Replies to Selgin and Smith

1.  George Selgin expressed puzzlement over my recent criticism of Summers:

But even this more sophisticated objection to Kohn and Summers, understood (as I understand it) to imply that those experts have overlooked a potentially effective means for combating recession, seems wrong to me.  True, if prospective buyers expect prices to increase, that’s a reason for them to spend more now.  But if prospective sellers expect consumers to spend more, that is a reason for them to start raising prices now. So while a higher announced inflation target might be self-fulfilling, there’s no reason to suppose that by announcing such a target the Fed can achieve anything other than a higher rate of inflation.

Inflation expectations, in other words, inform the positions and rate of change of both demand and supply schedules–as should be especially obvious to anyone familiar with Wicksteed’s famous exposition in which the latter schedules are nothing other than flipped-over portions of total (“communal”) demand schedules.  Changes in inflation expectations will, in still other words, tend to affect in the same manner the decisions of both buyers and sellers.  Consequently, if sellers’ expectations have been excessively rosy, so that their pricing decisions have resulted in disappointing sales, there’s no reason to suppose that an announced increase in the inflation target won’t cause them to become rosier still, ceteris paribus. Expectations are a double-edged sword that policy tends to sharpen on both sides, or not at all.

I would agree with George if we started from a position of macroeconomic equilibrium, were wages and prices had adjusted to previous changes in AD, or nominal spending.  But suppose we start from a position of disequilibrium, where nominal wages are 5% too high to maintain full employment, at current levels of NGDP.  In that case the SRAS curve will slope upward, and we will be in a position to the left of the LRAS curve.  Now assume the Fed decides to announce a 5% inflation target for the next year.  Because the SRAS curve is upward sloping, it might take a 8% rise in NGDP to achieve that rise in prices.  In other words it would cause RGDP to rise 3% as well.

George might reply that the higher expected inflation will shift the SRAS curve to the left, preventing any rise in RGDP.  That would be true if we started from a position of equilibrium.  But I assumed that wages were 5% too high, and thus workers would not respond to the higher expected NGDP growth and higher expected inflation by demanding higher nominal wages.  That’s why the sticky wage assumption is so key.  I’m assuming they ask for the same nominal wage at a 0% or a 5% expected inflation.

Now that’s an oversimplification, as they’d surely ask for somewhat higher wages at 5% expected inflation.  But if nominal wage stickiness is as important as I believe it is, the difference in the equilibrium wage rate increase would be far less than the difference in the expected NGDP growth rate.  Does anyone believe that expected wage growth for 2008-09 fell as sharply in late 2008 as expected NGDP growth for 2008-09 fell in late 2008?  Of course not.  So at least on the downswing the sticky-wage assumption makes sense, and I think it would make sense in the recovery as well.

That’s not to say the labor market would not recover without monetary stimulus, indeed it has been slowly recovering despite below normal NGDP growth.  But it takes longer.

2.  Noah Smith responded to my previous post with this comment:

But Scott, that’s not what I’m claiming.

What I am NOT claiming: “0.25% is a low number, hence a 0.25% IROR indicates easy monetary policy.”

What I AM claiming: “0.25% is not much different from 0%, so monetary policy is not much tighter than it would be with an IROR of 0% AND a TBill rate of 0%.”

See?

I AGREE with you that the level of the interest rate doesn’t say much about the stance of monetary policy.

I’m afraid that doesn’t help, as changes in interest rates are almost as unreliable.  Nominal rates on short term credit cannot fall (significantly) below zero, at least in our current cash economy.  So if Noah was correct then it would imply that no potential Fed policy would be highly expansionary, as no hypothetical policy is likely to push nominal short term rates much lower.   (Obviously I’m abstracting from Miles Kimball’s negative rate proposal.)

In fact, FDR did what Smith claims is impossible. In 1933 he enacted a highly expansionary Fed policy, turning deflation into 20% inflation at the WPI level, and fast growth in industrial production, all without any significant effect on short term rates.  Conversely interest rates fell sharply during 1930, despite the fact that money got much tighter.  It’s not just the level of rates that’s highly misleading; it’s also the change in rates.

