Month: June 2010

How is trade affecting wages?

There is a very good new paper by Lawrence Edwards and Robert Z. Lawrence.  In this case the conclusion is clearer than the abstract:

…the fear of rising US wage inequality from developing-country imports in recent years are unwarranted.  While conventional trade theory makes such expectations plausible our investigation reveals they are far off the mark.  At the most disaggregated level for which comprehensive skills are available we have found that the US industries competing with developing country imports are not particularly intensive in unskilled labor.  Moreover, the relative effective prices of the US industries that are unskilled labor-intensive have actually increased rather than decreased since the early 1990s.  Changes in effective US prices form whatever cause have not mandated changes in relative ages.  Neither have changes that can be ascribed to import prices mandated increases in wage inequality.

The most likely explanation for the data is:

The goods exported by developing countries are highly imperfect substitutes for those produced by developed countries.  This means that for the most part, unskilled US workers are not competing head to head with their counterparts in developing countries.

You can find ungated copies here, though in some browsers they seem to create problems.

How sticky are wages today anyway?

Keep in mind that unemployment rates today are disproportionately concentrated in low-income and low-education workers.  Haven't we been told, for years, that these same individuals are seeing some mix of stagnant and eroding wages?  That they are experiencing downward mobility?  That the real value of health care benefits has been falling and that more and more jobs don't offer health care benefits at all? 

Doesn't that mean…um…their wages aren't so sticky downwards?  And thus Keynesian economics is not the final story?

Or take illegal immigrant Mexican construction workers, a group which lost jobs in large numbers following the crash.  Are they — who often came from $1 a day environments – also supposed to have sticky wages?  They are out of work in massive numbers.  A lot of them went back home, which is a sign they are willing to make major adjustments.  It simply may be they were no longer employable in the United States at any plausible wage.

The alternative model is that many low-education workers are not employable through marginal changes in current conditions.  It may require a big upward Schwung for the entire chain of labor, so that desperate employers at the bottom of the ladder, unable to find anyone else, grudgingly hire these not-so-productive individuals because there is no other way of expanding.  In other words, it requires conditions which raise the marginal value product of these workers to the private sector, keeping in mind that the fixed costs of hiring a worker mostly have been going up due to the greater bureaucratization of society.

Under this hypothesis, the stimulus that works in the short-run is direct government employment of low-skilled labor, not funneling money through private contracting, and hoping the unemployed get picked up.

What should the government do with these workers?  Does their direct employment conflict with the Davis-Bacon Act or other regulations?  What wage should we pay to make sure we don't drain off workers from private sector jobs?  How much longer does it take such forms of stimulus to result in sustainable, private sector jobs?

As you'll see in my Principles text with Alex, we both believe that wage stickiness (both nominal and real) is a genuine issue in market settings, even in the absence of government intervention.  Still, I'm not convinced stickiness is the major problem today, at least not in a simple, direct manner.

If there is going to be more U.S. stimulus, it's exact nature should be thought through very carefully.  It's an additional question whether our politics is up to that.

Assorted links

What I’ve been reading

I've been trying not to read too much during my stay in Berlin, as an experiment in information processing and to see how it changes my thoughts.  Still, I've been reading a bit and here are a few of the books:

1. Weimar Germany: Promise and Tragedy, by Eric D. Weitz.  A bit stolid, but a good general overview of an era I very much would like to be able to visit.  That said, deflation and fascist political movements make for an obviously nasty combination.

2. My Name is Charles Saatchi and I am an Artoholic, an interview with Charles Saatchi.  Entertaining throughout, plus you can read it in a few minutes time.  This is the sort of book Felix Salmon would blog.  Saatchi claims that Pollock, Warhol, Judd, and Hirst are the four artists from recent times who will pass into history as the immortals.  The others will be swept away.

3. The Most Powerful Idea in the World: A Story of Steam, Industry, and Invention, by William Rosen.  This is a popular treatment of some of the themes in Jack Goldstone's excellent work on engineering culture in England.  I don't think this book has anything fundamentally new, but about half of it I found to be worthwhile reading.  The other half is OK summaries of various economic theories.

4. William Voegeli, Never Enough: America's Limitless Welfare State.  Voegeli has a good basic point, namely that a) the welfare state is here to stay, and b) we need to set limits to it.  At some point the book runs into diminishing returns.  Arnold Kling wrote a good review of the book, plus he had lunch with the author.

5. Herta Müller, assorted.  When she won the Nobel Prize last year, I was skeptical.  In Berlin I've been reading her work, much of which is set in Berlin, and I like it.  It helps if you have a connection to those who have left formerly communist countries.  In English, I suggest The Land of Green Plums as a starting point.

6. Salman Rushdie, The Satanic Verses.  This one is a re-read, as I will teach it next spring in Law and Literature and I am studying it well in advance.  This is Rushdie's most significant achievement and one of the truly excellent novels of the last thirty years.  It's not an easy read, but worth the commitment if you haven't already done so.  Sadly, this book seems to have fallen into a commercial black hole; you can't even get it on Kindle.

