07
Jun
2010
Who’s Afraid of Sticky Wages?
I am at the Rothbard Graduate Seminar, and I’m also wrapping up the manuscript for the book with Carlos Lara, so blogging will be light this week. In the meantime, I refuse to back down in my dispute with Greg Mankiw today at Mises.org:
The argument of sticky wages does not justify the existence of a central bank. Market prices, including wages, are flexible enough to smooth out macroeconomic disturbances. To the extent that workers hold out for a better job, rather than take a pay cut, this too reflects a legitimate outcome on a free market. Only in a simplistic macro model, with ad hoc assumptions about wages and prices, can the central bank improve the economy.
I think the this part of Mankiw’s quote basically summarizes much of what is wrong today with mainstream economists:
“If you deny that prices are sticky and assume they can instantaneously jump downward to new equilibrium levels, many macroeconomic problems become much easier to solve. Indeed, you don’t need to solve them at all, as the market would do it.”
So basically, economics is about recognizing the problems of markets and providing for solutions to fix them. This is like a physicist thinking his task is to spot all the “natural failures” of the physical world and to provide solutions for them (by some human engineering).
Also, I don’t get this accusation that somehow free market theorists assume “perfect and instantaneously” price adjustments for markets to adjust. This seems to be like the worst straw-man ever. Ironically, isn’t it them must make such assumptions?
And another Irony. You could have made almost the same argument against the ME/FB guys.
But he’s put so much work into coming up with the “Mankiw Rule” – he can’t back down now! I’m going to email Mankiw your article Bob, and let’s see if he will post a reply to it on his blog.
It is really weird that the Friedmanites still latch on to the most destructive aspect of Keynesianism (monetary theory) despite the growing mountain of evidence that disproves it.
Couldn’t it be argued that sticky wages are a self-fulfilling prophecy?
The central bank, worried about wage stickiness, constantly inflates the money supply.
In this costant inflationary environment, workers become conditioned to regular nominal salary increases, so when the deflationary collapse comes, they are less likely to recognize that a reduction in nominal wages doesn’t necessarily amount to a real wage reduction. People are lulled to sleep when it comes to considering the purchasing power of money, because the central bank (most of the time, in the short/medium run) is able to maintain moderate, linear inflation.
Excellent rebuttle of Mankiw! Thanks! Of course, Mankiw set up a straw man in insisting that either prices and wages adjust instantly and without pain or else the state has to intervene. As ADA wrote, they have a twisted view of economics and what the central bank is supposed to do. The job of the Fed is not to take away all of the pain in life. We learn from pain and if we learn we will try to avoid mistakes. Mankiw seems to think that the Fed’s role is to make sure that no one learns from past mistakes.
But the worst about Mankiw is that he is a totally short term thinker, as are most Keynesians, inlcuding Sumner. Short-term thinking is the plague of economics that Keynes made respectable. As Mises often pointed out, the common man is always focused on the short run; the economist’s job is to force him to glance at the long run once in a while. Mankiw and Sumner absolutely refuse under any circumstances to even nod at the long term.
Finally, have Mankiw and Sumner completely forgotten everything that Milton Friedman wrote? One of his main themes was that the lags from policy to effect are long and variable. The data make that abundantly clear. Yet Mankiw and Sumner act as if the lag is in days, not years. Monetary pumping will eventually bring wages down, but only after prices rise and the statistical lag between interest rate changes and cpi increase is 4.5 years on average. Yet Mankiw acts like changes in interest rates by the Fed will drop wages instantaneously. Did he get his degree from a cereal box?
Bob,
Your argument against Mankiw, as I understand it, is that 1) wages are only sticky because of various forms of government interference (e.g. unemployment benefits), and 2) even if wages are sticky by nature, increasing the money supply to offset a rise in cash holdings won’t maintain the relative prices of different items.
The first argument I view as insufficient, as we do, in fact, have unemployment insurance, etc., and aren’t going to get rid of them any time soon, so your conclusion ultimately stands or falls on your second argument. As to that, I guess I’m not seeing why maintaining the relative prices that would exist absent an increase in the money supply is so desirable as to outweigh the cost of having millions more unemployed people for years on end (I would note that when people typically decry increases in the money supply, the focus is not on maintaining relative prices but on the specter of inflation, i.e. the price level in general).
