Top-Down approach is not working… Go Bottom-Up
Economics is full of ideas for fiscal & monetary policies. But these policies are Top-down approaches. They work through investment and the financial system.
Yes, China lowers its benchmark rate from 6.0% to 5.6%, but China is supporting a failing policy of over-investment. Debt rises… and non-performing loans are increasing.
Yes, Draghi wants to do whatever stimulus is necessary to battle super weak inflation in Europe, but he is not getting to the root of the problem. Real wages are being cut in an effort to increase competitiveness for Euro-zone exports.
Yes, Japan has decided to raise the stimulus of Abenomics as consumers react to the increased sales tax. However, unless real wages rise (not just “for show” bonuses), Abenomics is doomed to failure.
And in the US, M2 velocity is still falling. Graph below is “Percent change from year ago” updated to 3rd quarter 2014. Falling M2 puts downward pressure on inflation, against which aggressive monetary policy has to fight. People are not receiving enough income. Consumer credit from the financial industry is not strong like before the last 2 recessions. People are spending cautiously. If Main Street has more money in their hands, M2 velocity will rise.
The answer is to raise real wages across advanced countries. The approach must be Bottom-up.
I say money velocity went up in November. I think V will continue to rise. It has to.
Velocity is the ratio of GDP to the money stock. When the Fed does QE, it adds to the money stock. The Fed has added money at much greater rate than the growth of GDP. Therefore V must decline.
But not any more. With no QE there will be no growth in reserves, no more drag on V.
The velocity of money sounds like something important, I’m not convinced it is. It’s a ratio, not a yardstick.
BKrasting,
Remember that lots of the money stock is sitting in reserves which is not counted in M2.
If governments increase infrastructure spending they will hire private industry. Would labor share increase?
If governments increase K-12 and higher education spending, there is little capital expenditure. That will cause labor share to increase, correct? Even if the government paid low wages, it would do so?
Taxing capital (which is correlated to taxing the rich) and giving it to labor (or to unemployed) will increase labor share. But there is such a thing as too high a labor share.
How do you structure a tax (or a benefit) to optimize the balance?
Hi Arne,
Increasing govt spending on infrastructure may not increase labor share. I would hope that the govt would make an attempt to pay hire wages in its projects. Yet govt seems to be employing less people through time.
Redistribution does not seem to change the effective demand limit upon the utilization rates of labor and capital. That limit held even when tax rates on capital were much higher and redistribution was greater.
??? “The answer is to raise real wages across advanced countries. – ”
That is not a policy that is a wish.
The problem is how to raise wages. In theory, rising productivity and falling unemployment should be accompanied by rising wages. In fact, that has to be true that making a resource both more valuable and more scare pushes its price up in a properly functioning market. So, that really only leaves one possibility- we don’t have a properly functioning labor market.
In my view, the problem with the market for labor is easy to spot- it isn’t competitive. When looking to see if a product market will be competitive in an antitrust context, you define the market based on a pool of goods that can reasonably easily be substituted for one another within whatever geographic constraints make sense given the product. Many products pass antitrust analyses because you can buy the product online from anywhere in the world. Sure, if WalMart comes to town and drives all the hardware stores out of business, you only have one hardware store left in town, which sounds like a monopoly, but they get away with it because they have to compete with thousands of ecommerce site and because people aren’t really that adverse to having to drive an hour and a half to get to the hardware store 4 towns over.
But, that isn’t true on the labor side at all. The monopsony power analysis in the labor market goes very differently. You can’t easily sell labor over the Internet and the barrier of driving 90 minutes to get to work every day is much higher than the barrier of having to make the drive once a month to get to a hardware store. If a person had worked at hardware stores for 20 years in a town with 10 hardware stores, and now that town has one- WalMart- then that’s that person’s only choice for a job. When they negotiate her salary, the employer holds all the cards and can get away with paying a competitive wage minus whatever tangible and intangible costs the person would face if they had to move.
Now, not everybody lives in a town dominated by one superstore, but you actually have similar problems in lots of niches. If a person is an expert at implementing PeopleSoft, there may only be two or three companies that hire PeopleSoft implementation engineers in even a major city.
If we want to rely on the market to keep wages increasing, then the DOJ needs to be doing antitrust analyses not just on the product side, but also the employment side, and that would mean breaking up a whole lot of companies. Or, if that would just be too destructive, then we need to take more direct steps to counteract the loss of negotiating power that employers’ monopsony power causes through much more progressive taxation, much stronger unions, shifting any kinds of costs and taxes that we can from the employee to the employer, raising the minimum wage, and so forth.
Or we just tax and spread. Why won’t anybody consider a “national dividend” (i.e. a phased in citizen’s income). I think it the “naturalistic fallacy” that is the problem here, people are hooked on thinking markets are natural (they aren’t) and what is natural is good (it isn’t necessarily).
Edward, et al.,
M3 velocity to private GDP (GDP less total gov’t spending) is below 0.8:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJ0
Acceleration is negative but still above the post-2007 nominal GDP trend of ~2.5% that would imply recessionary conditions were it at the level or below:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJ4
Velocity is not yet back to 1.0 after subtracting hoarded bank cash from M3:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJ1
Acceleration is decelerating again but, again, well above the post-2007 nominal GDP trend of 2.5%:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJ2
Wages are not inflationary:
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJ9
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJa
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJf
http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=SJe