More from Richard Williamson on the UK

Right now, unemployment remains at over 8% in the UK while real wages are lower than they were 7 years ago and are continuing to fall. Yes, you read that correctly. Which immediately leads one to ask: on this explanation of a recession as expounded by Karl, how much further do real wages have to fall to eliminate disequilibrium unemployment?

…I am finding the aggregate demand narrative an increasingly unsatisfying explanation of all that is happening in the British economy. Supply-side suffering is suffering too, and I think we need to take very seriously the chance that it is happening.

Here is his follow-up post.  Do note there is no deflationary downward spiral in the UK.  In a funny way, it is some of the more extreme Keynesian views which lead one to the most extreme stagnationist conclusions.  I know, fiscal policy, fiscal policy, fiscal policy.  But it can’t employ everyone forever.  What does the level of real wages need to be?


'Right now, unemployment remains at over 8% in the UK while real wages are lower than they were 7 years ago and are continuing to fall. Yes, you read that correctly. Which immediately leads one to ask: on this explanation of a recession as expounded by Karl, how much further do real wages have to fall to eliminate disequilibrium unemployment?'

More leeches! Seriously, doesn't this offer yet another piece of evidence that high real wages are not what's causing unemployment?

Does labor obey the laws of supply and demand?


I am not an economist

But tech and globalization render labor abundant and thus cheap

Why is that wrong?

That's another way of saying "Because of tech and globalization, real wages are too high for the desired level of unemployment." It only defines a cause, it does not affect the relationship between labor costs and unemployment.

Tech, globalization and anti-labour public policy

Funny how overnight labor suddenly became mispriced.

Funny how overnight stocks suddenly became mispriced

Ah, mispricing.

Funny story: back around 2000 my broker was telling me about a client of his who was one of the first guys every to do XML, company asked him how much he needed, he said $1200/hr, they asked him to start the next day.

Best part is he put it all in high-risk Internet stocks, and ended up losing about 90% when the bubble popped.

Cliff and Tall, must be that labor was mispriced for a very long time, not like your stock. By the way, funny how we protect the bondolders of banks and their shareholders with government guarantees as in Ireland, and likely in Spain, with their real estate over leveraged speculation.

Another way to look at this is that governments have had to make room on their balance sheets to cover the debts or risks assumed by their banking industries.

It's not austerity for prosperity.

It's austerity for banking.

Stocks can be mispriced for a long time too, until suddenly the market realizes and corrects. See the tech bubble, the electric bubble, etc.

It's not austerity for anything, it's solvency. Alternatively, if you want to live without credit markets, be prepared to accept a massive decline in living standards.

No, it does not because labour is only productive when combined with capital and so the concept of a pure labour MVP is nonsensical. The labour supply curve also supposes that workers trade off leisure for work time, as if the average worker has much control over their hours.

Also don't forget that wages are an essential component of AD.

"The labour supply curve also supposes that workers trade off leisure for work time, as if the average worker has much control over their hours"

Excellent point. I've always felt this was a massive flaw in microeconomic reasoning. It is as if the representative agent in the labour market is a tenured economics professor.

So in other words, if my employees get more expensive I will give them more hours and hire more, and if they get less expensive I will use them less and fire some? As the owner of a small business, I find that implausible.

Of course you're committing the fallacy whereby you can simply draw conclusions for the entire economy based on the decisions of individual business owners.
This tends to be the line given but I never see much data to back this up.

Uh, who do you think makes up the economy?

Right...but the economy is more then the sum of it's parts.

Mostly, yes. Because the times where your employees are going to be expensive are the times your business is booming, your revenues growing and you'll just need people, at whatever price (within reason etc). When Labour is cheap, the economy is likely to be depressed. Why would you hire?

Like with interest rates. They're pretty low right now. It doesn't mean that companies are queuing to borrow. Sure, some are using the opportunity to refinance cheaply but, in general, there is not that much impetus to borrow as there are few projects worth spending the money on...

It's more that if employees get more expensive you're not going to fire them automatically, assuming demand is sufficient. You also have the option of putting up prices (neoclassical models presume workers have control over their real wages).

And also it's not really the case that if wages are lower you will hire more people, assuming demand stays the same. As a business owner do you not agree that jobs are created by demand?

