Wednesday, December 30, 2015

What If?

Tim Taylor has written a blog post about a talk by Larry Summers on secular stagnation. Taylor doesn't seem to quibble with Summers's interpretation of what is going on in the data, but he thinks that we should view secular stagnation as a long-run problem, with potential long run solutions. This appears to have put Paul Krugman in a bad mood which in turn ruined Taylor's day.

What seems to have irked Krugman most is Taylor's take on short-term stimulus:
...it seems to me that we are in a situation where monetary and fiscal stimulus that has been extremely high by historical standards since about 2008 has had a much smaller effect on output and inflation than would have been expected before the Great Recession.
Krugman's first problem with this is that fiscal stimulus has not in fact been "extremely high" by historical standards. That's certainly correct, if we use government spending on final goods and services as our measure of fiscal stimulus. Here's government spending since the end of the recession:
And government spending as a percentage of GDP from the beginning of 2007:
So, government spending has been falling for most of the period since the end of the recession, and government spending accounts for about two percentage points less, as a fraction of GDP, than before the recession. That hardly looks like a stimulus program.

Krugman's next point is this:
...there is overwhelming evidence that fiscal policy has strong effects — that the multiplier is well above one. I’ve seen nothing suggesting that fiscal policy has lost traction...
Finally, he states:
...if you have a persistent problem of inadequate demand — which is the secular stagnation argument — then find things that will boost demand.

So, Krugman is making the case that we have a problem of "inadequate demand" that has persisted since the beginning of the Great Recession, and that fiscal multipliers are large - "well above one." First, suppose we look at the behavior of real GDP and of real GDP minus government expenditures - the latter reflecting what Krugman would consider private demand, I think.
We could also look at the time series in terms of year-over-year growth rates:
The recovery from the last recession has indeed been sluggish, with average real GDP growth of 2.2% since the end of the recession. But private demand growth is certainly less sluggish, with average growth of 3.0%. That's not as strong as growth coming out of the 1981-82 recession, for example. But, if fiscal multipliers are actually large, then given the large decline in government spending since the recession, we might have expected that the performance of private demand would be far worse. And I don't think we would expect to see unemployment in the 5 percent range, as it currently is.

Another way to look at this is by way of a counterfactual, though I'll warn you that this won't be anything fancy. Suppose that the government spending multiplier is 2, which seems in the "well above one" ballpark. As well, suppose that we assume that government spending had grown at 3% since the end of the recession. Basically, think of Keynesian Cross with investment and net exports exogenous and held constant (I warned you this would be crude, but I'm trying to do some kind of Krugman calculation), and we're going to change the path for government spending from what it actually was and look at the effect, which gives:
So, that gives us a big effect. Given these assumptions, real GDP would have grown at an average rate of about 4.1% instead of 2.2%, with real GDP 13.3% higher than it actually was in the third quarter of 2015.

But how would we have produced all of that extra output? Suppose that output per worker is the same on the counterfactual path as the actual one, which should put a lower bound on the number of workers required to produce the extra GDP, given that output per worker should fall with higher government spending. Then employment would have to be 13.3% higher now than it actually is. In the CPS, total employment is about 150 million, so it would require 20 million workers to produce the extra output needed to support the higher level of GDP. Where would those workers come from? Well, with the unemployment rate currently at 5%, 1.5 million workers transiting from unemployment to employment would give an unemployment rate of about 4%, which matches the lowest unemployment rate we have seen in the last 40 years, without putting much of dent in the worker shortfall. So, the extra workers would have to come from those who are currently not in the labor force. The employment/population ratio (epop) would have to go to 67.2%. Here's the actual time series:
So 67.2% is much higher than 59.3%, which is the current epop ratio, and is also higher than epop at the previous peak (63.4% in December 2006) or the all-time high of 64.7% in April 2000. Recall that epop has fallen since before the recession in line with a decline in the labor force participation rate. A substantial part of that decline was due to an aging in the population, but also to a decline in labor force participation in the young and prime-age groups. So, given our current demographics, and assuming no difference in average labor productivity, to produce the quantity of output consistent with a multiplier of 2, and what I think Krugman would consider mild stimulus (3% growth per year in government spending), each age group would have to be working much harder than they are now, and harder than any of their predecessors did.

