Marginal Revolution: Sumner and Krugman on zero MP workers

Marginal Revolution: Sumner and Krugman on zero MP workers:
Scott's post is here, Krugman's is here. (My first post on the topic is here, my last post here). Arnold Kling has more. Later, Tabarrock opposes Cowen on ZMP and agrees with Krugman. DeLong comments on Tabarrock:

That it is a fact is pretty clear:

It used to be that the times when unemployment was rising were times when economy-wide productivity growth was undershooting expectations. Now the times when unemployment is rising are times in economy-wide productivity is overshooting expectations.

If the stake had not been driven through the heart of real business cyle theory long ago, that would definitely do it...

What Have We Unlearned from Our Great Recession? - Grasping Reality with Both Hands

What Have We Unlearned from Our Great Recession? - Grasping Reality with Both Hands: "here are five things that I thought I knew three or four years ago that turned out not to be true"

A Platonic Dialogue on the Failure of Economics Education - Grasping Reality with Both Hands

A Platonic Dialogue on the Failure of Economics Education - Grasping Reality with Both Hands:

...only 4% of the American people and 10% of Washington elites believe that our current macroeconomic disorder of high unemployment is a serious but curable disease of the industrial market economy--a disease curable by strategic interventions to rebalance financial markets through appropriate monetary, fiscal, and banking policies. 96% of the American people and 90% of elites believe, by contrast, that our current macroeconomic disorder and high unemployment is--in some sense they cannot fully explain--just punishment for our sins against financial prudence, that we must take our just punishment like manly men, and that we must not attempt to evade punishment through financial trickery. Think of David Brooks: that argument, on that level, with that degree of background knowledge, and that degree of certainty....
If there are two lessons we want people to remember from the 'Intro Macro' part of Econ 1, they are (a) that government can stabilize the price level and prevent inflation by stabilizing the money stock over the long-term, and (b) that downturns--episodes of high unemployment--are usually cases of a disease that can be cured by the right strategic interventions in financial markets. Keynesians and monetarists, classicals and neoclassicals, credit-channelers and post-Keynesians--this is what we all believe: that while Say's Law can be broken, the only thing that can break it is some imbalance in financial markets that produces excess demand for some category of financial assets, and that a competent and nimble technocratic government can conduct strategic interventions that make Say's Law--even though false in theory--roughly true in practice. That is what we all think...

Debt, deleveraging, and the liquidity trap: A new model | vox - Research-based policy analysis and commentary from leading economists

Debt, deleveraging, and the liquidity trap: A new model | vox - Research-based policy analysis and commentary from leading economists:

...much analysis (including my own) is done in terms of representative-agent models, which by definition can’t deal with the consequences of the fact that some people are debtors while others are creditors. ...instead of thinking in terms of a representative agent, we imagine that there are two kinds of people, “patient” and “impatient”; the impatient borrow from the patient. There is, however, a limit on any individual’s debt, implicitly set by views about how much leverage is safe.

We can then model a crisis like the one we now face as the result of a “deleveraging shock.” For whatever reason, there is a sudden downward revision of acceptable debt levels – a “Minsky moment.” This forces debtors to sharply reduce their spending. If the economy is to avoid a slump, other agents must be induced to spend more, say by a fall in interest rates. But if the deleveraging shock is severe enough, even a zero interest rate may not be low enough. So a large deleveraging shock can easily push the economy into a liquidity trap. ...If debts are specified in nominal terms and a deleveraging shock leads to falling prices, the real burden of debt rises – and so does the forced decline in debtors’ spending, reinforcing the original shock. One implication of the Fisher debt effect is that in the aftermath of a deleveraging shock the aggregate demand curve is likely to be upward, not downward-sloping. That is, a lower price level will actually reduce demand for goods and services.

More broadly, large deleveraging shocks land the economy in a world of topsy-turvy, where many of the usual rules no longer apply. The traditional but long-neglected paradox of thrift – in which attempts to save more end up reducing aggregate savings – is joined by the “paradox of toil” – in which increased potential output reduces actual output, and the “paradox of flexibility” – in which a greater willingness of workers to accept wage cuts actually increases unemployment.

...ebt is often invoked as a reason to dismiss calls for expansionary fiscal policy as a response to unemployment; you can’t solve a problem created by debt by running up even more debt, say the critics. Households borrowed too much, say many people; now you want the government to borrow even more?

What's wrong with that argument? It assumes, implicitly, that debt is debt – that it doesn't matter who owes the money. Yet that can't be right; if it were, debt wouldn't be a problem in the first place. After all, to a first approximation debt is money we owe to ourselves – yes, the US has debt to China etc., but that's not at the heart of the problem. Ignoring the foreign component, or looking at the world as a whole, the overall level of debt makes no difference to aggregate net worth – one person's liability is another person's asset.

It follows that the level of debt matters only because the distribution of that debt matters, because highly indebted players face different constraints from players with low debt. And this means that all debt isn't created equal – which is why borrowing by some actors now can help cure problems created by excess borrowing by other actors in the past. This becomes very clear in our analysis. In the model, deficit-financed government spending can, at least in principle, allow the economy to avoid unemployment and deflation while highly indebted private-sector agents repair their balance sheets, and the government can pay down its debts once the deleveraging crisis is past.

Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com

Economics and Politics by Paul Krugman - The Conscience of a Liberal - NYTimes.com:
...money has real effects precisely because it pushes against sticky nominal wages.
...The way this channel works in standard models ...is that a rise in the real money supply reduces interest rates, leading to a rise in demand; and a fall in nominal wages for a given money supply would have the same effect. What happens when you’re in a liquidity trap, with short-term interest rates up against the zero lower bound?

Well, the answer in a simple model is that falling wages and prices can still be expansionary, but only because they reduce current prices relative to expected future prices, and thereby generate expected inflation. [But] once you add in debt-constrained players, it’s likely that the effect actually goes the other way: a fall in wages worsens debt problems, and so ends up contractionary.

...Some of us encountered a closely related question back in the late 90s, when thinking about the Asian financial crisis. It seemed obvious that there were big problems when people had large foreign-currency debt: a depreciation of the rupiah, say, worsened balance sheets by causing the domestic-current value of debt to explode, and was probably contractionary overall. But this did mean that no amount of depreciation would be expansionary? No; as I wrote in a little paper at the time, once everyone who could go bankrupt had, any further depreciation would be expansionary. So a sufficiently large depreciation could restore full employment.

Similarly, you could argue that a sufficiently large fall in wages could restore full employment now — but it would have to be a very large wage decline, and the positive effects would kick in only after deflation had first driven just about every debtor in the economy into bankruptcy.