Potpourri
==> Rand Paul and Mark Spitznagel vs. the Fed.
==> This Telegraph piece makes a compelling case for building your bunker. (HT2 Zero Hedge, I think)
==> Did I already link to this? I think Scott Alexander here is getting things backwards. Is this worth me pursuing?
==> Nick Rowe again showing that he eats reductio ad absurdums (absurda?) for breakfast.
==> Check out this interesting chart on minimum wages, nominal and real, from Pew (HT2 Cafe Hayek).
==> A story on Liberland.
==> Bitcoin is forking. Do you know where your kids are?
==> If you don’t work for the CIA, don’t tell people you do. And if you do work for the CIA, don’t tell people you do. (I sorta stole that joke from Josiah Neeley, but I think my version is funnier. This is how comedy improves. No one is original.)
==> When it comes to climate change policy, I say follow the money.
==> Nick Rowe is taking an awfully long time to get the simple point I’m trying to make in the comments of his post. Either I’m being dumb, Nick’s being dumb, or the importance of Austrian capital theory is even greater than I had realized. (Remember, Nick is no fool when it comes to capital theory. We were tag-teaming poor Piketty back in the day.)
Low/unskilled labor is not a consumer good, they should’ve used the GDP deflator.
Isn’t the point to show if there’s any credibility in the argument that the “living wage” has deteriorated due to inflation (one I’ve heard repeatedly)?
In that case the point isn’t what labor’s worth in real terms, it’s the purchasing power of people on the minimum wage. So the CPI would be the right choice.
Jim: measuring the purchasing power of an hours worth of minimum wage work would only make sense if the same people are always making the minimum wage. On the other hand, roughly the same people are always paying the minimum wage.
But, if one insists on making the comparison, yeah if you use PCE there hasn’t been long term decline. Technically if you use CPI there is, but it’s generally thought that CPI inadequately accounts for quality improvements and substitution effects.
Although honestly measuring “real value” the whole field of inflation index numbers is basically pseudoscience.
Hey. Thanks. Most of that makes sense.
I had missed the “personal price deflator” note at the bottom of the chart. I had always assumed “inflation adjusted numbers” and “real prices” were calculated using the CPI. I had to look up the difference.
But I don’t understand this: “measuring the purchasing power of an hours worth of minimum wage work would only make sense if the same people are always making the minimum wage.”
My son actually had thrown the argument at me – that the minimum wage purchasing power has been eaten away by inflation so in “real” terms plans to raise it only keep the lowest earners (“really”) where they’ve always been (no – I don’t think he believed this – it’s just what he had heard).
If that chart is meant to be a refutation of this argument (it shows the minimum wage up 110% in real terms since 1940), I don’t understand how it makes a difference to that argument or its refutation, if the same wage earners are in view or not.
Thanks again.
Jim
Jim, the lowest wage earners are not the same thing as the lowest earners. The lowest earners contain people who earn zero dollars an hour i.e. they have no job at all. And part of the problem with the minimum wage is it throws some people from the group “lowest wage earners” into the group that makes zero. Additionally, those making the minimum wage when it rises in real terms are doing some different kinds of work than those doing minimum wage labor when the minimum wage is lower in real terms.
If I’m a manufacturer and in my process I substitute the lowest skilled labor I can legally buy (work-hours at the minimum wage rate) and various capital inputs, the rising and lower minimum wage only changes the degree to which I substitute labor for capital and vice versa. Therefore always I pay for labor at the minimum wage and simply vary the quantity of labor I employ.
But if I’m a would be worker, a rise in the minimum wage might be a rise in my income, or it might not: if I already make at the new minimum, it does not change my pay-assuming my contract doesn’t index my wage to the minimum wage-but I have suddenly become a minimum wage worker when I wasn’t before. I’m suddenly in the class “lowest earner”. Now imagine the minimum wage falls in real terms: if my real marginal product is the same, I could try and negotiate for a higher nominal wage, and I would no longer be a minimum wage worker, so I’d no longer be among the lower earners.
But now let’s imagine someone whose real marginal product starts below the real minimum wage: a fall in the real minimum wage could cause an increase in my nominal income, and in fact real income, as I go from “unemployed” to “low wage earner”. If you wrongly think of me as having been a minimum wage worker before I was employed, you’d look at a falling minimum wage and conclude my purchasing power had been “eaten away by inflation.” No, it didn’t, my income rose in real and nominal terms.
Saying that a falling minimum wage implies the purchasing power of a worker’s labor has fallen, implies that said worker: gets a job and holds it for many years, has an employer that doesn’t care when the cost of the employee’s labor suddenly increase, doesn’t think to renegotiate their wage when it falls in real terms, and doesn’t think of changing jobs when their real income falls, that other employers don’t see the worker being paid for below their marginal product and try to snipe them from their current employer…All things which are pretty unrealistic, I’d think, individually, but downright unbelievable taken all at once and assumed to persist with the same worker for decades. There may be some people like this, but certainly not everyone who earns the minimum wage, and I would venture to say almost certainly not most.