Paul Einzig, from 1932

It is often argued that Governments are in a position to inflate by carrying out ambitious schemes of public works. Undoubtedly during the earlier stages of the crisis such measures might have produced the desired effect.  At present, however, they could hardly be adopted on any large scale.  Practically every Government has a huge budgetary deficit, which makes it difficult, if not impossible, to raise loans for meeting the extraordinary expenditure of such public works.  Any attempt to borrow for such purposes would inevitably lead to a further accentuation of distrust, which must be avoided at all costs.

No matter what your point of view on fiscal policy, you can find that quotation to be scary.  That is from this book, p.103, and I thank Michael Reddell for the pointer.

Here is a post on whether an austerity placebo can work.

Optimizing Kidney Allocation: LYFT for LIFE

Under the current system, kidneys are allocated to patients primarily based on the time that the patient has been on the waiting list and the quality of the match.  If we evaluate these criteria "locally" there's nothing obviously wrong but if we step back and think globally, that is think about what the ultimate goal of the transplant system should be, then the current system is deeply misguided.  Suppose that we want the transplant system to maximize total life expectancy or, as it is known in the literature, to maximize the life-years from transplant (LYFT).

The current system does not maximize life expectancy.  In the current system, a 60 year old patient can be given a 20 year old kidney–that's a waste because the life expectancy of the kidney is longer than that of the patient; it's like putting a new clutch in a car that is rusting away.  If we had 20 year-old kidneys to spare, this wouldn't be a big problem.  But we don't have 20-year old kidneys to spare, so we also give 20-year old patients 60-year old kidneys which means the kidney is likely to die early taking the patient along with it.  If we want to maximize total life expectancy, younger people should get younger kidneys.

Here is a simple example to illustrate the principle.  Suppose that the life expectancy of both patients and kidneys is 75 years of age so everyone dies when they are 75 or when their kidney is 75, whichever comes first.  Thus, if we allocate the 20 year old kidney to the 60 year old patient and vice-versa we gain a total of 30 years of life expectancy.

Patient Age Life Years
20 60 15
60 20 15
30 years Total

But if we allocate the 60 year old kidney to the 60 year old patient and the 20 year old kidney to the 20 year old patient we more than double life expectancy to 70 years in total.

Patient Age Life Years
60 60 15
20 20 55
70 years Total

It's not just age that matters, it turns out that the longer a patient has been on dialysis the less is their life expectancy after transplant (dialysis stresses the body so the sooner we get someone a transplant the better).  Although it may seem unfair, if we want to maximize total life expectancy we are doing the wrong thing by giving more points to patients who have been on the list longer.  

An optimized allocation system that took into account these considerations would increase total life
expectancy (modestly but significantly, about 11,500 extra life years) but it wouldn't benefit every individual.  Maximizing life expectancy would shift organs away from older people and people who have been on the waiting list a long time towards younger people.  As a result, some patients have argued that LYFT is unfair.  The Office of Civil Rights is even asking whether LYFT might violate age discrimination laws.  

But consider, would the older patients have objected to LYFT when they were younger?  If not, shouldn't their objections be discounted?  More formally, consider how people would vote behind a veil of ignorance.  By definition a LYFT approach maximizes total life expectancy, so without knowing the specifics of who you are or when you might need a transplant it's likely that behind a veil of ignorance just about everyone would favor LYFT.  Thus, in my view LYFT is a fair and ethical system. 

Here are previous MR posts on kidney transplant policy.

Interview with Tyler Cowen, pay-as-you-wish restaurants

To find out if the pay-what-you-can model could work for a restaurant, Salon spoke with Tyler Cowen, a professor of economics at George Mason University (and food writer), from Berlin, Germany.

 Do you think this pay-what-you-can model could actually work for restaurants?

You can have a small number of restaurants that use it, but if every restaurant were like that, it would never work. It gets people talking. It's like Radiohead — for the first group that does it, it's a good idea, but is it a good model for the industry? Not really. Imagine McDonald's at Times Square working on this principle. If you kept on going or eating they would discourage you from coming.

Do you think it could work on a small scale — two or three restaurants in a city?

I'm not even sure it can in the long run. I'm not sure if these places will still be going in three years' time. Part of the problem is if you're a customer and what you pay is voluntary, you're under pressure to pay a lot of money. You do it once to prove to yourself and others how charitable you are, but how many people go back 17 times? I would find it a burden — my reputation is on the line. What if I only pay $ 27 instead of $ 34? What does my date think? What does my wife think? You end up wanting to feel liberated and just paying a listed cash price. I think there's no way to solve that problem.

But Radiohead's experiment was fairly succesful. What's the difference between it and a restaurant?

With Radiohead, there's a focal price of about $10, which is pretty cheap. If you download an album and send in $10, you feel you've done your bit, and it's not a question of repeat business. You download the album once. Radiohead makes most of its income by touring, so even if they lose money on the album, but get more popular, they can just go on tour. A restaurant has no other way to get that money back. They count on the people to pay for their food.

