pretty hard here
in particular the neutrality assumption NA
" •Why the Pigou Effect does not get you out of a liquidity trap - mainly macro "
NA is yet another of many attempts to smuggle in the class consequences of pareto neutrality
here its infinite horizon
inter temporal government budget balancing
yes as a iron rule of government action
okay in the base line model
where
the balance occurs over the infinite horizon
and is
faced by an infinite lived single rep agent
but
sustained within the fairly short run horizon
of real taxpayers and debt holders
which may possibly mean
within two cycle
this neutrality
this rebalancing looks onerous
and lopsidedly stacked against
adequate counter cyclical state fiscal action
an excessive build up of nominal state obligations
--even or should I say in particular fully monetized--
to fund recovery rate enhancing state to citizen pay outs
to meet the pledged neutrality
leads to a full off set
thru an expected inflation tax
answer
Pareto constraints are bunk
ie requiring that
everyone after implementing a policy program
ends up at least as well off as without said program
is a formula that favors the have class the exploiter class the corporate class in our set up
over the job class
class struggle is non Pareto optimal at all times
in other words
social reality in a class cloven society
is inherently non Pareto optimal
the neutral state favors the private exploiters
Thursday, August 15, 2013 at 07:51 AM
paine said in reply to paine ...
mealy macro here
using the classic narrow definition
of the pigou effect
is btw
not generalizing his thesis
to cover the various QE channels
beloved of our ski mobiler
using the classic narrow definition
of the pigou effect
is btw
not generalizing his thesis
to cover the various QE channels
beloved of our ski mobiler
paine said in reply to paine ...
once again
as when on one the duke of toon town
old nick rowe's
microscopic stick figure
geek-o-nomical diversions
think of legal tender money as just
uncle sam issued
zero coupon consoles
as when on one the duke of toon town
old nick rowe's
microscopic stick figure
geek-o-nomical diversions
think of legal tender money as just
uncle sam issued
zero coupon consoles
paine said in reply to paine ...
the console has no obligatory redemption
removing the formal basis for
inter temporal budget neutrality
----------------------------------------------------------
removing the formal basis for
inter temporal budget neutrality
----------------------------------------------------------
bakho said...
The inflation everyone worries about is the wage-price spiral. This is kept in check by policy to suppress wages. IOW, the Fed creates a mild recession to put people out of work and take out upward pressure on wages.
In an economy with 7 percent unemployment and a global supply of cheap labor, there is No domestic wage inflation. No monetary policy will create domestic wage inflation. Domestic wage inflation can only arise if labor has strong bargaining positions. This demands that the economy be at full employment. Then the wages of domestic labor can be bid up, but not until then.
Wages will inflate only if Congress raises min wage or if labor is in a strong enough position to bargain upward the wages of the employed. When is the last time labor showed an ability to bargain up wages for large numbers of American workers? We have had "temporary wage inflation" with some of the tax cuts for workers and transfer payments. However, those are gone.
The Friedman focus on monetary policy left out the very important mechanisms that set and inflate wages.
In an economy with 7 percent unemployment and a global supply of cheap labor, there is No domestic wage inflation. No monetary policy will create domestic wage inflation. Domestic wage inflation can only arise if labor has strong bargaining positions. This demands that the economy be at full employment. Then the wages of domestic labor can be bid up, but not until then.
Wages will inflate only if Congress raises min wage or if labor is in a strong enough position to bargain upward the wages of the employed. When is the last time labor showed an ability to bargain up wages for large numbers of American workers? We have had "temporary wage inflation" with some of the tax cuts for workers and transfer payments. However, those are gone.
The Friedman focus on monetary policy left out the very important mechanisms that set and inflate wages.
samuel said in reply to bakho...
Bakho
I agree. Do all these economists need to lose their jobs and then have to go out and find new jobs at current wages to figure this out?
I agree. Do all these economists need to lose their jobs and then have to go out and find new jobs at current wages to figure this out?
Mark A. Sadowski said in reply to bakho...
"In an economy with 7 percent unemployment and a global supply of cheap labor, there is No domestic wage inflation. No monetary policy will create domestic wage inflation. Domestic wage inflation can only arise if labor has strong bargaining positions. This demands that the economy be at full employment. Then the wages of domestic labor can be bid up, but not until then.
Wages will inflate only if Congress raises min wage or if labor is in a strong enough position to bargain upward the wages of the employed. When is the last time labor showed an ability to bargain up wages for large numbers of American workers? We have had "temporary wage inflation" with some of the tax cuts for workers and transfer payments."
First of all the labor share of income has been falling everywhere (advanced, emerging and developing) for over 20 years so globalization is unlikely to be the problem.
When did we last have tight labor markets and wage inflation generated by those markets? In 1997-2001.
Here's the unemployment rate versus the natural rate of unemployment from 1993-2005:
http://research.stlouisfed.org/fred2/graph/?graph_id=133007&category_id=0
This caused real hourly and weekly earnings to increase significantly:
http://research.stlouisfed.org/fred2/graph/?graph_id=133008&category_id=0
(Note that there was a shift upward because of the recession but that is normal and is more due to the layoff of low earning employees and not an improvement in real earnings.)
The labor share of factor income surged and this was followed by an increase in core inflation:
http://research.stlouisfed.org/fred2/graph/?graph_id=133009&category_id=0
Did minimum wages or unions play a role?
Minimum wages were increased from $4.25 an hour in 1996 to $5.15 an hour in 1998. As a percent of average hourly earnings they increased from 36.5% in 1996 to 39.6% in 1998 but they fell back down to 35.4% by 2001, so that is unlikely.
http://www.dol.gov/whd/minwage/chart.htm
The unionization rate of wage and salary workers was 14.0% in 1996 and fell to 12.9% in 2001 (Appendix A, table A1):
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1176&context=key_workplace
So it would seem to have been the tighter labor markets and not labor market institutions that brought this about.
Did fiscal policy contribute?
The cyclically adjusted budget balance increased from (-0.8%) of potential GDP in FY 1996 to 1.2% in FY 2000:
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43977_AutomaticStablilizers3-2013.pdf
This was later cut to 0.6% in FY 2001 largely because of the first phase of Bush's tax cuts. But this was too small and too late to explain the increase in aggregate demand that occured in the late 1990s.
So the 1997-2001 wage boom was largely caused by expansionary monetary policy.
Wages will inflate only if Congress raises min wage or if labor is in a strong enough position to bargain upward the wages of the employed. When is the last time labor showed an ability to bargain up wages for large numbers of American workers? We have had "temporary wage inflation" with some of the tax cuts for workers and transfer payments."
First of all the labor share of income has been falling everywhere (advanced, emerging and developing) for over 20 years so globalization is unlikely to be the problem.
When did we last have tight labor markets and wage inflation generated by those markets? In 1997-2001.
Here's the unemployment rate versus the natural rate of unemployment from 1993-2005:
http://research.stlouisfed.org/fred2/graph/?graph_id=133007&category_id=0
This caused real hourly and weekly earnings to increase significantly:
http://research.stlouisfed.org/fred2/graph/?graph_id=133008&category_id=0
(Note that there was a shift upward because of the recession but that is normal and is more due to the layoff of low earning employees and not an improvement in real earnings.)
The labor share of factor income surged and this was followed by an increase in core inflation:
http://research.stlouisfed.org/fred2/graph/?graph_id=133009&category_id=0
Did minimum wages or unions play a role?
Minimum wages were increased from $4.25 an hour in 1996 to $5.15 an hour in 1998. As a percent of average hourly earnings they increased from 36.5% in 1996 to 39.6% in 1998 but they fell back down to 35.4% by 2001, so that is unlikely.
http://www.dol.gov/whd/minwage/chart.htm
The unionization rate of wage and salary workers was 14.0% in 1996 and fell to 12.9% in 2001 (Appendix A, table A1):
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1176&context=key_workplace
So it would seem to have been the tighter labor markets and not labor market institutions that brought this about.
Did fiscal policy contribute?
The cyclically adjusted budget balance increased from (-0.8%) of potential GDP in FY 1996 to 1.2% in FY 2000:
http://www.cbo.gov/sites/default/files/cbofiles/attachments/43977_AutomaticStablilizers3-2013.pdf
This was later cut to 0.6% in FY 2001 largely because of the first phase of Bush's tax cuts. But this was too small and too late to explain the increase in aggregate demand that occured in the late 1990s.
So the 1997-2001 wage boom was largely caused by expansionary monetary policy.
Tom Shillock said in reply to Mark A. Sadowski...
"First of all the labor share of income has been falling everywhere (advanced, emerging and developing) for over 20 years so globalization is unlikely to be the problem."
That is when the USSR imploded and workers in Asia began to enter the global workforce in a major way. See the work of Richard Freeman, labor economist at Harvard.
That is when the USSR imploded and workers in Asia began to enter the global workforce in a major way. See the work of Richard Freeman, labor economist at Harvard.
Paine said in reply to Tom Shillock...
Mark ski
Has no truck with global effects only a set of national snap shots
If these various time tagged snap shots
look synchronized in some dimension or other
Like falling wage share that must be about synchronized
National monetary policies
No way could
Growing cross border profit arbitrage
In a world economy segmented into localized price markets and wage pools
increase the share of each nations corporate earnings
in total national income
It's not globalization
look else where friend
Look to the nominal dynamics and the yield curve
Has no truck with global effects only a set of national snap shots
If these various time tagged snap shots
look synchronized in some dimension or other
Like falling wage share that must be about synchronized
National monetary policies
No way could
Growing cross border profit arbitrage
In a world economy segmented into localized price markets and wage pools
increase the share of each nations corporate earnings
in total national income
It's not globalization
look else where friend
Look to the nominal dynamics and the yield curve
Mark A. Sadowski said in reply to Tom Shillock...
I think you may miss my point.
Freeman's hypothesis is that an enlargement of the "global" workforce may explain why the labor share of income in OECD nations is falling. But this does not explain why the labor share of income is falling in the BRIC countries and other emerging and developing economies as well.
Furthermore the downward trend in labor share of income in the advanced world dates all the way back to the 1970s. The downward trend in the emerging and developing economies may date back further than 20 years but we do not have very good data.
Moreover econometric evidence does not support the hypothesis that globalization is responsible for declining labor share:
Effects of Globalization on Labor’s Share in National Income
Anastasia Guscina
December 2006
Abstract:
"The past two decades have seen a decline in labor’s share of national income in several industrial countries. This paper analyzes the role of three factors in explaining movements in labor’s share––factor-biased technological progress, openness to trade, and changes in employment protection––using a panel of 18 industrial countries over 1960–2000. Since most studies suggest that globalization and rapid technological progress (associated with accelerated information technology development) began in the mid-1980s, the sample is split in 1985 into preglobalization/pre-IT revolution and postglobalization/post-IT revolution eras. The results suggest that the decline in labor’s share during the past few decades in the OECD member countries may have been largely an equilibrium, rather than a cyclical, phenomenon, as the distribution of national income between labor and capital adjusted to capital-augmenting technological progress and a more globalized world economy."
http://www.imf.org/external/pubs/ft/wp/2006/wp06294.pdf
The results on page 20 (Table A2.1) are relevant. Trade openness has a significant positive effect on the level (but not rate of change) of labor share of income pre-1985 and a significant negative effect on the level of labor share of income post-1985. More importantly is the effect of trade with developing countries, which is significantly positive in levels pre-1985 and positive although insignificant post-1985.
