So You Want THESE GUYS to Run Stabilization Policy?

Lots of people aren’t happy with Federal Reserve policy, which has led to a call for use of fiscal stimulus.  Of course ad hoc policies don’t work, if we are serious about fiscal stabilization policy, we need a coherent rule, not a set of sporadic actions.  Even Keynesians like Eggertsson and Woodford have now accepted the rational expectations view that it’s the future expected path of fiscal stimulus that matters, not spending this month.  So how much coherence could we expect from Congress in the area of stabilization policy?

Start with a few facts:

  1. Congress raised the minimum wage by roughly 40% between 2006 and 2009.  How’s that working out for youth employment?
  2. The past 3 1/2 years saw the slowest NGDP growth since Herbert Hoover was president.

Looks like it wasn’t exactly the best time for a huge rise in the minimum wage, doesn’t it?  Not according to this New York Times story, indeed the 40% increase was far too small, it should have been closer to 100%:

As the nation’s economy slowly recovers and income inequality emerges as a crucial issue in the presidential campaign, lawmakers are facing growing pressure to raise the minimum wage, which was last increased at the federal level to $7.25 an hour in July 2009.

State legislators in New York, New Jersey, Connecticut, Illinois and elsewhere are pushing to raise the minimum wage above the federal level in their own states, arguing that $7.25 an hour is too meager for anyone to live on.

Massachusetts lawmakers are pushing for a big jump, with the Legislature’s joint committee on labor approving a measure last month that would raise the minimum to $10 an hour, which would leapfrog Washington State, whose $9.04 minimum is the nation’s highest.

Voters in Missouri may be asked to vote on a minimum wage referendum in November.

These moves are giving momentum to an effort to persuade Congress to embrace a higher national minimum wage. Some liberal and labor groups, capitalizing on the energy and message of the Occupy Wall Street movement, are urging Senator Tom Harkin, Democrat of Iowa and chairman of the Senate Labor Committee, to head a Congressional effort to raise the federal minimum to $9.80 an hour by 2014.

Why stop at 100%, why not go for 200%?  I suppose the argument against 200% is that it would be too inflationary.  And the argument for 100% is that businesses would just pass on the increases to consumers, with no loss of jobs.  Of course that assumes the Fed isn’t targeting inflation, and unfortunately the Fed is targeting inflation at 2%.  So if we don’t get inflation, what do we get?  Hint; the current rate is 8.2%.

Of course things look a little different when you are actually responsible for governing a state:

Jack Mozloom, a spokesman for the National Federation of Independent Business, an advocacy group for small businesses, said: “On this issue, our members tell us overwhelmingly everywhere they hate it.”

“It’s interesting that the Democratic governors of New York and Connecticut are ambivalent, even cool to the idea,” Mr. Mozloom said. “They seem reluctant to create an additional burden for small businesses in their state.”

For those Republicans who bemoaned Chris Christie’s decision not to run for President, consider this chilling report:

In New Jersey, the Senate and Assembly leaders, both Democrats, support raising the state minimum to $8.50 an hour from $7.25, and Gov. Chris Christie has urged them to sit down with him to discuss the issue.

I would have felt a bit better if he’d just said “Hell no!”

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About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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