The great mystery is why they are so clueless

If you are wondering why you should never go to a mainstream economist to solve our economic problems, you should read through this: A Rare Prize for an Economist Looking at the Big Picture. That is, he has won the John Bates Prize awarded to economists under 40. “New” Keynesian Economics is not actually new.

Nakamura is one of the leaders in the field of New Keynesian economics. This school of thought, which has become the dominant paradigm at central banks around the world, holds that recessions happen because companies are unable to adjust their prices in response to events like a financial crisis or a big rise in interest rates. Without the ability to adjust prices, the theory goes, companies cut their output and lay off workers instead. In a 2008 paper with frequent co-author and husband Jon Steinsson, Nakamura showed that even very small amounts of this so-called price stickiness can generate large recessions, and make the economy very sensitive to changes in monetary policy.

“Not able to adjust their prices”? Surely they can put their prices down. Who would stop them? Surely they could raise their prices as well if they saw fit. But the problem is that at the prevailing prices and other prices as well, these firms cannot make a profit. As noted in the article:

Exactly why companies can’t adjust prices, however, remains something of a mystery. Nakamura’s research has helped to shed light on this question. Another 2008 paper with Steinsson helped to establish that price stickiness probably results from multiple factors.

The other word for it being a “mystery” is that they are “clueless”. I wonder if there are any lessons to be learned from the United States.

ENVY OF THE WORLD
UNEMPLOYMENT 49-YEAR LOW
WAGE HITS $27.77/HOUR
STOCK MARKET ENDLESS RALLY
TRUMP APPROVAL 50%

And speaking about clueless, think about the other 50% of Americans who do not approve of Donald Trump.

This entry was posted in American politics, Economics and economy. Bookmark the permalink.

28 Responses to The great mystery is why they are so clueless

  1. Old School Conservative

    The 50% who don’t approve of PDT aren’t getting enough free stuff.

  2. Trax

    Yes, it is a complete mystery why, when there is credit deflation, companies simply don’t raise prices to levels people cannot possibly pay.

    Credit deflation -> less money
    less money -> lower sales/lower prices
    less income -> lay offs/loss

    Increasing prices (unless an absolute non-discretional, which can gain against increased loss to others) will only accelerate the loss or lay offs.

    Credit inflation does the opposite but is only temporary since it is a distortion of who currently has the money without the real ownership.

  3. stackja

    Meanwhile BS in Australia!

  4. Tim Neilson

    Exactly why companies can’t adjust prices, however, remains something of a mystery.

    Nonsense!

    It can easily be solved by the government raising the statutory minimum wage, so that workers have more spending power.

    You KNOW it makes sense!

  5. Iampeter

    Yes going to mainstream economists for economic advice is like going to conservatives for political advice. “Clueless” is indeed the word.

    And speaking about clueless, think about the other 50% of Americans who do not approve of Donald Trump.

    Donald Trump is the mainstream economist equivalent in politics. If you support him, with all his anti-immigrant, anti-trade and anti-private enterprise rhetoric and policies, you can’t oppose mainstream economists.

  6. MPH

    Only an economist could focus on price not profit margin… Companies don’t exist for the purpose of making money go round an economy.

    If he had focused on profit margin perhaps he would have uncovered the massive increase over the years in the base costs of a company, most of which are government regulations and therefore decidedly ‘sticky’.

  7. John Brumble

    Yeah… mostly agree.
    There is a legitimate problem, though. In cases where the buyer is a monopsony as a result of government intervention (to take an easy example, perhaps it -is- the government), suppliers compete on long term contracts. Raising prices by any of the suppliers is a death sentence for them. Eventually one wins and that supplier then raises prices once they have the monopoly. That’s ok as far as it goes, because if the monopoly supplier raises prices too far, or fails to innovate, another supplier/s will join.

    But there are three things that get in the way of this
    1) Fair work constantly forcing wage increases and
    2) The monopsony customer sets indulgent requirements, creating barriers to entry
    3) The volume on offer by the monopsony buyer allows a monopoly supplier to make massive margins due to volume while still offering a price that is better than another supplier with less initial volume can get. This is generally partnered with large market entry costs, making he small Australian market unattractive to those who could afford the up-front. Small suppliers needn’t bother.

    Of course, the likes of new Keynsians look at this mess created by government and regulation and automatically think “gosh, what we need is MORE intervention”. Obviously the solution is to remove the government-created barriers to entry for BUYERS.

  8. So an entrepreneur made a bad decision and labour resources are available for reallocation to a more profitable use. How do we make this as difficult as possible for both the entrepreneur and worker? Yes, price controls on labour and widgets.

  9. Experts are absolutely certain about climate change, something that is affected by so many unknowns; yet economics, while is man made, is a complete mystery.

  10. Perth Trader

    35% …..yes 35% of my business costs are govt imposed costs. License costs, permit costs, audit costs and indirect taxes on inputs. I dont need a economist to tell me how to adjust my prices , I need Govt. off my back.

  11. Rob MW

    “Not able to adjust their prices”? Surely they can put their prices down. Who would stop them?

    Centralised wage fixing for a start. Mandatory costs attributed to Law is a fairly high percentage of the business structure where non-compliance can mean bankruptcy. There’s no getting around mandated costs except by lowering the mandated proportion of the costs in the first instance.

  12. RobK

    The craziest part is many producers (especially primary producers) do sell at below cost for a short period if the market turns south, simply because production quantity is locked into a cycle and an unsustainable hit is taken by the producer. How this scheme referred to in the post gets any traction is beyond me.

