"Here’s Steve Williamson criticizing the sticky wage model of the recession:
Sticky wages and prices: Come on. The recession began in fourth quarter 2007, according to the NBER. How can we be suffering the effects of stuck wages and prices in mid-2012? The 1981-82 recession occurred in the midst of a rapid disinflation, from close to 15% (CPI inflation) in early 1980 to 2.5%, post-recession. If there was a time when wage and price stickiness would matter, that would be it. But, as you can see from the last two charts, the 1981-82 recession was short compared to the recent one, with a robust recovery.http://www.themoneyillusion.com/?p=15330
"wage stickiness is a much bigger problem when inflation is low, not high. In 1982 all employers had to do to restore labor market equilibrium was grant smaller pay increases. In contrast, consider the following example from George Selgin:
Here at UGA we haven’t had any raises for five years running. I know professors elsewhere with similar experiences."I presume he means that the pay increase during each of those 5 years was zero. Now let’s analyze that pattern from Williamson’s perspective. Presumably he doesn’t think wages are sticky after new contracts have been issued. So each year the UGA administration sat down and discussed all the possible pay increases they could grant. How about 2%? How about 0.5%? How about negative 1%? And so on and so on. Then it just so happens they decided on 0%? What a coincidence! The odds must be 10 to 1 against that particular number. And then the next year it was zero again! And the next year. Now you are talking a 1000 to 1 shot. And the next. And the next. Amazing coincidence? Or money illusion? I think you know where I stand, just from the title of this blog. I don’t know why people have money illusion, and it’s certainly a bizarre thing to put into a model. But it’s there."
So money illusion is Sumner's one concession from rational expectations. Of course, Keynes argued that "money illusion" is not irrational for workers. There's a good reason to defend nominal rather than real wages.
"There’s another problem with using common sense. The real world is very complex, and no one model can explain everything. Obviously the 40% increase in the minimum wage right before the recession slowed the downward adjustment in wages, especially for the lower classes where unemployment is concentrated. People typically ridicule the minimum wage hypothesis by saying “Come on, that can’t explain all the unemployment.” True, but no one claims it can. Ditto for the extended UI benefits. The natural rate of unemployment is estimated to be 5.6%, the actual rate is 2.6% higher. That extra 2.6% is partly extended UI benefits, partly the big minimum wage increase, and partly sectoral reallocation of labor. But I believe it is mostly wage stickiness, and the stock market also seems to think more NGDP would help a lot right now."
"The W/NGDP ratio shot up in 2009, and unemployment soared. Since then the ratio has come part way back to trend, and the unemployment rate has come part way back to trend. We have excellent data showing George Selgin’s example is common, wage increases bunch around zero percent. Until we get a more plausible theory of unemployment, I’m sticking with stickiness."
The idea of wage stickiness as the problem in recessions is the mainstream Macro idea. Although nothing provokes Williamson more than Krugman knocking mainstream Macro, to the extent he's questioning this, he's taking a non-mainstream position. It's not the first time he has either. Indeed, he has a very enigmatic position on the Zero Lower Bound problem.
He argues that monetary policy is ineffective at the ZLB so the government should do fiscal policy in the form of tax policy. Certainly a novel idea particularly for someone who calls himself a New Monetarist-the phrase as best I can tell is a throw a way line, by design it doesn't really mean anything. When I asked him about it, he answered that why can't he call himself a two headed frog if he wants to. He regularly attacks Krugman and "New Keynesianism" but hasn't give any clue about what his actualy position is. At the least he resists pigeon holing.
I can't help but be struck by a Wall Street Journal, pg. A1 headline today. I would give you the link but can't access it right now-my account is overdue and I'm currently broke! My "extravagant unemployment benefits" as Sumner sees them are still being withheld. The same week my cell phone expired. Yeah it's good times. About all i have to look forward to at this point in the week is maybe my good friend Nanute and I will go see our mutual friend Popeye. It's about the only thing I'm holding onto right now. That and the fun of Bain attacks and Rush Limbaugh whining that this is just payback for Swift Boat. Actually Rush's wishing that Karl Marx was aborted was worth its weight in gold-finally he loosens up on abortion. Who says the GOP isn't big tent?
“Wages are still climbing rapidly in China and many companies are having trouble filling jobs despite the sharp economic slowdown here-evidence of structural shortage in the labor market that may help China adjust to slower growth without political instability and whet consumer appetites for foreign jobs.”
