Jan Hatzius touts wage growth as a policy indicator

In my previous post I suggested that a nominal hourly wage target has a great deal of appeal from a theoretical perspective.  Indeed I advocated that the Fed adopt a wage target in a paper I published back in 1995.  Economists such as Earl Thompson and David Glasner discussed the idea even earlier.  Now the very influential Jan Hatzius has suggested that wage growth can help guide Fed policy (in a paper written with Sven Jari Stehn.)

Goldman Sachs economists Sven Jari Stehn and Jan Hatzius propose a simpler approach: the Fed should focus on wage growth as a primary input into the “reaction function” that dictates its response to changing economic conditions.

Why focus more on wage growth instead of inflation, or even the unemployment rate itself?

Ultimately, wages will respond to tightening labor market conditions, whereas consumer price inflation may not.

“Low inflation should be indicative of the size of the employment gap,” write Stehn and Hatzius in a report.

“This approach, however, relies on a tight link between slack and price inflation. And the experience of the last couple of years suggests that price inflation is not very responsive to the employment gap at low levels of inflation and seems to fluctuate quite randomly when we are in the neighborhood of price stability. The behavior of core PCE inflation between 2011 and 2013 is a good example: core inflation rose by a full percentage point during 2011 and then dropped by the same amount in 2013, without any compelling macroeconomic explanation.”

Brad DeLong also linked to this story.

HT TravisV


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90 Responses to “Jan Hatzius touts wage growth as a policy indicator”

  1. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. February 2014 at 09:44

    My guess is that potential political mischief outweighs the economic benefit.

  2. Gravatar of Steve Roth Steve Roth
    16. February 2014 at 09:59

    Wage inflation has long been a bogeyman, Chicken-Little red flag (“wage-price spiral!”) inhibiting the Fed from meeting its employment mandate. Tightening at the first hints, before it even starts to reveal itself in non-wage price inflation. (And before that inflation inflicts the associated horrific impact on creditors’ real asset values.)

    Does much to explain declining share of wages over recent decades, and the buoyancy and upward concentration of asset values.

    Would be nice to see the indicator wielded to opposite effect.

  3. Gravatar of Nick Rowe Nick Rowe
    16. February 2014 at 10:14

    Scott: Off-topic. Chris House says: “In this case, there would be a positive relationship between output and the real interest rate (the IS curve would slope up! Higher output would require more employment which would raise the marginal product of capital and raise the real interest rate.) An increase in the money supply would cause the real rate (and the nominal rate) to rise.”

    http://orderstatistic.wordpress.com/2014/02/16/a-faustian-bargain/

    My response: http://worthwhile.typepad.com/worthwhile_canadian_initi/2014/02/chris-house-is-a-market-monetarist.html

  4. Gravatar of Major_Freedom Major_Freedom
    16. February 2014 at 12:02

    A central bank targeting wages is a terrible idea. A growing, healthy economy would likely have a growing portion of the population of self-starting entrepreneurs, small business owners, and other profit income oriented activities.

    A reduction of wage income and a growth in profit income is not necessarily a bad thing. Yet if wage payments declined and profit incomes rose dollar for dollar, then a central bank that targeted wages would loosen for no good reason (and, separate from all this, would distort economic calculation further).

  5. Gravatar of TravisV TravisV
    16. February 2014 at 12:57

    Marcus Nunes wrote a fantastic new post (with great graphs):

    http://thefaintofheart.wordpress.com/2014/02/16/some-questions-do-have-answers

    I favor his story over David Beckworth’s!

  6. Gravatar of Tommy Dorsett Tommy Dorsett
    16. February 2014 at 14:58

    Scott – Do you believe nominal wage targeting solves the issue of supply side shocks (I.e., as in not having the central bank respond to them) as well as NGDP targeting?

  7. Gravatar of benjamin cole benjamin cole
    16. February 2014 at 15:28

    Oooh boy I can see the reactions…”libral pointyheads at Fed try to micromanage the economy and boost wages and ignore inflationary firestorm…”

  8. Gravatar of lxdr1f7 lxdr1f7
    16. February 2014 at 15:36

    Even if the CB targets wages and therefore responds earlier in the event of a contraction it wont make policy much more effective because the transmission mechanism of monetary policy is ineffective.

    The CB interacts with counterparties that have little or no propensity to spend and the lending channel is blocked. Policy needs to have a mechanism of expanding base on a non debt basis to avoid any blockages in the credit channel and the CB needs to interact with agents that have a higher MPS such as the general public.

  9. Gravatar of Dan W. Dan W.
    16. February 2014 at 16:02

    Given the reality of progressive taxation perhaps the lack of wage inflation indicates workers are all too aware of the cost of higher wages.

    The tax environment is what it is. In this environment a person is much better off earning the same and benefiting from price deflation than earning more and having prices remain the same.

