The beatings will continue until morale improves

Mark Sadowski directed me to a very perplexing post by Mickey Levy at Vox.  In fairness, it contains lots of good stuff. There’s a solid analysis of Abenomics, with a plausible forecast that core inflation will run in the 1% to 2% range in 2014.  Then a good analysis of the US:

In the US, the year-over-year core Personal Consumption Expenditures (PCE) index is at 1.2%, and the core CPI is at 1.7% – down from 1.8% and 1.9%, respectively, in the previous year. This disinflation is a lagged consequence of the disappointingly modest growth in aggregate demand that has constrained business pricing power, and high unemployment that has dampened wages, along with lower prices of selected goods and services benefitting from technological innovations.

However, nominal GDP – the broadest measure of aggregate demand – has grown comfortably faster than estimated real potential throughout the soft economic recovery. In the second half of 2013 it grew at an annualised rate of above 5% – a significant acceleration from the previous year’s 3.1%. Such growth in aggregate demand far in excess of productive capacity virtually rules out deflation.

Then a good analysis of the eurozone:

Europe’s recovery from financial crisis and its many necessary adjustments are at a much earlier stage. Weak aggregate demand puts downward pressure on product pricing. Nominal GDP in the Eurozone rose 0.7% in 2012 and an estimated 1% in 2013 – below estimates of potential growth. High unemployment and slack labour markets are expected to persist, and still lower wages are needed in troubled nations to regain competitiveness. To date, the stickiness of wages – which continue to rise in real terms in France and Italy – highlights the slow adjustments to the new economic realities. Despite some positive reforms, an array of regulatory, economic, and fiscal policies continue to constrain productive capacity, and many reforms and austerity measures have been put on hold. Europe’s risks of deflation are nontrivial.

I agree that the problem in the eurozone is that AD has been much weaker than in the US, and of course that implies that money has been far too tight.  But then Levy says the following:

Europe’s road to healthy economic performance will be difficult, and policymakers face tough choices and tradeoffs. Should the ECB move aggressively with a US- or Japanese-style round of quantitative easing in an attempt to avert deflation? No. The challenges facing Europe are real and not monetary, and the ECB’s monetary policy is already accommodative, with a negative real policy rate and ample liquidity in the financial system. Unintended consequences of aggressive QE may be costly. Such an ECB shift may signal to Europe’s fiscal and economic policymakers that they may postpone necessary reforms.

If you are going to argue that a region’s problems are real and not nominal, why would you preface the argument with a long string of paragraphs suggesting the problem is monetary, not real?  That makes no sense to me. He also says that monetary policy has been accommodative, citing the low real interest rate.  Of course real interest rates tell you whether credit is tight, not whether money is tight, but that’s a common mistake.  And if he thinks so, then why not advocate an even more expansionary monetary policy, as in the US and Japan?  Apparently taking the ECB’s foot off the throats of Greece and Spain and Portugal might induce their leaders to slack off on “necessary reforms.” Hence the title of the post.

PS.  Mark Sadowski had the following take on Levy’s post:

I give him points for acknowledging that nominal GDP (NGDP) *is* aggregate demand (AD). But he looks favorable on the US situation despite QE, and unfavorably on the Euro Area situation and advises against QE because of the “unintended policy side effects”. Has he never considered that more NGDP might be attributable to QE and that this is an *intended side effect*?

A passage towards the end on seems to give a clue:

“These innovation-based price reductions improve standards of living and free up disposable income to spend on other goods and services. They boost aggregate demand and enhance economic performance. And they contribute positively to longer-run potential growth.”

What model of the economy is this that nominal effects (AD) are attributable to real variables (technological innovation) and mysterious “unintended policy side effects” are attributed to nominal variables (QE)?

Levy seems to have misidentified a supply shock as a change in AD.  Or am I missing something?

PS.  A note to commenters.  The comment section here is not the place to argue whether the eurozone’s problems are structural or demand.  They are both.  The comment section is the place to discuss why Levy would present lots of evidence that the problems are demand side, and then claim they are structural.

PPS.  I have three new posts over at Econlog, over the past three days.  Take a look.


Tags:

 
 
 

58 Responses to “The beatings will continue until morale improves”

  1. Gravatar of Ben J Ben J
    24. February 2014 at 07:03

    Scott, everyone,

    Do we know if Levy was referring to Japanese “core” inflation, which includes energy, or Japanese “core-core” inflation, which excludes energy, and is thus comparable to American “core” inflation?

    A lot of Japanese energy is imported, so interpreting Japanese “core” inflation with respect to the stance of monetary policy may be trickier than usual, over and above the usual difficulties of using inflation for that purpose.

