tag:blogger.com,1999:blog-2546602206734889307.post5255446927325982442..comments2024-03-29T12:16:15.785+00:00Comments on mainly macro: Unemployment, the output gap and wage flexibilityMainly Macrohttp://www.blogger.com/profile/09984575852247982901noreply@blogger.comBlogger14125tag:blogger.com,1999:blog-2546602206734889307.post-7945193187117145222013-07-29T18:24:12.164+00:002013-07-29T18:24:12.164+00:00«This has the advantage that we know what policy s...«This has the advantage that we know what policy should be aiming to do: achieving the natural level of output.»<br /><br />I understand that this is a blog post and there are warnings in the text about "distortion" and hysteresis effects, but this very conventional statement is the usual very short-termist approach.<br /><br />Because it is as important and far perhaps more important that the main objective of policy be the aim to *increase* the natural level of output via productivity growth, and that *achieving* it instant-by-instant is a secondary consideration.<br /><br />Long term improvements in living standards come from *increasing* the natural level of output, and that can be a far bigger effect than trying to *reach* the natural level of output at all times.<br /><br />In an ideal world there is no compromise between these two goals: everything that is done to *reach* the natural level of output also helps *increasing* level of natural output, or at least does not decrease it.<br /><br />But in theory as well as in practice a lot of things that help reach the natural level of output can work against increasing the natural level of output.<br /><br />Even more subtly, things that can help reach the natural level of output today can make it much harder to reach it later on, by creating countervailing factors whose full effects happen later, as described cogently by Kindleberger and Minsky among others.<br /><br />Among the ways that focusing on *reaching* the natural level of output can damage the chances of *increasing* the natural level of output are various forms of under-depreciation of capital, such as encouraging the assumption of tail risk, for example if the form of excessive leverage, or the subsidy of wasteful forms of demand, for example for beachfront properties in Arizona.<br /><br />Also, as the Sraffian "return of the technques" and other amusing scenarios show, the economy can achieve multiple mostly-steady states (calling one "equilibrium" is appalling IMNHO), and is also definitely path dependent.<br /><br />Keynesian/class economists care a great deal about that, about capital formation ("supply side" economics) as well as or even more than the vagaries of the cycle ("demand side" economics).<br /><br />Thus I really take exception to:<br /><br />«The answer is that, as long as what they do does not seriously distort the economy, they should try to get to the natural level of output, because that produces an efficient economy.»<br /><br />because the level of policy-interest and the availability of credit at that interest level deeply influence:<br /><br />* the distribution of income;<br />* capital formation;<br />* the composition of capital.<br /><br />Because for example while the policy rate of interest of close to zero, I personally cannot borrow at close to zero, by deliberate policy design; only the friends of the Prime Minister, the Chancellor and of the Governor of the Bank of England are favoured with such a gift.<br /><br />The result of these massive distortions is that like in the past 30 years of reckless (private) credit policy perhaps demand has been sustained as in the Great Moderation, but also *increasing* a higher natural output level has been made more difficult.<br /><br />Keynes himself held a long term view of the economy, remarking that almost all capital is long term, that when a casino drives capital formation the job is unlikely to well done etc., that eventually the rentier would be euthanized and most people might choose to work 2 days a week; for him short term demand management, which involved dampening extremes, was just smoothing the path towards increasing level of natural output, and purely to ensure that *people* were not the collateral damage of creative destruction.<br /><br />Let's not forget that. Because often the advocates of policies that forget that are usually working to further the interests of shysters and rentiers.<br />Blissexnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-24655698603584166142013-07-22T15:33:47.113+00:002013-07-22T15:33:47.113+00:00On interestrates.
