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Krugman Monetary Policy and Models

Paul Krugman recently wrote two blog posts on monetary policy in a liquidity trap. In “Timid Analysis” Krugman presents a model in which Nash favors the bold

But a necessary (not sufficient) condition for this to work is that the promised inflation be high enough that it will indeed produce an economic boom if people believe the promise will be kept. If it isn’t, then the actual rate of inflation will fall short of the promise even if people believe in the promise – which means that they will stop believing after a while, and the whole effort will fail.

Note the language of mathematics “necessary (not sufficient)” used without appeal to stated axioms or assumptions such as “if we assume that the assumption that the world is in Nash equilibrium is a useful approximation to reality.” I’m nit-picking a blog post, but, technically, Krugman slipped into asserting that it is necessarily true that if a belief is contradicted by the evidence then people “will stop believing after a while”.

The day before yesterday, when discussing Congressional testimony on the effects of the Bernanke Fed’s monetary policy in a liquidity trap

What gets me here is the complete unwillingness to accept the reality test. Here you have monetary economists who made a totally wrong prediction, at a time when other people were not only getting it right, but explaining carefully both the theoretical and the empirical basis for their prediction. Yet the reaction of those who wrongly predicted runaway inflation is to assert that (a) nobody could have predicted (even though some us did) and (b) it’s just special circumstances. The possibility of conceding that their model was wrong never seems to cross their minds.

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Real wage stagnation, year 41

Remember the Economic Report of the President? Of course you do. It’s where we get our annual data on real wages (and apparently some other stuff, too). The 2014 edition was released on March 10. As you may recall, I made my first post on the declining real wage trend through 2011 and was literally the first person to notice 2012’s further slight decline.

The good news is that, in what is now Table B-15 rather than B-47, real wages advanced somewhat in 2013, from $294.31 per week (in 1982-84 dollars) to $295.51, an increase of 0.4%. Woo hoo!

The bad news, of course, is that this is still 13.5% off the peak real weekly wage of $341.73, achieved in 1972. One swallow doesn’t make a spring, and all that.

Interestingly, last week Paul Krugman felt compelled to argue that real wages aren’t going up all that fast, but so what if they did? He said that basically, this was something primarily only visible in the real hourly (my emphasis) wages of production and non-supervisory workers, which happens to be one of the components of Table B-15. However, he was reporting based on the Bureau of Labor Statistics’ monthly reporting of this stat.

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IMF sees need to raise labor share in Japan… & Krugman critique

On the IMF’s global economy forum, Dennis Botman and Zoltan Jakab published an article that Japan needs to push for higher wages. They say what I have been saying for some time here on Angry Bear. … And this story of low wages in Japan applies to the US and Europe too.

1. Wages and labor share in Japan have been suppressed. This is happening in the US and Europe too.

“So, labor’s share of national income has dwindled, from around 66 percent at the turn of the millennium to around 60 percent today. The average Japanese worker has been dipping into his savings to finance consumption growth. But there’s a limit to how far he can do this.  The savings rate as a percent of disposable income has declined from around 5 percent a decade ago to close to zero today…”

“For many years, nominal basic wages have been declining despite generally tight labor-market conditions. Real wages too have fallen despite solid productivity growth.”

2. Higher wages will support healthy inflation in Japan. Low inflation is a problem in the US and Europe too.

“So the message is clear: higher wages are needed to help to break the deflationary spiral and establish a virtuous growth cycle. Insofar wage increases are passed on to consumers by firms, higher nominal wages would allow the Bank of Japan to meet its inflation target more rapidly, without overburdening monetary policy.”

3. Higher wages would increase investment by increasing aggregate demand, which is more correctly defined as effective demand.

“Insofar real wages increase, larger pay packets would also support aggregate demand and create favorable conditions for firms to raise their investment.”

The IMF article goes on to talk about reasons why wages are suppressed in Japan and ways that wages could be raised. They talk about a higher minimum wage and “moral-suasion”, which are subjects that Paul Krugman talked against when he wrote about the living wage.

“In short, what the living wage is really about is not living standards, or even economics, but morality. Its advocates are basically opposed to the idea that wages are a market price–determined by supply and demand, the same as the price of apples or coal. And it is for that reason, rather than the practical details, that the broader political movement of which the demand for a living wage is the leading edge is ultimately doomed to failure: For the amorality of the market economy is part of its essence, and cannot be legislated away.” – Paul Krugman, 1998 (source)

Krugman’s quote above has a serious flaw in the understanding of the labor market. He compares wages to apples and coal. He makes labor a commodity. He did not understand that wages are not properly determined by the market. Labor is not a commodity. There are institutional, social, psychological, economic and class factors that work against labor.

The person who first coined the term “living wage” was Beatriz Webb. She lived over a century ago, when the institutions that created wealth inequality were as prevalent as they are now. What did she say? (source paper by Bruce Kaufman)

“The Webbs (1897) … claim, “the assumption of a mutual exchange of services among freely competing individual bargainers, is, from a practical point of view, entirely obsolete.”

Seeing wages as a commodity price “fairly established” by the market was theoretically obsolete over a century ago. But economists, even as influential as Mr. Krugman, defend the amorality of the market place as something natural and therefore something to be accepted.

