Lance Taylor on Central Bank - Dictionary of Arguments
Inflation targeting/interest rates/central banking/Wages/Economics/TaylorVsSummers/TaylorVsStansbury/Lance Taylor: Regarding inflation, both central banks and [Summers and Stansbury] ignore the facts that inflation is a cumulative process driven by conflicting claims to income and wealth and that for the past five decades profits have captured almost all the claims. >Inflation targeting/Summers. Consider the real “product wage,” the nominal or money wage divided by a producer price index (PPI) to correct for cost inflation confronting business. A little algebra (…) shows that the labor or wage share of output, which equals real “unit labor cost,” is equal to the real wage divided by productivity or the output/labor ratio. The profit share equals one minus the wage share. (…) the profit share and growth rates of real wages and productivity have varied over time (…).
The growth rate of nominal unit labor cost is the difference between rates of wage and productivity growth. As with the other labor market indicators, cost growth slowed after 2000.
To unravel the dynamics, we need a theory of inflation. Around the turn of the 20th century the Swedish economist Knut Wicksell pointed out that inflation is a “cumulative process” involving feedback between price and wage inflation rates. Even after their long decline [it] shows that labor payments still make up 55% of production costs and have to enter inflation accounting.
The “real balance effect” (or the “inflation tax” in a dynamic version) says that a jump in the price level will reduce the real value of assets with prices fixed in nominal terms – money is the usual example. Wealth is eroded and households are supposed to save more as a consequence. Along with a wage lag, the real balance effect is the key adjustment mechanism in Milton Friedman’s (1968) “inflation” model which still underlies contemporary monetary policy. “Forced saving” happens when a price jump against a constant money wage reduces real payments to wage-earners. If their capacity to borrow is limited, they have to cut consumption, sliding the demand curve downward. If an expansionary package does drive up the price level, middle class and low income households who rely on wages would be the ones to suffer.
Conflict arises because price increases are controlled by business while the money wage is subject to bargaining between business and labor. Both sides seek to manipulate the labor share as a key distributional indicator. In an overall inflationary environment, business can respond immediately to increases in the wage share or output by pushing up the rate of price increase in Phillips curve fashion along the “Inflation” schedule (…). Money wages on the other hand are not immediately indexed to price inflation so that they will follow with a lag. Labor will push for faster wage inflation when the wage share is low.
Suppose that there is an initial inflation equilibrium (…). The [Summers and Stansbury] proposal to use fiscal policy to stimulate aggregate demand would shift the inflation locus upward (…) with more rapid inflation and a somewhat lower wage share in macro equilibrium (…) along the stable share schedule. In light of the vanishing NAIRU [Non Accelerating Inflation Rate of Unemployment] over the past two decades, it is not clear how strong this upward shift could be.
The way that expansionary policy could pay off in terms of inequality and (possibly) faster inflation would be though an upward movement in the stable share schedule if the labor market tightens, leading to greater bargaining power for labor.
The new Keynesian inventors are now the ruling elders of macroeconomics, unlikely to change their minds. (…) [Summers and Stansbury] might remember with Max Planck that science advances one funeral at a time. They are certainly correct in saying that “the role of particular frictions and rigidities in underpinning economic fluctuations should be de-emphasized relative to a more fundamental lack of aggregate demand.”
(…) many of the correct observations that [Summers and Stansbury] make about the likely ineffectiveness of interest rate changes were raised almost 90 years ago by Keynes’s colleague Piero Sraffa (1932a (1), 1932b (2)) in a controversy with Friedrich von Hayek. Sraffa’s main emphasis was on the inapplicability of a “natural rate” of interest, a point amplified by Keynes in the General Theory.
The natural rate, nevertheless, remains a topic of great interest to left-leaning new Keynesians. How they reconcile that idea with the fiscalist Keynesian perspective adoped by [Summers and Stansbury] remains to be seen. >Central banking/Summers.
1. Sraffa, Piero (1932a) “Dr. Hayek on Money and Capital,” Economic Journal, 42: 42-53.
2. Sraffa, Piero (1932b) “Money and Capital: A Rejoinder,” Economic Journal, 42: 249-25.
Taylor, Lance: Central Bankers, Inflation, and the Next Recession, in: Institute for New Economic Thinking (03/09/19), URL: http://www.ineteconomics.org/perspectives/blog/central-bankers-inflation-and-the-next-recession_____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Author1]Vs[Author2] or [Author]Vs[term] is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
John Brian Taylor
Discretion Versus Policy Rules in Practice 1993
Central Bankers, Inflation, and the Next Recession, in: Institute for New Economic Thinking (03/09/19), URL: http://www.ineteconomics.org/perspectives/blog/central-bankers-inflation-and-the-next-recession 9/3/2019
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