Imho reality is mch more complic...On interestrates.<br />Imho reality is mch more complicated. Next to the technical stuff how to calculate it. Interestrates are determined by both fundamental and by technical stuff.<br />Your definition is basically purely fundamental. This is probably not correct. Your natural rate could differ at no output gap simply because of marketcircumstances. And say the following year (also with no output gap and say similar inflation might give another natural rate).<br />Probably the most correct description is that there is a fundamental/normal/natural rate. Which however can be affected by technical circumstances in both directions. <br /><br />From a finance pov interest is something in which risk plays an important role. We often assume riskfree but that is just a definition. All things in life have risks attached and so do riskfree loans.<br />What looks clear from that angle that if risk goes up so will interest demands.<br />That is one of the reasons why if things get in the percepotion of markets far from the normal riskpremia will be pushed upwards (whatever CBs do). CBs could push it back even completely but that is hardly a natural situation. What we have now by several meaures CBs are lowering marketdemands for risks involved. However there will remain a friction. If that actually comes to the surface is another point.<br /><br />In a nutshell a 'natural' interest with a CB heavily interfering most of the time is a bit of a contradictio.<br /><br />Anyway what we see is Macro like yourself says interestrates are still too high. What Finance however says is that they are probably too low (looking at the risk). And subsequently that from a Macro perspective all sort of unnatural stuff is done to make it effectively even lower). And from a Finance perspective investors are looking constantly for alternatives (abroad, but also in-out-in-out stuff and going into high risky stuff (with low yields, like PIIGS bonds).<br />This is probably the reason why there is so much friction/turbulence and it looks like CBs possibilities have come to their borders (even that the CBs have lost grip on certain markets according to some).<br />Looking from a Finance perspective the technical influence should be huge to compensate for the fundamental (risk) in such a way that the present low interestrates are accepted by markets. And putting these rates under heavy pressure when the excess demand created by QE and indirectly via lowering rates is lifted even for a relatively small part. And almost per definition you create a bubble unless you assume that CBs should constantly interfere (basically what we have now).<br /> Riknoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-86337974981845139202013-07-21T07:06:17.667+00:002013-07-21T07:06:17.667+00:00Productive potential being constant in all scenari...Productive potential being constant in all scenarios implies constant productivity.<br />However...<br />productivity = real hourly wage/labor share<br /><br />In scenario 2, if real wages stay the same and productivity stays the same then labor share of income must stay the same and productive capacity stays the same.<br /><br />In scenario 3, if real wages fall, and labor share does not change, then productivity falls and productive capacity should fall too.<br /><br />You mention that firms are protecting their profits, but you don't mention if they are lowering or raising labor share. In scenario 3, labor share would have to fall to keep productivity and productive capacity constant. <br /><br />If labor's share of income is changing, this affects effective demand, since labor's relative income to output determines the purchasing power for finished goods.<br /><br />What is happening to labor share in your 3 scenarios?Edward Lamberthttp://effectivedemand.typepad.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-1935488531034227892013-07-21T06:23:46.005+00:002013-07-21T06:23:46.005+00:00http://rodeneugen.wordpress.com/2013/07/21/the-mai...http://rodeneugen.wordpress.com/2013/07/21/the-main-problem-of-output-gap-is-it-emphasize-on-employment-level-and-the-interest-rate-it-is-not-surprising-that-most-of-the-economic-models-are-focused-in-these-two-issues-it-is-not-surprising-af/<br />EugenRhttp://rodeneugen.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-66829607200722785092013-07-21T06:17:49.490+00:002013-07-21T06:17:49.490+00:00Output gap and commondity prices
21/07/2013
The m...Output gap and commondity prices<br />21/07/2013<br /><br />The main problem of output gap is it emphasize on employment level and the interest rate. It is not surprising that most of the economic models are focused in these two issues. It is not surprising after all since the 1929 crisis and the total failure of the economic leadership of the time to cope with the unemployment problem and the horrendous consequences of their failure the main aim of the economist is to prevent anything similar to happen. However, if the model of output gap is focused too much on the unemployment, it naturally neglects the other limiting factors of the output. What if the economy reached its limits not because of limited aggregated demand, not because of limited labor force but because of limited other resource, for example energy and let’s assume the supply of the energy is with very limited flexibility. Any policy trying to stimulate the economy will case immediate increase in energy prices and with it the economy will be balanced at higher price levels. Nevertheless, if increased energy prices will be necessarily followed by increase of production prices. Now since the wages and the profit remain at the same level, the aggregated demand will stay at its nominal level previous to the energy price increase. The result will be decrease of the aggregated demand in real prices. Yet do not forget the energy price increase necessarily caused price increase and central bank as reaction to it will probably rise the interest rate.<br /><br />World Oil Prices 1970-2008.PNG<br /><br />http://switchboard.nrdc.org/blogs/mbaumhefner/thank_you_eia_for_making_it_cl.html<br /><br />http://www.americanthinker.com/blog/2010/12/graph_for_the_day_december_22.html <br /><br />The two graphs above show obvious correlation between the oil price and the unemployment. As to the inflation, it is in no correlation with the unemployment and the oil price, since 2008 but it was in correlation in the previous energy crisis at 1973 and 1979-1980. What can be the reason to this inconsistency? Probably that the oil price is not so crucial as it used to be in the seventies.<br /><br />World energy consumption by fuel type Source: 1965-1979: BP Statistical Review of World Energy (2008) (excludes wind, geothermal and solar energy); 1980-2030: U.S. Energy Information Administration International Energy Outlook (2008).