The Political Path to Full Employment

By Dan Kervick

Paul Krugman argues in a recent New York Times column  that right-wing critics of Ben Bernanke and his colleagues are trying to bully the Fed into a misguided obsession with inflation, and that “the truth is that we’d be better off if the Fed paid less attention to inflation and more attention to unemployment. Indeed, a bit more inflation would be a good thing, not a bad thing.”

Krugman is absolutely right to lament conservative pundits’ and politicians’ obsessions with inflation when tens of millions of Americans are languishing in unemployment, with all of the personal, social and economic misery and waste that unemployment entails.  But his argument, which assumes that the Fed can boost employment by engineering higher inflation, is problematic.  He defends the inflationist approach this way:

“For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.”

I believe this is the wrong approach.  The Fed’s ability to boost employment is very limited, well-intentioned citations of the Fed’s full employment “mandate” notwithstanding.  Rather than looking to central bankers and the banking system to accomplish a task for which they are not really cut out, we should turn our attention back toward fiscal policy as the primary tool for bringing the country up to full employment and keeping it there.   And rather than seeking engineered inflation as the mechanism for boosting spending and employment, we should implement the MMT job guarantee proposal to achieve full employment and price stability at the same time.

Krugman’s two main arguments for the beneficial results of inflation are questionable.  First, he argues that inflation will help reduce private sector debt overhang.  But inflation only reduces debt overhang in a significant way for households who are fortunate enough to see their nominal wages rise along with the general rise in prices.   In today’s economy, workers are frequently not so fortunate.

Suppose you work 40 hours a week for $1000 of take home pay, and you have a weekly debt bill of $500 and a weekly consumption bill of $500.  So you work 20 hours for debt repayment and 20 hours for consumption.  Now let’s suppose prices rise by 5%.  Then the same basket of consumption goods you purchased before for $500 now costs you $525.  Your debt bill, which is fixed in nominal terms, remains $500 per week.

Suppose also that your employer does not give you a raise, but chooses to take advantage of the inflation by keeping your nominal wages right where they were at $1000 per 40 hours.  Then the result will be that you will have to decrease your real consumption by 4.7%.  You will continue to work 20 hours for debt repayment and 20 hours for consumption, but now your consumption will be lower in real terms.

This worry about employers’ behavior is a real one.  We don’t live in the old days of strong unions and the wage-price spiral that existed when economists like Krugman were cutting their teeth.  We live in a permanent buyers’ market for labor characterized by persistently high unemployment and minimal worker bargaining power.  As prices rise, many people’s nominal wages stay fixed or lag well behind the price level increase.  Real wages go down and ordinary folks feel the sting of higher prices without the benefits on debt relief.

Doubts can also be raised about Krugman’s claim that people respond to inflation by increasing their propensity to spend their income.   The idea is that in an inflationary environment, one is losing money just by holding money, so to the degree people expect higher inflation their incentive to spend rather than save increases.   But while this behavioral response sounds plausible in theory, it might not be how people actually behave in practice.  Instead, people worried about having to pay higher prices in the future and attempting to maintain a stable level of real expenditures over time might cut back on expenditures now to save for the expected higher prices.

A recent paper by Rüdiger Bachmann, Tim O. Berg and Eric R. Sims, based on data from the Michigan Survey of Consumers, makes this argument.   The authors find that:

“… the impact of inflation expectations on the reported readiness to spend on durable goods is small in absolute value when compared to other variables, such as household income or expected business conditions. Moreover, it appears that higher expected price changes have an adverse impact on the reported readiness to spend. A one percent increase in expected inflation reduces the probability that households have a positive attitude towards spending by 0.15 percentage points. At the zero lower bound this small adverse effect remains, and is, if anything, exacerbated.”

In addition to these concerns about the efficacy of Fed-induced inflation as a tool for boosting employment, we should bring in a further consideration about the monetary policy approach to full employment.   There is growing appreciation among economists who study the banking system that the Fed’s powers to engineer significantly higher employment are quite limited.   The Fed’s influence on our economy is exerted primarily by its governance of the bank lending channel.  But the Fed’s role here is primarily to maintain the smooth functioning of the interbank payments system by passively accommodating any increased demand for bank reserves that result from higher bank lending.   Banks are not significantly reserve constrained.  The lending comes first; and Fed accommodation comes later.   The Fed can’t do much to make banks lend when the demand for credit among qualified borrowers just isn’t there.  Scott Fullwiler’s recent New Economic Perspectives post on the Fed’s role in the banking system brilliantly outlines this line of analysis.

