Saturday, February 18, 2017

Brian Romanchuk — NAIRU Should Be Bashed, Smashed, And Trashed

Professor Simon Wren-Lewis recently wrote an article "NAIRU Bashing," in which he attempts to salvage some value out of the concept. As observed by Ramanan, his defense of NAIRU can be summarised as: There Is No Alternative (TINA), A lot of what Professor Wren-Lewis wrote might appear similar to what I have written on the topic. (I will publish the relevant excerpt from Interest Rate Cycles: An Introduction shortly, in case readers would wish to contrast and compare.) However, the belief that there is no alternative to NAIRU is silly. If economics were scholarly (as I discuss here), knowledge would be additive, and we would not have such debates....
Bond Economics
NAIRU Should Be Bashed, Smashed, And Trashed
Brian Romanchuk

52 comments:

Ralph Musgrave said...

Now lets sit back and wait for a collection of daft commentators tell us that because someone thinks there is a relationship between inflation and unemployment, ergo they’re in favor of unemployment.

No doubt those people think that if you believe there’s a relationship between alcohol intake and liver disease, that proves you favor liver disease. Certainly there were plenty making that daft argument in the comments on Wren-Lewis’s blog.

Ralph Musgrave said...

Bill Mitchell is positively delusional when it comes to NAIRU. He foams at the mouth at the mention of the acronym, while admitting there is a relationship between inflation and unemployment. He just gives it a different name: the "inflation barrier". All he's doing is playing with words.

Auburn Parks said...

Ralph-

The concept, analysis and application of NAIRU is totally bogus. Yes, there is a relationship between unemployment, wage growth, productivity and inflation. But we have no idea what that relationship is on a formal mathematical level. This is because of the complexity of instiutional and policital arrangements and their impact on supply, employment, and income distribution. These things vary between countries, within countries and over time. So even if you were able to build a relevant mathematical model that approximated the data for a specific place at a specific moment in time, all the relevant inputs are dynamic and changing meaning the relevance of the model is basically extremely limited and decays over time.

All of this is far different then the Fed announcing that "full employment" is 5% because thats what our NAIRU model says. This is a factually inaccurate statement and not relevant to the underlying economic situation as the UE rates (specifically U3) that is primarily used as measuring sticks is itself misrepresenting the employment situation as the U3 excludes 6 million people who want a job but stopped looking as as such are not counted in the U3 figure.

In summary, to say there is a relationship between the employment, productive capacity and inflation is not at all the same thing as saying "unemployment below 5% will lead to accelerating inflation".

Matt Franko said...

Ralph the left is so incompetent that even if they had a JG and the borders were left open and a bunch of people walked in and were unemployed they would probably jump off the nearest bridge thinking their whole life's work was wrong as they would see unemployment even with a JG....

Ralph Musgrave said...

Auburn,

No one has ever claimed, far as I know, that NAIRU can be measured with any great accuracy. Certainly as a supporter of NAIRU I've never claimed it can be accurately measured. But that does not stop it being a useful concept. If you're taking a sailing ship from A to B, the knowledge that there is a relationship between wind speed and the speed of the ship is OF SOME USE, even if you don't know exactly what the relationship is.

“These things vary between countries, within countries and over time.” Yes, I’m well aware of that. Always have been. The fact that the relationship between the speed of a ship and the wind varies over time (e.g. because of sea weed clinging the bottom) does not stop that basic relationship being of some use.

Re the Fed’s claim that their NAIRU model says full employment is 5%, I sincerely hope they qualify that by saying something like “This is our best guess”. If you can provide evidence that the Fed thinks it can measure NAIRU to the nearest 0.0001% or thereabouts, then they’re talking complete BS, I agree.

Moreover, it is INEVITABLE that some institution (Fed, Treasury, etc) has to guess what the minimum feasible level of unemployment is (absent JG, and the fact is that the US does not have a JG system at the moment, and probably won’t as long as Trump is in power).

Finally, I agree that if anyone says "unemployment below 5% will lead to accelerating inflation" they are talking BS if they don’t qualify that with the above “this is our best guess”.

Ralph Musgrave said...

