It is clear from the comments of my last post that, as usual, people are not fully appreciating the cogency of my analysis. Before diving in, let me make sure the casual reader understands why I’m spending so much time on this guy Scott Sumner, of whom most may never have heard. It’s not that Scott cheated me in a card game last summer or something like that. No, Scott is arguably the world’s leading advocate of “market monetarism,” which (in the present environment) leads to calls for bolder action by the Fed. Since I think this would be awful policy, I am trying to dismantle the Sumnerian worldview–some days, singlehandedly. It is an awesome responsibility. The fate of the dollar and Western civilization itself hangs in the balance.
Now in my last post, I criticized something Scott had said about Congress raising the minimum wage, and people were jumping up and down on me in the comments. I believe they have no leg to stand on. So let’s go through it more slowly. Here’s the relevant quote from Scott, to refresh our memories:
If [the natural rate of unemployment in the US] did rise to 8.1%, the most likely explanation is that the policies I mentioned above (minimum wage increase, extended UI [unemployment insurance], etc) caused the increase. But monetary stimulus would help on both fronts; reducing the real minimum wage (which never would have been passed had Congress know[n] how little NGDP growth we were going to get) and also causing Congress to reduce the maximum UI benefit more quickly, as they do after every previous recovery from a recession. [Emphasis changed.]
So let’s walk through my problems with this, and along the way I will answer my critics (i.e. Scott’s defenders).
(1) My fundamental problem with Scott’s entire approach is that he diagnoses economic problems in terms of NGDP. I don’t think that’s a helpful way to view the world. OK, we have that disagreement. But, if it’s bad enough that Scott himself walks around, thinking about economic problems in terms of NGDP, then it’s even worse if he starts attributing that perspective to everybody else. It is simply not true to say that Congress wouldn’t have done such-and-such if they known about NGDP growth. And to repeat, it’s not merely a harmless slip; Scott does this kind of thing a lot. To be clear: I don’t mind if Scott had said, “Congress had no idea how bad their move to raise the minimum wage would be, since NGDP was about to collapse.” But that’s not what he said, and he does this thing a lot–saying for example that firms enter into long-term contracts with certain expectations of NGDP growth, which they clearly do not.
(2) What’s even weirder about this whole thing is that Scott once argued that the Fed couldn’t have been responsible for a boom in the 1920s as the Austrians claim, because the monetary aggregates M1 and M2 hadn’t been defined at that point. (You think I’m putting words in his mouth? No, he said that.)
(3) I don’t think that when Congress passes a minimum wage increase, considerations of the economy come into play. I think it is a backroom deal to get votes from labor unions who benefit from making lower-skilled competition more expensive.
(4) Gene Callahan and others in the comments were arguing that all Sumner meant was, Congress wouldn’t have taken this measure had they realized how devastating it would be. Well hang on. An equivalent term for “NGDP” is “nominal income”. So let’s suppose it’s not purely a cynical, political move, and that some concern for economics is involved. You’re telling me that Barney Frank is thinking, “If I thought nominal income in this country would rise like it normally does, then I’d support a law forcing employers to pay poor people more. But, if I thought nominal income growth would stall, then I wouldn’t want to force employers to pay poor people more.” On the contrary, to the extent that they actually worried about the economy and impact on poor people, I think if anything they would do the opposite of what Scott says: They would jack up the minimum wage if they thought the market, left to its own devices, wouldn’t give rising incomes.
During the New Deal, the federal government implemented all sorts of policies that were explicitly designed to raise nominal incomes. Was this because nobody in the government realized the economy was bad in the mid-1930s? They erroneously thought NGDP growth had been brisk? No, I would argue (a) they didn’t care about the economy, these were political moves and/or (b) to the extent they cared, they thought raising incomes was a way to help people in an awful economy.
Question: If Gene (and Scott) are right, there should be examples of Congress cutting the minimum wage in response to a recession, right? Just like Congress might extend unemployment benefits and so on to help the laid-off workers, they should also cut the minimum wage once they see with their own eyes that NGDP growth has been too low. Has that ever happened? (Maybe it has; I’m genuinely asking.)
(5) Some people are trying to defend Scott by saying something like, “Look, Barney Frank knows you can’t raise the minimum wage to $1000/hour. That would be too high in comparison to the general price level. That’s all Scott was getting at.” Well, if that’s what Scott meant, then he’s in trouble. He has spent lots of posts arguing that what most people think of as problems with price inflation is actually due to NGDP. So I might be extremely generous and agree that in some vague sense, Congress agreed to hike the minimum wage because they were just trying to catch up with general price inflation, and maybe they wouldn’t have been so aggressive had they realized CPI growth would slow down for a few years. But, in that case, they would be directly contradicting several posts that Scott has written, saying why this perspective is totally wrong. Remember kids, on certain days of the week Scott bans the use of the word “inflation” on his blog because the very term leads to all sorts of nonsense.