However, if one is really determined to boost demand, production and employment by pumping money into the economy, the clear preference should be for the fiscal pumps.  Congress could pass a law directing the Fed to credit $500 billion to Treasury’s account, and then pass a series of spending bills directing how that money is to be spent. No new taxes; no additional borrowing. Just credit the money and spend it out into the real world.   Demand and production are stimulated directly, rather than relying on the Fed-based, supply side approach of indirection and wishful thinking.

The direct fiscal approach might be inflationary, although the inflationary pressure from new money chasing goods and services in the market should be offset by the expanded volume of goods and services made available to meet the increased demand. But if there is inflation, at least ordinary people would be receiving the higher nominal income they need to cope with it.

Central bank induced inflation is sometimes supported by economists as a strategy for reducing the real wages of workers, in the hope that we then get higher employment by lowering the real cost of hiring people.   Yes, there are some people who still believe America’s workers are overpaid!   In a recent post, Scott Sumner approvingly quotes Tyler Cowan, who has argued both against public sector hiring and for lower real wages.  Cowan said, “the greater the number of protected service sector jobs in an economy, the more likely those citizens will oppose inflation.  Inflation brings the potential to lower real wages, possibly for good.”  Sumner then argued that Cowan’s considerations are a strong argument for favoring monetary policy over fiscal stimulus.

But working people have already suffered enough.  It is absurd to support lower real wages for working people as a tool for getting to lower unemployment.   The real incomes of workers have been falling for years, while the ratio of CEO to worker pay in America is now in the hundreds, and massive amounts of the nation’s productive wealth are skimmed off the top of our economy by a bloated and wasteful financial sector in the American plutonomy.  If there is another approach to full employment – one that does not place the burden of assisting unemployed workers on the backs of employed workers who are struggling themselves – we should take it.

The MMT approach to full employment is a federal job guarantee program that will stand ready to offer a job to anyone both willing and able to take it.   Descriptions of the job guarantee program and the economic theories supporting it can be found in the writings of many MMT authors.  One classic source is Warren Mosler’s article “Full Employment and Price Stability.”  And two useful recent discussions of the MMT approach to employment and price stability, by Pavlina Tcherneva and William Mitchell, can be found here and here.

The job guarantee and other fiscal policy initiatives can only be carried out by politicians, not by central bankers.  The exaggerated attention that pundits continue to devote to the Fed and monetary policy helps run interference for failing politicians, who are only too eager to continue to shirk their duties; to pass the buck to the convenient scapegoats at the Fed; and to promote the myths of monetary policy fixes for major economic challenges that require political courage and political solutions.  The obsession with the Fed, and the public delusions of vast untapped central bank powers that these obsessions propagate, are a massive social distraction.   There is no central bank shortcut to the goal of full employment.   We need more politics and more action by Congress and the President, not more financial technocracy.  It’s good to hold the feet of the powerful to the fire.  But right now the wrong feet are being roasted.

29 Responses to The Political Path to Full Employment

  1. Dan, I pretty much agree – bar one quibble:

    You say that having the Fed “credit $500 billion to the Treasury’s account” and spending the money into the economy is a “fiscal pump”. I wouldn’t call that a fiscal pump: I’d call it a combination of monetary and fiscal policy (which is what Abba Lerner advocated). I.e. fiscal consists of government borrowing and spending, whereas monetary consists of for example the central bank creating new money and buying government debt.

    The Lerner type policy which you advocate just combines the two.

    The big advantage of combining the two is that the effects of either fiscal or monetary alone are disputed. E.g. some economists claim that borrow and spend does not work well because the borrowing crowds out private borrowing. As to the effects of QE, that is also disputed.

    • Dan Kervick

      I wouldn’t call that a fiscal pump: I’d call it a combination of monetary and fiscal policy (which is what Abba Lerner advocated).

