201. FreetoChoose - June 4, 1999 - 11:38 AM PT
thoughtful
“ b) focused on increased investment, e.g., public works infrastructure;”
Why is this a problem? Is there a lower multiplier effect than other options? Does it work slower than other options?
I think of public works infrastructure as the classic fiscal stimulus. What other options did you have in mind? Tax cuts?
“c) tax cuts issued to consumers are only temporary.”
Is this because the consumers react differently to temporary cuts than to permanent ones? Could the government solve this problem by making the temporary cuts permanent?
Why did they use temporary cuts if they aren't as effective?
202. gwindau - June 6, 1999 - 7:46 AM PT
Let me focus on some of the 'myths' that I see in this thread that are used as responses to my analysis on Japan.
Myth 1) Reaganomics is/was just a series of tax cuts.
Myth 2) Inflation (or tricking people into fearing it) will stimulate consumer demand in Japan and automatically cause an increase in investment (no matter what the current low-risk profit rate is).
Myth 3) An absolute deflation automatically causes real wages to fall with real prices
Myth 4) Inflation is never caused or aggravated by non-competitive pricing power.
Myth 5) Lowered currency value (exchange rates) is always good because it makes your exports more competitive without hurting your asset and capital values.
Do you believe any/all of these 'myths'? If so, you are not relying on valid economic principles to discuss the topic of this thread.
203. FreeToChoose - June 6, 1999 - 10:37 AM PT
gwindau
Did you really glean some of these "myths" from this thread? I don't recall most of them. Is it too much to ask that you identify the posts?
204. gwindau - June 6, 1999 - 3:44 PM PT
FreeToChoose
. . . for your inspection:
Myth 1) #194 Raskolnikov
Myth 2) #199 NickVanston
Myth 3) #187 Raskolnikov
Myth 4) #154 cdm1110
Myth 5) #197 thoughtful
205. FreeToChoose - June 6, 1999 - 4:25 PM PT
gwindau
Thanks for the response. That makes it far easier to poke holes in your thesis(g).
Rask stated, " This is the exact opposite of Reaganomics. Reagan's idea was that if you gave tax cuts to the wealthy, they would be more likely to save, which would spur the economy. You are saying that the wealthy are actually *less* likely to save than the workers."
First, I suspect Rask would take exception to characterizing his brief comment as being a summary of Reaganomics. Yet in his brief, two-sentence commentary, he went well beyond characterizing them as merely tax cuts. He commented on the marginal propensity to save (and hence increase funds for investment) among the group receiving the majority of the direct impact. This is hardly as simple a concept as equating them to tax cuts. I believe Rask was using the tax cuts under Reganomics as a way to point out that your position requires evidence; it cannot be accepted as obvious.
It doesn't matter whether one accepts Reaganomics fully, or rejects it as nonsense. If you state that the wealthy have a lower propensity to save, this flies in the face of accepted economics. While that doesn't guarantee it is wrong, it requires stronger evidence.
206. FreeToChoose - June 6, 1999 - 4:36 PM PT
Gwindau
I'm not equipped to comment on your myth #2
Myth #3
Rask is talking about deflation. This is a reduction in the general price level. In your myth 3, you imply that it is a reduction in the *real* price level (emphasis added). This belies an ignorance of the terminology. If the CPI drops from 100 to 90, we have deflation. We define the change in the real price as the nominal change divided by the inflation or deflation.
207. FreeToChoose - June 6, 1999 - 4:44 PM PT
gwindau
IMHO, your myth # 5 is a gross distortion of thoughtful's post. But I hesitate to go too far in explaining what other people mean, particularly in areas where they are in their area of expertise, and I am not, so I will wait to see if thoughtful accepts your summary.
208. thoughtful - June 6, 1999 - 6:46 PM PT
FTC, from the last econ thread awhile back, PseuE correctly pointed out a key structural problem in Japan which is capital deepening. In a developing country, infrastructure needs are so great that a large portion of GDP is appropriately put toward public/private investment and infrastructure development. However, as a nation becomes a developed one, the need for such high capital expenditures falls. Instead, as part of the maturing process, returns to capital will diminish, making consumption a more important element to sustaining economic growth. It is rising demand that keeps capacity utilization high and investment spending profitable.
The phrase they frequently use about Japan's continued push into public infrastructure is, "they keep repaving the same roads." Not exactly productivity enhancing activity. (Less frequently mentioned is corruption which sees the funds are tapped off for even less productive uses.) Instead, Japan needs to get consumption up.
Why do they make tax cuts temporary? Seems they are concerned over their public debt, especially since their aging population problem makes social security pale by comparison. What they seem to have forgotten is whatever costs you may have in the future, it is much easier to afford with a growing economy. The last point has been most amply demonstrated in the US in the 90s where they are now pushing out the point of soc. sec. & medicare bankruptcy due to higher-than-forecasted tax receipts.
209. thoughtful - June 6, 1999 - 7:25 PM PT
gwin, you are incredible.
"Myth 5) Lowered currency value (exchange rates) is always good because it makes your exports more competitive without hurting your asset and capital values."
Your myth#5 is not what I posted at all. Perhaps I typed too quickly. I said that Japan is very dependent on exports to generate growth, which is true. I said that a stronger yen would hurt their export markets, which is also true. I said nothing about asset prices. I also never said "always". I don't think I ever use the term "always" in economics.
Perhaps, since you are so well trained in economics, you could walk me through your analysis of how exports impact currency valuations and thus asset prices. In fact, I would love to see the equation which relates exports and imports to GDP. Perhaps you could post it for me?
(FTC, cdm, Nick, Rask, et. al., shhhh!)
210. Raskolnikov - June 6, 1999 - 9:39 PM PT
FTC addressed your Myth 1, but regarding Myth 3, I never said that deflation automatically results in identical wage cuts. I said that if there is a differential between prices and wages, then that differential has to be accounted for elsewhere in the economy. You have 1) given no reason to explain why you think a significant differential will happen, 2) not explained why that differential is necessarily going to result in disproportionately lower wages, instead of disproportionately *higher* wages, and greater unemployment, as is usually the case.
211. cdm1110 - June 7, 1999 - 1:56 AM PT
gwindau
"Myth 4) Inflation is never caused or aggravated by non-competitive pricing power. (#154 cdm1110)"
Here's what I wrote in message 154:
"[Krugman] wishes the Bank of Japan to generated expected inflation, and at the same time to keep nominal rates close to zero. The goal is to generate negative real interest rates, thus encouraging consumption and so giving a boost to the economy. [...] I see no reason why this strategy should affect firms' market power, or lead to "monopoly price inflation" (whatever that means)."
So -- I wrote that I see no reason why inflation should affect the market power of firms, and you interpret it as saying that market power doesn't lead to inflation.
Now, as it happens, I *don't* think inflation is caused by the market power of firms. Obviously, if something happens to give firms more monopoly power, this will translate into higher prices for those firms, and so might affect the inflation rate in the short run. But for there to be a link from market power to inflation, it seems to me that we have to be talking about CHANGES in the degree of monopoly power. (If anything, there is evidence that market power falls in economic expansions, which leads to the exact opposite of your conclusion, but in any case this would surely be a minor factor in the context of a recovery in Japan.)
(Also, notice that, just as you wrongly put the word "always" in thoughtful's mouth, you likewise wrongly suggest that I used the word "never"...)
212. cdm1110 - June 7, 1999 - 2:12 AM PT
"Myth 2) Inflation (or tricking people into fearing it) will stimulate consumer demand in Japan and automatically cause an increase in investment"
Now, isn't this "myth" precisely what we are debating? Krugman's policy is based on the idea that anticipated inflation will reduce real interest rates and thus stimulate consumption and investment. You can disagree if you like, but you are simply WRONG WRONG WRONG to state that "if you believe any/all of these 'myths', you are not relying on valid economic principles to discuss the topic of this thread." This argument is indisputably based on valid economic principles, in the sense that it is based on a serious and internally consistent economic model. You can question aspects of the model, but it is extraordinarily disingenuous to claim that the model doesn't exist.
