, over the last decade or so, technological advances that allow for more sacrifice of skilled workers in order preserve wages. My view might be biased by the fact that I come from an IT and corporate strategy background, and we were always looking for more parts of the business that had ability to automate, even replace manual intelligence with AI where customers would accept it. Additionally, being around the block a bit within the IT industry, I have had many customers who have already squeezed as much remedial/manual labor out of the equation as possible.
    With this in mind I am not sure that the assumption that the low-wage, low-skilled population is hardest hit by unemployment this time around fully comprehends the degree of technological evolution that has taken place over just the last decade. It is possible that the average participant in the employment market requires far more technical training than ever before, and with just existing technology alone, many employers have the ability to do more with less if the cost curve makes it more favorable to take that leap now rather than spare an employee for a few more years. I suspect that with the general conditions in the employment market it is likely more cost effective to invest in further automation and AI now with a very small temporary programming staff and sacrifice a few more higher skilled employees than it’s ever been. And of course, I’m sure that off-shoring is looking even more advantageous as it doesn’t even require temporary programming staff.
    The technological evolution might have also tipped the scales farther on the longer end for those who are waiting for the CPI to adjust to what some think we should be seeing simply because of the technical skills required for making a living and the ability of employers to rapidly adapt to doing more with less as cost permits. If I am anywhere in the ballpark, it could be that the higher, more specialized skill set and moderate income folks are bearing a larger portion of the unemployment than in recessions past. It could also be why we’re seeing rather persistent wage stickiness (going the wrong way in some cases) and a level of unemployment that doesn’t seem to be going anywhere. To imagine the extreme where nearly everyone is classified as technically skilled and all employers could squeeze more automation out of existing technology as required, I could see it taking until the second coming of Christ for wages to drop enough to level out the unemployment situation and be hitting the CPI without another dip in activity that requires more employers to reduce wages across the board or face insolvency. That is obviously an extreme, and I’m not suggesting it is a reality, but it is worth thinking about because if it is even a slice of reality it could mean a higher instance of structural unemployment than anticipated and has implications for public policy that I don’t think have been considered.

  23. Gravatar of Luis H Arroyo Luis H Arroyo
    28. June 2010 at 01:41

    Ted, I agree with you. by the way, perhaps you can explain me the true sense fo the Taylor rule, because years ago I thought to be a mere empirical estimate of the Central Bank reaction function, but suddenly it become the Holy Grail of monetary policy. So Holy that any other factor could be obviated. But using it is the most frustrating way to analysis, because you can change the parameters until they fit well. An example of it is the discussion between Geenspan-Bernanke versus Taylor about the cause of the crisis: not to have follow the Taylor Rule in 2003. But I´m not sure that an FF interest rate around 2% could have slows the financial bubble.

  24. Gravatar of scott sumner scott sumner
    28. June 2010 at 06:04

    Luis, Thanks for the link. I hadn’t seen the post where Taylor accuses Bernanke.

    Thanks Benjamin.

    Joe, Most economists used to oppose the minimum wage. (I have no idea what my colleagues believe today.)

    Ted, You said;

    “Is John Taylor serious?

    Firstly, what is Taylor talking about. Doesn’t the cliff dive in the exchange rate around mid-2008 against both the dollar and the euro matter at all?”

    I also thought that was a bit odd. I guess people tend to see what they expect to see, when looking at messy real world data. But the natural interpretation would be that the Zloty got weaker.

    I suppose I cut people some slack because some of my ideas also look strange at first glance.

    I won’t comment on the multiplier estimates, as the entire project seems misplaced. It entirely depends on what you assume about monetary policy–there is no stable multiplier.

    Thanks for the info in Poland. I found it to be quite interesting and informative. I need to learn more about Poland.

    123, Yes, that is very similar to my argument. The only difference is that he puts more weight on QE than I do. But that may reflect the fact that the Fed won’t take the easier steps (price level target, ending IOR, etc) so QE is all they have left.

    Greg, Shouldn’t you leave that comment at Tyler’s blog? Seriously, I agree, and often mention that what is usually viewed as “Keynesian” economics is closer to conventional macro circa 1920s, the very theory that Keynes rebelled against. On the other hand modern Keynesians usually do assume wage and price stickiness, so Tyler’s not completely off base. Remember that today when people say “Keynesians” they refer not to the specific ideas of Keynes, but rather to modern economists who call themselves ‘Keynesians.’

    Declan, Some, but not all. I recall that nominal wages also feel sharply, which is quite different from today. The price level really was more unstable back then, even the non-commodity parts of the price level.

    Declan#2, I don’t know about England, but nominal wages also fell sharply in 1931-32.

    Mikko and Doc Merlin, Just the opposite. Debt losses are sunk costs, and don’t effect the incentive to produce. Sticky wages create unemployment.

    Bonnie, Some of your observations remind me of a recent argument by Garrett Jones. He argued that in modern technological firms a company could maintain output (at least for a while) with a lower workforce. Much of what the workforce does it to create organization capital for the future.

