Tuesday, February 16, 2021

The wages of stimulus


Discussing stimulus, a colleague passed along a factoid -- wages and salaries, he said,  are running $20 billion a month or $240 billion a year below where they should be. If the "stimulus" were to aim entirely to replace all lost wages due to the pandemic, that would stop at $240 billion, not $1.9 trillion. (My colleague is usually a pro-stimulus type.) I forgot to get the source, so I tried to recreate it. Here are some documented numbers, total compensation of employees, wage and salaries. 

Feb 2019 $9,228

Feb 2020 $9,659

Dec 2020 $9,675

These are billions at an annual rate. Actually, by these numbers Dec 2020 is already above Feb 2020! That doesn't account for inflation, or missing growth. If we want to entitle ourselves to the trend, wages should have gone up $430 billion. Ok, still less than $1.9 trillion. (My snarky comment: trends are earned slowly, not laws of nature. Trends in wages come from higher productivity, expanding businesses, greater labor force participation, lower unemployment.) 

One can argue for federal payments as insurance. Some people are definitely hurting, and some others are doing better. But the case for an overall "aggregate demand" shortfall seems weak. It is not always 1933. 


  1. John,

    "One can argue for federal payments as insurance. Some people are definitely hurting, and some others are doing better. But the case for an overall "aggregate demand" shortfall seems weak. It is not always 1933."

    Wonder where that demand is coming from? Here is one possibility:


    But the funny thing:


    Are the teaser rates, NINJA loans, and other non-sense making a comeback?

  2. John,

    Suppose that $1.50 trillion dollars that the federal government wants to spend is financed entirely by having the U. S. Treasury sell equity. Suppose then that the recipients of that $1.50 trillion dollars use that money to retire their existing debts (mortgage, student loans, etc).

    Doesn't that give you EXACTLY what you have been looking for - less debt and more equity in the economy?

    Yes, there are moral hazard issues with doing this, but as long as people are willing to buy that equity from the Treasury without being coerced into doing so - who cares?

  3. John,

    When you buy a new car, do you care what the car dealership does with the money that you give them? As long as you are happy with the purchase price and the car you buy, what difference does it make?

    Same thing with government finance. If the US Treasury department sells you equity that you purchase of your own volition (no coercion) do you really care what the government does with that money?

    The problem is that you think that the only ways a government can increase spending are by increasing taxes (coercion) or selling bonds - delayed increase in taxes.

    1. An explanation of what you mean by the phrase "the US Treasury department sells you equity" is needed. Do you mean "tax farming"?

    2. "wages and salaries, he said, are running $20 billion a month or $240 billion a year below where they should be." This is a normative statement that depends for its meaning on the status quo ex ante, i.e., the pre-pandemic socio-economic conditions prevailing during the third year of the Trump administration (eg., reduced income tax rates, reduced regulatory burdens, reduced foreign legal and illegal immigration, increased import duties and reduced imported goods quotas, reduced overseas military commitments, etc.)

      As the physicist would say, "the arrow of time points in one direction only, forward." You can't go back and redo the hair-do and restart time at the point before you first entered the hair salon.

      There is a different administration with a different set of socio-economic policies that will give rise to a different set of outcomes. The 'new broom' in the White House is determined to sweep the place clean and root out the former occupants' policies. It may not go well, given the left-ward bias of this new group. Indeed, if we consider Mr. Larry Fink's recent statements, and the apparent intention of the more radical elements of the Democratic caucuses in Congress, whole industries will find themselves in disfavor because the industries are heavy industries in the proper economic meaning of that term. Mr. Bill Gates is postulating that heavy industry (steel, cement, petrochemicals, etc.) must undertake a full technological makeover to eliminate emission of "greenhouse gases". What could possibly go wrong under the assumptions underpinning the outcomes desired by these clear-eyed practical (in their respective fields of expertise) men and women?

      As we've witnessed this week, the new industrial regime of 'green energy' dependency is fragile rather than robust. As the makings of war gather in the far east, a fragile domestic energy infrastructure is not the first thing that one would wish for. Likewise, a government turned against its own is hardly conducive to producing a unified response to a creeping external threat to the nation. We live in interesting times; would that we survive them in one piece.

    3. Old Eagle Eye,

      I already described this to you in a previous post (and no I don't mean tax farming):

      TR = Tax Revenue
      EX = Government Expenditures
      s = TR - EX
      EQ = Government Equity

      Change the equation to:

      d/dt(B/Y) = (r - g) * (B - Y) - (TR - EX)/Y - EQ/Y

      Now imagine that equity sales (by the U. S. Treasury) are determined through an apolitical process. Finally imagine that equity sold by Treasury is:

      1. Non-transferrable - when the owner of the equity dies, the government's liability with that equity dies (see Social Security as example of non-transferrable government liability)

      2. Fixed term - it goes without saying that to achieve broad appeal (and make any significant dent in debt / GDP), Treasury would need to sell fixed term securities rather than perpetual (very few of us are going to live forever)

      3. Zero coupon - This has the political advantage of not requiring Congressional authorization for cash payment of dividends / interest payments.

      4. Only redeemable against a future tax liability.

      Equity in this fashion has the advantage that returns are commensurate with future economic activity (similar to GDP linked bonds, except there is no government spending in the form of returns on investment). During a recession, returns on equity fall (irrespective of monetary policy stance).

    4. See U. S. Constitution, Article 1, Section 8

      Clause #1:
      The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises...

      Clause #2:
      To borrow Money on the credit of the United States

      Clause #5:
      To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures

      Now where does it say that Congress MUST do any of these things?

      Congress passes the spending bill for the $1.9 trillion in stimulus spending then refuses to raise taxes to pay for it, refuses to increase the debt to pay for it, and refuses to coin money to pay for it.

      All of these actions are completely within the legal framework set by the Constitution.

      In the event this happens, it would be up to the Executive Branch of government (Treasury Department) to execute the will of the Congress, and that leaves just one option - Equity.

    5. Old Eagle Eye,

      "As the physicist would say, the arrow of time points in one direction only, forward. You can't go back and redo the hair-do and restart time at the point before you first entered the hair salon."

      Fair enough. But in physics, does the rubber band not snap back to it's original position? It's called elasticity. Some things in physics cannot be undone, some can.

      To adopt a fatalistic approach to everything that happens is idiotic.

    6. Old Eagle Eye,

      You said:

      "FRestly, your equation is incorrect in the first term on the RHS of the equation. Your term EQ/Y has the characteristics of debt (B) and would be incorporated in the term d(B/Y)/dt, i.e., EQ/Y would not appear on the RHS of the equals sign."

      And I replied:

      "In lay terms, to borrow means to transfer an asset with the expectation of that asset being returned. If I borrow a car from someone, that person expects me to return the car (not a pony) that I borrowed. When a Congress borrows money, the expectation is that the lender will receive money back."

      "The equity that I have described does not constitute government borrowing since money is used to purchase the equity, but no monetary compensation is given once the equity reaches maturity. Instead the equity is used to fulfill a tax liability at maturity."

  4. Larry Summers, of all people, detailed all of this in his Washington Post op-ed. He also recently debated Krugman about it.


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