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June 16, 2006

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cathyf

Geez, {calm, sensible, interesting} = {not worth commenting} ?

We are so not serious... LOL!

cathy :-)

spongeworthy

At the time this supposed "crowding out" phenom in the debts markets was being demagogued, a few lonely voices were trying to ask exactly when this had ever happened.

When borrowing to GDP was much higher than now, rates actually declined. So while our projected deficits keep shrinking it's no surprise to us lonely voices that issuance is not driving rates higher and was never going to.

Anyway, kudos. When he shakes off the dementia Krugman can contribute and we should give him his props.

David

Interesting how Krugman slipped in the comment that today's unemployment rate is low by historical standards. I can't remember his admitting that before.

Pofarmer

O.K.

I was reading some comments by Warren Buffet the other day. He was asked about the risk of inflation being exacerbated by the Fed raising interest rates, and what to do about too easy credit. His answer was that the Fed needs to "sop up the excess money it has poured out there" or something very close to that, and that it could be done without raising interest rates. Can somebody explain that comment to me? I'm having a hard time getting my head around it.

Barney Frank

Somewhere along the line the Fed decided keeping track of the actual amount of money in the system is pretty much impossible, so they somewhat strangely substituted interest rates for money supply. Now when they speak of excess money they really mean low interest rates. So to 'sop up excess money' they now raise intesrest rates. The Fed is and has been stuck in a mish mash of mixed ideas about what its job is and how to go about it. They're half Keynsians, worried about asinine things like the Phillips curve and half classical economists and half deficit hawks, which by my calculations makes them too smart by half.
There is a difference between inflation and rising prices. Prices can rise for any number of reasons, but inflation is in the short definition too many dollars chasing too few goods. The Fed needs to stick to maintaining a stable currency not bumping or dipping the GDP whenever they sense a blip on some radar screen. If they don't, we get the boom and bust of the 70's and early 80's.

Tom Maguire

The Fed needs to stick to maintaining a stable currency...

Yes, but by what measure? CPI (or some variation), the gold price, a commodity index, the dollar versus a currency basket?

By some (all?) of those measures we have the beginnings of a problem.

JohnH

Pofarmer:

The Fed does not actually "raise interest rates." What they do specifically is to sell government securities in the market. This drives the market price of government securities down, and that raises the yield on the securities. The market yield is what we call the "market interest rate."

Selling securities means the buyers have to write a check to the Fed, and this money effectively disappears into the Fed, thereby reducing the supply of money in the economy.

Krugman's wage-price spiral explanation is unbelieveably antiquated and discredited. No mainstream teacher of macro economics today would give that 1960s-vintage rendition of wage-price spiral without adding the monetary sector to it and saying that a wage-price spiral cannot be maintained unless the money supply is increased to accommodate it

JM Hanes

"I would love to think Krugman is right about this, but mainly, I love to see him writing about this, rather than attempting to endure his 500 hundredth stab at the perfect phrasing of 'Bush Sucks.'"

BDS is an addiction, and recovery is tough. Krugman didn't become a rock star till he became a political pundit. If he sticks to economics, he loses all the love. Having prostituted his professional skills to the cause, he's already short on expert plaudits, he's got no serious body of work to build on.

All hope may not be lost though. I suspect he, more than almost anyone else, has suffered from the Times Select Effect. Having lost both stage and peanut gallery, perhaps there's been little left to do but sit around and actually start thinking again instead of just maneuvering.

Now, a query from a from a real amateur (c'est moi!) on this:

Over the past five years productivity, as measured by real G.D.P. per hour worked, has risen by about 14 percent, but the real wages of nonmanagerial workers have risen less than 2 percent.

Isn't that sort of the definition of a rise in productivity? You produce more for the same cost? In other words, isn't Krugman using "but..." where he should really be using something like "because..."?

JM Hanes

Barney

"too smart by half" -- LOL! Thanks.