Freeman's hypothesis is that an enlargement of the "global" workforce may explain why the labor share of income in OECD nations is falling. But this does not explain why the labor share of income is falling in the BRIC countries and other emerging and developing economies as well.
Furthermore the downward trend in labor share of income in the advanced world dates all the way back to the 1970s. The downward trend in the emerging and developing economies may date back further than 20 years but we do not have very good data.
Moreover econometric evidence does not support the hypothesis that globalization is responsible for declining labor share:
Effects of Globalization on Labor’s Share in National Income
Anastasia Guscina
December 2006
Abstract:
"The past two decades have seen a decline in labor’s share of national income in several industrial countries. This paper analyzes the role of three factors in explaining movements in labor’s share––factor-biased technological progress, openness to trade, and changes in employment protection––using a panel of 18 industrial countries over 1960–2000. Since most studies suggest that globalization and rapid technological progress (associated with accelerated information technology development) began in the mid-1980s, the sample is split in 1985 into preglobalization/pre-IT revolution and postglobalization/post-IT revolution eras. The results suggest that the decline in labor’s share during the past few decades in the OECD member countries may have been largely an equilibrium, rather than a cyclical, phenomenon, as the distribution of national income between labor and capital adjusted to capital-augmenting technological progress and a more globalized world economy."
http://www.imf.org/external/pubs/ft/wp/2006/wp06294.pdf
The results on page 20 (Table A2.1) are relevant. Trade openness has a significant positive effect on the level (but not rate of change) of labor share of income pre-1985 and a significant negative effect on the level of labor share of income post-1985. More importantly is the effect of trade with developing countries, which is significantly positive in levels pre-1985 and positive although insignificant post-1985.
bakho said in reply to Mark A. Sadowski...
You confuse correlation with cause and effect.
Tight labor domestic labor markets and highest in a long time employment rates indicated a tight domestic labor market. The tight market caused employers to bid up wages. Money supply was much more expansionary post 9/11 and post fiscal crisis without causing wages to boom. So expansionary monetary policy, by itself is not sufficient to cause wages to increase.
Tight labor domestic labor markets and highest in a long time employment rates indicated a tight domestic labor market. The tight market caused employers to bid up wages. Money supply was much more expansionary post 9/11 and post fiscal crisis without causing wages to boom. So expansionary monetary policy, by itself is not sufficient to cause wages to increase.
Paine said in reply to bakho...
For mark correlation is cause
That is once you sort true an incomplete distorted list of alternatives
Till only your nominated driver remains
Yes it's shooting fish in a barrel
Choose carefully five possible causes
asset they exhaust the possible suspects
One by one eliminate 4 for lack of correlation or whatever else looks black and white
Possible impact Size ...mechanism plausibility whatever
Now presto
The fifth must be
The cause
That is once you sort true an incomplete distorted list of alternatives
Till only your nominated driver remains
Yes it's shooting fish in a barrel
Choose carefully five possible causes
asset they exhaust the possible suspects
One by one eliminate 4 for lack of correlation or whatever else looks black and white
Possible impact Size ...mechanism plausibility whatever
Now presto
The fifth must be
The cause
Mark A. Sadowski said in reply to bakho...
"Tight labor domestic labor markets and highest in a long time employment rates indicated a tight domestic labor market. The tight market caused employers to bid up wages."
That's my whole point. But what causes tight labor markets? Sufficient aggregate demand, which by definition is simply nominal GDP (NGDP).
"Money supply was much more expansionary post 9/11 and post fiscal crisis without causing wages to boom. So expansionary monetary policy, by itself is not sufficient to cause wages to increase."
There are two ways policymakers can increase NGDP: fiscal and monetary policy. Fiscal policy became very expansionary in FY 2001-2004 thanks to the Bush tax cuts with the cyclically adjusted budget balance falling from 1.2% of potential GDP in 2000 to (-3.2%) of potential GDP in 2004 (see CBO link above).
The velocity of money is unstable so judging monetary policy stance by it is questionable. However if we look at the year on year changes of MZM you will note a big increase in the rate of change in MZM from April 1995 to February 1999 which corresponds to the late 1990s wage boom:
http://research.stlouisfed.org/fred2/graph/?graph_id=133033&category_id=0
There was another surge during 2001 but that coincided with a decline in velocity when the Fed was trying to counteract the recession. Note also that the rate of change in MZM fell steadily from early 2002 through late 2004 during the "jobloss" recovery.
More important is how NGDP behaved during this time period:
http://thefaintofheart.files.wordpress.com/2013/08/doomsayers_2.png
Note that NGDP was above trend in the late 1990s and below trend in the early 2000s. Put it alltogether and what you have is loose monetary policy coupled with tight fiscal policy in the late 1990s during the wage boom and tight monetary policy coupled with loose fiscal policy during the jobloss recovery.
That's my whole point. But what causes tight labor markets? Sufficient aggregate demand, which by definition is simply nominal GDP (NGDP).
"Money supply was much more expansionary post 9/11 and post fiscal crisis without causing wages to boom. So expansionary monetary policy, by itself is not sufficient to cause wages to increase."
There are two ways policymakers can increase NGDP: fiscal and monetary policy. Fiscal policy became very expansionary in FY 2001-2004 thanks to the Bush tax cuts with the cyclically adjusted budget balance falling from 1.2% of potential GDP in 2000 to (-3.2%) of potential GDP in 2004 (see CBO link above).
The velocity of money is unstable so judging monetary policy stance by it is questionable. However if we look at the year on year changes of MZM you will note a big increase in the rate of change in MZM from April 1995 to February 1999 which corresponds to the late 1990s wage boom:
http://research.stlouisfed.org/fred2/graph/?graph_id=133033&category_id=0
There was another surge during 2001 but that coincided with a decline in velocity when the Fed was trying to counteract the recession. Note also that the rate of change in MZM fell steadily from early 2002 through late 2004 during the "jobloss" recovery.
More important is how NGDP behaved during this time period:
http://thefaintofheart.files.wordpress.com/2013/08/doomsayers_2.png
Note that NGDP was above trend in the late 1990s and below trend in the early 2000s. Put it alltogether and what you have is loose monetary policy coupled with tight fiscal policy in the late 1990s during the wage boom and tight monetary policy coupled with loose fiscal policy during the jobloss recovery.
Rune Lagman said in reply to Mark A. Sadowski...
"Sufficient aggregate demand, which by definition is simply nominal GDP (NGDP)."
NGDP-targeting, in this context, is monetarist-speak for, across-the-board, higher wages. Higher inflation expectations are supposed to induce workers to demand wages that keep up with inflation.
It might work in Europe, where unions are ever-present and relatively strong. Here, in the US, the average, non-union, American lack the market power to keep up with the higher inflation expectations. Current US policy is to prevent inflation by depressing wages.
You and Bakho are, more or less, saying the same thing: "higher wages is the solution".
Bakho just don't believe that higher inflation expectations (NGDP-targeting) will get us there.
I concur with Bakho. I believe, that fiscal policy is the only thing that will goose US labor market, sufficiently, to cause higher wages.
NGDP-targeting, in this context, is monetarist-speak for, across-the-board, higher wages. Higher inflation expectations are supposed to induce workers to demand wages that keep up with inflation.
It might work in Europe, where unions are ever-present and relatively strong. Here, in the US, the average, non-union, American lack the market power to keep up with the higher inflation expectations. Current US policy is to prevent inflation by depressing wages.
You and Bakho are, more or less, saying the same thing: "higher wages is the solution".
Bakho just don't believe that higher inflation expectations (NGDP-targeting) will get us there.
I concur with Bakho. I believe, that fiscal policy is the only thing that will goose US labor market, sufficiently, to cause higher wages.
Mark A. Sadowski said in reply to Rune Lagman...
NGDP targeting will stabilize the level of NGDP which in turn will stabilize the (growing) level of real wages. It only promises to eliminate aggregate demand deficiencies, not necessarily to permanently increase labor share.
The biggest problem with the theory that the decline of unions are responsible for the decline in the labor share of national income is that the decline in labor share of national income was essentially universal throughout the advanced world, and yet union coverage rates have not declined everywhere. See Figure 10 on page 14:
http://www.cepr.net/documents/publications/unions-oecd-2011-11.pdf
Note that union coverage rates increased from 1980 to 2007 in Finland, France, Norway, Spain and Sweden and if you look at the table I posted below the labor share of income declined by 10.8 to 18.3 points in those countries. In fact I've regressed the change in labor income share for these same 18 OECD members against the change in union coverage rates, and the R-squared value is 0.0038 meaning that only 0.38% of the change in labor share of national income can be explained by the change in union coverage rates.
This is not to say that union coverage rates aren't an important factor in explaining changes in the *distribution of labor income*. It's just that they don't match up the data on changes in *labor share of ntional income* very well.
For example the peak year for unionization in the US was 1954 when 33.8% of all wage and salary workers were in a union (see Table A-1):
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1176&context=key_workplace
At that time the labor share of National Income was only 61.8%. By the time labor share of National Income peaked at 67.7% in 1980 union membership had already declined to 22.3%. By 2003 union membership had dropped to 12.4% and yet the labor share of National Income in 2011 was 62.1%, or higher than when union membership was at its peak.
I am as skeptical of fiscal stimulus as you are of monetary policy. Fiscal stimulus only works through changes in the cyclically adjusted budget balance. Thus it's theoretically impossible to maintain positive fiscal stimulus forever. If anyone has any doubts about the practical effectiveness of fiscal stimulus you have only to look at Japan where with the exception of 1997, 2001, and 2004-07 they have had expansionary fiscal policy for over two decades:
http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_4.png
http://thefaintofheart.files.wordpress.com/2013/06/sadowski3_10.png
And yet nominal GDP is lower now than it was in 1994.
That's why the Japanese now have Abenomics, which despite all the misperceptions in the West, is really about combining monetary stimulus with fiscal austerity (the doubling of the consumption tax from 5% to 10%).
The biggest problem with the theory that the decline of unions are responsible for the decline in the labor share of national income is that the decline in labor share of national income was essentially universal throughout the advanced world, and yet union coverage rates have not declined everywhere. See Figure 10 on page 14:
http://www.cepr.net/documents/publications/unions-oecd-2011-11.pdf
Note that union coverage rates increased from 1980 to 2007 in Finland, France, Norway, Spain and Sweden and if you look at the table I posted below the labor share of income declined by 10.8 to 18.3 points in those countries. In fact I've regressed the change in labor income share for these same 18 OECD members against the change in union coverage rates, and the R-squared value is 0.0038 meaning that only 0.38% of the change in labor share of national income can be explained by the change in union coverage rates.
This is not to say that union coverage rates aren't an important factor in explaining changes in the *distribution of labor income*. It's just that they don't match up the data on changes in *labor share of ntional income* very well.
For example the peak year for unionization in the US was 1954 when 33.8% of all wage and salary workers were in a union (see Table A-1):
http://digitalcommons.ilr.cornell.edu/cgi/viewcontent.cgi?article=1176&context=key_workplace
At that time the labor share of National Income was only 61.8%. By the time labor share of National Income peaked at 67.7% in 1980 union membership had already declined to 22.3%. By 2003 union membership had dropped to 12.4% and yet the labor share of National Income in 2011 was 62.1%, or higher than when union membership was at its peak.