Is there anything that these restaurants can do to encourage people to pay more?

You have to feel like you're being watched. You have to feel that other people are paying. You have to feel like you're part of a cool experiment. Even with Radiohead. it's wrong to call them neighborly, but their fans pretend they're a tight-knit pool of cool people. That's an illusion, but you're still relying on a peer effect. It's a way to feel you're better — that you're so committed to the band you paid for something out of your own pocket.

Are some sectors of the economy better suited to this kind of pay-what-you-can model?

It depends on what you mean by giving things away for free. There's plenty of stuff that gets given away for free, like NPR. But once NPR's content is produced, it doesn't cost them extra to have additional listeners. With restaurants, if somebody eats another plate of veal, it costs them money. It'll keep this strategy limited. There may be some niche on a small level for these kinds of restaurants, but it's hard to imagine people saying that they've been to six of these restaurant and they're about to go to their seventh.

Why are these restaurants popping up now?

I'm actually not surprised you see them in down economic times. You let some people pay less that can't pay more — it's part of the charm. But these days there's a restaurant for every possible cuisine, and so many marketing tricks. Restaurateurs are exploring every last possible idea. If you were opening a restaurant in 1957, you could do almost anything beyond steak and potatoes and be considered new, but if it's 2010 and you're across the street from the Malaysian place with roller skates, it makes some sense.

Scientific hypotheses from 1956

This article was from the Guardian:

Intelligence tests recently carried out among more than a thousand children in Wolverhampton schools appear to show a striking and quite unexpected increase in the mental capacity of children born since 1945. A psychiatrist concerned in the tests has suggested that the most probable hypothesis to account for this change is the effect on the brain of the increase in "background radio-activity".

For the pointer I thank Michelle Dawson.

Assorted links

1. Price transparency in earlier German medicine.

2. Labor productivity in Latin America; an important post, though I don't so much view IS and WC as causal in this context.

3. Ryan Avent on the stimulus debate.

4. Do chimps need a single tax on land?

5. Do World Cup losses predict negative stock returns?  (A fun topic, but I do wish to encourage a healthy skepticism about results such as these.)

6. The problem of missing heritability, and more here.

*The Age of the Infovore*, paperback edition


This is the paperback of Create Your Own Economy, with (to me) a better title and better cover.  I am pleased to have persuaded the publisher in this regard.  It is out this coming Tuesday, one week from today.  You can pre-order it on Amazon here (Kindle too), Barnes&Noble here, and here.

Of my books, it is my clear favorite and not just because it is the latest.  It is the one whose ideas I use and think about most often.

Understanding German fiscal policy

It is a common view that governments should run a deficit in bad times, and a surplus or balanced budget — if at all possible — in good times.

I have news for the people: according to the German view of the world, these are the good times.  Thus they want to run a surplus.  I don't see that perspective being rebutted.

The Germans see themselves as having made the necessary wage adjustments, in advance, and in a manner that Keynesian economics is skeptical of.  The Germans also see themselves as having produced and maintained true credibility about future fiscal policy (how many other countries can claim that?) by a constitutional amendment, a lot of tough talk, and a relatively robust real economy.  German bonds are a safe haven investment, even though Germany's numbers, such as the debt-gdp ratio, are not overwhelmingly wonderful.  That's a testament to German public sector management.

Did I mention that — after unification — the Germans tried (against their will, they had to) more than a decade of massive fiscal stimulus, and subsidization of consumption, starting with well under full employment, and yet with mediocre results?  That wasn't long ago.  

And yet somehow it is a mystery, or a strange annal in some long book of Dogmengeschichte, that the Germans are not more interested in Keynesian economics.

It is incorrect to argue that: "their high-savings export-oriented economy only works if someone else runs a high-debt economy and buys their stuff."  The Germans do just fine when they trade with current account surplus countries.  If Portugal and Greece were more like Norway or the Netherlands, the German trade surplus might well go down, but the total value of German exports likely would go up (Germany exports mainly "normal goods") and the German economy would do just fine.

The Germans are well aware that most of their neighbors have not managed their finances nearly as well as they have.  How should we expect them to respond, if we, and others, now tell them that, after all their careful management, it is now time to run up debt to spend more money in their neighbors' shops?  (And that is in addition to significant ongoing EU transfers from Germany to poorer countries.)  How would we respond to such a request?  Do we blame our own successful export sectors — such as aircraft and movies — for the troubles of the world economy?  Does Obama lecture Boeing and Hollywood for creating problems?

How do we speak to the much poorer Chinese?  Do we offer them aid or do we make demands on them?  In this matter, the Germans to me seem more reasonable than the United States.

The not-too-often-stated-but-often-thought German attitude is that if other nations are going to share in beneficial German and European institutions, some of them need a bit more discipline.  If they don't have that discipline, they need to step back until they do.  Is Germany doing either itself or the broader world a favor by lowering its policies and standards to meet the requirements of the less successful nations?

Here is my previous post on a related topic.