At the other extreme . . .

A quick follow up to my previous post.  Australia has seen 3% RGDP growth over the past 12 months, and 2.7% the year before, and 3.6% the year before.  Great news eh?  Here’s Australia’s unemployment rate over Screen Shot 2014-11-18 at 9.56.23 AMthe past 12 months:

That’s what happens when you have a high trend RGDP growth rate.




29 Responses to “At the other extreme . . .”

  1. Gravatar of Richard A. Richard A.
    18. November 2014 at 07:50

    It is nominal and not real GDP that determines the demand for labor. This could be shown with a aggregate demand-aggregate supply plot. Labor supply uses the same demand curve as does the output supply curve.

  2. Gravatar of boris boris
    18. November 2014 at 07:55

    This was a bit confusing for me, can you explain the causal connection? I would have thought the opposite.

  3. Gravatar of John Thacker John Thacker
    18. November 2014 at 08:57


    One thing to consider consider that Australia has pretty high population growth, so the economy has to grow somewhat faster to keep unemployment from rising.

    Scott, how useful would it be to focus on something like per capita R (and N) GDP?

  4. Gravatar of John Hall John Hall
    18. November 2014 at 09:29

    Can I second what boris is saying.

    Australia NGDP has been growing between 3-4% in Australia since mid-2012. I would think the first thing you would say is that Australia monetary policy is too tight and that is causing unemployment to rise.

  5. Gravatar of ssumner ssumner
    18. November 2014 at 09:40

    Richard, I agree. NGDP determines the demand for labor (due to sticky wages) and employment determines RGDP.

    John #1, I agree, per capita is better.

    John #2, That sounds right, I haven’t looked at the NGDP data recently.

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. November 2014 at 10:07

    Australia’s high minimum wage[s] law keeps its labor markets from clearing as well as you’d expect from a country that hasn’t had a recession in over two decades.

  7. Gravatar of Major.Freedom Major.Freedom
    18. November 2014 at 10:32

    John Thacker:

    “One thing to consider consider that Australia has pretty high population growth, so the economy has to grow somewhat faster to keep unemployment from rising.”

    Growth does not determine employment. Growth is an outcome of employment (and entrepreneurial activity).

    If growth decreases to zero, and we assume a rising population, then employment can keep rising, as long as wage rates are free to rise and fall along with nominal demand for labor. Real growth does not determine spending, the quantity of money does.

    Of course, at some point population growth must eventually come to a standstill as real growth remains zero and the same pie has to be cut into smaller and smaller pieces, down to minimum subsistence for each individual. But even here there is no effect from stangant output on employment. As long wage rates are free to rise and fall with demand for labor, then employment need not rise.


    Richard A:

    It is not NGDP that determines the demand for labor. NGDP is the aggregate of expenditures on final products, after wages have already been paid. NGDP is proximately financed, in large part, by (prior) wage payments. Interest payments, dividends, and draw payments from partnerships and sole proprietorships are some of the other forms of prior income that finance NGDP.

    What determines the demand for labor is savings and investment. Yes, these are indirectly affected by prior NGDP, but only if we assume unchanged time preference, i.e. ratio of saving and investment to consumption.

    NGDP is perfectly capable of rising without a nickel extra going to wages. This occurs when spending on final products rises by virtue of higher such expenditures financed out of interest, dividends, draw payments and all other non-wage forms of prior income. It can also take place by government spending money created out of thin air for itself, which raises refenues and profits of government contractors, other governments, etc.

  8. Gravatar of Charlie Jamieson Charlie Jamieson
    18. November 2014 at 11:31

    We’re getting to the point where we can have growth at the same time fewer people are working.
    We will possibly reach the point in which half the people of the society can do enough work to grow the economy, while the other half are supported at some sort of subsistence level either by taxes or printing/borrowing money.
    Not saying this is a good thing — it would be much better if everybody had the skills to contribute and there was a place for them do that.

  9. Gravatar of Major.Freedom Major.Freedom
    18. November 2014 at 14:44


    I wonder if you include statesmen in that category of “It would be nice if they contributed instead.”

    If we’re consistent in that, we’d all be anarchists.

  10. Gravatar of Tim Cameron Tim Cameron
    18. November 2014 at 14:47

    I think the per capita story is important for Australia given the a high relative immigration rate.

    RGDP/Capita growth has been < 2% p.a. since 2011.

    Also worth considering the large reduction in the terms of trade has had on real incomes in Australia. Real disposable income per capita has not grown in two years.

  11. Gravatar of benjamin cole benjamin cole
    18. November 2014 at 15:29

    The Aussie central bank does IT, but in 2-3% band. Better results than 2% Fed ceiling…actually, as practical matter a 2-3% band might work in the US…better than 2% ceiling anyway….