"Myth 3) An absolute deflation automatically causes real wages to fall with real prices"
Your ignorance of terminology is even worse than FTC indicated it to be. "Real wages" are wages corrected for inflation. What I think you meant to say was that 'An absolute deflation automatically causes NOMINAL wages to fall with NOMINAL prices'. It's odd to call this a myth, of course. The *definition* of a deflation is that nominal wages and prices are falling.
213. cdm1110 - June 7, 1999 - 2:20 AM PT
gwindau
One last question. A number of us here are attempting to take your posts seriously and to consider the arguments that you raise. And we seem to be in agreement that you are talking nonsense. Back in message #191 you wrote "I am, however, used to being heaped upon with tons of disrespect for my views." Does the response you're getting here make you at least consider the possibility that the problem is not one of lack of respect, but simply that you do not, in fact, know what you are talking about?
214. gwindau - June 7, 1999 - 5:55 AM PT
If I have misinterpreted any of your posts, I appologize. I do not want to be the issue of this thread, do you want me to be the issue? If it is important for you to assume that I do not know what I am talking about, so be it. Basically, I have said what I wanted to say, and despite your stong disagreements with what I have to say, you do indeed understand what I have said. Some of you claim that I use incorrect terminology (you forgot to criticize my mis-spelled words). We shall see what Japan does to revive her economy, neither you nor I can have much influence over what she does. We can try to 'guess' or 'forecast' what she will do for herself, and that is all that I tried to do. I have tried to be a polite contributor to this thread, I hope that you can at least notice that. I had a lot of fun, hope that you did too. Carry on.
215. thoughtful - June 7, 1999 - 6:45 AM PT
gwin, you disappoint me. The discussion here is not personal. It is a discussion of ideas and an opportunity for you as well as the rest of us to learn something. Taking it personally does not advance learning.
You said you have unique perspectives on this and have offered some ideas. All that we are doing is asking you to support those ideas with facts and analysis. That would be expected as your suggestions are different than standard thinking. That is not personal. That is how ideas are launched and tested, and knowledge gained.
216. gwindau - June 7, 1999 - 9:02 PM PT
I have tried to offer 'facts and analysis' (as best that I can in this forum). I don't run away from personal attacks around here, I laugh at them. I don't think you can discuss Economics without getting hit with a personal attack, once in a while. That's my experience anyway. It is a little overwhelming to be hit from all sides, however. Don't know where to begin to answer questions. Let me answer one question at a time. When I outlined some "myths" I asked people if they 'believed' in them, never accused anyone of spreading them. I listed a series of posts that gave me the idea to describe the myth in question. So, no offense was meant to anyone. I really am a polite person, believe it or not. If you want, we can go on from here with one question at a time (so that I can keep everything straight). I am happy to share what I know (or think I know).
217. cdm1110 - June 8, 1999 - 12:39 AM PT
gwindau
It was not my intention to give offense in my last message -- believe it or not, I'm a pretty polite person too. That post was born out of some frustration and actually was meant to be making a serious point. I know that if (when) I am engaged in a dialogue with a number of people, and I discover that everybody else thinks my analysis is suspect, then my response is to think very hard about my position, and to try and understand exactly what others are trying to say to me. (Of course, I may ultimately still decide that I'm right and they're wrong...)
218. cdm1110 - June 8, 1999 - 12:41 AM PT
[...cont] My sense is that many of us here have been trying to make sense of what you're saying, but simply are not able to do so. Still, we have been doing you the courtesy of taking your messages seriously and trying to point out exactly where we think the problems lie. We might make more progress here if you tried to respond in a similar vein. For example, you have not responded in a substantive way to any of the specific questions/criticisms that have been made of your economic logic. And you have declined to explain the "different models" that you use, despite being asked to do so:
"But if you have a particular view of how fiscal policy then you need to give us some justification or model to support your view. Otherwise, why should we care?" (cdm1110 #159)
"But for your musings to be interesting, they need to be grounded in some kind of model -- that is, an internally consistent framework of analysis. If they are, you should
be able to describe that framework for us. Tell us, for example, what you are taking as endogenous, and what as exogenous. Which markets are you analyzing? are the key economic actors, and what are they trying to achieve? What institutional (market or nonmarket) details do you regard as essential to to your theory?" (cdm1110 #196)
"Perhaps … you could walk me through your analysis of how exports impact currency valuations and thus asset prices. In fact I would love to see the equation which relates exports and imports to GDP. Perhaps you could post it for me?" (thoughtful #209)
If the best way to handle this is one question/topic at a time, that's fine by me.
219. thoughtful - June 8, 1999 - 6:33 AM PT
gwin, let me help you out. The equation which relates imports and exports to GDP is:
GDP=C+I+G+(X-M) where C=Consumption; I=Investment; G=Government spending; X=Exports; M=Imports.
This means that as exports rise, economic output rises; as imports rise, economic output falls.
If you've had any economics training, this equation should look familiar.
Now, what does this mean? A rising currency makes exported goods more expensive and imported goods less expensive. That means a rising currency has a dampening effect on economic output and growth.
There is a strong positive correlation between economic output and stock prices. To wit, the stock market is included in the US index of leading economic indicators.
While not "always" the case, a weakening currency tends to boost economic activity, and the outlook for stronger economic growth boosts stock prices.
There is an offset to this, which I think is what you were referring to in your "myth". Do you want to give it a shot?
220. gwindau - June 8, 1999 - 8:46 AM PT
I will do my best to answer multiple questions all at once, but, I am only human. First, with respect to Japan, it is my view that recent events have shown that 'demand side' stimulation has not worked as well as economists had hoped for. Second, when I characterize Japan's problem as an 'investment' crisis, not as a 'consumption' crisis this is an important difference in assumptions between myself and Prof. Krugman. For example, if savings propensities are rising (shift of an IS schedule on an IS-LM plot vs real interest rates) then a lowering of real interest rates should (in a dynamic model) have a larger effect on investment than on consumption (since people are shifting to more savings as opposed to consumption). Yet when Japan has dropped her real interest rates we see no major jump in investment while we have seen better than expected jumps in consumption. Thus, there is a basis in reality to calling Japan's problem an 'investment crisis' as opposed to a 'consumption crisis.'
221. gwindau - June 8, 1999 - 8:59 AM PT
thoughtful
I am quite familiar with the GDP equation but I see things a bit differently than most economists. The percentage of each component is important and can have an effect beyond its scale as a mere percentage. For example, let's say that (X-M) is a -10% of GDP, thus we are at a level of trade deficit. Seems small, seems unimportant but not so. If you went to the Red Cross and gave 10% of your blood it is something that your body could recover from (I'm not a medical doctor so I don't know for sure, but go with me on this). However, let us say that that 10% of your blood that you gave contained 90% of your white blood cells. Ooops, now we have a medical problem. The overall effect of one component of GDP can have a greater than scale effect on your economy. Thus, quantity can become quality at certain key percentage levels. An economy can gain or lose key blood cells, so to speak, at certain percentages. Thus trade deficits (X-M) can affect 'I' or 'C' or even 'G' in the GDP equation.
222. gwindau - June 8, 1999 - 9:08 AM PT
Oops, I made a mistake. I should not have used the IS-LM plot (in the post before the last one), I meant to say an 'I' and 'S' schedules on a plot vs real interest rates. Sorry, this proves that I am human. Please excuse me, I appologize for the confusion I caused.
223. thoughtful - June 8, 1999 - 9:16 AM PT
gwin, re Message #221 So far, no argument. Of course trade can impact the other sectors of the economy. A high and rising trade surplus can raise demand for labor, increase investment as capacity utilization rises, etc. So?
224. gwindau - June 8, 1999 - 9:05 PM PT
thoughtful
OK, with respect to Japan, while her export sector is only about 20% (roughly 20%) of her GDP, even if she is running a surplus she still may not be getting more than she is giving from her trade relationships in terms of values or derived multiplier effects. Much of Japan's strategy of the late 70's and early 80's was a predatory pricing policy (basically subsidized profit rates) to sieze market share and eliminate competition. As long as her trade sector grew, and her competition fell, things went well and her economy grew. Now, however, investment in the trade sector has topped out. Perhaps we can even call her current predicament as a case of 'overinvestment.' Japan, however, is not yet in a position to excercise pricing power over her foriegn markets and harvest the gains of any market share that she has gained. Is she in a position to play the 'predatory' pricing policy anymore? Maybe yes, maybe no. The only thing that is known for sure is that demand for her trade goods is not growing.