Having said that, I’m not claiming that Fed changes in the fed funds target are never meaningful.  If the Fed cuts or raises the ffr target by much more than markets expected, it tells us something about changes in the Fed’s intentions, and may be an important clue as to where NGDP will move over time.  But rate changes always need to be evaluated in that sort of context.

3.  Saturos asked me for areas where my views have been changed by bloggers.  I’d rather talk about bloggers who have influenced me.  MR is probably my favorite blog, but I’d single out 4 bloggers who often get me to rethink my assumptions; Bryan Caplan, Robin Hanson, Matt Yglesias and Paul Krugman.  In all four cases they often make claims with which I disagree.  After reading their arguments I still often disagree.  But I find that they seriously undermine my confidence in my own position.  That is, I find it hard to refute their arguments, even if the conclusion seems annoying.  Once and a while I am converted.

In some cases (such as the Cowen and the Tabarrok/Yglesias examples mentioned by Noah Smith), I have vague and free-floating intuitions that suddenly solidify into strong coherent arguments.  In others I go from strongly supporting X, to having some doubts.  It’s rarely a 180 degree turn.

I’d add that Yglesias influences me more than Krugman for two reasons.  First, he focuses more on narrow issues that interest me, such as progressive consumption taxes. (Has Krugman ever mentioned those?)  Yglesias does read my blog, and seems to be more a part of the monetary policy conversation as I see it.  Krugman almost never even nods to the monetary offset point.  He has a wider audience.  And second, Yglesias seems to come to positions from a more ideologically neutral perspective than Krugman.  That allows me to dismiss some Krugman arguments as “biased,” even if I really should not be doing so.

I probably shouldn’t have started this list, as I don’t know where to stop.  I like lots of the MM bloggers, but tend to already agree on most points.  Ditto for Ryan Avent.  Other talented bloggers like DeLong I don’t read as often, purely due to lack of time.  I’m always running behind these days.  Even the two teenage econ bloggers (Soltas and Wang), have influenced me on a few points.


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37 Responses to “Replies to Selgin and Smith”

  1. Gravatar of Frank Somatra Frank Somatra
    24. July 2013 at 08:11

    I have seen Krugman talk about consumption taxes, but never progressive consumption taxes [e.g. http://www.gurufocus.com/news/80753/paul-krugman-on-deficits-taxes-inflation-and-recovery%5D

  2. Gravatar of TravisV TravisV
    24. July 2013 at 08:26

    One of the things I’m hoping to figure out: optimal policy toward drugs. Is our patent policy for drugs just fine, as Tabarrok suggests, should drug taxes fund prizes, as Yglesias suggests, or should we just have NHS take care of drug research, as Dean Baker suggests? BTW, here’s Yglesias: http://www.slate.com/blogs/moneybox/2012/07/06/we_have_too_many_patents_not_too_few.html

    Also, I’m hoping to understand the question of taxing land vs. structures better.

  3. Gravatar of TravisV TravisV
    24. July 2013 at 08:34

    Yglesias:

    “The Extremely Effective Leak Campaign Against Larry Summers”
    http://www.slate.com/blogs/moneybox/2013/07/24/extremely_effective_leak_campaign_against_larry_summers.html

    Felix Salmon:

    “Don’t send Summers to the Fed”
    http://blogs.reuters.com/felix-salmon/2013/07/24/dont-send-summers-to-the-fed

    Mike Konczal:

    “Yellen, Summers and Rebuilding After the Fire”
    http://www.nextnewdeal.net/rortybomb/yellen-summers-and-rebuilding-after-fire

  4. Gravatar of W. Peden W. Peden
    24. July 2013 at 09:34

    TravisV,

    I’ve been surprised that we haven’t heard more about the “Larry Summers memo” recently, especially as it’s often used (erroneously) as an example of the evil of the IMF, neoliberalism, welfare economics, or a mix of these three.

  5. Gravatar of OhMy OhMy
    24. July 2013 at 09:56

    “In 1933 he enacted a highly expansionary Fed policy, turning deflation into 20% inflation at the WPI level, and fast growth in industrial production”

    How do you prove it was the Fed’s policy that did it?

    As you can see, the rate of inflation was smoothly increasing throughout 1933. http://research.stlouisfed.org/fredgraph.png?g=kSs The gold devaluation came later, in Jan 1934, just then inflation was arrested. It barely crossed 5% too, not a high number.

