Monthly Archives: May 2009

Teenagers and the Job Market

The Detroit News reports:

Teen unemployment in Michigan is expected to hit 28 percent this summer, up 2.7 percentage points from last summer

Of the 304,400 students in Michigan ages 16-19 who are expected to be looking for a job, only 219,200 are likely to get one, making the job search an enormous undertaking, experts said. There will be 7,100 more teens 16-19 unemployed this summer than last summer.

To make matters even more difficult, the young, inexperienced workers will be competing with older workers who have been in the work force for many years, but are unemployed now. Michigan’s unemployment rate hit 12.9 percent last month, the highest monthly rate since November 1983, when it hit 13 percent. The state’s jobless rate also was the highest in the nation during April.

Suspiciously, there is absolutely no mention of the fact that the minimum wage was raised to $7.40 per hour this past year.

Clive Granger, 1934 – 2009

James Hamilton offers his thoughts on the recent passing of Clive Granger.

Jimmy P Has Moved

Our friend James Pethokoukis has moved. He is now blogging for Reuters. Update your bookmarks.

Not a Good Sign

When the government proposes a program that will increase the costs of companies and the CEOs start talking favorably about the program, it is generally not a good sign that the policy is going to be effective.

About those “Buy American” provisions…

The Washington Post reports:

Ordered by Congress to “buy American” when spending money from the $787 billion stimulus package, the town of Peru, Ind., stunned its Canadian supplier by rejecting sewage pumps made outside of Toronto. After a Navy official spotted Canadian pipe fittings in a construction project at Camp Pendleton, Calif., they were hauled out of the ground and replaced with American versions. In recent weeks, other Canadian manufacturers doing business with U.S. state and local governments say they have been besieged with requests to sign affidavits pledging that they will only supply materials made in the USA.

Outrage spread in Canada, with the Toronto Star last week bemoaning “a plague of protectionist measures in the U.S.” and Canadian companies openly fretting about having to shift jobs to the United States to meet made-in-the-USA requirements. This week, the Canadians fired back. A number of Ontario towns, with a collective population of nearly 500,000, retaliated with measures effectively barring U.S. companies from their municipal contracts — the first shot in a larger campaign that could shut U.S. companies out of billions of dollars worth of Canadian projects.


Take, for instance, Duferco Farrell Corp., a Swiss-Russian partnership that took over a previously bankrupt U.S. steel plant near Pittsburgh in the 1990s and employed 600 people there.

The new buy American provisions, the company said, are being so broadly interpreted that Duferco Farrell is on the verge of shutting down. Part of an increasingly global supply chain that seeks efficiencies by spreading production among multiple nations, it manufactures coils at its Pennsylvania plant using imported steel slabs that are generally not sold commercially in the United States. The partially foreign production process means the company’s coils do not fit the current definition of made in the USA — a designation that the stimulus law requires for thousands of public works projects across the nation.

In recent weeks, its largest client — a steel pipemaker located one mile down the road — notified Duferco Farrell that it would be canceling orders. Instead, the client is buying from companies with 100 percent U.S. production to meet the new stimulus regulations. Duferco has had to furlough 80 percent of its workforce.

Read the whole thing.

In Search of Monetary Stability

I have been discussing a multitude of issues including quantitative easing, Ricardian Equivalence, and the current state of monetary policy with Scott Sumner over the in comments of his excellent blog and it has given me the inspiration to provide a more thorough outline of my thinking.

I think that the best way to think about money is, as Leland Yeager might say, in terms of monetary equilibrium. In other words, if we view money as being just one other good in a Walrasian general equilibrium model, then an excess demand (supply) of money is accompanied by an excess supply (demand) of goods and services. Thus, maintaining monetary equilibrium is essential to achieving economic stability. What’s more, the particular problem with an excess demand (or supply) of money is that money has no market of its own. Or as Keynes would say, labor cannot be shifted away from the production of goods where there is an excess supply to the manufacture of money. Further, the fact that money does not have a market of its own implies that an excess demand (supply) of money will have an impact on all markets because money is a medium of exchange.