  2. Gravatar of flow5 flow5
    24. February 2014 at 09:54

    “I give him points for acknowledging that nominal GDP (NGDP) *is* aggregate demand (AD)”

    That’s the Keynesian interpretation. Actually, MVt = AD, not nominal-gDp.

  3. Gravatar of mpowell mpowell
    24. February 2014 at 10:08

    Certain people clearly wish various European states would change policy to fix their ‘real’ problems. In many of these cases, poor monetary management on the tight side exacerbates the problems with these policies, probably because they make deflationary readjustment impossible for large sectors of the economy (state paid workers and similar). So two things happen in these persons’ minds: first, a little doublethink where they convince themselves that the ECB has been accomodative even though this isn’t really plausible, and secondly, a sincere conviction that the problem of poor public policy really is a worse one than recession inducing tight monetary policy.

  4. Gravatar of flow5 flow5
    24. February 2014 at 10:17

    informationtransfereconomics.blogspot.com/

    The Fed caused the Great Recession

    “So according to this analysis the Fed is to blame, acting through the interest rate channel. An exogenous shock from the financial crisis is not necessary to account for any additional shock to NGDP. This is effectively Sumner’s view above, however I don’t think he’d agree with my use of the IS-LM model! The unfortunate thing is that after the shock occurred, we ended up mired in a liquidity trap”

  5. Gravatar of benjamin cole benjamin cole
    24. February 2014 at 10:43

    Every modern economy has structural problems. Given the vast welter of federal, state and local governments in Europe, USA and Japan, how does one know which is worst?
    Now people say Japan has structural problems but they never said that in the 1980s.
    To answer Sumner’s question, why does Levy talk AD and then say “structural”—it is just an example of muddled thinking, or an obsession with QE-bogeymen.
    Perhaps Levy has ties to the ECB. In the USA many economists have ties to the Fed.
    The creation of a central bank apologa-tariet?
    Rationally, I defy anyone to explain Levy’s mumbo-jumbo otherwise…

  6. Gravatar of Major_Freedom Major_Freedom
    24. February 2014 at 12:08

    Levy’s is not a “good” analysis of the US, because he is reasoning from a price change. It is not true that lower price inflation implies insufficient demand. For lower prices could reflect increased productivity and supply, which operate to reduce prices within a given demand.

  7. Gravatar of Major_Freedom Major_Freedom
    24. February 2014 at 12:12

    “I agree that the problem in the eurozone is that AD has been much weaker than in the US, and of course that implies that money has been far too tight.”

    It isn’t “of course”. It is entirely dependent on the chosen definition of “tight”.

    If a more pragmatic and reliable definition is used, then a different judgment would be made.

  8. Gravatar of Major_Freedom Major_Freedom
    24. February 2014 at 12:28

    “If you are going to argue that a region’s problems are real and not nominal, why would you preface the argument with a long string of paragraphs suggesting the problem is monetary, not real?”

    The real problems manifest themselves in nominal effects. Analyzing these nominal effects in detail does not suggest the problem is nominal.

    It is real causes that caused the nominal declines 2008-2009. Just because the Fed “let it happen” it doesn’t mean they caused it. Absence of action doesn’t cause what occurs. It is the presence of actions that cause what we see. If you interpret the absence of an action as the cause, you’re really just ignoring, yet nevertheless depending on, the actions that did take place which actually caused the things you see.

    Nobody on this blog ever addresses in detail the positive actions that caused the decline in prices or spending 2008-2009. Nor does anyone seriously address whether or not more inflation actually succeeds in dealing with the real causes that had the no effects we see.

    Now, the Fed did cause certain effects. It caused inflation. That inflation has had the effect of hampering the real recovery. Free market economists predicted the economy would stagnate in large part because the Fed would try to reinflate the economy. The inflation which cauaed the rapid rise in spending post 2009 prevented, and continues to prevent, malinvestmenta dependent on accelerating inflation from being corrected.

    MMs believe if aggregate output and aggregate employment and AD rise within certain limits, then inflation simply cannot be a cause of any negative effects. This is of course a myth.

  9. Gravatar of Major_Freedom Major_Freedom
    24. February 2014 at 12:36

    Sadowski:

    “What model of the economy is this that nominal effects (AD) are attributable to real variables (technological innovation) and mysterious “unintended policy side effects” are attributed to nominal variables (QE)?”

    They’re not “mysterious”. They are well understood and developed.

    With regards to the question, if you replace “technological innovation” with “capital corrections” and you include nominal causes as the reason for the capital corrections, then the “model” is ABCT.