Matt,

I agree the left is incompetent. I also agree that a literal zero level of unemployment which some JG enthusiasts claim to be possible is plain impossible, or rather it could be done, but it would be an expensive shambles. A more modes JG scheme would be better. I'd actually pay good money to see the more vociferous JG advocates put in charge of JG scheme. The chaos would be a laugh a minute.

Auburn Parks said...

Ralph that is exactly what CBs say. We are at full employment and so we need to raise interest rates. The full employment figure is based on their NAIRU model estimate. So you are ignoring the explicit stated policy of most CB.

Ramanan said...

"Now lets sit back and wait for a collection of daft commentators tell us that because someone thinks there is a relationship between inflation and unemployment, ergo they’re in favor of unemployment."

1. There is a relation.

2. It doesn't mean price acceleration

Both true.

To confuse the two points vile.

Ralph Musgrave said...

Ramanan,

Whether inflation accelerates or simply rises to an unacceptably high level and stays there, when unemployment falls below some level, is unimportant, far as I'm concerned. My basic objection to "NAIRU bashers" is that some of them try to claim there is no relationship at all between inflation and unemployment.

Matt Franko said...

"CBs say. We are at full employment and so we need to raise interest rates. "

Auburn watch what happens if they start doing that in earnest and the borders are closed....

Ralph Musgrave said...

Auburn,

After a bit of Googling, I see what you mean: the Fed produces this chart which makes it look like NAIRU can be estimated with the same accuracy as the money supply, inflation, etc.

https://fred.stlouisfed.org/series/NROU

That’s silly. The chart should have a “health warning” on it, saying the NAIRU is very much a guess.

But that’s not to say there isn't some level of unemployment below which inflation accelerates, or rises to too high a level: it’s just that economists can’t estimate it very accurately. Also, the following sentence below that chart is garbage far as I can see:

“The natural rate of unemployment (NAIRU) is the rate of unemployment arising from all sources except fluctuations in aggregate demand.” I’ll contact them and ask them to explain that sentence, or delete it, or something. Plus I’ll suggest they put a health warning on that chart.

Tom Hickey said...

Granted the left is incompetent. The right is made up of grifters (rent-seeking parasites).

Tom Hickey said...

What is "inflation"?

Economic definition: Continuous rise in the price level.

How is it observed?

There there a standard for correlating interest rate changes with changes in the inflation rate that is medically established?

Is there a correlation of change in the interest rate and employment rate empirically?

How tight is it?

What is the time frame?

As far as I can see there is little empirical evidence involved. It's based on theory.

There is a correlate in medicine. Some causation is educed theoretically involving either cause or cure of disease. Empirical testing often shows that there is no close correlation that can be detected. Often single studies are contradicted by subsequent studies that are either fail to replicate the initial study or are more tightly formulated to eliminate confounding variables.

Nothing like this in NAIRU. It's basically theory that is reducible to ideology.

Ramanan said...

"My basic objection to "NAIRU bashers" is that some of them try to claim there is no relationship at all between inflation and unemployment. "

Agree with the part that some claim there's no relationship. But you are doing the same and opposite. Claiming any relationship means NAIRU true.

Jure Jordan said...

"some level of unemployment below which inflation accelerates, or rises to too high a level:"

Ralph
I see that you added additional condition to NAIRU definition; 'or rises too high'. Interesting!! Is defining terms a free for all thing for false economists?

What is too high inflation in your opinion so that we can know what you talking about?
It seems that you also completely forget about the word 'accelerating' in NAIRU? Does definitions have any meaning?

It looks like the operating word 'accelerating' is completely ignored not only in mainstream but also here.

Bob said...

What about the relationship between the unemployment level and the labor share?

Tom Hickey said...

What about the relationship between the unemployment level and the labor share?

There two possibilities.

Either let wages rise as competition for labor increases and reduce owner share to accommodate rising labor share, or else reduce competition for jobs by contracting the economy.

Generally speaking, firms do not alter capital-labor share. One of the reasons is that most large firms are publicly traded and markets will react negatively to lower profit share. So constant or rising profit share is baked into the system based on the prevailing assumption that firms are managed in the interest of owners.