    Of course having everyone pay a 39.6% federal tax rate would be one way to achieve a flat tax and inflation is just the ticket to get there.

  10. Gravatar of Negation of Ideology Negation of Ideology
    16. February 2014 at 16:15

    Dan W. –

    “Of course having everyone pay a 39.6% federal tax rate would be one way to achieve a flat tax and inflation is just the ticket to get there.”

    The tax brackets are indexed for inflation.

    Everyone else –

    If the percentage of wages of the economy changes over time, wouldn’t targeting wages be a bad idea? It seems to me we should be trying to transition to an economy where more people get their income from dividends, sole proprietaries, etc., rather than just wages. Labor is a cost – our goal should be to have as large real output and as small amount of labor as possible.

  11. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. February 2014 at 16:24

    Slightly off topic; I caught some of The Janet’s recent congressional testimony this morning on C-Span. In response to a question from a North Carolina congressman, she seemed to say that she thought contingent capital certificates–CoCos–which are bonds that automatically convert to equity in distressed banking times, would possibly be a good idea for stabilizing the banking system.

    Charles Calomiris is the economist most associated with the idea now, but Phil Gramm tried to get the Fed to adopt it back in the 90s.

  12. Gravatar of David Glasner David Glasner
    16. February 2014 at 17:53

    Scott, Thanks for mentioning me as an early supporter of wage targeting. As you know, I got the idea from Earl Thompson. But you forgot to mention that as far back as the 1920s, Hawtrey had proposed stabilizing wages as the goal of monetary policy.

  13. Gravatar of Saturos Saturos
    16. February 2014 at 20:24

    I wonder which blogs Hatzius reads…

  14. Gravatar of Ralph Musgrave Ralph Musgrave
    16. February 2014 at 21:19

    Scott and the Goldman authors are not the only ones to have seen the merits in “keeping an eye on wage growth”. I think the Bank of England does that, though doubtless they pay more attention to price increases than wage increases. And the wage increase idea has a basic theoretical merit, which goes like this. (Scott may well find this old hat, but here goes.)

    When an economy approaches full employment (of labour) what it runs short of is . . . wait for it . . . . labour!!!!! The economy will not necessarily run short of goods because those can always be imported so as to alleviate shortages. But that means a deterioration in the external balance which after several months or a year or two leads to the currency being devalued, which itself has an inflationary effect.

    So . . . rather than wait for that delayed inflationary effect, why not nip the problem in the bud?

  15. Gravatar of Tom Brown Tom Brown
    16. February 2014 at 21:48

    Saturos, I know which blog Hatzius writes:

    http://monetaryrealism.com/

    He authored the top three there. I see him on JP Koning, Nick Rowe, Nick Edmonds and pragcap quite a bit too. He used to comment here too a bit (back in the 2009 time frame I think).

  16. Gravatar of Saturos Saturos
    16. February 2014 at 22:09

    Ah, thanks Tom! Nick Rowe you say…

  17. Gravatar of Tom Brown Tom Brown
    16. February 2014 at 22:32

    …yeah, he Nick Rowe and Nick Edmonds all did posts on “negative money” recently: one right after the next: they all comment on each other’s posts. I guess he’s got some pieces on FTAlphaVille too. He cross-posts at pragcap. He’s got a lot of videos on youtube too (him being interviewed).

  18. Gravatar of Prakash Prakash
    16. February 2014 at 23:06

    @David Glasner, Since you’re following this post, quick question to you – do you support nominal average wage targeting or nominal median wage targeting? Scott asked , in the reply to the same question asked yesterday, if I knew what other economists support and I really don’t know.

    @major_freedom, negation of ideology,

    I think that in a generally prosperous country where a substantial fraction of people are getting their main income from capital, wage targeting is still ok.

    Proprietors usually pay themselves a salary, business and personal costs have to shown differently in the ledger.

    On the margin, the choice of going self-employed or working for a firm will always be there. So, for people of fairly equal skill – Some would prefer the comfort of working in a firm, some would prefer to go it alone, but in a well functioning market, they would be being compensated similarly.

    I’ve not thought enough about how the transition from a wage targeting regime to a dividend targeting regime might take place. Currently, dividends are such a low portion of income that it doesn’t sound like a great target.

  19. Gravatar of Jason Jason
    16. February 2014 at 23:35

    MF ,
    “A reduction in wage income and growth in profit income is not necessarily a bad thing”

    So screw the workers then? Nice, reeeal nice!

  20. Gravatar of John Becker John Becker
    17. February 2014 at 06:58

    This is off-topic but did anyone else who saw “Dallas Buyer’s Club” think it was the most libertarian movie of the year (maybe ever)? It was basically the story of people trying to survive forming quasi-legal and then black markets to treat their illness (HIV/AIDS). The FDA and hospital system were the evil villains who denied critically ill patients potentially life-saving medications or gave them placebos in the name of “science.”

