Month: July 2015

Must-Read: With a more equal distribution of income, there would be a lot more demand for manufactured goods–both consumer and residential investment goods.

And here, as elsewhere, I think that there is confusion between what we used to think of as the short-term aggregate demand problem and the long-term technological change-driven structural adaptation problem:

Miles Kimball: Bruce Greenwald: The Death of Manufacturing: “This is a fascinating discussion by Bruce Greenwald…

…of the difficulties of shifting people from working in sectors like agriculture and manufacturing where employment is declining because productivity is going up faster than demand, the efforts of some countries to export this problem to other countries, and  the effect of these forces on interest rates, and therefore, implicitly, their interaction with the zero lower bound…. It still doesn’t work to have more manufacturing output that people want to buy any more than it makes sense to have more food grown than people can possibly eat. So at the end of the day… either people will start consuming a lot more because of the low interest rates, or more likely there would end up being extra investment in something else. A good possibility is education…. Standard human capital theory suggests that a low enough long-run real interest rate can have a big effect on the amount of education chosen.

Must-Read: At a time when nominal interest rates are at their zero lower bound, and when as a result there is neither a real resource cost nor a future burden in terms of higher tax wedges to put more people to work doing things for the government, the fact that the U.S. has cut 1.8 million government jobs relative to trend since the start of 2008 is, from any technocratic point of view, a total and complete macroeconomic disaster.

Remember: whatever good things you may say about Democratic President Barack Obama, he helped it along.

Mark Thoma: Austerity: The Public-Sector Jobs Gap)

Nothing: I see no reason to edit my: What Do We Learn from the Latest Monthly Employment Report?: DeLong FAQ — Brad’s Buffalo Blog

A question of special interest to me right now because the departmental powers-that-be have decided to ask me to go back onto the 700-person Econ 1 Wheeler teaching line next spring…

Chris Y.: A colleague (middle grade civil servant) has sent this request to Mrs Y:

I was wondering if we could do a mentor session on the underpinning economic philosophies (lenses)–I have always wondered what the main underlying philosophies are and the risks associated with viewing economics through particular lenses like Neo-classical or Neo-Keynesian. I know you are quite good at the economics stuff, what do you think?

And so, like Own Glydwr, LizardBreath summons me from the vasty deep!:

If you had a moment to waste at Unfogged…. I figure that if anyone had useful suggestions, it’d be you. And given that you’re demonstrably reading the comments, I also figured that it wasn’t too much of an imposition to ask.

First, I am not reading all the comments.

In fact, I do not understand how anyone can read all the Unfogged comments and have a life–unless, of course, they are a post-human anthology intelligence.

Robert Heilbroner’s The Worldly Philosophers is, I think, still the best place to start. The next two things I have people read are Partha Dasgupta, Economics: A Very Short Introduction; Robert Allen, Global Economic History: A Very Short Introduction; and Milton and Rose Director Friedman, Free to Choose. Then I make people read Jonathan Schlefer, The Assumptions Economists Make; and Tom Slee, _Nobody Makes You Shop at Wal-Mart.

There will be an exam.

https://readfold.com/read/delong/what-to-read-to-gain-perspective-on-economics-u9jYa6DX

Must- and Should-Reads:

• Ryan Cooper: “Being in power while unemployment skyrockets towards 30 percent is not so great for one’s political prospects. PASOK did not just lose, it has been essentially destroyed–falling from 38 percent of the vote in 2009 to less than 5 percent this year…”
• Must-Read: Monique Morrissey: Are Disability Rates Increasing?
• Must-Read: David Atkins (December 2014): Another Opportunity to Test Who is Right About the Economy
• Martin Wolf: The Difficult Choices Facing the Greeks
• Must-Read: Caroline Freund and Sarah Oliver: Gains from Harmonizing US and EU Auto Regulations under the Transatlantic Trade and Investment Partnership
• Dean Baker and Cherrie Bucknor: Obamacare Is Good for Older Workers Too
• Danny Haim: U.S. Chamber of Commerce Works Globally to Fight Antismoking Measures
• Samantha Cooney and Heidi Moore: Who’s who in the Greek bailout crisis
• Jessica Fulton: A key tool to fight housing inequality remains intact – Washington Center for Equitable Growth
• Karl Whelan: Greece, The Euro and Gunboat Diplomacy
• Joe Gagnon: Can the Grexit Lemon Be Made into Lemonade?
• David Glasner: Gold Standard or Gold-Exchange Standard: What’s the Difference?