Beatriz Webb would get annoyed with Mr. Krugman. She called for legislative intervention in the labor market, as did Keynes later. Fortunately, Paul Krugman is now seeing that legislation and policy were likely responsible for the great economic growth of the past century. Likewise, the IMF would like society, government and social institutions to push against the amorality of a free market for wages. Mr. Krugman should have done the same back in the 1990’s, but “better late than never”.

I certainly hope that Mr. Krugman sees the light and jumps on the IMF bandwagon to push for an increase in labor’s share of national income not only in Japan, but also in the US and Europe.

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Generic brands and markets

This quote at Dailykos caught my attention on trends for the generic drugs markets:

For years, doxycycline has been a valuable drug for physicians who treat the indigent — unemployed or underemployed folks without insurance. A staple of $4 drug lists, it can be used to treat everything from bronchitis to “walking” pneumonia to urinary tract infections to skin infections to acne to venereal disease—and it covers some rarer infections like Lyme’s and is sometimes used for malaria prevention, too.…

A CVS pharmacist in Los Angeles, who asked that his name by withheld because of fear of retaliation by the company, shared with me the average wholesale price of different makers’ doxycycline, as made available to pharmacists by the McKesson Connect online ordering system.
The system shows that the average wholesale price of 100 doxycycline pills made by Watson with a strength of 100 milligrams is $328.20. The same number of doxycycline pills at the same strength made by Mylan cost $1,314.83.

Remember this sort of thing is in addition to general shortages and disruption in the US concerning important drugs. See these two Angry Bear posts from 2008 helping to look for trends in the generic drug markets Trends for generic drugs to watch and GAO report on generics and devices, Shortages of prescribed drugs 2011, Competition in the drug markets 2012, and Drug shortages and markets.

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Trade agreements, to what purposes?

Via Naked Capitalism reminds us of several thing about the current round of trade agreements, which would increase the ability of international corporations to sue governments both local and national for ‘loss of profits’.

As the Obama administration negotiates new trade agreements with European and Pacific nations, a battle has emerged over the agreements’ egregious rules that grant giant corporations unreasonable powers to subvert democracy. These rules, dubbed “investor rights” by the corporations, allow firms to sue governments over actions—including public interest regulations—that reduce the value of their investments.

Oxfam, the Institute for Policy Studies, and four other non-profits are releasing a new study that explains why these rules are so dangerous to democracy and the environment. We are among the co-authors of this study, titled “Debunking Eight Falsehoods by Pacific Rim Mining/OceanaGold in El Salvador.” The report offers a powerful case study of everything that is wrong with this corporate assault on democracy.

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Americans Woke Up and Realized They are Getting Screwed. Envy Isn’t the Emotion They’re Expressing

by J Tizimeskes  (who is currently juggling a job in the private sector while studying for a Wayne State MBA, getting a blog post or two in when he can. Previously, he worked for New York State and holds a Masters in Political Science from University at Albany and a biology degree from University of Toronto.)

Americans Woke Up and Realized They are Getting Screwed. Envy Isn’t the Emotion They’re Expressing.

Arthur Brooks has a column in  NY Times that I take a bit of exception to. In it, he makes the claim that envy is on the rise in America and that this is a problem.
My central issue with this is that I believe that over the past 30 years institutional and cultural shifts have resulted in an increasing exploitation of the majority of society by those at the very top of the income scale. There is no other credible explanation for why these trends are so pronounced in the Anglo-Saxon countries, with the US an outlier among this group, and so much weaker in the rest of the developed world. While there is a small shift towards inequality that is occurring across all developed nations, probably largely the result of the vast increase in labor supply caused by the development of the third world, this international component is far smaller than the country specific shifts we have observed in the U.S., Canada, and Great Britain.
However, Brooks mentions none of this, instead trying to frame it as if there is a cultural shift towards envy being caused by politicians “fomenting bitterness” and reduced mobility resulting from regulations, taxes, and a lack of school choice (never mind that this agenda doesn’t well describe the policies of countries with greater mobility than us). He summarizes Alexis de Tocqueville, stating that:

Alexis de Tocqueville phrased it a little differently, but his classic 19th-century text contains the same observation. Visiting from France, he marveled at Americans’ ability to keep envy at bay, and to see others’ successes as portents of good times for all.

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Too much coddling of the wealthy… so why loose monetary policy?

Mark Thoma is absolutely correct when he writes…

“The wealthy think it’s the same — in their minds they are the job creators, what’s good for the wealthy is good for America! — but it’s not.”

This is where I have to ask the question… So if loose monetary policy is good for the wealthy, then why support it? In your mind, you must still agree that they are job creators.

There is a contradiction. Economists seem to think that loose monetary policy will benefit the un-rich, but why can’t they see that this is not the case? Loose monetary policy is creating more imbalance of economic power than seen in a long time. This is not good for society.

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Try Something Different, Dems. Like Actual Defense of the ACA. There’s Nothing to Lose But Loss Itself. Really.

Reader Alex Bollinger posted this this morning in the Comments thread to this post of mine from yesterday:

Not only would low-info voters benefit from actually knowing that the ACA is doing good, but a few lefties could use a reminder that it’s not just a neoliberal gift to the insurance industry.

I responded:

Yes, Alex.  Exactly.  It surprises me that the insurance industry hasn’t been sponsoring pro-ACA, anti-AFP-disinformation ads.  I realize that it would involve implicitly acknowledging that their past policies–e.g., denying individual-market coverage to anyone who had even a minor preexisting condition–but they’re in real danger of losing the single-payer war (or at least the public-option) war.

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