225. gwindau - June 8, 1999 - 9:35 PM PT
cdm1110 re: # 218
Thanks for being patient. I am doing the best I can for being as outnumbered as I am. With respect to 'models', I prefer to use Kalecki's stuff. Most of his equations can be distilled into a couple of diff-EQ's and played with in dynamic analysis. With Kalecki, as you know, the 'profit rate' and 'level of monopolization' are rarely considered to be externalities, so I hope this gives you an idea where I am coming from. Keynesianism is really a second language for me, whereas it may be your native tongue. Can't say that I would pass one of your take home exams, but I might. With respect to Japan, I believe that Kalecki's ideas really apply here in terms of foriegn trade being an essential aspect of her economic growth and well being. That is why I feel that it makes more sense to look at Japan as an 'investment' crisis instead of a domestic 'consumption' crisis. How do Keynesian economists explain 'Reaganomics?'. What really happened back in the 1980's? Have any models for that?
226. Slackjaw - June 8, 1999 - 10:41 PM PT
haven't had much time to participate lately, but:
Falling profit rate? And now Kalecki? Gwindau, by any chance were you educated at the New School for Social Research?
"With Kalecki, as you know, the 'profit rate' and 'level of monopolization' are rarely considered to be externalities"
The juxtaposition of these words with "externalities" doesn't make any sense to me.
227. gwindau - June 9, 1999 - 8:53 AM PT
Slackjaw
No, I did not attend the school you mention, did you? My formal education is in Mech. Engineering, not Economics. I am an amateur economist, not a professional economist. I have taken many Econ. courses but I've been thrown out of a few courses as well (for using inappropriate terminology in one case). Once again, if I am not supposed to be here, please let me know. I always respect the verdict of the jury. I just wanted to present some different perspectives on some economic issues and have some fun. I did not come here to upset people or enrage them. If I misused the term "externalities" I appologize. How many appologies must I give before I am forgiven? What is the marginal efficiency of my appology?
228. thoughtful - June 9, 1999 - 9:17 AM PT
gwin, this forum is open to everyone and I don't think I will get an argument from anyone on that. All are welcome. (However, be prepared that nothing said here is taken at face value or accepted without question.)
You do not need to keep apologizing. However, if you do make a mistake, we need to know that you did as it clears up misinterpretations of statements. There's nothing wrong with saying "open" and then saying "I meant to say closed." But if you don't correct the term used, you will get an argument back as to why "open" is dead wrong.
Also, no one here is enraged. I've seen enraged in the Fray and there's nothing here that even comes close.
Keep in mind that we are getting to know you and it takes time. Especially in a forum where only text (and quickly typed text at that) is how we get to know each other. Ok, so we're learning that you don't always use terminology correctly. Just don't get upset if we ask you to correct it so we can understand the point you are trying to make.
229. FreetoChoose - June 9, 1999 - 9:56 AM PT
gwindau
AFAIAC you are welcome here. But I'm not an economist, so maybe I will find out that I am not welcome (That's a joke)
I feel some responsibility, because I think I asked some pointed questions.
My personal belief is that everyone is welcome in every thread. However, you left the impression that you had a level of expertise in economics that didn't seem to be borne out by your commentary.
This isn't coming out the way I had hoped, but I think that people with real expertise in an area are happy to talk to people who are amateurs, but there is some “push-back” if amateurs purport to be experts. I see that you have emphasized that you are an amateur (as am I), but when you summarize the points of others and call them myths, you leave the impression that you (believe you) are an expert.
230. thoughtful - June 9, 1999 - 10:26 AM PT
gwin, help me out here. You've referred to Japan's problem as an "investment crisis" as opposed to Krugman's assessment of a "consumption crisis", yet in Message #224 you refer to it as a case of "overinvestment". Which is it?
Yes, there are models to describe "Reaganomics" and they are Keynesian. The US in the 80s was a case of tight monetary policy trying to offset excessively strong fiscal stimulus in an expanding economy. The $ rose as a result of the very high interest rates which made US goods noncompetitive overseas resulting in very high trade deficit and distress in manufacturing.
231. Slackjaw - June 10, 1999 - 1:41 AM PT
Me? New School? No, I am not educated in the tradition of the Left's answer to George Mason University. I ask because your use of Kalecki as the reference for dynamic economic models suggests either a haphazard education in economics (no offense intended by that, btw), or the imprimatur of the New School.
232. cdm1110 - June 10, 1999 - 5:49 AM PT
[Slackjaw] Did I gather from your postings elsewhere that you just completed a dissertation defense? (I remember from when I was lurking a long time ago that you were in grad school, I believe...)
233. gwindau - June 10, 1999 - 6:46 AM PT
I wish that this forum could be a comparison of ideas in the field of economics rather than a comparison of academic creditentials or the number of books published by one participant or another. Can we stop making 'people' (and where they went to school) an issue and focus on some 'ideas'? There are some people here who want to explore some of my ideas (no matter how "Left" or "Right" those ideas may be). I want to address as many questions as I can. If I do not get to your question it is not because I want to avoid it. It is because my time is limited or I may simply have overlooked it (human frailty, not deliberate avoidance).
234. gwindau - June 10, 1999 - 6:59 AM PT
thoughtful re: #230
By 'overinvestment' (and I said "Perhaps" Japan may be experiencing this phenomenon), I meant that in the past Japan may have overinvested in capital goods for trade goods (maybe for domestic goods too) and found herself in a situation of 'overcapacity'. Over time many capital goods can be amortized (or sold at a loss). However, at this time, under favorable conditions, there may be an investment vacuum that is not being filled because of past bad experiences. If you asked 5 girls to go to the high school prom and all 5 turned you down, you might be reticent to ask the 6th girl to go. However, what if that 6th girl is the one who will say "yes" and afford you both a wonderful time? In simple math, if capital goods are rusting or being amortized (or sold) faster than they are being replaced, we have a shortfall in 'investment.'
235. gwindau - June 10, 1999 - 7:29 AM PT
thoughtful re #230
If we use Prof. Krugman's model for the 'liquidity trap' in a dynamic mode instead of a static mode, it might (I hope) make my ideas gel in your mind (regardless of whether you agree or disagree with me). Using the 'I' and 'S' schedules ploted against real interest, Krugman shows that the equilibrium point for Japan is probably below zero 'r'. In a dynamic model, if we consider that the 'I' schedule is a function of the real profit rate minus real interest and that the 'S' schedule is a function of the general wage rate and general price level (inflation/deflation), then we may want to consider policies that will 'move' or shift these schedules favorably for Japan. Now also consider that the real profit rate is a function of the general wage rate and the value of the currency (as affected by inflation/deflation). The common variables in the shift of both schedules is 'the general wage rate' and the 'level of inflation/deflation'. See where I am going? See where Japan could be going?
236. thoughtful - June 10, 1999 - 7:49 AM PT
gwin, I'm really trying to understand you, but I'm afraid your analogies add confusion.
The body of economic and econometric analysis suggests that capital investment is largely driven by an outlook for economic growth. Only when businesses foresee strong demand for their products will they invest. They do not tend to build capacity knowing it will be unused. This would certainly describe Japan as they've been in economic stagnation for nearly a decade now.
237. cdm1110 - June 10, 1999 - 9:04 AM PT
gwindau
Kaleckian isn't my first language (Keynesianism probably isn't, eaither...), but let me try and get a couple of clarifications on your message 235 (just to try and translate it into the frameworks I'm more used to).
First, will it do any injustice to your argument if I want to think of real income, rather than the general wage rate, as the argument of the saving and investment functions?
Second, I'm still confused about the way you are thinking of inflation/deflation. Wouldn't it be easier to think of everything expressed in real terms -- corrected for changes in the price level? Then general changes in the price level (inflationary or deflationary) shouldn't be expected to have any effect on S or I, where I am thinking of these as depending on real interest rates. The effect of inflation or deflation would simply be to affect the gap between real and nominal interest rates. (Likewise, inflation might lead to a depreciation of the nominal exchange rate without affecting the real exchange rate.) In other words (at least to a first approximation) it seems to me that we can analyze the S/I market purely in real terms, without worrying (at least yet) about nominal variables.
