In my last post, in which I argued that Open Borders plus NGDP (or even total labor compensation) targeting would lead to disaster, I fired off some quick numbers that (although technically not wrong) made it look as if I were missing the basic logic of Sumner’s framework. Thus, David Beckworth in the comments said:
The point of a NGDP target (or some variant of it) is to stabilize the nominal income (or nominal wage) growth and allow output prices to fluctuate inversely to supply shocks. In your scenario, there would be benign deflation of roughly 10% along side the stable stable nominal wage growth of 5%. Real wages growth of 15% would still emerge.
Your scenario is basically a large positive supply shock. Whether such a shock comes from a surge in labor or a surge in technology, the Fed would keep nominal wage growth stable–which NGDP is a rough approximation–but would be indifferent to the price level. This has ALWAYS been the implication of NGDP targeting. It allows benign deflation to emerge when there are rapid gains to the supply side of the economy.
So no, Caplan’s plan and Scott’s plan do not conflict with each other. They actually complement each other.
Again, my numbers in the last post were not clear, but in the above excerpt David is not seeing the problem. So I’ll be clearer in this version:
Originally the country has 1 million workers who each make $100,000 per year. So total labor compensation in nominal terms is $100 billion.
The central bank targets 5% growth in total nominal labor compensation. So next year, workers are going to be paid $105 billion total in wages/salaries.
Suppose that at the same time, productivity jumps 15%. In other words, the workers are producing 15% more in real goods and services. Is this a problem?
Nope. As David’s comment above said, it just means the prices of goods and services falls 10%. (Give or take, we always round in these exercises even though the math isn’t exactly right with growth rates.) So the typical worker made $100,000 in year 1 with CPI at 100, and in year 2 makes $105,000 with CPI at 90.
But now we’re going to start over, and introduce a different change. We’re back to the original scenario, where there are 1 million workers who each make $100,000 per year. The central bank is still targeting 5% growth in total labor compensation, meaning next year workers will collectively be paid $105 billion.
But in the meantime, the government throws open the borders and lets in another 150,000 workers, who are identical in productivity to the original batch. Assume there are no changes in productivity because of the addition, so that total real output goes up by 15%. Is this a problem?
Yes, it is, if you think “sticky wages” and “sticky debt contracts” are a problem. There is now $105 billion in total labor compensation to be spread among 1,150,000 workers, meaning each worker gets paid $91,304. It’s true that consumer prices will drop, which (if we had perfectly flexible prices) would just compensate, keeping real wages constant. (After all, per capita the workers are producing, and hence consuming, the same amount as before the influx of immigrants.)
But the whole point of NGDP targeting is that we don’t have perfectly flexible wages and debt contracts. The worker who signed a 30-year mortgage is going to be hurt by his nominal paycheck going from $100,000 down to $91,304, even if food prices are lower.
Moreover, if for various reasons nominal wages can’t fall to $91,304, but instead are stuck at $100,000 (or close to it), then the only way to enforce the central bank’s cap on total labor compensation growth is to reduce employment. After the immigrants come in and boost the labor force to 1,150,000, if wages stay fixed at $100,000 and total labor compensation is capped at $105 billion, then only 1,050,000 workers can keep their jobs. Another 100,000 will be involuntarily unemployed. If the immigrants are identical to the original population, then we would expect a bunch of the original workers to be “thrown out of work by the immigrants.”
In this outcome, Steve Sailer would be running victory laps, and poor Bryan Caplan would have to say, “It’s not my fault! Blame Sumner!”
P.S. I’m writing this post pretty late so it’s possible I made an arithmetic mistake. If you guys catch anything I’ll fix it in the morning.