I also have a question about the Hoover wages story. The general libertarian line is that trying to affect prices simply through moral suasion are ineffective. When President Ford tried to stop inflation by getting people to wear WIN buttons he wasn’t solving the problem, but he wasn’t making it worse either. It was just a meaningless gesture. Why wouldn’t the result of Hoover’s jawboning of businessmen be the same as Ford’s WIN campaign?
Blacadder,
it is very convenient for you to simply assert the following as if it were self evident in order to make your point:
” I guess I’m not seeing why maintaining the relative prices that would exist absent an increase in the money supply is so desirable as to outweigh the cost of having millions more unemployed people for years on end ”
Who could possibly object to avoiding the “cost of having millions more unemployed people for years on end”?
except for those principled free marketeers who would rather see unemployment rather then concede market failure)
1. Any and all acts of central bank money dilution merely effectuate a forced transfer of purchasing power from those holding the existing money to those receiving the new money. It is always a process of theft and fraud. Mankiw and central bank supporters of all stripes ignore this truth.
2. This new money artificially bids up prices making economic calculation difficult or impossible.
3. The boom and bust business cycle is merely the worst aspect of this distortion of the price, investment and capital structure.
4. Eventually, reality will assert itself. The bust begins. Re-pricing MUST occur so that people know what everything is actually worth, value being totally subjective and revealed only through free market prices.
5. Additional money dilution after the bust begins just starts the cancer growing again and interferes with the essential re-pricing.
6. The idea of the alleged “cost of having millions more unemployed people for years on end” as the result of sound money is ludicrous. Without the funny money, there would have been no business cycle and no reason to “un-stick” prices that would have never been artificially bid up in the first place. Further, there is no logical, evidentiary or historical basis for the proposition that money dilution cures unemployment. The best it can do is to trick over-priced union types into accepting lower wages temporarily, but at the cost of future business cycle catastrophes and the theft of purchasing power from everyone, especially the unsophisticated. And while it must shock Keynes himself, unions now seem to know something about C.O.L.A.
“Any and all acts of central bank money dilution merely effectuate a forced transfer of purchasing power from those holding the existing money to those receiving the new money. It is always a process of theft and fraud.”
Whenever someone opens a business providing a good or service in competition with existing businesses this dilutes the value of the existing businesses goods and services. That doesn’t mean that starting a business is always a process of theft and fraud.
There’s a difference between starting up a competing valet parking business as opposed to making counterfeit claim tickets and using them to drive off with someone else’s car.
The entire stated purpose of the Keynesian Hoax is to give people who are too poor to buy stuff claims on goods and services to which they would not otherwise be entitled to buy.
Being the victim of a competing business may result in a loss of wealth. The same goes for being the victim of a thief. However, they are not the same thing. To the extent Keynesians don’t care about the essentially immorality of the theft and fraud at the core of their policies just further demonstrates their general lack of character.
But don’t legal tender laws make your comparison inapt? WOuldn’t a closer comparison need some sort of legislation affecting that business?
The new business is an adjustment of economic resources. They have got to pull the land, labor, and capital from elsewhere without resorting to fraud. A central bank printing money is outright fraud, and the seignorage effect (Bob Roddis point #1) makes it theft.
“Being the victim of a competing business may result in a loss of wealth. The same goes for being the victim of a thief. However, they are not the same thing.”
True enough. But the only reason you’ve given for a Central bank printing money being theft also applies to competition. So if loss of wealth isn’t sufficient for theft, then you haven’t given any reason for thinking that Central banks are thieves.
My daughter came home from college with 90 cent in her bank account. I thought we should start a bank making jumbo $10 million loans at 8% by creating the money for loans out of thin air. That process would consist of lending out funny money but getting paid back in real money plus interest. That’s basically what central banking with a fractional reserve system consists of. It’s fraud and theft (see Mr. Hewitt’s excellent point above) and it’s all consumated without the slightest hint of legal or constitutional due procees.
And let’s not forget that the ONLY reason this painful re-pricing and correction is even necessary is due to prior central bank money dilution. IT’S ALL THE KEYNESIANS FAULT.
