Paul Krugman puts the IMF straight (and it is not what you think!)

This is from Market Watch:

The International Monetary Fund on Monday called on the U.S. to raise its minimum wage, but refrained from naming a specific level, saying that’s up to Congress.

In its annual review of the U.S. economy, the IMF said increasing the minimum wage and expanding the Earned Income Tax Credit would help raise the incomes of millions of poor, working Americans. Read the IMF’s review.

Christine Lagarde, the IMF’s managing director, told reporters an increase in the minimum wage — now $7.25 an hour — “would be helpful from a macroeconomic point of view.”

The fund’s recommendation will be well received by congressional Democrats and the Obama administration, both of which have been pushing for an increase to $10.10. The proposed increase has been hampered by an election-year stalemate over major policy issues. House Republicans don’t plan to take up a bill to increase it and Senate Democrats don’t have enough members to get it through their chamber.

Lagarde said the amount of an increase “needs to be decided by legislators.”

Frankly speaking I am somewhat shocked that the IMF would come up with this kind of policy suggestion, but it reminded me about what Paul Krugman once said about increasing the minimum wage (yes, yes he probably have another view today):

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.

This graph tells the same story.

minimum-wage

W eq is the equilibrium wage that would emerge in an unregulated labour market with no minimum wage. In such a market employment would be N eq.

W min is the minimum wage, which is higher than the equilibrium wage (W eq). In such a world the demand for labour will be only N2, while the supply of labour will be N1. The difference between the N2 and N1obviously is the level of unemployment caused by the minimum wage.

No more discussion of this topic should be necessary…

PS I deleted a lot of horrible things I wrote about French lawyers…

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Belka-gate – the Polish version of the Sumner Critique?

A key Market Monetarist insight (it is New Keynesian insight as well…) is that budget multiplier is zero if the central bank says it is so. Or rather it the central bank targets inflation, the price level or nominal GDP then the central and will offset any shock – positive or negative – to nominal spending (aggregate demand) from changes in fiscal policy.

This means that the central bank – rather than the ministry of finance – has the full control of aggregate demand in the economy. No matter what the government does with fiscal policy the central bank has the instruments to fully offset this. This is the so-called Sumner Critique.

A major scandal involving the Polish central bank governor Marek Belka that has developed over the last couple of days is a powerful illustration of the Sumner Critique.

This is from Reuters:

A Polish magazine said on Saturday it had a recording of a private conversation in which the central bank chief told a minister the bank would be willing to help rescue the government from economic troubles on condition the finance minister was removed.

The weekly Wprost news magazine said it had a recording of a meeting in a Warsaw restaurant last July between central bank governor Marek Belka and Interior Minister Bartlomiej Sienkiewicz. It did not say who recorded their conversation, or how it had obtained the recording.

According to extracts of the audio recording posted on the Internet by the magazine, which have been heard by Reuters reporters, and were also emailed to Reuters by Wprost in transcript form, the minister sets out a possible future scenario in which the government could not meet its financial commitments and faced election defeat.

The man identified in the transcript as Sienkiewicz refers in vague terms to monetary policy action carried out elsewhere in Europe – an apparent reference to central bank stimulus.

“Is that precisely the moment for launching this sort of solution, or not?” Sienkiewicz asks Belka.

Belka replies, according to the transcript: “My condition would be the removal of the finance minister.”

The finance minister at the time, Jacek Rostowski, was removed last November as part of a cabinet reshuffle.

There you go. Central bankers have the power to control nominal spending in the economy. They might even have the power to have finance ministers removed. Never ignore the Sumner Critique.

PS the Polish central bank has said that the recordings are authentic, but that they have been manipulated and that Belka’s comments regarding the removal of the Finance Minister were taken out of context.

PPS It has been – and still is – my view that Polish monetary policy has been far too tight since early 2012. Maybe an explanation to the overly tight stance could be – and I am speculating – dissatisfaction with the Polish government’s fiscal stance.

PPPS for game theoretical based discussion of the Sumner Critique see my earlier posts here and here.

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