238. Slackjaw - June 10, 1999 - 11:14 AM PT
cdm1110:
no, not so grand as a dissertation defense; just a seminar/bloodletting on a candidacy paper. Determines whether I get *in* to candidacy, not out of it.
gwindau: well, sure, ideas are all anybody really cares about, but whose ideas you talk about conveys information about you, and that's useful in interaction like this.
gotta go...
239. thoughtful - June 10, 1999 - 6:31 PM PT
cdm & gwin, boy I need help with this. Savings and investment are aggregate, no? That means it includes private, corporate and public savings, no? Savings are a function of income, not just wage income, but interest income, rents, etc., no?
Why not put everything in real terms? I can't quite follow the logic, but it seems to me that gwin's view allows for inflation to affect parts of the model instead of the whole. You have to have everything in real terms or in nominal terms, but not mixed. In other words, real profits may or may not be driven by nominal wages depending on how completely those wage changes are passed on to selling prices.
Currency changes don't just affect profits, but they affect consumer prices as well.
Inflation/deflation impact on savings/spending only complicates it as it depends *why* deflation is occurring? A pickup in productivity growth as the US seems to be experiencing now has allowed inflation to stay moderate though wage growth has been accelerating -- which is very different from a deflation due to a severe decline in aggregate demand.
This is not about static vs. dynamic models, in my view, but of how one accounts for inflation and its impact on the aggregate economy.
240. gwindau - June 11, 1999 - 5:44 AM PT
I am going to try to answer as many questions as possible. I (and cothinkers) see the issues of inflation and deflation in both 'relative' and 'absolute' terms. For example since the Asian crisis started in October '97, we have seen a 'relative' deflation in certain price levels for ag products, raw materials, energy fuels and so forth. Many economists predicted that the US economy would essentially 'import' deflation with the products it imported from Asia and elsewhere (Not happened yet, and the CPI jumped real high last month, I think). If it is difficult to view things in this manner, then ask yourself why we have a PPI and a CPI, why not just have a PI? Can the PPI be going one way while the CPI goes another way? If you can visualize this distinction you may begin to see why it may be more useful to think in terms of 'absolute' and 'relative' changes in price levels.If inflation/deflation moved in lock step formation through an economy then monetary policy would be less useful to attain economic goals.
241. gwindau - June 11, 1999 - 6:04 AM PT
No, it is 'not OK' (in my view) to declare an equivalency between 'national income' and the 'general wage rate'. The 'general wage rate' can fall while 'national income' may rise (and vice versa). I can understand and empathize with some of your confusion and concern with how I am playing with some of Prof. Krugman's models. My purpose here for doing this is not to be a heretic, but rather to find a point of common ground (since we are all fans of Krugman) and strike out from this point of common ground. If we were all sitting in a classroom and I could go up to a blackboard, I would display the 'models' that I prefer, not the ones that we can all visualize in a cyberspace forum. For example, it may be wrong to talk about easily 'shifting' schedules in Krugman's model (which I know it is) but if you can indulge me on this you may get some insight into my thought process. There are limitations to communication in this medium, in my opinion. The indescretions you may notice are not all my fault.
242. gwindau - June 11, 1999 - 6:19 AM PT
If you want to, try and visualize a distinction between the 'wage rate' and 'national income' in this manner. If we have a cubic block of ice, with a constant volume as an analogy for 'Y', and the wage rate ('w') as the 'height' of that block of ice off of solid ground and the area of ground covered as the level of 'employment'('E') you can see my distinction. We can also have a thin sheet of ice (same volume, same 'Y') that only rises slightly above the ground (low 'w') with a much larger area of ground covered (greater level of employment, 'E'). Both have the same 'Y' but different 'w' and 'E'. If living standards for employed people are a function of 'w', we can see that there is a big difference between a block of ice and a sheet of ice. I hope you can see that merely expressing 'Y' in a 'per capita' formulation does not spotlight the distinctions either since Y is constant and the population would be constant as well.
243. gwindau - June 12, 1999 - 6:07 PM PT
I meant to answer this question yesterday but did not have time to do so. Investment is not always and entirely dependent upon expanding estimates of future demand. Prof. Kalecki would point out that sometimes an enterprise must 'invest' just to tread water when we consider that certain manufacturing processes can become obsolete due to technological innovations made by competitors or general innovations in a society. Thus, the steel industry in the US during the 1970's was 'starved' of investment to keep pace with technological innovations in that industry. Demand did not evaporate, maybe it even expanded somewhat. Yet the US steel industry lost confidence in its ability to hold on to market share and just decided to run their old factories into the ground instead of updating them.
244. gwindau - June 12, 1999 - 6:15 PM PT
Yesterday the PBS radio show called "Marketplace" pointed out that unemployment is high in Japan (4.8% with 3.8 million people looking for work). In the 'white-collar' sector, the 'job-for-life' system is dead. Older white collar workers are being laid off or are taking 80% pay cuts to keep their current jobs. The labor unions are already marching in the streets of Tokyo demanding "jobs for all". The government has "promised to create 700,000 jobs" in the near future, but you can bet that the new jobs won't pay what the old jobs paid.
In short, the 'general wage rate' in Japan is under assault, either from the drag on wage rates from such a large reserve army of un-and-under-employed, or by direct pay cuts (up to 80% pay cuts).Can you visualize Prof. Krugman's savings schedule shifting to the left at the current real interest rate? Can't you just see those savings accounts being drained and the money flowing into corporate revenues?
245. gwindau - June 12, 1999 - 6:31 PM PT
Yesterday, the _USA_Today_ "Money" section reported that for Q1, Japan has experienced a 7.9% AGR in GDP (1.9% growth for Q1). Wow, that's pretty good for an economy that is supposed to be going into a "Depression" like the US did in the 1930's. There was a 10% rise in fiscal policy spending by the government (about 6/10ths of a percent of GDP). Not bad, sounds like Japan's fiscal policy is getting more 'efficient' at a lower National Income (Y). Well, if the Japanese keep crushing the wage rate pretty soon we may see a 'pop' in the profit rate and that old 'investment' schedule might start moving rightward to meet the leftward moving 'savings' schedule and 'whoop-there-it-is', positive real interest rates as the equilibrium point for Japan's miracle economy. All we need now is a Japanese politician in a cowboy hat, six-shooter on each hip, pointing his finger at Washington DC, saying: "Mr. President, tear down this trade barrier". Then it will really look like the 1980's, won't it?
246. thoughtful - June 14, 1999 - 9:27 AM PT
gwin, sigh.
"Investment is not always and entirely dependent upon expanding estimates of future demand." "Yet the US steel industry lost confidence in its ability to hold on to market share..."
1. Stop putting words in my mouth. I never said "always" or "entirely".
2. Without arguing with the facts as you laid them out, you contradict yourself in the two above statements. Inability to maintain market share *translates into* declining demand.
Please stop swinging around S & I curves -- we have yet to establish that your loose interpretation of those models is even an accurate one. You still need to sort out real and inflation. You throw around this term "general wage rate" like it is the be-all and end-all of the discussion. It isn't. You can have a decline in the general wage rate *and* an increase in real wages when prices are falling, as they are currently in Japan. You can have rising general wages and rising profitability depending on inflation and productivity.
Sigh.
247. gwindau - June 14, 1999 - 8:51 PM PT
I liked your last post, but I plead innocent to putting words in anyone's mouth. All I meant to say was that estimates of increasing demand can be negated by a 'lack of confidence' in maintaing market share. In other words 'risk' plays a part in investment, whether that risk is real or merely perceived risk. Depending on the investor's disposition, capital will flow to safety, to higher risk profit rates or will lie relatively idle. Yes, real wages can increase while nominal wages are slashed. True enough. But the goal of slashing real wages is to pump up the profit rate so unless real wages fall faster than producer costs and producer prices then what is the point? Perhaps John Maynard Keynes had the best idea when he suggested that "Wage Units" be used as the datum for evaluating real costs, prices and real profits, etc. I think it was one of Keynes best ideas in _General_Theory_. For the sake of argument, let's just say that I am using Keynesian "Wage Units" to evaluate prices and so forth.