  21. Gravatar of TravisV TravisV
    17. February 2014 at 07:12

    Dear Commenters:

    General question: what are the prevailing theories for why the gold standard failed in the 1930’s? The view of Sumner, Glasner, Irwin is (1) WWI really skewed the equilibrium, which eventually led to (2) excessive gold hoarding by the French central bank, then by the U.S. central bank, etc. etc.

    Are there competing Austrian theories floating out there? What does Bob Murphy believe? Peter Schiff? George Selgin? Larry White?

  22. Gravatar of TravisV TravisV
    17. February 2014 at 07:16

    Also, FYI, James Caton has been on fire with his new blog! Check out the number of new posts he’s written this month!

    http://moneymarketsandmisperceptions.blogspot.com

    This post in particular where he highlights a conversation between Hawtrey and Keynes is fantastic!

    http://moneymarketsandmisperceptions.blogspot.com/2014/02/keynes-vs-hawtrey-final-round-gold.html

  23. Gravatar of Jim Caton Jim Caton
    17. February 2014 at 07:53

    Travis,

    David Glasner is the one who pointed out Gaukroger’s thesis which contains the Macmillan Commission exhchange. It has been a valuable resource!

    Glad to know that you are enjoying my research.

  24. Gravatar of Jim Caton Jim Caton
    17. February 2014 at 07:59

    Travis,

    Concerning Austrian thoeries: White is aware of the problem with the gold standard, though in my opinion, he under emphasizes. A few months back, Selgin explicitly expressed agreement with me about the problem of volatility of demand for gold during the interwar period, though I have not seen any formal work where he expresses in the terms of Hawtrey and Cassel, Glasner and Sumner.

    For Selgin, see http://www.cato.org/sites/cato.org/files/pubs/pdf/pa729_web.pdf

    If you have not seen them, you will be interested in my papers on the subject. The first is under review at the JEH. The second is still a working paper.

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2330059
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2388545

  25. Gravatar of TravisV TravisV
    17. February 2014 at 08:07

    Great stuff, thanks Jim!

  26. Gravatar of Major_Freedom Major_Freedom
    17. February 2014 at 08:51

    TravisV:

    The gold standard is a choice. If there arise individuals who use force to impose a fiat system, that doesn’t imply that the gold standard “failed.”. For if we start understanding failure in that way, then it would mean a “successful” monetary system is one that withstands and resists all human choice. Such a monetary system would not even be a monetary system created by man at all.

    In other words, just because violent people prevent X from taking place, that doesn’t mean X is a “failure.”

  27. Gravatar of Major_Freedom Major_Freedom
    17. February 2014 at 08:53

    The standard of success is not what violent thugs agree to allow transpire.

  28. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 10:13

    Major_Freedom, how would you feel if violent thugs took away our monetary system and forced us to adopt the gold standard? Would you fight them because they were violent thugs imposing their will on us… or would you overlook that because you’d prefer the gold standard? (after all, if you’re going to have violent thugs running the show either way, you might as well have ones that agree with you, right?) ;^)

  29. Gravatar of Daniel J Daniel J
    17. February 2014 at 10:34

    Scott I fail to understand why you view wages any differently than interest rates. These are subject to market forces and structural changes in the economy. What happens when automation continues to reduce wages and the resulting employment is not best expressed through the wage channel. To sum up, why can’t we say that wages should be left just as dependent on market forces as interest rates? To go further, isn’t the whole reason Nominal Income was chosen to be controlled because of it’s broad nature, while the rest of the economy could adjust to it?

  30. Gravatar of Daniel J Daniel J
    17. February 2014 at 10:38

    If wages are figured into the cost of business but not revenue, why should employers care that the fed is targeting a certain wage index? If nominal income is targeted, that directly effects expected revenue and changes expectations accordingly. However if wages are targeted then they cannot know for sure if this will ultimately increase their bottom line and might not increase output and prices in response.

  31. Gravatar of Daniel J Daniel J
    17. February 2014 at 10:43

    Finally, explain to me the link between wages and money supply. Also explain to me how the ‘hot potato’ effects wages then effects nominal income. You’ve been able to circumvent search models with your current explanation of nominal gdp (market expectations), but adding a targeted wage index by the fed puts you right into their firing line. How does this effect the surplus gained by employers when matching jobs and employees, how does this then effect unemployment?

  32. Gravatar of Daniel J Daniel J
    17. February 2014 at 10:47

    http://research.stlouisfed.org/fred2/graph/?g=2Xa
    This is wages as a percentage of GDP. How is targeting 43% of the economy better than targeting 100% of the economy. The most convincing graph I have ever seen in support of your views is David Beckworth’s expected nominal income graph. When you start targeting wages (remember, 43%), I have to then discount that graph.