My view here is not unique. In fact, Nick Rowe recently wrote an excellent post on this very topic that rightfully referenced the work of Robert Clower. The central point is that individuals have notional demands for money, goods, and services. Notional demand is understood as the intended demand. Thus, suppose for example that everyone arrives at some centralized market with their own plans for consumption and ultimate real money balances. If there is an excess demand for say lemonade, individuals can bid up the price of lemonade and the market will clear. If the excess demand is for money, however, there exists no price to adjust to clear the market and the effective demand for goods and services will fall short of supply.

A very simple way to think about monetary equilibrium is in the context of the equation of exchange:


where M is money, V is velocity, P is the price level, and Y is real output. Thus, M is the supply of money and V can be seen as the demand for money. (A particular note: velocity is understood as the number of times that the average dollar — or other medium of account* — is turned over. Thus an decrease in velocity reflects an increase in the demand for money.) Monetary equilibrium therefore implies that the product MV should be constant (and thus so should nominal GDP, or PY. Keep in mind that this is a static analysis).

The maintenance of monetary equilibrium essentially implies that monetary policy should be aimed at satisfying money demand (or nominal income) rather than the price level (as is currently the case). Thus, in a growing economy, the price level should actually be falling as increases in real output and productivity put downward pressure on prices. This type of thinking loosely forms the basis for what George Selgin calls the productivity norm. Such a maintenance of monetary equilibrium has a rich history in the course of economic thought (see Selgin, 1995).

So how does this framework relate to the current situation? Scott Sumner believes that the current recession could have been avoided using a nominal income target (more specifically, using nominal income futures targeting). I am not sure that I agree with this assertion, but it does fit with this framework. Allow me to explain.

If Sumner is correct, then (using our simple equation of exchange model) anticipations of lower nominal income would be reflected in an increase in the demand for money or a decrease in spending (a fall in V). (Alternatively, it is possible that the increase in the demand for money could be an exogenous event such as described by Keynes when there is an increase in uncertainty.) If the central bank was targeting nominal income, they would respond by increasing the money supply to offset the fall in velocity such that nominal income remains at the target level.

Sumner, however, likes to view this phenomenon through the lens of nominal income and expectations rather than through a monetary equilibrium framework (or at least that is my impression). Thus, in his mind, the nominal income target signals to economic agents that the Federal Reserve will do everything that it can to make sure that nominal income does not fall. If the Fed is credible on this point, then nominal income will not fall because people expect the Fed to follow through on this promise. I actually think that my view of monetary equilibrium is consistent with this view, but that Sumner simply has a different way of describing the policy.

In any event, Sumner has recently expressed his concern with the productivity norm view because (as I understand it) he is concerned with nominal wage rigidity. Thus, the falling prices implied by the productivity norm might actually produce malign effects. He would prefer a broader idea of a nominal income target. He might be correct, but I do not share this concern about wage rigidity. The reason is because wage rigidity should only be a concern when prices are falling due to adverse aggregate demand shocks. Falling prices due to productivity advances should have no effect on the nominal wage. In fact, rising productivity should be consistent with higher real wages (in this case due to falling prices). In any event, one need not worry about this problem under the current circumstances because the decline in nominal income is the result of a severe adverse aggregate demand shock.

I am inclined to think that nominal income targeting is certainly more desirable than the current regime. However, the ultimate question is whether or not the current situation could have been avoided under a nominal income targeting regime. Scott Sumner believes that we could have avoided the recession and simply experienced a burst of the housing bubble had we followed a nominal income target. I actually think that we might not have even had a housing bubble if we had a nominal income target (that allows for falling prices). In any event, the current situation has raised interesting questions about the state of monetary policy and monetary stability. Hopefully, we will also stumble upon some of the answers.

* “Money is here called a medium and not, as customary, a unit of account because, clearly, money itself is not a unit, but the good whose unit is used as the unit of account” Niehans (1978).

Quote(s) of the Day

It is actually a tie regarding the proposed $17 billion cuts in the $3.4 trillion budget:

“What really worries me is what it says about the Obama Administration’s opinion about the intelligence of the American people. Either they think most Americans are stupid or most Americans are stupid. Or both.”

Mario Rizzo

“I guess that’s the only fat in the $3.4 trillion. The rest of it is just too essential.”

Russ Roberts