Sunday, December 25, 2011

Two good heterodox links

- First, Social Democracy for the 21st Century has a good discussion of the magnitude of the stimulus in perspective. It was a nice chunk of cash at a good time, when the financial crisis was making itself felt in the real economy. He makes really the essential point about state and local spending - that this was really just the federal government making sure things weren't as bad as they could have been. We can be glad for that at least - we can note that we're better off with Obama and that stimulus package than McCain and whatever he would have done (since a lot seems to be put in the frame of campaigns now again). But that's about it.

- Second, Unlearningecon has a good take-down of sticky wages. Some people do get really up in arms about this. I just get amazed anyone ever makes such a big deal of it. The really significant application of sticky wages in modern macroeconomics is as an explanation for why the short run aggregate supply curve is upward sloping. The frictions of the real world do a good job explaining why we don't live in the world of crude quantity theorists. But that's not how people think and talk about "sticky wages" more casually. In more casual discussion, sticky wages become a sort of naturally emerging wage floor. My response is - meh. That's possible, I guess. But it seems like a weird explanation. As I've noted many times - you can get a lot of unemployment in a clearing labor market. It just doesn't make sense, either. We seem to have much better ways of thinking about the cause of unemployment. On the margin, maybe a de facto wage floor contributes some to unemployment, but I think the real point of sticky wages is misunderstood.


  1. Do you think federal government taking over all state government debts would have minimized impact of recession?

  2. "Do you think federal government taking over all state government debts would have minimized impact of recession? "


    The US federal government should have:

    (1) extended money to the state and local governments to make their fiscal policy expansionary.

    (2) used the proper FDIC method of dismantling insolvent parts of the banks in 2008, writing off their bad assets and non-peforming loans, protecting depositors by Fed interventions, and probably more than that: they should have restructured vast amounts of unsustainable mortgage, credit card, student debt.

    Then once you have taken out 2 major sources that subtract from aggregate demand - (1) state and local austerity and (2) private deleverging - you go for big stimulus: maybe as high as 800 billion - 1 trillion dollars in 2009 and 2011. The US should have done massive public works projects.

  3. On the aggregate supply curve...folks might want to check out this 1996 article by Michael Emmett Brady in the History of Economics Review to see the full technical model. Please read it carefully. The graphical depiction is on page 7 of the PDF.

    P.S. Daniel Kuehn, please check your e-mail.

  4. Thanks for the link Blue Aurora - and I got the email.

    Prateek -
    I suppose LK is right - that would help. I'm not sure how burdensome state debts are, though. The same thing that enforces the austerity - balanced budget requirements - presumably also keeps their debt levels manageable. I just don't know. Ideally, I'd want the states to abandon their balanced budget requirements (or perhaps just substantially modify them), and do more spending themselves. I don't think it's ideal that the federal government takes on what the states ought to do.

    I do agree strongly that there are lots of federal public works that could be implemented. Another WPA would be fantastic.

  5. You're welcome Daniel Kuehn. As for LK and Prateek, I agree that more stimulus should have been done. I wish Obama had encouraged private contractors to build a few mag-lev lines especially.

  6. I could of course disagree with lots of stuff here, but I'm in a festive mood so I'll resist the temptation.

    It seems to me that what you're arguing about isn't sticky wages, its the primacy of sticky wages. That really comes down to substitutability assumptions. Your arguing that existing assets and output are not completely substitutable. So, in a recession demand for non-reproducible assets may rise relative to output.

    I agree with LK that the US government should have put the bankrupt banks through normal bankruptcy procedures. I would add that they should have got them through that rapidly. (Of course I disagree with LK on pretty much everything else).

  7. Blue Aurora,

    Which is the surest way to create a bunch of projects like Solyndra.

  8. Daniel, do you think it's a good idea to allow state governments to remove balanced budget requirements without giving state governments the right to issue their own currency?

    What's the point of fiscal flexibility, if it is not matched with monetary flexibility?

    If a state government sees a sudden shortfall in revenues, and it needs an immediate inflow of funds from debt instruments, it may find the bond market demanding prohibitively high interest rates from it. And if they can't pay such rates, they will be forced to cut services. The only way to prevent such a situation is to either keep balanced budget requirements (forcing it to plan in advance for such a situation) or allow state governments to issue their own currency to pay off debts.

  9. Lord Vader: Keynes was a big believer in private/public partnerships, but of course, they aren't perfect.

  10. Blue,

    Both Death Stars were public private partnerships, you saw how well those worked out.

  11. Blue,

    That is part of my routine on the upcoming Sith Lord/Libertarian Comedy Tour. No dates yet.

  12. > do you think it's a good idea to allow state
    > governments to remove balanced budget requirements
    > without giving state governments the right to issue
    > their own currency?

    I spoke with the Illuminati about that, they think it's a *wonderful* idea.

  13. Just from the aspect of having a federalist system it is a terrible idea. If you think federalism is a bad idea just get rid of it; if not, then things like this which subtly undermine it, yet keep certain aspects of it in place, are a very bad idea. In fact, I'll just say that all that does is provide incentives for state governments to act irresponsibly because they'll assume that big daddy federal government will be there to bail them out.

  14. Wow yes, what Lord Vader said.

    A lot of federal systems can involve an uneven distribution of authority and responsibility. On certain issues, one side will be given the greater share of authority, but none of the share of burdens or problems of wrong decisions.

    Looking at the Eurozone today, I can't help but agree. Germany should bail out neighbouring regions, but it should totally not dictate how their fiscal policies are to be run? So Germany shall keep bailing out and other governments shall keep squandering German money? Outrageous.

    In federal systems, people keep shifting rhetoric from need for solidarity to need for freedom based on what serves their interests. Need for solidarity when getting money and need for freedom when refusing terms and conditions.


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