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The Weekend Quiz – February 2-3, 2019 – answers and discussion

Here are the answers with discussion for this Weekend’s Quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of modern monetary theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.

Question 1:

A government can run a balanced fiscal position over a complete economic cycle (peak to peak) as long as it accepts, that after all the spending and income adjustments are exhausted, that over the same cycle, the private domestic balance will only be in surplus if the external balance is in surplus.

The answer is True.

Note that this question begs the question as to how the economy might get into the situation that I have described. Whatever behavioural forces were at play, the sectoral balances all have to sum to zero. Once you understand that, then deduction leads to the correct answer.

To refresh your memory the sectoral balances are derived as follows. The basic income-expenditure model in macroeconomics can be viewed in (at least) two ways: (a) from the perspective of the sources of spending; and (b) from the perspective of the uses of the income produced. Bringing these two perspectives (of the same thing) together generates the sectoral balances.

From the sources perspective we write:

GDP = C + I + G + (X – M)

which says that total national income (GDP) is the sum of total final consumption spending (C), total private investment (I), total government spending (G) and net exports (X – M).

Expression (1) tells us that total income in the economy per period will be exactly equal to total spending from all sources of expenditure.

We also have to acknowledge that financial balances of the sectors are impacted by net government taxes (T) which includes all taxes and transfer and interest payments (the latter are not counted independently in the expenditure Expression (1)).

Further, as noted above the trade account is only one aspect of the financial flows between the domestic economy and the external sector. we have to include net external income flows (FNI).

Adding in the net external income flows (FNI) to Expression (2) for GDP we get the familiar gross national product or gross national income measure (GNP):

(2) GNP = C + I + G + (X – M) + FNI

To render this approach into the sectoral balances form, we subtract total taxes and transfers (T) from both sides of Expression (3) to get:

(3) GNP – T = C + I + G + (X – M) + FNI – T

Now we can collect the terms by arranging them according to the three sectoral balances:

(4) (GNP – C – T) – I = (G – T) + (X – M + FNI)

The the terms in Expression (4) are relatively easy to understand now.

The term (GNP – C – T) represents total income less the amount consumed less the amount paid to government in taxes (taking into account transfers coming the other way). In other words, it represents private domestic saving.

The left-hand side of Equation (4), (GNP – C – T) – I, thus is the overall saving of the private domestic sector, which is distinct from total household saving denoted by the term (GNP – C – T).

In other words, the left-hand side of Equation (4) is the private domestic financial balance and if it is positive then the sector is spending less than its total income and if it is negative the sector is spending more than it total income.

The term (G – T) is the government financial balance and is in deficit if government spending (G) is greater than government tax revenue minus transfers (T), and in surplus if the balance is negative.

Finally, the other right-hand side term (X – M + FNI) is the external financial balance, commonly known as the current account balance (CAD). It is in surplus if positive and deficit if negative.

In English we could say that:

The private financial balance equals the sum of the government financial balance plus the current account balance.

We can re-write Expression (6) in this way to get the sectoral balances equation:

(5) (S – I) = (G – T) + CAB

which is interpreted as meaning that government sector deficits (G – T > 0) and current account surpluses (CAB > 0) generate national income and net financial assets for the private domestic sector.

Conversely, government surpluses (G – T < 0) and current account deficits (CAB < 0) reduce national income and undermine the capacity of the private domestic sector to add financial assets.

Expression (5) can also be written as:

(6) [(S – I) – CAB] = (G – T)

where the term on the left-hand side [(S – I) – CAB] is the non-government sector financial balance and is of equal and opposite sign to the government financial balance.

This is the familiar MMT statement that a government sector deficit (surplus) is equal dollar-for-dollar to the non-government sector surplus (deficit).

The sectoral balances equation says that total private savings (S) minus private investment (I) has to equal the public deficit (spending, G minus taxes, T) plus net exports (exports (X) minus imports (M)) plus net income transfers.

All these relationships (equations) hold as a matter of accounting and not matters of opinion.

To help us answer the specific question posed, the following Table shows a stylised 6-period economic cycle with some simplifications.

The upper panel describes the situation where the external sector runs a deficit of 2 per cent of GDP over the cycle.