  6. Gravatar of TravisV TravisV
    24. July 2013 at 10:00

    Dear Commenters,

    If Larry Summers is nominated chairman of the Fed, what do you predict the market reaction will be? I haven’t given it much thought but I’m inclined to think that it will be negative.

  7. Gravatar of Steve Steve
    24. July 2013 at 10:15

    Ok, my problem with the IOER is that if the Fed matches IOER with the Fed Funds rate in the future, then the opportunity cost of holding excess reserves will *never* be more than the credit spread and duration risk of a new loan.

    Of course, we don’t know if the Fed will match IOER with the FFR. But if we expect that they *might*, even partially, then the hot potato effect is permanently impaired.

  8. Gravatar of John S John S
    24. July 2013 at 10:35

    Prof. Sumner,

    Off-topic, but what do you think about Shiller’s CPI linked “basket” unit of account for long term debt? It seems to have worked well in Chile. Sounds like a good idea to me.

    http://en.wikipedia.org/wiki/Indexed_unit_of_account

    The Case for a Basket: A New Way of Showing the True Value of Money
    http://www.policyexchange.org.uk/images/publications/the%20case%20for%20a%20basket%20-%20may%2009.pdf

  9. Gravatar of George Selgin George Selgin
    24. July 2013 at 10:42

    “George might reply that the higher expected inflation will shift the SRAS curve to the left, preventing any rise in RGDP. That would be true if we started from a position of equilibrium. But I assumed that wages were 5% too high, and thus workers would not respond to the higher expected NGDP growth and higher expected inflation by demanding higher nominal wages. That’s why the sticky wage assumption is so key. I’m assuming they ask for the same nominal wage at a 0% or a 5% expected inflation.”

    The issue here is a subtle one, and it goes back to the question, “Why are wages 5% too high?” If the answer is that they are so because they are based on overly optimistic demand expectations (which surely must be part of the story in a dynamic context in which we still see positive w growth), then we must consider how those expectations, mistaken though they are, can nonetheless be further heightened by the Fed’s announcement of a higher target.

    Consider a very simplified case. Suppose that initially the target inflation (or NGDP growth) rate is 1%, that sellers base their expected inflation (NGDP growth) rate strictly on the announced target, and so expect 1%, and actual inflation is 0%. Evidently we could use some more ACTUAL NGDP growth. But suppose instead that the Fed simply chooses to solve the problem by announcing a higher target of 2%. If what we call “sticky” prices is really a shorthand for “sticky” expectations-formation, why shouldn’t our sellers, who (by assumption) have yet to see any reason to change their way of forming expectations (or else they would already have lowered them) not _raise_ them to 2%, and set prices accordingly, and thus get themselves still further mired in recession?

    Like I said, it’s an extremely simplified example, but I hope it clarifies my understanding nonetheless.

  10. Gravatar of George Selgin George Selgin
    24. July 2013 at 10:58

    Allow me to amend my explanation by observing that, in my account, workers (or other agents who set nominal wages on workers’ behalf) don’t “get” that their wage demands are already “too high,” and so adjust their expectations and behavior in respond to the Fed’s announcement to the same extent as buyers do. Scott, of course, is assuming otherwise. But then he needs to explain why “workers” continue to insist on what they know to be an excessively high w or, more problematic still but also more in accord with the actual record, an excessively rapid nominal hourly wage _growth rate_. This cannot be a simple matter of w being “stuck.” Expectations are surely already in play.

  11. Gravatar of jknarr jknarr
    24. July 2013 at 12:12

    Summers is only a shock if you assume that they want effective monetary policy. They don’t, so Summers is not a shock. They would not be pushing him unless Yellen was off their policy reservation. Summers can be relied on to oversee disasters and get promoted for the trouble.

    I’d suggest that this is another nail in the coffin for the assumption of good faith monetary policy. Summers is very smart — I’d suggest that he knows what he is writing/doing, and is not simply ignorant and unable to change his views — he could be, simply, guided by bad faith policymaking.

    Why is the possibility of bad faith policymaking at the Fed so threatening and over the top as to entirely ignore it in analysis? Bad faith policymaking takes place every day between Congress and lobbyists, the White house and industry, and state capitals and so on. Wherever there is power, there is malign influence.

