Living in interesting times

For market-oriented economists like me, it’s always nice to see genuine uncertainty before key policy decisions.  Today’s jobs reports sets up one of those times.  Hopefully we will learn something on September 18th, when the Fed decides whether or not to taper.

It is possible that the taper talk has recently slowed the pace of jobs growth, however I am reluctant to put too much weight on a few months data.  It’s bizarre how the data fluctuates, with some numbers like autos and new claims for unemployment now back to boom levels, and actual unemployment and GDP still very depressed.   A falling unemployment rate suggests the problems are demand-side, while falling LFPR rate suggests supply-side.

In some ways my biggest frustration with policy is its incoherence.  My specific criticisms may be wrong, but surely we can all agree that recent policy is incoherent:

1.  Tight money combined with fiscal stimulus (a few years ago.)  That’s the old one foot on the brake the other on the accelerator problem.

2.  And now he have extended unemployment comp (justified because there is inadequate AD), and taper talk (justified because there is not inadequate AD.)  Somebody has to be wrong!

Current policy is like an expertly tuned machine aimed at reducing employment in every way possible. Tight monetary, tight fiscal, higher MTRs on working people, extended UI.  Hell, why not raise the minimum wage to$10, at least it would be consistent with the current insanity.

BTW, don’t you love it when liberals complain that Germany isn’t really a big success because they got low unemployment at the cost of lots of sub-minimum wage jobs.

And the implication is . . . 



30 Responses to “Living in interesting times”

  1. Gravatar of Matt Waters Matt Waters
    6. September 2013 at 06:37

    I liked this sentence in particular:

    “Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe.”

    Nice sleight of hand there to say “relative to their national median income.” I’m sure by any absolute measure, Germany’s “low-wage workers” are doing much better than Portugal, Spain or Italy. Presumably, Spain does “better” in this metric because they don’t have low-wage workers with 50% youth unemployment.

  2. Gravatar of Morgan Warstler Morgan Warstler
    6. September 2013 at 06:53

    No need to stop the taper, since Yellen gets the job now right?

  3. Gravatar of Brian Donohue Brian Donohue
    6. September 2013 at 06:56

    Everybody’s moaning about the jobs number. As a fan of the ‘little by little’ recovery, considering fiscal cliff tax increases, expiration of the payroll tax holiday, and the sequester, all in 2013, the fact that the private sector has added 2.3 million jobs in the past year and government has cut 100,000 is A-OK with me.

  4. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    6. September 2013 at 07:41

    John Lott has a picture worth at least a thousand words;,+September+6,+9.11+AM.png

  5. Gravatar of Doug M Doug M
    6. September 2013 at 07:49

    Raise the minimum wage to $10? People calling for $15!

  6. Gravatar of Aaron W Aaron W
    6. September 2013 at 09:29

    You may get your wish! I’ve seen a meme floating around with my progressive friends lately about doubling the minimum wage. It was an instant palm to the face when I first saw it…

  7. Gravatar of Saturos Saturos
    6. September 2013 at 09:39

    Uh oh, the jobs report was inadequate and Fed funds futures show hiking…

  8. Gravatar of Saturos Saturos
    6. September 2013 at 09:43

    But hey, Japan is doing better (was doing better)

  9. Gravatar of Odie Odie
    6. September 2013 at 10:05

    I do agree that Germany is not really a success although I am actually from there. It’s economic growth has been achieved through a huge tradesurplus that quadrupeled since the implementation of the Euro. Its low wage workers together with higher productivity (stayed stagnant though that time) made the labor in other countries (Spain, Greece) less competitive. Hence, the German low unemployment was bought with putting other people in the EU out of their jobs. Those are now going to Germany looking for employment but may put additional pressure to lower wages. The correct recipe would be to spend some of the savings the Germans have accumulated during that time into investment to fuel future growth and business profits. As I know my fellow countrymen, this is not going to happen. Thus, the current economic trajectory of Germany can only be kept up as long as other countries are willing to buy German products.