I am as skeptical of fiscal stimulus as you are of monetary policy. Fiscal stimulus only works through changes in the cyclically adjusted budget balance. Thus it's theoretically impossible to maintain positive fiscal stimulus forever. If anyone has any doubts about the practical effectiveness of fiscal stimulus you have only to look at Japan where with the exception of 1997, 2001, and 2004-07 they have had expansionary fiscal policy for over two decades:
http://thefaintofheart.files.wordpress.com/2013/06/sadowski2b_4.png
http://thefaintofheart.files.wordpress.com/2013/06/sadowski3_10.png
And yet nominal GDP is lower now than it was in 1994.
That's why the Japanese now have Abenomics, which despite all the misperceptions in the West, is really about combining monetary stimulus with fiscal austerity (the doubling of the consumption tax from 5% to 10%).
Paine said in reply to Mark A. Sadowski...
Your narrative is
Often Brittle
at turns pedantic and obvious
And it ends with a tautology ..for u
Of course it was
expansionary monetary policy
behind that graceful wage boom
For you there is no way past tight money to a phase of greater prosperity
Corporate and household spending are ever and always thrall to monetary policy
One might call it an unreal business cycle theory
Often Brittle
at turns pedantic and obvious
And it ends with a tautology ..for u
Of course it was
expansionary monetary policy
behind that graceful wage boom
For you there is no way past tight money to a phase of greater prosperity
Corporate and household spending are ever and always thrall to monetary policy
One might call it an unreal business cycle theory
The real problem
Mark ski thinks economics is about discovery the workings of a machine
When economics is fundamentally a historical science
All we have in his above narrative is one interval
And one proximate cause
A tighter job market
What in that instance ..the clinton miracle
...produced and sustained that tighter job market
Is specific to that interval
Fortunately if we know a few different ways to tighten job markets
And we do
--- hell Even mark ski knows many of them---
We can just set our goal and start an FDR like pragmatic scramble till we get there
chit chat about a natural rate of anything
Of course
Only helps retard an eclectic process of discovery
And fantasy panaceas deliverable by a fed
following a simple rule
Is bound to end in shambles even as it may be cheered as masterful
Both bens immediate priors had long lines of cheering nit wits
Both were monstrously indifferent to job class welfare
One butchered his way to wall streets notion of a brighter future
The other was that brighter future
And then came fall 08
Mark ski thinks economics is about discovery the workings of a machine
When economics is fundamentally a historical science
All we have in his above narrative is one interval
And one proximate cause
A tighter job market
What in that instance ..the clinton miracle
...produced and sustained that tighter job market
Is specific to that interval
Fortunately if we know a few different ways to tighten job markets
And we do
--- hell Even mark ski knows many of them---
We can just set our goal and start an FDR like pragmatic scramble till we get there
chit chat about a natural rate of anything
Of course
Only helps retard an eclectic process of discovery
And fantasy panaceas deliverable by a fed
following a simple rule
Is bound to end in shambles even as it may be cheered as masterful
Both bens immediate priors had long lines of cheering nit wits
Both were monstrously indifferent to job class welfare
One butchered his way to wall streets notion of a brighter future
The other was that brighter future
And then came fall 08
Ah yes fall 08
Ben's time to shine
Ben's time to shine
Mark A. Sadowski said in reply to bakho...
Michael Kalecki was probably the first to propose a theory of the aggregate income distribution hinging on the determinants of firms’ market power. In particular:
(1938): ”The Determinants of the Distribution of National Income”, Econometrica, 6, 97-112.
(1954): Theory of Economic Dynamics, George Allen and Unwin, London.
The literature on price determination shows that firms’ markups depend on factors like industry concentration, collusion, demand elasticity, and the potential entry of other firms into a market. Most changes in these variables are uncorrelated across industries. Nonetheless, they are simultaneously affected by the business cycle. Hence the business cycle is an important determinant of profit margins. Furthermore, markups also depend on labor’s bargaining power (see Kalecki, 1954). Since higher unemployment is likely to decrease both labor’s bargaining power and the substitutability of employment by wages, unemployment constitutes a significant determinant of markups. In particular, markups are a positive function of the unemployment rate. And in fact this is what the more recent literature on the subject concludes (Page 3):
“I begin with three well-known explanations of labor share or its inverse. The overhead labor-wages lag hypothesis long identified with Sherman (1972, 1997) makes labor share a function of capacity utilization. The depletion of the reserve army theory hypothesis closely identified with Boddy and Crotty (1975) makes labor share a function of unemployment. The markup theories of Goldstein (1986, 1996) make the inverse of labor share a function of unemployment and capacity utilization. Since Goldstein’s views on the impact of unemployment are along the lines of Boddy and Crotty, it is his theory on the impact of capacity utilization that is of concern here. I begin with Boddy and Crotty on the role of unemployment and then turn to the contributions of Goldstein and Sherman on the role of capacity utilization.
Unemployment and the Strength of Labor
Boddy and Crotty focused on the increase in labor share in the second part of the expansion as the outcome of the rising strength of labor. Declining rates of unemployment increase labor share by increasing product real wages for given levels of labor productivity. According to Boddy and Crotty the depletion of the reserve army can also directly affect labor productivity. Although Boddy and Crotty (1975) carried out the analysis in the Burns Mitchell NBER cyclical stages framework and not with econometrics, we argued—presciently for my purposes in the present paper– that the confidence of labor would depend both on the level of unemployment and on the change of unemployment. Most workers are not directly affected by bouts of unemployment. Their confidence should be high when the rate of unemployment is low but confidence should also be affected positively if the rate of unemployment is decreasing. Based on the above arguments, I assume that the change in labor share depends on both the rate of change of unemployment and its level. It is crucial to understand the implications of the inclusion of the level of unemployment as a determinant of the change in labor share. Suppose that the rate of unemployment is extremely low but unchanging. In the absence of the level of unemployment the prediction would be that labor share would remain constant. With the inclusion of the level of unemployment the prediction becomes that labor share would continue to rise.”
http://www.peri.umass.edu/fileadmin/pdf/conference_papers/crotty/Boddy_Crotty.pdf
And should there be any doubt whether unemployment causes labor share, or labor share causes unemployment, it’s a relatively simple exercise, given an econometric software package, to confirm that the unemployment rate Granger Causes labor share of factor income, but labor share of factor income does not Granger Cause unemployment.
(1938): ”The Determinants of the Distribution of National Income”, Econometrica, 6, 97-112.
(1954): Theory of Economic Dynamics, George Allen and Unwin, London.
The literature on price determination shows that firms’ markups depend on factors like industry concentration, collusion, demand elasticity, and the potential entry of other firms into a market. Most changes in these variables are uncorrelated across industries. Nonetheless, they are simultaneously affected by the business cycle. Hence the business cycle is an important determinant of profit margins. Furthermore, markups also depend on labor’s bargaining power (see Kalecki, 1954). Since higher unemployment is likely to decrease both labor’s bargaining power and the substitutability of employment by wages, unemployment constitutes a significant determinant of markups. In particular, markups are a positive function of the unemployment rate. And in fact this is what the more recent literature on the subject concludes (Page 3):
“I begin with three well-known explanations of labor share or its inverse. The overhead labor-wages lag hypothesis long identified with Sherman (1972, 1997) makes labor share a function of capacity utilization. The depletion of the reserve army theory hypothesis closely identified with Boddy and Crotty (1975) makes labor share a function of unemployment. The markup theories of Goldstein (1986, 1996) make the inverse of labor share a function of unemployment and capacity utilization. Since Goldstein’s views on the impact of unemployment are along the lines of Boddy and Crotty, it is his theory on the impact of capacity utilization that is of concern here. I begin with Boddy and Crotty on the role of unemployment and then turn to the contributions of Goldstein and Sherman on the role of capacity utilization.
Unemployment and the Strength of Labor
Boddy and Crotty focused on the increase in labor share in the second part of the expansion as the outcome of the rising strength of labor. Declining rates of unemployment increase labor share by increasing product real wages for given levels of labor productivity. According to Boddy and Crotty the depletion of the reserve army can also directly affect labor productivity. Although Boddy and Crotty (1975) carried out the analysis in the Burns Mitchell NBER cyclical stages framework and not with econometrics, we argued—presciently for my purposes in the present paper– that the confidence of labor would depend both on the level of unemployment and on the change of unemployment. Most workers are not directly affected by bouts of unemployment. Their confidence should be high when the rate of unemployment is low but confidence should also be affected positively if the rate of unemployment is decreasing. Based on the above arguments, I assume that the change in labor share depends on both the rate of change of unemployment and its level. It is crucial to understand the implications of the inclusion of the level of unemployment as a determinant of the change in labor share. Suppose that the rate of unemployment is extremely low but unchanging. In the absence of the level of unemployment the prediction would be that labor share would remain constant. With the inclusion of the level of unemployment the prediction becomes that labor share would continue to rise.”
http://www.peri.umass.edu/fileadmin/pdf/conference_papers/crotty/Boddy_Crotty.pdf
And should there be any doubt whether unemployment causes labor share, or labor share causes unemployment, it’s a relatively simple exercise, given an econometric software package, to confirm that the unemployment rate Granger Causes labor share of factor income, but labor share of factor income does not Granger Cause unemployment.
Call in The Texas grangers
Paine said in reply to Mark A. Sadowski...
An important distinction kalecki makes somewhere
Originally in polish of course
Mark up v net margin
The price slashing triggered by a realization crisis
Versus holding ones price
Must be distinguished
from the squeeze on net margins
as fixed costs are spread
Over a smaller then anticipated and or required
revenue aggregate
Originally in polish of course
Mark up v net margin
The price slashing triggered by a realization crisis
Versus holding ones price
Must be distinguished
from the squeeze on net margins
as fixed costs are spread
Over a smaller then anticipated and or required
revenue aggregate
Mark A. Sadowski said in reply to bakho...
So the question then becomes, what determines unemployment?
Well the level of aggregate demand of course. By definition:
1) Aggregate demand (AD) is the total demand for final goods and services in the economy at a given time and price level.
2) Aggregate supply (AS) is the total amount of goods and services that firms are willing to sell at a given price level in an economy.
The AD-AS model is almost always represented graphically:
http://upload.wikimedia.org/wikipedia/commons/2/25/AS_%2B_AD_graph.svg
The intersection of AD and AS determines the price level and the level of real output. The level of employment is a function of the level of output. (Keynes repeatedly refers to the relationship between output and employment in The General Theory.) And the unemployment rate is simply the precentage of the labor force that is not employed.
Thus, as Adair Turner recently pointed out in his speech on Overt Monetary Finance (OMF) (see Slide 21):
http://ineteconomics.org/sites/inet.civicactions.net/files/Adair%20Lord%20Turner-%202013%20INET%20HONG%20KONG%20Keynote%20Slides.pdf
1) Fiscal and monetary policy determine AD which is equal to nominal GDP or NGDP.
2) And AD determines prices and real output.
Well the level of aggregate demand of course. By definition:
1) Aggregate demand (AD) is the total demand for final goods and services in the economy at a given time and price level.
2) Aggregate supply (AS) is the total amount of goods and services that firms are willing to sell at a given price level in an economy.
