24 Feb 2014

Nick Rowe Confounds New Keynesians Yet Again

Economics 9 Comments

Nick Rowe has another zany post. Nick is not personally taking a stand on the minimum wage debate. However, he argues that for those economists who do think employment effects will be minimal (or even positive) from hiking the minimum wage, the theoretical argument they usually give to explain the result would also mean that if the central bank raised interest rates, then this too would promote employment.

So, if I were to extend Nick’s analysis, this means that we shouldn’t see the same economists (a) supporting low interest rate policies and (b) supporting a hike in the minimum wage. And yet, that doesn’t seem to be what’s happening. It’s almost as if people pick and choose their economic assumptions (monopsony in low-skill labor markets, in this case) depending on their impact on preferred policy moves…

9 Responses to “Nick Rowe Confounds New Keynesians Yet Again”

  1. Transformer says:

    I don’t know much about NK models but I see that in this post Nick says:

    “Wages are perfectly flexible in the NK model, but prices are sticky, with a Calvo Phillips curve for price inflation.” and this is an important assumption to draw his conclusions

    Can you provide any examples of real-life economists who both support the minimum wage and thinks wages are perfectly flexible ?

    Seems like some famous New Keynesians don’t actually believe that wages are flexible:

    • Major_Freedom says:

      Krugman wrote:

      “At no point was this rejection of Keynesianism driven by superior empirical performance; it was all about the principle, about refusing to incorporate anything that wasn’t derived from maximization all the way.”

      “So you can’t say, “Well, OK, maybe people aren’t hyperrational, and wages really are sticky” and then go back to hating on Keynesians. Grant that one point — as you should, because the evidence is overwhelming — and you’ve conceded, whether you know it or not, that much of macroeconomics spent three-plus decades following a blind alley.”

      So apparently Krugman wants us to believe people are irrational fools who can never learn the difference between real and nominal wages, so let’s get….people…..to print and spend more money so as to help…people…overcome the undesirable effects of their irrationality.

      This is Krugman’s worldview in a nutshell:

      People are bad so we need a government made up of people are bad so we need a government made up of people are bad so we need a government made of people are bad…

      • Transformer says:

        But you do agree he rejects the idea of perfectly flexible wages, right, and therefore is not an example of the economists who Bob is aiming this post at ?

        • Richard Moss says:

          Am I missing something here?

          As I read it Rowe’s “Anti-NK” model – the one that generates higher employment with higher interest rates – assumes prices are flexible downward but wages aren’t. Based on that sole criteria, why wouldn’t it apply to economists like Krugman?

          • Transformer says:

            Bob is correctly saying that the NK model (not the “Anti-NK” one) described in the Nick Rowe post makes it inconsistent to believe that lower interest rates and an increase in the minimum wage will both boost employment.

            Paul Krugram may believe both those things (not sure if he has ever used the monopsony argument on the min wage?) and given Bob’s track record one might suspect that Krugman was the target of his post.

            But Krugman’s views on wage flexibility are clearly inconsistent with the NK model in Nick’s post.

            I was just wondering if there are really any actual NK economists who meet the bill?

            • Major_Freedom says:

              I see little emphasis from NKs on a major factor of sticky wages to be Marx’s exploitation theory.

            • RIchard Moss says:

              You said Krugman rejects the idea of perfectly flexible wages – that is why I brought up Krugman and why I am still scratching my head. In Nick’s “Anti NK” model wages are not perfectly flexible.

              And this “Anti NK” model is the one I read Nick referring to in his opening;

              I present a simple model that has exactly the opposite predictions to the standard New Keynesian model: if the central bank sets the nominal interest rate too high (too low), that will cause an increase (a decrease) in output and employment.

              If you think that an increase in the minimum wage will cause increased employment, because firms have monopsony power in the labour market, you will like my model.

              Either I am reading Nicks post incorrectly, or your point doesn’t make sense (or perhaps both).

              I read Nick referring to HIS model – the “anti-NK” model – as the one that shows employment and output increasing if interest rates are increased. Are you reading this as the NK model?

  2. JNCU says:

    “It’s almost as if people pick and choose their economic assumptions (monopsony in low-skill labor markets, in this case) depending on their impact on preferred policy moves…”

    And that is why I think politics is futile ( I hope I am wrong.) Getting involve in politics is to give up your brain for the benefit of the political tribe.

    If any of you know Octavio Paz, Mexican writer, Noble Prize winner, and libertarian. He was good friends with Orwell. What turned him into a libertarian was the threat to loose his freedom of thought, on the altar of statism.

    The case for Christian Libertarianism:

    “I came to Christ freely, not through Bush policies”

  3. John Becker says:

    It amazes me that Nobel prize winning economists can get away with arguing that the demand curve all of a sudden doesn’t slope downward when you’re talking about the labor market. It’s a denial of the most basic economic reasoning: supply and demand. Comparing it to interest rates is completely superfluous.

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