Does barter provide evidence against the sticky wage model?
Tyler Cowen seems to think so:
One interesting feature of these enterprises is that they push a bit of emphasis away from sticky wage and price theories of depressions. In essence the sellers participating in these exchanges are price discriminating, by trying to sell more of their output “” for lower prices “” through credit or barter mechanisms. Getting back credits in return really is like receiving a lower price or wage. So these exchanges show that at least some people are wildly willing to cut prices, wages, and returns, if only to sell more.
I see the Spanish barter exchanges described in Tyler’s post as powerful evidence in favor of sticky wages. Recall that the sticky wage theory suggests that nominal wages can get stuck above their true Walrasian equilibrium value (either due to long term contracts or money illusion.) Workers actually would prefer to produce more, and there are people who would like to buy that output, but sticky wages prevent the transactions from occurring. This would lead some workers to exit the formal labor market, and try to pick up some of these mutually advantageous trades via barter. And that’s seems to be what occurs. Unfortunately the informal labor market is far less efficient in a technological sense (even if being more efficient in a market equilibrium sense.) So the earnings from barter will be far lower than from formal jobs, and it doesn’t really “solve the problem.” It just makes the depression slightly less bad.
Tyler Continues:
So which factors behind depressions receive marginal support from the prevalence of these practices? First, these exchanges are a substitute for dysfunctional credit markets.
I’d say they are substitutes for dysfunctional labor markets.
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13. September 2012 at 07:38
In a situation of a liquidity trap, even if workers agree to lower their wages, there will still be no money for buying their output. So you may well say that barter is an indication that wages don’t necessarily display the same stickiness in all circumstances, but you go too far when you say that their are substitutes for dysfunctional labor markets. They are substitutes for lack of cash, as Cowen says.
Besides, it’s not only the labor market that’s sticky. Some capital markets may be even stickier. Take commercial rentals for example. Most owners will keep their shops and restaurants empty rather than rent them at a price significantly below the previous level (at least, that’s how it happens in Europe).
The reason is the same as for wages. The problem is that once you reset the price at a lower level, it will remain at that level (or close to) for a long time. People might accept to endure a temporary loss, but they’re reluctant to lower their long-term income (even if this often proves to be inter-temporally sub-optimal).
Then barter may be viewed as the acceptance of a temporary wage cut, with no implication on longer term perspectives.
13. September 2012 at 07:40
Inflation exacerbates wage inflexibility psychology.
Welfare and minimum wage laws “reward” such psychology with persistent unemployment.
Then monetarists come around and say we need inflation to deal with the problems of welfare, minimum wage laws, and wage inflexibility psychology.
It’s just another case of the state creating a problem and then solving its own problem by creating more of the same problem. It’s a modern day version of divide and conquer.
13. September 2012 at 08:38
You just saved me a comment on Tyler’s post. And it’s good to see you recognize NGDP matters because money is the medium of exchange.
13. September 2012 at 09:01
HOLY SHIT HOLY SHIT HOLY SHIT:
http://www.slate.com/blogs/moneybox/2012/09/13/qe_3_is_here_federal_reserve_announced_40_billion_per_month_in_new_asset_purchases_.html
http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/13/qe3-is-on/
http://www.bbc.co.uk/news/business-19592151
http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html
13. September 2012 at 09:05
Fed statement out;
http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm
———–quote———–
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens. In particular, the Committee also decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that exceptionally low levels for the federal funds rate are likely to be warranted at least through mid-2015.
————-endquote———–
Near unanimity.
13. September 2012 at 09:05
http://www.marketwatch.com/story/text-of-fed-statement-on-qe3-2012-09-13
13. September 2012 at 09:05
Thank God I checked Twitter before bed. Everyone is going crazy, naturally.
13. September 2012 at 09:06
http://www.slate.com/blogs/moneybox/2012/09/13/qe_3_is_here_federal_reserve_announced_40_billion_per_month_in_new_asset_purchases_.html
http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/09/13/qe3-is-on/
http://www.bbc.co.uk/news/business-19592151
http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html
For the record, I got in before Patrick, but it got withheld because I swore a bit. (Can you blame me?)