  12. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    18. November 2014 at 17:01

    Deirdre is, as I write this, discussing this paper at Northwestern;

    which absolutely brutalizes Thomas Piketty. Selected at random;

    ‘Piketty’s “structural” thinking characterizes the left, and
    characterizes too the economic thinking of physical and biological scientists when they venture into economic issues.
    It is why the magazine Scientific American half a century ago
    loved input-output analysis (which was the love also of my
    own youth) and regularly publishes fixed-coefficient arguments about the environment by physical and biological scientists. The non-economic scientists declare: “We have such-and-such a structure in existence, which is to say the accounting magnitudes presently existing, for example the presently known reserves of oil.” Then, ignoring that the search for new reserves is in fact an economic activity, they calculate the result of rising “demand” (that is, quantity demanded, not distinguished from the whole demand curve), assuming no substitutions, no along-the-demand curve reaction to price, no supply reaction to price, no second or third act, no seen and unseen, such as an entrepreneurial response to greater scarcity. In the mid-nineteenth century it was Marx’s scientific procedure, too, and Piketty follows it.’

    It’s 55 pages long, but enlivened by much that is devastatingly funny. Or would be, unless your name is Thomas Piketty.

  13. Gravatar of Dustin Dustin
    18. November 2014 at 18:34

    “NGDP determines the demand for labor”

    NGDP expectations? Moreso, the change in NGDP expectations?

    Also, “determines” is a strong word to use here. *Impact* seems more reasonable, as well as less controversial. Is it not so that demand for labor may change in an environment of flat NGDP expectations?

  14. Gravatar of Major.Freedom Major.Freedom
    18. November 2014 at 18:40

    Patrick Sullivan:

    Re: McCloskey paper…

    I cite this passage non-randomly:

    “One can line up the later items in the list, and some of the earlier ones revived à la Piketty or Krugman, with particular Nobel Memorial Prizes in Economic Science. I will not name here the men (all men, in sharp contrast to the method of Elinor Ostrom, Nobel 2009), but can reveal their formula: first, discover or rediscover a necessary condition for perfect competition or a perfect world (in Piketty’s case, for example, a more perfect equality of income). Then assert without evidence (here Piketty does a great deal better than the usual practice) but with suitable mathematical ornamentation (thus Jean Tirole, Nobel 2014) that the condition might be imperfectly realized or the world might not develop in a perfect way. Then conclude with a flourish (here however Piketty falls in with the usual low scientific standard) that “capitalism” is doomed unless experts intervene with a sweet use of the monopoly of violence in government to implement anti-trust against malefactors of great wealth or subsidies to diminishing-returns industries or foreign aid to perfectly honest governments or money for obviously infant industries or the nudging of sadly childlike consumers or, Piketty says, a tax on inequality-causing capital worldwide.

  15. Gravatar of Major.Freedom Major.Freedom
    18. November 2014 at 18:58

    “Long ago I had a nightmare. I am not much subject to them, and this one was vivid, an economist’s nightmare, a Samuelsonian one. What if every single action had to be performed exactly optimally? Maximize Utility subject to Constraints. Max U s.t. C. Suppose, in other words, that you had to reach the exact peak of the hill of happiness subject to constraints with every single reaching for the coffee cup or every single step in the street. You would of course fail in the assignment repeatedly, frozen in fear of the slightest deviation from optimality. In the irrational way of nightmares, it was a chilling vision of what economists call rationality.”

  16. Gravatar of Ray Lopez Ray Lopez
    18. November 2014 at 20:28

    Scott Sumner, vindicated. Read this and weep, Sumner-haters:

    Recessions Leave Permanent Scars, Fed Research Finds
    By Pedro Nicolaci da Costa

    Harsh downturns tend to permanently lower the economy’s growth potential, according to new research from the Federal Reserve that upends conventional theory and suggests early and aggressive policy action is advisable when dealing with recessions.

    <– did you read that last part, haters? AGGRESSIVE. EARLY. Just like Professor Sumner said. Target NGDP. Early and often. Hysteresis effects otherwise. This man is a genius….

  17. Gravatar of Carl Carl
    18. November 2014 at 22:28

    Ray Lopez:
    I, too, appreciate Professor Sumner’s insights, but I don’t think that study puts any nails in any coffins. The study discusses permanent effects but only covers about 40 years.

    And much of the discussion in the study is around zero bound issues which Professor Sumner doesn’t seem to care much about.

  18. Gravatar of ssumner ssumner
    19. November 2014 at 05:30

    Patrick, That was my biggest problem with Piketty, it seems to always downplay the effect of changing economic incentives on behavior.

    Dustin, Yes, I should have said “impacts” or “impacts strongly”. NGDP expectations are probably better, but are highly correlated with NGDP in any case.

    Ray, Just to be clear, I don’t think the recession is the ONLY reason for the slowdown, there are probably other factors as well. But it’s clearly hurt.