      Fair enough on the idea that it’s a combination of monetary and fiscal policy Ralph. Fiscal traditionally refers to the combination of taxing authority and spending authority. I just want people to understand that what is needed is for the legislature to authorize the expenditure of money. But if they do that not by authorizing more taxes (or borrowing) but by clawing back some of their constitutionally provided monetary authority from the Fed, then then will be exercising both fiscal authority and monetary authority.

      In any case, we’re not talking about discretionary central bank policy. We’re talking about something only Congress can do.

      • Dan Kervick,

        why do you constantly talk about federal government borrowing when MMT says it DOES NOT borrow? See for example Wrays answer here: http://www.youtube.com/watch?v=4J0j5VwnD7I

        And why do you propose central bank’s purchase of government bonds when these do not increase government’s spending power? All it does is to remove interest income from the economy.

        You are keeping up the illusion that bond issuance is a funding operation to the federal government.

    • I’d always thought that monetary policy works through manipulating interest rates under the trickle down theory that if big banks have more cheaper or less pricier money that the economy would react accordingly to the change in the cost of capital.

      Fiscal policy is supposed to work through government budgeted expenditures under the theory that government expenditures when expanded would stimulate demand or contracted would cool down the business cycle.

      What Dan is talking about here depends on whether the Congress would budget expenditures in a way that would promote broad based job creation or whether trickle down ideology would prevail in fiscal policy as it does currently similar to Fed run monetary policy.

      The other issue has to do with wages. High US wages are as much an artifact of the olden days of post-WWII US economic, military and political dominance that commands inexpensive resources from the global south to subsidize our standard of living. Now that BRIC is willing to pay for those resources, the US has competition and the ability to project military power to command those resources faces economic constraints domestically and political constraints in the global south. BRIC competition for those resources raises the cost of using the military to command them.

      The US and Europe are going to have to find our level down from the anomalous levels of the post-WWII boom which for many of us were normative but are clearly another long phase bubble which is in the process of popping. Wages will have to come down for global macroeconomic reasons that have nothing to do with making US labor more competitive on the global market.

    • Ralph,

      Dan said:

      ” . . . Congress could pass a law directing the Fed to credit $500 billion to Treasury’s account, and then pass a series of spending bills directing how that money is to be spent. No new taxes; no additional borrowing. Just credit the money and spend it out into the real world. . . . “

      That’s inconsistent with your comment. There’s no monetary policy in that, though it will require the Fed to pay Interest on Reserves (IOR) if it wants to maintain an FFR > 0.

  2. Clear as crystal. Thank you. MMT makes perfect sense. Now, who will get the Fed to put the dough into the Treasury, and who will create the “jobs” for the ready, willing, and able? Will the jobs help us advance in C.21? Will the “job creators” follow the proven model of the OSF-OSI in funding projects for innovation and effective development by active citizen-leaders doing good works at the local level? As Americans “live and work local” and trade their cars for bikes and running shoes, will there be more jobs fitting into this frame of C.21 healthy change in society, rather than into the C.20 fossil fuel wasting frame (e.g.”publicly funded superhighways destined to become private tollways”)? Will the “jobs” encourage such “Agency” in our citizens? I’m a pre-Boomer who would relish the opportunity to help deliver a healthier, kinder world to our youth.

  3. Nice one, Dan. Your comments on inflation potentially lowering peoples’ propensity to spend make sense to me and was always my intuition, rather than the oversimplified intertemporal consumption models taught in undergrad econ.

    • Thanks wh10. Yes, I learned those intertemporal consumption models too back in the olden days when I was in college using Samuelson’s book. My feeling now is that expectations of inflation mainly cause fear, and fear causes saving..

      Looking back on those classroom discussions, it seems to me that all of the mainstreamers are in thrall to the Phillips curve account of high employment correlating with inflation. The conservatives say that “excess” employment causes inflation, and so we shouldn’t push unemployment below the natural rate; the liberals say the causation goes the other way and that inflation -> inflation expectations -> spending -> employment. So we can get more employment by increasing inflation.

      If MMT is right about the defectiveness of the Phillips curve analysis, then that is a really major point that needs to get out there.

  4. Great piece, Dan. Japan has raised its inflation target to one percent. In my opinion, America’s inflation target should be no higher than that.