248. cdm1110 - June 15, 1999 - 2:11 AM PT
I don't have time to post much right now, but here are a couple of comments. First, I (of course) never suggested that national income and the wage rate are "equivalent"; my question is what we should be using as the arguments of the saving (and investment) functions. Now, aggregate saving is, as thoughtful points out, the sum of personal, business, and govt saving. Personal saving is the sum of the savings of all individuals, which depends upon their wage (and profit) incomes. To capture this latter aspect of saving, we usually assume that we are not too badly misled by treating aggregate saving as a function of aggregate income. gwindau is I think arguing (#242) that we should put the wage rate and the employment rate as arguments of the saving function instead. This would make sense if, for example, the employed and unemployd have different propensities to save (which they surely do) *and* if this distinction is important to the argument that is being developed. I'm not yet convinced of this latter point. Presumably we also need to put profit income in as an argument of the saving function as well. There's nothing wrong with any of this in principle, but it's making the model more complicated than would be usual, and so I'd like to be convinced that there's some good reason for it.
249. cdm1110 - June 15, 1999 - 2:30 AM PT
Of course the PPI and the CPI can move in different directions, as can nominal wages and real wages, or for that matter any prices or price indexes. But this doesn't mean that we wouldn't be better analyzing the S/I market in real terms (deflated by wage units if you like; I don't care). Moreover, if changes in relative prices are important to the argument, then we need to be clear on exactly which relative prices matter and why -- and then let's talk about those relative prices, rather than "absolute" and "relative" deflation.
"But the goal of slashing real wages is to pump up the profit rate so unless real wages fall faster than producer costs and producer prices then what is the point?"
Well, the whole point of the Krugman argument is that a general inflation or deflation can have an effect because it influences the gap between nominal and real rates.
#243. Some investment is replacement investment because capital depreciates and/or becomes obselete. Well, yeah. Big deal.
Meanwhile, thoughtful already pointed out the logical howler in that post.
#244, #245. gwindau, you're off again. We're trying to see if we can construct a tight argument, and you're giving us quasi-Marxist polemics that don't make sense. Not because they're Marxist, I hasten to add, but because they don't make sense. BTW, what has happened to real wages in Japan over the last decade? I haven't checked; have you?
250. cdm1110 - June 15, 1999 - 2:32 AM PT
Slackjaw
I'm even more impressed with your various postings to the Fray, in that case... And they're training you well, wherever you are (UCLA?).
251. gwindau - June 15, 1999 - 5:49 AM PT
cdm1110
I do not see the "logical howler" in my argument about investment. I pointed out that some enterprises must invest just to 'tread water' (hold current market share) with no change in demand for the product. I pointed out that investment can be choked off for subjective reasons (perceptions and misperceptions) regardless of the objective conditions that would or could support that investment. Thus, if the father of the young man who was turned down five times for a prom date told his son that he would pay him $50 for each girl that turned him down for a prom date (after these first five that turned him down), the son now has a way to recoup his losses from investing in a new suit and other items for the prom. The father wisely knows that the demand is out there even though the son does not percieve it yet. Thus, the father (in the government role) assumes the risk (financial risk here, not ego risk).
252. cdm1110 - June 15, 1999 - 7:47 AM PT
" Investment is not always and entirely dependent upon expanding estimates of future demand. ... Demand did not evaporate, maybe it even expanded somewhat. Yet the US steel industry lost confidence in its ability to hold on to market share and just decided to run their old factories into the ground instead of updating them."
In other words, the US steel industry forecast declining demand for their output, and so decided not to invest. Thus this example is completely contrary to the point you wanted to illustrate -- that firms may want to invest even when they do not forecast higher demand.
In your view of the world, firms (read, owners, managers, capitalists, whatever) seem to be pretty bad at doing what it is that firms do -- that is seeing profit opportunities and acting upon them. Thus, your firms irrationally fail to invest even though investmentment would be profitable, and you want the government to subsidize them by absorbing the risk. Your firms are, however, talented at "crushing the wage rate". My view is that firms are probably better than the government at exploiting profit opportunities, but can only have a very limited effect on the equilibrium in the labor market.
253. cdm1110 - June 15, 1999 - 7:48 AM PT
" Investment is not always and entirely dependent upon expanding estimates of future demand. ... Demand did not evaporate, maybe it even expanded somewhat. Yet the US steel industry lost confidence in its ability to hold on to market share and just decided to run their old factories into the ground instead of updating them."
In other words, the US steel industry forecast declining demand for their output, and so decided not to invest. Thus this example is completely contrary to the point you wanted to illustrate -- that firms may want to invest even when they do not forecast higher demand.
In your view of the world, firms (read, owners, managers, capitalists, whatever) seem to be pretty bad at doing what it is that firms do -- that is seeing profit opportunities and acting upon them. Thus, your firms irrationally fail to invest even though investmentment would be profitable, and you want the government to subsidize them by absorbing the risk. Your firms are, however, talented at "crushing the wage rate". My view is that firms are probably better than the government at exploiting profit opportunities, but can only have a very limited effect on the equilibrium in the labor market.
254. gwindau - June 15, 1999 - 9:55 AM PT
cdm1110
It really is not as complicated as you make it out to be. If the perceived return is not worth the perceived investment, then the capital flows somewhere else, dependent upon the disposition of the investor and the places that are available for capital to flow to. With respect to having a talent for 'crushing the general wage rate', this is indeed a 'national effort' that existing businesses either happily or reluctantly comply with. At different times, in different circumstances certain strategies are seen as workable and profitable. For example, in the past decades we have seen jobs and capital flow out of the USA to low-wage developing nations. If this cuts labor costs and increases the profit rate (which it does), why did US capitalists do this in the 1980's and 1990's instead of doing the same thing in the 1950's and 1960's? Even Ross Perot warned about a 'sucking sound' when NAFTA was adopted. So, I am not making this up.
255. gwindau - June 15, 1999 - 10:08 AM PT
cdm1110
In some cases, capitalists may invest even when demand is declining if they see a healthy return on investment. If a certain industry perceives that the 'customer base' for a certain generalized product is going to the more affluent consumer, they may invest to adjust their product line to this new customer base, selling their product at a much higher price, of course. Thus, this industry is orienting its pricing policy toward a smaller customer base with a much larger profit margin. Increasing the demand, in terms of the number of consumers of the product, is not as important as increasing the return on investment by orienting to a more affluent, yet smaller, customer base. This is called a 'top heavy' market. Demand is much less 'price elastic' but much more profitable than trying to relate to all socioeconomic classes with a low price, a low profit margin, hoping for exploding volume of sales.
256. gwindau - June 15, 1999 - 10:18 AM PT
cdm1110
I am sorry that you object to my "quasi-Marxist" terminology but I don't think you have a real case against me here. If I were to use the term "Trade Cycle" (Marx's term) when refering to the concept that is more often called "The Business Cycle", in general usage, then you may have a basis to chastise me. If Keynesians can use the term "comparative advantage" (David Riccardo's term), why can't I use some of Karl Marx's terms as long as everyone knows what I am talking about, and as long as there is no other term in more general usage? I appologize if I am not making any sense to you, but I assure you that I am trying very hard to communicate (and make sense).
257. colossus - June 15, 1999 - 10:38 AM PT
Doesn't the following sound like a plank from every GOP platform for the last 100 years?
"[The English Statute of Laborers - 1351] denounced not only laborers who demanded higher wages but particularly those who chose 'rather to beg in idleness than earn their bread in labor'. Idleness of the worker was a crime against society, for the medieval system rested on his obligation to work. The Statue of Laborers was not simply a reactionnary dream but an effort to maintain the system. It provided that every able-bodied person under 60 with no means of subsistence must work for whoever required him, that no alms could be given to able-bodied beggars, that a vagrant serf could be forced to work for anyone who claimed him" B. Tuchman "A Distant Mirror"
Echoes of Welfare Reform?
258. cdm1110 - June 15, 1999 - 1:45 PM PT
gwindau
"For example, in the past decades we have seen jobs and capital flow out of the USA to low-wage developing nations. If this cuts labor costs and increases the profit rate (which it does), why did US capitalists do this in the 1980's and 1990's instead of doing the same thing in the 1950's and 1960's? Even Ross Perot warned about a sucking sound' when NAFTA was adopted. So, I am not making this up."
