Does tight money make incomes more unequal?
Matt Yglesias recently suggested that tight money might make incomes more unequal. That struck me as rather implausible, but Matt did cite a NBER study by Olivier Coibion, Yuriy Gorodnichenko, Lorenz Kueng, and John Silvia (CGKS).
Before discussing the study, let me explain why I found the result surprising. We know that ultra-tight money in the early 1930s caused a collapse of NGDP, and also made incomes more equal. The share of income earned by the top percentiles dropped precipitously after 1929. And that’s not surprising, as income from investments like equities tends to plunge during depressions. Interest rates also fall sharply reducing interest income. We saw the same thing happen in 2009, another period of ultra-tight money. However deep recessions also tend to increase poverty, so I still have an open mind in the question.
So I wondered how CGKS defined monetary policy. This raised some red flags:
Over the entire sample, contractionary monetary policy shocks lower real GDP, consumption and investment while raising unemployment. Both short-term and long-term interest rates rise immediately while inflation declines after a two-year lag. These results are consistent with a long empirical literature on the macroeconomic effects of monetary policy shocks (e.g. Christiano, Eichenbaum and Evans 1999).
It seems very unlikely that a contractionary monetary policy would raise long term interest rates, at least for any extended period. Monetary shocks are notoriously difficult to estimate, but I like to use two rules of thumb.
1. Whatever technique you use, it better be consistent with what we know about the massive interwar shocks, the only shocks that are easy to identify.
2. Whatever technique you use should be consistent with the reaction of financial markets to the largest monetary policy surprises in recent years.
And what does the interwar period tell us? It tells us that tight money causes both inflation and short term nominal interest rates to fall almost immediately. That’s not consistent with the findings of CGKS.
And we also know that in recent decades when the Fed does a major policy change that is unexpected, a tight money surprise tends to reduce both equity prices and long term bond yields within minutes of the announcement, and vice versa. That’s also inconsistent with the findings of CGKS.
Most economists consider the period since 2008 to have been a period of easy money. In contrast, I regard it as a period of tight money, and I’m pretty sure that Matt Yglesias does as well.
PS. Paul Krugman has an excellent post on a slightly different inequality issue. I recently speculated that he would not care for Joe Stiglitz’s approach to macro, and I was right.
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22. January 2013 at 09:28
Almost feel sorry for poor Krugman having to confront the facts.
Almost.
22. January 2013 at 09:29
“Before discussing the study, let me explain why I found the result surprising. We know that ultra-tight money in the early 1930s caused a collapse of NGDP, and also made incomes more equal. The share of income earned by the top percentiles dropped precipitously after 1929.”
Let’s take a look at the share of noncapital gains personal income derived from capital income from 1929-37. But as we do, keep in mind that capital gains income as a share of personal income fell from 7.7% in 1929 to 2.6% in 1930 and never exceed that level with the exception of 1936 when it was 3.7%. A graph showing the proportion of capital gains income to all personal income is here:
http://www.kentwillard.com/photos/graphs/net-capital-gains-as-percent-of-individual-income.jpg
The following is from Piketty and Saez (capital gains in share) and the BEA:
Pretax Taxable Personal Income share (%) of the bottom 90% and NGDP growth and the GDP implicit price deflator
Year-P0-90-Deflator-NGDP
1929″”56.0″”-0.4″”-6.4
1930″”56.8-(-3.7)-(-12.0)
1931″”55.6-(-10.4)-(-16.1)
1932″”53.6-(-11.7)-(-23.3)
1933″”54.8″”(-2.7)-(-3.9)
1934″”54.8″”-5.6″”-14.7
1935″”56.5″”-2.0″”-11.1
1936″”54.9″”-1.0″”-14.3
1937″”56.5″”-4.3″”-9.7
Notice that income shares of the bottom 90% generally trended downward with deflation and falling NGDP and did the opposite with inflation and rising NGDP. The top 10% on the other hand saw their income shares increase during the contractionary period. In fact the split in income shares in Hoover’s last full year of 1932 was the lowest for the bottom 90% and the highest for the top 10% on record until 2005.