Right, obviously wages are going to be positively correlated with demand, but holding everything equal I am going to hire more people if their cost is lower. I certainly have experienced this recently. At first I was able to get excellent contract attorneys at very low (relatively speaking) hourly rates, and I used them a lot. Then, I was unable to find them for what I thought was a reasonable rate, so I simply worked more hours myself to make up the difference. Now I have gone back to using contract attorneys although at higher rates because I simply cannot handle the work any other way. But if costs were lower I would hire full-time employees and devote more of my time to client development and leisure.

But what YOU are going to do individually cannot be scaled upwards to assert what is going to happen on a macro level. If Economics is supposed to be some kind of science it cannot derive everything from just-so stories and abstractions, you need to actually have data to see what happens.

I don't care about your personal stories they have little to do with what happens in aggregate. The economy does not consist of a single employer, a single sector, and a homogenous pool of labour.

We were less wealthy than we thought we were.

Call me an AD-denier, but I still think the basic issue here is that you can't consume more than you produce. Production exists to satisfy demand, but at the same time demand is limited by production. We had a long boom built on the notion we could boost demand and thus supply and thus demand again in a virtuous cycle, and now we are seeing the cycle work in reverse as demand/supply seek their natural levels.

Good post, +1

And you don't have to be an 'AD-denier' to agree with this post, you are rightly pointing out that AD is only one portion of the problem and maybe not the main one.

Well, thanks, but you kind of do, because the implication this cannot be solved by increasing AD-boosting fiscal spending, as that just further impairs production (the ultimate limiting factor) in the attempt to restart the false boom.

I really think too many people on both the supply-side and the demand-side get seduced by the false precision of econometrics.

"Y is too small. Since we can control G, we'll make G bigger, which will make Y bigger and then everything will get better!"

The problem is you can't really aggregate all the trillions of decisions that went into C and I, which G does not contain.

AD-centric reasoning is too much like looking at the Bulls this year and noting that in games where Brian Scalabrine played, the Bulls won by an average of 21.4 points, and determining on that basis that the only logical decision is to play Brian Scalabrine every night.

As a Bulls fan I approve this analogy.

demand is limited by production.

This makes no sense. Demand is not limited by production.

Consumption is limited by production. Increases in demand - which is to say outward shifts in the demand curve - stimulate production and hence enable more consumption.

Yes, but where does the demand come from, if not from the fruits of production? A worker in a factory buys things because of the production of the factory -- his demand is limited by the ability of the factory to produce.

The other places it can come from are debt, and non-deficit government spending (indirectly the fruits of production, seized through taxation). But reliance on those leads... well, here.

And that would be were salaries are important - if revenues are declining but profit margins are maintained by pressurizing salaries, the demand of your factory worker is not limited by the ability of the factory to produce but by the portion of added value (or gross profit) he gets...

I really don't understand what surprises people in this piece of data. It doesn't matter to an employer that one of his input got cheaper. What matters to him is that he cannot see ways to grow his revenue/top line. Unless that happens, he will not hire and as long as he doesn't, fear and outright unemployment will allow him to compress salaries in order to maintain, as best he can, his profit.

Self-fulfilling depression - is that not basic economic? What am I missing?

I'm not concerned with what portion of the factory's production actually goes to a given worker, I'm just establishing that all the benefits of a factory that flow to workers/owners/etc to become demand cannot be more than the factory produces. Thus production limits demand.

"What matters to him is that he cannot see ways to grow his revenue/top line."

IOW, there's no demand for his product for any number of reasons.

The classic policy response is to lower the cost of capital and inject liquidity which, so the theory goes, will raise AD. What the Austrian school says is that the resulting gains are, perforce, nominal. Once the central bank gravy boat runs out, the economy recedes back to its "real" level. Nevertheless, the classic policy sounds better than let's-just-print-up-money-and-hand-it-out-to-factory-workers, which at bottom is what you're doing and which also wouldn't work for reasons that presumably are obvious. In any event, if you're a professional economist you can always say we just didn't increase liquidity enough.

What's going on with the UK specifically? My guess is their problems relate to a large net-consuming class to which they are continually adding, and boatloads of public and private debt.

"Thus production limits demand."

Demand partially comes from fruits of production of course. It can also come from decision to save less and spend more on something new that you did not want to spend on before. Example: Americans did not know until the mid to late 90s that they needed more soy lattes at a place called Starbucks. Where did that demand come from? it came out of dollars previously saved. I don't think it displaced dollar for dollar any other products. It's that kind of demand that we have a shortfall of in this recession and it makes a big difference to unemployment

And those dollars previously saved came from the fruits of production, thus production is the true limiting factor.