At this point, we should address the Austrian Business Cycle Theory which proves that money dilution is the cause of the boom/bust cycle. One important aspect of that theory is the importance of capital theory (see Bob Murphy here). Then we can move on to “Austrian Macroeconomics: A Diagrammatical Exposition” by Roger W. Garrison.
Suppose (for sake of argument only) that money dilution is not theft and fraud. Then refute the ABCT standing alone.
“Suppose (for sake of argument only) that money dilution is not theft and fraud. Then refute the ABCT standing alone.”
I’ve noticed that when you criticize an Austrian’s moral arguments against fiat money or fractional reserve banking they often will just switch to making economic arguments against it, and visa versa. I’m happy to discuss ABCT, but I think we should dispose of the strictly moral question first.
“My daughter came home from college with 90 cent in her bank account. I thought we should start a bank making jumbo $10 million loans at 8% by creating the money for loans out of thin air. That process would consist of lending out funny money but getting paid back in real money plus interest.”
It sounds like you’ve been reading a draft of Prof. Murphy’s new infinite banking book. Seriously, though, perhaps I’m not understanding your example, but I fail to see how it would involve fraud or theft. Say I start a business lending out monopoly money in exchange for people to agree to pay me back in dollars plus interest. The business would probably fail, since most people aren’t going to be willing to trade dollars for monopoly money (although I can think of places like Second Life or Disney Land where something like this does happen). But I fail to see anything immoral about the enterprise.
Mr. Hewitt’s comment is likewise unenlightening. He just asserts that central banks printing money is fraud, without giving any reason for thinking why, and repeats your money dilution argument, which I’ve already shown to be faulty.
Btw, I would point out that in the Sushi example from the Bob Murphy article you cite there is no central bank or fractional reserve banking. What causes the boom/bust in the example is not money dilution, but false beliefs about how much a new technology is going to boost economic performance (something which can happen with or without government).
In the sushi economy, Krugman commits fraud by falsely convincing the islanders that they can consume more AND invest more in unsustainable capital projects. There was no money (medium of economic exhange) on the island, as it was a simplified example. Krugman’s directive was sufficient.
In the real world economy, the central bank commits fraud by falsely convincing the people that they can consume more AND invest more in unsustainable capital projects. The fraud is achieved by printing more green paper tickets which happen to be the medium of exhange of consumption goods and capital goods.
I hope this is sufficient to back up my assertion that a central bank printing money is fraud, without resorting to the dilution argument.
“In the sushi economy, Krugman commits fraud by falsely convincing the islanders that they can consume more AND invest more in unsustainable capital projects.”
Krugman’s actions would only be fraud if he knew that his plan wouldn’t work. In the story (as in real life), however, he is a true believer. So he hasn’t committed fraud; he’s just mistaken.
The same would go, mutatis mutandis, for central bankers.
So fraud and crime are only such if those committing them believe they are such. I see.
So a rapist is not a rapist if he insists he is sexually satisfying his “partner”.. Did I get that right?
Fraud requires deceit. Is that really so hard to understand? Do you really want to dispute the distinction between lying and being mistaken?
If the central bankers are merely negligent (doubtful), then they are still tortfeasors and must be enjoined from commtting further acts of “waste” of other’s savings and resources.
If a backhoe driver mistakenly digs up someone’s safe on that other person’s property, he still has to give it back. You still have a guilty act (actus reus).
This doesn’t get you anywhere.
Further, the Keynesians fully INTEND to shift purchasing power to those who have none. That’s the whole point of their policy. They do not lack mens rea either.
“Fraud requires deceit. Is that really so hard to understand?”
You don’t like the use of “fraud”? How about “theft” then? Obviously I’m not deceived by the act, however, I can’t avoid it anyway because the government compels me to accept its money and monopolistic agencies. So now there is no fraud or theft or anything because the government had decreed its legitimacy. Very well. Then if tomorrow the government decrees that rape is legal, there there is no crime there either.
The point is that you cannot simply refute the “fraud” or “theft” charge on account that everything is in the open and has been made legal.
