With friends like Brad DeLong . . .
Kudos to Brad DeLong for sticking up for a guy he believes in. But I don’t see how the Summers case is helped by quoting this piece from September 28, 2008:
Monetary policy has very little scope to stimulate the economy….
That was days after the Fed decided not to cut rates from 2.0%. Bernanke has his flaws, but one thing he did understand is that the Fed has plenty of scope to stimulate the economy at the zero bound. Summers sounds like a Japanese central banker—from the old days.
HT: SG and 123.
PS. Tyler Cowen links to this post by Ashok Rao. I read the post twice and still don’t understand what the graphs are supposed to show.
While the level of unemployed workers remains uncomfortably high, the rate at which that level is falling is back at its pre-recession low – and there is little precedent for it to fall any further.
This does not mean the recession is over, or that aggregate demand is sufficiently high. It does mean that, were we to use the same logic as Meer and West, sticky wages and a dis-equilibrated labor market cannot sufficiently explain our troubles.
Even if the rate at which unemployment falls doesn’t change, unemployment may well keep falling. It’s already fallen from 10% to 7.4%!! And that means sticky wages can explain our problems.
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6. August 2013 at 03:47
That the rate at which its falling is leveling out is what worries me – historically it doesn’t stay low too long. The pace of recovery we have now is about as quick as it will get;.
This (http://research.stlouisfed.org/fredgraph.png?g=leZ) is perhaps a better graph, since the study refers to job creation, rather than U3. Though the signs are the same.
If the mechanism of min wage unemployment as suggested by the authors is the same as a Keynesian sticky wage mechanism, how do we know all further falls in unemployment have to do with sticky wages?
I’m not saying unemployment won’t fall further just curious about the extent to which wage adjustment is the key drawback.
6. August 2013 at 03:50
Ashok, Everyone knows that recoveries usually start fast and then slow down. What information are you adding here?
And I’m not saying I “know” sticky wages are the problem, I’m responding to your claim that somehow the graph shows it’s not the problem. Why?
6. August 2013 at 03:54
The graphs are just a direct translation of the variables Meer/West explored in the study. As I noted, there’s good reason to believe there are confounding factors, though it would seem to me historically the point at which job creation rose to the pre-recession level, the labor market adjustment was complete.
Is this time different?
6. August 2013 at 03:57
Scott, as you’ve pointed out, the Fed wasn’t even at the ZLB when the macro profession decided to start ignoring textbook macro.
One of the most persuasive arguments of the market monetarists is the overwhelming evidence that the Fed failed to adequately use its conventional monetary policy toolbox during the financial crisis, because of a misplaced focus on historical macro data, rather than market-based forecasts.
6. August 2013 at 03:59
I’m not claiming to add anything new as far as the recovery itself is concerned; only that this paper suggests that if minimum wages act like sticky wages the point at which job creation returns to its pre-recession peak is when stickiness becomes less relevant.
It’s a big “if” – I thought it was interesting: the only evidence I have that it matters is (a) the theoretical similarity between stickiness and minimum wages and (b) that historically this point has represented near-recovery.
This would not change my policy prescription much.
6. August 2013 at 04:05
Ashok, You are confusing levels with rates of change. It does not say we are normally recovered at this point, it says unemployment usually continues to fall at this point.
I still don’t understand what job creation at its pre-recession peak has to do with wage stickiness.
6. August 2013 at 04:11
The labor market has “adjusted” to the “low level” of AD! And that´s been true for a long time!
http://thefaintofheart.wordpress.com/2011/12/03/the-hole-theory-of-employment/
6. August 2013 at 04:21
“I still don’t understand what job creation at its pre-recession peak has to do with wage stickiness.”
I’m not necessarily saying it does: only if sticky wages work in the same way as minimum wages. There seems to be theoretical reason to believe they do, but also good reason (as I noted ) to believe they don’t.
But if they do, the study shows minimum wages decrease job growth to the control. Once job growth is no longer being decreased – a few years later – what evidence is there that stickiness is a big problem?