That's really the disconnect that bothers me -- yes, you can play around with saving ratios, but you don't ultimately get any more real stuff that way. You're just eating more of your seed corn and calling the result "prosperity."

I think the question to ask there why demand for Starbucks erupted in the 1990s. I would argue it was less because overpriced coffee did not exist or was nor marketed well enough before the 1990s, and more because because production rose to the point that the economy could support more demand for overpriced coffee (cultural factors notwithstanding; you might substitute other goods here).

I think the question to ask there why demand for Starbucks erupted in the 1990s. I would argue it was less because overpriced coffee did not exist or was nor marketed well enough before the 1990s, and more because because production rose to the point that the economy could support more demand for overpriced coffee (cultural factors notwithstanding; you might substitute other goods here).

Spending can easily be based on money saved. Indeed, it often is. What do you think retirement plans are all about? It can also come from money borrowed that was idle.

Say's Law is not true, as even Say figured out.

And no, again, demand is not limited by production. Demand is a function relating prices to quantity desired. There is a huge demand for Ferraris at $100/each. It doesn't matter that the company lacks the ability to meet that demand.

Tall Dave: sometimes you do get stuff by playing around with the ratios. Imagine an economy with a farmer john and a violin player dave. Farmer john grew 100 bushels of corn, used up 98 of them for his own needs and has 2 left over in the warehouse. Violin player dave came over and asked for 2 bushels of corn in exchange for beautiful violin playing. Get it? those extra 2 bushels would have rotted in the warehouse because farmer john has no use for them. But since dave the violin player came along, they engaged in trade that benefited both of them. Had there been no demand for violin playing though, they would have both been worse off

Yes, but again -- where did that saved money come from? The answer is the fruits of earlier production. And again, eating your seed corn (invested savings) and calling it "prosperity" only works until you run out of seed corn -- and then you starve.

Most versions of Say's Law were developed well after Say, and many are quite valid.

I'm not sure why you think I'm arguing prices play no part in determining demand for a given product; they certainly do. What I'm saying is that real increases in overall demand can only result from real increases in overall production; as AG said above; anything else is nominal or temporary and the economy will eventually seek its natural level.

Oh no,

In your example the corn isn't saved, it just rots. The gain is from trading a quickly-depreciating good for an immediate one, rather than trading savings for consumption.

Now say instead John actually needed those last two bushels to plant next year to grow more corn (i.e. they are invested savings). This year he has beautiful violin music, next year he starves.

Most versions of Say’s Law were developed well after Say, and many are quite valid.


I’m not sure why you think I’m arguing prices play no part in determining demand for a given product; they certainly do. What I’m saying is that real increases in overall demand can only result from real increases in overall production; as AG said above; anything else is nominal or temporary and the economy will eventually seek its natural level.

May I suggest you get a hold of an elementary economics textbook and learn what demand is.

>>Most versions of Say’s Law were developed well after Say, and many are quite valid.


>>I’m not sure why you think I’m arguing prices play no part in determining demand for a given product; they certainly do. What I’m saying is that real increases in overall demand can only result from real increases in overall production; as AG said above; anything else is nominal or temporary and the economy will eventually seek its natural level.

>May I suggest you get a hold of an elementary economics textbook and learn what demand is.

1) In general equilibrium there is no aggregate demand except for supply, for example: an Edgeworth Box game.
2) Demand in microeconomics represents the entire rest of the market.
3) Tall Dave is correct. I suggest you do a bit of reading beyond just undergraduate texts.

Actually, I have read beyond undergraduate texts, yet I confess I don't understand your comment.

I'll sign on to versions of an AD story and generally support market monetarist thinking, but the idea that salvation lies in fiscal policy seems to be less and less credible.

Well, I am glad you posted the author's reply to your post,

which has an opening, now, that says

"I am not pro-austerity".

As a poet once said:

"In a minute there is time,
for decisions and revisions,
which a minute can reverse."

If I may engage in a bit of PR for a second, I have long been in favour of fiscal policy that would 'help along' a central bank in raising AD. For example, here (in the context of NGDP targeting and fiscal policy)

By all means, please do so.

No one says that only one tool should work to the exclusion of others.

Well, most people don't say that.

The state doesn't have tools. Anyone who thinks contrary to this is merely deluding themselves.

Ah, so to quicken the state bankruptcy? I like it. That way instead of the default coming 30 years down the line, it only comes 20 years down the line!

Real wages may be lower, but how much lower? More than 6%?

