Aug 28, 2011 at 1:11 am
Q: Should the Fed target nominal GDP instead of inflation?
A: No, I think they should just get over the 2% upper bound target on inflation.
I do like the flexibility inherent in this idea, but I don’t see nominal growth as a better target per se. The problem we face with contemporary monetary policy is not due to targeting. In fact, the dual goals of stable inflation and full employment are the right ones. They’re “real” variables, which strike me as better targets than nominal growth. EG, suppose, coming out of a recession, we had strong nominal growth and low inflation, as used to be pretty common in V-shaped recession/recoveries. I wouldn’t want the Fed to tighten but an NGDP target could lead them to do so.
The problem is that the Fed is too hawkish re the 2% core inflation target. Sometimes, like now, the economy would benefit from faster inflation, as Ken Rogoff has stressed (I’m not quite where Ken is—he’s right that higher price growth would help to hasten deleveraging, but it also leads to even faster real wage decline than we’re already stuck with).
The way the Fed plays it, the 2% price target isn’t even really the target. If it was, they’d be OK with 3 and 4 percent sometimes in order to achieve 2 on average. But they treat it more like an upper bound, so the average target ends up being something lower than 2%.
Q: Re your post on corporate profits and compensation shares of GDP, I’d like to see the full time series.
A: Here tis, from the 1940s through now, though without the cool illustration. Profits are highly cyclical but note that the trend of both shares broadly follows the timing of the inequality story, which picks up in the latter 1970s. Also, note that the current profit share is almost the highest on record.
Q: Re my post on taxing capital gains at the same rate as regular income: Why are you looking at the statutory rate rather than the effective rate? The latter is the relevant decision variable for economic actors, so surely that’s what you should be looking at?
A: First, some would disagree, based on the theory, that the effective rate is what matters here. The microeconomics would argue that it’s the change in the marginal, not the effective, rate effects investment behavior (your effective rate is your tax liability as a share of your income; the marginal rate is what you pay on the last dollar of capital gains in this case).
I don’t think it matters too much here because the effective and marginal rates are probably close—the structure has not been particularly graduated over time—usually just one or two rates–and there are many fewer loopholes that effect the rate paid here relative to say, corporate income.
Finally, I know of no historical series on effective rates for k-gains taxes, but even if one existed, the relevant series for this analysis, given my first point above, is the marginal rate series.
Q: I’ve heard time and time again the argument that minimum wage increases unemployment is actually detrimental to low-wage workers. You recommended increasing it again. If you know the argument to which I’m speaking, would you mind explaining in a post why this is or isn’t the case and how raising the minimum wage would help?
A: The theory is that if you make something more expensive by fiat, as opposed to by market forces, people will buy less of it. So if you raise the min wage, employers will lay off workers who are now more expensive.
In fact, the theory argues that any increase in the minimum wage, even a few cents, should result in massive layoffs. Nothing of the sort has ever occurred. So the theory is demonstrably wrong which means you have to look at what has actually occurred when we’ve raised the wage floor.
There’s been extensive research on this question. Most of the research has found “small” layoff effects (I’ll explain small in a moment); but some high quality work has found no effect at all, and some research has even found positive employment impacts.
By “small” I mean that even if you accept that some workers could be laid off or end up with fewer hours, the vast majority—way over 90%–get a pay hike.
How could this be? What about “raise the price, people buy less?” A few explanations:
–our legislated min wage increases tend to be small, not affecting that many workers and usually just replacing the value eroded by inflation;
–firms have other ways of absorbing the wage increase, including higher productivity or raised prices;
–in some cases, firms that can set wages in a particular market (like the old coal mine towns, with one major employer) and they will set them too low to maximize their profits; a min wage increase will raise employment by drawing more workers into the labor force and increase firm efficiency and profits;
–markets in general, and the labor market in particular, are just more complex than you’d get from a simple supply and demand framework…dynamics, for example, could be important here…raise the minimum wage, more people have higher earnings…they spend them and create more economic activity, demand, and jobs.
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