The AD-AS model is almost always represented graphically:
http://upload.wikimedia.org/wikipedia/commons/2/25/AS_%2B_AD_graph.svg
The intersection of AD and AS determines the price level and the level of real output. The level of employment is a function of the level of output. (Keynes repeatedly refers to the relationship between output and employment in The General Theory.) And the unemployment rate is simply the precentage of the labor force that is not employed.
Thus, as Adair Turner recently pointed out in his speech on Overt Monetary Finance (OMF) (see Slide 21):
http://ineteconomics.org/sites/inet.civicactions.net/files/Adair%20Lord%20Turner-%202013%20INET%20HONG%20KONG%20Keynote%20Slides.pdf
1) Fiscal and monetary policy determine AD which is equal to nominal GDP or NGDP.
2) And AD determines prices and real output.
bakho said in reply to Mark A. Sadowski...
Yes and fiscal policy could increase demand directly. Monetary policy cannot increase demand (absent negative interest rates (which would really equal fiscal policy)) because the low demand has raised risk premiums above rate of return available at zero interest rate. Either investment would need to be subsidized or demand stimulated to reduce investment risk. The easiest and cheapest way is to simulate demand, which decreases investment risk and pushes the economy away from the ZLB where monetary policy can get traction.
Monetary policy, no matter how good, cannot compensate for bad or inadequate fiscal and regulatory policy.
Monetary policy, no matter how good, cannot compensate for bad or inadequate fiscal and regulatory policy.
Mark A. Sadowski said in reply to bakho...
The Traditional Interest Rate Channel is only one of the nine channels of the Monetary Transmission Mechanism (MTM) as enumerated by Frederic Mishkin.
The following paper by Mishkin gives an overview of the MTM:
http://myweb.fcu.edu.tw/~T82106/MTP/Ch26-supplement.pdf
You might find the following table, found in the author's best selling intermediate monetary economics textbook useful:
http://www.econbrowser.com/archives/2008/01/mishkin1.jpg
To understand what's been driving the recovery since 2009Q2 it might be useful to look at real GDP (RGDP):
http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=X&911=0&903=6&904=2009&905=2013&906=Q
Over the past 16 quarters RGDP has increased by $1291.8 billion in 2009 dollars at an annual rate. Net exports have subtracted $91.2 billion and government consumption and investment has subtracted $191.6 billion. Thus the other components of RGDP have grown by $1574.6 billion. Investment has contributed $594.1 billion (37.7%), consumption $567.8 billion (36.1%), durable goods $321.6 billion (20.4%) and residential investment $109.2 billion (6.9%). (It doesn't add up to 100% because of the residual.)
There are some immediate takeaways from this breakdown.
1) Given that there are only two ways policy makers can impact aggregate demand, fiscal and monetary policy, and that government consumption and investment has been an enourmous drag on the recovery, it's safe to say whatever recovery we have is due entirely to monetary policy.
2) Since net exports have been a net drag it's also safe to say that the Exchange Rate Channel has not contributed to the recovery. This is not surprising given the dollar's relative strength compared to many of the U.S.' trading partners, as well as relatively weak demand abroad.
3) Non-residential investment has contributed substantially to the recovery. But since so many channels impact it, it's difficult to say without further analysis what the relative contribution of each of the channels is.
4) Consumption's contribution to the recovery is also substantial, and this implies that the Wealth Effects Channel is probably the most important source of the recovery so far. This should not be too surprising in that household sector net worth has risen from about $48.7 trillion in 2009Q1 to $70.3 trillion in 2013Q1 according to the Federal Reserve Flow of Funds:
http://www.federalreserve.gov/releases/z1/
5) Durable goods have also contributed strongly to the recovery and this implies that the Traditional Interest Rate Effects Channel and the Household Liquidity Effects Channels have been important. (Note that the Household Liquidity Effects Channel is also asset price driven.)
6) Residential Investment so far has contributed relatively little, which tends to speak against the Bank Lending Channel's importance during this recovery, since mortgage lending accounts for three quarters of household sector debt. This shouldn't be too surprising given that the household sector's outstanding mortgage balance has shrunk by $1,083.1 billion since 2009Q2.
The following paper by Mishkin gives an overview of the MTM:
http://myweb.fcu.edu.tw/~T82106/MTP/Ch26-supplement.pdf
You might find the following table, found in the author's best selling intermediate monetary economics textbook useful:
http://www.econbrowser.com/archives/2008/01/mishkin1.jpg
To understand what's been driving the recovery since 2009Q2 it might be useful to look at real GDP (RGDP):
http://www.bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&910=X&911=0&903=6&904=2009&905=2013&906=Q
Over the past 16 quarters RGDP has increased by $1291.8 billion in 2009 dollars at an annual rate. Net exports have subtracted $91.2 billion and government consumption and investment has subtracted $191.6 billion. Thus the other components of RGDP have grown by $1574.6 billion. Investment has contributed $594.1 billion (37.7%), consumption $567.8 billion (36.1%), durable goods $321.6 billion (20.4%) and residential investment $109.2 billion (6.9%). (It doesn't add up to 100% because of the residual.)
There are some immediate takeaways from this breakdown.
1) Given that there are only two ways policy makers can impact aggregate demand, fiscal and monetary policy, and that government consumption and investment has been an enourmous drag on the recovery, it's safe to say whatever recovery we have is due entirely to monetary policy.
2) Since net exports have been a net drag it's also safe to say that the Exchange Rate Channel has not contributed to the recovery. This is not surprising given the dollar's relative strength compared to many of the U.S.' trading partners, as well as relatively weak demand abroad.
3) Non-residential investment has contributed substantially to the recovery. But since so many channels impact it, it's difficult to say without further analysis what the relative contribution of each of the channels is.
4) Consumption's contribution to the recovery is also substantial, and this implies that the Wealth Effects Channel is probably the most important source of the recovery so far. This should not be too surprising in that household sector net worth has risen from about $48.7 trillion in 2009Q1 to $70.3 trillion in 2013Q1 according to the Federal Reserve Flow of Funds:
http://www.federalreserve.gov/releases/z1/
5) Durable goods have also contributed strongly to the recovery and this implies that the Traditional Interest Rate Effects Channel and the Household Liquidity Effects Channels have been important. (Note that the Household Liquidity Effects Channel is also asset price driven.)
6) Residential Investment so far has contributed relatively little, which tends to speak against the Bank Lending Channel's importance during this recovery, since mortgage lending accounts for three quarters of household sector debt. This shouldn't be too surprising given that the household sector's outstanding mortgage balance has shrunk by $1,083.1 billion since 2009Q2.
Mark A. Sadowski said in reply to bakho...
Compensation of Employees reached its peak share (67.7%) of National Income in 1980:
http://research.stlouisfed.org/fred2/graph/?graph_id=132281&category_id=0
And that happens to be the peak year for inflation as well. Coincidence?
The labor share of income during the age of disinflation has declined pretty much everywhere in the advanced world.
Peak Core CPI Rate*, Peak and Recent Labor Share of Income (Total Economy) (*Except Portugal)
Nation------CPI-Year-- Peak-Year-Recent-Year-Change
US----------12.4-1980-69.6---1980-63.7---2010--5.9
Japan-------20.2-1974-72.5---1977-56.6---2009-14.9
Germany------6.8-1974-76.3---1974-68.5---2011--7.8
UK----------22.1-1975-75.6---1975-71.3---2010--4.3
France------12.7-1980-79.2---1981-68.4---2010-10.8
Italy-------22.3-1980-83.4---1971-68.1---2010-15.3
Spain-------26.4-1977-76.4---1977-59.9---2011-16.5
Canada------11.1-1980-68.1---1971-59.8---2008--8.3
Australia---12.8-1977-75.5---1975-61.3---2006-14.2
Neth.-------10.5-1975-77.1---1975-68.5---2010--8.6
Sweden------12.5-1980-77.9---1978-63.3---2011-14.6
Switzerland--8.9-1974-67.5---2002-65.9---2010--1.6
Austria-----11.1-1981-98.5---1978-66.3---2011-32.2
Norway------12.2-1981-73.7---1977-55.4---2011-18.3
Portugal*---33.1-1977-83.9---1975-66.4---2010-17.5
Denmark-----10.6-1978-73.7---1980-69.5---2011--4.2
Finland-----17.5-1975-76.9---1991-66.1---2011-10.8
Ireland-----21.2-1981-79.3---1980-60.9---2010-18.4
New Zeal.—--17.2-1982-60.7---1975-49.0---2006-11.7
The international labor share data comes from the OECD and is not consistent with BEA data:
http://stats.oecd.org/Index.aspx?queryname=345&querytype=view
Select *Total Economy*.
Although there are many reasons for the increase in inequality that we have seen in the US and in other parts of the world (regressive taxation, weaker unions, lower minimum wages, globalization, Skills-Based-Technological-Change (SBTC) etc.) the leading hypothesis for why there has been such large scale declines in the labor share of factor income is disinflation (i.e. tight monetary policy).
Disinflation during the eighties and the nineties was accompanied by a significant rise in the profit share of national income in most OECD countries or, equivalently, by a reduction in the labor share. This suggests that changes in the rate of inflation are non-neutral with respect to the distribution of factor income. The consequences of inflation upon inequality thus may largely be the indirect result of the effects of inflation upon factor shares. The mechanism by which this comes about is fairly simple. Accelerating inflation is correlated to falling unemployment rates, falling unemployment rates lead to greater labor bargaining power, and greater labor bargaining power is correlated with lower markups. Furthermore, higher inflation rates create greater price dispersion leading to greater competition among producers to limit markups. This hypothesis was tested with a panel of 15 OECD countries over the period from 1960 to 2000 and a robust positive relationship between inflation and the labor share was obtained:
Inflation and Factor Shares
Francisco Alcalá and F. Israel Sanchoy
August 2000
Abstract: “We use results from the literature on the determinants of price-cost margins to derive an equation relating labor’s share of national income to the inflation rate (as well as to the output gap, the unemployment rate and the capital stock per worker). The equation is tested with a panel of 15 OECD countries. We obtain a robust positive relationship between inflation and the labor share. Our results suggest that disinflation is not distributively neutral, provide empirical support for the distinct concern about price stability shown by trade unions and employers’ organizations, and help explaining the negative impact of inflation on growth.”
http://pareto.uab.es/wp/2000/46000.pdf
http://research.stlouisfed.org/fred2/graph/?graph_id=132281&category_id=0
And that happens to be the peak year for inflation as well. Coincidence?
The labor share of income during the age of disinflation has declined pretty much everywhere in the advanced world.
