Edward Harrison — How monetary policy entrenches secular stagnation

I believe that weak nominal growth is a policy choice in large part, rather than a destiny. Here’s why.

"Phillips Curve thinking."

Now what Dudley was implicitly saying is that he wants to tune Fed policy in order to make sure a small cadre of people stays unemployed so that inflation doesn’t take off. That’s because he thinks that, at low levels of unemployment, inflation will rise so much that the Fed will have to react violently. And so it makes sense to prevent that from happening by raising rates sooner rather than later.

That’s a policy choice, folks. Dudley is saying lower inflation is better than higher inflation. And he is also saying in no uncertain terms that he prefers some people be unemployed because their lack of employment will weaken wage-earners’ bargaining power and keep inflation lower. It’s choices like this – when nominal growth is already low – that entrench low growth. And that’s why the yield curve is flattening.

Credit Writedowns
How monetary policy entrenches secular stagnation
Edward Harrison

See also

Michael Kalecki (Michal Kalecki), Political Aspects of Full Employment, Political Quarterly, 1943

Peter Cooper — More on Unemployment as Policy Choice

The previous post drew some interesting responses including apost by Cullen Roche over at Pragmatic Capitalism. (H/t to Trixie.) This response started as a comment and got too long, so I thought it would be better to turn it into a new post. First, I will respond to a question posed by Philippe. Second, I will respond to Edgaras. But there will be some overlap. The points can also be considered in relation to Cullen's argument, since the comments were motivated by his post. Finally, I'll respond to an aspect of Cullen's post that didn’t crop up in the specific responses to Philippe and Edgaras.

heteconomist.com
More on Unemployment as Policy Choice
Peter Cooper

Peter Cooper — Unemployment is a Government Policy Choice

A common misconception is that if everybody was prepared to take awful enough jobs, unemployment would be eradicated automatically, at least eventually, irrespective of the government's fiscal stance. Embedded in this argument is a misconception that unemployment, overall, can be eliminated through lower wages or deteriorating working conditions. In a capitalist monetary economy, this is not true. To think otherwise is to succumb to a fallacy of composition.

Neoclassical economists made this claim prior to the contributions of Keynes and Kalecki, but it was shown to be unfounded in the capital debates as well as in later work by neoclassical general equilibrium theorists themselves.

Even intuitively there is little reason to expect that an inverse relationship between wages and aggregate employment would hold. A reduction in the price of anything always means two things simultaneously. It means: (i) somebody has to pay less for something they want; and (ii) somebody else is receiving less for providing that thing. At the aggregate level, it means: (i) all of us, taken as a whole, are paying less for the stuff we want; and (ii) all of us, taken as a whole, are receiving less for providing the same stuff. Why would this have any systematic effect on how much stuff will be produced in the economy? It doesn't, as has been demonstrated formally in the capital debates and later work.

Unemployment is a government policy choice. It occurs when the government fails to maintain demand at a level sufficient to sustain full employment.

heteconomist.com
Unemployment is a Government Policy Choice

Peter Cooper