Huh? You're certainly making some things up. In the past decades the US has consistently been running current account deficits and capital account surpluses. That is, there have been substantial net capital *inflows* to the US.
259. gwindau - June 15, 1999 - 5:41 PM PT
cdm1110
It is hard for me to believe that I am responsible for some confusion on this point about the export of US jobs to the 'maquilladora' zones as they are called in Mexico. I do not dispute that the US is a net importer of foriegn investment capital. But to cite this as a denial of jobs and industries being exported to low-wage nations, is a bit specious. Don't you think? If I said that the sky was blue and the world was round, would you argue with me? How many economic pundits have declared that the US is now a 'service' economy or an 'information' economy? In other words these pundits put a positive spin on the export of manufacturing jobs and the import of sub-manufactures back to the USA. Why don't you tell me your version what the 'maquilladora' zones are? I can't wait to hear about it.
260. thoughtful - June 15, 1999 - 5:42 PM PT
gwin, "But the goal of slashing real wages is to pump up the profit rate so unless real wages fall faster than producer costs and producer prices then what is the point? "
Here's another fundamental problem with your view of the economy. Businesses don't arbitrarily choose to set a wage at a certain level -- be it real or nominal. They don't wake up one morning and say, "Hey, if I halve my worker's wages, I can make more money." and then try to implement that. If they did, they'd be out of business as there'd be no workers. Wages relate to a worker's value which is determined by the productivity and scarcity of said worker as well as the demand for said worker. These are not edicts handed down by a cabal of CEOs -- rather they are determined by the "invisible hand" of the market a la Adam Smith.
261. AuNaturel - June 15, 1999 - 5:56 PM PT
"The father wisely knows that the demand is out there even though the son does not percieve it yet."
What a howler!!!!!
The son, being smarter than the father, will then proceed to ask as many girls as he possibly can whom he is sure will say no, earning $50 bux a pop. In the end may or may not quetly line up one girl he is sure will say yesget his money and still go to the Prom. He maximizes his profits by maximizing his failures. LOL!
Daddy is acting exactly like government by making a growth industry out of failure.
262. thoughtful - June 15, 1999 - 5:56 PM PT
gwin, industrial production has been and continues to rise in this country. The reason why mfg.jobs as a share of total jobs continues to fall is due to the strong productivity improvement in mfg. This is part of a long trend in the economy, just as the number of ag jobs as a % of total has fallen over the last two centuries.
This great sucking sound is a canard -- if it wasn't then how is it possible that the US has the lowest unemployment rate in 30 years and something like a third of all metro areas in the US have unemployment rates of 3% or less?
263. thoughtful - June 15, 1999 - 5:59 PM PT
gwin, I think I can sum up our disagreement in two simple words: theory & facts.
264. AuNaturel - June 15, 1999 - 6:08 PM PT
"Doesn't the following sound like a plank from every GOP platform for the last 100 years?"
No, the GOP gives the vagrant the option of becoming self employed, appealing to private charity, or simply staying unemployed without assistance. The English Statute of Laborers offers none of these options and turns unemployed people into slaves.
265. AuNaturel - June 15, 1999 - 6:09 PM PT
Besides, in most cases a recently unemployed person receives assistance by privately funded unemployment.
266. Slackjaw - June 15, 1999 - 7:18 PM PT
cdm1110 Message #250
Well thanks.
Caltech, not UCLA.
267. gwindau - June 15, 1999 - 8:26 PM PT
thoughtful re: #260
Even Keynes discussed the "stickyness" of wages, in other words, their tendency not to fall merely by the processes of supply and demand for labor. Furthermore, in the modern world, we have (or at least we used to have) labor unions. There is an entire sector of Economics that deals with Labor Union Economics. Thank you for this post, however, it helps me understand your thinking. I do strongly disagree with it, as you may well guess.
268. gwindau - June 15, 1999 - 8:32 PM PT
AuNaturel re #261
Thanks for appreciating my humor. It is gratifying to know that I still have it, so to speak. This joke, however, is not on me. It is on the Japanese government which is now carrying out a policy for small and mid-sized businesses which is quite similar to the one in my joke.You can bet this policy won't last long and the small and mid-size businesses in Japan will go bankrupt on a scale that will rival the same phenomenon during the Reagan years. Whether you know it or not, you may be qualifed to join "The Rational Expectationist" school of economic thinking. Rock-On!
269. Slackjaw - June 15, 1999 - 8:39 PM PT
no, one can't join that school without understanding opportunity cost.
270. gwindau - June 15, 1999 - 8:46 PM PT
thoughtful re: #262
Do you think extending the average work week (forced overtime), two-tier wage rates, wage concessions, part-time workers (no benefits) and declining benefit packages have anything to do with the increases in 'productivity' in manufacturing?? I mean after all, unless you can find a way to make the workers pay the employer for the privelege of having a job and find a way to make workers toil for 8 days a week then there are limits to this great American productivity miracle. I think Alan Greenspan hited at this last week, and rightly so. Do you think that you can make a robot work faster, longer and for less producer cost by threatening the machine with being fired? Now I am laughing. You people are too easy.
271. cdm1110 - June 16, 1999 - 5:11 AM PT
gwindau
Sorry, but I'm with thoughtful here. Your facts are suspect (euphemism for often wrong) and you still have failed to show that there is a coherent theoretical model underlying everything you say. You cling quite happily to the belief that you are right even in the face of serious, careful and thoughtful critiques of your statements. As I said before, doesn't the fact that you're being greeted with such scepticism make you consider, just a little bit, that maybe you're wrong about a lot of this stuff?
In #258, you claim I objected to your terminology. Read what I said again. I objected to your *analysis*.
Your message #259 is extraordinary. You made a blanket statement about capital flows that was completely, 100% wrong. I point this out to you. You respond by saying, "If I said the sky was blue and the world was round, would you argue with me?". The problem is that you said that the world was flat. Now you say, 'well maybe you're right and the world is round -- but you can still fall off the edge...' You had the facts wrong, but that doesn't stop you for a second, or make you rethink any of your positions. Why not?
As for the "export of jobs" and the giant sucking sound, thoughtful pointed out quite correctly that this is a very bizarre argument to make in the context of the current performance of the US labor market.
272. cdm1110 - June 16, 1999 - 5:32 AM PT
Slackjaw inferred earlier that your education in economics is haphazard, and you confirmed that. There's nothing wrong with that as such -- this is not a discussion among experts, by any means. But -- with respect -- I think you need to acknowledge that there are gaps in your understanding of the theories that you are trying to criticize. As it is, you throw around catchphrases and jargon that doesn't quite make sense; you play fast and loose with the facts; and you don't let logic or coherent analysis get in the way of your beliefs about the world. It makes for a frustrating conversation.
What do you mean by the "Rational Expectationist school of economic thinking", by the way?
273. cdm1110 - June 16, 1999 - 5:34 AM PT
Slackjaw
Caltech. Well yes, obviously, now you mention it...
274. thoughtful - June 16, 1999 - 7:54 AM PT
gwin, I'm glad you are able to laugh. Me my head is starting to hurt from hitting it against a steel trap.
Wages are sticky. Yeah, so what?
Forced overtime? What, at gun point? I don't think so. This makes no sense at all.... work overtime or I'll fire you? This makes less than no sense. The reason why employers need employees to work overtime -- at a 50% increase over their regular pay mind you for hourly workers -- is due to a *scarcity* of workers.
Sure there are some industries that have encouraged wage concessions, two-tiered pricing, etc. Like those formerly regulated (read quasi-monopoly) industries which, in the face of increased competition due to deregulation, must lower costs to stay in business. But that does not negate the fact that in the aggregate in the US, real incomes are rising, real compensation is rising, and unemployment rates even among the most difficult to employ is falling.
275. thoughtful - June 16, 1999 - 8:20 AM PT
Also, those wage concessions are made to reflect the fact that productivity for those workers have declined -- maybe the pilots are still flying the same flights, but due to deregulation, the profitability of those flights were reduced. (This argument, of course, must be set in the proper time frame. The industry is changing again as some large airlines gain monopoly power through the use of hubs and spokes -- thus the anti-trust suit.)