    I agree that if we don’t get more AD, there might be another reduction of wages coming along.

  25. Gravatar of Morgan Warstler Morgan Warstler
    28. June 2010 at 06:10

    Scott you are a contradiction without needing to be:

    1. You care about price. Above you assert to Declan that a 20% decrease in price would cause a depression.

    2. Then you note to Benjamin, we appear to have a capital glut.

    Meanwhile, little old me insists the problem is price, that capital KNOWS asset prices are inflated – in real estate which is all that truly matters right now.

    Lastly, the more I think about it, the more I think your NGDP target only works at zero bound IF the Fed focuses on buying cheap and liquidating what it buys immediately.

    Example: Fed uses it’s $1T to buy currently overvalued assets – but forces the truly insolvent debt holders (by cutting off their profits on reserve interest) to take big haircut being postponed (a good thing), then unwinds them and sells off the performing parts at whatever auction will bring of capital holders. Then does it again with proceeds if needed.

    Thus the Fed operates as FDIC or IMF, but does so with the printing press.

  26. Gravatar of Mikko Mikko
    28. June 2010 at 07:50

    Scott, yes, if you consider things from the point of view of the creditor. A debtor, however, is another matter. Individuals and companies struggling with their debts are not likely to (be able to) invest – and refinancing is not easy.

  27. Gravatar of Luis H Arroyo Luis H Arroyo
    28. June 2010 at 09:28

    Some link about the affair Taylor/Bernanke. I´m not sure that Economics is a rigorous activity.

    Taylor blaming Greenspan Monetary policy http://www.kc.frb.org/PUBLICAT/SYMPOS/2007/PDF/Taylor_0415.pdf

    Bernanke defending the “aggressive monetary policy” in 2002-03.
    http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.pdf

    Econbrowser and the dispute http://www.econbrowser.com/archives/2010/01/guest_contribut_6.html

    Taylor reply to Bernanke:
    http://online.wsj.com/article/SB10001424052748703481004574646100272016422.html

    Others on argument:
    http://www.businessweek.com/news/2010-01-05/taylor-disputes-bernanke-on-bubble-blaming-low-rates-update1-.html

  28. Gravatar of Greg Ransom Greg Ransom
    28. June 2010 at 11:46

    Yes, yes and yes.

    “Greg, Shouldn’t you leave that comment at Tyler’s blog? Seriously, I agree, and often mention that what is usually viewed as “Keynesian” economics is closer to conventional macro circa 1920s, the very theory that Keynes rebelled against. On the other hand modern Keynesians usually do assume wage and price stickiness, so Tyler’s not completely off base. Remember that today when people say “Keynesians” they refer not to the specific ideas of Keynes, but rather to modern economists who call themselves ‘Keynesians.’”

  29. Gravatar of scott sumner scott sumner
    29. June 2010 at 07:11

    Morgan, You are confusing prices and the price level. A fall in the price level indicates inadequate AD. A fall in the price of a particular good like housing is of no concern to me.

    Mikko, Sure there are some distributional effects, but they are trivial compared to the impact of falling NGDP, which is a monetary policy problem.

    Thanks Luis, I agree with Bernanke–easy money didn’t cause the bubble, because money wasn’t all that easy.

    Greg, Great, we agree.

  30. Gravatar of Luis H Arroyo Luis H Arroyo
    29. June 2010 at 09:37

    Ok,thanks. I like very much this post.
    I send you a figure on the credit in Euro zone (% year ago) As you can see, the credit is falling more rapidly than during the crisis ¿Do you think there is an inflationary risk? However, the ECB is cancelling the exceptional measures taken during the crisis.

    http://2.bp.blogspot.com/_UlqNAo7QxaA/TCmjKhOoErI/AAAAAAAABJk/5mVjV0sWvtg/s1600/credeuro.jpg

  31. Gravatar of Luis H Arroyo Luis H Arroyo
    29. June 2010 at 09:42

    Martin Wolf, in the FT, today, seems to agree with you.

    http://blogs.ft.com/martin-wolf-exchange/2010/06/27/is-monetary-policy-too-expansionary-or-not-expansionary-enough/

  32. Gravatar of ssumner ssumner
    30. June 2010 at 05:45

    Luis, Thanks. I think the bigger risk is disinflation. And I agree with much of what Wolf has to say.

  33. Gravatar of ppt repair ppt repair
    25. August 2010 at 01:54

    Does Wage Flexibility Really Create Jobs?

    Allowing wages to remain low is not the dominant reason for joblessness among the less-educated.
    LESS-educated workers in the advanced countries, it is widely believed, are trapped. Either they suffer decreases in their relative pay or their jobs are threatened by technical change and trade with low-wage countries. Many economists have argued that only flexibility in wages can increase the amount of work available for the least educated.

  34. Gravatar of ssumner ssumner
    25. August 2010 at 16:57

    ppt repair, I’m all for wage flexibility.

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