22. January 2013 at 09:32
All kinds of income declined in the Great Contraction but some kinds declined less than others. Obviously Olivier Coibion et al is stating financial income (what the CBO and others calls capital income) goes up during contractions but I that may only be true if the tightening of monetary policy is mild (a la the Great Moderation):
Capital income (dividends, interest and rent) share of personal income % (Source: Piketty and Saez) and NGDP growth rate and implicit price deflator
Year-Share-Deflator-NGDP
1929″”21.3″”-0.4″”-6.4
1930″”21.8″”(-3.7)-(-12.0)
1931″”22.0-(-10.4)-(-16.1)
1932″”23.2-(-11.7)-(-23.3)
1933″”21.1″”(-2.7)-(-3.9)
1934″”19.0″”-5.6″”-14.7
1935″”17.4″”-2.0″”-11.1
1936″”17.6″”-1.0″”-14.3
1937″”17.1″”-4.3″”-9.7
Note that shares of capital income vary inversely with inflation and the rate of NGDP growth.
It goes without saying the bottom 90% are highly dependent on wages and salaries for their taxable income. The top 10% on the other hand are much more dependent on capital and capital gains income. In 1929, which was a record year for capital gains during the pre-World War II period, capital gains nevertheless only ranged from 7.6% of all income for P90-95 to 22.7% of all income for P99.99. Capital income on the other hand varied from 18.9% of all income for P90-95 to 54.7% of all income for P99.99. A graph showing the distribution the sources of noncapital gains income for the top 10% in 1929 and in 1998 (Piketty and Saez) is here:
http://noumignon.livejournal.com/37706.html
22. January 2013 at 10:16
It certainly seems possible that deep recessions might have only temporary effects on top incomes, but permanent effects on the bottom fifth (say)?
22. January 2013 at 11:54
Dr. Sumner,
How do you know that CGKS are defining loose and tight money the same way you do? You are responding to their paper as if they are defining “tighter money” to mean a reduction in NGDP growth as well, when they could very well be defining “tighter money” and “looser money” in terms of the extent of the Fed’s OMOs.
This chart is of long term rates and the Fed funds rate.
Since the method by which the Fed increases the fed funds rate is through reducing the extent of its OMOs, i.e. it “tightens” as defined by the Fed’s direct activity of OMOs, then maybe CGKS are saying that when the Fed “tightens” as defined by this metric, interest rates really do rise.
It’s possible that because the Fed typically “tightens”, i.e. reduces the extent of its OMOs, when price inflation and NGDP get too high, so while you are claiming that monetary policy is NOT tight (since NGDP is rising at a reasonable rate), CKGS on the other hand are looking at the reduction in the extent of the Fed’s OMOs, which raises interest rates as shown by the graph above.
If another person argues money is “tight” or “loose”, then I think it is unwise to always assume they are using the same definition as me. You would say that money was “tight” 2008-2010, because you define it in terms of NGDP, but for someone who looks at the extent of the Fed’s OMOs, and direct inflation, they define money at that time as “loose”.
So to them, “loose money”, as defined by the extent of OMOs, is associated with lower interest rates, whereas to you, those lower interest rates are associated with “tight money”, as defined by NGDP.
22. January 2013 at 14:11
John, Interestingly, the impact of the Great Depression was just the opposite—income became much more equal than in 1929.
Geoff, This post was partly addressed at Matt Yglesias, who does define it the way I do. So that was the context.
Mark, Thanks for the data. I was focusing on the top earners because that was the focus on Matt Yglesias’s post.
I was also relying on posts by people like Krugman, which show inequality really high in 1929, and then getting much more equal after that. They complain that in recent years we’ve gone back to 1929 levels of inequality. But I can see that the question is complicated, and perhaps there is no simple correlation. I believe income became more equal in the 2001 and 2009 recessions.
22. January 2013 at 14:15
Mark, This link has some graphs that support my argument.
http://www.the-crises.com/income-inequality-in-the-us-1/
22. January 2013 at 14:41
“ultra-tight money in the early 1930s caused a collapse of NGDP”
No, the system failed which caused ultra-tight money.
22. January 2013 at 14:54
Dr. Sumner:
“Geoff, This post was partly addressed at Matt Yglesias, who does define it the way I do. So that was the context.”
For sure, but then Yglesias would be presuming CGKS define it the same way Ygelsias does, which would mean you’re depending on Yglesias’ interpretation which may in fact be a misinterpretation.