276. elliot803 - June 16, 1999 - 10:04 AM PT
"But that does not negate the fact that in the aggregate in the US, real incomes are rising, real compensation is rising, and unemployment rates even among the most difficult to employ is falling."
Is it true that in the U.S. real compensation (wages and benefits) per hour worked is rising? For all income groups? I'm not saying this isn't true, but I don't recall reading that it is. I have read that amoung low-income workers real wages have been stagnant for most of the past twenty years and that if they are now rising, this is only a recent phenomenon. I've also read that workers generally are working longer hours than they were in the 70s and 80s.
277. Raskolnikov - June 16, 1999 - 1:24 PM PT
elliot: I know that wages have been rising quite nicely. I haven't seen total compensation figures, but health care expenses, the biggest chunk of non-wage compensation haven't been rising fast enough to eat up nearly all of the wage gains.
I also haven't seen recent comparative wage data for different income groups. A few years ago, your description was right - lower income wages were stagnant. But I have seen individual pieces of information that imply that this has been turning around the last couple of years. I recently saw that wages for black workers, for instance, were making very substantial increases. I recommend looking through the Bureau of Labor Statistics web site, and you might find some recent hard data.
278. elliot803 - June 16, 1999 - 6:06 PM PT
Rask:
Your link doesn't work, but I might look for the BLS site anyway. And what I'm really asking about is "total compensation per hour worked," or somesuch, rather than simply "wages," which may not accurately reflect that quantity.
279. gwindau - June 16, 1999 - 9:06 PM PT
thoughtful
My point (and Keynes' point) about wages and their "stickyness" is a critique of the 'supply and demand for labor' as a determinant of the general wage level. Labor is not a commodity like ice cream. If the price of ice cream went lower, I might buy a second ice cream cone and enjoy it (wow, I would even enjoy a third ice cream cone). Yet with Labor, capitalists do not "enjoy" hiring extra workers when their wages go down. There is no marginal enjoyment of extra workers when wages fall. Labor has one function . . . a factor of production of commodities that consumers use and enjoy and the capitalist makes profit from the sale thereof. How many extra workers would a capitalist hire if the wage rate was zero? How many extra workers would a capitalist hire if the wage rate was negative? Are we getting somewhere or are you still 'frustrated?'
280. gwindau - June 16, 1999 - 9:14 PM PT
cdm1110 re: #271
Why don't you refresh my memory. What "facts" are wrong that I cited? Tell me again about why my analysis is wrong. A brief outline will do. If you can teach me something that I don't know, or help me to correct an error I made, I would be most grateful. Or, if you want me to leave this thread, just get the villagers together, get some torches and come on down to my castle and burn me out. That is how I see you. You have made it plain exactly how you see me. I must say that I am still laughing. I can't imagine why I am such a threat to you or your ideas about Economics.
281. gwindau - June 17, 1999 - 4:30 AM PT
thoughtful re: #275
It is interesting to see the 'dual logic' of my opponents here. Somehow I can be labled a "flat earth" economic thinker when I talk about productivity gains being linked to increasing the work week and slashing workers' paychecks and benefits. Now, here comes you, telling everyone that dips in productivity in the airline industry are justifiably compensated for, by forcing 'wage concessions' down the throats of the workers. If productivity falls, cut paychecks. That's your thesis. However when I say that recent productivity gains can be attributed to wage concessions and longer hours, why do you and your co-thinkers try to label me as unqualified to speak on economic topics? I must say, you are not giving a good account of your economic reasoning in this forum. (Notice that I have not even asked where you went to school so as to tar the 'thinker' instead of dealing with the 'thought'.)
282. gwindau - June 17, 1999 - 4:50 AM PT
cdm1110 In #272 You wrote: "Slackjaw inferred earlier that your education in economics is haphazard, and you confirmed that."
cdm1110 and thoughtful:
I don't think people are going to judge my self-education as "haphazard". I am running rings around you and your co-thinkers. You have retreated on your objections to my formulations on inflation/deflation. You objected to my assertion that inflation and deflation in producer costs and consumer costs does not move in uniformity throughout an economy, THEN you admited that the PPI and CPI can move in different directions. If we are to assume that you have a "non-haphazard" education in economics, then why aren't you winning? We have "lurkers" coming forward supporting my contention that the average wage week has been extended (in USA) confirming my thesis on the real source of productivity in this economy. With all due respect, if you have an 'ivy-league' education, use it! . . . and show these people that your time and money was well spent.
283. wexxford1 - June 17, 1999 - 5:42 AM PT
Systems integration makes all of your discussion about " The future of capitalism " just chatter . First big successful system-- Aircraft and Airlines. Boeing,Collins, Honeywell, Allied,United Technologies are linked in a massive systems chain. Productivity through technology is endless : EG--Boeing's 777 cuts transatlantic and long range costs by huge amounts--2 engines instead of 3 etc. No Antitrust means no rules . Antitrust went out twenty years ago.Union barginaing power disappeared at exactly the same point.( One the run up to the destruction of unions, one national union boss, Yablonski of the Coal Miners ,was shot in his bed in his home . That got every union boss's attention.) With union voices silenced,the North American distribution system was scratched and j-i-t took its place .Systems integration cuts costs year-after-year. Example : All the big national retailers were bankrupted . In came Walmart to show how unit costs can be cut majestically . Specialty chains for the masses replaced dept. store chains. Food canners set up factories in Asia--that cut costs dramatically. Best of all, monopolies are financed and encouraged to make systems integration a round-the-clock reality.
Check out Anheuser-Busch's beer monopoly--from barley growing in the red river valley to huge breweries dominating North America. This ain't capitalism as we knew it .
284. wexxford1 - June 17, 1999 - 5:52 AM PT
gwindau,me lad . When you talk about labor's stickiness etc,remember the Henry Ford-Walter Reuther explanation . " Hey, Walter," said Henry as they walked through a Detroit plant, " your fellas are standing around doin' nothin'." " Henry, " said Walter, " those fellas are buying your fucking cars. ". Got the picture now ? We sure love to see Amurrican companies hire Chinese labor at $ 1 a day--no benefits. That'll make out garment manufacturers plenty rich and spread the American way of life. But it ain't capitalism. Its imperialism .
By the way,gwindau. Explain why the cost of Hollywood movies keeps increasing, while we are supposedly in a non-inflataionary economy.( See Jack Venti's speeches for numbers ). Why ? Because the quid-pro-quo for a monopoly is to throw money around at the unskilled . For proof: see 5 minute credit crawls on every movie . Finally, who's counting ? There are only " soft" numbers now, not hard ones.
285. cdm1110 - June 17, 1999 - 6:28 AM PT
gwindau
Oh dear, oh dear, oh dear.
First, this is not, and has never been, in my view, about "winning" or losing.
Second, I'm not going to pretend I know how others in this Fray feel about all the arguments that you and I have presented. But for the record, you might note that, apart from thoughtful and myself, Rask, FTC, Slackjaw and Au Naturel have all expressed scepticism about your attempts at economic reasoning. (Take another look at, among others, messages 187, 194, 205, 229, 231, and 261.)
As for deflation/inflation, I'm not sure if the problem is that you don't read what other people write, or just that you're incapable of understanding it. What actually happened is that we first established that you didn't know what deflation and inflation actually mean (see my message 212, and thoughtful's 246, for example). We then established (I think) that you actually wanted to talk about changing relative prices, and in particular (I think) changing real wages. (I asked you which relative prices you wanted to talk about in message 249, but you didn't answer me.) You continue to betray a nmisunderstanding of basic economics by your apparent belief that we cannot or should not analyze variables in real terms just because the PPI and CPI don't always move together.
As for factual errors, I and others have pointed out several. Again, do you bother to read what we write? More to the point, do you bother to think about what we write? Maybe if you did, there wouldn't be any need to refresh your memory.
286. cdm1110 - June 17, 1999 - 6:42 AM PT
Finally, you have still conspicuously failed to describe the economic model that you are using, despite my repeatedly challenging you to do so. (An incoherent description of a single market, which is the most you have so far given us, does not constitute a macro model, BTW.) If you're willing to do that, then maybe there's still some hope of a serious discussion here. But I doubt it.