So, it seems hard to make Krugman's argument stick - quantitatively. Further, there are plenty of other reasons to find fault with what he is saying:

1. When Keynesians say "inadequate demand" they really mean than prices and wages are screwed up. How does wage and price stickiness persist for more than seven years after the beginning of the Great Recession? How does a Summers secular stagnation sticky-wage-and-price phenomenon persist indefinitely? How do we square these ideas with what we know about the frequency and size of price and wage changes?

2. As I pointed out in this post and this one, the labor market in the U.S. is actually quite tight. There's no "slack" there, in Krugman's sense.

3. Summers's secular stagnation argument is that real interest rates are low because of a dearth of investment opportunities. But, according to this piece by Gomme, Ravikumar, and Rupert, the measured real rate of return on capital has not declined. Here's their Figure 2:
Note in particular, the "business after-tax" number, which is higher than at any point in the time series. As well, investment rates are not low. Here's total investment (including housing) as a percentage of GDP:
And here's non-residential investment:
So, if anything, investment rates are high. To address why real interest rates are low, it's likely more productive to think about how asset markets work - for example to explore issues related to safe asset shortages.

What to conclude? Taylor should not take Krugman's jabs too seriously. We should be thinking about long-run issues.

52 comments:

  1. Real net investment/gdp trend ( the new one ) is aimed right down the toilet:

    https://research.stlouisfed.org/fred2/graph/?g=31bR

    Marko

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    1. A bit odd to describe something that's increasing as "aimed down to the toilet." But look at real net nonresidential investment, and divide by real net national product to be consistent:

      https://research.stlouisfed.org/fred2/graph/?g=31gC

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    2. Consider it as a prediction , then. 2015 will mark the peak in the graph for this cycle , as quarterly data appears to show the investment engine is running out of gas.

      My second prediction is that this downward trend will disappear - retroactively - as the greenshades rejigger the investment deflator to make things look like all is well , after all.

      Marko

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  2. Thanks a lot for this post, Stephen. Just one point, related to your point (1.). Simon Wren-Lewis has argued on a number of occasions that "inadequate demand" can't be resolved by waiting for all wages and prices to reset if Monetary Policy is constrained (e.g. by the Zero Lower Bound). See here:

    http://mainlymacro.blogspot.co.uk/2014/05/sticky-prices-how-we-confuse-students.html

    and

    http://mainlymacro.blogspot.co.uk/2015/12/the-centrality-of-policy-to-how-long.html

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    1. ZLB doesn't matter for my argument. Why would wages and prices adjust more slowly at the ZLB?

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  3. Two points. The first related to swl argument and the zlb. Swl argues that price stickiness matters if the central bank fixes the money supply or adopts a taylor rule. At the zlb price stickiness has no implication for how long a recession last, actually price flexibility may make it last more, rather than less. Second point related to your and krugman s point about lack of fiscal stimulus. Tim taylor in his last post, says that budget deficits have been at historical highs in the years 2009-2012. So yes givernment spending went down, but deficits (actual and structural) were very high. So we should agree about a definition of stimulus...

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  4. "But how would we have produced all of that extra output? Suppose that output per worker is the same on the counterfactual path as the actual one, which should put a lower bound on the number of workers required to produce the extra GDP, given that output per worker should fall with higher government spending. "

    Actually very simple, the output gap is inflated so if the gov't had done more stimulus we would have found higher GDP growth but it may not have reached 4%+ for a sustained time period.