This results in the private domestic sector running a deficit on average over that cycle that is equal in magnitude to the external deficit.

In the lower panel we have the situation depicted in the question.

Over the cycle, the government fiscal position is in balance – a surplus for the first three periods (but declining) and then increasing deficits.

Over the entire cycle, if a balanced fiscal rule was forced, then the fiscal balance averages zero.

So the deficits are covered by fully offsetting surpluses over the cycle.

The simplification is the constant external surplus (that is, no cyclical sensitivity) of 2 per cent of GDP over the entire cycle.

You can then see what the private domestic balance is doing clearly. When the fiscal balance is in surplus, the private domestic balance is in deficit. The larger the fiscal surplus the larger the private domestic deficit for a given external deficit.

On average over the cycle, under these conditions, the average private domestic surplus exactly equals the average external surplus.

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Question 2:

A basic understanding of Modern Monetary Theory (MMT) would leave you to conclude that excessive real wage demands by workers can cause unemployment.

The answer is True.

In this blog post – What causes mass unemployment? (January 11, 2010) – I outlined the way aggregate demand failures causes of mass unemployment and use a simple two person economy to demonstrate the point.

I also presented the famous Keynes versus the Classics debate about the role of real wage cuts in stimulating employment that was well rehearsed during the Great Depression.

The debate was multi-dimensioned but the role of wage flexibility was a key aspect. In the classical model of employment determination, which remains the basis of mainstream textbook analysis, cuts in the nominal wage will increase employment because it is considered they will reduce the real wage.

The mainstream textbook model assumes that economies produce under the constraint of the so-called diminishing marginal product of labour. So adding an extra worker will reduce productivity because they assume the available capital that workers get to use is fixed in the short-run.

This assertion which does not stack up in the real world, yields the downward sloping marginal product of labour (the contribution of the last worker to production) relationship in the textbook model. Then profit maximising firms set the marginal product equal to the real wage to determine their employment decisions.

They do this because the marginal product is what the last worker produces (at the margin) and the real wage is what the worker costs in real terms to hire.

So when they have screwed the last bit of production out of the last worker hired and it equals the real wage, they have thus made “real gains” on all previous workers employed and cannot do any better – hence, they are said to have maximised profits.

Labour demand is thus inverse to the real wage. As the real wage rises, employment falls in this model because the marginal product falls with employment.

The simplest version is that labour supply in the mainstream model (and complex versions don’t add anything anyway) says that households equate the marginal disutility of work (the slope of the labour supply function) with the real wage (indicating the opportunity cost of leisure) to determine their utility maximising labour supply.

So in English, it is assumed that workers hate work and but like leisure (non-work). They will only go to work to get an income and the higher the real wage the more work they will supply because for each hour of labour supplied their prospective income is higher.

Again, this conception is arbitrary and not consistent with countless empirical studies which show the total labour supply is more or less invariant to movements in the real wage.

Other more complex variations of the mainstream model depict labour supply functions with both non-zero real wage elasticities and, consistent with recent real business cycle analysis, sensitivity to the real interest rate. All ridiculous. Ignore them!

In the mainstream model, labour market clearing – that is when all firms who want to hire someone can find a worker to hire and all workers who want to work can find sufficient work – requires that the real wage equals the marginal product of labour.

The real wage will change to ensure that this is maintained at all times thus providing the classical model with continuous full employment. So anything that prevents this from happening (government regulations) will create unemployment.

If a worker is ‘unemployed’ then it must mean they desire a real wage that is excessive in relation to their productivity. The other way the mainstream characterise this is that the worker values leisure greater than income (work).

The equilibrium employment levels thus determine via the technological state of the economy (productivity function) the equilibrium (or full employment) level of aggregate supply of real output.

So once all the labour markets are cleared the total level of output that is produced (determined by the productivity levels) will equal total output or GDP.

It was of particular significance for Keynes that the classical explanation for real output determination did not depend on the aggregate demand for it at all.

He argued that firms will not produce output that they do not think they will sell. So for him, total supply of GDP must be determined by aggregate demand (which he called effective demand – spending plans backed by a willingness to impart cash).