  10. Gravatar of Major_Freedom Major_Freedom
    24. February 2014 at 12:37

    The “nominal effect” of falling prices can certainly be caused by real side factors like increased production.

  11. Gravatar of John Becker John Becker
    24. February 2014 at 13:08

    How are we supposed to get into the mind of Mr. Levy. The argument over what extent the problems in Europe are nominal or real is a much more interesting discussion than speculating on psychology.

  12. Gravatar of Mark A. Sadowski Mark A. Sadowski
    24. February 2014 at 13:44

    Scott,
    Off Topic.

    Noah Smith reveals that he didn’t know what he was posting three weeks ago, and that now he doesn’t realize he got it mostly right despite that fact.

    http://noahpinionblog.blogspot.com/2014/02/japanese-inflation-isnt-as-high-as-you.html

    February 23, 2014

    Japanese inflation isn’t as high as you think
    By Noah Smith

    “…But actually, “core-core” is a type of Japanese inflation that does not include food or energy prices. You may recognize this as being the same thing as what the U.S. calls “core” inflation. And you’d be right. The problem is that Japan already had something that they called “core” inflation, which omits food but does include energy prices. This naturally produces confusion in the press, since journalists dutifully report on Japanese “core” inflation, which readers take to be the same as the U.S. measure, even though it isn’t…The problem is, the Japanese inflation that people are looking at is the Japanese “core” rate, not the “core-core” rate. In other words, those rosy numbers you’re seeing include energy prices…In other words, if you use the inflation measure we use in the U.S., Japanese inflation is running at only 0.7% – not very close to its 2% target…”

    Not only does this produce confusion among journalists, it evidently elicits a lot of confusion in a certain economics blogger as well.

    Only three weeks ago in a blog post entitled “What can Abenomics teach us about macro (so far)?” Noah Smith stated

    “Headline and core inflation are both up, now into positive territory. Core inflation is higher than it has been in decades”

    And linked to the following graph:

    http://1.bp.blogspot.com/-96gs1McYifE/Uu5xwPzEq7I/AAAAAAAABXo/HHz6Nt6E5Dk/s1600/Japan1b.png

    The graph shows CPI and core-core CPI although core-core CPI was mislabeled as “core”. But there was no harm, no foul, because “core-core CPI” is essentially what the rest of the advanced world calls “core CPI”. Moreover Noah Smith was right when he said it was the highest in decades, because year-on-year core-core CPI last exceeded 0.7% in August 1998, and only then because of a 2 point increase in the consumption tax starting in April 1997. Prior to that one has to go back to March 1995 to find a year-on-year core-core CPI rate of inflation that is higher.

    So the main revelation of Noah Smith’s post appears to be that he didn’t know what he was posting the last time he discussed Japanese inflation, and that now he doesn’t know that he got it mostly right then despite his ignorance.

    P.S. Didn’t Noah Smith once imply that he knew more about Japan than the average economics blogger? So much for that.

  13. Gravatar of lxdr1f7 lxdr1f7
    24. February 2014 at 14:23

    “What model of the economy is this that nominal effects (AD) are attributable to real variables (technological innovation) and mysterious “unintended policy side effects” are attributed to nominal variables (QE)?”

    I thought technological innovation would increase productivity and hence increase income and demand.

  14. Gravatar of Lorenzo from Oz Lorenzo from Oz
    24. February 2014 at 15:15

    It’s the appeal of “monetary Calvinism”. The notion that the fleckless PIGS are victims does just not sit well with folk. Also, real explanations still have more of a grip than that “money, just the stuff we use in transactions” matters that much. Especially when it is easy to point to a host of supply-side problems which do exist.

    But, picking up Ben Cole’s point, they existed for a long time, so hardly explain the cyclical trough.

    Moreover, if the PIGS became much more like Germany, the ECB’s policy would suit them better. It is sort of the Procrustes bed approach to monetary policy–keep lopping off bits of yourself until you fit the monetary policy you are given.

    If the Euro is a Deutschmark for everyone, you have to reach that state of virtue where you are worthy of the Deutschmark.

    So, a mixture of moralism and belief-only-in-the-real parading as economics. In economics, the discounters of the nominal can just see themselves as realists (pun intended). And even when you have talked about nominal stuff, at some point that Real-ism just breaks through, particularly when there is a dose of moralism ready and waiting to give it that extra push.

  15. Gravatar of W. Peden W. Peden
    24. February 2014 at 15:40

    lxdr1f7,

    A rise in productivity raises real income, not nominal income.

  16. Gravatar of benjamin cole benjamin cole
    24. February 2014 at 17:16

    Lorenzo:
    Monetary ascetics who genuflect not to properity but to gold or deflation.

