sticky wages and downward nominal wage rigidity

Sticky Wages and the Macro Wars by Krugman

Simon Wren-Lewis, following up on Bryan Caplan, makes the case that downward nominal rigidity of wages is simply a fact, attested to by overwhelming evidence. Furthermore, it’s a fact that we understand fairly well in terms of behavioral economics. So he suggests that the unwillingness of many macroeconomists to incorporate this fact in their models — because it doesn’t have “microfoundations” — says something disturbing about the state of the field.  

He’s right, but I have the sense that many of his readers — and just about all of Caplan’s commenters — don’t understand the significance of this observation for the history of macroeconomics over the past 40 years.  

You see, the question of wage (and price) stickiness, and hence of real effects of changes in nominal demand, was what the great rejection of Keynesianism was all about. And I mean all about. Back in the 70s, there was hardly any discussion of the determinants of nominal demand; what Lucas and his followers were arguing was that Keynesianism must be rejected because it was unable to derive wage stickiness from maximizing behavior.

Lucas initially argued that unexpected nominal shocks still mattered, because people couldn’t initially distinguish them from real shocks, but that this offered no room for useful policy. Later, freshwater economics rejected even that proposition; the business cycle was all about real shocks, with demand playing no role at all.

At no point was this rejection of Keynesianism driven by superior empirical performance; it was all about the principle, about refusing to incorporate anything that wasn’t derived from maximization all the way.

So you can’t say, “Well, OK, maybe people aren’t hyperrational, and wages really are sticky” and then go back to hating on Keynesians. Grant that one point — as you should, because the evidence is overwhelming — and you’ve conceded, whether you know it or not, that much of macroeconomics spent three-plus decades following a blind alley.

I see that some of Caplan’s commenters are willing to accept that nominal demand matters, but draw the line at “nonsense” like the liquidity trap. Well, the zero lower bound is also a fact, and once you start admitting that demand matters, you’ll find yourself inexorably arriving at liquidity-trap analysis. But leave that for another day. The key point here is that to concede the obvious about nominal wages is, like it or not, to concede that Lucas, Prescott, and so on were just a great detour away from useful macroeconomics.

and

Wage Flexibility in Doctrine and Policy (Wonkish)

GOP fail: You're doing it wrong

The Last Days of the GOP: We could be witnessing the death throes of the Republican Party by John Judis

cyber activists

How Anonymous Picks Targets, Launches Attacks, and Takes Powerful Organizations Down by Quinn Norton

A Eulogy for #Occupy by Quinn Norton

debt ceiling clown show

At Risk: Currency Privilege of the Dollar by Floyd Norris

If He Has to, Obama Should Raise the Debt Ceiling Unilaterally by Emily Bazelon and Eric Posner

Nerdfury Hive Mind

AV Club reviews The Walking Dead (aka the GOP)

AV Club review "We Are Everyone" from Elementary

commenter Meander:

"It's so consistent with this characterization of Holmes that you can
completely believe how obsessive it would make him trying to prove to
people on the internet that they are wrong.

He also knew he would get clues and directions from people trying to prove HIM wrong. Which he did twice."

xkcd: Duty Calls: "Someone Is Wrong on the Internet."

Rob Donoghue

"The question at hand was how to find good restaurants, and his answer was to take the city you want to go to and just google up some restaurant names that serve the dish you're after. Then go to chowhound or another foodie site, and rather than asking about restaurants, you put up an enthusiastic post talking about how you just had the best whatever you're looking for at one of these restaurants. 

At that point, what drivingblind likes to call the nerdfury will begin. Posters will show up from nowhere to shower you with disdain, tell you how that place used to be good but has now totally sold out and - most important to your quest - will tell you where you would have gone if you were not some sort of mouth breathing water buffalo."

From 2007.

Silver wrong?

Nate Silver gives a hostage to fortune. Granted, a year is a long time in politics. Going to the mat over defaulting on the debt is a new phenomenon.

The Six Big Takeaways From the Government Shutdown by Nate Silver on October 10, 2013

The Shutdown Probably Won't Kill the GOP in 2014 by Yglesias. Probably wrong like Recovery Winter.

vs. Sam Wang (via DeLong)

Sam Wang: What the Gerrymander giveth with one hand… House 2014, prediction #1:

Provisionally, it looks like the following: In a little over a week, the shutdown has increased the probability of a Democratic House takeover in 2014 from 13% to as high as 50%.

 John Boehner Is Borrowing a Plan From Homer Simpson by Jonathan Chait

Here’s the best rule for determining what John Boehner will do in any situation: If there is a way for him to delay a moment of confrontation or political risk, he will do it. That’s why Boehner’s current plan is to raise the debt ceiling for six weeks while keeping the government shut down.

Business is freaked out and will be furious with him if he triggers a default. So he’s raising the debt ceiling for long enough to get them off his back. And tea-partiers will be furious if he abandons their quest to defund Obamacare by shutting down the government. So he’s leaving that part in place.

Is there a plausible strategic logic to this plan? None that I can see. The putative reason for delaying the debt limit is to open fiscal negotiations with Democrats. But Republicans have been dodging fiscal negotiations with Democrats for most of the year. Why? Because they don’t want to compromise on the budget. They want unilateral concessions.

Obama won’t give Republicans unilateral concessions. Any deal Boehner strikes with Democrats will have to contain some concessions to Democrats, which will further enrage the tea party. So there’s no deal Boehner can cut on the budget that won’t anger the base, which brings us back to the same stalemate — waiting until the next debt-limit hike, when he needs to prevent catastrophe again.

retcon

Retroactive continuity - "or retcon for short,^[1] is the alteration of previously established facts in the continuity of a fictional work.^[2]"

So a “futures market” in Federal tax receipts would not be a bad approximation of a futures market in nominal GDP!