JohnH

to JMHanes

No, it would not be correct to replace "but" with "because." Output per hour worked attempts to be a measure of how many widgets are produced per hour. That is not the same as wages (real wages, adjusted for inflation). PK is suggesting that employers are getting more output for each hour of labor they pay for yet they are not paying much more than they did. Once again--class warfare. The implication for Lefties is that workers are being screwed--again!!

But Krugman likes to cherry-pick his sources.

Forbes

Well, Krugman is cherry picking stats when he compares productivity to wages. Wages do not equal total compensation. Calculation of wages omit benefits like health care, the costs of which have risen dramatically, and is a significant proportion of employee compensation. (I guess it's a "cherry pie" comparison. Krugman's baking a partial recipe.)

Also, Krugman uses his '70s wage-price spiral dialogue to put words into Dallas Fed President Fisher's mouth regarding comments about current-day inflation concerns. Krugman takes the cake for dishonesty by changing the subject to wages in order to debunk Fisher's inflation comment.

Doesn't Krugman have any recent columns to crib from because he sounds like he hasn't learned anything about inflation since the '70s. I guess Krugman needs to cook up a few new arguments.

Rick Ballard

Forbes,

He may be using this BLS table, which does include benfits in the compensation number. I would prefer to see more use of Multifactor Analysis but is just isn't available in anything like a timely manner.

Personally, I think the Fed should use coin flips as the final decision making tool. It would save a lot of time and money, given that the BLS still hasn't figured out how to account for the growth in the number of self employed.

Tom,

If wages are catching up to productivity increases, is it really an inflationary problem? Doesn't the problem actually begin when increase in compensation exceeds increase in the labor component of increase in productivity (admittedly, that's what happened in the last report but not to an extent that covers previous lags)?

JohnH

The median wage is the wage earned by the person in the 50th percentile. Over the last ten years we have added millions of illegal and legal immigrants to the lowest end of the wage scale. This brings the 50th percentile level down. So everyone who was being measured ten years ago could have experienced large wage gains, yet the addition of low-wage immigrants means we are making a different comparison today. Krugman knows this but uses the crude and inaccurrate measure anyway.

And the immigrants will have large wage gains as they learn English and move up to higher skilled jobs.

JM Hanes

JohnH

OK, I gather we're talking about two different things. There's the number of widgets produced per hour, and then there's the cost per widget produced. I'm assuming that "nonmanagerial" basically means paid by the hour, vs. salaried. So Krugman is essentially saying that workers would be a lot better off if they were being paid per widget instead of per hour.

At the same time however, that would mean that rising productivity would not necessarily translate into increasing profitability and would effectively diminish the incentives to institute efficiencies -- except where your operation is large enough to operate on very small margins. Yet how do you grow your business to that tipping point without extra profit/cash to invest in it?

I'm not sure where I'm going with this, except perhaps to suggest that there really is a form of classic class warfare at the heart of Krugman's argument, and that it's not necessarily an ideological construct, but a fact of economic life.

There are the workers' vs. owners' interests, of course. The outrage over management compensation, however, highlights a second conflict, where the rewards for increased productivity all seem to go to salaried management vs. hourly laborers. This is a conflict that can only be resolved by owners (or by regulation), and for the most part they've been resolving in favor of management. The downside of widely held stock, (vs the benefits of what could be called distributed equity?) is that the owners don't know enough about any company to do otherwise.

It seems to me that what we're still really struggling to comprehend and cope with here is the disconnect between workers, management and owners that has grown exponentially over the last several decades. I used to think of it as the Harvard Business School effect: executives started traveling sideways from company to company, often in completely different types of businesses, and perhaps equally important from town to town. Maybe moving diagonally would be more accurate description, as they climb a rung or two with each transition, instead of working their way up from the bottom of a specific operation to the top, in a town where workers, management and owners live beside and with each other.

Globalization exacerbated what is at heart the demise of traditional communities. I suspect that the fundamental unhappiness which Krugman attributes to workers generally is not as excusively economic as he implies. There's real alienation at work here too, something which may have growing political ramifications. It's not unlike the kind of (perhaps related!) frustration and attendant helpless, that's universally expressed over being forced to negotiate unending menu choices when you're trying to make a simple phone call, just to end up speaking with someone in another country who can only read to you from a list of standard talking points.

