The WSJ Editorial Board, Paul Krugman and Simon Wren-Lewis

What do these strange bedfellows have in common?  Confusing employment shortfalls with productivity slowdowns. Here’s Ben Bernanke:

It’s generous of the WSJ writers to note, as they do, that “economic forecasting isn’t easy.” They should know, since the Journal has been forecasting a breakout in inflation and a collapse in the dollar at least since 2006, when the FOMC decided not to raise the federal funds rate above 5-1/4 percent.

[Memo to myself:  If I get into a debate with Bernanke, I need to expect to come out bloodied.  He’s been taking notes.]

Bernanke continues:

However, the WSJ editorialists draw some incorrect inferences from the FOMC’s recent over-predictions of growth. Importantly, they fail to note that, while the FOMC (and virtually all private-sector economists) have been too optimistic about growth, they have also been consistently too pessimistic about unemployment, which has fallen more quickly than anticipated. The unemployment rate is a better indicator of cyclical conditions than the economic growth rate, and the relatively rapid decline in unemployment in recent years shows that the critical objective of putting people back to work is being met. Growth in output has been slow, despite solid job creation, because productivity gains have been slow””perhaps as the result of the financial crisis, which hammered new business formation and investment in research and development, perhaps for other reasons. But nobody claims that monetary policy can do much about productivity growth. Where it can be helpful is in supporting the return to full employment, and there the record has been reasonably good. Indeed, it seems clear that the Fed’s aggressive actions are an important reason that job creation in the United States has outstripped that of other industrial countries by a wide margin.

Here’s where Krugman and Wren-Lewis come in.  Britain has done a very good job of creating jobs in recent years, much better than the US.  Unfortunately their RGDP growth rate has been poor, due to abysmal productivity growth (much worse than the US.)  Bernanke and I would say that this reflects supply-side problems.  Now in fairness Bernanke later mentions that infrastructure investments can boost growth in the long run (something I’m more skeptical about, at least if done by government.)  But of course when you look at how long it takes to do projects like Heathrow expansion of HR2 lines to Birmingham, it’s obvious these investments wouldn’t have effected productivity until many years in the future.  Yet somehow Krugman and Wren-Lewis seemed to think an AD shortfall in Britain caused by Conservative “austerity” killed output without killing jobs, sort of an economic reverse neutron bomb.  That doesn’t even make sense in the Keynesian model.  But then neither does the idea that fiscal stimulus can reduce the deficit by dramatically boosting growth.  We’ve now reached the point where Keynesian economics has “jumped the shark.”  Anything is possible, and one need not even be constrained by the (already rather heroic) assumptions of textbook Keynesianism.

OK, I’m letting my right wing tribalism get the better of me.  Rather than bashing two distinguished Keynesian economists, I ought to highlight the far more absurd arguments of the WSJ editorial page.  Here’s Bernanke:

For the second year in a row, the first-quarter Gross Domestic Product figures were disappointing. TheWall Street Journal, in an editorial entitled “The Slow-Growth Fed,” uses the opportunity to argue (again) for tighter monetary policy. The editorialists point out that the Federal Open Market Committee’s projections of economic growth have been too high since the financial crisis, which is true. Therefore (the WSJ concludes), monetary policy is not working and efforts to use it to support the recovery should be discontinued.

So since 2008 the Fed has mostly fallen short on both sides of its dual mandate, and hence the solution to the problem is tighter money—so that . . . . so that what?  So that we fall even further short of the inflation target?  What problem does tighter money solve?  I don’t get it.

And it’s not just on the right.  Today I got a newsletter from the Levy Institute, highlighting a paper suggesting that higher interest rates might boost growth.  OK, I could just barely envision a scenario where that is true. It’s very difficult, but not impossible.  Say the BOJ established a 100% credible forex regime where the yen depreciated 5%/year against the dollar, forever.  The interest parity effect would raise Japanese rates immediately and the yen depreciation would boost AD.  If that doesn’t work do 5%/month.  Yes, it’s possible.  But you read their explanations and they write as if central banks just moves rates around with a magic wand.  As if it doesn’t matter whether the higher rates are caused by easier money or tighter money. People write as if they didn’t notice what happened when Japan, the ECB and the Riksbank tried to exit the zero bound by raising rates.

