Philip Pilkington: Market Monetarism Or An Attempt to Speed Up the Decline in Real Wages

The so-called ‘mar­ket mon­e­tarists’ – that is, a grow­ing pack of neo­clas­si­cal econ­o­mists who are advo­cat­ing that cen­tral banks should try to gen­er­ate infla­tion – are not as strange a breed as many think. Recent­ly we com­pared clas­sic defla­tion­ary mon­e­tarism with con­tem­po­rary QE poli­cies and found that they were based on the same under­ly­ing the­o­ret­i­cal frame­work. We also found that the high priest of clas­si­cal mon­e­tarism him­self, Mil­ton Fried­man, strong­ly advo­cat­ed infla­tion­ary mon­e­tary poli­cies for both Japan after 1991 and the US after the stock mar­ket crash of 1929. So, it is by no means sur­pris­ing that when one mon­e­tarist pol­i­cy fails (I refer to QE), anoth­er will quick­ly be cooked up by Fried­man devo­tees.

That is pre­cise­ly the role of the mar­ket mon­e­tarists in the cur­rent pol­i­cy and eco­nom­ic debates. They have intro­duced the banal notion that cen­tral banks should no longer tar­get infla­tion or unem­ploy­ment but instead they should focus on Nom­i­nal Gross Domes­tic Prod­uct (NGDP) – that is, a mea­sure of GDP that has not been adjust­ed for infla­tion. The idea is that the cen­tral banks should pump up non-infla­tion adjust­ed GDP until eco­nom­ic growth begins once more.

The only thing that mar­ket mon­e­tarists are more vague on than how such infla­tion will trans­late into eco­nom­ic growth (mon­ey sup­ply voodoo?) is how they will actu­al­ly accom­plish the NGDP tar­gets. Some­times they refer to deval­u­a­tion, some­times to infla­tion­ary expec­ta­tions, some­times to banks levy­ing tax­es on deposits, some­times… wait for it… to more QE – indeed, one some­times gets the impres­sion that they are say­ing noth­ing new at all. How­ev­er, we will not con­cern our­selves here with peer­ing into their lit­tle black box­es. Instead we will focus on what might, in the unlike­ly event that they suc­ceed in their pol­i­cy goals, be the like­ly end result. But first a detour into the dis­tri­b­u­tion of income in today’s US of A.

Recent­ly Lance Roberts ran an excel­lent piece on cor­po­rate prof­itabil­i­ty and wages. He showed that while cor­po­rate prof­its are ris­ing, real work­er incomes are falling below trend. He pro­vides the fol­low­ing graph to illus­trate this:

Look­ing into this trend, Roberts notes that it is main­ly due to changes in the struc­ture of the US labour mar­ket. He is worth quot­ing in full in this regard:

The sin­gle biggest expense to any com­pa­ny is full-time employ­ees: pay­roll, tax­es and ben­e­fits. While the econ­o­my has grown since the depths of the last reces­sion, demand has remained weak in terms of sales growth. The lack of demand has kept busi­ness­es on the defen­sive with a focus on max­i­miz­ing prof­itabil­i­ty of each dol­lar of rev­enue. Dur­ing the reces­sion, and recov­ery, busi­ness­es have kept very tight con­trols on costs by reduc­ing inven­to­ry lev­els, cut­ting bud­gets and max­i­miz­ing pro­duc­tiv­i­ty per employ­ee. This has also led to mas­sive changes in hir­ing and employ­ment. Tem­po­rary hires (which have low­er wages and no ben­e­fit costs) have sub­stan­tial­ly out­paced per­ma­nent employ­ment since the end of the last reces­sion. Since the first quar­ter of 2009, part-time employ­ment has increased by more than 1.5 mil­lion while full-time employ­ment is still low­er by 1.25 mil­lion. The ana­lysts and media have been quick to jump on the idea that tem­po­rary jobs will ulti­mate­ly turn into full-time employ­ment. How­ev­er, in an econ­o­my that is grow­ing at a sub-par rate with a large and avail­able labor pool, the use of tem­po­rary ver­sus full-time employ­ment may well be the “new nor­mal”. This also explains why depen­dence on “food stamps” have surged by over 14 mil­lion par­tic­i­pants dur­ing the same peri­od.