You’re right that unemployment will continue to fall, but if this is the peak rate at which jobs are created that may be a sign that at least wages have adjusted? I don’t see why these two are contradictory.
This may not be a bad thing as I wrote, since it means job growth is quicker than it was, but it may not accelerate as much as the output gap would suggest.
6. August 2013 at 04:22
Speaking of monetary policy…although this book isn’t directly related to the question of Benjamin Bernanke’s successor, I recently learned of it through an online discussion.
http://www.amazon.com/Monetary-Policy-Implementation-Theory-Present/dp/0199274541/
I looked up the name of “Ulrich Bindseil” on your blog, Professor Sumner, and his name didn’t turn up in your blog. I know you are a very busy man sir, but does Ulrich Bindseil’s book look interesting enough to add to the “To-Read” List of your own and possibly other Market Monetarist “To-Read” Lists?
6. August 2013 at 04:39
[…] Scott Sumner also comments on the piece, but is not persuaded that the graphs in the Rao’s piece support the claim that sticky wages cannot explain our economic problems. He writes: […]
6. August 2013 at 05:43
I think we are getting very confused about the issues here. Ashok, to be blunt, I find your posts extremely confusing and cannot really make sense out of them. In simple, straight-forward sentences, what is the argument here?
Here is my interpretation of the minimum wage study and sticky wages in general. I made a long comment on the econlib blog about the effects of minimum wages and how they may only lead to unemployment with a long lag. I have actually done work with owner-operators of fast food restaurants and I will say that it’s quite unlikely for a small increase in the minimum wage to immediately lead to higher unemployment. The minimum wage increase is unlikely to be so high as to make the owners’ gross margin negative. Therefore, in the short term, their profit is still maximized by employing the same amount of labor.
The study’s findings that minimum wages lead to lower growth moreso than lower levels makes a lot of sense to me. As new restaurants open or the old ones renovate, they will use more capital vs. labor. As capital degrades over time, minimum wages will create higher unemployment as either more automation is needed or the lower gross margins do not provide economic returns on capital.
Again, in the short term, the owners will maximize GM by still employing workers. That lower GM may give owners a lower return than they were expecting, but they still make more money than keeping the machines idle. But new investments adjust for the higher wages, which means they either need more automation or either don’t invest in low-wage sectors at all since higher returns can be found elsewhere.
From a static point of view, sticky wages seem to have the same characteristics as minimum wages. Both involve above-market, non-clearing prices. But how sticky wages get to a non-equilibrium point is very different from minimum wages. Before minimum wages are enacted, the capital is fully utilized with a certain GM going to the owners. Afterwards, the wage increase takes out of the GM without increasing the price (in the short run). Without a price increase, demand stays constant.
In a recession, owners can reduce prices at first but they can’t reduce wages. The overwhelming evidence is that wage reductions at the same job just does not happen. With minimum wages, demand is constant as long as GM remains constant. With sticky wages, demand is the external factor. It first pushes down GM, but then owners have no choice but to let people go and have capital underutilized.
Relating this to growth and levels of employment, small minimum wage increases primarily affect employment growth which eventually feeds into levels. If demand goes down to where sticky wages become an issue, employment goes down even where capital does not need to be replaced, i.e. existing capital goes underutilized. In previous recoveries, we were not at the zero bound and therefore employment levels came back up. In this recovery, growth is at pre-recession levels which just means growth has been anemic. Indeed, the comparison of NGDP growth to the early-80’s recovery would predict exactly the anemic growth we have received. Sticky wages assumes that NGDP growth would start to strongly correlate with employment growth, and we have seen exactly that.
Finally, there is an arithmetic issue of using the graph of unemployment change in percentage. If unemployment goes up by 20% and then down by 20%, then unemployment is lower than where it started. That’s why the graph of the unemployment change understates the recovery from the early-80’s recession.
6. August 2013 at 05:44
“With minimum wages, demand is constant as long as GM remains constant” should say as long as GM goes down.