  17. Gravatar of ssumner ssumner
    24. February 2014 at 21:00

    Mark, I’ll do a post on that eventually.

  18. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 01:11

    W.Peden

    Increased productivity will also increase velocity and hence nominal income wont it?

  19. Gravatar of W. Peden W. Peden
    25. February 2014 at 01:57

    Why?

  20. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 02:26

    People earn more nominally if they are more productive. Part of increased productivity goes to pushing down prices and part to increasing nominal incomes. Both ngdp and rgdp are affected by productivity.

    Increased velocity as a result of higher income from lower input costs.

    If rgdp goes up because of higher productivity v has to increase. There is more transactions at a lower price level. More transactions means higher v.

  21. Gravatar of Willy2 Willy2
    25. February 2014 at 04:12

    – VOXEU also swallows the myth that both US NGDP & RGDP is better than in Europe.
    – The “(lack of) demand” issue is based on a structural issue. Keyword: Demographics. Read Harry S. Dent’s work on how demographics drives economic developments.

  22. Gravatar of W. Peden W. Peden
    25. February 2014 at 04:35

    lxdr1f7,

    “People earn more nominally if they are more productive.”

    That’s just the same thing as asserting that higher productivity increases NGDP, since NGDP = NGDI.

    “There is more transactions at a lower price level.”

    Not necessarily.

  23. Gravatar of Daniel Daniel
    25. February 2014 at 04:41

    lxdr1f7

    People earn more nominally if they are more productive.

    People earn more NOMINALLY if the money supply increases. Without an increase in the money supply, NGDP simply can’t rise. That extra money doesn’t just come out of thin air. End of story.

    Willy2

    How long are going to keep peddling that shadowstats bullsh*t before you accept that nobody here believes in it ?

  24. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 05:32

    W. Peden

    “That’s just the same thing as asserting that higher productivity increases NGDP, since NGDP = NGDI.”

    Yes, therefore a rise in productivity raises nominal income.

    Daniel

    “People earn more NOMINALLY if the money supply increases. Without an increase in the money supply, NGDP simply can’t rise. That extra money doesn’t just come out of thin air. End of story.”

    If money circulates faster (velocity) everyone can earn more nominally when the money supply is fixed.

  25. Gravatar of Daniel Daniel
    25. February 2014 at 05:56

    True that, but how does an increase in productivity increase money velocity ?

    Just asserting it does doesn’t make it so.

  26. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 06:02

    Daniel

    Increased productivity increases profit of business owners either through being able to produce the same with less or producing more with the same amount of input. The benefits of increased productivity may be all reaped by business owners or workers or split up.

    Higher income through profits or wages means more money to spend and a proportion of that will be spent according to recipients marginal propensity to consume. That extra spending increases velocity.

  27. Gravatar of Daniel Daniel
    25. February 2014 at 07:30

    lxdr1f7

    Either you’re unable to make the distinction between REAL wages and NOMINAL wages – or you’re a black belt in circular logic (it’s fallacious, in care you’re unaware).

    Either way, you’re not making any sense.

  28. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 07:43

    Daniel

    What is it you don’t understand about velocity?

  29. Gravatar of Daniel Daniel
    25. February 2014 at 07:50

    The part where you’re saying that productivity increases wages.

    What kind of wages ? Nominal or real ? Because if it’s real wages, then we agree.

    But then how does an increase in REAL wages boost NOMINAL wages ? You’re just asserting it does – and going round and round in circles.

  30. Gravatar of W. Peden W. Peden
    25. February 2014 at 08:52

    lxdr1f7,

    That’s not an argument. I don’t see why productivity should increase NGDI either, and anyone who doesn’t see why productivity should raise NGDP won’t see why it raises NGDI either.

  31. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. February 2014 at 13:47

    lxdr1f7,
    There’s no correlation at all between labor productivity and velocity. For example, here’s a graph of nonfarm business productivity and MZM velocity:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162682&category_id=0

    We could use different measures of either, but the story would largely remain the same. Velocity correlates very well with interest rates, inflation and rates of change in NGDP, and thus all three peaked roughly around 1980. Labor productivity on the other hand is volatile, and other than a modest slowdown after 1973, there is no discernable pattern.

    On the other hand an increase in productivity increases the amount that can be supplied at a given price level all other things being equal. That’s why if you open any Principles of Macro textbook to the section on the AD-AS Model it will mention changes in productivity as factor that could shift the aggregate supply (AS) curve. They will not mention changes in productivity as a factor that could shift the aggregate demand (AD) curve.