 


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40 Responses to “The WSJ Editorial Board, Paul Krugman and Simon Wren-Lewis”

  1. Gravatar of Randomize Randomize
    30. April 2015 at 14:21

    Dr. Sumner, it feels like, for an Econ blog, you don’t use nearly enough supply and demand graphs. While (hopefully) most of your readers can follow your arguments, pretty much everyone who’s been to college can follow a good old supply and demand graph. Imagine with me:

    WSJ is read primarily by investors who wants higher returns on their bonds. The Fed influences interest rates by nudging the supply curve so draw out supply curves A and higher curve WSJ with a demand curve kept constant. Presto chango, the new equilibrium is at higher rates (Yay?) but this also results in lower use of capital. Lower consumption = slower economy. Slower economy = bad! All those investors will be thrilled that their bonds are yielding more but unhappy that their stocks tanked and their employers are laying people off.

    Just saying, if there’s anything economists can actually agree on, it’s that the laws of supply and demand are real. Plus, it would really antagonize the WSJ editorial board (among others) to be refuted by 101-level economics.

  2. Gravatar of bill bill
    30. April 2015 at 14:23

    Keep up the good fight!

  3. Gravatar of benjamin cole benjamin cole
    30. April 2015 at 15:19

    in 1992 when inflation was 3 percent and reall GDP growth was 4 percent, Milton Friedman told the Fed to step on it…the accelerator, not the brakes. In a WSJ op-ed.
    When did the fetish for monetary asphyxiation take full bloom?

  4. Gravatar of E. Harding E. Harding
    30. April 2015 at 15:24

    @Randomize
    -Excellent point. So far, I’m the only person I know, amateur or professional, who has ever used an actual AS-AD graph with historical data to demonstrate a point on recent economic history on the Internet.

    BTW, to any ignorant people out there, Randomize is referring to the supply of liquid funds, not Aggregate Supply.

  5. Gravatar of Britonomist Britonomist
    30. April 2015 at 15:44

    ” Yet somehow Krugman and Wren-Lewis seemed to think an AD shortfall in Britain caused by Conservative “austerity” killed output without killing jobs”

    Why is everyone assuming productivity is only supply side caused? A weak economy results in less investment in new innovative and productive industry. The remaining less productive industries now have to constantly higher more people to keep up with even weak rising demand and rising population.

  6. Gravatar of Randomize Randomize
    30. April 2015 at 15:57

    @E. Harding
    Yes, thank you for the clarification.

  7. Gravatar of E. Harding E. Harding
    30. April 2015 at 16:13

    To elaborate on my above point, there seems to be a serious shortage of Econ 101-type graphs on econ blogs, though they can easily be made in Excel, Paint, or FRED:
    http://research.stlouisfed.org/fred2/graph/?g=19Oq
    http://research.stlouisfed.org/fred2/graph/?g=19Or
    The above are AS-AD graphs. But what is the horizontal axis of the graph with the money demand curve (oswego.edu/~edunne/200ch15.html) Randomize is referring to? M1? Adjusted base? Unadjusted base?

  8. Gravatar of E. Harding E. Harding
    30. April 2015 at 16:30

    @Britonomist
    Sure, massive demand shortfalls can negatively affect productivity, as in the Great Depression. But they always negatively affect employment and hours even more.

  9. Gravatar of Morgan Warstler Morgan Warstler
    30. April 2015 at 18:05

    Folks, anyone not seeing productivity gains is not measuring them correctly.

    Period.

    The End.

    Anyone who has even MENTIONED the word robots AND has also said we don’t have enough productivity gains should simply be drummed for the public space.

    ———

    Uber for Welfare is clearly the solution to all of our problems.

    And what does it do?

    It replaces govt with a robot.

    Is the growth just from just from cutting off public sector welfare admin jobs?

    No.

    It is from 30M people fixing Baltimore, Detroit, and every other city where labor should cost a couple bucks an hour, bc we price labor AFTER welfare checks.

    At some point Scott, you ought to do a podcast with Roger Farmer, Miles Kimball and me, bc somehow or another, we have lay the blame for unemployment and disemployment where is really lies:

    Welfare and Minimum Wage are not compliments. You can do one or the other, but not both.

  10. Gravatar of Jonathan Jonathan
    30. April 2015 at 18:09

    ן do not understand. If only unemployment matters, as you think regarding the UK, why you think that low inflation (or low NGDP) justifies easier money. It is the unemployent that counts.

  11. Gravatar of Doug M Doug M
    30. April 2015 at 18:15

    “WSJ is read primarily by investors who wants higher returns on their bonds.”

    Plenty of readers of the WSJ are long bonds and are happy to get price appreciation. Many are big time borrowers and love cheap financing. Traders, who don’t care so much the direction but the volatility. But, most are equity investors, who care more about earnings than all else.