I’ve read the paper, and I came across this passage:
“To characterize the effects of monetary policy on inequality in the U.S., we follow Romer and Romer (2004, RR henceforth) to identify innovations to monetary policy purged of anticipatory effects related to economic conditions. RR first construct a historical measure of changes in the target Federal Funds rate (FFR) at each FOMC meeting from 1969 until 1996. Using the realtime forecasts of the Fed staff presented in the Greenbooks prior to each FOMC meeting (denoted by F), RR construct a measure of monetary policy shocks defined as the component of policy changes from each meeting which is orthogonal to the Fed’s information set, as embodied by the Greenbook forecasts.”
CGKS define “monetary shocks” in terms of the Fed funds rate, not NGDP.
So it is very likely that CGKS would be defining “tight money” during a period of time that both you and Yglesias would define as “loose money”, and vice versa. This is because the Fed typically raises the Fed funds rate (“tightens” as defined by CGKS) during periods of, and in anticipation of, higher price inflation and NGDP growth.
In other words, CGKS conclude that inequality rises during and around periods of higher NGDP growth, when the Fed raises the Fed funds rate, which they define as “tightening”, while you call it “loosening” because of the NGDP.
CGKS’s findings are directly OPPOSITE to what Yglesias believes is the case as he defines loose and tight money. Yglesias is citing a paper that actually finds the opposite of what he thinks is the case (assuming he defines monetary policy in terms of NGDP like you say).
22. January 2013 at 16:09
Oportunity makes incomes unequal.
Periods of large increases in income inequality are also the times of the most radical increases of income growth.
22. January 2013 at 16:58
Scott,
Piketty and Saez have three series of top percentile income share data: 1) without capital gains, 2) capital gains “in share” and 3) with capital gains. The third series shows the top percentiles with the highest shares of income because tax units are ranked after capital gains are added in. If you wanted to exagerate income inequality that is the very series you would show, and that is in fact the series frequently shown by Krugman and in the graphs you linked to.
But as we both know, capital gains are irregularly realized so it makes more sense to use the first or second series (“in share” ranks first and then adds in the capital gains afterwards). Doing things this way is also more likely to demonstrate the pattern I have tried to show here, which is that inequality increases in contractions and declines in expansions.
With regard to the graph of the Gini coefficient, here are the best scholarly estimates of the Gini coefficient I know of for the Great Depression. See Appendix D (Page 58):
http://www.irp.wisc.edu/publications/dps/pdfs/dp116698.pdf
Note that the Gini coefficient for households and families peaks in 1931 and 1932 respectively near the bottom of the contractionary phase of the Great Depression and then falls until the 1937-38 recession when it briefly rises. This is the opposite of what you are claiming.
22. January 2013 at 17:02
Krugman missed something in one of his points –
Stiglitz:
“The most immediate is that our middle class is too weak to support the consumer spending that has historically driven our economic growth. While the top 1 percent of income earners took home 93 percent of the growth in incomes in 2010, the households in the middle “” who are most likely to spend their incomes rather than save them and who are, in a sense, the true job creators “” have lower household incomes, adjusted for inflation, than they did in 1996. The growth in the decade before the crisis was unsustainable “” it was reliant on the bottom 80 percent consuming about 110 percent of their income.”
Krugman:
“First, Joe offers a version of the “underconsumption” hypothesis, basically that the rich spend too little of their income. This hypothesis has a long history “” but it also has well-known theoretical and empirical problems.
It’s true that at any given point in time the rich have much higher savings rates than the poor. Since Milton Friedman, however, we’ve know that this fact is to an important degree a sort of statistical illusion… ”
Krugman doesn’t refute:
” The growth in the decade before the crisis was unsustainable “” it was reliant on the bottom 80 percent consuming about 110 percent of their income.”
And if this is true, they must be spending proportionately more than the rich. Nobody has argued that the rich spend 110% of their income. With the Stiglitz numbers the rich could have 0% savings and still spend less. I think it matters as much, however, that the rich buy different stuff.
This is the Forbes luxury goods index versus the CPI
http://images.forbes.com/media/2010/10/23/CLEWI_chart_9-23-10.jpg
The idea of debt fueled spending ties in nicely with the idea of poor consumer balance sheets depressing aggregate demand.