Well, wages are sticky right? Maybe even stickier now than they were in the 1930s. Or they were inflated much higher by easy money during the expansion than anyone has realized, and its taking a very long time for them to come down? That may not be a AD problem, or a problem that can be fixed by AD alone, but it's not really a structural problem either. (I type this as someone with casual interest but no actual knowledge of current research on the subject.)

Hold on, hold on.

Wages are going DOWN and that's not an AD related problem??!

Excuse me but that would be the perfect proof that this crisis is AD related. People don't have money. Thus they cannot spend. Thus producers do not hire/do not raise salaries. Thus people don't have money.

I am not sure if I am missing something but I think this pretty obvious and the only one who might have a problem with that are neo-classicals who think that as soon as something prices come down, there'll be more demand for it... As an approximation, that's true in many cases but crises like the one we're having are not 'normal'.

All of that doesn't mean that supply side has no role to play but, imho, it can only be a junior role to AD.


Nominal wages are rising, but not as fast as inflation. 'Real' wages are going down.

I didn't mention 'nominal' vs. 'real'.

In general, salaries are sticky and inflation is one way to get them down without having your workforce baying for management's blood.

Fine but so what? It's still true that workers lack disposable income and, if they are incentivised to save/reduce their debt because, even at low interest rates, it's either crushing or scary, it's all the same - You have the lack of disposable income directly translating into a depressed AD.

The only counter-argument I am aware of is suggesting that, as salaries drop (in real or nominal terms), companies are incentivised in recruiting more.

But that, imho, is not correct. Just as companies do not accumulate enormous reserves of a given commodity when it gets cheaper if there is no prospect of turning it into future sales, companies will only start recruiting again when they see prospects of growing their top line.

I have an intense feeling of deja vu

Yep, I am getting on in years. Apologies for repeating myself. But it's just that I did not (still don't) see what the nominal/real distinction has to do with my comments - it's valid (or flawed) independently.

But thanks for your vigilance. I won't do it again! :)

Well to answer your last point, I think companies understand that if they can reduce their price they can sell a higher quantity. So if labor becomes cheaper, you can hire more labor, reduce prices, and sell more.

Of course if everyone does this - sell more to whom? It also depends on how big a component wages are to the final price. It doesn't seem to me you can assert this chain of action being true in aggregate. But I guess this is the standard parrot line.

Who am I supposed to be parroting?

The real wages have already decreased, hiring more people is going to increase consumption, not decrease it. I don't see the "aggregate" problem.

Of course there's an aggregate problem. It's totally unclear that declining wages across the board will lead to increased consumption. I mean you can tell the story of how lower wages mean more people hired - but companies overall will only hire more people if they think they can sell more stuff. Is employment actually increasing or is this just a story you're telling about how you think things should go?

It's not "declining wages across the board" that leads to increased consumption, it is increased employment, given that the wages have already declined. If you are trying to argue that it makes no sense to hire additional workers once wages are lower because hiring more workers in the aggregate will cause demand to drop, that is incoherent.

I am not arguing that increased hiring is what actually happens, I don't know- though I would assume so, all else being equal, and given the laws of supply and demand. I am only saying, in response to Frederic, that there is a reason for companies to hire.

There would be a reason for companies to hire as long as they could expect to sell the extra product created but that's really questionable if everyone's wages are declining. This is why I'm saying you can't simply take the example of a single firm and use that to argue what will happen on the macro level.
It can happen that you have situations where the local economy is contracting, wages are falling but export markets are booming so you could ship the excess product over seas - then there's incentive to hire. This is what happened here in Canada in the 1990s.
But the UK situation looks like one where exporting more isn't really an option, and the lower wages just lead to an effective redistribution of income to a relatively tiny group who are most interested in using the income to hold cash, financial assets, or Georgian Townhouses in central London.

I think the point is that "real wages" don't have much, if any, direct bearing on unemployment. Real wages only have a correlation (not causation) with unemployment because inflation generally correlates well with NGDP.

NGDP is the real factor because it corresponds exactly to the revenue coming in to businesses and governments. The business/government revenues also needs to increase at a steady rate. If the revenues stay flat, then only the workers whose real productivity increased will not suffer layoffs. If any workers' real productivity decreased, those businesses will have to either cut wages or layoff employees to keep wages below to make the math work.

