Sumner Channels Yglesias Against Jones
Garett Jones is one of the most Sumnerian macroeconomists I know. But he’s not Sumnerian enough for Sumner. Sumner channels Matt Yglesias to question the importance of Garett’s debt deflation mechanism (or to be more precise, debt less-than-expected-inflation mechanism):
Debt prices are not sticky at all (check out the bond market.) I
believe Garett is referring to debt payments, which are sticky. That’s
true, but they aren’t prices. Debt coupon payments are sunk costs and
benefits that have almost no effect on the incentive to produce output
at the margin. Even worse, any impact they do have goes the wrong way.
A debt crisis often makes people poorer. But we have a lot of evidence
that leisure is a normal good, and hence people work harder when they
are poorer. Americans used to work six day workweeks. If I became
bankrupt, I’d work much harder, I wouldn’t take a vacation.
Touche. Debt deflation is a serious macro problem. But with flexible wages, it would cause rising employment as people struggled to make their debt payments. This could in turn conceivably spark a downward spiral of labor income (higher employment reduces wages, possibly reducing take-home pay, exacerbating deflation). Yet as far as I know, this specific conceivable downward spiral has never occurred.