    Stimulus here seems very simple as a concept:

    1. Stimulate.
    2. Is inflation increasing? If yes goto 3, no goto 1.
    3. Stop stimulating.

    Perhaps our labor participation rate would have gone to 67%. Perhaps an investment boom would have increased output per worker allowing GDP growth without labor force growth. Perhaps not. But for everyone who says stimulus wouldn't work, there's a natural feedback mechanism at work. As stimulus stops being able to boost real output, inflation picks up. Too much demand chasing a fixed supply.

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    1. I see you believe in Phillips curves.

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    2. Perhaps, although I can buy that you curve is not fixed so you cannot discover it's shape and rely upon it to stay that way.

      But if you don't buy this then explain what exactly happens as stimulus is increased and then increased and then increased some more? Assuming stimulus takes the form of direct purchases of goods and services by the gov't or the gov't giving money to people who are highly likely to purchase goods and services with that money (examples: food stamps, payroll tax holidays, 'stimulus checkes' etc.) what must happen?

      If demand increases then either employment must increase, assuming there is 'slack' to expand output, or supply is tapped out and prices must start increasing as a fixed amount of production is chased after by more shoppers holding green in their wallets.

      The alternative that does not produce that outcome would be some mechanism that offsets the increased demand with some other group decreasing their demand. There are not many plausible candidates as GDP = C+I+G+Ex-Im.

      C would imply some set of consumers pull back their spending in response to stimulus. If ten people get a $100 stimulus check maybe Donald Trump decides to skip his $1000 haircut this month.

      I might work if stimulus was accompanied by long term interest rate increases. Otherwise why would business pull back investment if they saw an increase in demand?

      G is out since we are talking about stimulus by G in this question.

      That leaves Exports and Imports. Here you probably could come up with some stories where all stimulus spending goes to buying imported goods thereby resulting in neither inflation or GDP growth. Or perhaps foreign nations decide to buy fewer goods from a nation and instead buy its bonds that the gov't is selling for the stimulus program thereby causing export industries to shed as many jobs and as much GDP as stimulus increases. But I doubt you could make this story tie to the actual exports/imports of the US economy.

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  5. "So, government spending has been falling for most of the period since the end of the recession, and government spending accounts for about two percentage points less, as a fraction of GDP, than before the recession. That hardly looks like a stimulus program"

    Why would you measure stimulus from the end of the recession? The recession started in 2007 and the first stimulus bill was passed in Feb 2008 (~150 billion dollars) and then there was another one signed in 2009 (~780 billion). You can only come to the conclusion that there was no stimulus if you ignore one trillion dollars in stimulus and then act as if the decline off that peak is somehow austerity.


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    1. I know there was a stimulus program during the recession. I just wanted to make sure that everyone is aware that we have a smaller government now than before the recession - in terms of expenditures.

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    2. If you wanted to demonstrate that you would use this graph https://research.stlouisfed.org/fred2/series/FYONGDA188S- which is federal net outlays. Of course FNO was still higher as a % of GDP in 2014 than in 2007 (by ~1.25%). The only way you can claim the government is smaller now is if you ignore the costs of the stimulus in coupon payments.

      One of the (many) criticisms of fiscal stimulus is that as soon as the spending ends the government has to either increase revenue or decrease expenditures which creates a drag and slows the recovery. Standard Keynesian analysis prior to and in the early stages of the crisis called for stimulus to be "Targeted, timely and temporary" (Larry Summers testimony), while the Keynesians did not get the size they wanted they got the structure they wanted.

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    3. "...while the Keynesians did not get the size they wanted they got the structure they wanted."

      What they wanted relative to what they were saying during the recession. Post-recession, it seems to me that the average Keynesian is not happy with the level of spending.

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  6. The price of investment goods is rising slower than the price of consumption goods. The actual investment (not adjusted for relative price changes) rate is this:

    https://research.stlouisfed.org/fred2/graph/?g=31so

    Pretty low, right?

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    1. I want gross private domestic investment. Your measure includes government investment and inventories.