    And yes, targeting NGDP would help.

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. November 2014 at 07:36

    Scott, there are a number of devastating observations in the McCloskey paper, of this nature; Piketty, such a nice boy, with such a long book…but he makes the undergrad error of confusing movement on a curve with a shift in the curve….

    I think my favorite being that while, normally, r>g (for perfectly understandable reasons), it hasn’t been the case for China for the last two decades or so. And inequality has risen in China at the same time.

  20. Gravatar of SG SG
    19. November 2014 at 07:39


    Shots fired!

    “The bad growth news shows, pretty clearly, that the consumption tax hike was a big mistake. It also shows, by the way, how weak the market monetarist argument “” which is that fiscal policy doesn’t matter, because central banks can always achieve the nominal GDP they want “” really is; do you seriously want to contend that Kuroda likes what he sees, that he isn’t trying as hard as he can to boost Japan out of deflation?”

  21. Gravatar of Edward Edward
    19. November 2014 at 09:10

    SG got to it before me.
    Its a stone in your garden.
    How will you respond?

  22. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    19. November 2014 at 09:40

    And following on Hurricane Deirdre, comes;

    ‘The main policy message of our work is to underscore the importance of overall economic growth for improvements in social welfare. Inequality may be a ‘hot’ current topic, but inequality changes in most countries over the past thirty years have been small, while differences in average growth performance have been large. In our paper, we also look systematically at the relationship between a variety of policy and institutional variables and changes in inequality, separating out their effects on growth in average incomes and on changes in inequality. Our findings suggest that it is difficult to isolate robust correlations between policy and institutional variables and changes in inequality, indicating that there is no simple recipe for enhancing equality. Furthermore, the fact that changes in equality are uncorrelated with economic growth means that there are likely to be some equality-enhancing policies that also promote growth, while others reduce growth. With growing pressure to ‘do something’ about inequality, it is important that policymakers are careful to avoid undermining growth in the quest for greater equality, as policies that raise equality at the expense of lower growth may be self-defeating in the sense of not improving social welfare.’

  23. Gravatar of W. Peden W. Peden
    19. November 2014 at 09:53


    I just saw the presentation of an interesting little empirical macro paper, testing the association of fiscal adjustments and RGDP, which had a lot going for it, except… No monetary policy reaction function! The response: “Well, there are going to be a lot of things affecting monetary policy”. Quite.

  24. Gravatar of Jeremy Goodridgde Jeremy Goodridgde
    19. November 2014 at 10:22

    See most recent Krugman post — 1st paragraph. He specifically critiques market monetarist predictions based on Japan’s recent growth!

    You need to respond!

  25. Gravatar of W. Peden W. Peden
    19. November 2014 at 10:58

    Patrick R. Sullivan,

    While you’re in the mood, here’s an idea I’ve been thinking about: let’s grant to the left-egalitarians (what may be true) that income inequality is bad for democracy, because the inequality of power and the inequality of income are linked. Then imagine a corporation which spend >40% of national income, and while it was more accountable to the general public than the average corporation (debatably!) it also had the power to control what people bought, sold, did etc. Wouldn’t that corporation be a big problem for a democratic society? And wouldn’t it be a lot like the contemporary states (super-states, by the standards of 100 years ago)?

  26. Gravatar of Major.Freedom Major.Freedom
    19. November 2014 at 15:46

    Ray Lopez:

    It is nit wise to cite the Fed for any “research” that conveniently serves their interests.

    Have you considered the theory that a cause for any permanently lower growth is prior INFLATION that distorted the economy, which subsequent deflation only revealed sooner rather than later whereby the permanent drop in growth would have been even lower?

    I do believe you are not extending your range of cognition far enough. Too much short term thinking often makes poor choices seem better than they really are.

  27. Gravatar of TallDave TallDave
    20. November 2014 at 10:26

    Ray Lopez,

    “Recessions Leave Permanent Scars, Fed Research Finds
    By Pedro Nicolaci da Costa”

    I find it baffling that that even needs to be pointed out in 2014. The main advantage of fiat money is that it can avoid the deflationary spirals that lead to deep recessions and mass liquidations of otherwise viable businesses.

    Thanks for sharing!

  28. Gravatar of sourcreamus sourcreamus
    22. November 2014 at 13:50

    I am confused. RGDP is at 3% growth and inflation is a litle over 2% growth. This means NGDP is growing at 5% which I believe is Sumner’s preferred target. Despite this unemployment is rising. What is happening?
    Is the target for Australia different and if so, how is it chosen?

  29. Gravatar of ssumner ssumner
    23. November 2014 at 08:22

    sourcreamus, There is no specific NGDP target, it depends on the situation. The trend rate of NGDP growth is about 6.5% in Australia, hence when growth slows unemployment rises.

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