<br /><br />http://energy.sigmaxi.org/?m=200904<br /><br />Does it mean there is no danger of a new stagflation as it happened in the seventies? To my opinion such a danger still exists, since the energy is not the only economic resource that can become scarce. Before the 2008 economic crisis the prices of all many commodities raised immensely as seen in the following chart, yet this price hike was short lived because it started at 2006 and with 2008 economic crisis the prices collapsed again. But since 2009 the commodity prices started to rise again and if this trend will continue, probably the phenomena of the stagflation of the seventies will be back. <br /><br />http://www.energyresourcefulness.org/Fuels/ethanol_fuels/modern_production_of_ethanol.html<br /><br />http://rodeneugen.wordpress.com/2013/07/21/the-main-problem-of-output-gap-is-it-emphasize-on-employment-level-and-the-interest-rate-it-is-not-surprising-that-most-of-the-economic-models-are-focused-in-these-two-issues-it-is-not-surprising-af/<br /><br />EugenRhttp://rodeneugen.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-41653601100733788162013-07-20T14:06:55.011+00:002013-07-20T14:06:55.011+00:00To finish the thought: If flexible wages cause de...To finish the thought: If flexible wages cause deflation then monetary policy aimed at ending this deflation will be more acceptable to inflationophobes than unconventional monetary policy that may increase inflation from a low positive inflation rate, even if the macroeconomic effects are identical.Rob Rawlingsnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-20666141500490974622013-07-20T13:46:51.549+00:002013-07-20T13:46:51.549+00:00I agree that you don't get to choose the level...I agree that you don't get to choose the level of wage flexibility you have to deal with at least in the short run (though I'm guessing that Britain did a good job of changing this via non-monetary policy in the 1980's and 1990's ?).<br /><br />I also agree the key thing to understand is "why are there inflation fears that are stopping monetary policy closing the output gap in the first place". Is there a simple answer to that question ? Despite much empirical evidence that unconventional monetary policy helps to narrow the output gap and has done so without causing inflation expectations to increase markedly, it still seems like it is fear of inflation on the part of CBs that prevents unconventional monetary policy from being used to the level that would be needed to bring something like a full recovery.<br />Rob Rawlingsnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-6871656266778371602013-07-20T12:17:05.347+00:002013-07-20T12:17:05.347+00:00so when my wages fall, will my two year lease and ...so when my wages fall, will my two year lease and all my payments on debt become lower as well? no will not. refinancing not guaranteed neirher. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-63191410936321630072013-07-20T11:09:23.068+00:002013-07-20T11:09:23.068+00:00I don’t like using monetary policy to adjust aggre...I don’t like using monetary policy to adjust aggregate demand. It distorts the economy towards the production of investment goods, a distortion that has to be unwound come the recovery.Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-86389852587918332272013-07-20T08:39:12.654+00:002013-07-20T08:39:12.654+00:00I know that Krugman uses the employment-population...I know that Krugman uses the employment-population ratio for prime-age adults aged 25-54 (see for example blogs September 7, 2012 'The Employment Situation' and July 12, 2013 'Les Not So Miserables'). By this measure, US unemployment has been flat for years, not falling as shown on the above graph. <br /><br />I don't know if there is an equivalent UK measure, but our figures seem so shrouded in zero hours contracts and self-employed people on unemployment benefits to the point where I wouldn't know the extent of their reliability.<br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-52619390131677258762013-07-20T08:27:16.033+00:002013-07-20T08:27:16.033+00:00Yes, that is what determines actual output in all ...Yes, that is what determines actual output in all these cases.Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-38931512087549909912013-07-20T08:26:45.385+00:002013-07-20T08:26:45.385+00:00I disagree. You pretty well have to work with the ...I disagree. You pretty well have to work with the degree of wage flexibility you have got. The resistance to nominal wage cuts is very deep. What you should ask is why are there inflation fears that are stopping monetary policy closing the output gap in the first place. <br /><br />In other words, you cannot choose to be like economy 2 or 3 rather than economy 1. And in economy 1 monetary policy should be trying to close the output gap. Mainly Macrohttps://www.blogger.com/profile/09984575852247982901noreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-45331750100126516822013-07-20T00:09:32.370+00:002013-07-20T00:09:32.370+00:00Let's remember Keynes' concept of effectiv...Let's remember Keynes' concept of effective demand. (Chapter 3 of the General Theory...)<br /><br />"This analysis supplies us with an explanation of the paradox of poverty in the midst of plenty. For the mere existence of an insufficiency of effective demand may, and often will, bring the increase of employment to a standstill before a level of full employment has been reached. The insufficiency of effective demand will inhibit the process of production in spite of the fact that the marginal product of labour still exceeds in value the marginal disutility of employment."<br /><br />Are you measuring effective demand in your scenarios above?Edward Lamberthttp://effectivedemand.typepad.comnoreply@blogger.comtag:blogger.com,1999:blog-2546602206734889307.post-29765391602269365652013-07-19T20:28:20.443+00:002013-07-19T20:28:20.443+00:00"As David Beckworth says, lower inflation may..."As David Beckworth says, lower inflation may raise actual output by encouraging expansionary unconventional monetary policy"<br /><br />This seems like a powerful point and implies that flexible wages plus an appropriate monetary policy will be the best option to minimize the output gap. Without monetary policy then the effects of of falling wages on AD are indeterminate. But introduce monetary policy and that changes. Monetary policy can in theory hit any level of AD (expressed in nominal terms) that it wants to but may be constrained by inflation fears from actually doing so. The more downward flexibility in wages the less these inflation fears will come into play and the smaller the output gap.Rob Rawlingsnoreply@blogger.com