  32. Gravatar of Jim Glass Jim Glass
    25. February 2014 at 16:06

    @ lxdr1f7

    If rgdp goes up because of higher productivity v has to increase. There is more transactions at a lower price level. More transactions means higher v.

    Do they? At that lower price level? With *less* money moving on every transaction???

    Productivity increases output, and higher output at any given level of money supply reduces prices by supply & demand, it is deflationary (see USA circa 1870s-1900), and thus increases real (but not nominal) wages.

    Now, Money x Velocity = Prices x Quantity, MV = PQ, or PQ = MV, of course.

    So P reduced x Q increased = Money unchanged x Velocity … must be up? Don’t think so.

    In fact a falling price level, deflation, is strongly associated with reduced velocity, for reasons that should be self-evident. (As is disinflation as well.)

    Higher income through profits or wages means more money to spend and a proportion of that will be spent according to recipients marginal propensity to consume. That extra spending increases velocity.

    That extra spending would be pretty much the definition of increasing velocity if prices weren’t falling and also the money supply stayed unchanged. (An impossible combination in the face of serious output increases.)

    But MV=PQ again. In our fiat money world, unlike the gold standard productivity-produces-deflation days of 1870-1900, the central bank directs the money supply, changes M to its will, to maintain price stability or whatever its target of the moment is.

    So let’s hand wave an assumption of your increase in Q by x% (from whatever cause) with the central bank correspondingly increasing M by x% for reasons it deems wise. Where’s the increase in V?

    lxdr1f7,
    There’s no correlation at all between labor productivity and velocity. For example, here’s a graph of nonfarm business productivity and MZM velocity:…

    Yup. When theory and facts fully agree, it makes a pretty strong case.

  33. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 16:39

    Mark A. Sadowski

    Definite correlation varying in strength.

    http://research.stlouisfed.org/fred2/graph/?graph_id=162682&category_id=0

    Productivity affects v and so do other factors such as inflation and monetary policy. Therefore nominal effects are attributable to real variables such as technological innovation and also nominal variables.

    Changes in productivity normally will affect s and d. Higher productivity results in higher profits or wages ceteris paribus.

  34. Gravatar of Daniel Daniel
    25. February 2014 at 16:42

    lxdr1f7

    You must be squinting really hard. As in all-out.

  35. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 16:59

    Daniel and Mark

    On graph change mzm from ratio to % change.

  36. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 17:05

    Daniel

    How do you get around the fact that increased productivity increases either wages or profits ceteris paribus? If true then velocity increases.

  37. Gravatar of Daniel Daniel
    25. February 2014 at 17:11

    Learn the difference between nominal and real wages and then we’ll talk.

    Also, stop squinting so hard, you’ll damage your eyes.

  38. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 17:18

    Daniel

    How do you get around the fact that increased productivity increases either nominal wages or nominal profits ceteris paribus? If true then velocity increases.

  39. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. February 2014 at 17:54

    lxdr1fx,
    Here’s the annual rate of change of productivity vs the annual rate of change of MZM velocity:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162716&category_id=0

    Here it is as a scattergram:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162717&category_id=0

    Regressing MZM velocity on productivity produces an R-squared value of 0.5% and its nowhere near being statistically significant. It’s about as random a relationship as random can get.

  40. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. February 2014 at 18:11

    lxdr1fx,
    “Productivity affects v…Therefore nominal effects are attributable to real variables such as technological innovation…”

    This is no evidence this is true. If there was evidence this were true it would be in every monetary economics textbook. You’re just making things up.

    “Changes in productivity normally will affect s and d. Higher productivity results in higher profits or wages ceteris paribus.”

    This is obviously false. Nominal wages and profits were soaring during the 1970s although productivity increased at more or less the same rate it always has since the end of WW II.

  41. Gravatar of Jim Glass Jim Glass
    25. February 2014 at 18:27

    How do you get around the fact that increased productivity increases either nominal wages or nominal profits ceteris paribus?

    What fact?

    How do you manage to keep insisting on this when the opposite is true, after it has been so clearly pointed out to you by so many?

    Increasing productivity reduces the price level, causes deflation, ceteris paribus — that is, with the money supply held stable.

    And with reduced price per transaction, there is no forced increase in velocity, obviously. MV=PQ. With P going down, how is V forced to go up? Plus deflation is in historical reality extremely well documented as going hand-in-hand with falling velocity. (As is disinflation.) Even during periods of great productivity gains.

    USA 1870 to 1900
    Real GDP per capita (2009 dollars):
    1870: $3,040
    1900: $6,004, +97.5%

    There’s our increase in productivity.