    So why on earth does the assumption of a good-faith Fed stand? Money policy is tight, policymakers are not stupid, and policy is a choice. Ergo, policymakers are enacting tight money.

    I’d suggest that we look at what they do, and not assume where their interests lie: Summers could be more hatchetman than bumbling technocrat, and this is more worrisome for districts outside the capital.

  12. Gravatar of TravisV TravisV
    24. July 2013 at 12:34

    Great sentence from Paul Krugman:

    http://krugman.blogs.nytimes.com/2013/07/23/the-death-of-high-inflation

    “To stand Milton Friedman on his head, high inflation is never and nowhere a merely monetary phenomenon.”

  13. Gravatar of Martin Martin
    24. July 2013 at 14:36

    Scott & George,

    As I understand it, monetary policy is not necessarily whether AD is high or AD is low, but whether or not AD is what people expect it to be. In other words, I’d expect recessions to be associated with an increase in the dispersion of inflation expectations (disequilibrium) and a recovery with a decrease in the dispersion of inflation expectations (return to equilibrium).

    I therefore think that you are both right, but only differ in how expectations are formed and contracts adjusted when the monetary authority credibly announces where it wants some nominal variable to be for a prolonged period of time.

    This seems to be an empirical question which you can test by looking at the dispersion of inflation expectations, changes in the mean or median expected inflation, and how wages adjust when the dispersion is high and when the dispersion is low, and when we move from a situation of a high dispersion of inflation to a low dispersion of expected inflation.

  14. Gravatar of Jack Cunningham Jack Cunningham
    24. July 2013 at 14:44

    your monetary offset point seems to have no evidence to support it, maybe thats why Krugman doesn’t support it.

  15. Gravatar of Mike Sax Mike Sax
    24. July 2013 at 15:14

    TravisV, I’d guess the market reaction will be very poor if they feel in any way about Summers as Felix Salmon feels about him-or for that matter Scott Sumner.

    There are still some who think that not only does Summers believe Fed policy is ineffective at the zero bound but is a bond-holder loving hard money man like his mentor Bob Rubin.

    No one seems to love Larry Summers for Fed

    http://diaryofarepublicanhater.blogspot.com/2013/07/why-everyone-doesnt-love-larry-for-fed.html

  16. Gravatar of Mike Sax Mike Sax
    24. July 2013 at 15:19

    Basically it’s like Krugman says. Assuming that Summers is qualified for the job-which I atend to agree with him and Yglesias that he is-why chose the candidate with all this baggage, who the Left as well as the Right hates-because they still blame him for deregulation in the 90s-and who also has the ire of the feminists after his talk about possible ‘innate deficiencies’ in the higher maths and sciences?

    Why not choose Yellen who is at least as qualified as Summers-some think she;s much more-and would be the first female Fed Chairman to boot?

    The main reason that Summers is supposed to have a good chance is that Obama likes him personally.

  17. Gravatar of George Selgin George Selgin
    24. July 2013 at 16:22

    I quite agree with Martin both in holding that the issue is about how expectations are formed and in holding that it is a matter that must be settled empirically. My main point was to suggest that one might reasonably doubt that a higher inflation target would not prove effective in spurring recovery even if it does succeed in raising the expected rate of inflation. (I do in fact doubt it, but that’s another matter!)

  18. Gravatar of George Selgin George Selgin
    24. July 2013 at 16:23

    Sorry: please delete the “not” in line 4 above

  19. Gravatar of Geoff Geoff
    24. July 2013 at 16:23

    It is important that we keep in mind relative prices, especially the prices of outputs relative to the prices of inputs.

    Businessmen and investors don’t take into account one gigantic blob of “price levels”, or “inflation”, or “spending.” They instead take into account the difference between input demand and output demand, input prices and output prices, cost and revenues, buying prices and selling prices.

    If there are investors who expect falling (rising) output prices, then they will set lower (higher) input prices now, when they purchase and sell means of production, including labor.

    ———–

    “But suppose we start from a position of disequilibrium, where nominal wages are 5% too high to maintain full employment, at current levels of NGDP.”