More and more folks will never even meet corporate management in the companies they work for, let alone run into them on the street. The ultimate effect of this stratification, which is at once economic and social and political, is difficult to discern, but I do think it is very real.

It's also not where I thought I'd be ending up, when I started out!

clarice

Frankly, I'd give a Nobel prize to the big box and online mega retailers(and free trade laws) for I think they have been a major factor in keeping inflation down. When I look back at the what I used to pay for things compared to now, in actual (not just inflation corrected dollars) it is less.

JohnH

JMHanes
I want to respond to your comments regarding productivity and wages. If I understand you clearly, you are thinking through how the economic system works in the U.S. and asking whether it would be better if management were to give more of the benefits of productivity gains to hourly wage workers rather than to management, including Harvard MBAs.

First of all, I think you are not correct when you say that Krugman thinks workers should be paid per widget. I doubt he was saying that. Very few workers work in widget factories these days. Most of them work in service businesses where output is hard to measure.
What PK wants to say is that gains are not going to the "working class" and therefore only heartless Rebublicans would boast about GDP growth. He wants to deny Bush any credit for a healthy economy.

But more importantly, no one is really "choosing" to give productivity gains to "management" rather than "labor." Our economy works by the market. Employers hire workers in a competitive market, including white collar workers and those with MBAs. The faster growth of MBA salaries compared with unskilled wages over the last 25 years or so is because the market values them in that way.
To paraphrase a point that Milton Friedman has been making for at least 50 years regarding the "social responsibility of business", if any individual employer were to decide to distribute more productivity gains to hourly wage employees and less to the managerial employees, that employer would soon be out of business, because the managerial employees would go to other firms. If he paid managers the market salary and also paid more to hourly wage empolyees, his costs would rise and he would either go broke or lose out to his competitors.

F

Rick: Thanks for the suggestion.

That release indicates that 2005 productivity was up 2.6%, while hourly compensation was up 5.1%. So that is quite a different picture than where Krugman says productivity over the past 5 years "has risen by about 14 percent, but the real wages of nonmanagerial workers have risen less than 2 percent."

Again, I think the point stands. Krugman cherry picks stats. Krugman points to overall productivity in the economy, as compared to the wages of a slice of the economy (nonmanagerial workers)--an inapt comparison. A dishonest argument in my book.

In a knowledge-based economy, where value-added input is comprised of timely information and/or inovation, rising incomes will accrue to those with knowledge-based skills--and are normally accorded an other than nonmanagerial status in employment surveys.

Labor that gets paid to sweat, rather than to think, and involved in the manufacture of commodities, or the assembly of goods from commodity components is usually assigned that nonmanagerial status. Such a catagory of labor is not particularily value-added, and will see wages rise relatively modestly as their share of the added value is similarily modest.

It's not terribly hard to understand the concept--except Krugman has proffered a dishonest argument.

Birkel

"most Americans are unhappy with the state of the economy, in spite of good numbers for the gross domestic product "

NYT readers will be shocked to hear that the economy is growing so quickly. Perhaps it will make more Americans happy about the economy if this information gets out.

Thanks to Paul Krugman for dropping the embargo of this information.

/sarcasm

Forbes

Let me make one other point, vis-a-vis "the reason most Americans are unhappy with the state of the economy."

Just as with the recent (WaPo article?) regarding the vicious cycle of the news coverage that breeds terrorist attacks and the terrorist attacks that breed news coverage, is it likely that the forever ominous news coverage of the economy breeds "Americans [that] are unhappy with the state of the economy," in as much these same polls report Americans are quite happy with their own situations?

Again, Krugman is making a polemical, not economic, argument.

Lurker

Just wait til Donald Luskin provides a response to this Paul Krugman's article.

patch

"(Can't spell "Over" without "R-O-V-E")"

What next, knock-knock jokes?

Carol Herman

Knock-knock jokes, indeed!

The Internet is defeating a lot of the old ways of doing business.