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  7. A question: how tight is the labor market? The economy seems to add 180,000 job or so per month while the unemployment rate only drops by baby steps. I believed that the US required about 100,000 jobs per month to keep the unemployment rate stable. Either we shouldn't be able to add so many workers per month for so long or there is a surplus of workers waiting to be reemployed. I look at the number of first time UI claims and I tell one story but then I look at the number of jobs added each month and I am sure I should tell a different story.

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    1. See if this helps:

      http://newmonetarism.blogspot.com/2015/10/some-unpleasant-labor-force-arithmetic.html

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    2. Thank you! I will read it carefully. But it was written after job gains of 150 and 140,000 to explain the new normal. We have since had job gains of 290 and 200,000 -- averages out to about 195,000 per month for the 4 months. It's hard to think of 100,000 or 60,000 per month as he new normal when we are adding so much on average per month.

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    3. You can do the arithmetic. Employment growth has to come from somewhere - some combination of a reduced unemployment rate, higher labor force participation, and population growth. Given the falling labor force participation rate, the unemployment rate has actually been falling rapidly, relative to previous recoveries, in contrast to what people had been forecasting. The point of my previous is that we're close to the end of employment growth of 200,000 per month, if not there. Wait.

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    4. Again, thank you! Are you willing to wager a guess as to when 100,000 per month becomes the new normal?

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    5. In the first quarter. I'll buy you coffee if you can find me.

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    6. Didn't happen in the first quarter! 200,000 or so jobs per month for 3 months! The unemployment rate rises from 4.9 to 5 %. It doesn't seem as if the labor market is overly tight at all in the first quarter of 2016 The labor marke t participation rate must still be climbing. I'll take my coffee if I can ever find you.

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    7. That's pretty interesting, don't you think? The employment growth is especially high in the household survey. And that's coupled with a level of long-term unemployment (27 weeks and over) that actually rose a bit. I haven't looked at the labor force flows, but clearly from what's happening to the participation rate and the unemployment rate, the employment growth is coming from flows from not-in-the-labor-force directly to employment. And this is all in the face of current forecasts that GDP growth in the first quarter will be weaker than expected. So what's driving the employment growth?

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    8. Yes. Workers are flowing directly from out of the labor force. And yes, for all of the job growth, GDP growth was 1.4 in the last quarter and is forcasted to be be low again in the 1st quarter. I ask a different question from you: it's not what is driving the job growth? It's given the job growth, why isn't GDP growing faster? Perhaps we're like England where job growth has been high and labor productivity is low. Does this mean that there has been an increase in low skilled work related jobs?

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    9. To complete my thought, what I meant was that low GDP growth, coupled with high employment growth, implies low growth in average labor productivity. But that should imply low real wage growth. So what's drawing the people into the labor force? As you say, there are composition effects. I haven't looked at all of the components of employment, but there is weak (or negative) employment growth in mining and logging (that's mainly oil and gas, I assume), manufacturing, and government. But construction employment is growing at about 5% per year, and there is strength in retail trade.

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    10. I am old fashioned -- very old fashioned. I believe in involuntary unemployment. If people have not chosen to be unemployed, then it is employment possibilities from a growing economy per se that matter not the low real wage opportunities. I have had this disequilibrium view of the labor market in the back of my mind since I wrote to you in January. It's a view that has allowed me to predict the robust job growth that we have seen over the last months. Is the new work by Katz and Krueger on contract work potentially helpful on where the jobs are? These jobs do skew to the old -- the kind of older workers who will have had trouble finding employment in the Great Recession?
      http://krueger.princeton.edu/sites/default/files/akrueger/files/katz_krueger_cws_-_march_29_20165.pdf

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    11. Well, it's like marriage. There are married couples, who are in that state through mutual agreement; there are unattached people searching for partners, and there are unattached people not looking for partners. There could be many reasons a person is unattached: maybe he/she is very picky; maybe he/she is very unappealing on some dimension; maybe there is something about this matching process that is screwed up and can be fixed through government intervention. The notion of voluntary/involuntary is actually a red herring - doesn't help one think about the problem in a serious way.