Why Scott Sumner should love the debt ceiling by Steve Randy Waldman

The Daily Show hires actual hostage negotiator to negotiate with GOP strategist.

Yellen, the Fed, bubble fighting

Yellen for the Fed by Jared Bernstein

Welcome to the Humanist Federal Reserve, Led By Janet Yellen By Kevin Roose

Is Raising Interest Rates the Fed's Only Tool for Bursting Bubbles? by Dean Baker

A Federal Reserve clown show by Ryan Avent

You Don't Need a Rigorous Microfoundationeer to Know Which Way the--Well, to Know Much of Anything, Really by DeLong

First Woman Fed Chair

Janet Yellen Will Be The Next Fed Chair by Yglesias

Evans rule

In Which I Reiterate My Conclusion That Non-Explicit Regime-Shift Changes in Monetary Policy Cannot Summon the Inflation Expectations Imp: A Note on Our Post-2009 Failure to Achieve Equitable Growth by DeLong

The Fed has been dealing with Congress's austerity. December 2012, the Evans rule provided the economy with insurance against the Fiscal Cliff and ongoing sequester. In June there was taper-talk in that they thought maybe things had calmed down. In September there was the non-taper in that the debt ceiling crisis was coming down the pipe and the data didn't support a taper.

2014

Bruce Bartlett: This Government Shutdown Will Defeat the GOP in 2014

(via DeLong)

The Midterms: Sam Wang Weighs In by Krugman

"If the election were held today, Democrats would pick up around 30 seats, giving them control of the chamber. I do not expect this to happen. Many things will happen in the coming 12 months, and the current crisis might be a distant memory. But at this point I do expect Democrats to pick up seats next year, an exception to the midterm rule." 

...As he says, November 2014 is a long way away. But it’s at least possible that the Republican brand will get worse, not better, over the course of the year, in which case an upset will indeed be in the cards.  

Republicans could lose their House majority because of the shutdown by Sam Wang

A breach of the debt ceiling and they definitely lose the House.

I believe the Republicans are going to suffer much more than anyone realizes. They're assaulting the constitutional order of the American government. They're causing economic chaos. People are pissed and will be pissed. Polls show 70 percent of respondents disapprove of their handling of the shutdown showdown. Yglesias hedges:

One Piece of Good News About the Debt Ceiling

And so what this means is that if Republicans force us to default on payments that come due on November 1, that doesn't put the U.S. government in the legal position of having defaulted on all its debts. In principle, you could have a minor disaster on the 1st followed by a hasty congressional recognition of the error of its ways and then the problem is addressed on November 2 before the whole world burns.

The thing is this could all end in a second of Boehner would violate the Hastert rule again and allow a vote.

Virginia's Republican candidate for governor looks like he'll lose bigtime on Tues. Nov. 5th.

The Shutdown Prophet by Jonathan Chait 

In our Founders’ defense, it’s hard to design any political system strong enough to withstand a party as ideologically radical and epistemically closed as the contemporary GOP. (Its proximate casus belli—forestalling the onset of universal health insurance—is alien to every other major conservative party in the industrialized world.) The tea-party insurgents turn out to be right that the Obama era has seen a fundamental challenge to the constitutional order of American government. They were wrong about who was waging it.

The debt ceiling needs to go away

One More Reason the Debt Ceiling Needs to Go Away by Jonathan Cohn

Blame the Deficit Scolds by Krugman

Point/Counterpoint

The Republican Party Cannot Stand By And Let Obamacare Destroy This Country vs. Help Me by John Boehner

Age of Niallism: the turn towards deficits and away from Obamacare

Whiskey-Tango-Foxtrot Wall Street Journal Bang-Query-Bang-Query: Is This Some Strange Berkeley Acid Trip I Am on? Weblogging by DeLong

Republicans will probably lose the House.

GOP wins with Ryan discretionary budget austerity, but no changes to entitlements, and the deficit is no longer an issue

But they'll probably pay electorally.

For the GOP, when Democrats are in power, the deficit is an issue. When they are it isn't but they push for tax cuts and deregulation to spur "economic growth."

Boehner Urges G.O.P. Unity in ‘Epic Battle’ by Jonathan Weisman and Ashley Parker

Democrats say they simply cannot trust the speaker to deliver. Mr. Reid said in an interview in his office on Friday that Mr. Boehner came to him at the end of July with a proposition: If Senate Democratic leaders could accept a stopgap spending measure in the fall at levels that reflected across-the-board spending cuts, the speaker would refrain from adding extraneous measures that could precipitate a clash.

Mr. Reid was leery, since that level — $988 billion in discretionary spending for the 2014 fiscal year — would be $70 billion less than the Senate-passed budget. “I didn’t like it. I’ve got a couple of tough women to deal with,” he said, referring to Senators Patty Murray of Washington, the chairwoman of the Budget Committee, and Barbara A. Mikulski of Maryland, chairwoman of the Appropriations Committee.

On Sept. 12, in a meeting of the top four Congressional leaders, Mr. Boehner said he was running into problems with a conservative groundswell demanding that a gutting of the health law accompany any spending measure. Mr. Reid and Senator Mitch McConnell of Kentucky, the Republican leader, suggested a procedural step that would allow the House to vote on a stopgap spending bill with a side provision removing funds from the health care law that the Senate could strip out before sending the spending measure to the president.

Again, the speaker agreed. And again, he could not carry through, Mr. Reid said. “If I told him I would do something, I would do that,” the Senate leader said.

At a White House meeting with the president this week, Mr. Boehner twice brought up quiet talks between Ms. Murray and Representative Paul D. Ryan of Wisconsin, the House Budget Committee chairman, as a way to end the impasse with a broad budget deal. The third time, Mr. Reid laughed out loud.