    The Fed should not have a mandate to maximize employment. It enables people like Paul Krugman and Dean Baker to argue for dollar devaluation.

    • I’m tired of the mythological “wisdom” of the technocrats. I think the Fed should be rolled into Treasury, and then the Executive can decide how to target both low inflation and FE, and then we can throw she/he out if he/she doesn’t perform well in both areas.

  5. For some reason, I feel like making the point that fiscal policy alone will probably be more effective stimulus than the combination of monetary policy and fiscal policy, where the money spent would simply be created by the Fed. If Congress were to tax that $500 billion off the top 1%, and then spend it, the stimulation would be greater than if the $500 billion were simply created and spent, with less risk of bubbles and inflation. The reason for this is simple; by losing more of their profits to taxes, the very wealthy will have an incentive to increase their income to compensate beyond the possibility of inflation. They may initially respond by cutting expenses, but they will quickly reverse course when they find they make more money by sticking their necks out and taking the tax loss than by retreating to their tax-haven holes and undermining their income. This hearkens back to my observation that it is the “shape” of aggregate demand that matters at least as much, if not more than it size.

    That’s one reason I sometimes fear the Job Guarantee funded by deficits wouldn’t prevent runaway inflation, or at least enough inflation as to make the basic wage of the JG worthless. The very wealthy have developed many financial and investment instruments designed to extract profit from consumers, growing their share of aggregate demand over the share of the wage-earning classes over time. When the share of aggregate demand commanded by the investment classes reaches a critical size over the share of aggregate demand commanded by wage earners, there occurs a shift in political power and the conditions of employment, further eroding the wealth of the working classes for the benefit of the investment classes. A stable economy involves redistributing wealth from investors to workers, either directly through taxing and spending, or indirectly by maintaining wage, benefits and working conditions standards and other regulations to maintain the relative proportions of aggregate demand going to one class or the other necessary for stability.

    A deficit funded or money-created by the Fed funding model for a job guarantee doesn’t do anything to redistribute wealth except introduce targeted inflation, pumping more money into the wage-earning classes, but it doesn’t drain that money back out of the investment classes. It doesn’t keep them from swelling their share of aggregate demand to too big a proportion to that of the wage-earning classes. If there’s one thing the investment class is good at, it’s getting a disproportionate share of any flow of funds. I like the idea of a Job Guarantee for all the stabilization it provides, but I worry that it won’t end up even doing that if it’s not accompanied by a capital gains tax as at least a partial offset.

    • Dan Kervick

      Very interesting Nathan. I think I agree with you in the long run. I also believe that severe inequality is economically wasteful and represents a misallocation of the nation’s wealth and is a drain on the productive potential of the economy. And even without expanding the government deficit, an old-fashioned redistribution via taxation from people with a high propensity to hoard toward people with a higher propensity to consume or invest in production will be stimulative. And I do think we have to address the extreme financialization of our economy, and the many systems that exist for people to make lots of money from nothing off of the productive work of others.

      In this piece, I suppose what I’m trying to focus on is that for those many people who keep arguing that what we need is more net government creation of financial assets – more money – they should come around to the idea that it would be far more effective to work on the demand side by spending that additional money into the real economy rather than sticking it in bank reserve accounts and hoping for a supply side expansion of bank lending.

      • That would certainly depend on the circumstances, but of course, we’re in the right circumstances for that argument to be meritorious. There could be such a thing as the working classes having too great a share of aggregate demand as well, which would limit the effectiveness of the investment classes in their role of distributing resources to where they would be most productive. In that case, increasing reserves would be stimulative, because investors would demand credit to increase their profits. But we’re not in any such situation right now.

    • Hi Nathan, By redistributing the $500 B you will lose aggregate demand since tax there will be a lost multiplier of $.30 for every dollar taxed. Not much but something. On the other hand, I’m all for taxing the wealthy to get at economic and political inequality. So, my preference would be $500 B redistribution, and $500 B deficit spending without borrowing.

      I’m not concerned about demand-pull inflation. That’s not a realistic possibility with the kind of output gap we have now. We may have cost-push inflation, but not due to Government fiscal policy in the range of an additional $500 B to $1 T deficit spending.

