supply-side inflation is something the Fed should ingore because the SRAS is fairly inelastic but eventually will shift as capital projects are completed.
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 [1], 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!
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:
http://www.econedlink.org/lessons/images_lessons/6...
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.
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.
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.")
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.
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.
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.
Our English stupidity is a point of pride for us. P.G. Wodehouse, whose spirit haunts the corridors of Downton, had the fundamental comic insight, when he made the manservant Jeeves well-read, cultivated, and sly, and his master Bertie Wooster genial, candid, and dim. So that, when Bertie occasionally rises to an apt Shakespearean adage—“And thus the native hue of resolution is sicklied o’er with the pale cast of thought”—he will always add the modest disclaimer: “Not mine—Jeeves’s.” The clever servant had been a stock figure in comedy way back in antiquity, but the master had never been so completely the servant’s creation as Bertie Wooster was.
Mr. Carson, the butler at Downton (Jim Carter), has a Jeevesian conservatism and sense of the decorums of country house life. Unfortunately, he is not blessed with the Jeevesian gift of total success at thwarting all comers. His master, the Earl of Grantham (Hugh Bonneville), commits the fundamental error of choosing his former batman from the Boer War, John Bates (Brendan Coyle), as his valet. In doing so, he has allowed his heart to influence his head. Bates has a limp and is therefore—as the rivalrous servants almost unanimously believe—unsuitable for the job.
This business, by the way, of officers giving employment to their batmen, their personal military servants, in later civilian life—this is or was a well-known cover for homosexual attachments. One went into the army and formed a passionate liaison with a man from another class. The war over, one brought the batman home, under pretext of valeting requirements. And while we have as yet (at the end of the second season, with a third already promised) no proof of any impropriety in the relationship between Bates and the earl—no eve-of-battle indiscretion on the veldt, no cuddles on the High Karoo—nonetheless we ought to treat with suspicion the bare story that, in some unspecified way, Bates saved the earl’s life in what was referred to as the African War.
What we learned from the Temin and Wigmore paper is that one way out of a recession at the zero lower bound is by changing expectations. To do that, often what is needed is a very strong change in policy – something economists call a “regime shift”. The most effective way to shake an economy out of a terrible downturn when we’re at the zero lower bound is an aggressive change in policy that makes people wake up, say “this is a new day” and change their expectations. What the Fed has done since early 2009 is much more of an incremental change.
I think that what the Fed needs instead is a regime shift. A number of economists have suggested that the Fed adopt a new framework for monetary policy, like targeting a path for nominal GDP. If the Fed adopted such a nominal GDP target, they would start in some normal year before the crisis and say nominal GDP should have grown at a steady rate since then. Compared with that baseline, nominal GDP is dramatically lower today. Pledging to get back to the pre-crisis path for nominal GDP would commit the Fed to much more aggressive policy – perhaps more quantitative easing and deliberate actions to talk down the dollar. Such a strong change in the policy framework could have a dramatic effect on expectations, and hence on the behavior of consumers and businesses.(via Thoma)
Doug Elmendorf, on the CBOBlog: "Slack demand for goods and services (that is, slack aggregate demand) is the primary reason for the persistently high levels of unemployment and long-term unemployment observed today, in CBO’s judgment."
Playboy (!) interview with KrugmanThis is correct. Strangely the subsequent discussion completely neglects monetary policy as relevant to demand. The Federal Reserve is supposed to conduct monetary policy independently, but that doesn't mean that other arms of government are supposed to pretend it's not there.
The German labor system, with its incentives to move workers to part time rather than lay them off, does appear to have been critical in keeping the country’s unemployment rate from rising more than it did during the credit crisis.
But the decline of unemployment since then has more to do with the fact that Germany — perhaps unintentionally but certainly effectively — has managed to assure that its currency is undervalued, both relative to that of its neighbors and to much of the rest of the world. That has helped the country’s exporters and brought more business to the country.The impact of currencies could be seen earlier this month on successive days when Nissan, the Japanese automaker, and Daimler, the German maker of Mercedes cars, announced profits. Nissan moaned about the yen, which makes it very difficult to make money exporting cars from Japan, while Daimler forecast strong earnings if the euro stays where it is. The euro has lost a third of its value against the yen since the credit crisis began.
...
The O.E.C.D. report is worth reading for its explanation of labor policies that other countries should consider. In good times, many German workers work overtime but are not immediately paid for it. Those hours are credited to their account, and when times get rough they go on part time but are paid full-time wages, with the difference coming out of the account. Another government policy allows companies to reduce hours with the government making up two-thirds of the lost pay.
Those policies no doubt reduce hiring when times are good, but also hold down layoffs when times are bad.
Not all is rosy in the German labor market. Felix Hüfner, an O.E.C.D. senior economist in charge of the German desk, told me that he was worried about the fact that about two-thirds of younger German workers did not have permanent jobs. Instead, they have “fixed-term contracts,” which make it easier for companies to let them go when the contracts end. Germany may, he said, be in danger of becoming a “two-class society,” with most older workers in a protected group and most younger ones outside of it.
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1) never reason from a price change: wage push is demand side inflation. Just because we have "inflation" does mean we have demand-side inflation. In fact, right now its all supply side (gasoline etc) because demand is cranking up. We really should not compare commodities prices to rock-bottom lows on 2009-2010 when demand sank. Gasoline prices are up but we've become a net exporter of refined products (combination of energy efficieny, vehicle-miles, and infrastructure issues).