Roberts notes that this is a curi­ous sit­u­a­tion because falling real wages should impart a defla­tion­ary bias to the econ­o­my as a whole due to less peo­ple hav­ing mon­ey to spend on goods and ser­vices. Actu­al­ly this sit­u­a­tion is not so curi­ous if we remem­ber the Kalec­ki prof­its equa­tion (which we dealt with in depth here). While there are a few iter­a­tions the Kalec­ki equa­tion is best stat­ed as such:

Pn = I + (G – T) + NX + Cp – Sw

Pn = total prof­its after tax. I = gross invest­ment. G = gov­ern­ment spend­ing. T = total tax­es. (So, G – T = the total gov­ern­ment bud­get deficit). NX = net exports (total exports minus total imports). Cp = cap­i­tal­ists’ con­sump­tion. And Sw = total work­ers’ sav­ing.

So, in Eng­lish that equa­tion reads as fol­lows:

Prof­its – Tax = Gross Invest­ment + Gov­ern­ment Deficit + Net Exports + Cap­i­tal­ists’ Con­sump­tion – Work­ers’ Sav­ing

Now, if we fol­low Roberts and assume that the labour mar­ket is being increas­ing­ly squeezed we can eas­i­ly guess where all that extra demand is com­ing from. It is, of course, com­ing from two chan­nels – the only two pos­si­ble chan­nels giv­en the cur­rent macro­eco­nom­ic pic­ture of the US – that is: the gov­ern­ment deficit and cap­i­tal­ist con­sump­tion (which can be read as: con­sump­tion out of pre­vi­ous prof­its). Of the two of these gov­ern­ment deficits are by far the most impor­tant.

Indeed, James Mon­tier from GMO [] has crunched the num­bers and turned out evi­dence that con­firms exact­ly what we would intu­itive­ly expect – name­ly that gov­ern­ment deficits are the main dri­vers of prof­its in the post-2008 world:

Now that we’ve run through some struc­tur­al dis­tri­b­u­tion­ary fea­tures of the US econ­o­my, back to the mar­ket mon­e­tarists. What does all this mean? Well, it seems that although fis­cal deficits by the US gov­ern­ment are indeed prop­ping up the econ­o­my and ensur­ing that those that have jobs can con­tin­ue to remain employed, they are also cov­er­ing up grow­ing macro­eco­nom­ic struc­tur­al imbal­ances. Because there are such wide deficits and because these sup­port cor­po­rate prof­its, com­pa­nies have been able to sup­press real wage growth and this has not sig­nif­i­cant­ly affect­ed demand for their goods and ser­vices.

So, if the mar­ket mon­e­tarists had their way and pro­voked added infla­tion in the econ­o­my it is clear that this would not nec­es­sar­i­ly result in real wage growth to match said infla­tion. The labour mar­ket is extreme­ly slack at the moment and, as Roberts has shown above, employ­ers are using this oppor­tu­ni­ty to supress real wages below trend. If a burst of infla­tion shot through the sys­tem there seems no rea­son to assume that real wages could keep pace. Much more like­ly that they would fail to rise and liv­ing stan­dards would fall. And as peo­ple need­ed to use more of their income to buy few­er, high­er-priced goods and ser­vices this would also lead to low­er econ­o­my-wide demand.

Indeed, such a pol­i­cy might, if pur­sued with gus­to, lead to a stagfla­tion sce­nario where work­ers suf­fered unem­ploy­ment on the one hand and falling liv­ing stan­dards on the oth­er. What a mess that would be… and, it should be said for those New Key­ne­sians who tie their flag to this mast (you know who you are), it would make it all the more dif­fi­cult to clear this dis­as­ter up with fis­cal stim­u­lus and oth­er sen­si­ble pol­i­cy mea­sures as this might feed into the arti­fi­cial­ly gen­er­at­ed infla­tion.

As we said though, it is unlike­ly that the mar­ket mon­e­tarists’ poli­cies will be able to gen­er­ate infla­tion even if they are imple­ment­ed. The last time mon­e­tarist cranks got into pow­er their poli­cies were used to mask polit­i­cal aspi­ra­tions that the gen­er­al pub­lic would not have oth­er­wise accept­ed. This time around, if the cen­tral bank choos­es NGDP tar­get­ing as its new shaman’s stick – since the QE-wand has by now gone com­plete­ly and com­i­cal­ly flop­py – they will like­ly just fall flat on their face. Where once mon­e­tarism was a grim mask worn by a disin­gen­u­ous reaper intent on mass destruc­tion, today it appears as noth­ing more than a cockscomb worn by an inse­cure fool try­ing des­per­ate­ly to con­vince the finan­cial mar­kets of his con­tin­u­ing rel­e­vance.