Peak Core CPI Rate*, Peak and Recent Labor Share of Income (Total Economy) (*Except Portugal)
Nation------CPI-Year-- Peak-Year-Recent-Year-Change
US----------12.4-1980-69.6---1980-63.7---2010--5.9
Japan-------20.2-1974-72.5---1977-56.6---2009-14.9
Germany------6.8-1974-76.3---1974-68.5---2011--7.8
UK----------22.1-1975-75.6---1975-71.3---2010--4.3
France------12.7-1980-79.2---1981-68.4---2010-10.8
Italy-------22.3-1980-83.4---1971-68.1---2010-15.3
Spain-------26.4-1977-76.4---1977-59.9---2011-16.5
Canada------11.1-1980-68.1---1971-59.8---2008--8.3
Australia---12.8-1977-75.5---1975-61.3---2006-14.2
Neth.-------10.5-1975-77.1---1975-68.5---2010--8.6
Sweden------12.5-1980-77.9---1978-63.3---2011-14.6
Switzerland--8.9-1974-67.5---2002-65.9---2010--1.6
Austria-----11.1-1981-98.5---1978-66.3---2011-32.2
Norway------12.2-1981-73.7---1977-55.4---2011-18.3
Portugal*---33.1-1977-83.9---1975-66.4---2010-17.5
Denmark-----10.6-1978-73.7---1980-69.5---2011--4.2
Finland-----17.5-1975-76.9---1991-66.1---2011-10.8
Ireland-----21.2-1981-79.3---1980-60.9---2010-18.4
New Zeal.—--17.2-1982-60.7---1975-49.0---2006-11.7
The international labor share data comes from the OECD and is not consistent with BEA data:
http://stats.oecd.org/Index.aspx?queryname=345&querytype=view
Select *Total Economy*.
Although there are many reasons for the increase in inequality that we have seen in the US and in other parts of the world (regressive taxation, weaker unions, lower minimum wages, globalization, Skills-Based-Technological-Change (SBTC) etc.) the leading hypothesis for why there has been such large scale declines in the labor share of factor income is disinflation (i.e. tight monetary policy).
Disinflation during the eighties and the nineties was accompanied by a significant rise in the profit share of national income in most OECD countries or, equivalently, by a reduction in the labor share. This suggests that changes in the rate of inflation are non-neutral with respect to the distribution of factor income. The consequences of inflation upon inequality thus may largely be the indirect result of the effects of inflation upon factor shares. The mechanism by which this comes about is fairly simple. Accelerating inflation is correlated to falling unemployment rates, falling unemployment rates lead to greater labor bargaining power, and greater labor bargaining power is correlated with lower markups. Furthermore, higher inflation rates create greater price dispersion leading to greater competition among producers to limit markups. This hypothesis was tested with a panel of 15 OECD countries over the period from 1960 to 2000 and a robust positive relationship between inflation and the labor share was obtained:
Inflation and Factor Shares
Francisco Alcalá and F. Israel Sanchoy
August 2000
Abstract: “We use results from the literature on the determinants of price-cost margins to derive an equation relating labor’s share of national income to the inflation rate (as well as to the output gap, the unemployment rate and the capital stock per worker). The equation is tested with a panel of 15 OECD countries. We obtain a robust positive relationship between inflation and the labor share. Our results suggest that disinflation is not distributively neutral, provide empirical support for the distinct concern about price stability shown by trade unions and employers’ organizations, and help explaining the negative impact of inflation on growth.”
http://pareto.uab.es/wp/2000/46000.pdf
Paine said in reply to Mark A. Sadowski...
Accelerating output price change
Is always correlated to falling unemployment ?
Is always correlated to falling unemployment ?
What marvels of torture by lag and lead might yield this iron law my friend ?
Mark A. Sadowski said in reply to Paine ...
Did I use the word "always"?
The Phillips Curve slopes downward, no?
The Phillips Curve slopes downward, no?
paine said in reply to Mark A. Sadowski...
no u didn't
but if not then when not or when if its easier to include then exclude
I think you realize you left out
a few
contextualizing links
in your chain
I refuse to think about
the Phillips screw wages magic equations differential or otherwise
the conception is pure mind trap
but if not then when not or when if its easier to include then exclude
I think you realize you left out
a few
contextualizing links
in your chain
I refuse to think about
the Phillips screw wages magic equations differential or otherwise
the conception is pure mind trap
samuel said...
No one expects the ... Zero Lower Bound!
But seriously, we need to start paying people more than what they made 10 years ago.
But seriously, we need to start paying people more than what they made 10 years ago.
reason said in reply to samuel...
Easy - institute (an initially small) citizens basic income. No other changes necessary (but you could increase some taxes on the rich to help pay for it).
paine said in reply to reason...
I agree we need to use the tax or borrow to transfer system
to tighten domestic job markets and mobilize domestic productive factors to the max
but only if you use
the dollar forex aggressively
to keep trade in balance
since a plunging dollar
means relative prices on imports must rise
the forex fiddling
among other effects
jumps job class cost of living
and to this extent
tight job market's
net impact
on real wage rates
is partially off set
to tighten domestic job markets and mobilize domestic productive factors to the max
but only if you use
the dollar forex aggressively
to keep trade in balance
since a plunging dollar
means relative prices on imports must rise
the forex fiddling
among other effects
jumps job class cost of living
and to this extent
tight job market's
net impact
on real wage rates
is partially off set
reason said in reply to paine ...
If you print enough money you kill the $ as a reserve currency. Even pigs eat their fill eventually.
What suggests to u the American job class over the longest haul
benefits by hosting the global reserve currency
benefits by hosting the global reserve currency
pgl said...
Metzler was writing sensible things about QE when Japan went through this mess. Ah but now it is the US with a Democrat as President and Metzler is with the AEI. So now it is all different - somehow.
ilsm said in reply to pgl...
Reprised Upton Sinclair: “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” Upton Sinclair
paine said in reply to pgl...
his absurdly reactionary
shadow fomc bull shit
glares out at us
from his record
he has a long history
trailing back decades
of reactionary anti job class macro Rx
shadow fomc bull shit
glares out at us
from his record
he has a long history
trailing back decades
of reactionary anti job class macro Rx
paine said in reply to paine ...
when meltzers politics crash
into his understanding of money markets etc
his politics win every time
into his understanding of money markets etc
his politics win every time
The PolyCapitalist said...
Generating inflation would be easy if people would stop believing in the Zero Lower Bound Myth:
http://www.polycapitalist.com/2013/05/krugman-perpetuates-myth-of-zero-lower.html
http://www.polycapitalist.com/2013/05/krugman-perpetuates-myth-of-zero-lower.html
reason said in reply to The PolyCapitalist...
What?
Oh come on, what proportion of the population pays attention to Krugman, or to you for that matter. You're nuts, most people don't theorise about these things.
Besides your linked post talks about cutting nominal interest rates, not "creating inflation".
Oh come on, what proportion of the population pays attention to Krugman, or to you for that matter. You're nuts, most people don't theorise about these things.
Besides your linked post talks about cutting nominal interest rates, not "creating inflation".
Main Street Muse said...
I am not an economist and I have not read any economic history recently. When was the US in the middle of an inflationary hot mess? Starting in the Nixon era and ending with the Reagan era, right? And while people want to blame monetary policy, there were other things going on - like the rise of OPEC, etc. I remember when "gas was running out." I was a wee one then, but wasn't there gas rationing? You could by gas on particular days only? I could be wrong...
When were the other major inflationary eras in US history?
And, as I understand it, no one outside of the C-suites and on Wall Street has gotten a raise since them. Gas has gone up quite a lot, but wages have remained stagnant. And inflation has remained low. And we keep obsessing about inflation?
When were the other major inflationary eras in US history?
And, as I understand it, no one outside of the C-suites and on Wall Street has gotten a raise since them. Gas has gone up quite a lot, but wages have remained stagnant. And inflation has remained low. And we keep obsessing about inflation?
Peter K. said in reply to Main Street Muse...
The 1970s were not that bad. Organized labor was strong enough to negotiate wage increases in their contracts which helped develop a wage-price spiral. Unfortunately they're not powerful enough today to repeat that.
Main Street Muse said in reply to Peter K....
They were very bad if you wanted to get a mortgage (interest rates being above 15%, I believe.)
Mark A. Sadowski said in reply to Main Street Muse...
Here’s a relatively simple way to frame this.
The following link is to a dynamic AD-AS diagram, and which can be found in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok:
http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG
You’ll note that the rate of change in the aggregate demand (AD) curve is equal to the sum of the inflation rate and the rate of change in real GDP (RGDP), and so is precisely equal to the rate of change in nominal GDP (NGDP). The rate of change in NGDP is determined by both fiscal and monetary policy in the short run but in the long run the rate of change in NGDP is determined solely by monetary policy.
Note also the short run aggregate supply (SRAS/AS) curve and the Solow growth curve. The Solow growth curve is essentially the long run AS curve (LRAS). In the short run wages and prices are sticky causing the SRAS curve to be upwardly sloped. In the long run money is neutral and wages and prices are flexible so the Solow growth curve is vertical. Thus shifts in AD influence the rate of growth of RGDP in the short run, but not in the long run.
Similarly, shifts in AS influence the inflation rate in the short run, but in the long run the inflation rate is determined solely by AD (i.e. monetary policy).
The following link is to a dynamic AD-AS diagram, and which can be found in “Modern Principles: Macroeconomics” by Tyler Cowen and Alex Tabarrok:
http://1.bp.blogspot.com/_JqNx8yXnFE8/SxlWoq_PI8I/AAAAAAAABCg/7y9VXIleCrs/s1600-h/Tabarrok-Cowen+ADAS.JPG
You’ll note that the rate of change in the aggregate demand (AD) curve is equal to the sum of the inflation rate and the rate of change in real GDP (RGDP), and so is precisely equal to the rate of change in nominal GDP (NGDP). The rate of change in NGDP is determined by both fiscal and monetary policy in the short run but in the long run the rate of change in NGDP is determined solely by monetary policy.
Note also the short run aggregate supply (SRAS/AS) curve and the Solow growth curve. The Solow growth curve is essentially the long run AS curve (LRAS). In the short run wages and prices are sticky causing the SRAS curve to be upwardly sloped. In the long run money is neutral and wages and prices are flexible so the Solow growth curve is vertical. Thus shifts in AD influence the rate of growth of RGDP in the short run, but not in the long run.
Similarly, shifts in AS influence the inflation rate in the short run, but in the long run the inflation rate is determined solely by AD (i.e. monetary policy).
Soley by monetary policy
In the model only or also in reality ?
In the model only or also in reality ?
The notion of long run is extrapolative
Not in any sense an estimate of future reality
As Lerner sez
In the long run we are in another short run
The sinister smuggling in of neutrality conditions and the like
Make these models into a hustle
Not in any sense an estimate of future reality
As Lerner sez
In the long run we are in another short run
The sinister smuggling in of neutrality conditions and the like
Make these models into a hustle
Mark A. Sadowski said in reply to Paine ...
Fiscal stimulus requires increases in the cyclically adjusted budget balance. This cannot be done indefinitely.
paine said in reply to Mark A. Sadowski...
ahh so you fall into the nominal rigidity trap
the nominal obligations of the state with a limitless money mine are paper shackles
btw
we need a better term for debt management
then financial repression
don't you agree ?
something positive like
fully managed carry costs
you ngdp types oughta see
your magic target
onc u break fre of this silly fear
of some sort of inertial moment
in product price and wage inflation
once you get the hang of forward guidance
talk of ngdp slope change
is just the gimmick
for paving over
a slug of financial repression
the nominal obligations of the state with a limitless money mine are paper shackles
btw
we need a better term for debt management
then financial repression
don't you agree ?
something positive like
fully managed carry costs
you ngdp types oughta see
your magic target
onc u break fre of this silly fear
of some sort of inertial moment
in product price and wage inflation
once you get the hang of forward guidance
talk of ngdp slope change
is just the gimmick
for paving over
a slug of financial repression
paine said in reply to paine ...
to be perfectly fair
why would one require constantly increasing primary deficits
given the other macro levers
at no point would I dispense with any of them
fiscal first transfer first FFTF
is a job class welfare first
policy maxim
for obvious reasons I way too often reiterate
but the wind hollows out here in left field
and I shout to keep my head warm
why would one require constantly increasing primary deficits
given the other macro levers
at no point would I dispense with any of them
fiscal first transfer first FFTF
is a job class welfare first
policy maxim
for obvious reasons I way too often reiterate
but the wind hollows out here in left field
and I shout to keep my head warm
Mark A. Sadowski said in reply to Paine ...