Might Like to Be Aware of:

• Amanda Marcotte: The Real Reason Why Conservatives Like Ross Douthat Oppose The Gay Marriage Ruling
• FT Alphaville: We’ve gone Camping…
• Trekonomics

Eric Lonergan: On Twitter: Keynes on inequality: “@delong @t0nyyates @Noahpinion http://t.co/94J9qC4IrY

From John Maynard Keynes The Economic Consequences of the Peace: the combination of high inequality and Victorian Prudence on the part of the upper class is, Keynes believes, highly functional for economic growth:

III. The Psychology of Society: [Before World War I] Europe was so organized socially and economically as to secure the maximum accumulation of capital. While there was some continuous improvement in the daily conditions of life of the mass of the population, Society was so framed us to throw a great part of the increased income into the control of the class least likely to consume it.

The new rich of the 19th century were not brought up to large expenditures, and preferred the power which investments gave them to the pleasures of immediate consumption. In fact, it was precisely the inequality of the distribution of wealth which made possible those vast accumulations of fixed wealth and capital improvements which distinguished that age from all others. Herein lay, in fact, the main justification of the capitalist system. If the rich had spent their new wealth on their roownad enjoyments, the world would long ago have found such a regime intolerable. But like bees they saved and accumulated, not less to the advantage of the whole community because they themselves held narrower ends in prospect.

The immense accumulations of fixed capital which, to the great benefit of mankind, were built up during the half-century before the war, could never have come about in a society where wealth was divided equitably. The railways of the world, which that age built as a monument to posterity, were, not less than the peer maids of Egypt, the work of labor which was not free to consume in immediate enjoyment the full equivalent of its efforts.

Thus this remarkable system depended for its growth on a double bluff or deception.

On the one hand, the laboring classes accepted from ignorance or powerlessness, or were compelled, persuaded, or cajoled by custom, convention, authority, and the well-established order of society into accepting, a situation in which they could call their own very little of the cake that they and nature and the capitalists were cooperating to produce.

and on the other hand the capitalist classes were allowed to call the best part of the cake theirs and were theoretically free to consume it, on the tacit underlying condition that they consumed very little of it in practice. The duty of “saving” became 9/10 of virtue, and the growth of the cake the object of true religion. There grew around the nonconsumption of the cake all those instincts of puritanism which in other ages has withdrawn itself from the world has neglected the arts of production as well as those of enjoyment.

and so the cake increased; but to what end was not clearly contemplated. Individuals be exhorted not so much to abstain as to defer, to cultivate the pleasures of security and anticipation. Saving was for old age or for your children; but this was only in theory–the virtue of the cake was that it was never to be consumed, neither by you, nor by your children after you.

In writing thus I do not necessarily disparage the practices of that generation.

In the unconscious recesses of it’s being, society knew what it was about. The cake was really very small in proportion to of consumption, and no one, if it were shared all around, would be much the better off by the cutting of it. Society was working not for the small pleasures of today but for the future security and improvement of the race–in fact for “progress”. If only the cake were not cut, but was allowed to grow in the geometrical proportion predicted by Malthus of population, but not the less true of compound interest, perhaps a day might come when there would at last be enough to go round, and when posterity could enter into the enjoyment of our labors. In that day overwork, overcrowding, and underfeeding would come to an end, and men, secure of the comforts and necessities of the body, and proceed to the nobler exercises of their faculties. One geometrical ratio might cancel another, and the nineteenth century was able to forget the fertility of the species in a contemplation of the dizzy virtues of compound interest.