      However, the old-fashioned involuntary unemployment stories I'm familiar with typically relied on downward nominal wage rigidity. This would seem to be an upward nominal wage rigidity problem. Basically, firms are looking hard for workers and are having trouble finding them, and they can't bear to pay these workers more in order to fill the empty slots. Do you see evidence of that?

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    12. Actually, isn't that what employers are saying? This is typical:
      http://money.cnn.com/2015/08/07/news/economy/us-economy-job-skills-gap/
      Firms don't want to pay higher wages yet they bemoan the fact that they can't find skilled workers at the going wage. Shouldn't wages be rising rapidly due to this excess demand?

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    13. I know that Robert Lucas taught us to ignore involuntary unemployment and that Lucas is brilliant. But how else do we characterize those people who are re-entering the labor force? Have they been picky for years or on vacation? Or have they always wanted to work but there weren't jobs for them at any wage? And now there are jobs and they're getting hired. I don't expect to convince you but I think that this way of thinking about the problem is the fruitful one. I think that, on this one, Lucas is wrong.

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    14. I think the conclusion is that neither of us knows why labor force participation is going up. I'll ask my labor economist friends and see what they think.

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    15. Indeed. I am grateful for this opportunity to have shared my thoughts with you. We shall see how long the employment to population ratio will continue to rise and for how long the economy continues to add 200,000 jobs per month.
      I am sure your new normal of 60,000 to 80,000 jobs per month will arrive. But I sense that it may not arrive soon.

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    16. Could be. But don't forget the first rule of forecasting: don't extrapolate. The participation rate increase could be a blip.

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    17. Didn't happen in the last 3 months! The 3 month average job growth for the last 3 months was 190,000 jobs with 255,000 in July and 292,000 in June. It looks like the unemployment rate has risen from May to July.

      Can I have coffee and a doughnut?

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    18. By the way, isn't a better rule of forecasting to extrapolate but be careful about how you do it? (I taught forecasting to MBA's for over a decade.) I remember listening to Saul Hymans

      http://www.rsqe.econ.lsa.umich.edu/index.php?page=staff&name=shymans

      discuss how the RSQE's assumptions about the world got built into their forecasts. The key isn't to mindlessly extrapolate.

      My first rule of forecasting was your forecast will always be wrong; the key is to make sure you're forecasts aren't predictably or consistently wrong -- e.g always under forecasting or over forecasting means you didn't understand the nature of the trend in your data

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  8. I think your graphs make clear the fallacy of the argument that the Keynesian multiplier has been substantially greater than 1. I argued in a blog earlier this year that the Keynesian multiplier is negative during recessions and probably not much greater than zero for a long time thereafter. The Keynesian multiplier is negative during recessions

    Inadequate demand is a result of consumers cutting their expenditure to make up for their loss of net worth during the 2008-09 crash. According to the Fed's consumer survey the median household lost 18 years of net worth. To recover this lost net worth the median household would have to double its savings rate for 18 years. In other words, the slow recovery is perfectly rational.

    The steep fall in gas prices has increased real income of consumers. But consumption has not increased. That again is proof that the Keynesian multiplier is less than 1.

    The fall in productivity growth is almost completely explained by the fall in real net private domestic investment. Making sense of the productivity puzzle

    You argue that a much higher labor participation rate than exists at present would have been needed to produce the counterfactual growth in your curve. But that assumes that productivity growth would not be higher in a faster growing economy. In a faster growing economy real net investment would be higher and therefore productivity growth would be higher.

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    1. I think nothing has been proven here regarding the multiplier. The multiplier is simply not a constant. If the economy nears full employment, then the multiplier's value will fall since additional demand from stimulus gets sucked up by rising prices instead of greater real output.