6. August 2013 at 06:25
Very good comment Matt.
6. August 2013 at 07:01
“The study’s findings that minimum wages lead to lower growth more so than lower levels makes a lot of sense to me. As new restaurants open or the old ones renovate, they will use more capital vs. labor.”
That makes sense to me as well.
If this is a story of “capital versus labor”, and I think it partly is, wouldn’t the existence of very low interest rates give an even bigger nod to capital?
I don’t think there is a very bright future (if there ever was one) for employment in cashier and many other minimum wage functions. Not at the current level of minimum wage and certainly not at a higher level. Those scanners and self-checkout stations, financed at historically low rates, would look even more financially irresistible.
This, and other reasons, also help explain why a greater percentage of younger cohorts are leaving the workforce to attend “college”, even though most of those giving up careers as cashiers, etc. to do so would be much better off learning a skilled trade.
The current recession seems to represent a perfect storm against many types of labor: sticky wages, minimum wages, low rates of financing for automating functions that replace labor ; and, this combined with non-work avenues of escape for those displaced: long unemployment benefits, easily financed “education” (that for many is just a government-financed postponement of reality), low barriers to social security disability, etc, etc.
How much of the above have been inflicted by ill-advised government policy?
6. August 2013 at 07:14
DeLong links to this Summers FT piece from March 2007;
http://www.ft.com/intl/cms/s/2/fda4255c-daf1-11db-ba4d-000b5df10621.html#axzz2aRRWWnZN
‘Some argue that the Federal Reserve should have started tightening monetary policy earlier in the current cycle and avoided what they see as liquidity-driven bubbles. Regardless of the merits of this position, the theory that this constitutes a reason to avoid easing monetary policy, come what may, hardly follows. If, as may prove the case, the dominant economic concern becomes a shortage of demand, it is incumbent on the Fed to provide stimulus so as to maintain conditions for growth and financial stability.’
And DeLong has some friends sticking up for him too;
http://hisstoryisbunk.blogspot.com/2013/08/am-i-my-bradfords-keeper.html
6. August 2013 at 07:19
Then there is Summers in November 2007;
‘Economic policy needs to be governed by the clear and public recognition that restoring the normal functioning of the financial system and containing any damage its breakdown may do the real economy is the central macro-economic and financial challenge facing the US…. Maintaining demand must be the over-arching macro-economic priority.’
6. August 2013 at 07:48
Wish I’d gone long ‘Fault Lines’;
‘India Names Rajan Central Bank Governor as Rupee Plunges’
6. August 2013 at 07:57
If wages went down, wouldn’t that be deflationary? Or to put it another way, given the importance of consumer spending to the economy, aren’t sticky wages actually a good thing in a recession?
6. August 2013 at 07:59
Note this is a partial quote. Maybe somebody with a FT subscription can give us a full quote.
6. August 2013 at 08:43
It will be interesting to see what Rajan’s impact as a central banker will be. He has been quite critical of the FED in the recent past and argued they should have raised rates in 2010 (if I recall correctly). But the problems in India are quite different than the in US, so he might still be a good choice (markets there went up after the announcement, if what I read can be trusted), or at least an improvement. I’m curious to hear what prof Sumner’s opinion on this is, if he has any!
6. August 2013 at 08:49
Yes, this recession is different, it has funemployment! We can’t really expect to keep increasing subsidies for nonwork while increasing the taxes on work and not expect any consequences re the amount of work. A fellow named Krugman once dubbed this phenomenon “Eurosclerosis.”
At the bottom end, part of the paradox of our ridiculously high living standards is that more and more people in the potential labor pool are giving up on work because they can’t add enough value to make the effort worthwhile. We no longer need ditch-diggers, and we hardly need factory workers. Yet we have shortages of highly skilled workers nearly everywhere.
6. August 2013 at 10:42
Ashok Rao,
When employment growth hits gets a little bit above million jobs / year, that is about what is needed for the unemployment rate to hold steady. Employment growth is about equal to popluation growth. At 2 million, employment is fast enough to grind down the unemployment rates, and employment growth rarely gets above 3 million — or stays there for long.