      If it occurs it needs to be fought by tight regulation and prosecutions/convictions of speculators and, if necessary price controls. No monetary policy or other blunt instruments that will cause recessions.

    • There you have it. A land value tax at the national level would likely take the form of taxing the capital gains from landed property. Most of the parasitism you describe comes from derivatives spun-off of investment class’ ability to speculate in land value. Other than that it’s just the inability of the public to understand finance.

      But surely you wouldn’t want to tax the products of anyone’s rightful labor? That just doesn’t make sense.

  6. Sorry for being off topic, but i was wondering what happened to the ” Say Whhat ??..” series here a while ago?
    Reason I ask is I have a candidate I’d like to put forward from Ireland.
    Prof John (cut faster) McHale of the Irish Fiscal Advisory Council (IFAC)

    “John McHale Says:
    April 6th, 2012 at 7:23 pm
    @cet. par.
    Good question.
    I think an aspect of the euro zone crisis that has taken many by surprise is that structural vulnerability to “runs” on sovereign debt in a monetary union. The importance of having a central bank as bill payer of last resort has been revealed to be critical to a country’s creditworthiness. The constraint seems to bind esspecially tightly when there isn’t a relatively captive domestic base of investors in domestically issued debt.”

    Link here:
    http://www.irisheconomy.ie/index.php/2012/04/06/austerity-without-growth-a-guarantee-of-stagnation/#comments

    It was in response to this question (by ‘Ceterisparibus’)

    “How come then that Japan, the UK and the USA can sell vast quantities of bonds and have strong currencies having spent trillions (billions in the UK) on stimulating their economies or saving them from meltdown.
    Is it only a Eurozone Phenomenon.”

  7. Dan, you’re trying to drink water with a fork out of a bucket with a hole in it. However, you are less wrong than Krugman, I will give you that much. But MMT would at best only help labor tread water — and only temporarily, before another tidal wave of unearned income destroys everything. Labor would never really have a chance to grab a seat and take a drink.

    Maybe you should have a talk with Michael Hudson. He’s the only reason I’m here, as I don’t seem to agree with the rest of UMKC on anything. As far as I can tell you are all wide of the salient points.

    Demand hasn’t been diminished one bit. It doesn’t need stimulating. It’s still there in the tent cities, crammed into motels and SROs, and living with family members in the crummy apartments of obscenely rich landlords. Plenty of resources and productive capacity still there too, ready to meet the demand. But something has made that unprofitable, and that something is LAND RENT. I’ll post it again for everyone’s benefit, particularly the lurkers who don’t know what to make of all this. This is the real deal.

    Inflation may not be the end of the world — and, again, your inflation would be preferable to Krugman’s, but it is still ultimately a tax on labor and will cause capital flight, making the situation continually worse.

    • Land rent is too simple an explanation by half. If the problem was that rent prices on land were too high, then production would simply move to the areas where rent was lower. Land in the US at least is not monopoly controlled, and there’s thousands of acres of the stuff in easily developed areas just sitting around not doing anything in particular. Yes, land is a finite resource, but we’re nowhere near maxing out land’s capacity to contribute to production. Unearned profit capture through exorbitant land-use prices is really only a problem as that capacity is approached and landowners are able to act as monopolists. There’s a reason why studies on the economically deleterious effects of land rent are seen mostly in Great Britain and Europe.

      The problem is rent in general. The capacity to extract rent is largely a matter of exclusivity. Something about the product or the entity supplying the product makes it special, so that the supplier can act as a monopolist. In terms of the total factors of production, there is at least one other class of goods besides land that can command rent, and that’s energy. Liquid fuels are essential to modern productivity, and are controlled on the international market by a monopolistic cartel. Exxon Mobil posted $40 billion profit in the third quarter of 2011. Virtually by definition, that profit is largely rent.

      Arguably, another example is credit, which is what I take William Black’s articles to largely be about, when he writes about criminality in and the need to regulate the financial sector. He’s detailing all the various ways banks have used and are using to extract rent, many of which wouldn’t even be prima facia moral, as some rent-taking sometimes appears to be. And in the US, just three agencies rate creditworthiness for the vast majority of borrowers, which is almost the definition of monopolistic practices (only two agencies away). Another way of looking at the rent-taking features of the credit market is to note that the purchase of credit does not effect the supply of credit. If I take out a line of credit, nobody else’s creditworthiness is effected, and everybody will be able to borrow as much after I take out my loan as they could have before, because loans create deposits.

