It is easy. Fire one 40 hours worker. Hire thirty-nine 1 hour workers. Congratulations! You've increased your "labor force" by 3800% !!!
You have a net loss of 1 man-hour however. I'm not totally sure how this relates to inflation, but jobs absolute numbers and gdp are only slightly related.
Another example would be to fire everyone making more than 100k$/year and relocate them to potato farming. In terms of gdp, this would be a net decrease despite the absolute worker count remaining the same
Everybody's aim in an economy is not to have to work, or at least to work less, and to produce more. No one wants to work more and produce less. So what we want is negative jobs (people working less) with positive GDP (people enjoying more goods and services.)
In bad times, when there is a loss of productivity or where people stop working in the productive (private) sector and go to work for the unproductive (public) sector, you absolutely can have negative real growth with more employment.
The Fed has tools like interest on reserves, reverse repos and term deposit facilities to make sure that all of the excess reserves on bank balance sheets don't turn into actual price increases.
Austrian economists conflate increases in the money supply and price inflation, but it's not necessarily true. In fact, mainstream New Keynesians (that includes conservatives like Greg Mankiw) have predicted for years that increasing the Fed's balance sheet wouldn't increase inflation. They have been right.
But this is due to the larger forces of supply and demand for US treasury bills. So it's the US's role as an empire that makes its sovereign debt demanded by nations with less solid foundations.
The US enjoys this position largely b/c of its size but also b/c of the frequent policymaking folly that occurs in other nations.
The only thing that can impose true discipline on this process is the existence of competition.... it's the only thing that could decrease demand for US Treasury bills.
It's obvious that we're not currently experiencing hyper-inflation, but the configuration of the world that will allow the trend to continue becomes less certain the further things get extended.
Imagine someone issues you a credit card with a $1 per month minimum payment. As long as you can keep getting the limit increased you'll surely be able to make the payment each month, no matter what other spending you do. The US is able to keep borrowing and borrowing, and its creditors are very lenient b/c they lack a better option.
The debt situation might get out of hand, but that doesn't necessarily mean we're headed for inflation. The US has gone for hundreds of years without a default[1] and I'm sort of proud of that as a US citizen, but if worst came to worst we could always just default - unlike, say, 1920s Germany.
[1] There was a few payment in the 1970s that was slightly late due to a clerical error, but that hardly counts.
I agree that it doesn't necessarily mean we're headed for inflation, but I think the counterfactual is that the US is headed for even more dramatic economic hegemony.
Because if Europe had the right institutions, it would be worth saving. The cost of breakup is so high.
Unfortunately, the things they need to do to save the euro economically make it less politically likely that they'll be able to get the institutions they need.
Spain has real structural problems in its labor markets. But those kind of generous policies aren't unique to Spain within Europe. And other European countries have far, far, far lower unemployment. Why?
The answer is that employment policy does not have more to do with unemployment than any other metric. This is a story about a huge housing bubble and an awful currency union.
Although many European countries also have generous policies, I think Spain is fairly unique in terms of the sheer level of generosity (and inflexibility) baked in to their labour laws. The only other comparable European state is Greece and their unemployment figures are running very close to those of Spain.
Edit:
And the reason Spain's overall unemployment rate is even worse than Greece is probably as you say due to the fact that they've suffered more than most from the housing and construction bust (since it accounted for such a large section of their economy).
Edit 2: I think that both my argument and yours are overly simplistic. There are so many other factors at play which make it difficult (impossible) to point a finger at one particular cause. Examples: corruption, over reliance on tourism, lack of focussed structural investment (e.g. infrastructure), byzantine business laws and regulations, large sections of society regarding tax evasion as socially acceptable (with equally lax enforcement from the government) etc. Also, in Spain's case, there's also the dynamics of the Catalan and Basque issues to consider (which have economic impacts as well).
I agree. I did not mean to marginalize the other issues, just emphasize the very negative effects of labor policy. Spain has been an unemployment leader for 20 years, long before this recent bubble and even the Euro, so in some fashion policy has to play a larger role than outside influences.
Spain has become a victim of the "perfect storm" in regards to internal and external forces.
I don't think that proves what you think it proves. You're missing what he would do with that $25k if he marries his maid. Maybe he would spend it on something else. Maybe he saves it and the bank loans it to someone else. In either case, it does matter what happens, because it gives us a clue into the velocity of money.
GDP measures the value of all the stuff and services we produce. Which shows how much income we earned. So, you're wrong.
In the more detailed version of the hypothetical (i.e., the careful econ textbook version), it's explicitly stated that the wife continues spending the exact same amount as before, and she was already a live-in maid.
Welfare has improved - the husband and wife have all the same goods and services as before (a house paid for by the man, which is cleaned by the woman), and they are now having sex (which is presumably welfare improving). Yet GDP has gone down $25k.
GDP measures the value of all the stuff and services we produce.
No, it doesn't. If you believe it does, I have a great stimulus package: ban joint bank accounts for married couples and require the higher income partner to pay a salary to the lower income partner.
This will certainly increase GDP. Could you explain how this would have any effect on anything else?
GDP is a flow. So is personal income. GDP is the dollar value of the stuff we sell. The flip side of that is that this is how much income we earned. You can dispute this, but it's what it means. http://bit.ly/HYokZe
Your example is flawed for the reasons I mentioned. You have to include the opportunity cost.
