I very often do, but I think he overreaches when responding to Steven Landsburg (who himself overreaches). Jason writes:
…there is near universal agreement (and if it were not for you I probably would not have needed the word "near") that when the economy is operating below its productive capacity the problem is insufficient aggregate demand, and the solution is to temporarily boost spending or investment through monetary or fiscal policy.
Usually, yes. Sixty percent of the time, I will agree. But sometimes real shocks and sectoral shifts are the problem. Can expansionary monetary policy help an economy adjust to sectoral shifts? Sometimes but not always. Is Furman correct that deregulation won’t help in the short run? Yes. Is "the solution…to temporarily boost spending or investment through monetary or fiscal policy"? Probably not. The solution is for the economy to adjust. The flow of investment is hard to encourage and the best monetary policy can do in such instances is to prevent a deflation. If the government can do something to help short-run sectoral adjustments, it is usually clarity of expectations and legal and regulatory benchmarking in the interests of transparency. Today that means clear standards for future lending and securitization.
As an aside, if you are someone who complains about stagnant American median wages, that means many particular nominal and real wages have been falling. (It could be in theory that the entire distribution is strictly stagnant but in reality no.) Tricky distinctions between real and nominal wages lie beneath the surface, but overall this flexibility of wages makes it harder to embrace the Keynesian framework. Keynesianism requires sticky nominal wages and since we have been having low inflation times (until now, at least) that means relatively sticky real wages as well. Yet it is claimed implicitly that many real and nominal wages have been falling. Beware the Keynesian who wants to have it both ways (I’m not accusing Jason of this).
I find this strange. The quote says that all (or nearly all) economists agree on this concept of using monetary and/or fiscal policy as a short run stimulus to increase aggregate demand in the economy. Perhaps they are a small percentage, but isn’t this leaving out Austrian economists?
I would like to see a debate between you (who agree 60% of the time apparently) and Pete Boettke or somebody who could represent the Austrian position.
I thought that Keynesianism required sticky wages in the short run. In the long run, wages could still fall as people move to different jobs.
if you are someone who complains about stagnant American median wages, that means many particular nominal and real wages have been falling. (It could be in theory that the entire distribution is strictly stagnant but in reality no.)
another possibility for average (real or nominal) wages to be stagnant is to have a sector with high wages to contract and a sector with low wages to expand, with each particular wage slightly growing or stable
Thanks for the compliment. In some senses my statement was tautological. And there is near universal agreement that tautologies are true.
When I first started graduate school I loved reading about the micro-foundations of macroeconomic models, and in particular New Keynesian ones. But then it seemed to me like the problem had been solved sufficiently that for everyday purposes I could just use the macro models. I thought that some of the leading solutions, like small menu costs for prices, are not inconsistent with stagnant wages. But I’ll think more about it. That said, I’m much more guilty of one of the sins you identified. The evidence clearly shows that median compensation, properly measured and adjusted with an accurate inflation measure, has been growing – just not as quickly as productivity or mean compensation.
I *often* operate below my productive capacity. Sometimes I need to, sometimes I’m screwing up, sometimes I’m feeling perverse, sometimes I feel like I need a day off. Some days I just have no interest in even addressing the “productivity” thing. Good riddance to it.
Anyway, is there any reason to think that “operating at its productive capacity” is always and everywhere a good or desirable thing for an economy? It isn’t for me as an individual.
And, as Conservative of Progress asks, how can we possibly know what the economy’s “productive capacity” is? Doesn’t that the give the person in charge of measuring “productive capacity” an awful lot of power?
Floccina I did not say that the rate of cost increases reported in the CPI is wrong. I am well aware that the price of health insurance includes both real growth and higher prices.
What I pointed out is that it only a weight of 0.3% to 0.4% in the CPI
and since health care costs are rising faster then overall inflation this creates a very strong bias in the deflator for compensation.
Do you want to take the position that health insurance only has a weight of 0.3% of total labor compensation? I do not think you would get very far with that argument with any businessman who is making those payments.
By “problem” I suspect Jason meant “cause”? I cannot see how insufficient (how much is sufficient?) aggregate demand could be responsible for either the housing or dot-com booms. Both were very clearly and obviously caused by terrible investments.
Or does Jason mean the recovery (re-allocation of capital, labor, etc) from these events is slowed due to insufficient aggregate demand?
Count me as another observer who took it for granted that few people think this way anymore.
An economy operates below its productive capacity for exactly one reason: the capital of the economy is not allocated to the productive uses people are demanding.
The present slowdown, for example, is because significant capital has been invested in houses no one wants to live in. The problem won’t be fixed until the lower prices and the lost apparent wealth percolate through the economy.
…and the solution is to temporarily boost spending or investment through monetary or fiscal policy.
People can discuss the technical reasons why or when this approach will or will not work. But it would work mostly by accident. Giving people more (apparent and transient) wealth will not make them want what the capital is misallocated to produce any more than before. Perhaps an intentional demand pulse helps by providing a quick and strong signal indicating what new investments of capital should be redirected to.
But believing that insufficient demand is the cause of recession is loony — unless, of course, you believe that “insufficient” translates to “incorrect”, with blame left to be assigned.
Perhaps aggregate demand drops for a reason: Fischer Black’s theory of mis-match. People choose to produce goods they think others will value at a certain price. They turn out to have been wrong, and there’s a downturn. Maybe pumping money into the banking system increases noise and the chance of mis-match.
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