The rationale of the central banks for targeting inflation is given by ISLM . Increase interest rates to increase saving over borrowing. This reduces lending and curtails demand by reducing growth of M1 as the spendable money supply. Firms adjust production quantity down to accommodate lower demand since workers resist wage cuts to do so.

NAIRU is therefore the basis for a central bank rule instead of being only an economic theory.

If there is much wrong with the theory, the the policy will be misguided.

So the argument over NAIRU is as much political as economic. That means it is likely to be permeated with ideology.

Footsoldier said...

A recent economic paper by Warren and Damiano B. Silipo

Maximizing price stability in a monetary economy



http://www.sciencedirect.com/science/article/pii/S0161893817300017


Uses the JG wage as a price anchor.

Footsoldier said...

The US unemployment rate during the last 3 years of world war 2 was 1.7%

The closest the US has ever got to full employment.

Here's the inflation rates, tax rates etc from 1940 - 1949

http://inflationdata.com/articles/inflation-consumer-price-index-decade-commentary/inflation-cpi-consumer-price-index-1940-1949/

Of course there was rationing of food and othe rthings.


However, would the rationing be the same today ?

AXEC / E.K-H said...

NAIRU does not exist because equilibrium does not exist
Comment on Brian Romanchuk on ‘NAIRU Should Be Bashed, Smashed, And Trashed’ and on Lars Syll on ‘Debunking the NAIRU myth’

The current state of economics is this: Walrasian microfoundations are false since 140+ years and Keynesian macrofoundations are false since 80+ years.#1 By consequence, employment theory, too, is false and this, of course, includes NAIRU.#2 What is urgently needed is true macrofoundations and the true employment theory.

Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for unemployment, deflation, depression, stagnation.#3

What orthodox employment theory says is this: “We economists have all learned, and many of us teach, that the remedy for excess supply in any market is a reduction in price. If this is prevented by combinations in restraint of trade or by government regulations, then those impediments to competition should be removed.” (Tobin, 1997)

What microfounded supply-demand-equilibrium economics says is that there is a NEGATIVE relationship between wage rate and employment. From the true macrofoundations follows that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

It should be possible to empirically establish which of the two opposing propositions is true. In fact, the Great Depression and the current mass unemployment gives one a clear hint that supply-demand-equilibrium in general and labor market theory in particular is dead wrong.#4

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2489792

#2 See ‘NAIRU ― a folk psychological hallucination’
http://axecorg.blogspot.de/2016/10/nairu-folk-psychological-hallucination.html

#3 See ‘How economists murdered the economy and got away with it’
http://axecorg.blogspot.de/2016/11/how-economists-murdered-economy-and-got.html

#4 See ‘Macroeconomics without Keynes’
http://axecorg.blogspot.de/2017/01/macroeconomics-without-keynes.html

Bob said...

What microfounded supply-demand-equilibrium economics says is that there is a NEGATIVE relationship between wage rate and employment. From the true macrofoundations follows that the MACROECONOMIC relationship between wage rate and employment is POSITIVE.

Can this be observed from changes to the minimum wage?

Neil Wilson said...

"My basic objection to "NAIRU bashers" is that some of them try to claim there is no relationship at all between inflation and unemployment. "

There is no aggregate relationship, in the same way that there is no aggregate relationship on interest rates. There is no meanignful aggregation function.

There are 'own' intererest rates and there are 'own' price inflation/employment shortages - all very specific to the markets they are in and depending upon a variety of factors, none of which are anything to do with the interest rate at the central bank.

So it is a useless concept in the aggregate. At best it is a micro concept and even there it is of little use.

The neo-classical think it has a meaning in aggregate because they aggregate by summation - which then violates the SMD conditions rendering the whole exercise meaningless.

There is no meaningful aggregate NAIRU. You can't get there from here anyway because you'll trip over something else first and if you have any sense you won't push policy that far in the first place.

The only reason neo-classical push the envelope is because they have an aversion to public sector employment on a social value principle. Drop the obsession with market value and the problem goes away.

The correct level of private sector employment is somewhere between where we are and prices starting to rise a bit. When you get anywhere near prices rising a bit you tighten policy via fiscal policy tools and leave everybody else working for the public sector.

