Federal Reserve, Information, Wages, Income and Pie

On Information

In this post on Google+, I explained why the Federal Reserve’s interest in monitoring online economic blogs:

I sure wish the Federal Reserve did. If they had, they would already have read their exceptionally great advice – advice which they’ve been preaching for the past four years to no avail because their advice is unconventional and how monetary policy can work effectively during when we’re at the lower zero bound is still not completely understood.

If the Fed had listened to Scott Sumner in 2008, this recession would not have happened.

informationBasically the gist is that the Federal Reserve, for all their wisdom and resources, are still knowledge constrained. Economics is still a soft science. Most of what we need to understand about economics cannot be tested in an empirical fashion in the real world. We cannot put millions of people on an island and use them as lab mice to see how economic theories work out in a closed system (which, being closed, would make the experiment completely flawed). The key to understanding economics is information – tons of it. There are millions of economists out there who have different ideas about how the markets work and not one person knows it all.

Below I’ll show an example of a semi-popular but not popular enough blogger who has been a part of an ongoing conversation about what’s been going on in the economy and the different theories and ideas on how to improve how the markets function. I’ve been following many different bloggers for a few years and have gained an incredible amount of knowledge in politics and economics and I haven’t even started to touch the tip of the iceberg.

Just recently a bunch of video gamers were able to solve a puzzle about AIDS that scientists hadn’t been able to figure out through computer simulations. Gamers! How? It was basicall the power of crowds. Video gamers worked together to figure out puzzles and figured out better ways to figure them out. This is no different than reading a ton of economic bloggers who keep talking to each other and figure out better ways to solve common and uncommon economic problems. This is what the Federal Reserve wants to do.

Minimum Wage, Inflation, the Federal Reserve and Monetary Policy

We all know the reasons for a minimum wage: people gotta live! We all know (well some) the problems with minimum wage: it can lead to price inflation of goods and potentially lower employment due to increased labor cost. It’s also a distraction in politics that keep debates from progressing toward more interesting and potentially more viable solutions to poverty and abuse of labor.

Did you know the minimum wage is just one way of making sure workers get a minimum wage? If not, then here’s a pretty good lesson:

How about instead of a minimum wage, which places a direct burden on employers, we have a minimum income? How do we do this? Many ways. We already do, in a way. The Earned Income Tax Credit is one way we supplement incomes (by saving them from getting taxed to abject poverty). George W. Bush’s tax credits that he mailed out to people (remember that nice $600 [max] check?)

Or how about this, from Peter Frase:

HELICOPTER DROP MONEYIn other words, the stagnation of median wages and the funneling of income growth to the top 1% is directly related to the pattern of credit expansion and asset bubbles that we’ve seen over the past 30 years. See Waldman’s post for an explanation of why, while it’s possible to have an ongoing dynamic where economic growth is fueled by repeated bubbles followed by debt cancellation, this isn’t a desirable state of affairs. What I’m interested in is the later post where Waldman gives a third stabilization strategy: having the Fed hand out free money, the mythical “Helicopter Drop”:

 

Hold on. Some translation is necessary:

3531dsStagnation, we all know is just that: a state of inactivity. In this case, it’s about median (the middle mark within a range instead of an average) wages. In essence, wages have not been growing and that’s led to more credit being given out (people are borrowing more in order to make up for the lack of wage income) and this tends to end up giving the wealthier class much more money. This is partly why the top 1% of income earners have become so incredibly rich, much richer than they ever could have before. The problem is that this has led to economic bubbles which explode and create wealth destruction and unemployment.

A “Helicopter Drop” is basically what it sounds like: giving out free money. I’m sure you’re thinking that such a thing is morally heinous and probably not a good idea, but it’s not. The Federal Reserve prints money all the time in order to control the amount of money in the economy. The question is, has the Federal Reserve been using its resources in the best possible way, or are there better ways to control the supply of money?

I guess the question might arise: Why does the Fed control the supply of money, though? Let’s say the Fed didn’t exist and suddenly there was another Katrina which ended up causing all kinds of havoc, slowing down the economy considerably. We suffered an oil shock, meaning that the price of oil has skyrocketed because demand has continued at the same pace but supply has gone down. When supply goes down but demand stays the same – prices go up. We end up with a recession.

What if the Fed did exist, what then? How about increasing the supply of money in order to increase economic activity elsewhere and lessen the burden of the recession? Boost the economy back up by printing money is what the Federal Reserve does. It also keeps the economy from growing too fast, which can lead to rapid growth in the prices of goods (measured as CPI, or Consumer Price Index), also known as inflation. Remember the hyperinflation of the 80s? The Federal Reserve put an end to that by creating a recession by tightening the money supply. If it hadn’t, we’d be Zimbabwe right now, using $1 trillion dollar bills to buy a loaf of bread.