It's actually a pretty good textbook and the diagram is enormously useful (it's far less confusing to students than the usual ones).
Despite the fact Tyler Cowen has implied that I do not share his "mood affilitation" he has made posts out of my comments, so I now choose to be polite in return:
http://marginalrevolution.com/marginalrevolution/2013/05/from-the-comments-15.html
Despite the fact Tyler Cowen has implied that I do not share his "mood affilitation" he has made posts out of my comments, so I now choose to be polite in return:
http://marginalrevolution.com/marginalrevolution/2013/05/from-the-comments-15.html
paine said in reply to Mark A. Sadowski...
very wise of you
play it suave and diplomatical
you are nothing
if not discretely sadistic
in fact
you're nothing but
discretely sadistic
play it suave and diplomatical
you are nothing
if not discretely sadistic
in fact
you're nothing but
discretely sadistic
paine said in reply to paine ...
btw
these stars will gladly exploit your
boundless diligence
while retaining the there gathered habitual
readership
they the ever vigilant axe to grind
hosters with the toasters
can burn you off the site's face
at any time
again get your own blog
make the mountain come to Mo-ham-ski
these stars will gladly exploit your
boundless diligence
while retaining the there gathered habitual
readership
they the ever vigilant axe to grind
hosters with the toasters
can burn you off the site's face
at any time
again get your own blog
make the mountain come to Mo-ham-ski
Mark A. Sadowski said in reply to Main Street Muse...
Here's a century of year on year CPI and PPI inflation rates. Enjoy!
http://research.stlouisfed.org/fred2/graph/?graph_id=133017&category_id=0
http://research.stlouisfed.org/fred2/graph/?graph_id=133017&category_id=0
don said in reply to Mark A. Sadowski...
Thanks Mark. Can you show us one of inflation against the monetary base that goes back before 1929?
Mark A. Sadowski said in reply to don...
Here's the same graph with the monetary base added. Fred only has monetary base data back to 1918:
http://research.stlouisfed.org/fred2/graph/?graph_id=133048&category_id=0
If the Fed is targeting inflation we expect the correlation to be negative, which over the 95 years of data, it frequently is.
http://research.stlouisfed.org/fred2/graph/?graph_id=133048&category_id=0
If the Fed is targeting inflation we expect the correlation to be negative, which over the 95 years of data, it frequently is.
BigBozat said in reply to Main Street Muse...
Main Street Muse asked:
"When were the other major inflationary eras in US history?"
Depends on how & what is measured (some statistical series don't go back all that far)...
Short version:
2 waves post-WW II, both relatively brief... One immediately after the war (removal of price controls) & second @ onset of Korean War @ late 1950...
WW II (late '41 ~ mid-late '43)
WW I & aftermath (1916 ~ 1920)
Standard series only goes back to 1913...
Before then:
Civil War... 'tho we subsequently went through an extended deflationary period after the war in order to bring bring the economy back onto a gold standard.
Prior to that: the War of 1812, and the Revolutionary War (think scrip).
Using wholesale commodity prices as surrogate for inflation measure see, e.g.: http://fraser.stlouisfed.org/docs/publications/1943chart_busibooms.pdf
"When were the other major inflationary eras in US history?"
Depends on how & what is measured (some statistical series don't go back all that far)...
Short version:
2 waves post-WW II, both relatively brief... One immediately after the war (removal of price controls) & second @ onset of Korean War @ late 1950...
WW II (late '41 ~ mid-late '43)
WW I & aftermath (1916 ~ 1920)
Standard series only goes back to 1913...
Before then:
Civil War... 'tho we subsequently went through an extended deflationary period after the war in order to bring bring the economy back onto a gold standard.
Prior to that: the War of 1812, and the Revolutionary War (think scrip).
Using wholesale commodity prices as surrogate for inflation measure see, e.g.: http://fraser.stlouisfed.org/docs/publications/1943chart_busibooms.pdf
The long return to gold post 1865
Is quite a sage
A trail of tears in fact
Is quite a sage
A trail of tears in fact
I put doesn't like the word saga
bakho said in reply to Main Street Muse...
Yes. Oil demand was much greater than supply. Carter energy policy fixed this so that oil demand dropped by 22 percent from its peak in 1978 and 1983.
Monetarists claim victory and lionize Volcker, but Volcker would have been unsuccessful without Carter energy policy.
Monetarists claim victory and lionize Volcker, but Volcker would have been unsuccessful without Carter energy policy.
Charlie Baker said in reply to bakho...
I very much agree with this. The Carter energy policy reduced petroleum imports sharply, and were a major aid to recovery in the '80s.
The total amount of US imports did not surpass its 1977-79 peak until 1993.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrimus1&f=a
Even today, we are a more fuel efficient country than we were in the '70s, so much that oil price shocks do not have the same impact now as then.
The total amount of US imports did not surpass its 1977-79 peak until 1993.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mcrimus1&f=a
Even today, we are a more fuel efficient country than we were in the '70s, so much that oil price shocks do not have the same impact now as then.
Paine said in reply to Charlie Baker...
The history in numbers
Of the energy share in GDP must be at anne's finger tips
Of the energy share in GDP must be at anne's finger tips
But I must insist we give volcker credit
where goes the credit
also goes the blame
The horrifically un necessary butchery of the Volcker Carter Reagan double dipper
The second scoop deeper then the first by far of course
where goes the credit
also goes the blame
The horrifically un necessary butchery of the Volcker Carter Reagan double dipper
The second scoop deeper then the first by far of course
Mark A. Sadowski said in reply to Paine ...
"The history in numbers
Of the energy share in GDP must be at anne's finger tips"
Personal consumption expenditures on gasoline and other energy goods were 4.0% of personal consumption expenditures (PCE) in 2012:
http://research.stlouisfed.org/fred2/graph/?graph_id=121946&category_id=0
By comparison they were above 4.0% of PCE in 1974-85 and peaked at 5.8% of PCE in 1980-81. Given the inherently volatile nature of energy prices this of course meant consumer prices were more volatile back then.
Of the energy share in GDP must be at anne's finger tips"
Personal consumption expenditures on gasoline and other energy goods were 4.0% of personal consumption expenditures (PCE) in 2012:
http://research.stlouisfed.org/fred2/graph/?graph_id=121946&category_id=0
By comparison they were above 4.0% of PCE in 1974-85 and peaked at 5.8% of PCE in 1980-81. Given the inherently volatile nature of energy prices this of course meant consumer prices were more volatile back then.
Mark A. Sadowski said in reply to bakho...
"Monetarists claim victory and lionize Volcker, but Volcker would have been unsuccessful without Carter energy policy."
I don't think it's a question of lionizing Volcker. I think its a question of recognizing reality.
Incidentally if the decline in inflation was purely the result of a positive energy shock how come unemployment went to 10.8% and the economy didn't completely recover until 1987?
I don't think it's a question of lionizing Volcker. I think its a question of recognizing reality.
Incidentally if the decline in inflation was purely the result of a positive energy shock how come unemployment went to 10.8% and the economy didn't completely recover until 1987?
Charlie Baker said in reply to Mark A. Sadowski...
"Incidentally if the decline in inflation was purely the result of a positive energy shock how come unemployment went to 10.8% and the economy didn't completely recover until 1987?"
Not to speak for bahko, but I don't think he nor I said it was "purely" the result of the positive oil shock. But if not for the Carter policy, it's likely 5.8% PCE would not have been the top. Note also that the larger share of the increase was going to imports rather than domestic producers, as was the case prior to 1970.
I think Volcker's actions inflicted too much pain, and the wage-price spiral might have been addressed by other means. His solution stuck was because it was politically supportable, and set the precedent for putting the Fed in the leading role as manager of economic policy.
Not to speak for bahko, but I don't think he nor I said it was "purely" the result of the positive oil shock. But if not for the Carter policy, it's likely 5.8% PCE would not have been the top. Note also that the larger share of the increase was going to imports rather than domestic producers, as was the case prior to 1970.
I think Volcker's actions inflicted too much pain, and the wage-price spiral might have been addressed by other means. His solution stuck was because it was politically supportable, and set the precedent for putting the Fed in the leading role as manager of economic policy.
Second Best said...
Also note the shift in blame from those who can't find inflation under a single overturned rock. Now it's about all that QE benefitting the rich by buying off bad debt that will destroy the economy when the Fed attempts to sell it back later, just when austerity was about to achieve full employment. LOL.
Peter K. said in reply to Second Best...
"Now it's about all that QE benefitting the rich by buying off bad debt that will destroy the economy when the Fed attempts to sell it back later, just when austerity was about to achieve full employment"
They're echoing left-wing trolls like Kervick.
They're echoing left-wing trolls like Kervick.
Rune Lagman said in reply to Peter K....
"left-wing troll" = someone that refuse to apologize for corrupt Democrats.
Paine said in reply to Rune Lagman...
Peter has a legendary dedication
To the proposition
Lesser evilism protracted becomes a benignity
Perhaps a benignity without high honor but a benignity never the less
To the proposition
Lesser evilism protracted becomes a benignity
Perhaps a benignity without high honor but a benignity never the less
"Peter has a legendary dedication
To the proposition
Lesser evilism protracted becomes a benignity "
I can't be summed up in a proposition. The devil is in the details. Even Paine is a unique snowflake, no?
Two sayings I would favor: power corrupts and "don't make the perfect the enemy of the good."
But let's take a specific policy at a specific moment in history: QE2.
Republicans and conservative economists like Meltzer blast Bernanke and the Fed, as do export competitors Germany, China, South Korea, Brazil etc. As do people like Kervick who heroically - in his own mind - argues that fiscal policy would be better than QE2.
To the proposition
Lesser evilism protracted becomes a benignity "
I can't be summed up in a proposition. The devil is in the details. Even Paine is a unique snowflake, no?
Two sayings I would favor: power corrupts and "don't make the perfect the enemy of the good."
But let's take a specific policy at a specific moment in history: QE2.
Republicans and conservative economists like Meltzer blast Bernanke and the Fed, as do export competitors Germany, China, South Korea, Brazil etc. As do people like Kervick who heroically - in his own mind - argues that fiscal policy would be better than QE2.
paine said in reply to Peter K....
fiscal poicy would be better much much better
if its
uncle credit card financed
transfer payments to job class households
rather then trying to squeeze out
more spending
now
from the portfolio class by pro temp
upping their paper wealth
but I agree why make a nugget of help into a bucket of hurt
QE annoyed me because it was measured out in relative tea spoons
ie
the snail pace recovery was kept out of a double dip
anything more was deemed sub optimal
by the fed's inner circle crop
of corporate welfare fiends
if its
uncle credit card financed
transfer payments to job class households
rather then trying to squeeze out
more spending
now
from the portfolio class by pro temp
upping their paper wealth
but I agree why make a nugget of help into a bucket of hurt
QE annoyed me because it was measured out in relative tea spoons
ie
the snail pace recovery was kept out of a double dip
anything more was deemed sub optimal
by the fed's inner circle crop
of corporate welfare fiends
paine said in reply to paine ...