The result is full employment.

Neil Wilson said...

"It looks like the operating word 'accelerating' is completely ignored not only in mainstream but also here."

The general belief appears to be that inflation always accelerates if it 'takes root'.

I find it funny that the economy is supposed to tend to equilibrium after 'shocks' but inflation never does. Which just shows that the whole belief structure is there to further the interests of the creditor class. Allow as much lending as possible and never let it be rotted away with inflation.

Ralph Musgrave said...

Tom,

The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables , i.e. “other stuff”, is held constant. In economics that is not possible normally.

A second point in favor of NAIRU is that the idea that there is NO RELATIONSHIP between inflation and unemployment is blatantly absurd. What would have happened if we’d cured the recent recession by printing $1bn of $100 notes per day and distributed them to the population? The average ten year old would be able to tell you that initially unemployment would fall, but that at some point all that happens is that inflation goes thru the roof.

Ralph Musgrave said...

Jure,

You ask: “What is too high inflation in your opinion so that we can know what you talking about?” Answer: I’m happy with the standard 2% target, but I accept there are arguments for a slightly higher or lower level.

Re definitions and whether the “A” in NAIRU is important, i.e. “accelerate”, I think it’s thoroughly unimportant. The important point is that if inflation rises above the 2% target (or whatever the target is) it needs to come down. Whether it is accelerating or not is relatively unimportant.

Ralph Musgrave said...

Neil,

I’m delighted to hear there is no relationship between inflation and unemployment. Then why don’t we bump up demand to astronomic levels, e.g. by printing and distributing $1tr of $100 bills? Demand will rise: caused by everyone trying to spend their $100 bills. While according to you, there’ll be no effect on inflation.

Why did no one think of this before? Because it’s nonsense!

Greg said...

Ralph

Why do you respond with such an idiotic defense? "Printing and distributing $1tr of $100 bills" is essentially a basic income scheme..... not anything to do with a relation between unemployment and inflation levels.

I know of no one who has argued that basic income schemes wont be inflationary. Why bring that into a discussion of NAIRU which is specifically about EMPLOYMENT levels?

Ignacio said...

I think you are mistaken on what NAIRU means for most economists in most policy making circles: They pretend you can model and acknowledge the unemployment rate at which inflation won't accelerate and hence use that rate an anchoring mechanic to keep inflation tight. It's a load of garbage, period (and that is what Bill Mitchel attacks).

Precisely because is a non-linear system where you cannot establish causality tightly you cannot anchor inflation through unemployment. Not to say that is a load of unsustainable crap socially speaking because is the equivalent of saying: "we got inflation, so let's throw people under the bus to get prices down".

OFC at certain levels of consumption at full employment you will get consumption, but making the leap of faith from there to that you have to destroy employment to reduce inflation is quite stupid on the level only economists can achieve.

Noah Way said...

The critical levels of unemployment are the points at which the number of consumers (the employed) is reduced to the point of effecting consumption or increased to the point of effecting labor costs. With global markets domestic consumption is a smaller share and labor is available for pennies on the dollar, thus domestic employment is less important. Most obviously, reduced employment holds down wages via increased competition and provides manpower for the "voluntary" military - those who join because they have no better - or other - options. All the esoteric BS economic theories do not change this reality, they only mask it to provide cover for the failed (for the vast majority at least) capitalist system.

Full employment could easily be achieved by increasing social security benefits to livable levels and lowering the retirement age to make way for young workers. Increasing minimum wage to livable levels (some multiple of the so-called poverty level) would also create more space in the job market as many people work multiple low-wages jobs just to survive.

Universal health care (Medicare for all) would relieve companies of the responsibility (economic burden) of this expense, which is of course an enemy of profit. Additionally we must consider child raising as a productive social function and support caregivers economically. I know a woman, who because she spent her life raising children, gets $200 a month in Social Security, $100 of which is deducted for Medicare. This is both unjust and inhumane.

AXEC / E.K-H said...

Ralph Musgrave

You argue: “The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables , i.e. ‘other stuff’, is held constant. In economics that is not possible normally.”