BTW, these balance sheets have improved dramatically since 2007. The brakes may now be off.
We have all the traditional pieces of a recovery but construction spending, where there is still an inventory overhang. It’s being reduced quickly, however, by investors buying to convert the properties to rentals.
22. January 2013 at 18:25
Peter N,
I don’t see what there is to refute. Krugman believes the government can offset any AD shock if it wants to.
22. January 2013 at 18:33
I think this is a pointless discussion. Income data is very poor (just uses IRS AGI data). At the top end, it’s totally distorted by irregular one time capital gains which are impacted by market movements, tax policies, etc.) At the bottom end, there is huge under-reporting because of the grey economy, no inclusion of health insurance benefits, etc.
Also it makes no sense to discuss this unless you also look at the effect of unequal incomes on long term economic growth.
22. January 2013 at 20:14
> Most economists consider the period since 2008 to have been a period of easy money.
easy for who? .. volumes of money gathering in a stratospheric clump is more like a tumor.
22. January 2013 at 20:44
No, what can is inflating asset prices. Most of the financial wealth is held by a small portion of the population. So when interest rates are driven down, it creates a present value effect on capital assets. Not only that, but it also reduces the price of borrowing alone. So you have a fall in yields, combined with a falling of interest rates, and rising interest rates. Guess what happens: investment boom.
22. January 2013 at 20:47
However, like you said, falling asset prices and depression (debt deflation) times usually do cause a decrease in inequality; however, inflating asset prices and driving down yields creates increasing inequality with an artificial investment boom–Kindleberger focuses on this quite a bit.
22. January 2013 at 21:12
I have no strong argument, but….
Okay, when General MacArthur ran the Philippines and then later, Japan, he instated land reform. MacArthur!
One reason: The rich owned everything, had no incentive to develop anything. Why do anything if you are rich beyond comprehension, and can chase pretty girls all day?
It could be that if wealth and income become too concentrated, then if the rich stop spending, you get a sudden decline in demand…and at the same time, the rich see the investment picture souring (from the decline in demand) so they bank their money…at zero bound, banking your money is disintermediation.
Well, it a thought…..
22. January 2013 at 21:32
Mark and dtoh, As you both probably know I think income distribution data is worthless. It’s others that think this data means something. I’m saying that if you really believe this stuff, then income got much more equal in 2001 and 2009, compared to the year before, which means tight money hurts the rich. I’m not saying that’s true, I’m saying that’s what you’d find if you believed the worthless income distribution numbers that are always thrown around by liberals. So liberals shouldn’t be claiming that tight money occurs because the central bank is trying to help the rich, or if they did they should first disavow everything they’ve ever said about income distribution.
23. January 2013 at 11:27
Geoff,
I just read through Chapter 19 of The General Theory and I didn’t find that anywhere. Keynes even talks about the possibility of flexible wages increase employment for the reason that the classical economists did. He also talks about other scenarios. In the end, all he conclusively says is that you can have flexible wages and still have mass unemployment.
The word asset doesn’t even appear once in Chapter 19 of The General Theory. Here’s a copy of Chapter 19.
http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch19.htm
23. January 2013 at 11:28
Here are possibilities that Keynes talks about when he talks about the effect of flexible wages vs sticky wages:
“The most important repercussions on these factors are likely, in practice, to be the following:
(1) A reduction of money-wages will somewhat reduce prices. It will, therefore, involve some redistribution of real income (a) from wage-earners to other factors entering into marginal prime cost whose remuneration has not been reduced, and (b) from entrepreneurs to rentiers to whom a certain income fixed in terms of money has been guaranteed.
What will be the effect of this redistribution on the propensity to consume for the community as a whole? The transfer from wage-earners to other factors is likely to diminish the propensity to consume. The effect of the transfer from entrepreneurs to rentiers is more open to doubt. But if rentiers represent on the whole the richer section of the community and those whose standard of life is least flexible, then the effect of this also will be unfavourable. What the net result will be on a balance of considerations, we can only guess. Probably it is more likely to be adverse than favourable.