In the General Theory, Keynes questioned whether wage reductions could be readily achieved and was sceptical that, even if they could, employment would rise.

The adverse consequences for the effective demand for output were his principal concern.

So Keynes proposed the revolutionary idea (at the time) that employment was determined by effective monetary demand for output. Since there was no reason why the total demand for output would necessarily correspond to full employment, involuntary unemployment was likely.

Keynes revived Marx’s earlier works on effective demand (although he didn’t acknowledge that in his work – being anti-Marxist).

What determined effective demand?

There were two major elements: the consumption demand of households, and the investment demands of business.

So demand for aggregate output determined production levels which in turn determined total employment.

Keynes model reversed the classical causality in the macroeconomy. Demand determined output. Production levels then determined employment based on the current level of productivity.

The labour market is then constrained by this level of employment demand. At the current money wage level, the level of unemployment (supply minus demand) is then determined.

The firms will not expand employment unless the aggregate constraint is relaxed.

Keynes also argued that in a recession, the real wage might not fall because workers bargain for money or nominal wages, not real wages.

The act of dropping money wages across the board would also reduce aggregate demand and prices would also fall.

So there was no guarantee that real wages (the ratio of wages to prices) would therefore fall. They may rise or stay about the same.

Falling prices might, however, depress business profit expectations and so cut into demand for investment. This would actually reduce the demand for workers and prevent total employment from rising.

The system interacts with itself, and an equilibrium of full employment cannot be achieved within the labour market.

Keynes also claimed that in a recession it should be clear that the problem is not that the real wage is too high, but rather that the prices are too low (as prices fall with lower production).

However, in Keynes’ analysis, attempting to cut real wages by cutting nominal wages would be resisted by the workers because they will not promote higher employment or output and also would imperil their ability to service their nominal contractual commitments (like mortgages).

The argument is that workers will tolerate a fall in real wages brought about by prices rising faster than nominal wages because, within limits, they can still pay their nominal contractual obligations (by cutting back on other expenditure).

A more subtle point argued by Keynes is that wage cut resistance may be beneficial because of the distribution of income implications.

If real wages fall, the share of real output claimed by the owners of capital (or non-labour fixed inputs) rises.

Assuming such ownership is concentrated in a few hands, capitalists can be expected to have a higher propensity to save than the working class.

If so, aggregate saving from real output will increase and aggregate demand will fall further setting off a second round of oversupply of output and job losses.

It is also important to differentiate what happens if a firm lowers its wage level against what happens in the whole economy does the same. This relates to the so-called interdependence of demand and supply curves.

The mainstream model claims that the two sides of the market are independent so that a supply shift will not cause the demand side of the market to shift.

So in this context, if a firm can lower its money wage rates it would not expect a major fall in the demand for its products because its workforce are a small proportion of total employment and their incomes are a small proportion of total demand.

If so, the firm can reduce its prices and may enjoy rising demand for its output and hence put more workers on. So the demand and supply of output are independent.

However there are solid reasons why firms will not want to behave like this. They get the reputation of being a capricious employer and will struggle to retain labour when the economy improves. Further, worker morale will fall and with it productivity.

Other pathologies such as increased absenteeism etc would accompany this sort of firm behaviour.

But if the whole economy takes a wage cut, then while wage are a cost on the supply side they are an income on the demand side.

So a cut in wages may reduce supply costs but also will reduce demand for output. In this case the aggregate demand and supply are interdependent and this violates the mainstream depiction.

This argument demonstrates one of the famous fallacies of composition in mainstream theory. That is, policies that might work at the micro (firm/sector) level will not generalise to work at the macroeconomic level.

There was much more to the Keynes versus the Classics debate but the general idea is as presented.
MMT integrates the insights of Keynes and others into a broader monetary framework.

But the essential point is that mass unemployment is a macroeconomic phenomenon and trying to manipulate wage levels (relative to prices) will only change output and employment at the macroeconomic level if changes in demand are achieved as saving desires of the non-government sector respond.

It is highly unlikely for all the reasons noted that cutting real wages will reduce the non-government desire to save.

MMT tells us that the introduction of state money (the currency issued by the government) introduces the possibility of unemployment.

