Economics for the Rest of Us Explains NAIRU, Including Its Political Implications

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Yves hers. Since many of you seemed to like Diptherio’s last podcast, we thought we’d give you his latest installation. This edition covers NAIRU, or the Non-Accelerating Inflation Rate of Unemployment.

The discussion is deliberately at a generalist level, so most of you will already know this terrain well. Nevertheless, it can serve as a helpful introduction to friends and colleagues, as well as illuminating the basis for the Fed’s aggressive position on inflation. One obvious point which does not fit into this discussion’s framework: economists frame wages at the big potential driver of cost increases, when for manufactured goods, direct factory labor (which are in the class of worker most exposed to macroeconomic swings) is a small percentage of total product cost. By contrast, the NAIRU framing leads economists to obsess over unemployment levels (with the new “structural” level curiously higher than in the 1960s, when workers were less mobile than now) and ignore the roles of monopolies and oligopolies.

As before, Diptherio welcomes your feedback!

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  1. Norb

    -Every time I talk to you I come away angry- isn’t that the truth! For the non-economists here, your work is very educational. Clearly explained and done with a sense of humor as an added plus- thanks. It is so very important that people come to understand how they are being screwed by this system and I have found myself recommending NC and now your presentations as a means to help interested people get a better understanding of the system they are trying to navigate.

    I find it almost incomprehensible that the powers that be can get away with their inflation argument in order to suppress wages. CEO pay and rising inequality clearly demonstrate that false notion but still it persists. The power of propaganda on display. It also points to why Obama thinks every problem is a matter of messaging- he has functioned as the chief propagandist for corporations- that is his true function.

    Reversing the brainwashing is an ongoing effort.

    As a recommendation for future topics of interest- How value and pricing are determined in an economy. I mention this because the general population accepts the notion that ALL wages and prices are true because they are set by the market. This is very problematic in a rigged economy. I was talking with the owner of the cleaning crew in our office, he and his wife run a small company with 4 employees. When discussing minimum wage, he states he will not be able to pay a fifteen dollar minimum wage to his employees and stay in business. I do not doubt his assessment. It seems only large corporations will be able to absorb such a policy. An economy must be designed to reflect the true cost of production and provide a living wage to the participants. How to get there and maintain it is the problem.

    We have already lost the battle between large corporations and small holders. Corporations rule. In the cleaning company example above, is the solution to have one large Cleaning Company of America servicing the entire nation thru small subsidiaries, guaranteeing a wage and healthcare for employees? How are those wages and prices set? Being large brings efficiencies, but if administered by corrupt individuals or groups, spells disaster for the majority. The expedient solution for small holders is to operate in the dark- not to follow the law. Corrupt or unscrupulous business owners exploit this weak position and offer low renumeration for services rendered. The downward spiral continues.

    The people need to understand that they either need to control the government to set policy in their interest, or need to control corporations to supply goods and services in their interest. Believing that the free market will provide for their needs is just that- a belief system that has reached its end date.

    An economy to serve the people indeed.

    1. John Rose

      Your cleaning company example illustrates the rationale for a required living wage since all the company’s competitors would have to pay it as well. That would raise your cost as the higher cost was passed on to you, but do you really want to be serviced by people who receive less than a living wage?

      1. Norb

        No- everyone should be guaranteed a basic standard of living. The problem is the price paid by the companies needing the cleaning, not the price charged by the cleaning companies. Downward pressure on wages can only be stopped if the work or service is withheld. What is the fair cost of cleaning services? If that question is left to private businesses, on both sides of the equation, labor value will always be discounted first. It is the let them starve mentality. In order to survive, unorganized labor will accept less and less out of necessity.

        Since most business don’t operate on any moral sense of fairness, they must be forced in some manner. Just giving people money won’t solve the problem because the relative numbers can always be manipulated.

        The system must reflect a certain standard of living guaranteed along with guaranteed jobs. Its not one or the other- its both. People with more talent and drive might have larger range of job offerings, but no one should be forced to struggle for daily subsistence in such a world of abundance.

  2. Brooklin Bridge

    Great podcast. All the issues of last time are gone. The music adds a pleasant background but doesn’t overwhelm (I wonder if Beethoven’s 5th would work), voice modulation is excellent, content is clearly explained, DP? (sidekick) does a great job of pausing, emphasis, and explanatory repetition. I’m one of the non economists for whom such explanations are really worth while.

    and no sing song.

    That was clear and instructive. You really are a natural for this (and using that great voice for something other than seducing lovers doesn’t hurt).