This is one of the oldest excuses of economists which can be traced back to Hume and Mill: “There is a property common to almost all the moral sciences, and by which they are distinguished from many of the physical; this is, that it is seldom in our power to make experiments in them.” (Mill)#1

The solution of this methodological problem consists in making a system science out of the moral or behavioral or social proto-science of economics. To get out of failed economic theory requires nothing less than a full-blown paradigm shift from accustomed behavioral microfoundations to entirely new systemic macrofoundations.

In the following a sketch#2 of the correct employment theory is given. The most elementary version of the objective systemic employment equation is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.
The complete employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa.

The systemic employment equation fully replaces the bastard Phillips curve and NAIRU.#2, #3 The equation contains nothing but measurable variables and is therefore testable.

Right policy depends on true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum, 1991)

Economists do NOT have the true theory and this explains their endless inconclusive wish-wash. In their scientific incompetence both orthodox and heterodox economists are ultimately responsible for the enormous social devastations of mass unemployment. Economists are not only hopeless blatherers but a real danger for their fellow citizens.

Egmont Kakarot-Handtke

#1 See also ‘Failed economics: The losers’ long list of lame excuses’
http://axecorg.blogspot.de/2017/01/failed-economics-losers-long-list-of.html
#2 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421
#3 For the relationship between profit and employment see ‘Have data, lack theory’
http://axecorg.blogspot.de/2016/02/have-data-lack-theory.html

Tom Hickey said...

Unlearning on SMD conditions:

The first example is the Sonnenschein-Mandel-Debreu (SMD) Theorem. Broadly speaking, this states that although we can derive strictly downward sloping demand curves from individually optimising agents, once we aggregate up to the whole economy, the interaction between agents and resultant emergent properties mean that demand curves could have any shape. This creates the possibility of multiple equilibria, so logically the system could end up in any number of places. The SMD condition is sometimes known as the ‘anything goes’ theorem, as it implies that an economy in general equilibrium could potentially exhibit all sorts of behaviour.

The DSGE Dance

Tom Hickey said...

The fact that there is little empirical evidence to support NAIRU is easily explained by the amount of background noise. Same problem applies in other subjects (chemistry, astronomy, etc). But in subjects other than economics, it is normally possible to do experiments where non-relevant variables , i.e. “other stuff”, is held constant. In economics that is not possible normally.

This argument depends on the homogeneity or close similarity of the subject matter of the natural, life and social sciences, which is a false assumption empirically, which should be obvious based on the differences between atoms and cells, and cells and human beings. Human being are not homogenous enough behaviorally to be additive other than in the most simple way. Assuming homogeneity and additivity involves the fallacy of composition, as Keynes observed. This is clearly the case with saving and interest rate setting is supposed to work on the basis of its effect on the saving-investment curve.

But even in the natural sciences there is emergent behavioral. There is no problem aggregating atoms since they are additive. The number of atoms doesn't affect the behavior of a gas. The number of elections doesn't affect the operation of a circuit, so determinative "laws" can be formulated. They are called "laws" because of the degree of confirmation, which is very precise regardless of time. In other words, history is not relevant.

However, when atoms join with atoms one element of other elements, emerge properties develop. This is the case with individuals and groups. An individual's preferences are affected by group affiliation and institutional arrangements, resulting in emergence. This generates many causal factors that become confounding.

Matthew Franko said...

" grifters (rent-seeking parasites)."

They put up their savings (ie foregone consumption) to pay for the construction of material productive systems in expectation of a return of their savings + an increase...

this manifestly results in more efficient outcomes in real terms than any alternative approach to material endeavors...

This is where someone like Hudson is blind to what is really going on... and hence all he can come up with some idiot "debt foregiveness!" thing...

Ralph Musgrave said...

Greg,

Your claim that printing and distributing $1tr of $100 bills is the same as a basic income scheme is absurd. The “print” scheme would not be the same as basic income unless great care was taken to ensure the freshly printed bills were VERY evenly distributed among the population. The standard helicopter drop scenario normally envisages a RANDOM distribution of $ bills, not a careful distribution.

Next: “I know of no one who has argued that basic income schemes wont be inflationary.” Hilarious. I imagine about 95% of advocates of basic income claim it won’t be inflationary: certainly if the total number of dollars spent on BIG is approximately balanced by numbers of dollars collected in tax, there is no reason for BIG to be inflationary.

