commenter dwb writes:
"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister
"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."
- Daenerys Targaryen
"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"
- Tyrion Lannister
"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."
- Jorah Mormont
"These bad people are what I'm good at. Out talking them. Out thinking them."
- Tyrion Lannister
"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."
- Michael Barone
"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker
Friday, February 24, 2012
Thursday, February 23, 2012
That all sounds reasonable. But Yglesias has fallen into a trap. Unit labor costs are not “basically wages divided [by] productivity”. That’s not the right definition at all. [See update.] Unit labor costs are nominal wages per unit of output. With a little bit of math , it’s easy to show that
UNIT_LABOR_COSTS = PRICE_LEVEL × LABOR_SHARE_OF_OUTPUT
An increase in unit labor costs can mean one of two things. It can reflect an increase in the price level — inflation — or it can reflect an increase in labor’s share of output. The Federal Reserve is properly in the business of restraining the price level. It has no business whatsoever tilting the scales in the division of income between labor and capital.
Yet throughout the Great Moderation, increases in unit labor costs were the standard alarm bell cited by Fed policy makers as an event that would call for more restrictive policy. And all through the Great Moderation, except for a brief surge during the tech boom, labor’s share of output was in secular decline. (More recently, the Great Recession has been accompanied by a stunning collapse in labor share. Record corporate profits!)
...Update: It is easy to show that unit labor costs are not equal to total wages divided by labor productivity. But Nick Rowe points out in the comments that unit labor costs are equal to the average hourly wage divided by labor productivity. So, depending on how you want to interpret “wages”, I was too quick in tweaking Matt Yglesias for a misstatement. Sorry!
Tuesday, February 21, 2012
During the 90's and the early oughts, we also had a bigtime money-printing in place. Arguably we were expanding our money supply faster during the 90's and the oughts than we were in the '70's. (And here the Austrians have the their one useful insight: banking is a license to print money, and each bank is its own little Federal Reserve.) We did not suffer anomalous increases in unit labor costs (but we did have anomalous increases in the amount of credit!). And just so not coincidentally oil supplies were steadily increasing in volume during the period. When economic growth outran the ability to support steadily increasing growth, pop went the weasel. (emphasis added)Also, on the difference between demand-pull/demand driven and cost-push inflation, commenter Philip Pinkelton writes:
You have to track causality here. Why did the unit labour costs rise? My reading is that unions saw inflation go up that was largely driven by oil price rises. When they saw prices go up they started demanding higher wages and this led to a classic wage-price spiral.This sounds right to me. Inflation went also because of the Fed reserve trying to curry favor with Nixon and Vietnam War spending. There were a lot of variables, but it got locked in because of the power of unions to negotiate wage increases in anticipation (expectation) of further price increases. And so on. So maybe some of it was demand.
The underlying cause was the oil embargo. The response was the wage-bargaining on behalf of the workers. Then, wage-price spiral.
Here's the inflation from the era -- note the oil embargo kicks in in Oct. 1973 and instantly causes oil prices to skyrocket, the inflation then tracks this:
So, this was NOT a case of pure demand-led inflation which might result from a government running too high deficits. This was a political crisis which triggered an institutional crisis.
Monday, February 20, 2012
Unit labor costs are basically wages divided productivity. It's not the price of labor, in other words, but the price of labor output. If productivity is rising faster than wages, then even if wages themselves are rising unit labor costs are falling. Conversely, if wages rise faster than productivity than unit labor costs are going up. Clearly there's nothing wrong with a little increase in unit labor costs here or there. But over the long term, growth in unit labor costs needs to be constrained or else it becomes impossible to employ anyone. And you can see that in the seventies it's not just that gasoline got more expensive, we had an anomalous spate of high unit labor cost growth. That was inflation and it's what led to the regime change that's governed for the past thirty years.
The Need for a Regime Change by Yglesias
I liked that during the 2008 campaign Obama said that productivity had long risen above wages (throughout the Clinton years) and that it was unfair.
Sunday, February 19, 2012
His first and last sojourn in Washington began in 1982, when Martin Feldstein, then chairman of Ronald Reagan's Council of Economic Advisers (CEA), invited Krugman, Lawrence Summers, and a few other whiz kids onto the CEA's staff. The early '80s recession and debt crisis had thrown Reagan's economic policy into disarray, and Feldstein had been brought in to fix things up. Working in government had two contradictory effects on Krugman. On the one hand, it induced in him a deep dislike for those he would later describe as "policy entrepreneurs"--activists and journalists, usually lacking academic credentials, who seemed to exert so much influence over economic decision-making in Washington. Feldstein was a pioneer of the supply side policies then in favor among Reaganites, who believed taxes were the most important determinant of economic growth. But unlike policy entrepreneurs such as Jude Wannisky and The Wall Street Journal's Robert Bartley, Feldstein refused to pretend that Reagan's massive tax cut could pay for itself. When Feldstein insisted on issuing accurate budget projections anticipating government deficits, and even called for a small tax increase to offset them, the administration's supply side purists attacked. (Treasury Secretary Donald Regan even urged reporters to "throw out" the council's annual report.) Like many economists, Krugman cherished his discipline's purity, and the sight of Feldstein being pummeled for not painting a rosier election-year picture was deeply disillusioning. "One thing you learn when you're working in an administration--not to mention at the Fed, where it's even more extreme--is to think three times before you speak and then bite your tongue," says Alan Blinder, the Princeton economist and former vice chairman of the Federal Reserve. "That's not how academics normally behave."...