For example, if a business has thirty million of dollars in revenue and 1,000 employees, that comes out to $30,000 per employee. The revenue is flat year over year. Half the employees had real production increase by 3% and the other half, for whatever reason, had real production decrease by 3%. The 15 million going to the first half becomes 15.45 million since those employees will have other opportunities. The other half now only have 14.55 million going to them. Ideally their wages would be cut, but in the real world they would be laid off and RGDP suffers. Also notice that the revenue increase needed is agnostic to whether the revenue is increased through prices or through productivity. Ideally, it would come through productivity, but if productivity suffers price levels can offset that to keep unemployment from going up.

The UK NGDP went down from 2.8 trillion to 2.2 trillion and hasn't come anywhere close to its pre-trend NGDP growth. From what I can tell, the UK does have a lot of terrible structural factors for RGDP growth which should depress RGDP tremendously. Structural factors reducing real productivity, however, do not have to increase unemployment which even further depresses RGDP.

I am from Cambodia, unfortunately we are a poor country :( I think the solution to our problem is to spend more and have the government give everyone more money. Like people keep saying, we are poor because we don't have enough demand in our economy, we may have many structural issues and not enough production but give us the money, even better if it's printed (that way we don't have to pay taxes hehe), and we will transform our economy overnight. Those stupid East Asians, rather than build up a manufacturing sector und improve human capital they should simply have spent and all would be fine.

I fully agree, I dropped out of high school and can't find a job now. I don't get it, all I want is to be paid three times as much as some random Asian dude who may have a university degree but I am a Westerner and Caucasian. Obviously globalization shouldn't affect me.

"Those stupid East Asians, rather than build up a manufacturing sector und improve human capital they should simply have spent and all would be fine."

So how did the East Asian manufacturing sector get going? Did it have government support?

It's humorous to me when people act like printing money is the end of the world. The economy cannot grow unless the monetary supply is increased (unless you prefer deflation). People act like monetary policy has some sort of moral implications - it is somehow wrong to fiddle with it. Remember these are just numbers.

People act like monetary policy has some sort of moral implications – it is somehow wrong to fiddle with it. Remember these are just numbers.

They're just numbers until you start drawing down your 401k. Or wake up in Buenos Aires one morning and realize the government has effectively cut your earnings in half.

Except this absolutely no danger of inflation right now so you're hysteria is completely unwarranted and damaging.

Well, like I say, there's "absolutely no danger of inflation" until it happens.

So this is a policy choice - do we remain always vigilant again inflation the unemployed be damned? I mean that's a pure policy choice that has become to be treated as some kind of moral crusade.

If by "absolutely no danger of inflation right now" you mean "we do have inflation right now", then yes.

If by "absolutely no danger of inflation" you mean, that we have high and rising CPI, then yes.

Sorry you don't make any sense. All the East Asian economies were built up with massive government support.

Government support = money printing?

I still don't see what's morally wrong with printing money. Again it's a policy issue that people have turned into the 11th commandment.

I don't see what's morally wrong with it either, I am a market monetarist. I just don't get your point I guess.

The economies of Communist China and North Korea also had massive government support. Apparently that doesn't work without free markets.

Also, the most successful economy is probably Hong Kong, which has the lowest gov't share of the economy in the world.

No one is saying to get rid of markets. I don't think Hong Kong has the lowest share of government in the world.

Well, you just told that poor Cambodian free markets didn't make any sense.

"The standard income tax rate is 15 percent, and the top corporate tax rate is 16.5 percent. The tax system is simple and efficient, and the overall tax burden is low at 13.9 percent of total domestic output. Government spending is equivalent to 17.3 percent of GDP. The budget balance has recorded large surpluses, which the government has chosen to reduce through per capita cash payments and tax rebates. Public debt is low."

The U.S., for comparison:

In the absence of comprehensive tax reforms, the top individual and corporate tax rates remain at 35 percent. Other taxes include a capital gains tax and excise taxes, with the overall tax burden amounting to 24 percent of total domestic income. Government expenditures have grown to 42.2 percent of GDP, and the budget deficit is close to 10 percent of GDP. Total public debt is now larger than the size of the economy.

Nah, I said his comment made no sense. I don't think the US can emulated Hong Kong which is geographically tiny. Also this doesn't look like smallest in the world to me. Hong Kong is not the typical development story and I think it's telling that it's really Hong Kong and Singapore that are brought to demonstrate how great low tax policies work. I really question whether this would work for any large country.

His comment was they need free market reforms rather than gov't intervention.

It's not just Hong Kong and Singapore, the negative correlation between taxation and growth is pretty robust.

17.3% of GDP is the smallest of any industrialized country afaik. I've never heard any explanation as to why geography should require tax rates more than twice as high, but politically it's probably easier with a small population.