(2) If we are dealing with an unclosed system, and the reduction of money-wages is a reduction relatively to money-wages abroad when both are reduced to a common unit, it is evident that the change will be favourable to investment, since it will tend to increase the balance of trade. This assumes, of course, that the advantage is not offset by a change in tariffs, quotas, etc. The greater strength of the traditional belief in the efficacy of a reduction in money-wages as a means of increasing employment in Great Britain, as compared with the United States, is probably attributable to the latter being, comparatively with ourselves, a closed system.
(3) In the case of an unclosed system, a reduction of money-wages, though it increases the favourable balance of trade, is likely to worsen the terms of trade. Thus there will be a reduction in real incomes, except in the case of the newly employed, which may tend to increase the propensity to consume.
(4) If the reduction of money-wages is expected to be a reduction relatively to money-wages in the future, the change will be favourable to investment, because as we have seen above, it will increase the marginal efficiency of capital; whilst for the same reason it may be favourable to consumption. If, on the other hand, the reduction leads to the expectation, or even to the serious possibility, of a further wage-reduction in prospect, it will have precisely the opposite effect. For it will diminish the marginal efficiency of capital and will lead to the postponement both of investment and of consumption.
(5) The reduction in the wages-bill, accompanied by some reduction in prices and in money-incomes generally, will diminish the need for cash for income and business purposes; and it will therefore reduce pro tanto the schedule of liquidity-preference for the community as a whole. Cet. par. this will reduce the rate of interest and thus prove favourable to investment. In this case, however, the effect of expectation concerning the future will be of an opposite tendency to those just considered under (4). For, if wages and prices are expected to rise again later on, the favourable reaction will be much less pronounced in the case of long-term loans than in that of short-term loans. If, moreover, the reduction in wages disturbs political confidence by causing popular discontent, the increase in Liquidity preference due to this cause may more than offset the release of cash from the active circulation.
(6) Since a special reduction of money-wages is always advantageous to an individual entrepreneur or industry, a general reduction (though its actual effects are different) may also produce an optimistic tone in the minds of entrepreneurs, which may break through a vicious circle of unduly pessimistic estimates of the marginal efficiency of capital and set things moving again on a more normal basis of expectation. On the other hand, if the workers make the same mistake as their employers about the effects of a general reduction, labour troubles may offset this favourable factor; apart from which, since there is, as a rule, no means of securing a simultaneous and equal reduction of money-wages in all industries, it is in the interest of all workers to resist a reduction in their own particular case. In fact, a movement by employers to revise money-wage bargains downward will be much more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.
(7) On the other hand, the depressing influence on entrepreneurs of their greater burden of debt may partly offset any cheerful reactions from the reduction of wages. Indeed if the fall of wages and prices goes far, the embarrassment of those entrepreneurs who are heavily indebted may soon reach the point of insolvency, “” with severely adverse effects on investment. Moreover the effect of the lower price-level on the real burden of the National Debt and hence on taxation is likely to prove very adverse to business confidence.
23. January 2013 at 11:30
Wrong post. I wanted to post that on a different post.
23. January 2013 at 12:07
The rich owned everything, had no incentive to develop anything. Why do anything if you are rich beyond comprehension
Read North & Co. and/or AcemoÄŸlu & Robinson on the development of nations and you will see there is a **huge difference** between “the rich” by dint of monopoly and their use of political power to extract rents and maintain their personal and family positions, and “the rich” by dint of obtaining wealth and preserving it in competitive markets.
The former have every reason to not develop anything and make sure nobody else does either, killing innovation to preserve their position. The latter have every reason to innovate and keep innovating — they *must* either do it themselves or fund others doing it, first to obtain their position, then to keep them.
In Latin America there are super-rich families that literally trace their wealth back to their Conquistador family forebearers taking it from the natives, who today use their wealth to obtain political power they use to suppress anyone who might pose any economic or political competition to them.
In the USA you have Steve Jobs starting in a garage, then as a rich man running a major breakthrough-innovation corporation, then being fired by his own corporation and being sent back into the wilderness, then as an even richer man running an even bigger more innovative corporation … Sam Walton starting a convenience store and going broke, then relocating and starting again to make deca-billions… IBM making the biggest profits in business history, taking its shareholders’ wealth up with it — then only two years later suffering the biggest losses in business history, taking its shareholders’ wealth down with it.