    Regrading supply / demand graphs… hate them myself… they look pretty and provide a convenient generalization, but the miss all of what is actually going on.

    I like to look at time series.

  12. Gravatar of Ben J Ben J
    30. April 2015 at 18:16

    Scott,

    Just letting you know that the trend in low initial claims is still ongoing. The latest initial claims was 262k, which is the second lowest level ever (one week in April 2000 was 259k). Pretty astonishing.

  13. Gravatar of Scott Sumner Scott Sumner
    30. April 2015 at 18:57

    Randomize, Thanks, although supply and demand isn’t always enough for monetary policy, when expectations are important.

    Britonomist, The question is why was the British economy weak after 2010? Austerity had little immediate impact on productivity.

    E. Harding, I seem to recall that productivity did well during the 1930s.

    Morgan, I’m always willing to debate.

    Jonathan, I’m not saying only unemployment matters, I’m saying the slow RGDP growth in the UK was due to productivity.

    Ben, Yes, it’s clear that something fundamental has changed in the labor market. People aren’t losing jobs, just as people aren’t moving to different states. The figure is actually far below 2000, when you account for population growth. It’s an all time low.

  14. Gravatar of Britonomist Britonomist
    30. April 2015 at 19:25

    “Britonomist, The question is why was the British economy weak after 2010? Austerity had little immediate impact on productivity. ”

    What about talk and even hysteria about austerity? Remember you like to talk about monetary policy having long and variable ‘leads’. Why can’t fiscal policy as well? If businesses and investors are widely expecting a massive fiscal consolidation, that would likely drive down their growth and inflation expectations.

  15. Gravatar of Morgan Warstler Morgan Warstler
    30. April 2015 at 19:41

    “Warby Parker is investing in technology to let customers conduct eye exams using just their mobile phones.”

    http://blogs.wsj.com/digits/2015/04/30/eyeglass-retailer-warby-parker-valued-at-1-2-billion/

    No productivity!

    Robots steal our jobs!

    WHY do we let economists continue to play wonk, when it is clear they are unable to deal with digital?

  16. Gravatar of Britonomist Britonomist
    30. April 2015 at 19:54

    Morgan, it’s not that hard to measure aggregate productivity. This, coupled with the fact that low RGDP + high employment is always a telltale sign slowing productivity means you’ve got a major uphill battle here, and single inventions or anecdotes alone might not be enough to overturn the data.

  17. Gravatar of Ray Lopez Ray Lopez
    30. April 2015 at 20:42

    Sumner: “I got a newsletter from the Levy Institute, highlighting a paper suggesting that higher interest rates might boost growth… OK, I could just barely envision a scenario where that is true. It’s very difficult, but not impossible…But you read their explanations and they write as if central banks just moves rates around with a magic wand. As if it doesn’t matter whether the higher rates are caused by easier money or tighter money. ” – there may be hope for Sumner if he now takes the small step of convincing himself that central banks react to the marketplace, not the other way around. Indeed central banks cannot just move rates around with a magic wand.

    I find myself agreeing with what Sumner writes three times in a row now. There’s either something wrong with me, or him…

  18. Gravatar of Ray Lopez Ray Lopez
    30. April 2015 at 21:35

    @Randomize: people have been calling for more graphs from Sumner for quite some time, but one of his ‘charms’ is that he is slow to change.

    Sumner: “One request was for more graphs, which might buttress my argument.” – March 29th, 2009 blog post.

  19. Gravatar of james in london james in london
    30. April 2015 at 23:12

    Britonomist
    Productivity is impossible to measure in a largely service sector economy. Think about it, read how the ONS tries to calculate it. It’s largely nonsense. All you end up measuring is the growth in above average service sector labour compensation levels, ie changes in the mix of labour compensation.

    It is possibly even an outdated and useless concept in such an economy. The only “capital” investment that can raise productivity in a service sector economy is human capital investment, and that is a very personal thing.

    Your point about prospective “massive” fiscal consolidation is just wrong, it’s more likely to make business people invest if they think the deficit is going to come under control rather than just postponing the evil day yet further out.

  20. Gravatar of CMA CMA
    30. April 2015 at 23:43

    “nobody claims that monetary policy can do much about productivity growth”

    If the fed achieves its targets then more investment should occur due to greater growth and stability. Greater investment should affect productivity.

    Productivity should also increase if the fed employs tools which generate less instability and financialization.