Sadowski in Sumner's comments section quotes from an interesting article:
"I came across this by Robert Solow on sticky prices today:
“Now here is a peculiar thing. When I was in advanced middle age, I suddenly woke up to the fact that my colleagues in macroeconomics, the ones I most admired, thought that the fundamental problem of macro theory was to understand how nominal events could have real consequences. This is just a way of stating some puzzle or puzzles about the sources for sticky wages and prices. This struck me as peculiar in two ways.
"First of all, when I was even younger, nobody thought this was a puzzle. You only had to look around you to stumble on a hundred different reasons why various prices and factor prices should be much less than perfectly flexible. I once wrote, archly I admit, that the world has its reasons for not being Walrasian. Of course I soon realized that what macroeconomists wanted was a formal account of price stickiness that would fit comfortably into rational, optimizing models. OK, that is a harmless enough activity, especially if it is not taken too seriously. But price and wage stickiness themselves are not a major intellectual puzzle unless you insist on making them one.”
http://www2.gsb.columbia.edu/faculty/jstiglitz/festschrift/Papers/Stig-Solow.pdf
UPDATE: Predictably this was Sumner's answer to my comment about the Wall St. Journal story-I had pointed it out in the coments section:
"Why would you rely on the WSJ? How would they possibly know the impact of rising wages?"
Sure, attack the source.
Sumner's claim about money illusion is an important point, but stories of the 1970's also suggests people, at times, recognize how inflation reduce their real wages. Regardless, Sumner's view continues to ignore the role private debt in the recent crisis. Unfortunately, Williamson is not much better in this respect.
ReplyDeleteSeparately, relating to the Solow quote, I have still been unable to figure out if Sumner believes nominal changes can or can not have real effects.
Hey Woj! Sumner believes they have real effects in the short term only.
ReplyDeleteMike - Thanks for the reply, but here's an interesting question regarding that view...if the long-term is just a series of short-term periods, how can the real effects be only in the short-term? If so, then presumably nominal changes would not have real effects in some short-term periods in the future.
ReplyDeleteInteresting point. I'm not saying I share Sumner's view. I'm not entirely sure but my guess is that it does have long term effects as well.
ReplyDeleteI think the whole notion of the neutrality of money is wrong. Your point may well be a road to demonstrating this
I'm pretty sure Sumner-his views not mine-would deny that point of Keynes where the long term is just a collecdtion of short terms.
ReplyDeleteHe probablay believes in a long term that is more than this. I very much suspect.
Here was my relatively recent attempt to get at the fallacy of monetary neutrality (http://bubblesandbusts.blogspot.com/2012/06/fallacy-of-monetary-neutrality.html).
ReplyDeleteSumner probably does have a different perspective on time than Keynes, but it's hard to fathom how the above could not be true. It would be like saying a minute is not the collection of sixty seconds.
Yeah, I don't know how he would get there but I'm sure he'd try to argue that there "really is a long run."
ReplyDeleteAfter all that's what the Classicals believed until Keynes.
Thanks for the link.
I was thinking as well about a recent post he wrote back in June. Here he talked about stagflation. What was interesting is that he basically had the wrong definition of inflation.
He thought it meant high inlfation and low growth. Everyone of course knows it means high inflation and high unemployment. You might assume that high unemployment will tend to come with low RGDP but it's not always so. In the late 70s you did have times of pretty good RGDP and unemployment too high
Exceot Sumner, It was rather comical to see all his acolytes assure him after this was pointed out that he just has a different way of looking at it that's just as valid!
But what really was of interest to me is the idea he suggested where a 5% NGDP target could have solved all the problems.
He seems to think that if you have say 15% NGDP where only 3% is RGDP the rest inflation, that under a 5% NGDP target you would simply tighten monetary policy and you'd drop inflation down from 12 to 2 while maintaining RGDP at 3.
He seemed to be forgetting that even he admits the short term real effects of nominal changes.
This is on my mind. I see he just put up a new piece that declares that "money is half of Macro."
I'm going to check that out and then maybe write more about the question of money neutrality. I will defintely check out your piece which is what I'm trying to get at-how you explain the fallacy of monetary neutrality
From my above link, if you click through to the post about NGDP targeting: altering theory to fit history, you'll notice I caught on to the same mistake/post regarding stagflation. It's unfortunate that Sumner, at times, resorts to this tactic since there are other aspects of his research which are really solid.
ReplyDeleteNow that you mention it I think you were who pointed it out to me-by reading your site. I knew I read about it somewhere but couldn't remember.
ReplyDelete