    CPI
    1870 12.65
    1900 8.14 -36%

    There’s our deflation “ceteris paribus”, with the gold standard restricting growth of the money supply.

    Deflation like that works highly contrary to rising *nominal* wages and profits, plainly.

    Labor income (index number)
    Nominal dollars

    Cost of unskilled labor
    1870: 142
    1900: 140 -1.5%

    Production worker wages
    1870 11
    1900 13 +18%

    Where is your increase in nominal wages driven by the 97.5% increase in production per capita?

    (Measuringworth.com)

    Note well, the gold standard only limited money supply growth, didn’t stop it. If there had been no money growth — true ceteris paribus — the deflation would have been steeper and the nominal wage levels in 1900 even lower.

    And again, in our more modern world, the central bank can do what it wants with M. MV=PQ. What arithmetic are you using to keep deducing a forced increase in V when ceteris paribus rising productivity drives P down correspondingly and the central bank can do whatever it wishes with M??

    Plus with all the real world empirical data showing exactly zilch relation between productivity and V?

  42. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 18:27

    Mark Sadowski

    I cant see any way around it. How do you get around the fact that increased productivity increases either nominal wages or nominal profits ceteris paribus? If true then velocity increases.

    Periods do have a relationship. After 2009 for example. Many factors are affecting V including real ones. Productivity'[s effect on v is being mixed in with other factors much of the time thats why you cant see the correlation IMO.

  43. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. February 2014 at 18:59

    lxdr1f7,
    “How do you get around the fact that increased productivity increases either nominal wages or nominal profits ceteris paribus? If true then velocity increases.”

    But it’s *not* a fact. There is *no* correlation at all between changes in productivity and changes in nominal wages or nominal profits. For example, here’s the change in nominal wages at an annual rate and the change in labor productivity at an annual rate:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162724&category_id=0

    Here it is as a scattergram:

    http://research.stlouisfed.org/fred2/graph/?graph_id=162725&category_id=0

    If you regress nominal wages on labor productivity the R-squared value is 0.2%. In other words 0.2% of the variation in the rate of change in nominal wages is explained by the rate of change in productivity.

  44. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 19:08

    Mark

    “But it’s *not* a fact. There is *no* correlation at all between changes in productivity and changes in nominal wages or nominal profits. For example, here’s the change in nominal wages at an annual rate and the change in labor productivity at an annual rate:”

    Do you understand that you cant get around that? Imagine a company that realizes greater worker productivity ceteris paribus. This shows up either in increased profits or increased wages. Maybe I am missing something. What is it? If you can explain this to me I would greatly appreciate it.

    The data isnt isolating the effect of labor productivity on v its just showing everything that affects v. There is period in mzmv and non farm productivity when you can see a relation like 2009 onwards can you see it?

  45. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. February 2014 at 19:25

    lxdr1f7,
    “Imagine a company that realizes greater worker productivity ceteris paribus. This shows up either in increased profits or increased wages.”

    But we’re talking about the macroeconomy, not the microeconomy.

    If the productivity of a single relatively small firm goes up then the revenue of that firm goes up because it has negligible effect on the entire economy. That is microeconomics

    On the other hand, assuming a unit elastic aggregate demand curve, if the productivity of all firms goes up by the same amount then the aggregate price level will fall proportionate to the increase in productivity. Real output will rise but there will be no change in nominal output. That is macroeconomics.

    “There is period in mzmv and non farm productivity when you can see a relation like 2009 onwards can you see it?”

    I looked at the first graph I posted of MZM velocity and productivity and I don’t know what you are talking about.

  46. Gravatar of Mark A. Sadowski Mark A. Sadowski
    25. February 2014 at 19:31

    lxdr1f7,
    Infering something is true of the whole from the fact that it is true of some part of the whole is called the fallacy of composition:

    http://en.wikipedia.org/wiki/Fallacy_of_composition

  47. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 21:32

    In this instance the macroeconomy is just a collection of microeconomies and there is no fallacy of composition. nominal output will also increase because of increased v. The D curve will shift because of higher income and potential output and the S curve also will shift.

    If efficiencies are found everywhere, no fallacy of composition.

    You get the same ngdp is if everyone works less exactly offsetting the increase in efficiency. IN part that may happen and in part you also get more ngdp and income.

    “The aggregate price level will fall proportionate to the increase in productivity. ”

    If this happens yes no increase in NGDP. The result wont be this though you will get a bit of a fall in price and a bit of an increase in ngdp. They will meet somewhere in the middle. Things arent so black and white. An increase in rgdp will also pick NGDP up as a secondary effect.

