For a week, I’ve been eagerly awaiting Dean Baker’s thoughts on this Paul Krugman posting:
Lonegan also said Friday that in conjunction with the Fed’s annual Jackson Hole symposium in Wyoming this year, a group of conservative economists are planning to hold a meeting of their own “directly across the street” featuring former Federal Reserve Chair Alan Greenspan as the keynote speaker.
I guess we wait for confirmation before adding this to the file of examples establishing Maestrodamus as the worst ex-Fed chairman in history. But consider the notion that this group regards AG as an authority figure.
Mr. Baker is diametrically opposite that group of conservative economists, and yesterday he wrote this:
[T]here was a widely held view back in the 1990s, back up by a considerable amount of evidence, that the magic number was close to 6.0 percent. Alan Greenspan had the good sense to ignore this view and allowed the unemployment rate to continue to fall, eventually bottoming out at 3.8 percent in some months in 2000. The result was that millions of people had jobs who would not otherwise have been able to, and tens of millions saw pay increases. And, we had trillions of dollars in additional output.
The gains from lower unemployment contrasted with the risks of higher inflation seem so asymmetric that it is difficult to see why the Fed should move to dampen growth until there is real evidence of higher wage growth and accelerating inflation. There clearly is none now, so why shouldn’t the Fed be prepared to take the Greenspan gamble?
To be fair, Krugman believes Alan Greenspan is the worst ex-Fed chairman in history; indicating Greenspan’s current behavior is the issue. Mr. Baker titled that post “Krugman Nails It on NAIRU,” due to the fact that Krugman distinguishes between Greenspan’s stature and his authoritative track record:
I very much hope that Fed staff remembers the 1990s. Circa 1994 it was widely believed, based on seemingly solid research, that the NAIRU was around 6 percent; but Greenspan and company decided to wait for actual evidence of rising inflation, and the result was a long run of job growth that brought unemployment below 4 percent without any kind of inflationary explosion. Suppose they had targeted the presumed NAIRU instead; they would have sacrificed trillions in foregone output, plus all the good things that come from a tight labor market.
I, however, have a real problem with this:
The NAIRU is, I’d still argue, a useful concept, mainly because it’s a caution against expecting too much from monetary policy in the long run. Much as I want full employment, there is some lower bound on the unemployment rate, a rate that you just can’t achieve on a sustained basis with demand-side policies.
The NAIRU is demand-related? Dean Baker would disagree; he really nailed it when he declared last October that the NAIRU is a supply issue, not a demand issue. But this also overlooks the fact that the NAIRU is grounded on economic and logical fallacies:
Last summer Nick Hanauer identified a failed prediction in basic economics:
If you took Econ 101, then you literally were taught that if wages go up, employment must go down. The law of supply and demand and all that. That’s why you’ve got John Boehner and other Republicans in Congress insisting that if you price employment higher, you get less of it. Really?
Because here’s an odd thing. During the past three decades, compensation for CEOs grew 127 times faster than it did for workers. Since 1950, the CEO-to-worker pay ratio has increased 1,000 percent, and that is not a typo. CEOs used to earn 30 times the median wage; now they rake in 500 times. Yet no company I know of has eliminated its senior managers, or outsourced them to China or automated their jobs. Instead, we now have more CEOs and senior executives than ever before. So, too, for financial services workers and technology workers. These folks earn multiples of the median wage, yet we somehow have more and more of them.
The thing about us businesspeople is that we love our customers rich and our employees poor. So for as long as there has been capitalism, capitalists have said the same thing about any effort to raise wages. We’ve had 75 years of complaints from big business—when the minimum wage was instituted, when women had to be paid equitable amounts, when child labor laws were created. Every time the capitalists said exactly the same thing in the same way: We’re all going to go bankrupt. I’ll have to close. I’ll have to lay everyone off. It hasn’t happened. In fact, the data show that when workers are better treated, business gets better. The naysayers are just wrong.
Most of you probably think that the $15 minimum wage in Seattle is an insane departure from rational policy that puts our economy at great risk. But in Seattle, our current minimum wage of $9.32 is already nearly 30 percent higher than the federal minimum wage. And has it ruined our economy yet? Well, trickle-downers, look at the data here: The two cities in the nation with the highest rate of job growth by small businesses are San Francisco and Seattle. Guess which cities have the highest minimum wage? San Francisco and Seattle. The fastest-growing big city in America? Seattle. Fifteen dollars isn’t a risky untried policy for us. It’s doubling down on the strategy that’s already allowing our city to kick your city’s ass.
The Econ 101 argument Hanauer contradicts blames (in the textbooks and other writings of freshwater economists) even the minutest wage increases for setting off inflationary storms. But the argument is dead wrong—capacity constriction, not excess demand leads to spiraling price increases. Even using terms like excess demand is at its heart a supply problem; demand is not in excess unless there is insufficient economic capacity to meet demand. Under the circumstances, why would it be more logical to crush down the demand side with wage restrictions (or stating there is a “pent-up demand for wage cuts”) rather than encourage supply expansion?
Just as in this light the normalized reaction to rising wages leads me to bloodletting comparisons, the common wisdom surrounding unemployment and inflation seems, well, unwise. If unemployment drops to such a low level SRAS can no longer expand, that’s still an issue with supply—throwing workers onto the unemployment rolls would be counterproductive after passing what increasingly appears to be the mythical NAIRU.
Can I really defend attacking the NAIRU as mythical? Yes, by answering a rhetorical question—since when is Argentine and Venezuelan monetary policy remotely equal to American monetary policy? I will answer this in the following posting.