  21. Gravatar of Blue Eyes Blue Eyes
    1. May 2015 at 02:38

    Surely measuring productivity in a service economy such as the UK’s is exactly the same as measuring productovity in a manufacturing economy and a tourist economy: take the total aggregate output of the economy and divide by the number of hours worked.

  22. Gravatar of Morgan Warstler Morgan Warstler
    1. May 2015 at 03:28

    Blue Eyes / Britonimist –

    wrong.

    Productivity us measured in real value consumption. Consumption is the pea in the shell game of economics. Nothing else.

    So here are two more facts of the model you must work with:

    1. Since 1994, there is no poor person in US without more Real Value Consumption (leading a better life), we’ll call it RVC, than the richest person pre 1994. Yep. a fact. no person alive today Pre-Internet was better e off than our saddest riotous poor person today Post Internet.

    2. To measure RVC in the digital space, you need to think about what I call Time Scale Inequality. This is the amount of time it takes for a new luxury good to be available to the poor, Imagine that real value consumption of food – as in TASTE of food – improved at Internet speed… we’ll use Moore’s Law. so a $12/lb Ribeye steak falls by half price every 1.5 years until ribeye steaks are free and people eat them in now massively higher quantities. Note: We CONTINUE to count every pound consumed as worth $12.

    The important part of this measure is that it forces us to do thing like say well, 10 years ago, it was still possible for a rich man to spend $5K in International calling charges (actually far more), and today we allow the poor to have this for free – so credit each poor person’s account in $5K annual real consumption value.

    Now you can argue that poor don’t make use of international calling – and that’s not true – but more important is that if you have ANY mental resistance to this becoming a key economic measure – you do not get to call yourself a wonk, nor an economist.

    I do not have a “tough sell” to this crowd. I’m right. And those that admit it, get to count in economics post digital, and those that will not admit it, do not get to count… you are the writer’s of the old testament.

    Ok then, so you see how rich the poor are today, let alone the middle class who are super rich in RVC.

    So let’s throw this hoary nugget out the window:

    “take the total aggregate output of the economy and divide by the number of hours worked.”

    Don’t you feel slimy just reading it, now?

  23. Gravatar of Dilip Dilip
    1. May 2015 at 03:30

    Scott: you are missing a link to Bernanke’s post. You have just quoted him.

  24. Gravatar of Morgan Warstler Morgan Warstler
    1. May 2015 at 03:45

    Andreessen just RT’d this:

    https://growthecon.wordpress.com/2015/04/29/there-is-more-to-life-than-manufacturing/

  25. Gravatar of collin collin
    1. May 2015 at 04:58

    In terms of the US/Britian productivity slowdown, is simply the slowdown of outsourcing work and wage increases of India and China. (Basically a version Michael Mandel arguments.) The really huge increases in productivity was the early Bush years in which the US job was not improving and a lot of the productivity gains were an iPod costing ~$150 and being sold for $400 here?

    Otherwise, I suspect the contradiction of lower productivity growth and better job market in the US & Great Britian is the natural reaction to the huge 2009/2010 layoffs. Back in 2009/2010 the productivity gains were made by cutting back staff to bone and workers doing more with less. Since that point, due to normal attrition and working staff ‘bench or minor league’, there is a sudden shortage of skilled labor. Our office has on shored several entry level positions so they work/train for our business.

  26. Gravatar of ssumner ssumner
    1. May 2015 at 05:22

    Britonomist, Yes, I could see how that could reduce AD, which could reduce jobs, which could reduce output. But not productivity, at least not in the short run.

    Ray, I’ve gone from no graphs to some graphs.

    CMA, Yes, but even the Keynesians agree that this would involve very long lags. The Keynesian model has never been based on a short run productivity channel.

    Thanks Dilip.

  27. Gravatar of Blue Eyes Blue Eyes
    1. May 2015 at 06:22

    Morgan, emotive vocabulary, but you are basically saying that we need to adjust for purchasing power. Ok.

    I read a book recently which argued that we should go back to gold because in ancient Rome a toga cost an ounce of gold, and today a tailored suit costs an ounce of gold.

  28. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. May 2015 at 08:51

    I’d be very surprised if Scott finds himself in a debate with Bernanke. I put up a comment on his latest blogpost, asking about this;

    ‘The unemployment rate is a better indicator of cyclical conditions than the economic growth rate, and the relatively rapid decline in unemployment in recent years shows that the critical objective of putting people back to work is being met.’

    I asked if this is the reason he refuses to say anything about NGDP targeting. Didn’t even make the cut.