Maybe you should try having this discussion with wexx instead? I think you two might understand one another better.
287. jayackroyd - June 17, 1999 - 7:22 AM PT
Message #282
Here's one lurker who finds your postings incomprehensible.
Take, for example, this notion you have of forced concessions from laborers. There's no economics there. Anecdotally, it seems to me that people work harder than in the recent past, and that their level of productivity is tracked more closely. So what? They can quit, form their own businesses or go work for someone who doesn't track their activity so closely. I know some people who have invested a decade or two in a career and are unhappy with their current level of compensation, but can't do better by leaving. That's not force.
When you've got this wacked "us vs them" mentality, which you display when you talk about "winning" an argument and "running rings around" people, you're missing out on the fundamentals of positive economics. It doesn't speak to the politics you keep injecting into the discussion. Normatively speaking, politics matters, but even there, nobody presumes--in economics--that one actor is cramming anything down the throat of any other actor. This is a good presumption. It removes much of the emotion from policy discussions. The emotional content of your postings should be something of a warning bell that you're not being as analytical as you think you are.
288. MsIvoryTower - June 17, 1999 - 7:38 AM PT
"Yet with Labor, capitalists do not "enjoy" hiring extra workers when their wages go down. There is no marginal enjoyment of extra workers when wages fall."
This is silly. Of course they do. Producers are always assessing the relative costs of inputs. That these trade-offs don't happen instananeously is simply because of real time lags and information, but over time, relative costs of inputs are accurately evaluated and purchases of those inputs predicated on them. Neo-Keynesianism, you know.
I'll second Jay's comment: this is another lurker who has found your posts misguided applications of basic economics.
289. thoughtful - June 17, 1999 - 8:07 AM PT
gwin, I'll end here where I began in this discussion with you: you know not whereof you speak. I have pointed out factual errors to you many times over the last posts and you have never answered one.
Here is another:
"We have "lurkers" coming forward supporting my contention that the average wage week has been extended (in USA) confirming my thesis on the real source of productivity in this economy."
Productivity is defined as output *per hour*. An increase in hours *only* does not constitute and increase in productivity. Productivity increases come only when the output produced in an hour of labor increases.
290. thoughtful - June 17, 1999 - 8:21 AM PT
elliot,
FYI, yes I believe real family income has been stagnant for awhile, with the growth going to the upper classes being offset by declines in the lower income classes. However, I think they have started to rise more recently even in the lower income groups. I don't have the data handy by income group, but I remember the Clinton administration taking credit for the success maybe 6 months back.
Here's the data in aggregate. For nonfarm business workers, from 1989-98, real compensation (wages + benefits) grew 0.6% per year. In 1997 the growth was 1.1% and 1998, 2.6%. For manufacturing workers, 1989-98 also grew 0.6% per year, but in 97 it was 1.8% and in 98 it was 2.9%.
291. thoughtful - June 17, 1999 - 8:24 AM PT
gwin, I am not trying to "justify" anything. I am trying to demonstrate the strong relationship between productivity and wages. The fact remains that you can't stay in business very long hiring workers at $10/hour to produce goods that are valued at only $5/hour. That is the economic reality. Sheesh! Is that so hard to grasp?
I'm done.
I'm going to wipe myself now.
292. gwindau - June 17, 1999 - 9:29 AM PT
cdm1110 re: #286
When we were discussing Japan I specifical built upon Prof. Krugman's Investment and Savings vs real interest rates (where he describes the 'liquidity trap' and the savings over investment gap). You complained that my model was too complicated. I explained my underlying equations (Prof. Kalecki's equations) and tried to translate those to a modification of the 'I' and 'S' vs 'r' model.
293. gwindau - June 17, 1999 - 9:36 AM PT
MsIvoryTower re: #288
We have a good model for wage rate = 0 (or very close to zero), in the slave labor policies of the corporations in Nazi Germany. Did these corporations take all the 'slaves' they could fit into their factories or did they only absorb that number of slave laborers that produced a favorable impact on production output? There is no 'marginal enjoyment' of labor at any low or zero wage rate unless it produces incremental increase in either output or profit.
294. gwindau - June 17, 1999 - 9:41 AM PT
wexxford1 re: #284
Thank you for putting your two cents in. I liked your post. Now let us assume that the wage level is determined by the supply and demand for labor. Then along comes this guy named Henry Ford, who creates the assembly line, and out of clear blue sky (is it really blue, hmmm, shall we argue over this point) Mr. Ford DOUBLES the wages of all his workers. Has the supply of labor decreased here? Has the demand for labor increased here? Nope, supply and demand did not change but wages went way up. Was Ford a foolish capitalist or was he a visionary? At any rate we can see he totally trampled over the 'supply and demand for labor' as a model of wage determination.
295. jayackroyd - June 17, 1999 - 9:44 AM PT
MsIT says this: "Producers are always assessing the relative costs of inputs. "
Gwin says this: "Did these corporations take all the 'slaves' they could fit into their factories or did they only absorb that number of slave laborers that produced a favorable impact on production output?"
This is either a non-sequitor or agreement. BTW, "enjoy" is not an economics term, except maybe in the famous article about Activity X.
296. jayackroyd - June 17, 1999 - 9:54 AM PT
Message #294
{Danger Will Robinson!! Event Horizon Ahead. Danger Will Robinson!!}
Ford can double wages anytime he wants, without violating laws of supply and demand. He can choose, anytime he wants, for any reason he wants, to change his wage offer to his workers. In a capitalist economy there are lots of different ways people compensate workers in what they see as their long term interest. Microsoft pays relatively low wages and gives stock options. Lincoln Electric profit shares and guarantees employment. Stock brokerages pay a large chunk of compensation in bonuses, and pay above market wages to IS talent, in order to attract the best ones.
The conglomeration of all these different firm strategies determines the market wage. "Market wage" is, of course, shorthand for "the range of wages for a particular task that an employer will offer a potential employee and that the employee will accept." In your example, we'd expect Ford to have his pick of assembly line workers, and end up with the most reliable. Would he stay in business with this strategy? Don't know unless you try it. But your example doesn't show that anyone has "totally trampled over the 'supply and demand for labor' as a model of wage determination."
297. gwindau - June 17, 1999 - 9:57 AM PT
thoughtful In #289 you wrote: "Productivity is defined as output *per hour*. An increase in hours *only* does not constitute and increase in productivity. Productivity increases come only when the output produced in an hour of labor increases."
I am so glad you brought this up. In the USA, productivity is not measured in physical output per hour, but is assigned a dollar value.In otherwords, we are not measuring widgets per hour but dollars per hour. If the extended work week (or work day) has no effect on productivity, as you claim, I bet the UAW will want you at their bargaining sessions to give testimony. See if you can convince Ford Motor, GM or DaimlerChrysler AG that "forced overtime" is not a productivity issue. If there is no logic to an extended work week, then it must make sense to shorten the work week and hire more workers. I am afraid that you are under the illusion that productivity always relates to labor-saving technology and is never related to job overload and speed ups. Not so.
298. gwindau - June 17, 1999 - 10:01 AM PT
jayackroyd re: #296
Yes, Ford wanted good workers, happy workers and loyal workers and was willing and able to pay for such a human asset. Now, about that 'minimum wage' stuff, does this violate the 'supply and demand for labor' model for wage rate determination. Do labor unions bring this into question as well? Talk amongst yourselves, I already know the answer.
299. jayackroyd - June 17, 1999 - 10:03 AM PT
The reason companies prefer overtime, and are willing to pay a premium for overtime is not because they enjoy enslaving workers. Acquiring and firing workers is expensive. It's cheaper to just pay them more for a short period of time (and not pay benefits to new hires).
The dollar value thing does raise an interesting and controversial issue. The relationships between time, dollars and commodities is tricky. Workers today spend less labor time, on average to buy, say, a television, than they did 20 years ago. A lot less time, actually.
Fewer real dollars, but even fewer labor hours. Same with food. People in the bottom quintile today live better than they did in the seventies, even though real wage growth is close to flat.
300. jayackroyd - June 17, 1999 - 10:05 AM PT
Message #298
So we agree? There's no violation of supply and demand in your example, right?
Collective bargaining is part of the conglomeration of effects that set the market wage, as are government enforced minimum wages.