  13. RobK

    Obviously the same goes for other producers, especially if stock goes out on consignment or long credit terms.

  14. gowest

    Amazing what getting out of Paris will do to Wages and the economy.

    Hope our public service are looking at USA – that’s the only way they will ever get a pay rise with the current crop of clowns in charge.

  15. Bruce of Newcastle

    he has won the John Bates Prize awarded to economists under 40

    The definition of insanity is trying the same thing over and over expecting different results.

    The definition of complete frothing fruitloopery is giving prizes to each other for trying the same unsuccessful thing over and over.

    Lefties, of course, love giving each other prizes.

  16. Mark M

    We’re gonna need a bigger clue …

    ECONOMISTS’ STATEMENT
    ON CARBON DIVIDENDS

    ORIGINAL CO-SIGNATORIES INCLUDE:

    27Nobel Laureate Economists

    4Former Chairs of the Federal Reserve

    15Former Chairs of the Council of Economic Advisers

    2Former Secretaries of the US Department of Treasury

    Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations.

    https://www.econstatement.org

  17. Entrepreneur

    It seems to me that academics need a dose of the real world. Get out there, start a company and compete in the market. Those 2 simple steps will teach you a lot about economics (plus strategy, critical thinking, marketing etc.)

    You get the picture.

  18. One Surplus doesn’t make a Spring

    Price stickiness. WTF that’s got to be the dumbest phrase of the year.

    If only government could interevene and unsticky the prices like they do in say Venezuela.

    Suggest an department be established to centrally purchase hand wipes for the clean up.

  19. Percy Popinjay

    Nakamura is one of the leaders in the field of New Keynesian economics.

    There are two distinct groups of economists:

    Those that are wrong 97% of the time; and
    Those that are wrong all the time

    If iampoofter was an economist (yes, let’s just suspend our disbelief here) he’d inevitably be in the latter group.

    What a f*cking useless idiot he is. Dumb as dogueshyte.

  20. Percy Popinjay

    iampoofter’s staggering stupidity and subsequent wrongology is so off the scale it makes mUttley and semenblogger shitferbrains look almost as intelligent as a creature you’d find existing under a rock.

  21. Sticky wages and prices are real.

    Government intervention just makes things worse.

    The only policy worth considering at all is monetary accommodation and money that is non-neutral regarding the economic calculation of current values and future projects.

    The cost of lessening what marginal stickiness that exists in a free market is that you induce a credit and business cycle by subsidising consumer good production over capital goods production until productivity falls so far it cannot payoff the many more uneconomic projects that have been taken on because of the accommodation and manipulation of the price of credit. This is accelerated by the investment hedge in fixed assets as a hedge against inflation.

    The result is since capital is non-fungible that you end up with less capacity than before and higher prices for commodities and lower real wages and output, along with lower demand for labour.

  22. JC

    Yes, sticky prices and wages are real alright.

    Spring, tell us whose wages were cut in real terms during the GFC. Certainly aggregate wages fell because people were laid off, but even this is an evidence of stickiness in wages.

  23. One Surplus doesn’t make a Spring

    JC my point being it’s a stupid term. The market should determine the price unless there are other measures that come in to corrupt the process. If competition is strong , margins are
    Lower and the ability to drop prices is limited. So business works to beat the competition through other strategies to maximise profits.

    During the GFC prices moved with the market where possible. As they are at the moment. Not sure if any Cat followers are in business currently but the climate is poor with a chance of layoffs.

  24. Iampeter

    Look at all you capitalists, with your boilerplate “market should determine something” and “government intervention just makes things worse.” Deep stuff.

    Well, Trump has apparently agreed on a 2 trillion dollar “infrastructure bill” with democrats. Can’t wait to see all the criticism from you lot given what I’m seeing here.

    This is of course on top of all the years of anti-trade, anti-immigrant, anti-tech companies, trillion dollar spending bills, not letting market determine things and government intervention making things worse, which no one here seems to have had any issues with to date.
    But far be it for me to point out the usual total contradictions here.

    Tired of the winning yet?

  25. Roger

    Global climate change is a serious problem calling for immediate national action.

    Since when does being a Nobel Laureate in Economics or a high ranking civil servant make one an expert in diagnosing the cause of climate change and prescribing the remedy?

  26. Iampeter
    #3004611, posted on May 5, 2019 at 8:43 am

    Look at all you capitalists, with your boilerplate “market should determine something” and “government intervention just makes things worse.” Deep stuff.

    Now we have a Randbot trolling the threads when Austrian school economics is brought up.

    Which is why don’t think this idiot is a real Randian at all.

    *government intervention just makes things worse*

    Yes, I said that.

    *not letting market determine things*

    You said this – again you seem more like Daffyd from Little Britain than anyone actually concerned with how this country is governed.

  27. NuThink

    Well, Trump has apparently agreed on a 2 trillion dollar “infrastructure bill” with democrats.

    IamPeter, is there a hint in the words infrastructure bill as opposed to a welfare bill in which the latter would normally be the preference of the democrats? Perhaps they have been dragged screaming to the agreement. I have not seen the article but just trust your post.

  28. Iampeter

    Now we have a Randbot trolling the threads when Austrian school economics is brought up.

    Oh wow. Just…wow.

    IamPeter, is there a hint in the words infrastructure bill as opposed to a welfare bill in which the latter would normally be the preference of the democrats?

    Seriously? No one’s going to say anything?
    LOL.

    I couldn’t make this up.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.