  10. Gravatar of ssumner ssumner
    6. September 2013 at 12:35

    Odie, I think it’s exactly the opposite. It’s the low productivity in Spain and Greece, combined with the high wages, that are the problem. Germany’s doing things the right way.

  11. Gravatar of MikeDC MikeDC
    6. September 2013 at 13:59

    The implication is that “liberals” (especially politicians) have and always will preferr higher unemployment and high unemployment benefits. to increased employment at lower wages combined with lower unemployment benefits.

    This can be cloaked in technical terms (from time preference for work, through a view of old-school Keynesianism, through capitalism requiring a reserve army of the unemployed to outright Marxism), or presented in populist terms (human dignity requires we not pay anyone poorly!), or viewed from a political lens (a supplicant underclass is filled with more reliable voters than a poor but employed working class). But it’s pretty hard to dispute.

  12. Gravatar of Morgan Warstler Morgan Warstler
    6. September 2013 at 15:12

    MikeDC, there is another way:

    One that the Congressional Black Caucus and Tea Party can get behind.

  13. Gravatar of Geoff Geoff
    6. September 2013 at 15:30

    “For market-oriented economists like me, it’s always nice to see genuine uncertainty before key policy decisions.”

    Socialist banking.

    Socialist welfare.

    Socialist taxes.

    Socialist education.

    Socialist healthcare.

    What’s the difference between a “market oriented” political strategist who supports the above, and a socialist who says “You know, ideally I want everything to be socialized, but I’ll concede that maybe food, cars, textiles, electronics, and housing should be run competitively”?


  14. Gravatar of Odie Odie
    6. September 2013 at 17:09


    So your suggestion would be for Spain and Greece to lower wages and/or enhance productivity to reverse the trade flows and accumulate a surplus towards Germany? What happens when Germany counters the same way?

    And sorry for hijacking this thread but I really want to clarify that I get your point about the HPE:
    Because banks expect the future policies of the Fed will increase base money they will be forced to lend excess reserves out as their stock of money will loose value? With that an increase in base money will promote inflation. Is that it in a nutshell?

  15. Gravatar of benjamin cole benjamin cole
    6. September 2013 at 17:28

    I contend the low LFPR reflects weak demand. Even returning vets are claiming disability (about one-third are taking post-traumatic stress claims).

    I don’t think vets decided not to work—they returned to a crummy job market and looked for ways to maintain income. I’ll concede post-traumatic stress claims are probably a racket. But the impetus is a lousy job market.

  16. Gravatar of mbka mbka
    7. September 2013 at 04:48


    attempt at a partial answer: wages have to be consistent with the product of labor. If the productivity just isn’t there in Spain or Greece, the wages must also be lower than they were. In Germany itself, if wages stagnated for a decade while overall economic performance improved, then one conclusion would be that workers might have been overpaid in the decade prior to that, vs their actual productivity, and the more flexible labor market after the Hartz reforms has allowed a rebalancing.

    From the FT article I suspect though that if “average/median wages stagnated” while “low wage jobs rose” what probably happened is that ordinary wages increased but the average was drawn down by the creation of low wage jobs at the side. But this should be reason for joy because that is precisely what reduced unemployment.

    The FT article btw shows how the framing of these kinds of issues is completely off the actual realities. It is not that “Germany created low wage jobs”. Germany (the government) didn’t hire anybody. What really happened is that “In Germany, the government stopped preventing the economy from creating (low wage) jobs”. Of course it would have been even nicer had the economy created high wage jobs. As it is though the government can’t order the economy to create specific jobs. But they can, and frequently do, prevent the economy from creating specific jobs, example, low wage jobs. So either you allow the creation of low wage jobs, and these jobs are created, or you disallow it, and these jobs are not created. The consequence would have been that the economy would have created no jobs at all.

    Finally a quip from an official of Austria’s Chamber of Commerce a few years back when asked about a guaranteed minimum wage for workers. He said “Sure, but let’s also have guaranteed minimum profits for companies”.