  33. Gravatar of Major_Freedom Major_Freedom
    17. February 2014 at 11:10

    Tom Brown:

    “…how would you feel if violent thugs took away our monetary system and forced us to adopt the gold standard? Would you fight them because they were violent thugs imposing their will on us… or would you overlook that because you’d prefer the gold standard?”

    I’d fight it as well. The fundamental problem isn’t the specific form of the currency being imposed, it’s the fact that it’s imposed. Isn’t that obvious? I certainly wouldn’t do what MMs do, and overlook fiat being imposed under the ideological cover of pragmatism.

    “(after all, if you’re going to have violent thugs running the show either way, you might as well have ones that agree with you, right?) ;^)”

    Are you critiquing MM with that comment?

    Thugs imposing a monetary system is not inevitable. We can succeed in preventing thugs in monopolizing food, computers, and medicine. No reason we can’t do it for medium of exchange and store of value.

  34. Gravatar of MFFA MFFA
    17. February 2014 at 11:24

    So what’s the deal with Japan??!

  35. Gravatar of TravisV TravisV
    17. February 2014 at 11:27

    Larry Kudlow just wrote a very disappointing op-ed:

    http://www.nationalreview.com/article/371187/janet-yellens-problem-larry-kudlow

    “I’ll give Yellen and her predecessor Ben Bernanke plenty of credit for today’s low 1 percent inflation rate. But I don’t understand why the Fed’s planners want to raise inflation to around 2.5 percent. Higher inflation is a tax on consumers, families, investors, jobs, and growth.

    Paul Volcker made this point in a recent speech at the Economic Club of New York. Price stability, not monetary fine-tuning, is good for growth. And price stability, which ultimately means protecting King Dollar, requires clear monetary rules to maintain credibility.”

  36. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 11:34

    TravisV: that is disappointing. I thought Kudlow had gotten away from that kind of thinking, but I guess I was wrong (or maybe he went back to it!).

  37. Gravatar of Dan W. Dan W.
    17. February 2014 at 11:51

    Thanks for the correction on the indexing of tax brackets. It is the AMT that was only recently indexed for inflation, a change incorporated in the 2013 budget agreement.

    Back to the original post, I have the same questions as Daniel J. I’ll also add that wages are even more of political issue than prices and I don’t see how the Fed can delve into the politics of wages and income and come out clean. So why go there when it would cause so much political pain with so little economic gain?

  38. Gravatar of TravisV TravisV
    17. February 2014 at 11:55

    As a reminder, Larry Kudlow wrote some very encouraging things about Bernanke and the Fed last year:

    “Larry Kudlow Makes A Stunning Admission About Changing His Mind On Bernanke”

    http://www.businessinsider.com/larry-kudlow-says-bernanke-may-have-gotten-it-right-2013-3

  39. Gravatar of TravisV TravisV
    17. February 2014 at 12:01

    Question: do Sumner, Glasner, Irwin, Selgin and Caton all agree that if not for World War I we’d still have the gold standard today?

    Are there any substantive differences between Market Monetarists and Austrians about why the Gold Standard failed?

    There vaguely seems to be universal agreement that World War I made the Gold Standard unsustainable…….

  40. Gravatar of Jim Caton Jim Caton
    17. February 2014 at 12:29

    Travis,

    I my paper, “Monometallism as the Winner’s Curse” I argue that the instability of the gold standard was a feature, not a bug, of the system. With the international adoption of the gold standard in the 1870s, non-gold metallic substitutes were essentially outlawed as base money. This decreased the elasticity of demand and made price instability more likely, especially as central banks centralized gold reserves. Note that by the middle of WWI over 75% of the world’s monetary gold was held by central banks. By 1929 the proportion reached 90%. Decisions by primary holders of gold, like the Federal Reserve, the Bank of France, and the Bank of England, that changed reserve levels substantially impacted the price level.

    The same problem would hold for any other commodity that was adopted as the sole standard for base money.

  41. Gravatar of David Beckworth David Beckworth
    17. February 2014 at 12:32

    Tom Brown:

    So your saying the Jan Hatzius of Goldman Sachs fame is also the JKH of the econ blogosphere?

  42. Gravatar of John Becker John Becker
    17. February 2014 at 12:51

    Why are you guys disappointed in Larry Kudlow’s article? Maybe because you lazy guys didn’t read it.

    http://www.nationalreview.com/article/371187/janet-yellens-problem-larry-kudlow

    “For most of the time under Paul Volcker and Alan Greenspan, the Fed operated a market-price rule that used gold, commodities, bond spreads, and the dollar to guide the money supply and interest rates. Many now believe a nominal GDP rule would also help. Unfortunately, Yellen has backed away from any of these rules.”

    If you had read further, you’d see that he’s actually mentioning and endorsing Sumner’s central idea.