So, here we are at the 2 mm a year — similar to what we saw in the last recovery. It may be reasonable to say, that this is about fast as things are capable of improving. But they are improving.
However, looking to previous recoveryies, it seems we should be able to do a little bit better.
6. August 2013 at 11:08
Rajan takes over the CBI. They lost the chance of getting a market monetarist, instead choosing a finance guy. Bad choice, even if his work is cut-out for him:
http://thefaintofheart.wordpress.com/2013/08/06/rajan-has-his-work-cut-out-for-him/
6. August 2013 at 12:28
TallDave, where are these shortages of highly skilled workers? I’d love to find a field with rapidly rising wages to go into.
6. August 2013 at 13:25
India has monetary problems for sure, but it’s supply side problems are 10x worse. Rajan appears to get that and could help. And many think the Finance Ministry makes monetary policy anyway.
6. August 2013 at 13:35
On Yellen vs Summers I more detect the dead hand of banksterdom. The debate over the successor may not be about monetary policy at all, as the folk on this blogsite think, but about bank regulation. Bernanke has left regulation largely to Governor Tarullo, Yellen would probably leave that division of labour in place. Banksters hate Tarullo and need one their own at the head of the Fed to “tame” Tarullo. All I read about Summers is that he is very bankster-friendly.
6. August 2013 at 13:41
Ashok, As long as something is adjusting, I don’t see why it makes a big deal whether it is adjusting a bit faster or a bit slower than before.
Thanks Blue.
Matt and Vivian, Good points.
Maynard, No, lower wages would tend to boost employment, as the Fed is targeting inflation.
MFFA, I really don’t know much about the situation in India. I’m not impressed by Rajan’s views on monetary economics, although of course that doesn’t necessarily mean he’ll do a bad job. He’s a fine economist.
rbl, Why not Minot?
James, Good point.
6. August 2013 at 13:58
Scott, how would you have answered Kelly Evans’ challenge to Lars?
http://video.cnbc.com/gallery/?video=3000187092&__source=yahoo|headline|quote|video|&par=yahoo
6. August 2013 at 18:33
Matt, in once sentence, “sticky wages may no longer be hindering employment growth”. In some sense, it’s great that we’re back to faster growth levels (I’m not confusing a level and rate of change). In another, there are quite a few Keynesians (like myself) who believe further elevation of AD may substantially accelerate growth (or the converse that halting of AD decelerated growth).
There are many more avenues for growth, and I’m not arguing that everything is structural, only that we increasing price levels further may not help with stickiness.
I also noted four reasons why this analysis may not hold – and your point on capital/labor is a good one.
7. August 2013 at 04:51
Saturos, I’d say you do NGDPLT until you come up with a better rule (say aggregate wages and salaries, and then you switch to the better rule.) Those switches might occur once ever 30 years.
7. August 2013 at 18:08
“Why Obama should not pick Summers for the Fed” By Scott Sumner
http://www.ft.com/intl/cms/s/0/e0488744-fed2-11e2-b9b0-00144feabdc0.html
17. August 2013 at 05:37
“I’d say you do NGDPLT until you come up with a better rule.”
What would make that better rule “a better rule”, and, related, why isn’t that better rule better now?
Was despotism ever better than democracy, until democracy became better than despotism?
Was socialism ever better than capitalism, until capitalism became better than socialism?
If the criteria is about education and knowledge, then the focus should be on educating people about better alternatives, including – GASP! – free market driven alternatives, rather than trying to force history into your own personal story.
If we can get every intellectual to became “dogmatists” as you call them, then we don’t need to pretend history has to go through inevitable stages like a Hegelian or Marxist would believe. (Historicism is also self-contradictory, FYI).
19. February 2017 at 09:25
[…] sounds like a Japanese central banker—from the old days.” http://www.themoneyillusion.com/?p=22790 This is something that Sumner always returns too-lack in the power of […]