13. September 2012 at 09:14
A lot of this stuff is done by professionals who already have good jobs and who want to price discriminate and also extend credit to their consumers.
13. September 2012 at 09:14
@Patrick: Yes, everyone in favor except Lacker.
And now it begins.
13. September 2012 at 09:15
Tyler, epic news story breaking here. Get on it.
13. September 2012 at 09:16
But as for your comment, are we improving efficiency, facilitating exchange and mutual coincidence of wants? Then it is substituting for the dysfunctional labor market.
13. September 2012 at 09:21
Market response:
http://www.bloomberg.com/news/2012-09-13/fed-plans-to-buy-40-billion-in-mortgage-securities-each-month.html
13. September 2012 at 09:23
Very good news. It’s too bad we didn’t see a 7/3 target though. The market will still reasonably assume 2.5/3 percent core inflation would probably mean higher rates. We’ll still get a recovery at 2 percent inflation, but it won’t get to a lower rate of unemployment as quickly.
13. September 2012 at 09:23
All Hail Scott and Woodford.
13. September 2012 at 09:26
Special thanks to all the other Market Monetarist greats:
Nick Rowe
Lars Christensen
Bill Woolsey
David Beckworth
Robert Hetzel
Marcus Nunes
Josh Hendrickson
David Glasner
Bennett McCallum
Ambrose Evans-Pritchard
Matt Yglesias
Matt O’Brien
Ryan Avent
Evan Soltas
Yichuan Wang
anyone else I forgot
Brought to you by Quantity Theory Productions.
13. September 2012 at 09:28
Oh yeah, and Tyler Cowen for making this blog famous. Sir you indirectly saved the world.
13. September 2012 at 09:30
Obama you lucky S.O.B.
13. September 2012 at 09:30
So the Fed did go big after all! Give him credit, at least Bernanke didn’t let himself be intimidated about whether or not stimulus now is interferring in the election.
Obviously, the only way he can be accused of being political is if he does something different than he would have with no election-whether or he were to ease or stay put.
The markets love it at this point. Isn’t this the exact policy of Benjamin Cole?
Look forward to hearing what you think of this Scott. I’ve been more focused on the election lately than monetarty stuff but still a fan.
13. September 2012 at 09:31
No disrespect to the president’s mother, obviously, she did nothing wrong.
13. September 2012 at 09:34
Ed Conway has the market reaction:
https://twitter.com/EdConwaySky/status/246289483547435008/photo/1/large
13. September 2012 at 09:35
Catherine Rampell links to another graph: http://www.google.com/finance?q=INDEXDJX%3A.DJI%2CINDEXSP%3A.INX%2CINDEXNASDAQ%3A.IXIC&ei=0Q1SUJjcMonC0AHPRg
13. September 2012 at 09:36
Scott, if you’re here, you may want to do a post about now.
13. September 2012 at 09:37
Should somebody tell Obama that his ass just got saved?
13. September 2012 at 09:38
heres a good video showing the markets reaction:
http://www.youtube.com/watch?v=P3ALwKeSEYs
13. September 2012 at 09:38
Full Market Reaction Here: http://www.businessinsider.com/fomc-stock-market-update-2012-9
13. September 2012 at 09:38
Hey, where did my comment go ? Did anyone else lose any ?
13. September 2012 at 09:41
why is gold up? is it the crazies?
13. September 2012 at 09:42
History may note that the world economy’s woes lasted almost exactly four years. (And as always the game changed in the fall.)
13. September 2012 at 09:43
Satuoros Obama is lucky though he might well have won anyway. He’s been lucky in his opponent is as well. But hey drinks are on men.
13. September 2012 at 09:43
Bill, my first one got block because I displayed some “irrational exuberance”. Chargercarl, money is about to lose value, plus NGDPLT is supposed to work by raising asset prices, such as commodity prices, such as gold.
Okay it’s not NGDPLT, but Ryan Avent is still predicting a serious dent in unemployment.
