Questions that are rarely asked

Suppose we were back in the 1990s, and unemployment was 5.0%.  But now suppose the economy was growing slowly due to slow growth in the working age population and slow growth in productivity.  A “Pop Keynesian” says that we can solve this problem with fiscal stimulus.  What do the smart 1990s Keynesians say in reply?

What do they say today?

That is from Scott Sumner.  And in these articles you can read about “Japan” and “labor shortage,” two topics which fit well together these days.

Comments

Can I make a question (another one, I mean)?

Does it matter where the workers are? Evidently people in Mexico can not roof houses in Texas unless they use some remote action device, but can't Japan outsource manufacture growth and other activies (softwre design) in other countries with foreign workforce (maybe not agriculture even when current farmes die due to paranoid need to defend "self-suffiency")? Wages probably won't have to be as the ones earned by people living in Tokyo.
Wouldn't the effect be the same? To invade the world instead of inviting it? The Japanese can get the service sector jobs which deman being physically in Japan.

OK, but
1) Why not today and outside (already developed or rapidly developing) East Asia? Let's say African and Southeastern factory workers and European designers. Japan is a rich country and can compete for the best workforce.
2) Evidently, multinational corporations are not exactly a new idea, but people keep complaining that Japan's workforce is shrinking, trend growth is shrinking, monetary stimulus is powerless, Japan won't accept immigrants, dogs and cats are now friends...

If one can made the Bangladesh (Vietnam is a low-hanging fruit, just Little China, any fool can make it work) thing work, the former Portuguese Africa plus Southern Africa, except Zimbabwe, should be a piece of cake. And China is working successfuly in Ethiopia--there is plenty of Africa in the West.
Well, let's see how Japan will solve its workforce dilemma. It is a very intelligent people, led by brilliant politicians and bureaucrats. Thank you very much for your help.

Actually, it is already happening now in Africa

The Chinese are investing in a railroad from Ethiopia to Djibouti and factories are already being set up in Ethiopia.

Here's a story from reddit about the shoes at least:

https://www.reddit.com/r/pics/comments/3rq120/friend_found_this_in_an_unopened_shoe_box_at_work

Even the house roofing doesn't have to be done in nearly as labor intensive a way as in conventionally is. Metal roofs are more durable and cheaper after factoring in labor and maintenance costs...they can also be made to reflect light in order to create big savings on cooling costs in Texas.

Not comparable. In the 1990s the U.S. wasn't (yet) suffering from the consequences of disinvestment in productive capital; today we are. Sumner indirectly acknowledges it by blaming a slow growing economy in part on slow growth in productivity. Why the slow growth in productivity? Inferior workers? No, disinvestment in productive capital. [For those who would cite the recent spike in business investment, it is attributable to investment in commercial real estate - not exactly helpful in increasing productivity.] Why the disinvestment? It's cheaper to invest overseas (where labor is cheaper as well) and, besides, the returns on speculative investments here (including real estate) are higher.

The term "rust belt" was popularized in the 1980s. If that's not a prime example of "disinvestment in productive capital", then I don't know what is.

Speculative investments don't crowd out capital investment in the economic sense. If someone decides to buy Facebook stock on the secondary market then someone is selling for the same price. There's no net change in the utilization of economic capital. If Facebook itself issues new stock in the primary market then that's a different story. But in that case the proceeds go the Facebook treasury, increasing its balance sheet capital, and is capital investment in the traditional sense.

Can I get a short list of productive capital and one of unproductive capital? Plz CC: the Fed, as I'm sure they will find the list useful as a policy guide.

Thx.

1990s US wasn't in a liquidity trap.

Scott Sumner does not understand Keynesian economics. He never understands that it matters if a country is in a liquidity trap or not.

Sumner is also pretty weak on the Flying Spaghetti Monster.

What is a liquidity trap? Rates near zero? But rates can demonstrably be decreased from where they are. Also it seems onetary easing has been demonstrated to be effective at near-zero interest rates? Europe by that measure was not in a liquidity trap until quite recently.

The Fed defines a liquidity trap by a Taylor rule that requires negative nominal interest rates. Zero nominal rates with below target inflation and above normal unemployment a fortiori mean the Taylor rule requires negative rates.

That's probably the best definition.

You could also say that it's the point where short term debt and cash are close substitutes.

And you probably shouldn't put forward theories about how to deal with a liquidity trap if you don't know what one is. It's ok, Scott Sumner doesn't know what one is either!

Liquidity traps - if they ever existed - can easily be solved by printing money. End of story.

If you don't believe this, then the Fed can go on a printing press spree and give us all infinite amounts of free money with no inflationary consequences.

It is really simple.

Exactly. No Keynesian would have suggested fiscal stimulus in the 1990s.

The premise of Scott's question sets up a straw man because he doesn't understand Keynesian economics.

8 million new jobs in 4 years despite the dreaded 'fiscal consolidation' of 2013 that was gonna throw the economy back into recession, because liquidity trap monetary policy ineffective at ZLB blah blah blah.

This just happened. Weren't you paying attention?

+1 to Jason Smith. I did not realize Sumner doesn't acknowledge liquidity traps until I read JS's comment at TheMoneyIllusion. It's amazing what a professional economist like Sumner will blind himself to just to convince himself (or others) he's right.

'liquidity trap- yes' 'sticky wages- no'.

LOL Ray, you might have better luck just flipping a coin.

On November 12 Tyler wrote "the best question to ask about fiscal policy is how well the money is being spent.

I agree, so much in fact that I think Keynesian vs Pop Keynesian thought experiments a bit of a distraction .. but then maybe I miss something and they actually connect.

To the extent that the government does discretionary spending, it should be for future returns.

[Something witty about educational signaling.]

Question that is rarely asked:

What, exactly, is a smart Keynesian?

Maybe Japan shouldn't be so hostile to women in the workforce? Or perhaps they could increase wages to induce more men to rejoin the labor force?

With regards to America, I think we know why our "official" unemployment rate doesn't indicate full employment:

http://blogs.wsj.com/economics/2015/06/26/the-u-s-stands-out-on-labor-force-participation-rates/

Well, Japan is pretty crowded. Maybe a smaller population would suit them better.

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