      The use of a single commodity like gas, is hard to measure but JP Morgan did find that about 80% of lower gas costs ended up being spent rather than saved by consumers (https://www.jpmorganchase.com/corporate/institute/report-how-falling-gas-prices-fuel-the-economy.htm). Gas, though, is only about 4% of our consumer spending (https://www.eia.gov/todayinenergy/detail.cfm?id=9831) so while people get emotional about saving a few pennies per gallon on gas, the reality is most of the money in your wallet disappears to other uses. But nonetheless that does imply a multiplier greater than 1, probably around 5!

      Your analysis of inadequate demand rings right to me but the obvious problem is that this implies a multiplier greater than one. If consumers suddenly increase savings to make up for lost wealth in a market crash (stocks, real estate, dot-com investments, tulips, whatever), then that is going to produce an income hit since spending falls. All things being equal increasing your savings rate will increase your wealth but getting whacked with a layoff, a demotion, a pay cut or even a delayed raise is going to make an individual's quest to achieve or return to a desired wealth position more difficult. You aren't making an argument against Keynesian economics, instead you're 'discovering' something that Keynes noted nearly three quarters of a century ago.

      Where I think Stephen has fallen short here is he made a case that the supply side of the economy could not ever be expected to achieve the purely rosy picture of 4% continued growth unless we suddenly experienced a surge of productivity or a leap in labor force participation. That, however, isn't an argument against more stimulus anymore than saying a 40 yr old reader here is never going to make the Olympics even if starts exercising and working out 20 hours a day starting now is an argument against exercise. Instead the 40 yr old would see benefits from more working out but if he kept increasing exercise, the increased benefits would start to decrease and at some point become negative (20 hour a day workouts would no doubt start putting his health at risk).

      So if stimulus wouldn't get real GDP to 130% of 2009's GDP, then what would it have done for us? If we had increased stimulus until we started seeing negative effects, what would they have been? I would say they would have been increased inflation and long term interest rates, at that point you would have your signal to stop stimulus. Not simply a low unemployment rate and inflation barely above 0%.

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    2. "If the economy nears full employment, then the multiplier's value will fall..."

      A vocal group of people claims that we're nowhere near full employment. Are you saying they're wrong?

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    3. Quite possibly since we have not seen evidence that stimulus has been exhausted. Again what is that evidence? Picking up inflation, rising interest rates (esp. long term rates).

      You've argued that our economy simply cannot supply the type of growth that would leave us with 30% more real GDP than we had in 2009 or so. To do so would either require productivity that we simply do not have at hand or an increase in labor force participation that our society simply does not want to supply. Perhaps that's right or maybe it isn't, if we don't exhaust stimulus how do we know?

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    4. "Picking up inflation..."

      You'll notice that inflation has been falling for the last four years while the unemployment rate is falling. And that's by no means unusual. Why would you think that the inflation rate is a good indicator of tightness in the labor market? Why not just look at what is going on in the labor market?

      "... if we don't exhaust stimulus how do we know?"

      The idea is that there are tradeoffs - in a perfect Keynesian Cross world I know there are none, but that isn't the case in the world we live in. And there is plenty that can go wrong in the implementation.

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    5. The idea of saying 'exhaust stimulus' implies tradeoffs. If there wasn't you could stimulate up to infinity.

      "You'll notice that inflation has been falling for the last four years while the unemployment rate is falling. And that's by no means unusual. Why would you think that the inflation rate is a good indicator of tightness in the labor market?"

      So where is your tradeoff? If you can increase stimulus but you do not see evidence of inflation then what is the problem? "Tightness in the labor market"? That's not a problem. Perhaps your labor market is expanding via increased labor force participation or by increased productivity. If there's no evidence of inflation picking up or interest rate increases then you haven't found a tradeoff against stimulus and hence have not demonstrated a reason to cut it back.

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    6. "So where is your tradeoff?"

      The idea is that the Phillips curve is not there in the data. So, you should not use inflation as a guide to how much government spending there should be. You can make a case for more government spending, but it should be based on what you're spending on, and what the opportunity cost is.

      "Perhaps your labor market is expanding via increased labor force participation or by increased productivity."