  17. Gravatar of ssumner ssumner
    7. September 2013 at 05:21

    Odie, I hardly think Germany sets its policies based on what Greece is doing. In any case, it’s not a zero some game. More jobs in Germany do not mean less jobs in Greece. Of course Greece never should have joined the euro. If they had not, they would have devalued their currency by 30% to 50%, indeed every party on both the left and right would have favored devaluation. And of course currency devaluation is a less painful way of cutting wages. Germany would not have followed, as they like low inflation.

    mbka, Good comment.

  18. Gravatar of Scott H. Scott H.
    7. September 2013 at 05:33

    A new idea to run by you: Stopping the taper will expand the money supply and greater NGDP.

    Why? QE purchases are NOT going into the money supply now. They are only pushing up Bank Reserves — just google it and check out any chart. Meanwhile continued QE is lowering the spread between long term and short term interest rates. In other words QE is lowering the profitability of loans.

    Now that bank reserves are at a historically high level it’s time to stop QE, increase that spread between long term and short term rates, and increase loans. We know what that will do to the money supply, inflation, and NGDP.

  19. Gravatar of Ben J Ben J
    7. September 2013 at 05:33


    The “compassionate conservatives” you joked about in your last post on Australia have won a convincing victory (although it wasn’t as bad for the Labor party as first expected). Won’t mean much for monetary policy (obviously) or fiscal policy – both planned almost identical spending levels, just with different compositions.

  20. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    7. September 2013 at 07:34

    The ball seems to be back in your court, Paul;

    … the [fiscal] shock initially provides stimulus but this can turn into a contractionary force as time passes.

    Third, while the overall effect on real GDP is expansive even at very long horizons, the higher the debt ratio, the less this is the case.

    Eventually, at debt ratios beyond 90%, the overall effect on real GDP becomes significantly negative

  21. Gravatar of Steve Steve
    7. September 2013 at 07:39

    “it’s always nice to see genuine uncertainty before key policy decisions”

    I think there’s a consensus that the Fed will taper to either 70 billion or 75 billion.

    This allows them to save face in two ways; when they said taper in the spring, they meant it. But, by not doing 65 billion, they prove that they are still ‘state contingent’.

    The devil is going to be in the statement.

  22. Gravatar of Steve Steve
    7. September 2013 at 07:43

    “Raise the minimum wage to $10? People calling for $15!”

    Yes, the Walmart and McDonalds stikers want $15. I saw one woman who makes $8 interviewed. She said she deserves $15. Then she said she had the option to make $10 as a supervisor, but she declined because it would inconvenience her schedule.

    BTW, the true minimum wage is closer to $3 after taxes. I would support raising that to $4.

  23. Gravatar of ChargerCarl ChargerCarl
    7. September 2013 at 08:27

    Scott H, you said:

    “Why? QE purchases are NOT going into the money supply now. They are only pushing up Bank Reserves “” just google it and check out any chart. Meanwhile continued QE is lowering the spread between long term and short term interest rates. In other words QE is lowering the profitability of loans.”

    Karl Smith answered this a few years ago in a great post:

  24. Gravatar of Brian Donohue Brian Donohue
    7. September 2013 at 12:42


    Great link. Thanks.

  25. Gravatar of Merijn Knibbe Merijn Knibbe
    7. September 2013 at 14:11

    As far as the Statistisches Bundesamt is concerned, job growth in Germany since 2008 was not mainly in crappy jobs, but in ‘Normalarbeitsverhaltnisse’, normal jobs.

  26. Gravatar of apt apt
    7. September 2013 at 15:49

    Scott H. I don’t know if you have done the maths, but in fact the spreads for the long-run and the short-run are negatively correlated with Inflation (around -0,4 since 1960).
    One might however wonder if there is any causality and, even if there is, if it goes from “A to B” or “B to A”.
    The way I like to think about this and that I think was not described in ChargerCarl’s post is that, with lower spreads, refinancing becomes less costly in comparative terms, thus encouraging investment.
    Another thing: I noticed in a comment of the post ChargerCarl suggested that a reader talked about saving being perceived as a Gifen good. Although I must admit it is probably going too “far”, it is actually an appealing idea, and also makes up for this plea.

