Wednesday, December 3, 2008

A Little Macro

Greg Mankiw poses a question about aggregate supply (AS) and aggregate demand (AD) on his blog today. He is responding to a note (he links to it) by Paul Krugman on New Deal wage policies. (The note is very well done and should be useful in the classroom - for personal benefit if not for direct student use.)

Mankiw's counter is that while policies implemented in extraordinary circumstances may have different (positive) effects on AD than they would have in "normal times." The changes in rules (tax policy, etc.) changes expectations and may actually have a negative impact on investment, which is a more volatile part of AD.

I have to admit it's an interesting argument that appears to have some merit.

What do you think? Can/Do policy changes have significant impact on expectations and change that important investment portion of AD?

I look forward to your comments.

3 comments:

Jack Horan said...

Dr. Mankiw's note about the amorphous nature of confidence is well taken, but I think that he is making some questionable assumptions about the projected results of the "cartelization" of labor.
While one can assume that the business manager might hold back on his long-term project for fear of dealing with higher labor costs, one can also assume that the business manager might go ahead with his project once he or she thinks that the increased income for workers could lead to higher levels of demand for the output of the project. A second assumption is that the presumed shrinkage of investment spending would lower AD, but we have to consider that higher wages create the potential for higher consumption expenditures, and C is a much larger portion of AD than I.
I am assuming that "cartelization of labor" refers to an increased level of unionization. While we are presently blaming the problems of at least some of our industries (e.g., autos) on unions, we have also experienced periods of high economic growth concurrent with strong unions (1950's and 60's). The presence of unions certainly did not keep GM, Ford, Chrysler, and other companies from activating long-range plans during that period.

Tim Schilling said...

I agree with your analysis but I do question whether most managers see their workers as a sufficient slice of the market for their products. Certainly that may the case for a large firm, but I don't think most firms are large enough that the workers make up a significant portion of product demand.

On your point about cartelization of labor, I do think the reference is to unionization but also includes any attempt to "organize" the market. However, it was the idea of changing policies and rules that I was focussing on. One of the things that characterized the New Deal was that a wide variety of policies were tried, sometimes in relatively rapid succession. I can't help but think that it created an atmosphere of uncertainty that could not have been helpful.

Thanks for your comment, though. It's a little more to chew on.

Tim Schilling said...

I agree with your analysis but I do question whether most managers see their workers as a sufficient slice of the market for their products. Certainly that may the case for a large firm, but I don't think most firms are large enough that the workers make up a significant portion of product demand.

On your point about cartelization of labor, I do think the reference is to unionization but also includes any attempt to "organize" the market. However, it was the idea of changing policies and rules that I was focussing on. One of the things that characterized the New Deal was that a wide variety of policies were tried, sometimes in relatively rapid succession. I can't help but think that it created an atmosphere of uncertainty that could not have been helpful.

Thanks for your comment, though. It's a little more to chew on.