I think you're missing the point. Either way, it's 200k split between the two of them. Unmarried, he has 175k and she has 25k. Married, they both share 200k. He doesn't get to divert that 25k once they marry, because she will consume resources as well.
They have access to Big Macs, they are one of the cheapest foods ever. Do you think anybody would have cared about that cake remark (which she never said) if they really had eaten cake instead?
There's something called the Bill of Rights. It's to protect the minority from the tyranny of the majority. Just because the majority wants something doesn't mean it's legal.
Fannie and Freddie actually lost market share as the bubble really got going. They were prohibited from getting into most subprime, and tried to get around their regulations.
Wall Street was the driver in buying up these shitty mortgages to put into MBS/CDOs -- and quite a few big banks bought mortage originators so they could get bigger margin on these deals. Unfortunately for them Wall Street couldn't find buyers for all of this toxic crap and/or were too dumb to realize how bad some of this stuff was (ie Citigroup). That's why you had a bank run on Bear Stearns, once people realized the collateral they were using in the repo market was effectively worthless.
Fannie and Freddie bought a lot of subprime. I had friends that worked there and told me so and I've read about it. Over the long term Fannie made a lot of people rich. Read Beating the Street by Peter Lynch. He made a fortune off Fannie. Taxpayers will pay, unfortunately.
Maybe, but the underlying problems were the bad ratings assignments, shady conflicts of interest, and companies figuring out they could drive demand while betting against that demand.
There was a run on investment banks after Lehman's failure. Merrill Lynch was on the edge of the abyss before Ken Lewis made the deal of the century - for John Thain. Morgan Stanley was next. Their CEO John Mack successfully lobbied the government to institute a ban on short selling, much good that did. Goldman was next. Without the government backstop, Goldman would not exist today.
And if Goldman was entirely populated by "geniuses", why did they need $13 billion from AIG? They made all the same bad bets as everyone else, but they "hedged" them with a counterparty unable to pay out. And once AIG was downgraded to AA in 2005, everyone should have known that they'd be unable to pay out the ridiculous CDS contracts they guaranteed on subprime bonds. It'd be like buying volcano insurance from a homeless guy - and you live next to a volcano. Goldman isn't run by geniuses; its run by people who control the government.
And without the government backstop, your savings would not exist today (and anyone else with cash in a money market or savings account).
The chain of collapse without a backstop is not a robust argument in general, becuase at the point you say Morgan, etc. fail without a government backstop and then try to assume that those firms were the only (or majority) beneficiaries, it becomes shaky. Why? Because if the banks failed as you described, nearly most would have as well and then anybody holding cash in a bank (read all of us sans the mattress crowd) would have been in horrendous trouble. Remember, the government had to backstop not just investment banks, but money market funds as well (which were failing due to the related crisis of confidence issues). Remember the northern rock episode with huge lines of people unssucessfully trying to withdraw their money in the UK?
Imagine not being able to withdraw your cash from a money market or savings account. Banks being structurally exposed to runs and therefore requiring government backstops is actually a well understood issue. The point is we all benefited from the federal backstop, and this argument that, why should banks benefit from an implied or explicit backstop ignores the fact that all of us are backstopped by this as well, whether you realize it or not. Nobody can claim that people keeping their life savings in a money market or savings account and earning 5% interest a year is not also implicitly benefiting from government backstops in general, so let's not single out the investment banks in this case.
As for AIG, this has been discussed in infinite more detail so the interested reader can look up articles on this, but the essence of the point is that of the 13 billion owed, most of it was already collateralized (which means they would have just kept the US treasury collateral had AIG collapsed). Yes, there was a smaller portion that was hedged via CDS that could have failed as insurance, but let's not claim this is the entire 13 billion, in fact, it was far from that. And let's also remember had CDS truly failed it would have reflected a state of the world where most banks were in default, and forget about some investment bank not being able to collect their insurance, we are talking about ATMs not working anymore at this point. So the point is the backstop prevented things from getting to this nightmare, saving banks but also the rest of us as well.
You're afraid health care will become too bureaucratic? Are you familiar with health insurance companies? There's already a bureaucrat between you and your doctor - the fact that he's from the private sector doesn't change that fact.
And private sector bureaucrats have an incentive to deny coverage, purge rolls, etc. - it means greater profits. In the last twenty years, health insurance companies have gone from spending 95 cents of every premium dollar on health care to roughly 80 cents today. Where did that extra money go? Greater overhead and profits. Under a universal system, public bureaucrats wouldn't have the same incentives to deny care.
Just a friendly reminder that before you start spouting cliches about "bureaucrats ruining things" you should ask whether they already have - just not from the government.
Yes, surely the incentives are different. I don't at all believe that the public-bureaucrat incentives are better.
My wife is manager of budget & reimbursement at a hospital, which means that her primary task is working with Medicare and Medicaid officials. I don't think that a day goes by that she's not telling me about some inefficiency in the process. It might be the (literally) reams of paperwork they're required to produce, or unnecessary tests that are necessitated by Medicare rules, or the attitude she gets from the public employees she must talk to. But any time you hear that Medicare is more efficient, remember that because Medicare/Medicaid nearly comprise a monopsony, it's able to push many of its administrative chores onto the healthcare providers.