      But the very point of investment is to extract rent. That’s what investment is, taking your resources, which are virtually interchangeable with anybody else’s resources of the same type, usually financial resources, and doing something with them so you can get something out of it you can charge a premium for, that has an element of exclusivity to it so you can get the maximum profit. Whatever resources are commanding rent, the proceeds of that rent end up in the hands of the investment class. Taxing the investment class’s overall income recoups that rent from wherever it proceeds. A direct land value tax only captures a part of the overall rent-taking occurring.

      • While I agree that economic rent in general is a concern, and that the financial sector is garnering the larger share of that rent by MORE than half, you seem to be forgetting that banks are the biggest landlords of all and the leverage they enjoy is based almost exclusively on income from land rent. The entire MBS and land based derivatives fiasco could NEVER have occurred were there a land value tax in place. Banks would be forced to make productive loans, and we could generously fund our public projects without touching labor or capital.

        As for relocating production, this does indeed happen; it’s called outsourcing and suburban sprawl. But surely you would not ask all of Manhattan to just relocate in order to dodge their rent? All of our most valuable businesses, residences and infrastructure in every metropolitan area in the country? Civilization cannot just turn itself inside out in counter sync with the 18 year business cycle. Doesn’t work like that. It’s all about location and infrastructure. The rent may be high, but it is more the matter that it is being paid to the wrong party. Land rent needs to be paid as a return to the general pool of labor that created it, otherwise you are robbing labor and subsidizing idleness.

        Monopoly in this case means monopoly by a class of landholders or else a monopoly on any given location. Land rent is more of a problem in Europe because the countries are smaller and more developed and land monopoly has had more time to consolidate itself, as it tends to do.

        It sounds like your 3rd paragraph is making the Austrian argument about banks being a counterfeiting cartel. I agree. I don’t know why Black and MMT can’t see that….

        But let’s not throw economic rent around too loosely. It means a price above the cost of production. Investment is not economic rent because capital has a cost of production, and it has an opportunity cost to lenders and borrowers, expressed as interest. No sense in taxing that; we want more investment, not less.

        I would guess that the LVT would remove better than 3/4 of the economic rent, and set us up nicely to remove the rest through ingenuity rather than mandates.

      • Land values are the highest in locations where the infrastructure for productive activity and housing required for it are concentrated. Progressive taxes on land rent will fall most heavily in these locations.

        The problem is a system that allows for such amounts of money to be made in the first instance, not in how the profits from those nonproductive speculation are reclaimed through taxation. The Democrats are trying to shift the conversation into the latter because they are prepared to coopt that into minor policy change. We need to keep our eyes on broader structural if not systemic changes that prevent that kind of wholesale speculative profiteering. That the Democrats cannot digest into a form that can be metabolized.

  8. Hey Dan! Have always liked the idea of the Job Gurantee-I’d favor the revitalization of a permanent Public Works Administration-if we can’t get it right away at the Fed level maybe innovative states can get it done at the state, county, or even city level.

    No question, as we have discusses, Monetarists like Sumner greatly overhype the powers of the Fed. It does seem that it can play a constructive role-though I agree with Cullen that fiscal policy should be the main driver. The Fed from the time of Eccles till the 70s had a positive relationship to employment with its Full Employment mandate.

    I do think that inflation has some relationship to recoveries. It may be a chicken and the egg question-is it that we need to generate inflation to get a recovery or is it that when we generate a recovery imflation is a by-product? Certinaly deflation is related to deep depressions as we saw both in the early 30s and in 2009.

    As for your discussion about the impact of inflation on workers I was going to point out to you that your assuming wages wont rise with prices but you’re right that the wage-price spirals we saw in the pre-80s economy may not hold as it once did. Even so, this means we need to do what’s necesary to have the economy more like that in the future. One way would be to strengthen unions again.

    In your example of th guy making $1000 per week who’s consumption bil goes up, it’s ture that his nominal debt bill remains $500 but the real value goes down.