    Actually, disequilibrium in wages arises when nominal wage rates are too high (or too low) to maintain full employment, at current levels of nominal demand for labor, which of course is not NGDP. It is not correct to use NGDP as a proxy for wages, since NGDP is spending on output, which is independent of spending on wages. Wages and AD can and do move in opposite directions.

    Just witness wage payments relative to NGDP, and we see that wages have actually been negatively correlated with NGDP.

    I am puzzled why Dr. Sumner keeps assuming in his blog posts that NGDP and wages are interchangeable in terms of modelling. I’ve pointed this out before, and yet there is some mental block that prevents it from being integrated into subsequent analyses.

    “But if nominal wage stickiness is as important as I believe it is, the difference in the equilibrium wage rate increase would be far less than the difference in the expected NGDP growth rate.”

    Even if wages are sticky, it does not follow that maintaining NGDP via inflation will eliminate or reduce unemployment due to such stickiness.

    But more importantly, I see a repeated pattern of ignoring key facts here as well, facts that have been raised many times by myself and others in the past. Namely, the fact that inflation exacerbates wage stickiness, if not causing it in the first place.

    If prices keep rising over time due to the central bank increasing the money supply year in and year out, and people and their children and their children’s children are born into this and live their lives in it, then your average worker who doesn’t quite understand why prices are rising all the time, will come to expect no fall in their wage income, and more often, a gradual rise in wage income.

    If most workers expect a constant rise in income, then should the monetary system of credit go through a boom and bust, then it should not be surprising that workers (and employers) who keep the same wage rate ask and bid prices, in a context of monetary deflation, would of course fail to clear the market, and unemployment results.

    But I never see any MM connect inflation with wage stickiness in a causal fashion. Wage stickiness is always treated as a primal force of its own, unconnected to inflation itself. I find this incredibly naive, if not intellectually permissive, or even worse dishonest.

    It’s like we’re constantly being told that for some reason or another, wages are sticky, and that’s it. And then we’re told that’s why NGDP has to do this or that or else unemployment results.

    Even with the highly inflationary early 1920s, wages were able to decrease quite substantially. This is likely because inflation had not been around for very long, and so workers and employers were more accustomed to setting more variable wage rates, in the downward direction if need be. There was less of a mentality of “My wages have to keep increasing over time or else I will suffer from a reduced standard of living.”

    Imagine a few generations of falling prices due to a free market in money. The whole doctrine of “wage stickiness” would become a relic of history, recognized as a contingency, not a law of the economic universe.

    Why aren’t MMs dealing with this? Why the lazy assumption of stickiness with ZERO analysis of how wages come to be sticky in the first place?

    “Does anyone believe that expected wage growth for 2008-09 fell as sharply in late 2008 as expected NGDP growth for 2008-09 fell in late 2008?”

    Blame the central bank for creating the inflationary psychology that they couldn’t deliver. It’s not just the falling spending. It’s the previously induced rise in spending that was built on a deflationary credit system.

    ————

    I won’t even touch Smith’s posts. He’s more ignorant than a bag of hammers, because his goal is to get pats on the back from his self-created role models who are themselves ignorant.

  20. Gravatar of ssumner ssumner
    24. July 2013 at 16:55

    OhMy, Um no, the devaluation occurred “smoothly” throughout 1933-34, and the weekly WPI showed a strongly correlation with weekly changes in the dollar price of gold. So your observation actually supports my point. And the WPI was the best price index for that period.

    Steve, The hot potato effect isn’t impaired as much as you might think. Peter Ireland has a paper showing that the quantity theory still holds with IOR.

    John, I don’t see much need for it. But I’m not opposed if the market goes that way.

    George, I’m afraid we are stuck at the same point that people often get stuck. It seems like wages are sticky in a way that doesn’t seem to make much sense if you think about it from a micro perspective.

    Consider two hypotheses:

    1. Tight money made NGDP plunge and unemployment soared to 10%. Then the unemployment rate fell gradually as wages slowly adjusted. But they adjusted at a rate that seems implausibly slow.

    2. Tight money made NGDP plunge and unemployment soared to 10%. Then wages adjusted quickly but at roughly the same time bad government policies drove the natural rate of unemployment up to 7.5%, from its usual 5.5%.

    Either theory fits the facts, but both theories seem somewhat implausible for one reason or another. For all sorts of reasons discussed in other posts I favor theory one, even though I can’t really explain why wages adjust so slowly.

