I’m joking of course. He’s still grinding the supply-side axe (though judiciously here, IMO). But you gotta admire a fellow when he follows the logic of the data where his own logic requires him to go. He’s just done three posts about Germany’s growth and unemployment rates through the great recession:
Annualized change, Q1 2006 – Q4 2012:
RGDP: 1.3%
NGDP: 2.4%
But the unemployment rate fell from about 12% to 5.4%.
Lackluster GDP growth coupled with a damned impressive drop in unemployment. How do you account for that in Scott’s long-argued model, where NGDP growth drives employment growth?
As he says, he buries the lede in his first post. Here it is, from the end of the post (I’m reversing these two paras to make it flow even better; emphasis mine, correction his):
Recessions are not caused by less spending; they are caused by less income going to workers. Usually the two go hand-in-hand, but the German miracle tells us that when they diverge, it is
employeremployee income that matters most.When I started blogging I assumed wage targeting would be politically impossible, and knew that NGDP targeting was already a well-regarded concept. So I latched on to NGDP targeting. But in retrospect I wish I’d latched on to aggregate employee income. Call it “income targeting.â€
Did I mention admirable? Speaking of the very argument he’s been making doggedly and insistently for years, he says:
I took some shortcuts, instead of staying true to the “musical chairs model.†In the past I’ve often argued that a fall in NGDP causes unemployment because there is less income to pay workers, and yet hourly wages are sticky. Some workers end up sitting on the floor. The logic of that model suggests that the real problem is not unstable NGDP, but rather instability in a component of NGDP, namely total wages and salaries.
And speaking of the school of economics based on that thinking, a school that he’s been primarily responsible for creating and popularizing, he says:
Now that market monetarism riding high, I figured it was time for a vicious internecine struggle for the soul of market monetarism. Consider this the first shot.
The fruit doesn’t fall far from the tree, of course; in his second post he attributes the “miracle” largely to “structural”/supply-side factors:
Germany did lots of labor market reforms, which I’ve discussed in previous posts, and this opened up lots of low wage jobs.
The basic idea: the Hartz reforms beginning in 2003 resulted in more jobs, though often with shorter hours and/or lower wages, all netting out to a larger share of GDP going to employee compensation.
This is not crazy. But it’s incomplete. And he even acknowledges that in a nod to his commenters:
Many commenters pointed to various job sharing programs, or subsidies to keep workers employed during the recession. Libetaer used the metaphor of putting 2 workers in one chair. The one chair reflects relatively meager growth in NGDP, and the two workers represent job sharing.
The key problem I find in his thinking is his glossing over a key word in the preceding: subsidies. He only discusses job sharing, which fits neatly in his musical-chairs analogy. (How about musical benches instead? When the music “stops” — national income is weak — workers squeeze in more tightly.)
But the Hartz reforms did more than make it easier for firms to hire cheap (create more chairs/bench space); they increased subsidies for low-wage and part-time jobs. This 1) makes it easier for employers to hire lower-productivity workers for low wages, 2) gives those lower-productivity workers sufficient incentive to take those jobs, and 3) increases the share of national income going to lower-income workers.
And since those workers have a high propensity to spend their income, all things being equal that distributional shift should mean there’s a higher average velocity of money, aggregate demand, NGDP, etc., all in a virtuous cycle. (See JW Mason here and me here.)
Scott says much the same thing from a different direction:
The welfare loss to a society from a 5% RGDP shock is much greater if 5% of workers lose their jobs, as compared to all workers staying employed, but working 5% less hard.
This is a statement about absolute utility, but (hence, because spending is driven by the desire for utility) it’s also a statement about different policies’ distributional effects on spending and aggregate demand. Because subsistence has (very!) high utility, cutting some subsistence incomes (which would surely be re-spent) results in a bigger hit to aggregate demand than cutting many marginal incomes (which are less likely to get re-spent). It’s straightforward Marginal Propensity to Spend out of income thinking.