  43. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    17. February 2014 at 13:06

    Russ Roberts’ podcast this week is one of his best;

    http://www.econtalk.org/archives/2014/02/calomiris_and_h.html

    Should make the Housing Cause Denialists squirm, too. Hope it sells a few copies of ‘Fragile By Design’, which is scheduled to come out next week.

  44. Gravatar of TravisV TravisV
    17. February 2014 at 13:11

    Lars Christensen is helping me understand the severity of China’s monetary tightening in the comments section of this new post:

    http://marketmonetarist.com/2014/02/17/the-risk-of-chinese-monetary-policy-failure/#comments

    I have to say, I find that particular subject extremely confusing.

  45. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 13:49

    David Beckworth, yes that’s my understanding. I don’t recall where I read that, but obviously I thought it was credible and believed it. If you have evidence to the contrary, please let me know!

  46. Gravatar of David Beckworth David Beckworth
    17. February 2014 at 14:00

    Tom, no I don’t have evidence to contrary. It just blows my mind that all this time JKH has been Jan Hatzius. Wow!

  47. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 14:03

    John Becker, I was lazy and didn’t read it! I’ll take a look.

    Jim Caton, I’m having trouble squaring your first sentence above:

    “I my paper, “Monometallism as the Winner’s Curse” I argue that the instability of the gold standard was a feature, not a bug, of the system.”

    with the rest of your paragraph. I guess I should read that one too. 😀

    But briefly, why do you say a “feature?” Are you saying the proponents of the gold standard were looking for instability?

  48. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 14:11

    David, does JKH comment on your blog too? If I recall he doesn’t like to advertize who he is, so I’m probably being a big blabbermouth jerk here. Sorry JKH 🙁

    If you go back in Sumner’s old 2009 blogs, you’ll find some truly strange things: Sumner thanking JKH for teaching him about banking! Lol!

  49. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 14:22

    (David… so do me a favor and keep it on the down low) ha! 😀

    …and let that be a lesson to you… don’t go telling me any secrets!

    BTW, I also know who “beowulf” is… but I’ll let you figure that one out. It’s a pretty open secret. I was having a conversation about the $1T coin idea with beowulf on pragcap… before it ever so slowly dawned on me who beowulf was… boy did I feel dumb. 🙁

  50. Gravatar of David Beckworth David Beckworth
    17. February 2014 at 14:29

    Tom Brown, with the above comment thread I think JKH identity horse has already left the barn 🙂 Now to figure out who is Beowulf…

  51. Gravatar of TravisV TravisV
    17. February 2014 at 14:37

    Major_Freedom,

    You’re a nihilist. See here: https://www.themoneyillusion.com/?p=15602#comment-173676.

    You’re actively rooting for a severe depression. That’s nihilism. And I oppose nihilism.

    In fact, I’m for the opposite of nihilism: Friedman/Sumner full employment optimism!

  52. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 14:41

    TravisV, I’m curious why you’d ask about Peter Schiff above. I’m a rank amateur and really have no right to look down my nose at anybody in the econ field, but my gut check on Mr. Schiff puts him somewhere between the Nigerian princes that write me emails looking to use my bank account, and John Williams of ShadowStats fame, trying to hawk $175 subscriptions to his website. Am I being too hard on the guy? Does he have more merit that what my gut tells me?

  53. Gravatar of Mark A. Sadowski Mark A. Sadowski
    17. February 2014 at 15:21

    David Beckworth,
    Don’t you read the NYT?

    http://www.nytimes.com/roomfordebate/2013/01/13/proposing-the-unprecedented-to-avoid-default/platinum-coin-would-create-a-trillion-dollar-in-funds

    P.S. Any other notsosecret identities that need revealing?

  54. Gravatar of David Beckworth David Beckworth
    17. February 2014 at 15:29

    Thanks Mark. I quickly discovered his identity after that last comment. But no, I did not see the NYT article when it first came out.

  55. Gravatar of Major_Freedom Major_Freedom
    17. February 2014 at 16:06

    TravisV:

    Nihilism. I do not think it means what you think it means.

    I am advocating for preventing the fundamental causes that make the proximate causes depressions inevitable.

    Your solution is the fundamental cause that makes it seem necessary to impose a coercive centralized monetary system.

    To me you’re the “nihilist” (using your wrong definition).

    I oppose violence. You do not. You welcome and revel in it.

  56. Gravatar of Tom Brown Tom Brown
    17. February 2014 at 16:28

    “P.S. Any other notsosecret identities that need revealing?”

    Yes, who is this “Mark A. Sadowski” fellow anyway? (I like how he adds a middle letter to make it seem more legitimate)

  57. Gravatar of ssumner ssumner
    17. February 2014 at 16:46

    Patrick, That’s possible.

    Steve, I doubt Fed policy has any significant effect on the share of income going to labor.

    Nick, Good to see the message is getting out.

