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Why I Am Not Surprised That U.S. Treasury Bond Yields Are Still Very Low Today

The Three Musketeers vs. Teh Macroeconomic Ignoramuses, Part CXIV

Nick Rowe looks at Catherine Rampell's truly excellent NFIB chart:

What's Holding Back Small Businesses? -

He muses on the great puzzle: Jean-Baptiste Say and John Stuart Mill could recognize in 1829 that in Britain in 1825-1826 an excess demand for money had produced an excess supply of currently-produce goods and services--that the problem was not one of structural unemployment (too much demand for goods workers could not make and too little demand for goods that they could) but of deficient demand in general.

So why do so many economists have a problem recognizing that the same thing?

Trained incapacity is the answer.

An education devoted to making sure that they cannot understand the economy that is out there, but only their ideological vision of an economy that simply does not exist. And an education devoted to making sure that they are not allowed to look at the world outside the window.

Nick Rowe:

Worthwhile Canadian Initiative: Labor Quality: The Dog that Stopped Barking: I see something a bit different in that [Catherine Rampell] graph that all the macro-bloggers have been blogging about. Sure, I see the "poor sales."... But what about "quality of labour"?... It's usually, in normal times, seen as a problem by a lot more businesses. That tells us something important....

[B]ooms [are] times when it's easier to sell stuff... recessions are times when it is harder to sell stuff.... By "stuff" I mean both goods and labour.... The important distinction is between money and everything else.[1] It's money that is hard to "buy" in a recession; everything else is easy to buy.

So firms are telling us that it's hard to sell goods and it's easy to buy good quality labour.

Yep. That sounds like an excess demand for money and an excess supply of everything else.

Standard Keyneso-monetarist recession. Not structural unemployment, where firms can't find the right sort of labour....

In an update Nick sends us to Daniel Kuehn, who

picks up on [my] post and makes explicit a point I really should have emphasised more, and repeated. This data goes right against the recalculation story (or what I call "structural unemployment"). If recalculation was the reason for increased US unemployment, more firms should be saying that finding good quality labour is their most important problem. But we see the exact opposite. In other words, at the margin, recalculation looks less of a problem now than it usually is. (Though, if we solved the deficiency of demand problem, it might of course become a problem; which is why I said "at the margin".)

Daniel Kuehn:

Facts & other stubborn things: One more NFIB chart post...: Nick Rowe looks at the same data and makes a point not many other people have been making: the concern about "quality of labor" has gotten a lot lower since the beginning of the downturn. That militates against Arnold Kling's "recalculation story". I wonder if he'll pick this up. How does this relate to ABCT? Well, Yglesias thinks of recalculation and ABCT as one and the same. I've said in the past that that's a little strong but there are clearly common threads. And let's be honest - "recalculation story" just means "contracting for specific assets". It's a fairly non-controversial point that does have a lot of common ground with the Austrians too. There's nothing wrong with the way Kling approaches the issue - it's simply a question of how important of a factor it is in the current recession. Do we have near 10% unemployment because of a matching problem or because of something else? Nick Rowe suggests it's something else. So another question now - why the sudden interest in the NFIB survey? I've been pointing to this data for months and Yglesias and Krugman have pointed to it in the past too. I guess Rampell has a lot of influence on what gets blogged about.

And Nick sends us to Niklas Blanchard, who:

has found a much better chart to show what I wanted to show, and coloured it in to make it clearer. It's all much clearer now. (How come other people can do such things??)

Niklas Blanchard:

Sales vs. Labor Quality: In a fairly textbook recession (adverse shock to aggregate demand), demand for money increases, while demand for everything else produced in the economy decreases. This raises the real value of money, producing the macroeconomic dislocations resulting from what is popularly known as “price stickiness”. This phenomenon is similarly true (perhaps even more-so) within the labor market. An increase in demand for money reduces the demand for labor, which increases the quantity (and thus average quality) of labor available.

Nick Rowe noticed this phenomenon in the popular small business survey chart that is running around the blogosphere. He then said that if he were more technically capable, he would produce a graph of “poor sales minus labor quality”. I was going to produce one for him, but luckily I found this.... There is such a stark inverse relationship between the two answers that a separate index is hardly necessary (although I took the liberty of coloring the chart myself). As you will notice, taxes are always a favorite, and since the start of the Great Moderation, interest rates have hardly been of concern...

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[1] As Nick knows, I think this way of expressing it is slightly infelicitious. Right now it is easy to get liquid cash money--the Federal Reserve has flooded the zone with medium-of-exchange and means-of-payment assets. What it is hard to get are safe-store-of-value assets--the things you want to hold if you are subject to John Maynard Keynes's "precautionary motive" for wanting to hold money. The key is that safe assets--money, Treasury bonds, bonds securitizing conforming mortgages--are "in request" and that economic agents have cut back on their spending to try to build up their stocks of such assets.