Friday, January 20, 2012

Increasing NGDP to increase income

Scott Sumner today writes:
Of course wages are not flexible, but if NGDP was raised sharply then aggregate nominal wages would not rise as fast, allowing more jobs for Murdock making pick-up trucks, and more income to buy those pick-up trucks.  This is what “Say’s Law” is really trying to “say.”  If we can produce more stuff, society will be rich enough to buy that extra stuff.  No matter how much we produce, there is always some price level where we are rich enough to buy all the stuff.
I have questions about this assertion:
You're advocating NGDP, and you believe this income to buy trucks. But how does  income without wages?

If NGDP, thus cost of living, why won't people demand wages?

If NGDP , how does this actually lead to income? Does NGDP entail government sending checks to everyone? QE, does not cut it as a mechanism that income, as it just exchanges income earning assets with non-income earning cash.

If you believe in neutrality of money, why would you believe that - if you NGDP,  which costs, and thus wages - it leads to sellers and income?  Income for whom? And sellers do not automatically become buyers of same nominal amount.

And if money were indeed neutral, what is the point of NGDP?  Money neutrality just means everything will pari passu.  (Of course, we know that money is not neutral, NGDP via QE actually price of financial assets, making savers strive to save more.)


alternative investments said...

Right now, income is not rising because wages are not rising. Its that simple. If anything, people are scared of keeping their jobs and most do not even dare ask for any salary increases.

Lahore said...

NGDP actually makes more sense to average citizens as they can relate to what they are earning and spending now, as opposed to real GDP the policy makers and economists use. The inflation number is also an averaged figure with individual baskets of consumption varying considerably with unavoidable “burnt” consumption (food, transport) being curtailed to stay within a monthly budget. Maybe its time that media and economists provided nominal data to speak to citizens everywhere than try to get them understand that this is based on 2001 prices or something like that.

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