    Tommy, Yes, I believe it could do as well

    lxdr, You said;

    “The CB interacts with counterparties that have little or no propensity to spend and the lending channel is blocked.”

    There are lots of problems with this statement. There is no such thing as the “lending channel.” Counterparties don’t matter. Propensity to spend makes no difference. And nothing is blocked.

    David, Thanks, I forgot about Hawtrey. The policy was actually first advocated in the 1800s, if I’m not mistaken.

    Daniel, The answer is simple. Wages are sticky and interest rates are not sticky.

    TravisV, You said;

    “Question: do Sumner, Glasner, Irwin, Selgin and Caton all agree that if not for World War I we’d still have the gold standard today?”

    I don’t agree. It was doomed–just a matter of when.

  58. Gravatar of Vince Cate Vince Cate
    17. February 2014 at 17:18

    TravisV, I think the reason gold ran into trouble is that with the creation of the Fed they switched from a gold coin standard, to a Ponzi Gold Standard where they claimed paper could be turned in for gold but by law only had 40% of the needed gold. As with all Ponzi schemes it worked when more gold was coming in than going out (the roaring 20s) but failed when people started taking out gold.

    http://howfiatdies.blogspot.com/2010/11/feds-ponzi-gold-standard.html

  59. Gravatar of TravisV TravisV
    17. February 2014 at 19:56

    Vince Cate,

    Don’t hold your cards so close to your vest, when do you predict the massive U.S. hyperinflation is going to happen? Within the next 5 years? 10 years?

  60. Gravatar of Major_Freedom Major_Freedom
    17. February 2014 at 20:32

    Thoughts?

    http://uneasymoney.com/2014/02/10/paul-krugman-and-roger-farmer-on-sticky-wages/

  61. Gravatar of TravisV TravisV
    17. February 2014 at 21:11

    Major_Freedom,

    I’m reminded of this dumb comment you made a few months back:

    “inflation tends to encourage downward price rigidity, so it cannot be a solution to price rigidity.”

    http://consultingbyrpm.com/blog/2013/05/who-said-it-5.html

    Wrong. There’s just something special about zero. Workers feel that a nominal wage cut is a slap in the face. So a little NGDP growth is a FANTASTIC solution to that problem.

  62. Gravatar of Major_Freedom Major_Freedom
    17. February 2014 at 21:26

    TravisV:

    Workers feelings towards wage cuts has no bearing on the efficacy of wage cuts to eliminate unemployment.

    Workers who lived in a world of price deflation, due to productivity growth, would not have the same resistance towards wage cuts. It would be natural, because the rate of population growth and production would tend to outstrip the rate of money production. People would be born into a world where they make less than their parents, and yet still be materially better off.

    You’re just taking worker psychology for granted, without even attempting to analyze WHY they might come to have that psychology.

    Dumb comment? Please. It’s a far better argument than “Workers just don’t like wage cuts, mmkay, therefore NGDPLT is justified!”

    You should have more intellectual courage.

  63. Gravatar of Saturos Saturos
    18. February 2014 at 01:12

    Scott will probably agree with the conclusion to this John Taylor post: http://economicsone.com/2014/02/17/should-policymakers-or-macro-models-be-taken-to-the-woodshed/

  64. Gravatar of Daniel Daniel
    18. February 2014 at 02:06

    Shorter Major_Freedom

    “I’m an autist who cannot understand human emotions.”

  65. Gravatar of Benjamin Cole Benjamin Cole
    18. February 2014 at 05:03

    OT but maybe not given title of this post.

    From BLS 2/6/13

    Unit labor costs in nonfarm businesses decreased 1.6 percent in the
    fourth quarter of 2013, as the 3.2 percent increase in productivity
    was larger than a 1.5 percent increase in hourly compensation. Unit
    labor costs fell 1.3 percent over the last four quarters. (See table
    A.)
    –30–

    So we have dead commodities, and declining unit labor costs, and global competition in most markets. Just where is inflation supposed to come from?

  66. Gravatar of Dan W. Dan W.
    18. February 2014 at 05:56

    Benjamin,

    Deflationary forces are overwhelming the economy and for good reason. The ability of the economy to efficiently supply the goods people want continues to improve and the pace is accelerating.

    The extent of this deflation is greatly masked by monetary and fiscal policy. In the past 5 years the Fed had increased it balance sheet by $3 trillion and the federal government has spent $8 trillion more than it has taken in. Do economists have any clue how much these policies distort the economy? I doubt it.

    Ultimately here is the dilemma that AD theorists face. What is the meaning of AD when the price of goods goes to zero? Of course not all goods are going to zero. Those products protected by cartel or by legal monopoly or by extremely strong branding, have prices that reflect the extent of the dollar devaluation. One example of distortion is this: One can pay $150 for a day at Disney or $150 for a ski day at Vail. Yet the small town amusement park and ski hill are shuttered. Liability laws simply do not allow the economics of the business to work for a small competitor. Instead, the lower end of the amusement industry is filled by video games which allow consumers to enjoy endless days of incredibly rich virtual entertainment for a near zero marginal cost and a few hundred dollars up front investment.