These are two rather different situations, qualitatively. Which demonstrates the bogosity of arguments (such as I have seen plenty of recently) along the lines of “The US has the same wealth distribution as third-world nations” to imply their political/economic situations and systems are in any way comparable.
BTW, who are some real-world examples of people who are “rich beyond comprehension”.
Surely, if not Steve Jobs, a mere single-digit billionaire, then Bill Gates and Sam Walton (and on back to Vanderbilt, Carnegie, etc., who arguably had far more wealth than Gates and Walton).
If they had “no incentive to develop anything”, why did they do it and keep doing it?
(Or, if these people don’t qualify as “rich beyond comprehension”, who the heck does?)
23. January 2013 at 13:21
Jim Glass,
Good post.
23. January 2013 at 18:32
“I’m saying that if you really believe this stuff, then income got much more equal in 2001 and 2009, compared to the year before, which means tight money hurts the rich.”
Actually that’s not true. CGKS measure income inequality by the Gini coefficient. According to the Census Bureau the Gini coefficient rose from 2000 to 2001 and from 2008 to 2009. In fact almost every important indicator of income dispersion rose from the first year to the latter in both cases. See Table A-2:
http://www.census.gov/prod/2012pubs/p60-243.pdf
In fact if one uses the Gini coefficient as an indicator of inequality it’s easy to see that tight money is correlated with greater inequality and loose money with less inequality. The highest Gini coefficient in American history was in 1931-32 near the bottom of the Great Depression. The lowest Gini cefficient in American history was in 1968, during the Great Inflation.
P.S. If you look at Figure 3 in CGKS you’ll note that eventually the one standard deviation confidence intervals for the 10-year T-Note eventually fall on both sides of zero, so it’s not true that their definition is inconsistent with a negative monetary shock.
P.P.S. What happened to Major Freedom?
24. January 2013 at 06:12
Mark, I think we are talking past each other. I view income distribution data as meaningless, so I’m not surprised that you can produce studies that show the opposite of what I have seen. My point was that people on the left tend to present graphs showing changes in income distribution that are procyclical in the 1920s-30s and also in recent years. Those may be “wrong,” although I’d say all studies are wrong, but that’s the data they use to make their points.
24. January 2013 at 06:36
Suvy:
“I just read through Chapter 19 of The General Theory and I didn’t find that anywhere. Keynes even talks about the possibility of flexible wages increase employment for the reason that the classical economists did. He also talks about other scenarios. In the end, all he conclusively says is that you can have flexible wages and still have mass unemployment.”
“The word asset doesn’t even appear once in Chapter 19 of The General Theory. Here’s a copy of Chapter 19.”
Suvy, you’re not in the right chapter. The relevant chapter is chapter 11.
Keynes there writes:
“If there is an increased investment in any given type of capital during any period of time, the marginal efficiency of that type of capital will diminish as the investment in it is increased, partly because the prospective yield will fall as the supply of that type of capital is increased, and partly because, as a rule, pressure on the facilities for producing that type of capital will cause its supply price to increase; the second of these factors being usually the more important in producing equilibrium in the short run, but the longer the period in view the more does the first factor take its place.”
Yet the context under discussion is whether or not a fall in wage rates and prices can lead to full employment. This question is the context which must always be kept in mind. It is the context within which Keynes’ declining MEC theory is proposed, in order to show why a fall in wage rates and prices allegedly cannot achieve full employment.
Keynes, as far as I know, proposed three reasons for a declining MEC. Yet, if you read them, you will find that all three of those reasons completely contradict the context of falling wage rates and prices. They actually presume the exact opposite.
Now, I hope that you have the intellectual wherewithal to at least understand that it is nonsensical to argue against the ability of lower wage rates and prices to lead to full employment, by advancing a series of arguments and explanations that flatly contradict that context!
It would be like trying to refute NGDP targeting theory by making a series of explanations that presume an absence of NGDP targeting. I am sure you can think of other possible examples.
24. January 2013 at 10:16
Geoff,
As for the particular topic of whether flexible wages can achieve full employment, I have my doubts–primarily in a debt deflation. If you have falling incomes/wages in a situation where debts stay rigid and mass defaults occurring, it causes a situation where more debt/income ratios rise even further. The only caveat is if you assume that a fall in wages will cause the employer to save money and spend it on employing others. You have to add in that the main problem with a debt deflation is that even though debts fall in nominal terms, debt/income ratios rise due to second and third order effects. This can cause falling aggregate demand where flexible wages may not only make any difference, but could make things worse.