Matthew Franko said...

"certainly if the total number of dollars spent on BIG is approximately balanced by numbers of dollars collected in tax,"

Ralph this is monetarist thinking...

Even if the govt is providing USDs and taxing out all previous provided USDs during some fiscal interval (ie no USD savings), if the govt increases the loan limits for single family homes during that same interval, the price of housing has been increased...

ie the rote MMT statement: 'its about price not quantity'...

Ralph Musgrave said...

Tom,

You seem to be making my case for me. You say (to summarise) that writing laws that describe human behaviour (in particular large groups of humans) is difficult because humans are more complicated than atoms. Quite agree! That helps explain my above point that empirical confirmation of the NAIRU idea is difficult because of background noise.

AXEC / E.K-H said...

Tom Hickey

Science is about invariances (Nozick) but there is NO such thing as behavioral invariances. Because of this the neo-Walrasian axioms* are methodological madness to begin with. There is NO need to invoke the Sonnenschein-Mantel-Debreu theorem in order to refute/unlearn standard economics.

The subject matter of economics is NOT the behavior of humans but the behavior of the economic system.** See ‘The existence of economic laws and the nonexistence of behavioral laws’
http://axecorg.blogspot.de/2015/12/the-existence-of-economic-laws-and.html

Egmont Kakarot-Handtke

* The microfoundations approach is defined with these five hard core propositions, a.k.a. axioms: “HC1 economic agents have preferences over outcomes; HC2 agents individually optimize subject to constraints; HC3 agent choice is manifest in interrelated markets; HC4 agents have full relevant knowledge; HC5 observable outcomes are coordinated, and must be discussed with reference to equilibrium states.” (Weintraub)

** The macrofoundations approach is defined with these three BEHAVIOR-FREE systemic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours. L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.

Tom Hickey said...

They put up their savings (ie foregone consumption) to pay for the construction of material productive systems in expectation of a return of their savings + an increase...

Savings funds investment?

Matthew Franko said...

"Savings funds investment?"

Part of it...

Warren via rote: "its always an unspent income story..."

You have to create incentive for some people to spend some of that unspent (saved) income...

Look at Trump's infrastructure plan via the PPPs, 20% of that will typically come from the Private Partner...

So if he is talking about $1T, then this is potentially going to get $200B of current savings out of the mattress and creating investment flow...

http://www.foxnews.com/opinion/2016/10/27/wilbur-ross-peter-navarro-trump-vs-clinton-on-infrastructure-and-why-it-matters.html

Tom Hickey said...

Means redefining infrastructure as a capital good rather than a public good. Another step toward a market state.

Jeff65 said...

Matt,

> You have to create incentive for some people to spend some of that unspent (saved) income

Why???

The govt doesn't need money.

And if savers are so clever wouldn't they make a lot more money without govt sweetening the deal? The only way this works is if the govt essentially subsidizes the investment or underwrites the risk. Nothing smart or clever here, just people who already have money with their hands out. A scam.

We have PPPs here in Australia - that is how they work.

AXEC / E.K-H said...

Matthew Franko, Tom Hickey

Seems you lost your way. The point at issue is NAIRU and not the relationship between investment and saving. The latter is given by Qm=I-Sm, i.e. monetary profit is equal to the difference between investment and monetary saving. For more details see ‘Wikipedia and the promotion of economists’ idiotism’
http://axecorg.blogspot.de/2016/11/wikipedia-and-promotion-of-economists.html
and cross-references Refutation of I=S
http://axecorg.blogspot.de/2015/01/is-cross-references.html

Egmont Kakarot-Handtke

Neil Wilson said...

"Then why don’t we bump up demand to astronomic levels, e.g. by printing and distributing $1tr of $100 bills?"

Ralph,

That is very simple. Because you have nothing to sell that is worth that much.

Government is about buying things. IF you don't have anything worth buying you're not going to get any money are you. And that is what provides the natural limit - nothing to buy means no extra spending.

As I keep saying governments, or central banks for that matter, are not in the business of spending. They are in the business of buying. That shift in focus means everything.

