Month: July 2010

Ezra Klein reports:

Notice that adding new jobs at a rate of 200,000 a month would take us 150 months — or 12.5 years — to get back to normalcy. So far, only April has seen more than 200,000 in non-census jobs growth — and even then, just barely.

This in my view is a puzzle for all theories of labor market adjustment.  Why does it take so long?  This isn't one of those West European scenarios where, due to benefits, being unemployed is permanently somewhat attractive alternative for some subset of the work force.  Nor is the United States a country where employers cannot fire recalcitrant workers.

If monetary velocity fell by eleven percent, is it the view of the Keynesians that the required nominal wage adjustment takes so many years?  Hysteresis means that unemployment gets "baked in" to some extent, but if anything you might expect that to speed up shorter-term adjustment in the work force, to avoid such a fate.

Does the required "recalculation" take so long?  I find myself coming back to the view that many previously employed workers simply have a current marginal product pretty close to zero.

Addendum: Arnold Kling comments.

Eric Crampton alerts me to the following idea:

Design student Fabian Brunsing has devised a fiendish device that makes pay toilets seem positively munificent: Dubbed “Pay & Sit: The Private Bench,” it consists of a bench covered with retractable metal spikes and a coin slot. If you want to sit down on the bench without an array of spikes jamming you in the keister, you’ve got to pay €0.50 (about 70 cents US).

As seen below, this causes the spikes to retract so you can sit on the bench, and also activates a timer. Shortly before the timer expires, you’re warned by a buzzer to get up; then, the spikes shoot back up. Beware!

Of course actual privatized benches, as you might find them in a shopping mall, do not usually embed this device.

E. Barandiaran writes in the comments:

Tyler, I hope that tomorrow (7/14) you read this comment about Arnold Kling's challenge to BC: define money that meets two requirements. Please tell AK that his two requirements were the same that Milton F. argued for the QT of M to make sense –but as anyone familiar with the history of Milton's version knows, he failed miserably. I'm still waiting your definition of money.

Arnold Kling writes:

So my challenge for Bryan (and for the rest of the profession, because I am the one who is out on a limb on this) is to come up with a definition of money that satisfies two criteria. First, your monetary aggregate is correlated with nominal GDP in a reliable way (with "reliable" including that if you were to target it, the relationship would not fall apart). Second, the Fed controls that monetary aggregate reasonably closely.

No definition of money fits Arnold's challenge (though Bryan argues for the monetary base) and I'm not going to offer a single definition of money, period.  I see money first as a medium of account and then as an option on purchasing goods and services.  As an option, "money" is more like "credit cards" than many economists might find comfortable, but so be it.  No single number very well summarizes the quantity or outstanding value of the money supply, properly understood to include the option value of lines of credit but also the option value of currency and bank reserves.  (Bill Barnett promotes "divisia indices," which I view as a nice try to a hard-to-solve problem.)

That said, a large, exogenous shift in the money supply will raise the general level of prices.  There is overwhelming evidence for that proposition (check out my macro Principles text with Alex, for one good chart, or visit Zimbabwe).  If some mix of currency, bank reserves, and useful lines of credit go up, prices will go up too, in very rough proportion, no matter what the exact measure of the money supply should be.

A lot of the better criticisms of the quantity theory play off of whether "money" is exogenous in the first place.  Many of the points of these critics are well-taken, but still a properly specified exogenous boost in the money supply will bring the traditional quantity theory result.  You just don't have to see that exogenous shift as the only relevant scenario for all real world monetary economics.

I see this post as "a lot of words."  I'm not saying much, I am just trying to limit how much other people's words confuse you.

On the quantity theory, I recommend reading and studying Arthur Marget's A Theory of Prices, especially volume II.  Marget was a penetrating thinker who understood his chosen topics better than anyone else and who was very good at pulling out the deep truths in apparently simple propositions.  I think of him as the Scott Sumner of his day, minus a blog.

George Loewenstein and Peter Ubel say yes.  Often there is no nudge-based free lunch and we need a straightforward relative price shift:

Behavioral economics should complement, not substitute for, more substantive economic interventions. If traditional economics suggests that we should have a larger price difference between sugar-free and sugared drinks, behavioral economics could suggest whether consumers would respond better to a subsidy on unsweetened drinks or a tax on sugary drinks.

But that’s the most it can do. For all of its insights, behavioral economics alone is not a viable alternative to the kinds of far-reaching policies we need to tackle our nation’s challenges.

There is much more here, hat tip to Mark Thoma.  Loewenstein, of course, is one of the pioneers of…behavioral economics.  (If you're wondering, I don't agree with a number of their examples, but I do agree with their overall point.)