      That's just it. Labor force participation is falling and productivity growth appears to be low by some measures.

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    7. I think there is a simpler explanation, just consider that the marginal propensity to consume isn't an independent variable, specially in early recession stages.

      So lack of fiscal stimulus on early recession, or better the infamous expansionary austerity, would cause a decline in the propensity to consume, and also IMHO the increase of liquidity preference, which would have caused lack of demand and investment.

      We have to acknowledge to the change of the models with recessions due to the change of fundamental parameters, yet most of the arguments are still debating the changes in variables without realizing that reality changed and what we consider givens, aren't givens anymore.

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    8. "You can make a case for more government spending, but it should be based on what you're spending on, and what the opportunity cost is."

      And what is the opportunity cost? If inflation/interest is not picking up, then you have not exhausted the economy's ability to supply labor or capital with stimulus. If labor and capital can supply more output then there's no opportunity cost.

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    9. jose,

      Why would stimulus cause a decline in the propensity to consume *early* in a recession? I could understand why a recession alone might cause a decline in a propensity to consume. If all in the sudden people have lost their jobs or are afraid of losing their jobs, they might try to hold back as much consumption as possible. But you said stimulus itself would cause an additional decline in consumption propensity. Why?

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    10. "...If inflation/interest is not picking up..."

      Again, inflation is not a measure of the opportunity cost of government spending, and neither is the interest rate. If we want to know if there are resources lying around that can be used more productively, we can go out and measure that directly by looking at what is going on in the labor market, for example.

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    11. Stephen, let's recall the production function. An economy at full employment is at the frontier of the production curve. It can only increase the output of one good by decreasing some other good. In that case a gov't program to, say, build a bridge must come at the expense of some other good. In a market economy this would take the form of higher taxes which decrease private sector consumption, if the bridge is paid for directly; or it takes the form of inflation if the gov't tries to just print money to pay people to build a bridge or higher interest rates if the gov't tries to borrow the bridge cost...thereby crowing the borrowing markets.

      You say 'look at the labor markets' but this doesn't tell us much. A low unemployment rate may be labor exhausted or it might simply be the start of the labor force participation rate increasing. Or it could be the start of a productivity increase. There's no simple signal like a price that can tell.

      And you are talking about 'opportunity cost' and 'tradeoffs', that implies at the end of the day there must be something that is measurable and actually costs us something. A low unemployment rate that seems exceptional is not a 'trade off' or 'opportunity cost' of a gov't stimulus program but, in fact, the point!

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    12. @Boonton

      The recession would decrease the propensity, the fiscal stimulus would prevent that.

      History, IMHO,proves that you need direct government action in order to both increase consumption propensity and decrease the preference for liquidity.

      My hypothesis is that this crisis are a sign of a "model" change, a tipping point, due to major changes in "model" parameters like propensities/expectations and money velocity among others, that's why the micro foundations and rational expectations branch is struggling so hard.

      The impact is so deep that there are signs of the aggregated demand inverting the slope...

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    13. Very strange to be reading this discussion on a blog called New Monetarist Economics... its more like "Old Neo classics Economics"

      I just figured out that I'm probably at the wrong place to learn about NMT.

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  9. "Where would those workers come from?"

    Mexico? Syria? Cuba?

    Stimulus in a tight labor market ought to raise wages, even if we don't believe in Phillips curves. Higher wages might produce more immigration, or if President Trump gets in the way, they might raise the labor share of GDP. I think Krugman would like a higher labor share, even if GDP doesn't increase.

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    1. Sure. In this piece

      http://newmonetarism.blogspot.com/2015/10/some-unpleasant-labor-force-arithmetic.html

      I point out that the working age population is growing at only 0.5%, which confronts us with an array of problems. Immigration is a good idea on many dimensions.

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  10. Not that it will change everything in the initial graphs, but where are transfer payments?

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    1. I just want to focus on expenditures. With transfers we get into another set of issues.

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