  27. Gravatar of Odie Odie
    7. September 2013 at 19:50

    Scott, since Germany is in an economic union with the other EU countries it should better worry about what those are doing. It is certainly right now. The same applies to the US: No one should celebrate low unemployment in Texas due to a less restrictive labor market when those figures are rising in all other states. Overall, the country as a whole would be worse off.

    As you said yourself, normally Greece would have devalued their currency to become competitive again. With the Euro that is what Germany had done earlier, devalued theirs so their workers could outcompete most other workers in the EU. That is the actual reason why the trade surplus rose so sharply after the Euro was implemented. Hence, more jobs in Germany actually meant less jobs in Greece.

    Since Greece/Spain cannot adjust their exchange rates what should they do? Lower their wages, too, as Germany did when it joined the Euro? Where would that stop?

  28. Gravatar of Odie Odie
    7. September 2013 at 20:29

    mbka, thanks for taking the time. As I already mentioned in my post to Scott, Germany cut its cost of labor already with implementing the Euro and de facto devaluing its currency. When looking at the trajectory of the trade surplus it becomes clear that it took off once the Euro was general currency. Since you are doubting that paying higher wages would be economical beneficial may I ask if you have ever seen Kalecki’s profit equation which is simply based on the fact that GDP = GNI?

    Profits = Investment – Household Savings + Government Deficit + Trade balance + Dividends

    I am pretty sure Adam Rosen is aware of it. As you can see on a macroeconomic level wages do not factor in the profits of the businesses sector. Why that difference? Because if one business pays lower wages it increases its profits but also reduces the income of other businesses. If all businesses reduce wages they all will have less income. Hence higher wages only affect businesses negatively when the household savings rate increases and/or the trade balance decreases.
    Current high profits of German companies were achieved through a huge trade surplus but that is not going to continue when the rest of the EU has high unemployment. I doubt Germany will do more deficit spending so the two big profit drivers in the future can only be spending of household savings and increasing investment. Neither of the two look very likely either.

  29. Gravatar of ssumner ssumner
    8. September 2013 at 05:37

    Scott, The markets don’t agree, and it’s their opinion that matters.

    Ben, I’m not a fan of Tony Abbott.

    Patrick, Interesting.

    Steve, And let’s do it by cutting taxes on the poor.

    Odie, Greece and Spain need to decide whether they want to leave the euro or cut wages or remain permanently depressed.

    German wages are not the problem of Spain and Greece. Germany has sound labor market policies, all countries should have similar policies. It’s not a zero sum game.

  30. Gravatar of John Papola John Papola
    8. September 2013 at 17:49

    Sigh. The vast dark age of economics thanks to Keynesianism continues where costs are confused to be benefits and means are confused to be ends.

    “Depend on exports for growth” is almost as ridiculous a concept as depending on “consumption led growth”. Exports are a cost for the benefit of imports just as it is a cost for us to export our labor to our employer so that we may get the benefit of a paycheck.

    Growth has one source: productivity. That’s it. Increased productivity through more efficient production and/or increased effective employment is the ONLY thing which grows “the economy”.

    Just as the purpose of work is to finish a job, not create one, the purpose of exports are to pay for imports. That’s why I export my dollars to the grocery store, so that I might import groceries. The exporting isn’t a benefit unto itself.

    And why should we believe that the German people aren’t being sufficiently provided for in terms of consumer goods and services, the point of economic activity? Increased productive employment is surely superior to higher wages for some at the expense of less employment for others, if one’s goal is to have a system where the most people benefit.

    It is just appalling what passes for economic analysis today. The 1700s called. They want their mercantilism back.

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