And, the donks will bite the dust, because they chose an underhanded "revolutionary" approach to destroy our Constitution. Far beyond the "stealing" Hugh Hewitt discussed in 2004.

WHen will we whistle "It's OVER, over there." ???

JM Hanes

JohnH

*You might want to read the last paragraph first, before deciding whether to take the long hard slog in between!

Yes, I'm definitely working through this out loud here, and much appreciate the patient assistance you've provided above. I did think Krugman's assumption that the "real wages of nonmanagerial workers" somehow ought to have risen in a proportional way seemed flawed -- the obvious implication being that this administration has somehow managed to deny them what would ordinarily been their due. I assume that increases in productivity probably have more to do with efficiencies instituted by management than by laborers just working harder in hour than they used to. I also think the that large segments of the MSM bury the goods news pretty effectively.

On the other hand however, I think the folks who dismiss a terrible unease at the lower end of the labor market as a political fiction -- because everything's really going great guns -- can be faulted for cherry picking too. That's the "class" that's been taking the hardest lumps in the transition to service/IT/global economics. In the market place they are the least valuable, most fungible, anonymous commodity. They are also the group that are most mercilessly exploited by unscrupulous employers and service purveyors of all sorts, and the further down the ladder you get, the faster the unscrupulous types multiply. Maybe it's a Jon Edwards styled, North Carolina thing, but I see a lot of it, and I don't think it's healthy.

I'm not trying to make an argument for government regulation or arguing that "business" as a whole is, or should be, responsible for the problems and abuses I'm thinking about, or for meeting all the needs of this group as a whole. A lot of the exploitation, for example, could be mitigated if kids came out of the public education system just knowing the basics about things like loans, mortgages, insurance etc.

I have, however, become more skeptical over time about the idea that capitalism and democracy are flip sides of the same coin and that what is good for one is necessarily good for the other. Pls note that I'm very definitely not anti-capitalism, or anti-capitalist, or at least, I certainly don't see myself that way. I'm just not so sure that society's interests and business's interests are nearly as neatly alligned as the rhetoric on the business side usually tries to suggest. Politically, you've got one side claiming that business creates/lives off a permanent underclass, and on other the side you've got folks saying there is no underclass. If I were to use the language of the market place, I guess I'd say that business and community can often be competing interests.

Sorry for rambling on, but I feel like I should be able to get this sorted out in my own mind, and my brain's just not cooperating on the big picture the way it usually does in other disciplines. Pls. don't feel obliged to reply specifically to this post; you've already been most kind. I'll go take a seat in the peanut gallery and just watch for awhile.

Barney Frank

Tom,

I said....
"The Fed needs to stick to maintaining a stable currency..."

You said....
"Yes, but by what measure? CPI (or some variation), the gold price, a commodity index, the dollar versus a currency basket?

By some (all?) of those measures we have the beginnings of a problem."

By all of those measures we have had various recent blips, most of which have already seen large corrections. All of those measurements have their uses but my main point is that the Fed now battles inflation and deflation via braking or accelerating the economy which is based on a profoundly flawed premise and is extremely cumbersome and prone to overshoot in both directions. We end up with the Fed manipulating the economy to fend off the results of their last manipulation. It provided huge liquidity leading up to Y2K (remember that non event?) then immediatelly reversed course when the bubble it helped create popped leading to overwrought deflationary fears and a one percent Fed funds rate, and has now raised rates seemingly five hundred times to correct that correction, which may very well pop the real estate bubble it helped create. Its become the Federal Roller Coaster not the Federal Reserve Bank.
The benign and puny rise in prices brought about by economic growth is not inflation and should be of no concern to the Fed.

It is not so much how they measure a stable currency, there are several credible ways, it is how they attempt to maintain it. The Fed was not created to mandate how much or little our GDP is to grow or shrink per year, but that's the job its given itself.


Rick Ballard

"A lot of the exploitation, for example, could be mitigated if kids came out of the public education system just knowing the basics about things like loans, mortgages, insurance etc."

JMH,

Assuming the basic problem is ignorance, that would be so. Group instruction can overcome ignorance - if the person taking instruction is motivated. Group instruction can't overcome a low IQ though and it is ineffective in instilling self discipline.