There is no unemployment in non-monetary economies. As a background to this discussion you might like to read this blog post – Functional finance and modern monetary theory (November 1, 2009).

MMT shows that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities.

So taxation is a way that the government can elicit resources from the non-government sector because the latter have to get $s to pay their tax bills. Where else can they get the $s unless the government spends them on goods and services provided by the non-government sector?

A sovereign government is never revenue constrained and so taxation is not required to “finance” public spending. The mainstream economists conceive of taxation as providing revenue to the government which it requires in order to spend. In fact, the reverse is the truth.

Government spending provides revenue to the non-government sector which then allows them to extinguish their taxation liabilities. So the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.

It follows that the imposition of the taxation liability creates a demand for the government currency in the non-government sector which allows the government to pursue its economic and social policy program.

The non-government sector will seek to sell goods and services (including labour) to the government sector to get the currency (derived from the government spending) in order to extinguish its tax obligations to government as long as the tax regime is legally enforceable.

Under these circumstances, the non-government sector will always accept government money because it is the means to get the $s necessary to pay the taxes due.

This insight allows us to see another dimension of taxation which is lost in mainstream economic analysis.

Given that the non-government sector requires fiat currency to pay its taxation liabilities, in the first instance, the imposition of taxes (without a concomitant injection of spending) by design creates unemployment (people seeking paid work) in the non-government sector.

The unemployed or idle non-government resources can then be utilised through demand injections via government spending which amounts to a transfer of real goods and services from the non-government to the government sector.

In turn, this transfer facilitates the government’s socio-economics program. While real resources are transferred from the non-government sector in the form of goods and services that are purchased by government, the motivation to supply these resources is sourced back to the need to acquire fiat currency to extinguish the tax liabilities.

Further, while real resources are transferred, the taxation provides no additional financial capacity to the government of issue.

Conceptualising the relationship between the government and non-government sectors in this way makes it clear that it is government spending that provides the paid work which eliminates the unemployment created by the taxes.

So it is now possible to see why mass unemployment arises. It is the introduction of State Money (defined as government taxing and spending) into a non-monetary economy that raises the spectre of involuntary unemployment.

As a matter of accounting, for aggregate output to be sold, total spending must equal the total income generated in production (whether actual income generated in production is fully spent or not in each period).

Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).

Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account through the offer of labour but doesn’t desire to spend all it earns, other things equal.

As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment.

In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.

So we are now seeing that at a macroeconomic level, manipulating wage levels (or rates of growth) would not seem to be an effective strategy to solve mass unemployment.

MMT then concludes that mass unemployment occurs when net government spending is too low.

To recap: The purpose of State Money is to facilitate the movement of real goods and services from the non-government (largely private) sector to the government (public) domain.

Government achieves this transfer by first levying a tax, which creates a notional demand for its currency of issue.

To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed.

The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on government spending.

It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).

It is also clear that if the Government doesn’t spend enough to cover taxes and the non-government sector’s desire to save the manifestation of this deficiency will be unemployment.

Keynesians have used the term demand-deficient unemployment. In MMT, the basis of this deficiency is at all times inadequate net government spending, given the private spending (saving) decisions in force at any particular time.

Shift in private spending certainly lead to job losses but the persistent of these job losses is all down to inadequate net government spending.

But in terms of the question – after all that – it is clear that excessive real wages could impinge on the rate of profit that the capitalists desired and if they translate that into a cut back in investment then aggregate demand might fall.

Note: this explanation has nothing to do with the standard mainstream textbook explanation.

It is totally consistent with MMT and the Keynesian story – output and employment is determined by aggregate demand and anything that impacts adversely on the latter will undermine employment.

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Question 3:

Assume that a nation’s GDP growth is half a percentage point below its trend rate of growth of 3.5 per cent per annum and labour productivity grows at 1.5 per cent per annum. If average working week is constant in hours and the labour force grows at 2 per cent per annum, then we would observe a rising unemployment rate.

The answer is True.