    I wish theory two was correct, as I find that theory more appealing on aesthetic grounds.

    jknarr, We’ve been over this a 100 times. I know lots of academic economists who agree with my opponents. They don’t seem motivated by bad faith. I’m not convinced.

    TravisV, Nope, Friedman was right.

    Martin, I don’t follow–why would recessions lead to dispersion of expectations?

    Jack, You obviously have not been following the spectacular failure of Keynesian models to predict the impact of austerity in 2013. Instead of massive jobs losses we have jobs gains at a faster pace than 2012. Krugman simply ignores data that doesn’t fit his model. If we were losing 1000s of jobs he’d be saying austerity did it—as in Europe.

  21. Gravatar of Greg Hill Greg Hill
    24. July 2013 at 17:16

    Scott,

    You write, “But I assumed that wages were 5% too high, and thus workers would not respond to the higher expected NGDP growth and higher expected inflation by demanding higher nominal wages. That’s why the sticky wage assumption is so key. I’m assuming they ask for the same nominal wage at a 0% or a 5% expected inflation.”

    This seems odd to me. Are you saying that workers, looking at their GE models or some such guide, realize that wages are 5% “too high,” and therefore wouldn’t ask for higher wages if prices rose by 5%? Do you also suppose that workers, having accepted a 5% cut in their real wage, would still spend the same fraction of their income? I suspect you don’t hold these views, but I’m really not sure.

  22. Gravatar of George Selgin George Selgin
    24. July 2013 at 18:35

    Scott, I agree with you entirely in observing that we are left without a satisfying theory of why wages have been as sticky as theory 1 requires. But (setting aside the option of resorting to theory 2) our ignorance obliges us, I think, to entertain the possibility that some naive expectations-formation process is at work, which possibility raises the questions I wish to raise about the merits of a higher target rate of inflation.

    I’m pretty sure this is your understanding also, but just wanted to clarify mine. In any even, I believe that research on the nature of wage stickiness/expectations formation, especially in connection with the recent recession, definitely belongs at the forefront of the MM research program. (I hope some MM-inspired grad students listening!)

  23. Gravatar of Benjamin Cole Benjamin Cole
    24. July 2013 at 22:02

    “There’s no reason to suppose that by announcing such a target the Fed can achieve anything other than a higher rate of inflation.”–Selgin.

    Well, there is. Competition, Anyone who has had the misfortune of running, say, a cabinet business, in a real estate depression will learn you cannot raise prices, indeed you cane barely lower our prices fast enough.

    As long as there is a lot of competition for sales—and global trade has helped that along nicely—increases in the money supply will largely translate into increase in output (velocity half constant).

    Only when you start getting to full capacity do businesses find themselves with some pricing power.

    Selgin is a nice guy; I suspect he never ran a business fighting for sales. You can never raise prices in a recession, unless you would like to lose even more sales.

  24. Gravatar of Martin Martin
    25. July 2013 at 00:05

    Scott,

    “Martin, I don’t follow-why would recessions lead to dispersion of expectations?”

    I would argue that they coincide with, if not causal, rather than lead to. I mean what are people to expect from the future of monetary policy and the path of nominal variables, if the monetary authority all of a sudden decides to tighten? They should be more uncertain about what the value of a nominal variable will be in the future. I would be.

    That said. If we are currently in a disequilibrium (due to monetary causes), then this should be visible in the data as people hold wildly diverging expectations about the future (path of monetary policy).

    I looked it up. If you look at table 32 of the Michigan survey (http://www.sca.isr.umich.edu/data-archive/mine.php)and either look at the interquartile range or the variance of inflation expectations over time, then increases in the value of these variables seem to coincide with recessions.

  25. Gravatar of Martin Martin
    25. July 2013 at 00:23

    I decided to graph it.

    http://jmp.sh/v/ycoeq2nFvgTSpb7ERg2m

    1. “growth” on the first ordinate is real gdp growth per quarter from the FRED-database.
    2. “range” on the second ordinate is the interquartile range from the Michigan survey table 32.
    3. The date of the observation is on the abscissa.