I’m here to suggest that the same logic, rather inevitably, applies to subsidies for low-wage jobs (paid for by better-off taxpayers). We redirect disposable income at the margin from higher-income folks, and flow it into the hands of lower-income folks who will spend it on. Got velocity?
Which brings me back to the axe that I’m forever grinding: the best and most feasible structural labor-policy change we could make in the U.S. to improve long-term macroeconomic performance would be to greatly expand the Earned Income Tax Credit (while streamlining its tortured administration and — to increase its “salience” — delivering the credit on weekly paychecks as we do with payroll tax deductions).
If these subsidies were sufficient to make low-wage work/workers attractive for both employers and workers (and perhaps if they subsidized hourly compensation rather than annual family income), we might even be able to do what the Germans, with their generous low-wage subsidies, have been able to do: do without minimum-wage laws.
I bet Scott would like that.
And we still haven’t talked about national compensation/income targeting by the Fed, which promises to be a very lively discussion indeed. (I can just see Ben Bernanke slapping his forehead and looking heavenward.)
Cross-posted at Angry Bear.
Comments
36 responses to “Scott Sumner Goes Marxist, Proposes Targeting Labor’s Share of Income”
I’ve been promoting wage subsidies for 30 years.
But you really need to give up on that MPC stuff, it was discredited decades ago. Monetary offset rulz.
@Scott Sumner “I’ve been promoting wage subsidies for 30 years.”
Good on ya.
“But you really need to give up on that MPC stuff, it was discredited decades ago.”
I’ve poked around a lot looking for a straightforward, cogent refutation (that doesn’t make assumptions that I consider to be questionable). Any leads for me?
@Asymptosis
By MPC stuff, do you both mean marginal propensity to consume?
@Asymptosis
“I’ve poked around a lot looking for a straightforward, cogent refutation … Any leads for me?”
I’d settle for a rambling, incoherent refutation.
Not thinking of any source in particular for that.
🙂
I hate to say it but I might actually agree with Sumner but I would phrase it a little differently.
Instead of; “Recessions are not caused by less spending; they are caused by less income going to workers” I would say modern financial crises…. which lead to recessions…. are caused by workers share of income falling. The reason why should be obvious but if its not Ill explain why (in my view)
As workers wages fall they are less able to take on more credit (and as we know without more credit our economy slumps) and more of their income share is going to paying off previous period consumption, additionally, many will default on current loans. As you need to devote more to previous period consumption you are devoting less to present period consumption and we see drops in sales etc etc. Overall “spending” might stay near level since those “with” probably start buying more and more savings vehicles (which we unfortunately refer to as investment) for a while until a market “event” is realized. Its not overall spending that is as important as spending on things which we need workers for that determines our employment level. This is the flaw of NGDP targeting in my view. NGDP can be high but not lead to more employment depending on the nature of what is purchased. Buy something built by a robot and no person becomes employed as a result of your spending.
the main flaw in NGDP targeting is that it is inflexible
that’s why monetary authorities will never adopt NGDP as a target – they will only use it an input for consideration in setting monetary policy – and that’s not the same thing as targeting it
Of course this also points to the absurdity of decreasing consumption. What workers spend on IS consumption goods that a firm has produced. I believe Scott has also called for less consumption (as a means to “cause” more investment) so while I agree with A point he has made I still think he is overall very muddled…… much like Nick Rowe who made a post stating that “monetary policy doesnt work by increasing actual borrowing….. monetary policy works by increasing spending not borrowing” So in Nicks mind bank lending is not the other side of borrowing… but I digress.
@JKH
RGDP 3%, P 2%, NGDP about 5%.
“Something happensâ€. RGDP 1%, P .5%, NGDP about 1.5%.
Next, RGDP 1%, P 2%, NGDP about 3% and stays there.
What is happening if P is raised to 4% and RGDP starts falling?