  3. diptherio

    Thanks again Yves! This is really going to make me keep doing these things…what have I gotten myself into?!?

  4. TheCatSaid

    As soon as you start discussing an important new economic term (what NAIRU stands for) please stop the background music. The music–even in the background–makes it hard to focus on taking in a new concept.

      1. TheCatSaid

        I believe the music will contribute best as punctuation rather than possible distraction.
        (Or a little when it’s something a little lighter. Like start of the ragtime–but don’t keep it going through the whole section.)

    1. Lambert Strether

      I agree on the music. Music should be used for structural breaks only (there’s a word for that, I think segments?)

      The very successful podcast “Stuff You Should Know” is a model in that regard.

      1. diptherio

        It just seems so….bland to me without something. But then, that’s probably because I get hella tired of listening to my own voice. Noted though. Episode 4 currently in production (as in, literally right now).

        1. TheCatSaid

          You have a wonderful speaking voice and combined with your clarity and dark humour in how you talk about your subject matter, there’s no reason to worry about being bland.

          If you must keep some music on, make it even softer.

          1. diptherio

            It’s mostly for me to listen to while I’m doing the editing, so it’s out for the next one. You’ve convinced me.

        2. Lord Koos

          As a musician, I’ll offer my input. I think the music would be less annoying if it were less beat-oriented. Longer, slower notes would be less distracting. Rhythmic stuff feels like it interferes with the natural pace of a speaking voice, so I would use that type of music very sparingly if at all.

  5. tegnost

    Excellent, thanks, definitely improved production over the first segment with the volume modulation. Now I know what NAIRU is.

  6. ke

    From the perspective of the majority, trapped in a closed system, real labor flexibility is ruinous.

    You do not have a court of law. You have a court/economy of arbitrary expert opinion with no cross examination, paid for with debt assigned to so impoverished children. And you have no right to appeal because the court can simply choose not to hear your case. If you think the shifting sands of law is your ally, you are SOL, and that’s the foundation.

    The State doesn’t replace parents with no due process, and the majority does not follow blindly along, by accident. The New World Order is always the same as the old, a new theory accepted as the dress swapped with debt, and the destroyers are many things, like a chameleon, none of which are creative. You limit your exposure, and the empire hunts you down by elimination, group association, until it strangled itself. Make sure that choker is tight before you lift the load.

    Beware idle hands, and those so directed, which cannot measure productivity. For the idle, wages are a cost of hunting you down, not an investment.

  7. ke

    Bring on the next theory.

    Meanwhile the pension dominoes fall.

    They “thought” digital money was the answer, and pulled the lever, to a trap door beneath themselves. And we are watching it kick, while they bring out a new test dummy.

    1. ke

      Long before the “evil” corporations, parents were employing their children as slaves, selling their children into slavery and employing other people’s children as slaves. The State Corporation simply.legitimizes the operation to make it more efficient.

      The California/Chicago bail out formula should be interesting. There’s going to be cavepeople wherever you go, and you are going to have your hands full raising your own. It’s quality vs numbers. Spending more debt than the rest of the world combined does not mean you have the best military. The electronics are crap, controlling crap , motors, with crap sensors, because we sell crap. Scaling up is the easy part.

      1. makedoanmend

        So a corporartion is equivalent to a parent?

        An largely agrarian based system is equivalent to an industrial based system?

        A system which has slavery as the legal basis is the equivalent or exactly the same as one which explicitly outlaws slavery? We should not, therefore, identify or seek to analyse the cultural, economic and personal nuances?

        no shades of colour
        nor in between colours
        binary world

        1. ke

          Artificially increasing complexity does not change the fundamental operation of debt slavery psychology, from the perspective of labor, but there are many perspectives. From ours, it doesn’t matter if you slice it into specialties for growth, and give each group a mythology to justify participation. The biggest error is associating the middle class with people who work, by conveniently redefining work. If the planet is in worse shape than it was, natural resource liquidation has magically been redefined as work, to the end of global slave trade.

          Demographics are demographics. Why don’t they just print, instead of booking it as actuarial debt.

          The middle class awakens to a prison of its own construction, accepting debt as money, and as the history of reserve currency attests, it’s not the first time, pulling spending forward to enslave future generations.

          1. ke

            As Silicon Valley has proven, the majority live in a bipolar, digital world; you haven’t noticed, public healthcare, education and safety is all about artificial population control by experts, and nothing about democracy and individual nuances.

          2. ke

            Why would labor associate itself with the middle class when the middle class has been taking its children for going on three generations?