I doubte that a solution to the conundrum you pose will ever be found but depriving an individual of the opportunity to learn through suffering the consequences of lack of attention or self discipline is unlikely (IMO, anyway) to create a more just society.

I like the idea of truly draconian penalties for those guilty of fraud in business practices as a method of mitigation. Suffering total loss of all assets plus a bit of time in jail would keep some sharpies from preying on the weak.

vemrion

This is a decent article, but Krugman has to recognize that inflation is basically government theft. The Fed controls how much inflation there is by printing cash and making loans. The fact that there's usually money to be had keeps us out of trouble, but political and economic forces can also cause inflation (oil prices, for example). Even the moderate amount (small by Fed standards) of inflation we've experienced lately is too much because it's so continuous. A few deflationary periods ever now and then wouldn't hurt. There would be less money in circulation, but the cash you did have would become more valuable.

The Fed's insistance of constant boom times has created a boom-bust cycle when we should have a normal up and down cycle. I think it's time we take a look at where the Fed is leading us and ask whether they have people's interest at heart. After all, they are not elected, yet they control our encomony, which is arguably even more important (read: more powerful) than our democracy (such as it is). I think we need to take a long, hard look at the Fed and wonder if we really need it.

Pofarmer

"In a knowledge-based economy, where value-added input is comprised of timely information and/or inovation, rising incomes will accrue to those with knowledge-based skills--and are normally accorded an other than nonmanagerial status in employment surveys."

Got an example or two?

Pofarmer

JM Hanes

I'm not familiar with the "brain businesses" or whatever you want to call them. But in manufacturing and transportation higher fuel prices, steel prices, rubber prices(sometimes double what they were just 2 or 3 years ago) has taken a real bite out of companies income stream. They may be more efficient, but it's because they had to become so, in a lot of cases I'd argure that there was not much left to give back to the "workers". In my own situation, my basic costs are up nearly 30% in the last 3 years. Overall, inflation for the entire economy may not be that bad, but for certain segments it's been a real dousy.

vemrion

This is a decent article, but Krugman has to recognize that inflation is basically government theft. The Fed controls how much inflation there is by printing cash and making loans. The fact that there's usually money to be had keeps us out of trouble, but political and economic forces can also cause inflation (oil prices, for example). Even the moderate amount (small by Fed standards) of inflation we've experienced lately is too much because it's so continuous. A few deflationary periods ever now and then wouldn't hurt. There would be less money in circulation, but the cash you did have would become more valuable.

The Fed's insistance of constant boom times has created a boom-bust cycle when we should have a normal up and down cycle. I think it's time we take a look at where the Fed is leading us and ask whether they have people's interest at heart. After all, they are not elected, yet they control our encomony, which is arguably even more important (read: more powerful) than our democracy (such as it is). I think we need to take a long, hard look at the Fed and wonder if we really need it.

JM Hanes

Rick

"I like the idea of truly draconian penalties for those guilty of fraud in business practices as a method of mitigation."

I've always thought it's easy to ascenrtain someone's commitment to halting illegal immigration by whether or not they support serious penalities for those who hire undocumented workers. In the arena I'm talking about however, the vast majority of the victims will never get to the court house steps, or at best, will end up being hauled into small claims court, without a lawyer, by the very people who are abusing them. Indeed, the threat of small claims court is more likely to be a tool in the extortionist's kit than a potential remedy.

A lot of the exploitation is vicious, not illegal and/or relies on verbal assurances which contradict the fine print on contracts. Like a mortgage at 11%, with payments which never apply to equity, and where customer service consists of scaring people to death with misinformation in the hope of precipitating a default. Or like a truck driver who is promised that his benefits will commence after a 6 month probationary period, at which point he's promptly replaced by someone new -- and has no clue what his rights might or might not be.

This just isn't the kind of thing you can stop with regulation or draconian penalties. I think you have to empower (not a word I'm usually fond of) people to defend themselves. Sometimes, it's something as simple as telling someone to insist on getting commitments and registering complaints in writing, not over the phone. It's just not that hard to get such concepts across even if your students are dull, or unmotivated.

