Evidence for Hell Freezing Over

Washington has had a lot of snow recently but until now I had not realized that this was due to hell freezing over.

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It happened when a black man was inaugurated president; the climate effects just took a while to get here.

Of course, since D.C. sits directly atop Hell, some of the worst snow has been found there.

Well, it fits with the NK views. They believe that the reason recessions happen is because of stickyness... so naturally more stickyness is bad. What is rare, is an NK not reverting to oldschool hydraulic Keynesianism for political questions.

Anyway, Alex, you made a very good point. I think one that most economists on the right and left can agree with.

Yeah, we don't need to reduce real wages. We just need to increase aggregate demand, by using expansionary fiscal and monetary policy, and that will work to increase employment by reducing real wages. Wait... What did I say?

Even given that the problem is a drop in aggregate demand, lower wages are still needed. Wages can go back up when aggregate demand rises. Until the demand gap closes, we are worse off with higher unemployment rather than lower wages.

Having more lower wage employed will raise consumption at least to a small degree, due to the relatively higher propensity to consume. Someone who is employed at higher wages is more likely to save than someone just barely getting by.

There might be some friction with wages as demand rises, but then we can address that friction...not now.

Pretend we have an alternate reality. In this world there was a great recession.

Let's say the only problem is that people are spooked by their own shadow. Then I could see how bridging demand for a time might work, although I'm not sure how you use government to bridge private demand for years. I don't demand much more from government or state services so that means just take my money and give it to my neighbor to continue his spending at the expense of my saving. Maybe that's a good idea, maybe I saved too much. I don't know, I'm not a Keynesian. I was buying stocks, investing in productive assets ultimately. I was investing in education and keeping my living expenses low. So, it won't achieve my goals but maybe it will achieve theirs.

Now let's say people are spooked because the only problem is debt. Everyone owes everyone so I could see how inflating away and bailing out would keep the cascade of looming defaults from causing a scramble for cash which ends up fulfilling the prophecy because noone wants to rollover everyone else's short-term debts that they are using to make loan payments. I'm not sure why borrowing short and lending long isn't recognized as the underlying problem, but okay. Also, I don't think you should borrow to spend on your needs. In the aggregate, you need to borrow to spend on the needs of the lender, because you end up having to pay him back. If you borrow to buy a flat screen TV and the lender is building the flat screen TV that seems like not such a good plan.

Now let's say that we do have a real structural growth problem, but it's temporary. After two years we just resume. However, we lost the interim economic activity. It wasn't anyone's fault, per se, just an economic cycle. Noone can predict these things, but someone has to pay, right? It might as well be the people who would benefit from being right who pay when they are wrong. So, people who owe and are owed need to split the difference. Debt for equity swaps might do the trick, although there has to be such a market and a legal framework. As a wise man once said, "get 'er done!"

But wait, what if there is a permanent shift in economic activity. What if a resource price spike prior to the recession indicated that what we thought we had as far as raw materials relative to global usage growth versus revenues isn't really their. Then we have a permanent shift downward in the rate of usage of resources. This requires a recalculation and shift in technological emphasis to work around resource constraints. Maybe global trade will break down as cooperation shifts toward competition for resources. Can you just increase the money supply so people can pay more and consume the same rate of resources?

Last but not least, what if an expansion of credit caused people to enter into obligations, legal and structural that were unsustainable. The availability of money disguised the fact that resources were scarce causing wasteful decisions to be made. Central banks, foreign and domestic accommodated broad expansion of credit. Neighbors apparently making money asset trades made you feel like you were falling behind. Leverage appeared an easy way to catch up. Asset prices rose, giving the feeling of wealth, but we forgot that the money doesn't just sit in the asset, it went with the seller. He spent it. Did he spend it on things that increased the productivity of the economy to keep pace with the rate of GDP growth we were used to? Did he build a plant here, or, did he just double-down his bet on asset price increases? Did the government build infrastructure, or did they pay for drugs, wars, and pensions? Did they borrow from the people making flat screen TVs to buy flat screen TVs, thus financing the building of flat screen TV plants that we will have to pay back. With what? Did we in fact send our engineers over their to help them build the plants? When the asset prices got too high, did The Fed raise rates not accounting for asset prices based on leverage and mortgages (and thus interest rates) owed to the people that we just exported our plants to? Did the bills come due just as the growth jig was up? Will a return to recent activity and aggregate demand fix this?

We just need to increase aggregate demand, by using expansionary fiscal and monetary policy, and that will work to increase employment by reducing real wages.

One of the more impressive blogs Ive seen. Thanks so much for keeping the internet classy for a change.

That's a good idea,like it!!

Nice post.. Thanks for sharing it!

Wow! Some amazing effects. Definitely some great ideas here. Thanks for sharing!

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