Although my work on the “Productivity Norm” has led to my being occasionally referred to as an early proponent of Market Monetarism, mine has not been among the voices calling out for more aggressive monetary expansion on the part of the Fed or ECB as a means for boosting employment.*
There are several reasons for my reticence. The first, more philosophical reason is that I think the Fed is quite large enough–too large, in fact, by about $2.8 trillion, about half of which has been added to its balance sheet since the 2008 crisis. The bigger the Fed gets, the dimmer the prospects for either getting rid of it or limiting its potential for doing mischief. Besides, a keel makes a lousy rudder.
The second reason is that I worry about policy analyses (such as this recent one) that treat the “gap” between the present NGDP growth path and the pre-crisis one as evidence of inadequate NGDP growth. I am, after all, enough of a Hayekian to think that the crisis of 2008 was itself at least partly due to excessively rapid NGDP growth between 2001 and then, which resulted from the Fed’s decision to hold the federal funds rate below what appears (in retrospect at least) to have been it’s “natural” level.
My third reason for hesitating to endorse proposals for doing more than merely sustaining the present 4-5 percent NGDP growth rate is the one I consider most important. It is also one that has been gaining strength since 2009, to the point of now inclining me, not only to keep my own council when it comes to arguments for and against calls for more aggressive monetary expansion, but to join those opposing any such move.
My third reason stems from pondering the sort of nominal rigidities that would have to be at play to keep an economy in a state of persistent monetary shortage, with consequent unemployment, for several years following a temporary collapse of the level of NGDP, and despite the return of the NGDP growth rate to something like its long-run trend.
Apart from some die-hard New Classical economists, and the odd Rothbardian, everyone appreciates the difficulty of achieving such downward absolute cuts in nominal wage rates as may be called for to restore employment following an absolute decline in NGDP. Most of us (myself included) will also readily agree that, if equilibrium money wage rates have been increasing at an annual rate of, say, 4 percent (as was approximately true of U.S. average earnings around 2006), then an unexpected decline in that growth rate to another still positive rate can also lead to unemployment. But you don’t have to be a die-hard New Classicist or Rothbardian to also suppose that, so long as equilibrium money wage rates are rising, as they presumably are whenever there is a robust rate of NGDP growth, wage demands should eventually “catch down” to reality, with employees reducing their wage demands, and employers offering smaller raises, until full employment is reestablished. The difficulty of achieving a reduction in the rate of wage increases ought, in short, to be considerably less than that of achieving absolute cuts.
U.S. NGDP was restored to its pre-crisis level over two years ago. Since then both its actual and its forecast growth rate have been hovering relatively steadily around 5 percent, or about two percentage points below the pre-crisis rate.The growth rate of U.S. average hourly (money) earnings has, on the other hand, declined persistently and substantially from its boom-era peak of around 4 percent, to a rate of just 1.5 percent.** At some point, surely, these adjustments should have sufficed to eliminate unemployment in so far as such unemployment might be attributed to a mere lack of spending.
And so, my question to the MM theorists: If a substantial share of today’s high unemployment really is due to a lack of spending, what sort of wage-expectations pattern is informing this outcome?
That the question badly needs an answer is evident from statements like the following recent one (attributed to a writer for Credit Suisse), that very much beg it:
With the low-hanging fruit of lower interest rates and debt service costs already having been harvested, restoration of margins is achieved mainly through keeping a lid on labor costs. To break this pattern, nominal GDP needs to grow considerably faster to foster strong gains in both labor income and profits. It’s hard to see where such growth will come from in the short term, with slowing global growth and fiscal restraint becoming stiffer headwinds.
If NGDP growth is inadequate, as the statement suggests, why is it necessary to “keep a lid on labor costs”? Can it really be the case that NGDP (and equilibrium wage rate) expectations continue to race ahead of reality, even when that reality involves what would normally be considered a perfectly respectable, if not excessive, growth rate of overall spending? How can this be?
I should admit that my puzzlement in part reflects my personal experience. Here at UGA we haven’t had any raises for five years running. I know professors elsewhere with similar experiences. We are, bless our hearts, helping to eliminate the spending “gap,” and doing so despite the lower NGDP path. So who the heck isn’t helping, and why should the rest of us put up with, much less root for, a more bloated and dangerous central bank for their sakes?
P.S. (added 3:15 on July 8): There’s been a lot of loose talk, it seems to me, about how curing unemployment calls, not merely for raising the level or growth rate of actual NGDP, but for raising NGDP growth rate or level expectations. Well, if I’m an employer, I might well welcome, ceteris paribus, the news that demand for my output is going to go up. But suppose I am an employee. How should I respond to the changed expectation? Does it not give me grounds for holding out for a faster rate of wage increases than I would have been inclined to insist upon otherwise? Does it not, in other words, cause me to delay a needed adjustment to my schedule of wage demands? And does it not, to that extend, hurt rather than foster recovery?
*My former student, David Beckworth, has on the other hand been one of the more prominent proponents of greater monetary easing. Though we disagree, I’m damn proud of him.
**Link added at 7:30 on July 8.