    • Dan Kervick

      Hi Mike,

      Note that some of the people calling for inflation explicitly recognize (or hope) that nominal wages will not rise along with other prices. For some years there have been people calling for an export-led recovery that starts by making US workers more “competitive” by further reducing their wages. It’s hard to reduce their wages outright via straightforward cuts, so people look to inflation as a way to reduce them in real terms by raising prices as wages stay close to their current nominal values.

      • What we’ve had the past three to four years is little inflation or rather opportunistic disinflation as we have been far from full employment and workers’ incomes haven’t risen which is not surprising given the weakness of the job market. The Fed has been bullied into not taking its mandate seriously.

        More of the same is what you are effectively advocating because your other policy prescriptions are a pipe dream and people can’t pay their bills with pipe dreams.

        If you can, please explain how they are not pipe dreams otherwise yes they are interesting ideas to discuss but practically speaking it’s the same as calling for everyone to be given a unicorn so they can fly to work and save money on gas, which would help spur a stronger recovery as people pay down debts and spend more.

  9. Oh, I should add that Minsky in his book on unstable economies argued that we averted a depression in 1975 due to high inflatioin government policies-government transfer payments, especially unemployment benefits which quadrupled during the downturn. To be sure UI benefits were more generous then. Now nothing is indexed to inflation anymore.

    Minsky argued that facing a deep recession there are two responses-debt asset deflation which really hurts borrowers-which means most of us-or price inflation.

  10. Pingback: Dan Kervick: Contra Krugman, Why Increasing Inflation is Not Likely to Increase Employment « naked capitalism

  11. “there is growing appreciation among economists who study the banking system that the Fed’s powers to engineer significantly higher employment are quite limited”

    It isn’t within the power or responsibility of the Federal Reserve to hold unemployment to a 5 or even a 6 per cent. In fact, tIf there is an inflation-unemployment trade-off curve, it is shifting to the right, and at an accelerated rate. o assume that the Federal Reserve can solve our unemployment problem is to assume the problem is so simple that its solution requires only that the manager of the Open Market Account buy a sufficient quantity of U.s obligations for the accounts of the 12 Federal Reserve Banks. This is utter naiveté. If there is an inflation-unemployment trade-off curve, it is shifting to the right, and at an accelerated rate.

  12. Marcos, what you say hardly makes sense, man. Are we missing something? The LVT does prevent “such amounts of money” from being made off advancing land values. The Democrats aren’t saying shit at all, ever, and every mainstream economist has been trained not to talk about this. Friedman, Samuelson, Stiglitz have all agreed but were relatively mute about it because this is a very direct confrontation with privilege. This is indeed the very foundation of privilege and structural change, which is why it is never talked about.

    If I could respond to what Nathan said again — I realize I neglected the central folly the first time. Nathan says that production can just go where rents are lower. This is not really the case for a number of reasons.

    Firstly, the speculators are literally everywhere; wherever development goes titleholders are paid an unearned increment for any preceding development, and land values rise all around the relocated development — wherever it is — rendering further unearned increments to the current surrounding titleholders. This is why when Walmart and their creditors go looking for real estate to develop, they are not just looking for good locations where customers will have access to the store and all the utilities can be had to run the thing, they are looking for locations where all the surrounding land can be had so they can pocket the rise in value resulting from their own development.

    To say that development can simply go around avoids the issue because the phenomenon exists at all times in all places, and only varies by degrees from the city centers to the margins.

    But most importantly, we’re missing the forest for the trees. In any given instance it may appear that development has the theoretical option to avoid exorbitant land rent, but we are forgetting that, at the time of the crash and in the months preceding it, the financial system has already become so clogged by the speculative increase of rent everywhere else that the cumulative effect is that nobody can obtain reasonable financing anywhere; the banks are all drowning in over-inflated, non-performing assets. They’ve been allowed to create little rentiers everywhere along the way, pocketed most of the increasing rent themselves, and strangled the entire system with idle greed.

    They’ve really hit it out of the park this time. And this has gone on for so many generations that the misallocation of built capital in all those vacation homes will be very hard to liquidate. The inequality is now so dangerously unsustainable. We should probably invite some more Mexicans over, though.

    Here’s a video featuring Michael Hudson that may be illuminating:
    Real Estate 4 Ransom from Real Estate 4 Ransom on Vimeo.

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