The facts were:

  • Real GDP growth is half a percentage point below its trend rate of growth of 3.5 per cent per annum – that is, it is growing at 3 per cent.
  • Labour productivity growth (that is, growth in real output per person employed) growing at 1.5 per cent per annum. So as this grows less employment in required per unit of output.
  • The labour force is growing by 2 per cent per annum. Growth in the labour force adds to the employment that has to be generated for unemployment to stay constant (or fall).
  • The average working week is constant in hours. So firms are not making hours adjustments up or down with their existing workforce. Hours adjustments alter the relationship between real GDP growth and persons employed.

Of-course, the trend rate of real GDP growth doesn’t relate to the labour market in any direct way. The late Arthur Okun is famous (among other things) for estimating the relationship that links the percentage deviation in real GDP growth from potential to the percentage change in the unemployment rate – the so-called Okun’s Law.

The algebra underlying this law can be manipulated to estimate the evolution of the unemployment rate based on real output forecasts.

From Okun, we can relate the major output and labour-force aggregates to form expectations about changes in the aggregate unemployment rate based on output growth rates. A series of accounting identities underpins Okun’s Law and helps us, in part, to understand why unemployment rates have risen.

Take the following output accounting statement:

(1) Y = LP*(1-UR)LH

where Y is real GDP, LP is labour productivity in persons (that is, real output per unit of labour), H is the average number of hours worked per period, UR is the aggregate unemployment rate, and L is the labour-force. So (1-UR) is the employment rate, by definition.

Equation (1) just tells us the obvious – that total output produced in a period is equal to total labour input [(1-UR)LH] times the amount of output each unit of labour input produces (LP).

Using some simple calculus you can convert Equation (1) into an approximate dynamic equation expressing percentage growth rates, which in turn, provides a simple benchmark to estimate, for given labour force and labour productivity growth rates, the increase in output required to achieve a desired unemployment rate.

Accordingly, with small letters indicating percentage growth rates and assuming that the average number of hours worked per period is more or less constant, we get:

(2) y = lp + (1 – ur) + lf

Re-arranging Equation (2) to express it in a way that allows us to achieve our aim (re-arranging just means taking and adding things to both sides of the equation):

(3) ur = 1 + lp + lf – y

Equation (3) provides the approximate rule of thumb – if the unemployment rate is to remain constant, the rate of real output growth must equal the rate of growth in the labour force plus the growth rate in labour productivity.

It is an approximate relationship because cyclical movements in labour productivity (changes in hoarding) and the labour force participation rates can modify the relationships in the short-run. But it provides reasonable estimates of what happens when real output changes.

The sum of labour force and productivity growth rates is referred to as the required real GDP growth rate – required to keep the unemployment rate constant.

Remember that labour productivity growth (real GDP per person employed) reduces the need for labour for a given real GDP growth rate while labour force growth adds workers that have to be accommodated for by the real GDP growth (for a given productivity growth rate).

So in the example, the required real GDP growth rate is 3.5 per cent per annum and if real GDP growth remains at its trend growth rate of 3 per cent annum, then the output gap that emerges is 0.5 per cent per annum.

The unemployment rate will rise by this much (give or take) and reflects the fact that real output growth is not strong enough to both absorb the new entrants into the labour market and offset the employment losses arising from labour productivity growth.

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    This Post Has 10 Comments
    1. Well question #2 has appeared multiple times in the quiz over the last several years. March 11, 2018- January 27, 2018- December 9, 2017- September 24, 2016 and maybe more times than that. So, at this point, I know which answer you consider to be correct. But I still consider your answer to be incorrect. Or, at the least, I don’t understand why you make this distinction in this case and not others. So, I will disagree again and hope that maybe this time it will be addressed. And I apologize in advance if I am just missing something very obvious.

      Key phrases from today’s answer-
      “MMT tells us that the introduction of state money (the currency issued by the government) introduces the possibility of unemployment. There is no unemployment in non-monetary economies.” Seems pretty clear to me what an understanding of MMT tells us there.

      “So it is now possible to see why mass unemployment arises. It is the introduction of State Money (defined as government taxing and spending) into a non-monetary economy that raises the spectre of involuntary unemployment.” Very clear.

      “Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).” Says that workers demanding more than currently offered wages are not ‘involuntarily unemployed’.

      “MMT then concludes that mass unemployment occurs when net government spending is too low.” Clear what MMT concludes.