  48. Gravatar of lxdr1f7 lxdr1f7
    25. February 2014 at 22:04

    Many factors at play

    Expectations of higher income due to higher productivity increase nominal income.

    Production shift to other goods services offsets in part the reduction in prices and in part increases NGDP.

    Sticky prices means prices have trouble going down, labor market rigidity means workers produce more in short term, more production means higher input demand (D shifts to right).

  49. Gravatar of W. Peden W. Peden
    26. February 2014 at 02:16

    lxdr1f7,

    I’m still unconvinced. For example-

    “Expectations of higher income due to higher productivity increase nominal income.”

    Why would expectations of higher real income increase nominal income?

    You seem to have neither empirical evidence nor received theory on your side.

  50. Gravatar of lxdr1f7 lxdr1f7
    26. February 2014 at 02:59

    W.Peden

    “Why would expectations of higher real income increase nominal income?”

    Expectations of increased purchasing power. More purchasing power means you buy more stuff.

  51. Gravatar of lxdr1f7 lxdr1f7
    26. February 2014 at 03:26

    Mark

    “I looked at the first graph I posted of MZM velocity and productivity and I don’t know what you are talking about.”

    Change the mzmv to % change in following graph and do from 2007 onwards.

    1959 to 74 also with both data sets on percent change.

    http://research.stlouisfed.org/fred2/graph/?graph_id=162716&category_id=0

    Velocity is affected by many factors with efiecny being one of them. The strongest are monetary policy related though IMO. Do you know of any way of isolating the effect of labour productivity on v?

  52. Gravatar of lxdr1f7 lxdr1f7
    26. February 2014 at 04:08

    Jim Glass

    “Increasing productivity reduces the price level, causes deflation, ceteris paribus “” that is, with the money supply held stable.”

    It does yes. But also higher real incomes as a result of higher real gdp will increase nominal income expectations and confidence. Peoples greater expectation of purchasing power means they will buy more nominally than before.

    “And with reduced price per transaction, there is no forced increase in velocity, obviously. MV=PQ. With P going down, how is V forced to go up? Plus deflation is in historical reality extremely well documented as going hand-in-hand with falling velocity. (As is disinflation.) Even during periods of great productivity gains.”

    V is a flow. Greater efficiency allows V to flow faster. Im saying ceteris paribus an increase in efficiency increases V.

    “Where is your increase in nominal wages driven by the 97.5% increase in production per capita?”

    There is an 18% increase in there. That is without including profits which are also income.

    “Note well, the gold standard only limited money supply growth, didn’t stop it. If there had been no money growth “” true ceteris paribus “” the deflation would have been steeper and the nominal wage levels in 1900 even lower.”

    Apparently the price of gold remained static for most of that period in dollars. In silver it doubled roughly over that time. Im not sure what the supply was though.

    “And again, in our more modern world, the central bank can do what it wants with M. MV=PQ. What arithmetic are you using to keep deducing a forced increase in V when ceteris paribus rising productivity drives P down correspondingly and the central bank can do whatever it wishes with M??”

    Not sure what you mean forced increase. V moves according to peoples propensity to spend or expectations and other things. The CB can affect V if it interacts with counterparties with high MPS higher V results in short term at least when compared to counterparties that just save.

    “Plus with all the real world empirical data showing exactly zilch relation between productivity and V?”

    Have a look at previous comment.

  53. Gravatar of Daniel Daniel
    26. February 2014 at 04:31

    lxdr1f7

    You gotta stop making up your “facts”. They simply don’t exist.

  54. Gravatar of W. Peden W. Peden
    26. February 2014 at 05:13

    lxdr1f7,

    And if I can buy that more stuff at lower prices, then why must P*Q change?

  55. Gravatar of W. Peden W. Peden
    26. February 2014 at 05:14

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?chart_type=scatter&height=600&width=1000&id=OPHNFB,MZMV&scale=Left,Bottom&range=Custom,Custom&cosd=1959-01-01,1959-01-01&coed=2013-10-01,2013-10-01&line_color=%230000ff,%23ff0000&link_values=true,true&line_style=Solid,Solid&mark_type=MARK_FILLEDCIRCLE,MARK_FILLEDCIRCLE&mw=4,4&lw=1,1&ost=-99999,-99999&oet=99999,99999&mma=0,0&fml=a,a&fq=Annual,Annual&fam=avg,avg&fgst=lin,lin&transformation=pca,pca&vintage_date=2014-02-26,2014-02-26&revision_date=2014-02-26,2014-02-26

    That doesn’t look like much of a correlation.

  56. Gravatar of Mark A. Sadowski Mark A. Sadowski
    26. February 2014 at 06:50

    lxdr1f7,
    “In this instance the macroeconomy is just a collection of microeconomies and there is no fallacy of composition.”