Neil Wilson said...

"Full employment could easily be achieved by increasing social security benefits to livable levels and lowering the retirement age to make way for young workers."

It can't. That's pump priming and has precisely the same failures as thinking you can sort out the economy by altering the amount of borrowing in the system.

It's rather more than just an aggregate demand problem that is sorted out by magic with 'markets'. Unless you anchor the markets they drop out of control. And at the moment we anchor the markets with 5% unemployment - millions of people in destitution scrabbling to find bones that aren't there.

Matt Franko said...

Jeff,

"Govt doesn't need the money"

Nobody believes that... maybe you haven't noticed?

As Warren says "it's always an unspent income story..."

Maybe change tactics and work on ways to reduce the unspent income....

Matt Franko said...

AX,

Imo anybody who talks about "inflation" under a numismatic system is a moron.

Ralph Musgrave said...

Neil,

You say "Because you have nothing to sell that is worth that much." What's that supposed to mean?

Car manufacturers, and tens of thousands of other manufacturers and retailers have hundreds of thousands of tons of "stuff" to sell. And given more demand they'd bring more to market.

But if demand rose too far I reckon they'd be liable to raise prices. Inflation ensues.

But according to those deluded NAIRU bashers, inflation DOESN'T ensue when demand rises and unemployment falls, because apparently there's no relationship between inflation and unemployment.

Matthew Franko said...

"Another step toward a market state."

No... as govt retains 80% ownership of the PPP shares....

Some form of general taxes (fuel tax/vehicle sales tax...) is replaced with a toll or fee for use of the specific segment of the infrastructure...

Private partner is also the managing partner responsible for operation and maintenance so they get first position on the toll flow....

Tolls are split 80/20 after O&M is covered...

Is more efficient because the toll flow can never be diverted from the partnership interests and only the excess is returned to govt general accounts...

AXEC / E.K-H said...

ICYMI

NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather
Comment on Simon Wren-Lewis on ‘NAIRU bashing’

NAIRU is dead, not because of measurement problems, but because the underlying employment theory is false.

You say: “The way economists have thought about the relationship between unemployment and inflation over the last 50 years is the Phillips curve.”

This hallucinatory Phillips curve has first of all to be rectified.#1 The objective systemic employment equation is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this equation follows:
(i) An increase of the expenditure ratio rhoE leads to higher employment (the Greek letter rho stands for ratio). An expenditure ratio rhoE greater than 1 indicates credit expansion, a ratio rhoE less than 1 indicates credit contraction.
(ii) Increasing investment expenditures I exert a positive influence on employment, a slowdown of growth does the opposite.
(iii) An increase of the factor cost ratio rhoF=W/PR leads to higher employment.

The complete employment equation contains in addition profit distribution, government deficit/surplus, and the trade balance.

Item (i) and (ii) cover Keynes’s well-known arguments about aggregate demand. The factor cost ratio rhoF as defined in (iii) embodies the price mechanism which, however, does NOT work as standard economics hallucinates. As a matter of fact, overall employment INCREASES if the average wage rate W INCREASES relative to average price P and productivity R and vice versa. If the average price increases faster than the average wage rate employment decreases.

The systemic employment equation fully replaces the hallucinatory Phillips curve and NAIRU. The equation contains nothing but measurable variables and is therefore testable. No prohibiting measurement problems at all!

Right policy depends on true theory: “In order to tell the politicians and practitioners something about causes and best means, the economist needs the true theory or else he has not much more to offer than educated common sense or his personal opinion.” (Stigum)

Economists do NOT have the true employment theory and this explains their endless inconclusive blather about NAIRU which is a NONENTITY like the Tooth Fairy or dancing-angels-on-a-pinpoint.

Egmont Kakarot-Handtke

#1 See ‘Keynes’ Employment Function and the Gratuitous Phillips Curve Disaster’
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2130421

Jeff65 said...

Matt,

The unspent income story is what leads the idiots to recommend negative interest rates.

The compelling part of MMT is that you understand you don't need rich people's money to advance an agenda, except to the extent that those people use their money and influence to oppose it. They can stand aside or lose it all, I say.