Heritage and Mercatus - oh yeah I love the non-partisian totally unbiased sources here.
Actually it's pretty easy to see why small geography would require lower tax rates even if say you didn't want to have much in the way of social programs. You basically have significantly lower fixed costs particularly in terms of infrastructure if you're Hong Kong sized. The reality is in a large country like the US or Canada not all regions are uniformly productive. Much of the national wealth is generated in certain areas but there's large swaths of the country where people still live and politically you aren't going to be able to get away with not providing a certain level of infrastructure spending to those regions even if many of them are not going to be productive. In a tiny area like Hong Kong the fixed costs just aren't as large to providing a basic level of services.
So if all of the US was high productivity this wouldn't be an issue but there is an economic geography and large parts of the country are subsidized by other areas.
Another thing is - I know you're a big big fan of having massive military spending and participating in all kinds of foreign wars. Do you think Hong Kong does this? Is the massive US military cheap to maintain? You're a huge fan of this kind of thing.

The government owns a lot of the land in HK and they have large housing subsidies as well as state funded healthcare and education. They also have a minimum wage.

Singapore: yet again, the govt owns a large amount of the land (about 80%), and it has a large GSE component.

State spending as a % of GDP grows as countries develop due to Baumol's Cost Disease, rather than because of the evil statists wanting to take over your life.

Seriously, this silly 'unleash free markets' view of economies, along with the blatant disregard for the protectionist history of almost every developed nation, and topped off by smug references to the USSR, which I can bet that you don't actually know anything about on any meaningful level, is getting tiring. Please, for everyone's sake, read a history book.

And that goes for almost every libertarian.

Heritage and Mercatus do fine work. No one is unbiased, some are just more honest than others.

Infrastructure costs are actually lower for low-density populations, not higher. Putting more people in smaller areas is expensive -- is it cheaper to live in Manhattan or rural North Dakota? Which has less government spending per capita?

Nearly every U.S. state has higher PPP GDP per capita than every country in Europe. The supposed subsidization you refer is mostly a myth based in confusion over where revenue is produced versus where it is taxed -- e.g., do you really think those oil-producing and farming areas currently producing record profits are a drag on the economy? The real massive subsidy is from high income citizens to low income, irrespective of location.

Hong Kong is another of those lucky countries like Japan and most of Europe that outsources its defense to others. Free riding works great until no one wants to drive anymore.


Really now, if you're going to off half-cocked telling people they don't know what they're talking about you should at least not make basic mistakes in reading comprehension. I have not mentioned the USSR once on this page, as a simple search will show. Maybe take a few deep breaths before you post?

So the gov't owns most of the land. Guess what, that is also true in several U.S. states.

And in any case, my argument was based on % of GDP that is government spending.

Yes, every country has a history of protectionism. As an argument against free markets that is about as sensible as saying we should have slavery since just about every industrialized country had that at one point too. You do understand Smoot-Hawley is widely regarded as a mistake?

Worth pointing out too: the real estate situation in Hong Kong is a bit more nuanced than "the gov't owns it all." While that is technically true, rents are apparently nominal and expectations are that the leases are essentially permanent (many on HKI are for 999 years!). It doesn't look that different from ownership (though I'm not 100% sure how transferability works, but it does seem to exist).

So in practical terms I'm not sure it's much different than in a U.S. state, where in theory you own the property but the state will seize it if you don't pay the taxes they ask.

Nearly everyone seems to agree Hong Kong ranks at the top in economic freedom. It's a very contrarian position you're staking out there...

Infrastructure costs are actually lower for low-density populations, not higher. Putting more people in smaller areas is expensive — is it cheaper to live in Manhattan or rural North Dakota? Which has less government spending per capita?

Irrelevant - the US must provide infrastructure across huge areas - in North Dakota or very dense Manhattan or Chicago. It would seem to me that economies of scale in the delivery of services are much easier to recognize in a small area then over a large one where you probably have to provide a lot of duplicate services. I think it's very telling that the two major examples people trot out of these successful low-tax economies are tiny Hong Kong and Singapore which are both heavily dependent on their ports and internationally oriented sectors for success. This is not something the US could easily emulate.
Nor does the US HAVE to emulate it as there is no dichotomy between taxes and prosperity. It's also interesting that you brush off military spending - one of the largest chunks of the budget as a minor detail. Where do you think all this spending goes? I know Rush told you it's all Solydras and crazy Kenyan-Marxists schemes but maybe it's time to take off the team Republican jersey for a minute.

