Catching up on Econlog

Returning from vacation I found some very interesting items from the three bloggers on Econlog.  I am so far behind that I only went back to the 13th of May.  Perhaps someone can tell me if I missed something essential.

Here is an excellent Arnold Kling post on econometrics.  I share Kling’s skepticism about progress in methods, and also his view that a low tech, eclectic approach is much more reliable that searching for some sort of statistical magic bullet that can answer extremely complicated questions.  I’d say the same about theory.  In the 1970s and 80s I recall Robert Lucas saying we were making great progress in macro modeling.  During the recent crisis I saw him give a talk where he concentrated on the drop in velocity, and the Fed needing to offset that.  Good advice, but it’s hard to see how it is based on anything that Irving Fisher didn’t know.

Both Bryan Caplan and David Henderson had good pieces on the role of real wages in the business cycle.  And even Kling gave me a nice plug.  A few comments:

1.  Real wages are not reliably pro- or countercyclical.  They tend to be more countercyclical if the downturn is caused by demand-side factors.  When the negative demand shock is strong enough to produce deflation, real wages get especially countercyclical.  I would add that the Phillips Curve also tends to be most reliably downward-sloping when there are demand shocks severe enough to produce deflation.  This is why over the past 25 years the Phillips curve in places like Japan and Hong Kong looks most like the textbook model.

2.  When there is a negative demand shock, real wages often rise more sharply if deflated by wholesale prices (the PPI).  This is partly because the CPI is severely biased over the business cycle.

3.  For all these reasons, I prefer to compare nominal wage growth to NGDP growth.  As you know, I don’t believe “inflation” is a very useful concept in business cycle theory.  When per capita  NGDP growth rates fall far below nominal wage growth rates, then it is likely that sticky wages are contributing to high unemployment.

BTW, I also had the same reaction as David Henderson to this Mark Lilla article.  Lilla is a very impressive political thinker, but economics is not his strong suit.



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