They say that the most important thing about saying something is not what you say, but how you say it. And sometimes when somebody says something that is actually quite brilliant, the brilliance gets lost in the framing.
Take the “too low for too long” as a cause of the housing boom/bust argument, for example. It’s a topic fraught with superficially plausible hyperbole in an era where there is certainly no shortage of tabloid economists weighing in, seasoned with enough snake oil explanations to fill an ocean. It’s not that I think it’s completely out of the question. But none of various reiterations of the argument can explain what monetary forces magically aggregated low interest rate activity into housing from typical OMO’s, a phenomenon that would have to be explained in order resolve at least one lingering non sequitur.
Since I doubt that issue can be straightened out without pointing squarely toward the supply side, it appears to me that a monetary cause or mostly monetary cause is improbable and looking for one is futile. Thus, I simply tune it out because I’ve had more than enough of my share of rhetorical flourishes as justifications for tight money – they won’t miss what they’ll never have – when we wouldn’t be talking about the serious degree to which the housing bust occurred today had the tight money never happened, a point that I believe is lost on people who should know better (it seems like a peculiar argument for a market monetarist to be making). But I’ve probably said enough.
You can see, at least for me, the brilliance gets lost in the framing and from there it’s nothing but a waste of time. DOA.
But David Beckworth has found a new, and much more constructive use for the brilliant underpinnings of his argument that I very much like and welcome. In his new post he talks about the coming productivity boom from the second machine age, and how the Fed can manage it to lessen the disparity between labor’s share of income and that going to capital.
One widely-held concern about large positive supply shocks is that they will shift income from labor to capital. This concern can be seen in this The Economist’s discussion of the Asian supply shock back in 2005.
The trends, of course, being , the higher share of income going to capital and the slow growth of real wages. It is a natural consequence, the article argues, of the higher returns to capital generated by such supply shocks. The rapid technological advances, therefore, will only reinforce these developments since they too raise the return to capital. Woe is the labor share of income.
Another related concern is that that this growth in global capacity will not be matched by sufficient demand given the declining share of income going to labor. There will be a persistent demand shortage as argued Dan Alpert in his “Age of Oversupply”. He worries there will be a persistent global glut.
So what should be done?
So let me propose another solution, one that allows markets to support growth in labor’s share of income. It is a very simple solution: let the price level reflect changes in productivity while stabilizing nominal income growth. Put differently, central banks should aim to stabilize the growth of nominal wages, but ignore changes in the price level. This would allow real wages to more closely follow the rapid productivity growth.
All I can say is wow. Just wow. Please read the whole thing.