Sunday, May 24, 2015

The natural rate of painting himself into a corner


The most interesting part of Scott Sumner's no such thing post was this right here:

And when those economies are artificially depressed by a combination of low NGDP and sticky wages, then the rest of the world benefits from monetary stimulus that boosts output closer to the natural rate.

The natural rate of output. I never heard of that one. Well... I heard of the natural rate of unemployment. I suppose the two are related by Okun's law: There's a tight relation between employment and output. But that doesn't prove there's any such thing as the natural rate of output.

If you have a natural rate of unemployment, I guess you could have a natural rate of output growth. So the question is: Do we really have a natural rate of unemployment?

I'm not touching that one.

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Sumner expresses the idea that an economy might be "artificially depressed" by "low NGDP and sticky wages". Well, I'm not an economist so I don't have to have an opinion on whether wages are sticky. But if wages are sticky, that's a natural phenomenon. Not an "artificial" one.

Thus it is fortunate that the workers, though unconsciously, are instinctively more reasonable economists than the classical school, inasmuch as they resist reductions of money-wages...

If wages are sticky, it is because of human nature. That's not "artificial". And if NGDP is low, that's not what makes the economy depressed. It's what we measure so we can tell if the economy is depressed. Sumner depends a lot on his own popularity instead of on clear thinking these days. He used to be better than that.

I agree with Auburn Parks. It is as if Sumner has painted himself into a corner by his prior argument. And now he is stuck having to say stupid things to prop up his entire conceptual framework for understanding the modern economy.