Friday, September 09, 2011

One (mostly) good thing about Obama job plan

I am not exatly enthusiastic about Obama's new job plan, which is mostly just more of the failed policies he has pursued in the past. There was one mostly good part though, in the form of a reduction in the employers payroll tax. Given the fact that due to wage rigidity, labor costs have fallen insufficiently to solve unemployment, a payroll tax reduction that reduces labor costs is just what is needed. The fact that it is limited to the first $5 million could however create some distortions, making even this part less good than it could be. Still, it is despite that a mostly good thing.


Blogger Ralph Musgrave said...

Wasn’t the basic point made by Keynes that falling labour costs do NOT reduce unemployment? Reason is that prices fall in proportion which means everyone is back where they started (except in as far as the “wealth” or “Pigou” effect works).

However I support the payroll tax reduction because, assuming it is not balanced by some tax increase, it injects new money into the economy. In particular, it puts extra spending power into the pockets of a group which is likely to spend a significant proportion of the tax cut: low and middle income people. I.e. there should be a decent multiplier effect.

5:12 AM  
Blogger stefankarlsson said...

Ralph, I am aware of the Keynesian position, but I don't agree with it. I see no reason why all prices is going to fall as much as wages because other prices are affected by other factors than labor costs.

10:28 AM  
Blogger Ralph Musgrave said...

Stefan, I very rarely spot what I think are mistakes in your writing, but I think you are wrong here. “All prices” will fall as fast as the cost of labour in that about 100% of the cost of anything is ultimately the cost of labour (especially if one counts entrepreneurs’ remuneration as “wages”). If the adjustment in the cost of other things (especially materials and capital equipment) does not happen QUICKLY, then employers will tend to employ labour in place of other things. But that means fewer jobs in “other thing production”. Plus, when the ratio of the cost of labour to the cost of other things reverts to normal, the excess unemployment will presumably re-appear, all other things remaining constant.

10:21 AM  
Blogger stefankarlsson said...

Ralph, no not all costs are ultimately "cost of labor" because there is also the cost of capital.

And I see no reason why there would be less capital goods production because wages fall. Quite to the contrary, because more investment is now profitable, it would be more of it.

12:22 PM  
Blogger Ralph Musgrave said...

Why do capital goods cost anything? It’s because of the labour, capital and materials are required to make those goods. As to the latter capital and materials, why do they cost anything? It’s because labour, capital and materials are required to make those goods, and so on, and so on. I.e. ultimately, 100% of the cost of everything is the cost of labour (assuming one counts the entrepreneur’s “profit” as labour).

In a recession, there is a surplus of both entrepreneurs and labour. If the monetary rewards for both fall by same percentage, everyone is back where they started (Pigou effect apart). Even if wages fall by more than profits, it is true that that raises profits, but I don’t see where the extra demand comes from, and nor did Keynes. And coincidentally this is where the US is right now: profits have risen, but there is a lack of demand to expand employment.

6:34 PM  
Blogger stefankarlsson said...

Ralph, it is not sufficient with labor input to create capital goods. There must also be a decision to save and invest rather than to consume, and the existence of natural resources (which by definition is simply there for us to use regardless of both labor and saving decisions) also plays a role.

8:35 AM  

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