So the Fed prints money all the time. Not all the time, but whatever. Here’s Waldman:

We should try to arrange things so that the marginal unit of CPI is purchased with “helicopter drop” money. That is, rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public. During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle. We could reach the “zero bound”, but a different zero bound than today’s zero interest rate bugaboo. At the point at which the Fed is making no transfers yet inflation still threatens, the central bank would have to coordinate with Congress to do “fiscal policy” in the form of negative transfers, a.k.a. taxes. However, this zero bound would be reached quite rarely if we allow transfers to displace credit expansion as the driver of money growth in the economy. In other words, at the same time as we expand the use of “helicopter money” in monetary policy, we should regulate and simplify banks, impose steep capital requirements, and relish complaints that this will “reduce credit availability”. The idea is to replace the macroeconomic role of bank credit with freshly issued cash.

inflation_2008First, the first bolded part: “rather than trying to fine-tune wages, asset prices, or credit, central banks should be in the business of fine tuning a rate of transfers from the bank to the public.” This is what the Federal Reserve does. We have a minimum wage, but the Federal Reserve also fine-tune wages indirectly; by increasing the money supply, the Fed can increase demand for goods and that increased demand for goods increases employment; increasing employment gives workers a better position to demand for higher wages. Cut the money supply (which tends to also cut demand for goods) and you get unemployed people. A lot of unemployed people end up begging for jobs and tend to go for lower wages to get something.

These are the problems the Federal Reserve has to battle every day. Increase wages and unemployment may go up. We don’t want that. This is why Waldman (and other economists) are suggesting a different tactic:

“During depressions and disinflations, the Fed should be depositing funds directly in bank accounts at a fast clip. During booms, the rate of transfers should slow to a trickle.”

Remember what I said about minimum income? Well let’s call it basic income instead. Saying minimum would be wrong because this is monetary policy we’re talking about; the point is to change the way the Federal Reserve manages it. We can still worry about making sure everyone is making a reasonable income, and the Federal Reserve’s transfers can help out.

What if there’s too much money out there? Won’t there be a growth in prices? Nah. That’s where the federal government’s “negative transfers, a.k.a. taxes” come in. Taxes take money out of the economy just like the Federal Reserve does (sort of). Taxes decrease the money supply temporarily, cutting any potential inflation short.

Part of the point is to make sure that people aren’t trying to borrow too much, which, as mentioned before, tends to transfer great amount of wealth to the top 1%. We don’t want that. That’s like stealing from the poor because the poor need to eat. Cash from the Federal Reserve’s “Helicopter Drop” would replace that credit/borrowing. This would lead to more saving instead of borrowing. That’s always good.

What’s am I talking about? This post is too long anyway.

If you’ve made it this far, might as well finish.

Steve Randy Waldman is a blogger. He’s also pretty fricking smart. These ideas aren’t Waldman’s alone; these ideas come from other economists, many of whom the people at the Federal Reserve have never heard of. Information is key to understanding economics. Waldman is one of those video gamers.

And finally…

Here’s a bit more from Waldman:

If people grow accustomed to getting sizable checks from the central bank, that would change behavior. But not all changes are bad. For example, it may be true that many workers would be pickier about what jobs to take if government transfers generated incomes they could get by on without employment. Employers would undoubtedly have to pay people who work unpleasant jobs more than they currently do. But that’s just another way of saying that workers would have greater bargaining power in negotiating employment, as their next best alternative would not be destitution. That we’ve spent 40 years increasing the bargaining power of capital over labor doesn’t make it “fair”, or good economics. Supplementary incomes are a cleaner way of increasing labor bargaining power than unionization. Unionization forces collective bargaining, which leads to one-size-fits-all work rules and inflexible hiring, firing, and promotion policies, in addition to higher wages. If workers have supplementary incomes, employment arrangements can be negotiated on terms specific to individuals and business circumstances, but outcomes will be more favorable to workers than they would have been absent an income to fall back upon.

First of all, people being pickier about which job to take is a big plus. You don’t want companies hiring someone who is just taking the first job they find, train them, and lose them when some other, better job, comes around. That employer just wasted a ton of training time, costing them money.

workers-wages-vsAlso, having a basic income means that employees wouldn’t have to worry so much about destitution, or abject poverty. That gives employees a better position to bargain for better wages and better work conditions.

“That we’ve spent 40 years increasing the bargaining power of capital over labor doesn’t make it “fair”, or good economics.”

That basically means that we’ve been giving people who hold capital (the means of production; i.e. the wealthy who own the stuff you work on and the money that you end up borrowing because you’re strapped for cash since your income sucks) more power in the last several decades while labor power has dwindled (like unions).

“Unionization forces collective bargaining, which leads to one-size-fits-all work rules and inflexible hiring, firing, and promotion policies, in addition to higher wages.”

Ew!

The thing is, each worker won’t need a union to shove companies around anymore. Workers won’t be afraid of destitution so they can be more confident to fight for their rights.

So…

  • Workers are empowered: check.
  • Unions suck: check.
  • Less poverty: check.
  • The Fed continues managing monetary policy, probably more efficiently: check.

None of this would likely reach anyone at the Federal Reserve anytime soon without the Fed reading Waldman or Peter Frase’s blogs.

And the pie? I ate it while you were reading.

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