“You don’t like the use of “fraud”? How about “theft” then? Obviously I’m not deceived by the act, however, I can’t avoid it anyway because the government compels me to accept its money and monopolistic agencies.”
There’s no requirement that you have to maintain your assets in dollars, and in fact most people don’t do so (lots of people, for example, keep part of their savings in precious metals, or foreign currencies, etc.)
“If a backhoe driver mistakenly digs up someone’s safe on that other person’s property, he still has to give it back.”
Well, okay. If a central banker digs up a safe on someone’s property, I’m 100% in favor of him giving it back. But that’s not exactly how central banks operate.
Let’s pretend for a moment that we were back on the gold standard and I found a huge gold mine on my property. If I dig up the gold, that will decrease the purchasing power of everyone else’s gold holdings. Indeed, the effects of my digging up the gold would be precisely the same as if we were under a fiat system and the central bank printed up a comparable amount of money. Presumably you don’t think that my digging up the gold is theft or fraud, or that it makes me a tortfeasor who must be enjoined, etc. So what’s the difference?
“Further, the Keynesians fully INTEND to shift purchasing power to those who have none.”
When someone starts a business, he firmly intended to shift purchasing power from his competitors to himself. That doesn’t make his actions immoral.
I think this debate comes down to the initiation of force vs the non-initiation of force. Fiat money regimes depend upon legal tender laws which FORCE people to accept it as payment for real debt. Without such laws, no one in their right mind would use constantly diluted fiat money. The initiation of force is wrong and immoral.
Finding a new source of gold or out-competing someone in the market are acts that do not involve the initiation of force and are neither wrong nor immoral.
However, even if the creation of fiat money wasn’t immoral as theft or otherwise, it doesn’t work and causes the boom/bust cycle etc….
Legal tender laws are kind of like laws against necrophilia. They may be on the books, but they don’t really need to be enforced all that much. If I go into a Starbuck’s and order a coffee I don’t need to hold a gun to the barista ‘s to get her to accept my dollars as payment.
You can see this clearly if you look at countries that have much worse monetary policy than the U.S. In those countries, legal tender laws are as ineffective in getting people to use the local currency in transactions as they are redundant here. In fact, in many developing countries it’s not uncommon for transactions to be conducted using American money, i.e. the stuff you claim is only used because the law requires it. Likewise, people generally hold most of their savings in dollars, not because the law requires them to (it doesn’t), but because they think dollars make a better store of value than other alternatives.
So it’s not clear to me that fiat money does require the initiation of force. On the other hand, I’m pretty sure that prohibiting fractional reserve banking (which according to ABCT would also be necessary to stop the boom/bust cycle) *does* involve the initiation of force. So if the nonaggression axiom is true and ABCT is true, then the world is a pretty hopeless place.
In a competitive free market, the purchasing power in your possession is derived from the value of your previous production.
If some person or organization can create money out of thin air, then the purchasing power in their possession is derived from the value of previous production of everybody else, but they themselves have produced nothing. (except for the cheap paper). The end result is precisely the same as if that organization had physically stolen some previously existing money from somebody or collectively from many people.
Now, if you can’t understand the difference between people bidding with other people’s property and people bidding with their own property, and insist that there is no fundamental difference between the two cases, then what can I say… well, I’d rather not.
Bob Murphy says the Fed is a giant counterfeiter. As opposed to being LIKE a giant counterfeiter.
See:
http://mises.org/daily/4029
Sounds like theft to me.
Gene Callahan critiqued Bob Murphy’s article shortly after it appeared. Here is part of Bob’s response to the critique:
“On the very narrow point, is the Fed (or the US Treasury) a counterfeit operation, no, it’s not, because, as Gene points out quite correctly, you could ask, “OK then, what is a $20 bill a counterfeit of?” I have in print disagreed with Walter Block on this very point (when I critiqued his defense of the “heroic” private counterfeiter), so point Callahan.”
http://gene-callahan.blogspot.com/2010/02/callahan-versus-murphy-throwdown-on.html
Btw, what makes counterfeiting theft and fraud is not that you are printing bills but that you are passing them off as real dollars when they aren’t. I recall a story a while back about an artist who would design his own bills with Clint Eastwood instead of Lincoln or whatever, and try to get stores to accept it as payment. The Secret Service wasn’t happy with the guy, but there was nothing they could do legally because he was always upfront that he’d made the money himself.