I know you are more then a set of summary parts
I know you are on the side
of us earth angels with spiked tails
I know you are on the side
of us earth angels with spiked tails
paine said in reply to paine ...
the only good guy I razz consistently is ski mobile
he not only needs it
his readers need it
on occasion he can marshal
some pretty persuasive pitter patter
and he always has a bag full of pre digested responses
hand carved supporting data included
too bad right now
he still the center of his mind
stuck up Sumner's pant leg
he not only needs it
his readers need it
on occasion he can marshal
some pretty persuasive pitter patter
and he always has a bag full of pre digested responses
hand carved supporting data included
too bad right now
he still the center of his mind
stuck up Sumner's pant leg
Dan Kervick said...
In order to increase the amount of bank lending for capital development, we need to increase the demand for capital development. And to do that we need to increase the demand for the goods and services that people consume, and that provides the incentive for firms to develop their capital in the first place.
The US government has extraordinary untapped potential to drive this demand, both by purchasing such consumer goods and services itself, and by setting and investing in the core infrastructure of a strategic national development plan that will give coherence and motivation to the path of US economic transformation over the next decade, and reduce risk and confusion in the private sector. Businesses need some conception of the national plan, so they know what long-term investments to make.
Economists of the present very conservative generation have been loath to take this step. Insofar as they support government spending at all, they conceive it in a very limited short-term way in terms of "stimulus". Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization.
Seems to me we need a new breed of more adventurous thinkers who are willing to go bigger, not smaller.
The US government has extraordinary untapped potential to drive this demand, both by purchasing such consumer goods and services itself, and by setting and investing in the core infrastructure of a strategic national development plan that will give coherence and motivation to the path of US economic transformation over the next decade, and reduce risk and confusion in the private sector. Businesses need some conception of the national plan, so they know what long-term investments to make.
Economists of the present very conservative generation have been loath to take this step. Insofar as they support government spending at all, they conceive it in a very limited short-term way in terms of "stimulus". Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization.
Seems to me we need a new breed of more adventurous thinkers who are willing to go bigger, not smaller.
paine said in reply to Dan Kervick...
the covert or at least implicit
"national plan"
we have today
isn't about development ....here at liberty central
nope
here
its about cash cow economics
think mitt Romney
vulture prince of the commonwealth
development corporate cosmo style
is for ..chindia and the other emergers
"national plan"
we have today
isn't about development ....here at liberty central
nope
here
its about cash cow economics
think mitt Romney
vulture prince of the commonwealth
development corporate cosmo style
is for ..chindia and the other emergers
paine said in reply to paine ...
but of course your vision for a new overt national plan
is
inspiring
correct
and very practical ...technically
is
inspiring
correct
and very practical ...technically
paine said in reply to paine ...
" adventurous thinkers who are willing to go bigger, not smaller."
yup kill the crackpot realists
and the rubinite bondsmen
yup kill the crackpot realists
and the rubinite bondsmen
Thank u
To me it's all about the over tones
To me it's all about the over tones
Peter K. said in reply to Dan Kervick...
"Economists of the present very conservative generation have been loath to take this step. Insofar as they support government spending at all, they conceive it in a very limited short-term way in terms of "stimulus". Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization."
Pure ad hominem from the resident MMT troll.
Pure ad hominem from the resident MMT troll.
Roger Gathman said in reply to Peter K....
Troll is a very stupid term for a commentator who has been writing here longer than you have. If you have a problem with Kervick's arguments, fine, but the troll thing - as though you were the superserious gatekeeper, instead of another commenting peon - is ludicrous. There's only one gatekeeper at this site, and it is Mark Thoma.
Peter K. said in reply to Roger Gathman...
Any proof he's been here longer than me? No? Just more MMT trolling on your part.
Even if so, so what?
Kervick acting like a gatekeeper criticing THOMA for linking Krugman:
"Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization."
Can dish it out but can't take it, huh? Who are you anyway?
Even if so, so what?
Kervick acting like a gatekeeper criticing THOMA for linking Krugman:
"Now people like Krugman seem to want to give up and sulk and turn entirely toward things like macroprudential financial stabilization."
Can dish it out but can't take it, huh? Who are you anyway?
Peter
We agree on what we'd prefer
You just tolerate what we get
better then me and rog and Dan
Some might call you a realist
Others might bring up Essau
We agree on what we'd prefer
You just tolerate what we get
better then me and rog and Dan
Some might call you a realist
Others might bring up Essau
Mark A. Sadowski said...
When Inflation Doves Cry
By Alan Metzler
"...The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that.
Monetarists insist that economies experience inflation when money-supply growth persistently exceeds output growth. That has not happened yet, so inflation has been postponed.
Instead of rejecting monetary theory and history, the army of Wall Street soothsayers should look beyond the Fed’s press releases and ask themselves: Does it make sense to throw out centuries of experience? Are we really so confident that the Fed has found a new way?
The Fed has printed new bank reserves with reckless abandon. But almost all of the reserves sit idle on commercial banks’ balance sheets. For the 12 months ending in July, the St. Louis Fed reports that bank reserves rose 31%. During the same period, a commonly used measure of monetary growth, M2, increased by only 6.8%. No sound monetarist thinks those numbers predict current inflation.
Indeed, almost all the reserves added in the second and third rounds of QE, more than 95%, are sitting in excess reserves, neither lent nor borrowed and never used to increase money in circulation..."
I'm not so troubled about Meltzer's contrary policy recommendations for Japan in 1999. That was two full years before Japan actually got around to doing QE, and at the time Japanese bank reserves were not elevated, which seems to be Meltzer's primary concern about the U.S. QEs. And in fact I can find no record at all of Meltzer commenting on Japanese excess bank reserves during their 2001-06 QE although they were quite large.
On the other hand Meltzer has written extensively about the Great Depression, so that's a logical place to find him contradicting himself.
In an act that was essentially the QE of its day, FDR took the U.S. off the gold standard in April 1933 and allowed the price of gold to rise from $20.67 an ounce to $35.00 an ounce by January 1934. This price was high enough to attract a large gold inflow from abroad which the Treasury monetized by issuing gold certificates to the Federal Reserve. As a consequence the monetary base skyrocketed upward.
Here's Friedman and Schwartz's M2 measure of money supply and bank reserves indexed to 100 in July 1933, as that was the month that the monetary base stopped decreasing after FDR became President:
http://research.stlouisfed.org/fred2/graph/?graph_id=132965&category_id=0
Between July 1933 and July 1936, the month before reserve requirements were first increased, M2 increased by a total of 50.1% and bank reserves increased by 201.8%, or at an average annual rate of 14.5% and 44.5% respectively.
Now let's contrast that with the change in the modern measure of M2 and bank reserves since October 2010, the month before QE2 was officially announced.
http://research.stlouisfed.org/fred2/graph/?graph_id=132968&category_id=0
M2 has increased by a total of 22.9% and bank reserves by 109.7%, or at an average annual rate of 7.8% and 30.9% respectively. I'm certain that MZM, a broader measure of money supply, has increased at a faster rate than M2 over the same time period.
So bank reserves increased at three times the rate as M2 in the recovery from the Great Depression and four times the rate of M2 in the Recovery from the Great Recession, not a great deal of difference.
What about the proportion of QE that has remained reserves? Or rather, what proportion has become currency in circulation?
Here is the monetary base and currency in circulation from FDR's inaugeration through the end of 1938:
http://research.stlouisfed.org/fred2/graph/?graph_id=132969&category_id=0
The monetary base and currency in circulation increased by $4,408 million and $815 million respectively between July 1933 and July 1936, meaning 18.5% of the expansion in the monetary base became currency.
Here is the monetary base and currency in circulation since October 2010:
http://research.stlouisfed.org/fred2/graph/?graph_id=132970&category_id=0
The monetary base and currency in circulation have increased by $1,328 billion and $236 billion respectively, meaning 17.8% of the expansion in the monetary base has become currency. This is almost exactly the same proportion as during the recovery from the Great Depression and nearly four times greater than the 5% proportion that Meltzer is claiming.
Now, what is Meltzer telling us that we should be doing today?
"...Instead of continuing along this futile path, the Fed should end its open-ended QE3 now...Most important, it should announce a strategy for eliminating the massive volume of such reserves..."
Now it should be noted that after the Fed increased reserves in August 1936, the U.S. started sterilizing gold inflows in December and underwent a second round of reserve increases in March and May 1937.
The U.S. entered recession in May 1937. Here's what Meltzer had to say about the monetary policy causes of the 1937 recession in 2001 (pages 6-7):
http://www2.tepper.cmu.edu/afs/andrew/gsia/meltzer/transmission.pdf
"...The National Bureau ranks the 1937-38 recession as the third most severe recession in the years after World War I. Real GNP fell 18% and industrial production 32% in the thirteen months from May 1937 to June 1938. Unemployment reached a peak of 20%, not very different from the 25% peak in 1932.
The probable causes of the recession include both fiscal and monetary actions. There is a very large reduction in the government deficit in 1937 and a very large reduction in growth of the monetary base..."
"...The most important monetary actions are the beginning of gold sterilization at the end of 1936 and the second and third increase in reserve requirement ratios in March and May 1937. These increases completed the doubling of reserve requirement ratios between August 1936 and May 1937..."
So Meltzer attributes the monetary policy causes of the 1937 recession to a very large reduction in the rate of growth in the monetary base, and the reduction in excess reserves due to the doubling of reserve requirements (which nevertheless remained nonbinding).
And yet today Meltzer is recommending stopping the growth in the monetary base and eliminating excess reserves.
By Alan Metzler
"...The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that.
Monetarists insist that economies experience inflation when money-supply growth persistently exceeds output growth. That has not happened yet, so inflation has been postponed.
Instead of rejecting monetary theory and history, the army of Wall Street soothsayers should look beyond the Fed’s press releases and ask themselves: Does it make sense to throw out centuries of experience? Are we really so confident that the Fed has found a new way?
The Fed has printed new bank reserves with reckless abandon. But almost all of the reserves sit idle on commercial banks’ balance sheets. For the 12 months ending in July, the St. Louis Fed reports that bank reserves rose 31%. During the same period, a commonly used measure of monetary growth, M2, increased by only 6.8%. No sound monetarist thinks those numbers predict current inflation.
Indeed, almost all the reserves added in the second and third rounds of QE, more than 95%, are sitting in excess reserves, neither lent nor borrowed and never used to increase money in circulation..."
I'm not so troubled about Meltzer's contrary policy recommendations for Japan in 1999. That was two full years before Japan actually got around to doing QE, and at the time Japanese bank reserves were not elevated, which seems to be Meltzer's primary concern about the U.S. QEs. And in fact I can find no record at all of Meltzer commenting on Japanese excess bank reserves during their 2001-06 QE although they were quite large.
On the other hand Meltzer has written extensively about the Great Depression, so that's a logical place to find him contradicting himself.
In an act that was essentially the QE of its day, FDR took the U.S. off the gold standard in April 1933 and allowed the price of gold to rise from $20.67 an ounce to $35.00 an ounce by January 1934. This price was high enough to attract a large gold inflow from abroad which the Treasury monetized by issuing gold certificates to the Federal Reserve. As a consequence the monetary base skyrocketed upward.