  8. ekstase

    This is a really good blend of information and entertainment. The music doesn’t overwhelm you, but using it as “punctuation” might be fun for you to splice rogether, and make your dialogue the focus. It was a good idea to have a secondary character-and he gets to say things the rest of us are thinking.
    When a non-economist is faced with arguments like: there must be unemployed people to have a healthy society, questions like those of racism are swept under the rug. It’s helpful to have some encouragement to go ahead and ask these things, which you provide.
    Also, this may be too much work, but at some point you might include some visuals: charts, images, maybe even a little animated guy.

    Keep going! This is good!

  9. TheCatSaid

    Could the podcast include your own website address to hear more? At the beginning and the end?

      1. mk

        thank you for posting, I’ve been curious about worker coops, I’ve been thinking about possibly starting one (except I have no skills/experience/background, so….) I’ll check it out.

  10. Russell

    “Non Accelerating Rate of Unemployment on Naked Capitalism by Yves Smith & Lambert Strether is an episode worth the time, regardless of where other it might have slipped away.”
    How’s that for Good Copy?
    Ke has lost his mind, or their mind. Great Line: “Bring out a new Test Dummy. ”
    I enter stage. Moving stage right to center;
    I put forth the Insurodollar which I even have generic bills for. (I been around.)
    MMT gets to me. Of course it is right and works if you use it. All is about balance and a bureaucrat. In designing a better nation we determined that a bureaucrat’s career trajectory ought be aimed at Technocrat status. This to reduce the Dostoyevsky Effect.
    We would be better to have a Treasury than the Fed. No system is all bad and Feudalism was clear cut aye? Bullshit overload and nobody is allowed to believe in anything.
    My thing, is to combine the Insurance Co. With the Treasury and print money on actuary tables & equity of Whole Life Policies from Birth.
    While they failed me for obvious reasons as an Insurance Saleman for NY Life in the mid ’80s, it isn’t as if I didn’t learn a few things.
    If all is spent on Education & Health, after Defense, and all are Defenders of the Nation, Human Capital values will only go up.
    The precedent for my modeling is Aviation Front Businesses of the CIA & MI6, though I like to think I am completely original, I am not.
    I was going with Hong Kong, a drug war founded city state of the UK, Pan Am, & Disneyland for precedents.
    Maybe these were what got the CIA & MI6 in Malyasia going for Page, as Bill Donovan was Buffalo & Mohawk or something got him to take the last bits of his brain there to Malaysia.
    It was traditional for the Mob bosses of Buffalo to live in Rochester I once heard.
    Is my Goal the Same as the CIAs or MI6? The Secret War, is supposed to keep us at peace. War is bad for business? Well there are profits made during war by big Corporations and most of the MBAs are so focused on not paying labor that war fits every purpose.
    Ben Franklin liked the entire concept of paper money. He liked what put more money in circulation. Higher wages put more money in circulation.
    Fuck the Fed.
    “Worth all of our time?” No rewrite: “It is will set with you as a great time set aside to listen to a great podcast.” Rolling edit. How comes it off the tongue?
    I went back & changed it to the, the time. Your time, well, yes that gives ownership. Thanks to DiphtheriO, I myself didn’t have any problem at all with the music. I normally hate modern country Steve Miller twang, is what it is, but this as deeper and as end note worked fine for the amateurish quality meant to be all inclusive. As a play, like Krapps Last Tapes, I’d stage it.
    Later I will dedicate a musical episode of the Intendor Tm Radio Show to this. Thanks, Russell

  11. steelhead23

    Wiki defines inflation as a general increase in the prices of goods and services. Others focus on the money supply, arguing that any unproductive increase in the money supply is inflation (growth in M1 greater than GDP growth) and that the general increase in prices is a symptom of inflation, not the cause. Then there is the specter of idle money, or speculative inflation in the value (in terms of a currency) of assets. By a measure of asset value, the DJIA grew by 25% in 2013 while the Fed was doing ZIRP – that is, the Fed was desperately encouraging asset inflation. It seems to me that if the job of the Fed is to constrain inflation, then using the Fed prime rate to do so is a functional equivalent to the Titanic’s notoriously undersized rudders in a sea of economic icebergs. And, if inflation (again, meaning the general increase in prices for goods and services) really works the way the Fed believes, then its duty to control inflation while maintaining full employment is a tightrope act without a net (remembering Volcker’s Miracle, killing labor AND inflation). Doesn’t fiscal policy play a role? Doesn’t sudden shortage like the oil embargo play a role? Isn’t the key to controlling inflation lie in consumer spending habits, perhaps best controlled through taxation? Dang, I kind of feel I know less about economics than I did when I started following this blog.

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