      And then- out of the blue- you write “But in terms of the question – after all that – it is clear that excessive real wages could impinge on the rate of profit that the capitalists desired and if they translate that into a cut back in investment then aggregate demand might fall.”

      Well that just isn’t a good answer.

      Why is it clear? Where is the argument made for that statement anywhere at all in this answer? Even if it were true, why would you think that excessive real wage DEMANDS by workers morph into excessive real wages? I mean I demand things all the time- but that doesn’t mean I get them. If I won’t do a job because I don’t think the pay is high enough that doesn’t mean the pay will increase if I don’t show up. And it probably doesn’t mean I’m ‘unemployed’ as the term is used in economics.

      I know the other day you said you get no new questions. And this one is not new either since I have asked it several times before. Don’t worry- I’m still working on generating a ‘new’ question for you. But you’ve made that pretty difficult to do because MMT makes so much sense. But I will find one eventually. Maybe.

    2. So I’ve been thinking more about question 2. But I still think you are wrong. But maybe I can understand a little better if we change excessive ‘wage’ demands to excessive ‘commodity price’ demands. Since I have a labor union background I strongly resist the idea that increases in wages are ‘excessive’ and that they cause unemployment, and maybe even somewhat irrationally at times. And that these even happen in the first place given our economic history. But anyhow.

      So could an ‘excessive’ price demand in the form of a price increase for a commodity vital to many forms of production cause unemployment? Say OPEC and oil in the 1970’s. So looking at it this way, I still say no unless there is a government policy to cause the unemployment to attempt to restrain price increases. I can see the hit to living standards that should happen, but I don’t see the unemployment aside from transitioning from highly oil dependent production to less oil dependent production. So a temporary increase while things adjust. Is that the argument?

    3. Dear Jerry Brown (at various times)

      Sorry. The “excessive” descriptor is in the context of conflictual class relations between labour and capital and the prerogative of capital as the employer, which defines the capitalist order.

      Excessive is not what you and I might feel is fair or appropriate in the spirit of a progressive socially beneficial environment.

      It is what capital thinks hinders their expected rate of profit.

      Trade unions are naive if they think that capital will not retaliate if that expectation is threatened. The art of bargaining though is to make the costs of that retaliation higher than conceding the initial demand.

      best wishes

    4. So the capitalists will just take their gifted talents with them and leave us hopeless as they run to their own island a la Ayn Rand?

    5. “So the capitalists will just take their gifted talents with them and leave us hopeless as they run to their own island a la Ayn Rand?”

      You could say that many are doing that now. By the actions of many you could guess that they find running an actual business is too much trouble, too risky, too hard to understand. That many see no reason trying to run a manufacturing, or retail enterprise, when they can make more and surer money running financial plays, mergers and leveraged takeovers.

    6. Mel, what it comes down to, in my opinion, is that it is the government that protects these property rights and allows (as in protects) their financial gains from “running financial plays, mergers and leveraged takeovers”.

      I don’t like to be crude, but fuck them if that’s what they want to do if it doesn’t make anyone other than themselves better off. We might want them around but we don’t ‘need’ them. They would be perfectly welcome to go somewhere else and even maybe we would allow them to take a bit of their wealth with them if we were generous. There really are no capitalists on islands with a population of one.

      It takes a society to make a rich man rich.

    7. Bill @ 10:19,
      I didn’t thank you for the reply, but I am somewhat thankful. So, Thanks.
      But your reply really didn’t address anything I wrote. I will run your response about the ‘art of negotiation’ through an actual very experienced and very successful labor contract negotiator and get his opinion. He’s not naive, by the way. I expect he will say you are right about this particular statement. But we will see. In any event, that has nothing to do with what I wrote in the first place.

    8. Just to report back on my fact checking endeavors- Your definition of the “art of bargaining” is fairly reasonable if you keep in mind that the costs associated with abandoning prior investment are going to be highly industry specific. It also will have something to do with just what are the alternatives available to your capitalist. And the alternatives (substitute goods if any I suppose) available to consumers. And the particular level of necessity for that product. And the law. And the vulnerability of a particular firm or owner to negative publicity. And the willingness of the employees to withhold their labor (strike). All these and more go into the art of bargaining a labor contract.