Here's Friedman and Schwartz's M2 measure of money supply and bank reserves indexed to 100 in July 1933, as that was the month that the monetary base stopped decreasing after FDR became President:
http://research.stlouisfed.org/fred2/graph/?graph_id=132965&category_id=0
Between July 1933 and July 1936, the month before reserve requirements were first increased, M2 increased by a total of 50.1% and bank reserves increased by 201.8%, or at an average annual rate of 14.5% and 44.5% respectively.
Now let's contrast that with the change in the modern measure of M2 and bank reserves since October 2010, the month before QE2 was officially announced.
http://research.stlouisfed.org/fred2/graph/?graph_id=132968&category_id=0
M2 has increased by a total of 22.9% and bank reserves by 109.7%, or at an average annual rate of 7.8% and 30.9% respectively. I'm certain that MZM, a broader measure of money supply, has increased at a faster rate than M2 over the same time period.
So bank reserves increased at three times the rate as M2 in the recovery from the Great Depression and four times the rate of M2 in the Recovery from the Great Recession, not a great deal of difference.
What about the proportion of QE that has remained reserves? Or rather, what proportion has become currency in circulation?
Here is the monetary base and currency in circulation from FDR's inaugeration through the end of 1938:
http://research.stlouisfed.org/fred2/graph/?graph_id=132969&category_id=0
The monetary base and currency in circulation increased by $4,408 million and $815 million respectively between July 1933 and July 1936, meaning 18.5% of the expansion in the monetary base became currency.
Here is the monetary base and currency in circulation since October 2010:
http://research.stlouisfed.org/fred2/graph/?graph_id=132970&category_id=0
The monetary base and currency in circulation have increased by $1,328 billion and $236 billion respectively, meaning 17.8% of the expansion in the monetary base has become currency. This is almost exactly the same proportion as during the recovery from the Great Depression and nearly four times greater than the 5% proportion that Meltzer is claiming.
Now, what is Meltzer telling us that we should be doing today?
"...Instead of continuing along this futile path, the Fed should end its open-ended QE3 now...Most important, it should announce a strategy for eliminating the massive volume of such reserves..."
Now it should be noted that after the Fed increased reserves in August 1936, the U.S. started sterilizing gold inflows in December and underwent a second round of reserve increases in March and May 1937.
The U.S. entered recession in May 1937. Here's what Meltzer had to say about the monetary policy causes of the 1937 recession in 2001 (pages 6-7):
http://www2.tepper.cmu.edu/afs/andrew/gsia/meltzer/transmission.pdf
"...The National Bureau ranks the 1937-38 recession as the third most severe recession in the years after World War I. Real GNP fell 18% and industrial production 32% in the thirteen months from May 1937 to June 1938. Unemployment reached a peak of 20%, not very different from the 25% peak in 1932.
The probable causes of the recession include both fiscal and monetary actions. There is a very large reduction in the government deficit in 1937 and a very large reduction in growth of the monetary base..."
"...The most important monetary actions are the beginning of gold sterilization at the end of 1936 and the second and third increase in reserve requirement ratios in March and May 1937. These increases completed the doubling of reserve requirement ratios between August 1936 and May 1937..."
So Meltzer attributes the monetary policy causes of the 1937 recession to a very large reduction in the rate of growth in the monetary base, and the reduction in excess reserves due to the doubling of reserve requirements (which nevertheless remained nonbinding).
And yet today Meltzer is recommending stopping the growth in the monetary base and eliminating excess reserves.
Second Best said in reply to Mark A. Sadowski...
Then: It's about the velocity stupid.
Now: It's about the liquidity stupid.
Now: It's about the liquidity stupid.
Mark A. Sadowski said in reply to Second Best...
With respect to M2 velocity, it was relatively stable during the recovery from the Great Depression:
http://research.stlouisfed.org/fred2/graph/?graph_id=133014&category_id=0
It stayed within the range of 1.85 to 2.15 and showed no real trend.
In contrast M2 velocity has been falling steadily since 2010Q4:
http://research.stlouisfed.org/fred2/graph/?graph_id=133015&category_id=0
It's fallen from 1.74 to 1.58 as of 2013Q2.
So I would argue that if anything velocity is more of a problem now than it was then.
As for "liquidity" that means a lot of different things to a lot of different people. What do you mean by it?
http://research.stlouisfed.org/fred2/graph/?graph_id=133014&category_id=0
It stayed within the range of 1.85 to 2.15 and showed no real trend.
In contrast M2 velocity has been falling steadily since 2010Q4:
http://research.stlouisfed.org/fred2/graph/?graph_id=133015&category_id=0
It's fallen from 1.74 to 1.58 as of 2013Q2.
So I would argue that if anything velocity is more of a problem now than it was then.
As for "liquidity" that means a lot of different things to a lot of different people. What do you mean by it?
Joe Smith said in reply to Mark A. Sadowski...
I assume that excess reserves on deposit with the Fed simply amounts to borrowing by the Federal government and gets spent like any other borrowing by the government.
Mark A. Sadowski said in reply to Joe Smith...
Bank reserves are banks' holdings of deposits in accounts with the Federal Reserve plus currency that is physically held in the bank's vault (vault cash). Bank reserves are a liability to the Federal Reserve.
The Treasury has no access to bank reserves, so no, the Federal government does not spend bank reserves.
The Treasury has no access to bank reserves, so no, the Federal government does not spend bank reserves.
Joe Smith said in reply to Mark A. Sadowski...
So what does the Fed "do" with those bank reserves which are on deposit with it? Use it to buy treasury paper?
Mark A. Sadowski said in reply to Joe Smith...
The Fed doesn't really "do" anything with them. (In fact it pays 0.25% interest on them.)
The Fed buys and sells Treasury and Agency securities (plus some other minor stuff). These securities form the bulk of the assets on the Fed's balance sheet.
The liabilities side of the Fed's balance sheet mostly (about 91-93%) consists of bank reserves and currency in circulation (i.e. the "monetary base").
The Fed buys and sells Treasury and Agency securities (plus some other minor stuff). These securities form the bulk of the assets on the Fed's balance sheet.
The liabilities side of the Fed's balance sheet mostly (about 91-93%) consists of bank reserves and currency in circulation (i.e. the "monetary base").
Paine said in reply to Mark A. Sadowski...
Excellent
Here you turn honest narrator and deadly prosecutor
Bravo
Here you turn honest narrator and deadly prosecutor
Bravo
Tom Shillock said...
Does Allan Meltzer still have a job as an economist? If so, why? More generally, what is the unemployment rate for economists? Unlike at least a few other forms of employment incompetence seems no bar in economics. They would seem to share that blessing with CEOs, financial analysts and brokers, politicians and too many others especially those in professions. Perhaps that is the purpose of professions for those who are in them?
don said...
I am not convinced that we will not have inflation until we reach full employment and the labor market tightens - we have had "stagflation" before. I do not believe that the interest on excess reserves is responsible for their size, but I am also not convinced that it will prove the invincible weapon against future excess inflation.
Paine said in reply to don...
The late 70's and now
Make a nice comparison
One concern ski likes to squash like he likes to squash the liquidity trap
Is the pricing momentum bug a boo
The notion price setters get into more then just an adapters gig
More then just a response
They get out ahead of themselves
by looking hard
into the masked faces of an uncertain future
Where prices on their relevant markets
both input and output
Become self fulfilling conjectures
Rat ex really looks like a white hat here
Ask ski
If the fed communicates effectively expectations of price and wage setters can change in a flash
The paradigm shift
FDR in 33 busting the gold dollar price ceiling
Ben this past late spring toting with the termination of QE
One big one trivial
But they both demonstrate price setters and wage makers hardly need a long strangulation by a Paul volcker
To wise up at least not since tall Paul showed the fed had big hairy ones at any rate
Now inflation fighting is believed in
Too much?
Now trying to hint at higher future inflation gets missed
Ahh the irony
Make a nice comparison
One concern ski likes to squash like he likes to squash the liquidity trap
Is the pricing momentum bug a boo
The notion price setters get into more then just an adapters gig
More then just a response
They get out ahead of themselves
by looking hard
into the masked faces of an uncertain future
Where prices on their relevant markets
both input and output
Become self fulfilling conjectures
Rat ex really looks like a white hat here
Ask ski
If the fed communicates effectively expectations of price and wage setters can change in a flash
The paradigm shift
FDR in 33 busting the gold dollar price ceiling
Ben this past late spring toting with the termination of QE
One big one trivial
But they both demonstrate price setters and wage makers hardly need a long strangulation by a Paul volcker
To wise up at least not since tall Paul showed the fed had big hairy ones at any rate
Now inflation fighting is believed in
Too much?
Now trying to hint at higher future inflation gets missed
Ahh the irony
It's a shame we will exit the QE interval
Without a broad consensus up or down on it's efficacy
But then the long since " proven efficacy "
of fiscal activism ...un countered by the fed at least
And At the zero bound
Was so muddied up
By the stimulus package
and the turn toward the long view
And the rigors of budgetary prudence
Lots of decent people now wonder about Keynesian remedies
Even as they take fiscal austerity in the chops
Making the portfolio class wealthier on paper
by buying into the asset markets
Sure looked like an excellent adventure
Without a broad consensus up or down on it's efficacy
But then the long since " proven efficacy "
of fiscal activism ...un countered by the fed at least
And At the zero bound
Was so muddied up
By the stimulus package
and the turn toward the long view
And the rigors of budgetary prudence
Lots of decent people now wonder about Keynesian remedies
Even as they take fiscal austerity in the chops
Making the portfolio class wealthier on paper
by buying into the asset markets
Sure looked like an excellent adventure
darrell said in reply to don...
Stagflation was short-term, cost push based on oil embargo.
Paine said in reply to darrell...
Cut short
Ie
The prolonged taper we might have seen
With no second contraction etc etc
Might have
Eft us thinking inflationary intervals are stubbornly resistant to remedy
The beauty of the evil tittle named volcker
He proved inflation can be forced into retreat
by a remorseless throttling of credit
The delta of p was tamed
By a tsunami of layoffs
It's as if the irrigation system was shut down to prevent an accelerating secular glut
of corn
Ie
The prolonged taper we might have seen
With no second contraction etc etc
Might have
Eft us thinking inflationary intervals are stubbornly resistant to remedy
The beauty of the evil tittle named volcker
He proved inflation can be forced into retreat
by a remorseless throttling of credit
The delta of p was tamed
By a tsunami of layoffs
It's as if the irrigation system was shut down to prevent an accelerating secular glut
of corn
darrell said...
No one expected it? Really? I expected it!!!
Making it possible for the banks to make more loans to willing and qualified borrows, in no way creates more willing and qualified borrowers.
Everyone willing to go into debt is already in debt up to their eye balls.
Those few qualified borrowers that remain are the ones that have no interest in going into debt.
Making it possible for the banks to make more loans to willing and qualified borrows, in no way creates more willing and qualified borrowers.
Everyone willing to go into debt is already in debt up to their eye balls.
Those few qualified borrowers that remain are the ones that have no interest in going into debt.
Paine said in reply to darrell...
When its a tale of systemic irrationality
Sometimes exaggeration gets closer to the truth then the bare facts
Sometimes exaggeration gets closer to the truth then the bare facts