I’ve have not seen a good answer about that from NGDP targeters.
@Greg
Let’s say I save $100,000. Someone else wants to start a new bank. They sell me a $100,000 bank bond (bank capital). The reserve requirement is 0%, and the capital requirement is 10%. Can the new bank now make 10 (ten) $100,000 mortgage loans?
If so, I saved $100,000. I lent $100,000 to the bank, and the bank borrowed $100,000. The bank lent $1,000,000 to ten other people, and the ten other people borrowed $1,000,000. The bank lent $1,000,000 to ten other people, however, it only borrowed $100,000 from me.
Is that scenario correct?
Just some general points on the German model:
– While Germany is not a particularly high tax country by European standards, labor taxes (including payroll taxes) on the average worker are exceptionally high (~50% vs ~30% for the USA). Government benefits therefore are not particularly redristibutionist, they are paid for by average workers. (OECD table here: http://economix.blogs.nytimes.com/2012/05/01/taxes-and-employment/ )
– Germany has one of the shortest hours worked per worker in the OECD, and consequently I suspect a high emphasis on home production. Transactions (direct or indirect) between average workers does not make sense at these tax rates when one can do something oneself (remember one taxes at these rates twice, once when the first worker gets paid, and then again when the first worker pays the second worker).
– The consequence of this is that despite high tax rates, per capita government spending in Germany is lower than in the USA.
On balance, I doubt that a majority of Americans, liberals included, would actually want to reproduce the German model in the USA.
@Fed Up
right – whether it happens or whether its a risk
that’s why an NGDP target inevitably would end up being floating rather than fixed
which just becomes inflation targeting, or flexible inflation targeting, which is what we already have
@JKH
i.e. the idea of a fixed NGDP target is just inconsistent with sensible risk management, because its too inflexible
@Greg
“As workers wages fall they are less able to take on more credit (and as we know without more credit our economy slumps) and more of their income share is going to paying off previous period consumption, additionally, many will default on current loans.”
I’m of the opinion that lower and middle class workers were experiencing negative real earnings growth by their monthly budgets and using debt to make up the difference.
“NGDP can be high but not lead to more employment depending on the nature of what is purchased. Buy something built by a robot and no person becomes employed as a result of your spending.”
1) if real GDP growth is below labor productivity growth, then employment falls.
2) higher prices may lead to less real GDP, not more.
@Greg
“(and as we know without more credit our economy slumps)”
The questions are why and what to do about it.
@Fed Up
Your scenario at #9 sounds correct to me but it seems there should be a broader point to be made, not sure exactly what you are getting at.
As far as why our economy slumps without more credit money, it seems obvious to me that the reason is that credit money is the lifeblood (currently) of our economy. When banks stop making loans econ activity dies. Of course banks stop making loans when people stop seeking loans. Question then becomes why do people stop seeking loans suddenly?
@Greg
A bunch of economic sites I see have some reason why debt does not matter. I see:
1) for every borrower, there is a lender
2) for every $1 borrowed, there’s $1 lent
3) banks are just financial intermediaries between savers and borrowers
4) debt is an asset to someone and a liability to someone else
I don’t believe any of those means debt does not matter. Maybe I will be wrong. I am hoping that example of mine shows 1, 2, and 3 are not correct. For #4, banks produce liabilities (demand deposits) that are MOA/MOE. If my example is correct, then the purchasing power of borrowers increases more than the purchasing power of savers decreases. “Banks” increase the amount of both MOA and MOE. I consider MOA and MOE to be currency plus demand deposits.
Now take MV = PY. Assume P = 2% per year and Y = 3% per year. Assume V is constant or falling. M = currency plus demand deposits (not monetary base, currency plus central bank reserves). That means M needs to grow by at least 5%. The central bank wants the “Banks” to be the ones increasing M using debt. That opens up the possibility that debt defaults and debt repayments can lead to a shortage of M.
Thoughts?