There were two pitfalls in this prospect: list, population still outstripping accumulation, our self-denials promote not happiness but numbers; and less the cake be after all consumed, prematurely, in war, the consumer of all such hopes…

Keynes says that they must be “inexperienced persons”.

John Maynard Keynes (1936): The General Theory of Employment, Interest and Money: Chapter 19: Changes in Money-Wages: “The method of increasing the quantity of money…

…in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former…

John Maynard Keynes (1936): The General Theory of Employment, Interest and Money by John Maynard Keynes: “A moderate increase in the quantity of money…

…may exert an inadequate influence over the long-term rate of interest [to restore full employment], whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence…

Over at Grasping Reality: Robert Waldmann**: Comment on “More Musings on “Monetary Economics”: “Also:

it is not the case that curing the excess demand for safe and liquid assets always requires painful ‘liquidation’ and austerity…

is true but doesn’t go very far.

In particular, painful liquidation doesn’t require austerity–overinvestment is costly to those who overinvested whether or not there is countercyclical stimulus: WorldCom and Global Crossing went bankrupt, even though Greenspan made sure the 2001 recession was tiny.

I think the the weight of evidence strongly suggests that structural adjustment and sectoral rebalancing is accelerated not slowed by demand stimulus. I actually think this is proven beyond reasonable doubt. Non-monetary models with either effect can be written.

I note as always, that there can be fluctuations of production, exchange and welfare in models without money including say the original Diamond search model. In general imperfect competition is plenty (and needed anyway for price stickiness).

Also incomplete markets are enough.

It may be that historically those who understood that something could and should be done about depressions focused on money and money demand, but it is not and was not logically necessary to recognise the existence of money to get the point.

Robert is referring to my (5):

(5) Because of sticky prices and sticky nominal contracts, declines in the price level–declines in the prices of currently-produced goods and services relative to money–cannot quickly rebalance the economy at full employment. Sticky prices do not fall fast enough to do so. And non-sticky prices that do fall produce chains of bankruptcies that further boost demand for money–for safe and liquid assets.

And the extremely thoughtful Roger Farmer agrees with Robert:

Read this excellent piece on Schumpeter by @delong http://t.co/7UVRu0tUmR I agree with all of this except for Brad's point 5.

— Roger E. A. Farmer (@farmerrf) July 2, 2015

I would plead for mercy from Robert and Roger, not because they are wrong (they are right), but rather for two other reasons:

1. (5) is at bottom an idea I had when I was 23, an idea that I thought then was both really smart and original (and that I think now is really smart and semi-original). Think in the terms of Modigliani’s (1944) reduction of Keynesian economics to (i) sticky wages and (ii) the observation that sticky wages kept the market from adjusting quickly turn a high-unemployment into a full-employment real money stock. My idea was that if prices were flexible the process of adjusting to get the full employment real money stock with itself disrupt the economy by getting you the wrong real interest rate and the wrong degree of leverage. I am attached to this idea. I have tried, with a very limited degree of success, to communicate it in “Is Increased Price Flexibility Stabilizing” and “Should We Fear Deflation?. I beg for some slack so that I can continue to do so. (Note: this is why I now say “semi-original”)

2. I would hazard a guess that, empirically, most unemployment-generating business cycles over the past two centuries at least have been primarily driven by the two monetary channels–sticky nominal wages and sticky nominal debts–rather than by market power and coordination failures. (Besides, over here in reserve I have Nick Rowe, who will passionately argue that the notion of “coordination failure” is incoherent in a barter market economy with its n(n-1)/2 open markets, and makes sense only in an economy that is, at least tacitly, a monetary market economy).