24. January 2013 at 11:05
Suvy:
If falling wages is in part predicated on debt deflation, then debt deflation cannot itself be a problem that frustrates falling wage rates reducing unemployment.
The reason the whole discussion about falling wage rates is considered in the first place is because of falling spending statistics, such as the demand for labor, which of course is a “deflation” in money and spending.
You said that debt deflation has “second/third order effects, which makes things worse.” But I read that as you simply describing a snapshot photo of a process of adjustment. You aren’t describing any ultimate end, or some sort of abyss where one more step and it’s all over, so to speak.
Yes, if there is a process of debt deflation, then of course the debt deflation will not only be an effect, but also a cause that has other effects. That is exactly what we would expect in economic processes. A causes B, such that B is an effect, and B causes C, such that B is also a cause.
You can’t just take a snapshot of the middle of an adjustment process, and stop there and say that because B is also a cause, that debt deflation has to be reversed somehow because you imagine a continuous spiral downwards to zero with no end in sight.
Of course, there is an end, and the end is when the quantity of money and volume of spending fall to a level that there is no longer the same type of deflationary force that is part of the process of adjustment.
Those who want the central bank to target a nominal statistic are essentially refusing to allow the market to adjust that statistic via “the invisible hand.” Now, please don’t misunderstand me. I want the central bank to target a nominal statistic. I admit that I don’t want a fully market oriented process of human interaction. I want to be the sole money issuer. Or, second best, I want the prevailing money issuer to target my own personal income. Or, third best, for he or she to target their own preferred statistic, but having me as the sole primary dealer.
Of course I can’t achieve this without myself using, or benefiting from someone else using, threats of violence against the overwhelming majority of people. That’s why I don’t pretend that monetarism is a rationally grounded, intellectual discipline. It is a political power game, and he or she who has their mind expressed as the greatest physical power, “wins”.
Of course, most people recoil at this notion, so I have to be sure that I frame my selfish desires in terms of “the public good.” Then I can get most of the credulous and naive people, who make up most of the electorate, on board. For the rest, I will use intimidation, ad hominem, name calling, and other non-intellectual means.
25. January 2013 at 01:13
“You said that debt deflation has “second/third order effects, which makes things worse.” But I read that as you simply describing a snapshot photo of a process of adjustment. You aren’t describing any ultimate end, or some sort of abyss where one more step and it’s all over, so to speak.
Yes, if there is a process of debt deflation, then of course the debt deflation will not only be an effect, but also a cause that has other effects. That is exactly what we would expect in economic processes. A causes B, such that B is an effect, and B causes C, such that B is also a cause.
You can’t just take a snapshot of the middle of an adjustment process, and stop there and say that because B is also a cause, that debt deflation has to be reversed somehow because you imagine a continuous spiral downwards to zero with no end in sight.”
Let me rephrase what I’m saying.
The whole point of a debt deflation starts with a high level of debt, this high level of debt cannot be sustained as the debts cannot be paid. This causes mass liquidations and distress selling of assets–which causes asset prices to collapse. This worsens balance sheets; reduces the income flows from assets and causes further liquidations.
My point is simple, having rigid wages and prices could act as a counterbalancing force. Having flexible prices and wages could act as something worsening the cycle.
Now, I’m not discounting the fact that there could be a positive effect on employment from flexible prices and wages. However, there could also be slight positive benefit on employment from flexible prices and wages, but in a debt deflation, flexible wages could also worsen balance sheets, and reduce income flows thus having a negative effect on employment. It’s hard to say exactly what the impact on employment is. However, I think it is just absolutely absurd to say that the reason we don’t have enough people working is sticky wages and prices. I actually think stick prices and wages don’t affect employment very much.
As for the rest of what you said on nominal incomes and targeting nominal incomes; I agree. It prevents a debt deflation from happening by preventing the feedback loop as you stated. You provide enough money in circulation to prevent massive defaults and preventing falling incomes.
25. January 2013 at 03:32
Mark don’t tell me you want MF back. He’s still on Bob Murphy’s website now and again. Maybe he decided we’re hopeless over here.