    Clearly monetary easing does not raise all prices equally. Is that a feature or a bug?

  67. Gravatar of TravisV TravisV
    18. February 2014 at 07:33

    Benjamin Cole wrote an excellent post a few days ago on lack on inflation here:

    http://thefaintofheart.wordpress.com/2014/02/16/elvis-presley-and-inflation-are-dead

  68. Gravatar of Edward Edward
    18. February 2014 at 07:39

    MF,

    The 1920’s were a decade that had prices falling. Yet that didn’t prevent workers and businesses from resisting wage cuts in the 30s. Don’t forget pres. Hoover didn’t sign a law, all he did was “pressure” businesses into doing something they would have done even without his pressure. Businesses believed in maintaining a high wage policy.

    Your whole premise is an epic failure. Workers money illusion goes far beyond the prices they experience in their cost of living. It has to do with ” fairness” perceptions, being rewarded and not punished for working hard for their company. Nominal wages are a symbolic and psychological measuring stick, no matter how”irrational” it might seem,

    Try again bucko!

  69. Gravatar of Jason Jason
    18. February 2014 at 07:41

    why does everyone forget sticky debt? Why is it always workers who have to bear the brunt if the pain?

  70. Gravatar of TravisV TravisV
    18. February 2014 at 07:42

    Major_Freedom,

    I know that you agree with us that faster NGDP growth –> higher interest rates and vice verse.

    So doesn’t it bother you that Ron Paul continues to promote an opposite (false) story today? See his new commentary today:

    http://www.ronpaulinstitute.org/archives/featured-articles/2014/february/16/at-the-fed,-the-more-things-change,-the-more-they-stay-the-same.aspx

  71. Gravatar of TravisV TravisV
    18. February 2014 at 07:45

    Bob Murphy just wrote a new column where he wrote the following:

    “we do have historical examples of central banks ruining their economies/currencies through massive expansions of their balance sheets (Weimar Germany, Zimbabwe, etc.). To my knowledge, this has never actually worked anywhere in history. Can anyone point to a successful example?”

    http://mises.ca/posts/blog/bernankes-qe-programs-has-this-ever-worked-in-history

    The Fed massively expanded its balance sheet during the 1930’s and the U.S. prospered greatly during subsequent decades.

    I know Mark Sadowski analyzed what happened with the Fed’s balance sheet recently…….

  72. Gravatar of W. Peden W. Peden
    18. February 2014 at 08:54

    Travis V,

    He doesn’t define what he means ‘worked’, so it’s not clear what he means.

    The US central bank massively expanded its balance sheet in 2008-2009, and avoided a Great Depression scenario despite almost all the (supposed) causes of the Great Depression being in play.

  73. Gravatar of Jim Caton Jim Caton
    18. February 2014 at 09:01

    Tom,

    I was not suggesting that failure was a matter of intent. Failure was an emergent phenomenon that was made likely by the arrangement. Instability associated with the late gold standard was not a fluke. It was the consequence of governments centralizing gold reserves and disallowing the use of base money substitutes.

  74. Gravatar of JKH JKH
    18. February 2014 at 09:06

    David, Tom

    I have it on fairly good authority that JKH is not Jan Hatzius.

  75. Gravatar of Major_Freedom Major_Freedom
    18. February 2014 at 09:12

    Daniel:

    Ah yes, the “humans are stupid emotional wrecks” trump card that is always played when statists try to justify their statism. How uninspiring and unsurprising. Next thing you’ll tell me is that since people become emotional wrecks from losing their jobs, the state should employ everyone, you know, to save us from our own immaturity and and helplessness. Strong mommy and daddy government, helpless and vulnerable children citizenry.

  76. Gravatar of Donal Pretari Donal Pretari
    18. February 2014 at 09:24

    “Asset purchases enhance the credibility of the shift in the target, and the shift in the target raises the likelihood that the asset purchases will be effective. The whole is greater than the sum of the parts. The case for such a policy would strengthen further if inflation fell sharply and the risk of deflation reappeared clearly on the radar screen.

    The credibility of the policy could be strengthened further via a broadening of the assets to be purchased and/or renewed fiscal expansion. But these policies would probably require the explicit cooperation of Congress, which seems unlikely for the foreseeable future. ”

    I feel the need to say that this is My QE Plus a Reinforcing Stimulus Reasoning.

  77. Gravatar of Major_Freedom Major_Freedom
    18. February 2014 at 09:30

    Edward:

    The 1920″²s were a decade that had prices falling. Yet that didn’t prevent workers and businesses from resisting wage cuts in the 30s.