@Greg
“As far as why our economy slumps without more credit money, it seems obvious to me that the reason is that credit money is the lifeblood (currently) of our economy.”
Is debt/credit only the “lifeblood” of the economy because the way the system is set up now all new MOA/MOE has to be “borrowed” into existence thru a bank or bank-like entity?
@Fed Up
Now I see where you are going with it and I agree totally. I see those same claims made and, to me, if you understand the nature of bank lending those are absurd positions. Additionally, most people making those claims make them only in regard to private debt but those same things should apply to govt debt as well yet we are supposed to be terrified when govt debt approaches 100% of GDP (which is a third as high as private debt BTW)
I made this comment at Winterspeaks site quite a few months ago in a thread on this same topic;
“The reason they dont think private debt is a problem is that they view it as debt owed to each other as WS said. Ive seen Nick Rowe AND Paul Krugman state as much. They think if I am in debt that someone somewhere is in surplus and therefore that surplus is being invested and not causing a monetary imbalance. They fail to see that virtually all of us are indebted to the banking system, which is really a third party outside the economy so to speak. A banking systems “surplus” is of no more use than a govts budget surplus. Banks dont “spend” their surpluses. They exist only on their books as “outstanding loans” owed to them. But when we cant pay them back they freeze up.”
Now about your MOE and MOA. When I think of that nomenclature I think of demand deposits AND cash as MOE but things that are bought (like stocks or other financial instruments) and have price appreciation or depreciation as MOA. To me, MOA is simply price, or another way of saying “How much MOE it takes to separate me from this”
@Greg
I consider borrowing from a friend loanable funds, while bank borrowing is not loanable funds.
Private debt can be bank borrowing or “friend” borrowing. Gov’t debt can be bank borrowing or “friend” borrowing. I believe people should concentrate more on the similarities between gov’t debt and private debt. Hopefully, no entity would borrow then.
@Greg
About MOA and MOE, see these 2 links:
http://jpkoning.blogspot.com/2012/11/discussions-of-medium-of-account-could.html
Last comment.
http://www.asymptosis.com/medium-of-account-vs-unit-of-account-brazil-anyone.html
In the USA, I would say MOA equals currency plus demand deposits. UOA equals $1 of currency or $1 of demand deposits.
In the USA, I would say MOE equals currency plus demand deposits. UOE equals the different denominations of currency and demand deposits???
@Scott Sumner
“But you really need to give up on that MPC stuff, it was discredited decades ago. Monetary offset rulz.”
I’m going to try to interpret that. I find it difficult to believe that having the central bank buy a bond from a bank and then the bank buying a bond from Warren Buffett or Apple will get either Warren Buffett or Apple to stop saving in financial assets or the MOE/MOA itself and start spending on consumption goods or start spending on investment goods in the present.
@Fed Up
Ill go with that definition of loanable funds. Works for me. But Ill add that friend borrowing cant even be measured so when we report the level of private debt in this country its virtually ALL bank borrowing. The things which the fed tracks are bank activities. They have no way of knowing how many thousands I might owe to you or Ramanan. Worrying about the level of friend borrowing is silly, that activity truly is zero sum, bank borrowing isnt.
In theory every American could go out and get a mortgage for 200% of their income tomorrow which would put everyone in debt to the banks. In the other guys model, whose savings would we be borrowing ?
[…] Scott Sumner’s recent reversion to labor share as the appropriate target for monetary policy, I’m thinking that Market Monetarists might find Lambert’s work as interesting as […]
[…] Scott Sumner’s recent reversion to labor share as the appropriate target for monetary policy, I’m thinking that Market Monetarists might find Lambert’s work as interesting as […]
The debate is opening up on labor share targeting. Awesome!
I see you posted today about my work on effective demand.
A good link to include would be the one on my model for a monetary policy based on labor share.
http://effectivedemand.typepad.com/ed/2013/05/universal-model-for-monetary-policy.html
@Greg
“thousands I might owe to you or Ramanan.”