If we're just going to focus on bullshit like PPPs, what's the point? We already have those and they don't help most people.

AXEC / E.K-H said...

ICYMI

Comment on Blissex (post on Economists’ View blog)

You comment on the rectification of the obsolete NAIRU-Phillips curve: “That sounds very plausible, and the replacement of the imaginary Phillips curve(s) is welcome, but your comment lacks one very important detail, the ‘central banker’s’ question.”

It is a matter of indifference whether ‘that sounds very plausible’. The point is whether the hallucinatory NAIRU-Phillips curve or the objective SYSTEMS-Phillips curve is the TRUE representation of the determinants of employment/unemployment.

Scientific truth is methodologically well-defined by material and formal consistency and is established by PROOF and NOT by what ‘sounds plausible’ to Blissex.

Because the NAIRU-Phillips curve is PROVABLE false NO economic policy conclusions can be drawn from it, neither with regard to monetary nor to fiscal policy. Because economists lack the true theory their economic policy guidance has NO sound scientific foundation since Adam Smith.

Everybody has the right to climb on a soap box and to address the Circus Maximus with policy proposals EXCEPT economists. Economics is supposed to be a science and economists are supposed to adhere to scientific standards. This means that economists have to make sure that they have the true theory about how the economy works BEFORE they tell the world how to save the economy.

The fact of the matter is that profit theory, IS theory, monetary theory, and employment theory is false.#1 Because employment theory is false, economic policy guidance regularly WORSENS the situation, that is, economists bear the intellectual responsibility for unemployment, deflation, depression, stagnation.#2

Before economists in general and Wren-Lewis in particular can address ‘the central banker’s question’ there is a lot of scientific homework to do.#3

Egmont Kakarot-Handtke

#1 See ‘The Three Fatal Mistakes of Yesterday Economics: Profit, I=S, Employment’
https://papers.ssrn.com/sol3/papers2.cfm?abstract_id=2489792
#2 See ‘How economists murdered the economy and got away with it’
http://axecorg.blogspot.de/2016/11/how-economists-murdered-economy-and-got.html
#3 See ‘If it isn’t macro-axiomatized, it isn’t economics’
http://axecorg.blogspot.de/2017/02/if-it-isnt-macro-axiomatized-it-isnt.html

AXEC / E.K-H said...

ICYMI

Comment on Simon Wren-Lewis (post on mainly macro)

You say: “What I find very dispiriting about most of the comments on this post is a complete failure to engage with what I have said, and say where they disagree. Instead it is more along the lines of repeating the NAIRU is rubbish, without ever giving a coherent account of what exactly is rubbish.”

The microfounded NAIRU-Phillips curve has first of all to be rectified.* The macrofounded SYSTEM-Phillips curve is shown on Wikimedia
https://commons.wikimedia.org/wiki/File:AXEC62.png

From this correct employment equation follows in the MOST ELEMENTARY case that an increase of the macro-ratio rhoF=W/PR leads to higher total employment L.

The ratio rhoF embodies the price mechanism. Let the rate of change of productivity R for simplicity be zero, i.e. r=0, then there are three logical cases:
(i) The rate of change of the wage rate W is equal to the rate of change of the price P, i.e. w=p, then employment does NOT change NO MATTER how big or small the rates of change are. That is NO amount of inflation or deflation has any effect on employment.
(ii) The rate of change of the wage rate is greater than the rate of change of the price then employment INCREASES.
(iii) The rate of change of the wage rate is smaller than the rate of change of the price then employment DECREASES.

So, it is DIFFERENCES in the rates of change of wage rate and price and not the absolute magnitude of change. Every PERFECTLY SYNCHRONOUS inflation/deflation is employment-neutral, that is, employment sticks indefinitely where it is. In more general terms the neutrality condition reads W(1+w)/P(1+p)(R(1+r)=rhoF=constant.

There is NO such thing as a NAIRU, all depends on relative rates of change. This is a testable proposition.

Egmont Kakarot-Handtke

* See ‘NAIRU: an exhaustive dancing-angels-on-a-pinpoint blather’
http://axecorg.blogspot.de/2017/02/nairu-exhaustive-dancing-angels-on.html