  26. Gravatar of George Selgin George Selgin
    25. July 2013 at 03:40

    Benjamin Cole: “You can never raise prices in a recession, unless you would like to lose even more sales.” Much as this conclusion may conform to your own business experience, it doesn’t jibe with the empirical record, according to which the CPI (and several other indexes) have been rising since late 2009.

  27. Gravatar of Ognian Davchev Ognian Davchev
    25. July 2013 at 04:14

    An interesting talk on how we acquire beleifs and how how hard it is to change them once acquiered.

    http://bloggingheads.tv/videos/20056

  28. Gravatar of Joe Joe
    25. July 2013 at 05:04

    Just a back of the envelop type theory:

    Perhaps the relationship between wage/salary/income growth distribution being more heavily concentrated among the top earners over the past decade(s) has something to do with the ‘extra’ wage stickiness seen in the data. When a significantly larger portion of income is going to people who demand much higher wages than the average worker, its going to have consequences on the overall market, especially in an environment of high unemployment/underemployment. If income was more dispersed among the population, to workers with less bargaining power, perhaps wages would be able to adjust faster than they have.

    Any studies out there which try to determine the effects of income distribution and how it affects wage stickiness?

  29. Gravatar of ssumner ssumner
    25. July 2013 at 06:29

    Greg, Wage decisions are made in labor markets, and reflect all sorts of forces. I don’t believe wages follow inflation, I think they follow NGDP. That’s why Chinese wages rise fast despite low inflation, and it’s why US wages rose more slowly than inflation when the CPI shoots up for supply shock reasons.

    If real wages are cut I suppose workers might spend a larger share of their income. What’s the point on that?

    George, Good point.

    Martin, OK, that graph looks pretty strong.

    Joe, I don’t know of any.

  30. Gravatar of jknarr jknarr
    25. July 2013 at 07:10

    Fair enought, but I meant policymakers, not academics.

    Academics study policy, policy is made by policymakers. Yet, academics assume good faith policymaker efforts when it comes to the Fed — and most certainly do not critically question this remarkable and perhaps unfounded assumption.

    I’m just challenging this prior, not the question of academic integrity. Academics who gain fame and fortune and coincidentlally toe a particular school of thought are not that interesting or consequential. Policy is important.

  31. Gravatar of OhMy OhMy
    27. July 2013 at 09:04

    SS,
    “OhMy, Um no, the devaluation occurred “smoothly” throughout 1933-34”

    Do you have a reference for this? I only know of the January 1934 devaluation.

  32. Gravatar of ssumner ssumner
    28. July 2013 at 08:30

    OhMy, The January 1934 devaluation was simply a legal formality, reducing the par value of the dollar and raising the price of gold from $20.67 to $35 an ounce. The actual devaluation began in mid-April 1933 when we left the gold standard, and the dollar started falling in the forex markets. The dollar price of gold rose continually (in stops and starts) over a 9 1/2 month period.

  33. Gravatar of OhMy OhMy
    29. July 2013 at 12:59

    Ok, I see that CPI stopped dropping when the exchange rate started sliding. What is the mechanism? It is not like the exports were a big enough part of the aggregate demand to prop up prices, no? Is it raw materials and energy prices that feed into everything?

  34. Gravatar of OhMy OhMy
    29. July 2013 at 12:59

    SS,
    Ok, I see that CPI stopped dropping when the exchange rate started sliding. What is the mechanism? It is not like the exports were a big enough part of the aggregate demand to prop up prices, no? Is it raw materials and energy prices that feed into everything?

  35. Gravatar of ssumner ssumner
    30. July 2013 at 07:20

    OhMy, I see two mechanisms:

    1. Exports understate things because the law of one price tells use it would push up US tradables prices (say wheat or coal) even if only 5% were traded.
    2. Expectations channel. A devalued dollar pushes up NGDP and inflation expectations, which tends to reduce money hoarding and raise AD right now.

  36. Gravatar of OhMy OhMy
    30. July 2013 at 12:18

    SS,
    Thanks. I don’t get this expectations channel. Why would expected inflation be expansionary? How does inflation decrease money hoarding? It is not like it increases the number of investment opportunities with good real return. So people might respond by saving *more* to replace the lost savings. And firms invest not out of savings but by borrowing and banks are not that happy to let interest rates on their loans go below expected inflation. What are your thoughts?

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    19. February 2017 at 09:50

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