Very soon, however, Washington disappointed Krugman again. His writing and congressional testimony about income inequality brought him to the attention of Bill Clinton's campaign in 1992, which used some of his findings to attack the Bush administration. When Wannisky and other conservatives argued that skyrocketing income inequality was in fact a myth, Clinton's aides enlisted Krugman to help them fight the ensuing propaganda war. When he published a defense of Clinton's economic plan in the Times that August, it was widely assumed that Krugman would be Clinton's pick, should he win, as chairman of the Council of Economic Advisers.
Clinton did win. But his economic transition team was headed by Robert B. Reich, a Harvard lecturer, journalist, and author who had penned the early '90s other big policy tome, The Work of Nations. Not only had Reich tussled with Krugman over trade policy during the 1980s; he had also gone to Oxford with Clinton. Eventually, Reich became Secretary of Labor in the new administration, while Berkeley economist Laura D'Andrea Tyson was named chair of the CEA. Many other economists were drafted into top administration slots, including Krugman's colleague from the Reagan days, Larry Summers. But Krugman was passed over--largely, say former Clinton officials, because he was deemed too volatile. (After clashing with fellow attendees at Clinton's Little Rock economic summit, for example, he had appeared on "Larry King Live" to declare the meeting "useless.")
Keynes versus Modern Macroeconomics by Robert Waldmann
Mike Kimmel in the comment section:
The Peltzmann EfFect:(sic) the more effective the satefy net is perceived to be, the more risks people will take. Yes, it is micro, but I suspect applied to macro it explains a heck of a lot. It explains why real economic growth rates in this country hit peaks in the 1930s and 1940s, and again in the 1960s, and have been going downhill since.Steve Roth comments on his comment:
Very interesting. I've been pondering the idea that widespread economic security is a public good, with positive externalities in encouraging "good" risk-taking and allocation of investment. (See the latest at interfluidity.) Ironically, this involves using the Peltzmann Effect to argue for positive outcomes, rather directly contrary to Peltzman's examples.Kenyan Socialists would agree with Roth. The strong economic performance of the 50s and 60s was due to the safety net and creation of the middle class via the New Deal and GI Bill, etc. In the 1970s things went sideways as Japan and Germany came online and the inflation of the 70s brought on a Thermidor by the ruling class such as Doug Henwood has discussed. We've been living with the consequences ever since.
Starter Savings Accounts by Steve Randy Waldman
These “starter savings accounts” would be a popular vehicle for ordinary people who want convenience and safety with as little entanglement as possible in casino finance.
But the real benefit would be macroeconomic. “Market monetarists”, MMTers, and old-fashioned Keynesians love to squabble with one another, but they have a great deal in common.
Kenyan Socialists would support this. We're all about the positive externalities! Let's make the dismal science a little less dismal.By whatever combination of monetary and fiscal policy, in a depression, all these groups agree that some manner of expansionary intervention should be pursued to maintain spending and effective demand. But any such policy increases the risk of inflation, and so is opposed by people holding debt or fixed-income securities. The people with the most to lose from inflation are the very wealthy, who hold a disproportionate share of financial claims. But middle-class savers value their small nest eggs just as dearly, and make common cause with multibillionaires to oppose inflation. By providing means for small savers to protect themselves from inflation when intervention is called for, we can stop the very wealthy from using middle-class retirees as human shields, and thereby create political space to adopt expansionary policy.
Ygelsais coined the concept "the crisis we should have had" in the context of all the obsession with deficits and the idea that the U.S. is Greece. (If we were Greece, our problems would be easy to fix. We'd just raise taxes.)
Here's another Friedman column on runaway spending. Nowhere does he mention the Bush tax cuts, the housing bubble and financial crisis. Government spending went up because of the crisis so maybe we should concentrate on preventing asset bubbles and financial crises or at least respond will in the aftermath.
Bonds Backed by Mortgages Regain Allure
Others in the industry are also bullish, pouring money back into mortgage securities. Trading has surged in recent weeks. Prices have risen more than 15 percent in the first two months of 2012, after dropping by as much as 40 percent last year.
“There was a lot of money waiting on the sidelines because yields were starting to look very attractive,” said Jasraj Vaidya, a strategist at Barclays Capital. “Lots of it seems to have come out now.”...
The mortgage bond market is a very different creature than it was before the financial crisis. For one, it is much smaller: very few residential mortgage-backed securities have been issued since the crisis. The market, at $1.3 trillion, is half the size it was at its peak and shrinks by an estimated $10 billion every month.
The NYT had a very good piece from Barry Schwartz, one of my former college professors, asking this question. The context is whether the Bain Capitals of the world should be allowed to downsize without any consideration for workers or the community.
The United States is the only wealthy country that allows companies to dump long-serving workers at will. It might be reasonable to require some amount of severance pay when they fire long-serving workers (e.g. 2 weeks per year of work). This would nor prevent downsizing where there are large efficiency gains, however it may prevent some cases where the gains are marginal.Kenyan Socialism supports this policy proposal as something doable which we can work towards. Policies other wealthy nations employ can be good guideposts. Conservatives prefer not to make international comparisons.