Money Illusion at the National Review
Mark Thoma reads a comment from John Tamny over at Mark’s blog and has decided Tamny will never understand basic economics. The topic Mark was trying to raise had to do with how Tamny fails to grasp either what Ben Bernanke or the long-run effects from monetary policy. Rather than concede his errors, Tamny compounds them:
Assuming Thoma could even know what “full” employment is, my point still stands. We are not constrained by Thoma’s silly belief in full employment and capacity restraints for two reasons. First off, assuming we hit “full” employment, wages will rise and in doing so will attract the marginal worker back to the workforce. More on that, I can’t think of the last time I bought gas, movie tickets or airplane tickets from a live human being. I can’t because markets have a funny way of innovating around these “shortages” that have people like Thoma so hot.
While some supply-siders have insanely high estimates of the elasticity of labor supply, few would be stupid enough to assert employment decisions are based on nominal wages rather than real wages. I say this with a little caution as Lawrence Kudlow seems to believe that the 4.81% increase in nominal wages over the past two years makes workers better off even though prices have increased by 6.25%.
In the traditional classical macroeconomic model envisioned by most supply-siders, a 10% increase in the money supply would raise nominal wages by 10% but would also raise prices by the same 10%. In other words, there would be no real effects.
Alas, Tamny continues:
Second, Thoma might agree that this is a world economy. Most companies large and small that are based here don’t limit themselves to the US workforce as my writeup very clearly stated. For Thoma to continue to act as though what I said is not true in order to impress his readers for having gotten himself some NRO hide is really pathetic, but not surprising.
Even though we covered one aspect of this earlier, which was that the extra income enjoyed by workers in India is not part of U.S. GDP, perhaps Tamny is hoping U.S. monetary expansion will lead to faster growth for our trading partners. Whether faster U.S. monetary growth leads to an increase or a decrease in foreign aggregate demand growth depends on the exchange rate regimes and the reaction of foreign central banks. For example, under floating exchange rates, faster U.S. monetary growth could lead to dollar devaluation with resulting expenditure switching effects that would increase U.S. demand but lower foreign demand. Of course, it is possible that the faster U.S. monetary growth would induce faster monetary growth abroad.
But would that lead to more employment abroad or just more foreign inflation? Tamny is assuming the Indian central bank is too stupid to manage its own economy. Last I check, the Indian central bank had not hired anyone from the National Review, which tells me that there are much smarter than Tamny thinks.