But it's very relevant -- while it may seem more expensive to build roads and truck stuff from a farm and send electricity all over, it's actually much more expensive to try to put a farm on top of a power plant on top of residential housing. Space has value!

While we can't have the proportion of ports HK has, we could achieve their propotion of gov't.

People who extoll the supposed laissez-faire economic policies of Hong Kong fundamentally misunderstand HK's economic history, structure and taxation mechanisms. Yes, income and corporate taxation is low compared to HK's Western counterparts. However, a majority of HK's tax revenue is derived from property taxation. HK's gov't owns all land within its sovereign territory. Furthermore, given geographic constraints and economic policy, the gov't artificially augments the value of property--thus augmenting gov't revenue.

HK's geographic position was and is essential to its economic prowess. It's ideally suited to benefit from int'l trade, especially from an historical perspective. As you probably know, the China was an economic basket-case from 1945-1980, this provided HK a consistent supply of cheap foodstuffs--thus dampening inflationary pressures--and further strengthened its geographic position as a gateway to East and SE Asian economies. Furthermore, HK benefited from institutional prerequisites of economic development inherited from extended British colonial rule.

HK is truly something of an economic outlier whose history and policies cannot really be extended didactically.

Why can't money printing solve my country's problems? If only Visa set up shop here and gave every a credit card we could finally move on to become a post-industrial economy. Who needs production facilities or wages based on productivity in a globalized world when we all know that demand is the key? Let all Cambodians spend way beyond their means, enjoy an asset-price boom based on no fundamentals, have the government spend beyond its means and once we hit the brick-wall we can always have the central bank print more money. W weon't see any inflation, asset-prices may be getting a huge boost from money-printing and thereby increasing inequality but we don't (need) to measure that.

Why does the World Bank keep sending us macro-experts rather than Visa or Mastercard reps??

It's not hard to find countries in similar situations that did not do nearly as well as HK.

At any rate my argument was based on their spending as a % of GDP, which is anomalous. Keynesian logic argues they should be poor.

Yeah - and no one is arguing that merely being in a certain situation means you're going to take advantage of it. Many countries have poor institutions - but I bet you it's not all about the tax rate. What people ARE saying is that the US is not in the situation that HK is in.

I don't know what the Cambodian is talking about - no one is discussing the economy of an undeveloped, capital-poor country.

True, but -- and this perhaps the most important point in all this -- one of the chief virtues of free markets is they produce a better internal ethic. Look at the mess Communism left behind -- incentives matter!

How much lower do real wages have to go???

What a question.

Isn't wanting to lower wages just another form of austerity?

Sure, the way to improve the economy is to make everyone poorer.

On the one hand is the contention that if we boosted velocity then higher wages could be supported. On the other hand, the babysitter and hairdresser model ignores fixed labor costs such as gas prices (up 9% YOY US$) and higher velocity means compounding losses faster.

That's pretty much how currency devaluation works, too.

You hit the nail on the head. This is why monetary policy doesn't work. All it does is make everyone poorer.

All of this ignores:
1) the Austrian insight that bad policies can create bad investments in both physical and human capital. More bad policies can continue creating bad investments that create more physical and human waste.
2) Bad policies can create governmental structures and promises that reduce productivity and make unsustainable promises.
3) We will in a global economy. That can create real business changes that impact a specific country. Also 1) and 2) in other countries can and do impact other countries.
4) Demographic changes also create real business (and social and political) impacts.

Mankind’s first serious attempts to deal with the challenges of retirement, health care, financial security, housing, employment, and sustainable economic growth are unsustainable. With no good options, governments are paralyzed and trust in governmental elites is collapsing.

There isn't any technocratic tinkering that will fix these problems.

Why must bad investment decisions in the past necessarily mean we can't do anything now? Where is the evidence that the economy simply has less production now then 10 years ago?

1. Because you know no more know how much demand there should be in the economy than the Soviet Central Committee.

2. Production in the UK has been mortgaged for far into the future. Debt as % of GDP has doubled in the past 20 years. The numbers are really awful, like Japan and Italy awful. Unless the Brits start inventing some really cool gizmos, they are going to be stagnant for a long time.

Too bad the Brits have based their economic decisions off the neoliberal beliefs that you just need to make the investment bankers and billionaire class happy. Making London into a playground for Russian oligarchs and Gulf State oil sheiks not working out?
I don't think there's any real Soviet style planning needed to get the economy going - just provide money. I know a lot of people around here don't like this notion but income has been totally redirected to a tiny group of entrenched economic interests who are not actually that productive but are really really good at exerting political pressure to get the policies they want.