13. September 2012 at 09:44
prepare yourself for the right wing cries of “dollar debasement”
13. September 2012 at 09:47
Speaking of Ryan…
http://www.economist.com/blogs/freeexchange/2012/09/monetary-policy-3
13. September 2012 at 09:49
Saturos,
I am not saying this is not good, But don’t you think it could have been much better ?
The Fed is not giving the markets a solid target.
What does “If the outlook for the labor market does not improve substantially” really mean ? It’s pretty vague.
An open ended approach is good, but is an open ended approach to achieving a vague goal really enough to create confidence in expectations ?
And while I have your attention…What about the number…Is 40 bill alright ?…I have no clue.
13. September 2012 at 09:55
ChargerCarl,
“prepare yourself for the right wing cries of “dollar debasement””
Agreed.
Also…Chargers 22 Radiers 16 …Yeah !!
red zone problems though…
13. September 2012 at 10:01
Yeah, im glad we won but it was more a case of the Raiders falling all over themselves and us not making any mistakes which did it.
Need Ryan Matthews back and a VJ replacement.
13. September 2012 at 10:08
The Fed’s New Projections:
http://www.federalreserve.gov/newsevents/press/monetary/fomcprojtabl20120913.pdf
13. September 2012 at 10:17
“prepare yourself for the right wing cries of “dollar debasement””
Yeah, I’ve looked on Bloomberg and BI and found this in full force already. Zerohedge of course had the most dumb comments, but here’s an actual blog post. It’s very, very wrong.
“There is one big problem with the Fed’s announcement of Open-Ended QE moments ago: it effectively removes all future suspense from FOMC announcements. Why? Because the Fed has as of this moment exposed its cards for all to see from here until the moment it has to start tightening the money supply (which may or may not happen; frankly we don’t think the Fed tightens until hyperinflation sets in at which point what the Fed does is meaningless). It means easing is now effectively priced into infinity. Now rewind back to that one certain paper by the New York Fed, which laid it out clear for all to see, that if it wasn’t for the expectation of easing in the 24 hour period ahead of the FOMC meeting, the market would be 50% or lower than where it is now, and would have been effectively in negative territory in the aftermath of the Lehman collapse. What Bernanke did is take away this key drive to stock upside over the past 18 years, because going forward there is no surprise factor to any and all future FOMC decisions, as easing the default assumption. It also means that Bernanke may have well fired his last bullet, and it, sadly, is all downhill from here, as soaring input costs crush margins, regardless of what revenues do, and send corporate cash flow to zero. Unfortunately, not even in the New Normal can companies operate without cash flow.”
Well, first of all, Fed will DEFINITELY tighten way before hyperinflation sets in. The BOJ and even the ECB in the current recession have already done this. FDR did it in 1936. There is no basis at all to say the Fed will not tighten sooner.
Nor would the Fed actions “not matter” when hyperinflation supposedly happens. Not until the Fed sells off every last asset does the Fed run out of firepower to stop inflation. The post just gets worse as it starts talking about the lack of a “surprise factor.”
ZH is, well, ZH. But the thing is that I see ZH linked to on a number of well-respect economic and financial blogs. They typically know how crank their theories are, but there’s still this attitude that “well, there’s some truth to what they say. We need PAIN and we need it NOW.” They have no idea just how wrong these cries of hyperinflation or adverse effects of QE are.
13. September 2012 at 10:51
matt that post is hilarious, thanks
13. September 2012 at 11:38
Fresh easing is still not priced in, relative to their current communicated policy stance. We know there’s more he could do.
13. September 2012 at 11:57
You can’t draw conclusions about the US labor market from Spain. Spain is notorious for having one of the stickiest labor markets in the world.
They have a 45 day per year worked severance for “unfair” termination, which seems to include all termination other than for defined causes or for companies that can demonstrate a sufficient pattern of losses.
13. September 2012 at 11:58
Bill I think in a way it’s good there is no solid target. That’s Ygelsias’s take if I understand it.
We don’t want the Fed to say “once I hit this target I will immeidately jam my foot down so hard on the brake you will get whiplash.”
13. September 2012 at 22:06
Garett Jones replies to this post: http://econlog.econlib.org/archives/2012/09/sumner_channels.html#226063