John Maynard Keynes (1936): The General Theory of Employment, Interest and Money: Chapter 19: Changes in Money-Wages: “The Classical Theory has been accustomed to rest…

…on an assumed fluidity of money-wages; and, when there is rigidity, to lay on this rigidity the blame of maladjustment…. Let us… apply our own method of analysis to answering the problem…. We must base any hopes of favourable results to employment from a reduction in money-wages mainly on an improvement in investment due either to an increased marginal efficiency of capital under (4) or a decreased rate of interest under (5)….

A sudden large reduction of money-wages to a level so low that no one believes in its indefinite continuance would be the event most favourable to a strengthening of effective demand. But this could only be accomplished by administrative decree and is scarcely practical politics under a system of free wage-bargaining. On the other hand, it would be much better that wages should be rigidly fixed and deemed incapable of material changes, than that depressions should be accompanied by a gradual downward tendency of money-wages…. The effect of an expectation that wages are going to sag by, say, 2 per cent. in the coming year will be roughly equivalent to the effect of a rise of 2 per cent. in the amount of interest…. With the actual practices and institutions of the contemporary world it is more expedient to aim at a rigid money-wage policy than at a flexible policy responding by easy stages to changes in the amount of unemployment….

It is, therefore, on the effect of a falling wage- and price-level on the demand for money that those who believe in the self-adjusting quality of the economic system must rest the weight of their argument…. We can… theoretically at least, produce precisely the same effects on the rate of interest by reducing wages, whilst leaving the quantity of money unchanged, that we can produce by increasing the quantity of money whilst leaving the level of wages unchanged…. Just as a moderate increase in the quantity of money may exert an inadequate influence over the long-term rate of interest, whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence; so a moderate reduction in money-wages may prove inadequate, whilst an immoderate reduction might shatter confidence even if it were practicable. There is, therefore, no ground for the belief that a flexible wage policy is capable of maintaining a state of continuous full employment;–any more than for the belief than an open-market monetary policy is capable, unaided, of achieving this result….

While a flexible wage policy and a flexible money policy… [are] alternative means of changing the quantity of money in terms of wage-units, in other respects there is, of course, a world of difference between them….

(i) Except in a socialised community where wage-policy is settled by decree, there is no means of securing uniform wage reductions for every class of labour. The result can only be brought about by a series of gradual, irregular changes, justifiable on no criterion of social justice or economic expediency, and probably completed only after wasteful and disastrous struggles, where those in the weakest bargaining position will suffer relatively to the rest. A change in the quantity of money, on the other hand, is already within the power of most governments by open-market policy or analogous measures…. A method which it is comparatively easy to apply should be deemed preferable to a method which is probably so difficult as to be impracticable….

(ii) Having regard to the large groups of incomes which are comparatively inflexible in terms of money, it can only be an unjust person who would prefer a flexible wage policy to a flexible money policy….

(iii) The method of increasing the quantity of money in terms of wage-units by decreasing the wage-unit increases proportionately the burden of debt; whereas the method of producing the same result by increasing the quantity of money whilst leaving the wage unit unchanged has the opposite effect. Having regard to the excessive burden of many types of debt, it can only be an inexperienced person who would prefer the former.

(iv) If a sagging rate of interest has to be brought about by a sagging wage-level, there is, for the reasons given above, a double drag on the [nominal] marginal efficiency of capital and a double reason for putting off investment and thus postponing recovery…

It follows, therefore, that if labour were to respond to conditions of gradually diminishing employment by offering its services at a gradually diminishing money-wage, this would not, as a rule, have the effect of reducing real wages and might even have the effect of increasing them, through its adverse influence on the volume of output. The chief result of this policy would be to cause a great instability of prices, so violent perhaps as to make business calculations futile in an economic society functioning after the manner of that in which we live. To suppose that a flexible wage policy is a right and proper adjunct of a system which on the whole is one of laissez-faire, is the opposite of the truth. It is only in a highly authoritarian society, where sudden, substantial, all-round changes could be decreed that a flexible wage-policy could function with success. One can imagine it in operation in Italy, Germany or Russia, but not in France, the United States or Great Britain.