30 comments? looks like a lot of ppl are afraid of sticky wages!
Black Adder raises some very fantastic critiques of the standard Austrian distaste for fiat money. I personally am “against fiat money” and I’d like to end the Fed etc, but I still think Adder raises great questions and concerns about the difference between theft and diluting value of money. I think Bob Roddis is correct in his position that the Government “steals” purchasing power from people through inflation, but that it isnt inflation per se that is the immorality; it is the forced fiat money.
We all know that if i walked into a Starbucks (as Adder pointed out) that they would happily and voluntarily accept a dollar bill, and don’t feel “forced to take it,” even though i could have bartered with them etc. But this is only because the Government has forced the dollar to be the national money for several generations; the new generations see the dollar as a fact of life and nothing more. It’s not that the government forces us to pay in dollars; we can easily barter and trade in other forms. what it does force is the payment of taxes with their fiat currency. This is where the aggression lies that Bob Roddis (and I) hate. Through coercion, the government has turned “bad money” (i.e. the constantly diluting dollar) into the most preferred money due to a shift in incentives and costs. Put another way, since we all must pay the government its taxes in its fiat currency, and since the government crowds out the money market, we decide to use the dollar in all our exchanges out of convenience to the state’s eventual demands for taxes. The State puts a cost on using other monies by forcing us to eventually pay them in its currency (or they will imprison, audit us, etc.).
One could rebut, “Ah, but Michael, in a free market different competing currency companies could ‘force you to pay them in their fiat money’ so what is the difference?” The difference is that in a free market for competing currencies, people are likely to be attracted to the currency which provides the most benefits at the lowest cost (like any product), and that is likely to be the one which stores value the best (i.e. the currency that inflates the least).
So I think Adder and Bob R. make great points. Adder has shown that “diluting” the value of something as the government is doing is not necessarily theft. Bob R. has shown that the government does eventually steal your money directly and force you to use a good (the dollar) you may not prefer to use (and we all know that the gov’t uses “new money” to fund projects that would be impossible in a free market.
Y’all have a great day
Michael,
You make a great point. The fact that a country requires taxes to be paid in its own currency makes people more likely to use that currency an advantage over other currencies within the country’s borders. My guess, though, is that what you really object to is the obligation to pay taxes itself, and not the fact that they have to be paid in a certain way. After all, if the state could legitimately demand taxes from it’s citizens, then it would be hard to see why it couldn’t demand a certain kind of payment (just as a private individual could specify that his debts be paid in gold or Euros as opposed to dollars). On the other hand, if taxes are illegitimate then they are illegitimate even if the government demands they be paid in gold, etc.
My guess is that if the U.S. were to allow tax payments in other currencies monetary policy would get tighter, but I still think the dollar would stay the main currency used for exchange and savings. That’s a guess, of course, but the fact that so many people in other countries prefer dollars as a store of value and medium of exchange (even to precious metals), suggests that the dollar has something going for it beyond its strictly legal advantages.
Anyway, you’ve given me something to think about, so thanks.
Thanks for the reply, and you make another great point; the real issue is whether or not the Gov’ts taxes are legit or stealing. If legitimate, then as you said, they can demand the payment be in any form they wish (usually specified in a contract or something), same as a private person or company. Thats the real issue ( i believe its theft but thats another discussion for another time).
I think many pro-gold guys love gold because A) thats what the original money was that dollars were redeemable in, B) the government revoked the right to redeem for gold which seems awfully fishy and back-handed. It was like a phasing out of the preferred money, and a phasing in of a receipt which became the money. now that dollars, a much more reproducible good than gold, are the main currency, the gov’t which many like Roddis and I do not voluntarily support can do things with “new money” which we would object to. Gold is a type of “check” on the expansion of state power.
I agree with you though that gold isn’t necessarily the most preferred money, and if “we went back to the gold standard” i would find the gov’ts taxation just as bad. its my guess that a commodity money would reemerge as the global standard, but if a privately made currency could out compete a commodity then so be it.