Saturday, November 16, 2013

In praise of wage inflation!!!!

"Wage inflation". The very words strike terror into the hearts of economists and financiers everywhere. We are taught that wage inflation is categorically evil, as if some comprehensive set of data proved this beyond any doubt. But, maybe there is a time and place for wage inflation, and maybe that time is now and that place is here.

A primary goal of the government today should be to stimulate the economy to, in principle, cause hiring to create additional GDP. US companies are sitting on record balances of cash, so they have no problem funding capital expansion and hiring. The low interest rates may help them on current interest payments by some refinancing, but otherwise makes not difference to them. They see no demand for more goods and services beyond what they currently plan to produce, so they sit and wait. They are waiting to be signaled by consumers to increase production by consumers buying more goods and services than these companies are currently planning for. This is the demand signal that moves companies to hire workers and invest in capital expansion.

Consumers, seeing their pay stagnate or shrink, and being up to their ears in debt, are in no position to increase their spending to create the demand needed to signal companies. So, they muddle through hoping not to loose the jobs they have and become one of the tens of millions of unemployed.

The long-term unemployed try to find work, but are unable. Neither are they in much of a position to start businesses of their own. I suppose some try to do odd jobs or deal things at flea market and on line. But they just hope to find some decent job before their unemployment runs out. BTW, unemployment insurance payment is the one fiscal stimulus that is actually in effect to boost demand.

I believe this whole line of argument is the one Keynes made to justify government intervention in the first place. And that fiscal policy is needed during recessions.

Consumers are spending all they can afford to, but that level is below the amount that the businesses in the economy are structured to produce. The lack of growth in the economy is because the consumer isn't buying more. And the consumer isn't buying more because they lack the income to do so. In other words, incomes have not kept up with expectations of producers. So, production is cut back to a level that consumers can currently afford. This means the supply and demand curve is moved to lower demand and thus lower supply at a lower price. This is source of the lack of inflation that we've been seeing.

What is needed is for consumers incomes to grow, which would spur purchasing, which would spur increased production, which would spur hiring and capital expansion. Which would...increase incomes. This is, in fact, wage inflation. Prices would necessarily rise as demand is bid up by rising incomes, and rising supply would only happen if prices were bid up to motivate the increase in production.

The happy side effects of this wage inflation are: lowered unemployment, raised taxes, and likely increases in long term profits for companies as those sales increases accrue over the years. This is a much better situation for all then if those unemployed stay idle, government deficits continue at the current pace, and production at companies remain below the potential output.

Going back to Keynes, this is where the government needs to step in. How to achieve wage inflation? By cutting taxes on wage earners. I.e. those folks who make their incomes through work producing real goods and services. Also known as the middle class and the working class. The groups who have been taking the brunt of the economic crisis. One which they largely didn't create. How to pay for this? By increasing taxes on those who benefit by increased incomes from unproductive activities. I.e. Wall St types and those who's incomes come from rents and capital gains. This isn't a punitive suggestion, merely a recognition that the wealth is flowing to those groups and they are not spending it to produce increased demand for the goods and services that the nation's companies are set up to produce. Such a trade off of taxes would be essentially revenue neutral, but would increase demand in the economy and send it back to full production and employment.

Such a suggestion goes against the entire "cut taxes on job creators and the wealthy" arguments.  But, I think that those arguments were weak to begin with, and have now been largely discredited by the current economic and financial crisis.  Will government have the will to make these changes?  Will the economics profession have the will to acknowledge these new policies are the correct ones to make?  Only time will tell.

Tuesday, November 5, 2013

Should America remain a sovereign nation??

The modern nation-state is a political entity that was created at the end of the thirty years war by the Peace of Westphalia.  This new concept recognized geographic boundaries of a nation and that nations should largely be free of outside influence.  Also, that the nation was the primary, cohesive entity with common internal interest that negotiated with other nation states that have their own interests.  The idea of empire became passe', particularly as related to a single sovereign person (king, emperor) or one of a religious state that ailed with a particular religious sect.

The essential properties of a nation-state are:
Sovereignty:  being independent from other nations.
Independence of the influence of external agents, either other nations or others.
Have relations with other nations.  The nation is the primary negotiating entity.
Has a population of citizens.  These folks have rights and responsibilities to the nation.
Has a geographic boundary.  The nation controls the land within its boundaries.
Has a national currency.  Controls and regulates the values of the currency used by the nation.
Has a common culture.  Common values, rituals, symbols, mythology, and history.
System of laws aligned with the culture.
A national defense to defend against other nations which could be hostile.

The United States of America, one could argue, became by the mid-twentieth century, the purest realization of the ideal of the nation-state.  It kicked out the british king and became sovereign.  It kicked out the british to get rid of external agents (at least they tried).  It formed relations with other nations, e.g. France.  Americans then thought of themselves as, well, Americans rather than brits.  The borders were the combination of the state boarders.  They eventually created a national currency, but that took some time.  By mid-twentieth century the US had a culture that bound its citizens (most of them at least) together with a common identity.  It had laws which reflected this culture and the founding principles of the rights of man.  And it developed a military in WWII that was able to overwhelm fascism.  So, the USA became truly a nation-state.

But how does a nation cause those properties to come into being and continue into the future?  That is what actions does a nation-state take and what structures does it put in place to actually be a nation-state?  Looking back at the list we see that the essential feature of a nation-state is controlling what transits boarders.  That is, what leaves and enters the geographic boundary of the nation.  Control over boarders is how the nation-state puts into effect the properties to be a nation-state.  In a sense, a nation is defined by its borders and the control thereof.  Well, what transits borders?  People, goods, services, money, communications, ideas.  These elements that transit borders are mostly economic and financial in nature.  So, being a nation entails border concerns with economic and finance issues as well as political issues.  So the opposite must also be true.  That is, nations which don't control their borders are no longer sovereign.

The US used to control these boarder crossing entities quite strictly, as do all sovereign nations.  Entering and leaving the country was controlled by strict visas on how long one could visit.  And for work, relatively few could enter and stay on a temporary basis.  Entry for work was predicate upon intent to immigrate and become a citizen.  And the right to immigrate was relatively difficult to secure.  The currency, i.e. the US dollar, was backed by gold and then by the gold exchange mechanism of Bretton Woods, which ensured its value and stability.  Trade was regulated to prevent deficits and protect key national industries by means of tariffs and quotas.  Even ideas were regulated to some extent as certain books and publications were prohibited from import.

Today the situation for the US is much different.  No longer are borders so controlled.  People flow over the border relatively unimpeded as illegals aliens to work in agriculture and construction.  H1-B visa workers come by the tens of thousands for years to fill technology positions because of a supposed shortage of domestic talent.  Trade is now almost totally unregulated, so massive deficits accrue year after year.  Financial transactions across the border are similarly almost unregulated with foreigners able to buy up property and businesses unimpeded.  National defense has become world policing for someone's interests.  However, who's interests that is remains a bit unclear.

Many of the essential characteristics of a sovereign nation have been given up by the US over the last few decades.  The US really doesn't control its borders anymore.  Which makes me ask: is the US still a sovereign nation?  and should it even continue to try to be one?  Perhaps the globalists are right? or at least are getting their way?