      Generally, if you can, you want to squeeze hard enough to be painful, but not fatal. Occasionally, it can happen that fatality is the best option. Companies that can’t or won’t pay the going rate do not necessarily deserve to survive. Seems a bit harsh but then I’m just reporting back. I am fairly sure that Randall Wray has said similar things about companies that might not survive a JG wage rate though.

      But none of this has much if anything to do with my original objection to the answer for this question.

    9. Not that it matters, but I had that answer wrong, too, and tend to agree with Jerry on this one. I feel like, at times, there is no clear distinction of practical and theoretical aspects. In theory, I would have thought excessive wage demands don’t casuse the unemployment, it’s employers not complying with the demands that do so. Following the same logic one could argue that by complying with the excessive demands inflation would ensue, right? I understand that to be the standard neoliberal argument: I’d love to pay you more, but then I’d have to let other people go and also INFLATION!1!

      A further point that wasn’t clear to me was whether we considered a JG to be enforced in this scenario, since it is part of of MMT theory and thus part of “A basic understanding of Modern Monetary Theory (MMT)”. If so, then the excessive wage demands would lead to layoffs, but those laid off could find a JG-job at non-excessive wages and no involuntary unemployment would take place. Maybe it’s simply all in the nature of multiple choice questions that often leave a lot open to interpretation.

      @Jerry & Mel about Grifter’s Island

      I’m all for it. I don’t really care how much money one amasses, it’s what you do with it that matters. I don’t care how much booze, high-priced escorts and designer accesoires some random oligarch decides to surround himself with, it’s the well-poisoning that goes along with it that bothers me. Take russian oligarchs that profit from and promote the further corruption of their political and economical system, or the drug-lords and currupt politicians in Mexico: they have gamed the system so far to enrich themselves at the expense of everybody else, thet they actually HAVE TO go live elsewhere because they f*cked their countries up so much. Im uncertain what the motivation of Ocasio-Ortiz is behind pushing for high taxes on the ultra-rich, since she allegedly acknoledges (supports?) MMT and we know it’s not necessary from a budget constraint perspective. However, I support her anyway from the perspective, that any money the obscenely rich have to pay in taxes isn’t used to fund their democracy-wrecking endeavors. If selling it as a means to “finance” the green new deal is what is needed then so be it. I’m not about to get all intellectually pure if the result is more, better paid jobs for the betterment of the whole society and the weakening of the grip of the modern robber barons on the biggest “democracy” of the world.

    10. Thank you Hermann for responding and thank you Bill, as always, for the quiz. But I can’t leave it alone- your answer that is. So I’m going to speculate as to your thinking as to how you drew this conclusion about ‘excessive wage demands’ causing unemployment. Obviously this could go very wrong very quickly. So please do not hesitate to tell me I am wrong.

      So embedded in your idea is that if private investment does not take place, then we are all screwed, or at least destined to experience unemployment beyond the ‘normal’ unemployment that occurs when some firms fail or some workers look for different jobs. Investment is necessary and can come from nowhere but the ‘capitalists’ (who are very finicky types about where and when they will use their capital and great talents to benefit society). They don’t like paying wages under any circumstances, and if they decide the wages are ‘excessive’ well they will just take their ball and go somewhere else and nobody else can play the game.

      Well everything you have taught me over the years tells me that this story is not true. That the government can always step in to employ workers and always step in to create investment. Whether it is good at that may be a legitimate question, but the ability is there. Since MMT has already assigned blame for even the existence of unemployment squarely on the government, why try to place the blame on workers asking for raises at this point?

      Secondly, since I may have an irrational support for labor, why does an increase in the price of an input to production cause unemployment? I tried to ask this using a price increase in oil as an example. I can see that there could be attempts to switch away from using this input when that is possible. But it doesn’t necessarily follow that less oil involuntarily gets used overall. Or that vast quantities of unused (unemployed) oil start to accumulate. In the case of OPEC, the ‘unemployed’ oil would have been ‘voluntarily’ unemployed by OPEC governments as a matter of policy. Which is different from ‘unemployment’ as we discuss it at billyblog.

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