    There is always “resistence” from anyone who sells anything to lower their asking price. It’s quite natural to want to make more money than less money. The queation is whether wage rates DO fall. Wage ratws did in fact fall during the early 1930s but did not fall enough because of Hoover and some misguided employers, as you alluded to. That Hoover did not send police squads to firms forcing them to maintain wage rates does not mean such misguided meddling and political pressure had no effect on wages rates and unemployment. Wages rates fall in a free market if there is a fall in NYC minal demand for labor. Stickiness is a temporary historical phenomenon that cannot possibly persist without laid off employees dying of starvation. I don’t care who you are. If you want a higher wage rate than what is being offered, you will eventually relent. With zero government meddling and zero politically backed union pressure, wage rates have nowhere to go but down.

    Hoover didn’t sign a law, all he did was “pressure” businesses into doing something they would have done even without his pressure. Businesses believed in maintaining a high wage policy.

    Which caused unemployment! Without government pressure, employers would have been as “ruthless” with wage rates then as they were during the 1920 recession.

    Your whole premise is an epic failure.

    EPIC DEMOLITON COLLAPSE DESTRUCTION DESTROYED!!

    Workers money illusion goes far beyond the prices they experience in their cost of living. It has to do with “ fairness” perceptions, being rewarded and not punished for working hard for their company. Nominal wages are a symbolic and psychological measuring stick, no matter how”irrational” it might seem,

    You are fallaciously presuming others can never learn what you claim to know. Humans learn. If someone like you can understand the difference between real wages and nominal wages, then so can every janitor and McDonalds employee.

  78. Gravatar of John Becker John Becker
    18. February 2014 at 09:49

    Scott,

    You should address Bob Murphy’s piece on monetary theory over at Mises Canada.

    http://mises.ca/posts/blog/bernankes-qe-programs-has-this-ever-worked-in-history/

    I found his arguments compelling given my biases but I’m curious what you might say.

  79. Gravatar of Edward Edward
    18. February 2014 at 10:48

    MF,
    There is another option to workers dying in the streets:
    Rioting. Or theft of the means of production

    Or electing a dictator to reflate the economy, as the Germans did with hitler, an entire decade after the hyperinflation of the 1920s was long finished

  80. Gravatar of Edward Edward
    18. February 2014 at 10:50

    And the 1920s recession was caused by the fed, and ended when rates were LOWERED. (The economy didn’t recover “naturally”)

  81. Gravatar of benjamin cole benjamin cole
    18. February 2014 at 15:04

    Travis–
    Thanks!
    B

  82. Gravatar of Vince Cate Vince Cate
    18. February 2014 at 15:35

    Travis, here I can explain hyperinflation in many different ways, using different theories. Do you agree with any of these, or have another explanation I can add to my list?

    http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

  83. Gravatar of ssumner ssumner
    18. February 2014 at 17:44

    Saturos, Yes, the conclusion, but not all the analysis.

    Travis, Bob Murphy forgot about interest on reserves.

    John, Are there any issues I have not already addressed over here?

  84. Gravatar of TravisV TravisV
    18. February 2014 at 17:54

    Testing

  85. Gravatar of James in London James in London
    19. February 2014 at 12:35

    The Larry Kudlow piece has some good points on supply side issues relating to tax and minimum wages, but is all at sea on monetary policy. The minor nod to NGDP targeting does not follow at all from his dismissive comments on QE and the need to raise rates to “normalise” Fed policy. He is no friend of Market Monetarism evidenced by this article.

  86. Gravatar of Tom Brown Tom Brown
    19. February 2014 at 20:18

    James in London: maybe Kudlow just doesn’t understand MM?

  87. Gravatar of David Glasner David Glasner
    20. February 2014 at 09:42

    @Prakash,

    Thompson’s argument for stable average wages was based on a search theory of unemployment. Under that theory, workers search too much if their wage expectations are too optimistic and too little if their wage expectations are too pessimistic. By stabilizing the wage index (actually the expected wage index), the argument goes that you would eliminate inefficiencies in the amount of search. So the answer to your question would depend on whether stabilzing the mean or the median expected wage would be more likely to eliminate search inefficiency. I’ll leave that to the experts in probability theory to figure out.

    Hawtrey’s argument for stabilizing wages was different, and the wage that he wanted to stabilize was the wage for unskilled labor.

    I have to admit that I am less confident now that search theories tell us all that much about cyclical unemployment. There are too many aspects of cyclical unemployment that search theory cannot account for. e.g., quit rates fall, not rise in recessions. And very few workers quit their jobs in order to search. If they quit, it’s because they already have a job offer. I just don’t know if Thompson’s views on the relevance of search theory changed over time.

  88. Gravatar of Scott Sumner Scott Sumner
    20. February 2014 at 19:48

    David, Very interesting comments. I tend to agree with you about search unemployment.

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