Essentially it’s a fallacy to think that a rise and fall of the minimum wage in real terms is automatically a rise or fall in any actual individual’s real income. It might be, or it might be the opposite, or it might have no effect at all. Changing the minimum wage changes the people classified as “lowest wage earners” and raises some of their incomes, lowers others, and reclassifies some middle wage earners as lowest wage earners (when it is raise) and some lowest wage earners a middle wage earners when it falls.
(actually, if you want to be pedantic, the lowest wage earners are probably people in prison, or as David Henderson has called them “the bottom 1 percent”)
Thanks for the long explanation. I see what you mean now.
Originally I thought you meant the “same people” weren’t earning the minimum wage because of class mobility over time rather than who’s working at the minimum wage based on the real productivity of the worker.
Sometimes I wish Rowe would just out-with-it-already instead of doing the “Gee, I’m puzzled…” shtick. I know it’s kind of his “thing” but bleep-bloop types like me who can’t always tell when someone’s being funny have a real hard time getting to the bottom of things that shouldn’t take 4 cycles to explain haha…
Mostly it’s my problem, I think.
For example, his comment under this Marginal Revolution post was concise and unambiguous:
http://marginalrevolution.com/marginalrevolution/2015/08/germany-projection-of-the-day.html
His open borders post from a couple of weeks ago said the same thing in a far more confusing way. Shouldn’t it e the other way around? I try to make my good points on my blog, and put my teasers in comments. (Har har, RPLong, that’s a good one – you don’t have any good points…)
RPLong: My guess (only a guess) is that many people found my MR comment to be totally confusing. “WTF is Nick Rowe talking about? Open Borders people aren’t forcing anyone to emigrate to a foreign country!?”
Sometimes it’s good to get yourself muddled, because when you eventually get clear again it’s clearer than it was before, and you see things you hadn’t seen before.
Good point! 🙂
Bob: I did a follow-up post, especially for you (well as much for me as for you), to try to clarify things:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/08/good-shocks-bad-shocks-and-shocks-that-cause-a-monetary-coordination-failures.html
I had your mate Hayek as my co-author while I was writing it.
Thanks Nick. Friedrich and I are just friends.
I suppose it’s true what they say:
‘Heroes get remembered, but legends never die’
Truly the English speaking Peoples are separated by a common language.
So hypothetically, if some disease spread through a nation and greatly reduced the work capacity of the citizens for a whole year… this would NOT be a recession, even though almost guaranteed the GDP would go down.
For example, Japan’s GDP was shrinking for two quarters in 2011, so was that a coordination failure?
Japan’s GDP was also shrinking in 2009, so presumably we must conclude that there’s some close link between what happened in 2009 and 2011… because everything comes down to monetary policy.
Well, Japan 2011 was not a recession. If NGDP went down, that would be a monetary coordination failure.
On a year over year basis Japan GDP did go down in 2011. However the more typical definition of “recession” merely requires two consecutive quarters of GDP going down.
http://www.focus-economics.com/data/charts_summary/Japan-GDP.gif
Also, here’s the quarterly stats:
Dec. 31, 2012 472.23T
Sept. 30, 2012 472.74T
June 30, 2012 476.22T
March 31, 2012 481.05T
Dec. 31, 2011 475.48T
Sept. 30, 2011 475.32T
June 30, 2011 465.02T
March 31, 2011 471.48T
Dec. 31, 2010 481.59T
Sept. 30, 2010 486.89T
June 30, 2010 482.84T
March 31, 2010 479.76T
So the first two quarters of 2011 were going backwards, and they didn’t recover parity with where they were until 2012. But anyway I would argue that the massive earthquake and tsunami might have been more significant as a cause of this, than any monetary policy.
Scott’s always worth pursuing, especially this time. That post bugged me, too.
I’d say no on pursuing Scott’s piece. It’s too rambling, and no real point is even made. I can’t imagine very many people read that whole thing and got much out of it.
Reductiones ad absurdum
http://www.nytimes.com/2015/08/21/opinion/paul-krugman-debt-is-good-for-the-economy.html?_r=2
“What can be done? Simply raising interest rates, as some financial types keep demanding (with an eye on their own bottom lines), would undermine our still-fragile recovery. What we need are policies that would permit higher rates in good times without causing a slump. And one such policy, Mr. Kocherlakota argues, would be targeting a higher level of debt.”
Yes Mr Krugman, this does not only sound insane it is!
What are good times, what are bad times? What makes times good or bad? Simply question begging that is all he does..
You know, the same sorts of arguments progressives use in favor of raising the real minimum wage in a fragile recovery are also the same ones that can be used to argue for raising the real interest rate in a fragile recovery.
Also, Bob, can you go after this mind-bogglingly stupid article:
http://www.vox.com/2015/8/21/9186313/carly-fiorina-climate-wrong
? Please?
Vox? ‘nough said. 🙂
Yes, please take this one on, Bob.
That entire section praising California’s economy is one of the dumbest things I’ve read recently- citing raw job growth totals ignoring the fact that California has by far the largest population of any state, citing a single year of GDP growth (2012), and proclaiming “its budget is balanced” as if that is some sort of accomplishment. I wonder if David Roberts has also praised Jeb Bush, Rick Perry, and Scott Walker for balancing their budgets year after year.
Also, California’s unemployment rate compared to the national rate.
https://research.stlouisfed.org/fred2/graph/?g=1FSq