awm, on 2012-August-09, 15:12, said:
Right now we are very far from full employment. Unemployment causes downward pressure on wages, which increases inequality, which reduces demand, which causes unemployment. Government needs to step in and break this cycle.
If government acts to directly increase demand and/or employment, this means a massive increase in government. That is politically untenable and also creates massive opportunity for graft. Raising the minimum wage would seem to break the cycle without most of the issues. Its also easy to justify morally, since it directly helps only people who work and the minimum wage has not kept up with inflation and really is not a "living wage." A similar suggestion is to mandate paid vacation days.
Downward price ridigity is a feature of our economy. No one takes pay cuts. Instead they fire people and hope to rehire at a lower wage. Imagining a higher minimum wage will make a significant impact on this cycle is fairytale economics. If you believe that minimum wages are insufficient, direct transfer payments based on hours worked is more efficient, and has none of the negative impacts.
Or alternatively, the Fed could do its job.
Aggregate demand is really a statement about the price level. Everything is in demand at the correct price. This is the central (new) Keynesian insight; Prices clear markets, a demand side recession is when markets fail to clear, ergo the the price level is wrong. The easiest way to reset the price level is through moderate controlled inflation.
For the third time in a century, we are suffering through needless economic hard ship because central bankers cannot tell the difference between demand side and supply side problems. There was the great depression, then there was stagflation when the central bank thought that high inflation would cure unemployment, when that trade off only applies if the short fall in production is demand side. Supply side problems require innovation, and increase in production. Demand side problems just require appropriate policy.
Now they are pursuing price stability while millions suffer, because that was the solution the last time around. Its like a sick joke. Millions of people are suffering because the ECB is allowing the periphery to slip into outright deflation. The Fed, whose dual mandate specifically authorises it to allow above two percent inflation in times of high unemployment, is now a cumulative 5% below its two two percent target over the time since the financial crises. This is a scandal.
The hard money lunatics have taken over the asylum. Only in this case, the asylum are the biggest players in the world economy. Bring on high inflation. Let the unemployment rate fall. It is the only realistic chance the developed economy has to avoid decades of lost production as the price level slowly adjust through high unemployment and lower wages. In the absence of higher inflation, every peripheral country in the EU will follow spain into a black hole of unemployment that may take decades just to return to normal.
Fiscal policy will do nothing if the the central banks do not allow inflation to rise. If they were happy for it to rise to lower unemployment, why don't they make it rise? If they want to keep inflation below two percent, they will act to tighten money in response to fiscal policy, and you will have larger deficits and no gain. If the government gets into a tug of war with the Fed over fiscal vs monetary policy. The government will lose. The Fed controls the path of aggregate demand. In can increase demand, at will, by lowering the price of money. The federal reserve statement came out and said, for the sixth, successive quarter, the path of the economy was yet again below their predictions, but that there was still no need for the fed to change course. If the fed's policy forecasts are less than it hopes for, that is the perfect reason to do more.
It makes me so angry. Millions of people are suffering, and our political classes are wholly oblivious to the actual problem. Those countries who are doing ok out of this recession have exactly one thing in common, their central banks have acted aggressively to keep NGDP on growth, by allowing high inflation through the aftermath of the recession. Australia: 5% inflation, to keep NGDP at 8%. New Zealand: 5% inflation, Iceland, inflation peaked at 17% for a few months post crises: result, unemployment fell 3% in six months. Sweden, inflation peaked at four %, and knocked two percent of the unemployment peak. In the united states, the inflation rate was negative two percent. NEGATIVE TWO PERCENT. And you wonder why there is a problem.
My dad told me once (I paraphrase) that every generation starts off optimistic about the future, imagining that they will not repeat the mistakes of the past, and then they have a WTF moment when they realise that the world government is run by a collection of pretty faces in fancy suits, and they they descend into cynicism and conservatism, because better the suffering you know than the cluster**** that they made of their last `good idea'. I was just hoping to get to thirty before I became a cynical old man.
The physics is theoretical, but the fun is real. - Sheldon Cooper