    The fallacy of composition is lesson 1.1 of principles of macroeconomics. It always applies.

    “nominal output will also increase because of increased v.”

    There is no evidence at all that productivity has any effect on the velocity of money.

    “The D curve will shift because of higher income and potential output and the S curve also will shift.”

    The short run AS curve shifts to the right. The price level falls and real output increases.

    “You get the same ngdp is if everyone works less exactly offsetting the increase in efficiency. IN part that may happen and in part you also get more ngdp and income.”

    There is no evidence that any increase in productivity has ever caused an increase in NGDP.

    “If this happens yes no increase in NGDP. The result wont be this though you will get a bit of a fall in price and a bit of an increase in ngdp. They will meet somewhere in the middle. Things arent so black and white. An increase in rgdp will also pick NGDP up as a secondary effect.”

    In order for NGDP to rise due to arightward shift in AS you need a AD curve that is not unit elastic. From its theoretical foundations in the quantity theory of money the standard non-dydnamic AD curve has almost always been assumed to be unit elastic with respect to the price level. Keynes argued that AD can have variable elasticity. But you have not made such an argument and so far you certainly haven’t provided any evidence for anything.

    “Expectations of higher income due to higher productivity increase nominal income.”

    Increased productivity can also lead to expectations of lower income. If a technological innovation dramatically reduces the need for factor inputs and the product becomes as common as tapwater expectations of income will collapse.

    “Production shift to other goods services offsets in part the reduction in prices and in part increases NGDP.”

    Only if the AD curve is not unit elastic.

    “Sticky prices means prices have trouble going down, labor market rigidity means workers produce more in short term, more production means higher input demand (D shifts to right).”

    Wages are stickier than prices. An increase in productivity means you need less factor inputs to produce the product. This is why in fields where there is rapid technological development you see dramatic drops in prices despite the fact wages do not fall.

    “Change the mzmv to % change in following graph and do from 2007 onwards.

    1959 to 74 also with both data sets on percent change.”

    This is fishing for correlations. It’s possible to take any dataset and find periods when spurious correlations exist. It is generally considered bad econometric practice.

    The period since 2007 shows no evidence of any correlation. The period from 1959 to 1974 shows a positive correlation but on the other hand the period from 1982-89 and from 1991-1998 show a negative correlation.

    “Velocity is affected by many factors with efiecny being one of them.”

    There is no reason theoretically to assume that productivity has any effect on the velocity of money. Moreover there is no empirical evidence that it does either.

    “Do you know of any way of isolating the effect of labour productivity on v?”

    First you would need a plausible model of why increases in labor productivity lead to increases in the velocity of money.

  57. Gravatar of lxdr1f7 lxdr1f7
    26. February 2014 at 16:07

    The empirical evidence is weak for my case.

  58. Gravatar of Major_Freedom Major_Freedom
    9. March 2014 at 16:59

    lxdr1f7:

    I don’t usually agree with Daniel or Mark, but in this case, you’re totally and completely wrong.

    You are engaging in what’s called the fallacy of composition.

    You are taking the fact that for an individual company to innovate and produce goods more attractive to that industry’s customers, they will tend to earn higher nominal revenues and profits. Yes, that is true and everyone would agree.

    But…BUT…just because this is true for a single company, it does not follow that it is therefore true for all companies taken together. And why? Because for an individual company, when you see it making higher revenues and profits, the very fact that that company example is taken in isolation, you are necessarily ignoring the fact that those additional revenues will, ceteris paribus, come at the expense of other companies earning FEWER dollars.

    Providers of a new good called “electricity” will experience additional revenues and profits, because they outcompete candlestick makers who now earn fewer revenues and profits, ceteris paribus.

    Same thing with car makers and horse carriage makers.

    Do you understand how one company innovating and offering new products, which may earn higher revenues and profits, cannot be assumed to have done so without any changes to other company revenues and profits? The whole reason the horse carriage industry isn’t still producing so many horse carriages, is because the increased nominal demand for cars and other internal combustion engine vehicles has come at the expense of horse carriages?

    Yes, an increase in NGDP can potentially take place because of something other than increased money supply, for example “velocity”. But increased velocity is ultimately constrained to the money supply. There is a limit to how many times the same supply of dollars can be exchanged over a period of time. This is why economists say that higher aggregate spending requires a higher money supply. It is not because they are denying velocity, but because a higher money supply is the only way NGDP can increase year over year, for years on end.

    It is not just that the empirical evidence is weak for your case. Your case is weak theoretically.

Leave a Reply