Sumner has a kind of rebuttal post to Steve Waldman's.
http://www.themoneyillusion.com/?p=14117#comments
Here is the original post by Steve
http://www.interfluidity.com/v2/date/2012/04
Sumner claims that Steve somehow confused real wages and real incomes. Here is the paragraph by Steve:
"In the standard New Keynesian story, a depression is caused by the relative prices of goods and services falling out of whack. This is the basis for much of the mainstream policy consensus. The source of macroeconomic problems is sluggish adjustment of some goods and service prices, and stabilizing the price level should diminish the need for such adjustments. Macro policy can’t prevent relative prices in the real economy from needing to change sometimes. But it can prevent difficult-to-adjust prices from requiring frequent updates due to fluctuations in the overall price level. Because some important prices — the price of labor especially — are thought to be “sticky downward” (meaning they can “ratchet” upwards but can’t adjust down), targeting a positive inflation rate is recommended. The gradual, predictable movement of prices allows slow updates, preventing misalignments due to sluggish adjustment. The upward-slope permits “sticky downward” prices to fall in real terms relative to other goods and services by simply not rising with other prices. A recession, in the New Keynesian telling, occurs when this stabilization policy is not sufficient. If changes in supply and demand are so great that “sticky downward” prices must fall faster than the targeted rise in the price level, markets won’t clear. If the “sticky downward” price is workers’ wages, then it is employment markets that won’t clear, and we will experience mass joblessness. If this occurs, a cure would be to increase the targeted rate of inflation until real wages fall relative to other goods and services. When real wages fall enough, employment markets will clear again and the recession will end."
"In the post-Keynesian story, a depression is driven by an decrease in agents’ willingness or ability to carry debt. Agents “pay for” decreased indebtedness by devoting their income to the purchase of safe assets (including especially their own outstanding debt) rather than spending on real goods and services. Unfortunately, money spent on financial asset purchases does not create income (they are asset swaps), and may not be cycled back into income for producers of real goods and services. So, in aggregate the attempt to reduce indebtedness can lead to a reduction of income that sabotages the attempt to pay down debt. This is the famous “paradox of thrift”. We simultaneously experience unemployment (reduced spending and income to real goods and service providers plus sticky wages means that people get canned) and financial distress (reduced income and fixed debt makes prior debt ever more burdensome). In this story, reducing real wages is not a solution. Real wage reductions might mitigate unemployment temporarily, but they also engender financial distress. Financial distress then causes agents to redouble their efforts to satisfy debts, reducing aggregate income and requiring further reductions in real wages ad infinitum. The only way out of a post-Keynesian depression is to increase real wages relative to the real burden of debt. In the post-Keynesian story, inflation is helpful only if real incomes hold steady, or, at very least, fall more slowly than the real value of prior debt."
Sumner's rebuttal:
"Keynes argued that wage and price stickiness were factors in the transmission of nominal shocks into real output changes, but also famously argued that wage cuts probably wouldn’t help, because they would simply push you deeper into deflation. But that argument has no merit if the central bank is targeting inflation or NGDP (as in Britain today.) In that case wage cuts can increase employment. Now that doesn’t mean that a fall in real wages will necessarily be correlated with higher employment—we’ve known for decades that there is no reliable cyclical relationship between real wages and the business cycle. Indeed I’ve argued that we should stop talking about inflation and real wages entirely, and instead focus on the ratio of hourly wages to NGDP. That ratio rose sharply in the US during 2009, and I’m almost certain the same happened in Britain."
So if the CB targets inflation or NGDP then it can increase employment? As an aside, if Britian is doing NGDP today is that much of a reccomendation for it as they are now in a double dip?
"In fact, in every single macro model ever developed (including Austrian, RBC, monetarist, Keynesian, and Marxist) expansionary policy initiatives are only successful if real incomes don’t fall, because real income is the variable you are trying to expand! Now I suppose some readers are thinking that I’m nitpicking, and that Steve obviously meant real wages, not real incomes, in that final sentence. But that won’t work either, as it would make the rest of his claim incorrect. It is real incomes that determine consumption spending, it is real incomes that determine ability to serve debt. Not real hourly wages. Even shifting to an income distribution argument won’t help; as long as the central bank targets inflation of NGDP, it’s almost impossible to tell a story of high unemployment and downward flexible wages."
I like that flourish-'every single marco model ever developed" including Marxism and RBC-to get those two into the same sentence is impressive. What is the importance of this distinction though of real income vs real wages vs. real hourly wages? Whatever it is it means that we could have a delcine in real wages and an increase in employment according to Scott. Presuming a CB that is either IT or NGDP. So is he saying 'let's cut some wages' or even 'lets cut some hourly wages?' He says no:
"NGDP. So in policy terms I’m right with my “frenemy” Steve Waldman. I just don’t think the real wage patterns observed in the UK tell us anything about the relative validity of New or Post–Keynesian models."
Well gee! If he's going to get all mushy like that and talk of "frenemies" how can you hate on the guy? I don't hate Scott, I have learned a lot in the course of reading his blog and-mostly-like him on a personal level. However, I respect him enough not to entirely trust him.
Maybe Morgan Warstler is party to blame for this-he puts lots of words in Sumner's mouth to teh effect that this is a brilliant game of co-option for Scott. It may be. I never rule that thesis out. Even here I have reason to at least question his claim not to want to lower real wages in light of what he said just last week:
"I believe that more NGDP right now would modestly lower the unemployment rate, which would cause Congress to shorten the maximum number of weeks people can collect unemployment insurance, which would lower the natural rate of unemployment."
http://diaryofarepublicanhater.blogspot.com/2012/04/scott-sumner-on-case-for-ngdp.html
http://www.themoneyillusion.com/?p=14092
See what I mean? I mean based on the quotes above from Sumner what do you think his real policy preference is with regard to wages? What is clear is that he thinks that the minimum wage hike of 2007 was terribly excessive-here in NY state the state is currently debating whether to raise the state minimum wage above the federal of $7.25 to $8.50. The reasoning as Assemblyman Sheldon Silver of Manhattan tells is is because the current $7.25 wage is "very, very acute in its restrictions."
There has been a recent debate on inflation-Krugman argues that we need more, Dan Kervick at least has reservations-for him it's important to distinguish between types of inflation. Sumner's benefits from inflation are at least questionable. For one thing even if more people are nominally employed it doesn't help much if it's for $5 an hour-the minimum wage before the 2007 hike that Sumner sees as extravagant.
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