  29. Gravatar of Morgan Warstler Morgan Warstler
    1. May 2015 at 08:59

    Nope Blues Eyes.

    This is not purchasing power – PPP is of the atomic world – it’s built of a manufacturing shipping mindset.

    I am speaking of what happens when digital free overwhelms the atomic and everything physical is eventually $1 per lb.

    This is not an end to atomic property, this is most people being satisfied to not compete for it.

    Think of digital as a new alien substitute good thats better than the atomic goods and cannot be priced into the national product forcing atomic economics into a ditch.

    The old testament.

  30. Gravatar of Brian Donohue Brian Donohue
    1. May 2015 at 09:28

    @Britonomist, you wrote:

    “If businesses and investors are widely expecting a massive fiscal consolidation, that would likely drive down their growth and inflation expectations.”

    Was 2013 that long ago? Maybe a bunch of economists could write a letter about this.

  31. Gravatar of Britonomist Britonomist
    1. May 2015 at 12:08

    “Britonomist, Yes, I could see how that could reduce AD, which could reduce jobs, which could reduce output. But not productivity, at least not in the short run.”

    Scott, I’m talking about what businesses were expecting in 2009. If this adversely impacted investment then, I don’t see why it couldn’t have caused a decline in productivity by late 2013 onwards.

  32. Gravatar of James in London James in London
    1. May 2015 at 12:27

    Blue eyes (and Britonomist)
    What is the output of an architect, an accountant, a derivatives trader, a call centre worker, an IT consultant, a management consultant, a doctor, a health and safety inspector, a fund manager, a senior sales assistant, a lobbyist, bus driver, an air traffic controller, a care home worker, or a television producer?

    A few minutes thought will tell you that “Output” is a very tricky concept. All you end up really measuring well is nominal income or nominal expenditure, and then start scratching your head.

  33. Gravatar of E. Harding E. Harding
    1. May 2015 at 13:54

    @ssumner
    -I think the 1930s productivity boom was not during the Great Contraction, but during the recovery phase of the depression.

  34. Gravatar of Britonomist Britonomist
    1. May 2015 at 14:14

    I’m really not sure what you’re getting at James. Why do you think unemployment is doing well while RGDP isn’t, and what explanation is there other than low productivity?

  35. Gravatar of Engineer Engineer
    1. May 2015 at 14:57

    James of London…
    You forgot to mention how to measure the productivity of economists….blog entries/day * number of comments/entry? By any measure.. the productivity of economists has been rising sharply both in the US and “across the pond”

  36. Gravatar of James in London James in London
    1. May 2015 at 21:45

    Britonomist
    It’s easy to bandy about a term like “productivity” but unless you understand the micro-foundations “doing something” about it is not easy. I’ve tried read widely on the issue of service sector productivity, measuring it, and how to improve it, there is not much literature. Most of what there is talks of supply side reforms. What have you read?

  37. Gravatar of ssumner ssumner
    2. May 2015 at 06:20

    Britonomist, Productivity growth stopped long before 2013.

    Also, why didn’t we see this pattern in previous business cycles.

    E. Harding. Yes, but the UK has been in recovery since 2009.

  38. Gravatar of Britonomist Britonomist
    2. May 2015 at 09:49

    “Britonomist
    It’s easy to bandy about a term like “productivity” but unless you understand the micro-foundations “doing something” about it is not easy. I’ve tried read widely on the issue of service sector productivity, measuring it, and how to improve it, there is not much literature. Most of what there is talks of supply side reforms. What have you read?”

    I didn’t say anything about ‘doing something’ about it. I was just objecting to the implication that a decline in productivity is obviously always for supply side reasons.

  39. Gravatar of James in London James in London
    2. May 2015 at 13:53

    Britonomist
    Apologies for my inference. The question remains: what is service sector productivity?

    I guess we agree that labour mobility aids productivity growth.

    One obstacle to labour mobility is low nominal growth. Higher nominal growth aids productivity growth as it allows more flexible labour mobility. Low nominal growth leads to labour market ossification/lower productivity due to sticky downward wages.

    Another obstacle to labour mobility is supply side constraints.

    And a last obstacle, or maybe not an obstacle but a consequence, is a move along a labour supply curve or a shift in the labour supply curve.

  40. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    3. May 2015 at 11:28

    @Britonomist, @Blue Eyes, @Morgan
    A while ago, from John Cochrane’s blog, I found this excelente summary on productivity …
    http://www.hoover.org/sites/default/files/jones-facts040.pdf

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