Which oligarch-friendly policies are those, exactly?

Long time strong dollar policies, guaranteed no-strings-attached bailouts for large, politically-connected finance companies, the strong policy preference to fight inflation over unemployment, the increasing unevenness of the judicial system, Congress' obsession with protecting copyrights that should have long-ago expired by constantly extending them. It's a complete package to protect established economic interests.

Strong dollar benefits consumers and actually hurts businesses. Inflation is similarly mainly a consumer issue.

The rest I agree are a problem... but with the exception of copyrights the things you mention don't really "redirect income." The only real example of that is the UAW bailout, which cost taxpayers about $35B all told.

The people who are getting really rich are by and large doing it through voluntary transactions, and they are mostly nouveau riche, not entrenched interests.

If you want to see "entrenched interests" look at Europe's national industries and how they're treated.

Right it hurts businesses that want to export I agree and hence hurts a lot of industries such as manufacturing which provided good jobs to large numbers of people in the past. You confuse oligarch with businessman. Some guy who owns a business and is maybe pulling in a few hundred thousand, that's a joke that's not the kind of person I'm talking about.

It helps consumers but it helps a particular economic class of consumer - those working in sectors which as law, medicine, finance, defense, which benefit from huge amounts of protection.
Voluntary transactions with other people's money, and when these voluntary transactions don't pan out they come crying hat in hand to the government and get everything they want. Hey they're bonuses aren't even affected.

I'm still hoping for a Neal Stephenson "Diamond Age" scenario. Haven't decided whether to join the Vickys or Cryptnet yet.

Its a sad day when Diamond Age has become a best case senario.

Ne debt-deflation per se but a similar mechanism at work, I would guess. Decreasing real wages mean that disposable income decreases even faster due to debt service. Meanwhile, the BofE's QE has been devaluing the pound and raising import prices. So you get cost-push inflation while austerity and wage moderation reduce AD. Brilliant.

We will know that real wages are low enough when women stop to curtsy when they see a Rolls-Royce drive by.

Obama jokes now, eh?

Did you hear Obama once saved a dog? He named him Leftovers.

Oh, and : <>

It doesn't need to. Increase transfers, cut payroll taxes, stop messing with govt payrolls, and with some monetary stimulus you'll soon get a tax base that allows you to think about the deficit seriously.

They tried this. It was called the stimulus package. It failed to do what you suggest.

why is the burden on Keynesians to provide support for their theory? let's put the burden on the supply-siders. at what point is your theory wrong in contemporary U.K.? what facts would disconfirm it? at what level would wages have to fall and de-regulation occur AND what kind of macroeconomic conditions would need to exist for supply-siders to say: "my theory is wrong"? if you can't tell me this COWEN, then you are a fraud to social science and you are instead letting your ideology drive your analysis. i would guess that it is about to become very clear that the supply-side theory is wrong in the U.K.: a horrible economy, yet low wages and the implementation of structural reforms to provide micro-level incentives.

There is huge demand in petroleum and substitutes now and food is doing well also but it takes time for those industries to add on workers never the less more demand should help.

GA, look, there is no such thing as aggregate demand. In micro, demand just represents the entire rest of the market.
Lets say you are looking at the market for shoes: the demand for shoes represents every non-shoe choice make in the market. Its an abstraction that only exists in partial equilibrium. When we aggregate the entire market, we end up with only supply and preferences about consumption bundles.

First Ireland, then the UK...what other countries need to fail before Tyler Cowen abandons his faith in austerity. Everywhere it was tried it failed. And yet the countries that did the opposite are doing well.

Germany passed the biggest stimulus in Europe and now has the lowest unemployment since reunification:

China did stimulus.

The US did stimulus and is doing better than every one of the European nations that did not do stimulus.

Every day the austerity crowd looks like a bunch of snakehandlers. You may as well worship the sun, there is no evidence on your side.

> How much lower do real wages have to go???

Pardon my simple-mindedness. But wages would have to go low enough so that it was worthwhile to hire someone in the US or UK rather than China or India.

But wages that low would not allow people to buy non-globalized goods like real estate or education or health care. Though they could still buy iphones and food from Walmart etc.

So it's necessary for the economy to develop more non-globalizable jobs at different skill levels (ie. frack-ers, app developers, artisanal sandwich makers and so on).

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