I see hardworking, poorly educated, but responsible people in low income jobs getting hit hard this way a lot. I also see folks whose families have sustained themselves in manufacturing jobs for multiple generations trying to negotiate the transition, either without understanding that the jobs they've lost aren't coming back or if they do, without resources or any hope of acquiring new skills.

Obviously, I think this is wrong, or at the very least a terrible shame. However, regardless of whether one simply considers it a fact of life or not, my point is that this group, as a class, does indeed exist. I also personally believe that stratification on the basis of multiple criteria is increasing. In a perfect world, Democrats would stop exploiting the class warfare meme, and Republicans would acknowledge that the free market model does not always come without a human price tag, and that it is not, by itself, the answer to every economic or social question we should be willing to address.

I would note that part of why I tend to look at education is because I don't think business needs to be saddled with providing all the solutions either (ditto on healthcare too), nor should we leave it to the courts. I think the quality and nature of public education, for the dullest to the brightest, along with defense, is a legitimate national interest.

JM Hanes

Pofarmer,

"They may be more efficient, but it's because they had to become so, in a lot of cases I'd argure that there was not much left to give back to the 'workers'."

I'll have to defer to your real world experience on the rewards aspect of productivity. I'm just working from reports on the exploding differential between managment and labor -- or rather from reports which seem designed to leave that impression. Perhaps, in reality, the management in question is actually a relatively small group of top executives with astronomical salaries which throw the whole comparison off. That's certainly where most of the articles on the subject start!

JM Hanes

Tom

I emailed you a fascinating tidbit on Krugman, via your "Email Me" address.

lucklucky

Recovery of what? GDP at 4% grow in last years is stagnation now?

shorse

JohnH:

"Over the last ten years we have added millions of illegal and legal immigrants to the lowest end of the wage scale. This brings the 50th percentile level down."

I wonder if their illegal wages get recorded to even be a factor? Perhaps those with fake papers and fake SSN's who get real jobs have their wages factored in. I believe the much bigger impact is having a huge pool of low end labor that will work off the books for below market rates pulling the wages of legal workers down. The bottomless pit of commodity resources has probably taken 2-3 points off the average wage for non-management labor.

It's like that story from California where the lady with the road crew said on the radio she needed the illegals because she couldn't find anyone else to take the job even at $30k. A bunch of Americans called the show to get a job and of course she backed out of her statement because she probably wasn't really paying her illegals that much. Employeers could easily check if their workers' SSNs were legit or not, but they don't. They need to be arrested and fined.

Toog

Well, even a broken clock is right twice each day.

It turns out that sustained $70 oil is actually good in some ways.

Swen Swenson

Forgive me if this is a dumb question, but where are the companies that are experiencing this "explosive growth in corporate profits" of which The Krugman speaks? Shouldn't explosive growth in corporate profits be reflected in a booming stock market? Am I missing something here?

HSD

So the dude's brain got a hit of oxygen for once. Big deal.

Michael

Krugman? Paul Krugman? Isn't he dead? He died the same time as that ditsy chic ... Maureen Howdy Doody or something like that.

flicka47

I have very much enjoyed reading your post and the comments. They have all been enlightening.

I thought you all might be interested in reading Thomas Sowell's article(Preserving the Liberal Vision)at RealClearPolitics(sorry I don't have a link),in regards to minimum wage and minimum wage earners.

This is taken from part 2

"In reality, data from the Bureau of Labor Statistics show that only about 2 percent of workers who are 25 years old or older have minimum wage jobs."

"In general, people earning the minimum wage have been a declining proportion of the population during the past quarter century. In absolute numbers, they have declined from 7.8 million to just over 2 million, even though the population as a whole has been growing."

So if the "bottom" is not where we "think" it is, then maybe we are all doing better....

Jim,MtnViewCA,USA

who is this "Paul Krugman" of whom you speak?
[agree that Times Select is working! I haven't heard of the guy for months and months now!]

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