Give my money back 🙂
@Greg
“Friend” borrowing is basically loanable funds where the capital requirement is 100%. I save $1,000 in MOE/MOA then I buy $500 of a gov’t bond and buy $500 of a bond from a firm.
If a bank or bank-like entity buys a $500 gov’t bond and $500 of a bond from a firm that is not loanable funds. The capital requirement is less than 100%.
@Greg
“In the other guys model, whose savings would we be borrowing ?”
Nick Rowe says we are borrowing from ourselves. I don’t believe that is correct. I think others would say something similar.
@Greg “I would say modern financial crises…. which lead to recessions…. are caused by workers share of income falling.”
I like that a lot. I think “business cycles” are something of a myth; main street would keep plugging along working, producing, buying, selling, if it weren’t for financial/leverage cycles. When workers don’t get a big enough income share, the ultimate collateral for that leverage collapses.
@Asymptosis
So if you want zero debt or not enough debt, how are you going to get more MOA/MOE into circulation?
“main street would keep plugging along working, producing, buying, selling”
What if they decided to save more and retire earlier?
@Fed Up
“Nick Rowe says we are borrowing from ourselves. I don’t believe that is correct. I think others would say something similar.”
Actually in a sense I agree with Nick, but not in the way he probably means it.
The way I came to view a credit relationship with a bank I had to start by asking a few questions;
1) Where is the money coming from? I think PKE, MR/MMT and the Keen circuitists have the best answer to this question…. it comes from thin air. The loan creates the deposit in the banking system and the deposit is used as the medium of exchange to purchase something
2) What is it “backed” with? Backing is kind of vague but the assumption within the question here is that someone else is putting up the money to be loaned. They are allowing their money to be used with a promise of a return on investment. This happens in some scenarios I believe like some private equity deals and even corporate bond issuances but this is not the manner in which a bank loan takes place.
There is a level of equity that banks must have to insure their loan portfolios but each individual loan is backed with something else. In mortgages (the preponderance of loans) its the property value and your future income stream, in credit cards its the income stream of the borrower,and in student loans its the future income prospects that you are “borrowing against” so to speak. The success of the whole relationship depends on the bank accurately assessing your future income prospects (and your assets). So really what you are borrowing is your own future income not someone elses savings.
Thats how I see it.
@Ramanan
I left off the numeraire…… thousands of pesos!!
The main advantage of targeting wages is that wages are far stickier than other prices and unemployment is the worst part of recessions.
http://azmytheconomics.wordpress.com/2013/01/18/what-is-the-purpose-of-macroeconomic-policy/
@James Oswald “The main advantage of targeting wages is that wages are far stickier than other prices and unemployment is the worst part of recessions.”
Also that the labor generating those wages is the ultimate collateral for outstanding private debt? A small decline in labor share can, through the leveraged collateral, result in big problems for debtors and creditors?
@Asymptosis
“Also that the labor generating those wages is the ultimate collateral for outstanding private debt? A small decline in labor share can, through the leveraged collateral, result in big problems for debtors and creditors?”
Yep. Everyone out there, every capitalist out there, firm, bank, stock broker, educational institution is trying to get their share of the working guys income. When our share goes down the pickings get slimmer and then the workers get harangued for being lazy, uneducated, do nothing malcontents.
Its kind of strange really. All these guys are making bets based on OUR future income levels being stable and then support policies which destabliize our incomes and make their bets look worse and go bad. And almost none see this as a problem
@Greg
Where is the “money” coming from? Demand deposits can be created out of thin air. The loan part is mostly that way too.
It seems to me the backing for the liability (demand deposit) is from the ability to repay, the collateral, capital, and some kind of guarantee.
“So really what you are borrowing is your own future income not someone elses savings.”
I believe there are some assumptions there that might not come true. Does it also probably depend on more MOE/MOA in the future and how it is distributed?