Month: August 2010
What’s the actual problem in the labor market?
David Leonhardt has a very good piece which presents some relevant facts about unemployment. Felix Salmon summarizes one part of the piece as follows:
In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.
Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.
Also from Felix:
The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession.
To those observations I would add that corporate profits are doing fairly well.
Those facts, in a nutshell, are why I am not AD-obsessed when it comes to explaining the current economy.
Furthermore, I don't buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion. There are so many blog posts written to the Fed, to Bernanke, etc. "Hey guys, goose up the money supply! Bernanke, read your old writings!"
Yet I have seen not one such post to the unemployed: "Hey guys, lower your wage demands! It's good for you! You'll get a job and avoid the soul-sucking ravages of idleness. It's good for the country! It's good for Bernanke, you'll get those regional Fed presidents off his back! Why not? The best you can hope for is to get tricked by money illusion anyway! Show up those elites and get to that equilibrium on your own! Take control!" and so on. If such posts would seem patently absurd, we should ask what that implies for our underlying theory of current unemployment.
I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising and not facing any easy adjustment to set things right again. Furthermore I consider that portrait of their troubles to be more consistent with the general tenor of liberal, left-wing, and progressive thought, not to mention plain common sense.
Elsewhere, Matt Yglesias has an interesting post on the recalculation argument and its relation to political ideology. He claims that promoting the argument will make people like capitalism less and that may well be true. I would add:
1. The Industrial Revolution also was a tough slog for quite a few decades. Yet it was both worthwhile and it gave capitalism a bad name for a long time.
2. Alexander Field argues that the Great Depression brought greater productivity improvements than any other decade in U.S. history.
3. If one wishes to consider state intervention, in light of recalculation, one is pointed in the direction of direct employment of the struggling workers; the recalculation argument does not rule out intervention per se. This advice could potentially be useful and I don't see why even libertarians should consider it necessarily worse than $800 billion of fiscal stimulus.
4. Like Matt and many others, I favor a more expansionary monetary policy. But the last stimulus was oversold and there is no reason to oversell this one. We really don't know how well it will work (and I'm not referring to liquidity traps). But if the Fed tries more monetary expansion, we'll see how much of the current employment is cyclical and AD-related in the traditional sense.
5. By its very nature, a recalculation argument ought to be somewhat agnostic as to how much (and what kind) of recalculation is actually required. See #4.
Addendum: Bryan Caplan comments, non-ironically.
Betting markets in everything
Think you're going to ace freshman year? Want to put money on that?
A website called Ultrinsic is taking wagers on grades from students at 36 colleges nationwide starting this month.
Just as Las Vegas sports books set odds on football games, Ultrinsic will pay you top dollar for A's, a little less for the more likely outcome of a B average or better, and so on. You can also wager you'll fail a class by buying what Ultrinsic calls "grade insurance."
CEO Steven Wolf insists this is not online gambling, which is technically illegal in the United States, because wagers with Ultrinsic involve skill.
Student users claim it motivates them to work harder. Here is the full story, here is another. Here is an Andrew Gelman post.
How do they avoid adverse selection? Is it that they lure failing fools, who think that money will make such a difference?
For the pointer I thank Max Levine, a loyal MR reader.
The culture that is Virginia
Virginia received $35 billion in defense contracts, supporting more than 530,000 contracting and associated jobs in fiscal 2008, Fuller said. About 70 percent of those dollars flowed to Northern Virginia.
He said three years of 10 percent cuts to military contracting, as announced by Gates, could swallow up as much as half of the economic growth projected for Northern Virginia in coming years.
Here is more.
Assorted links
1. Are TV viewings actually up?
2. Sounds like excess capacity to me.
3. At the State Fair: deep-fried butter and chocolate-covered bacon.
4. Where does the Laffer Curve bend? (prize for the best answer goes to Greg Mankiw)
6. Japanese aquarium features frozen fish.
7. Very good post on carbon tax and innovation.
German imports jump
On the imports side, the picture was even stronger – good for Germany and its European trading partners whose economies benefit in the German slipstream. Imports soared 31.7pc to 72.4bn euros, the Destatis statistics office said, the all-time record since figures were first compiled in 1950.
Don't overreact to one report, of course, but that is better than virtually everyone was expecting. The standard line had been that Germany's export prowess, combined with a longer-term move toward a near-balanced budget, was sucking air out of the global economy.
*Seeds of Destruction*
That's the new tract by Glenn Hubbard and Peter Navarro; the subtitle is Why the Path to Economic Ruin Runs through Washington, And How to Reclaim American Prosperity.
Beyond the usual market-oriented prescriptions, the book defends a price floor for oil imports, price indexing of social security benefits, it is anti-fiscal stimulus, anti-easy money, for job training programs, and for health care it advocates eliminating the tax deduction, removing state-level barriers to competition, and malpractice reform. The authors also devote special attention to criticizing Chinese protectionism as a reason why American job growth hasn't been better.
I take Hubbard to be a (the?) future "kingmaker" for economic policy within the Republican party, with possible competition from Douglas Holtz-Eakin. If you wish to know where those debates and proposals are headed, this is the book to pick up.
Will QE work?
Basile, Landon-Lane, and Rockoff have a new paper on the Great Depression. They conclude:
The main finding is that as we move away from short-term government bonds on the "liquidity spectrum" we encounter rates that appear to have been sensitive to changes in monetary policy, although the mortgage rates were an exception.
They note that Keynes himself did not believe America was in a liquidity trap, though some of the American Keynesians did.
Here is a new paper from the Kansas City Fed, by Taeyoung Doh, summarized by the Fed bulletin as such:
Doh uses a preferred-habitat model that explicitly considers the zero bound for nominal interest rates. His analysis suggests that purchasing assets on a large scale can effectively lower long-term interest rates. Furthermore, when heightened risk aversion disrupts the activities of arbitrageurs, policymakers may lower long-term rates more effectively through asset purchases than through communicating their intentions to lower expected path of future short-term rates.
I hold the default belief that such policies could prove effective today. There's also the broader point that QE can work by stimulating AD, without having to push around long rates very much.
My dialogue at Ess-a-Bagel
That's the excellent bagel and smoked fish shop at 3rd Ave., just north of 50th St.
I order my bagel from a gentleman with a thick New York accent and he eyes me suspiciously. Finally he grunts out, in a tone slightly less than that of accusation:
Server: "Where are you from?"
(I pause. There are different answers to this question, depending who is asking and where you are. Is it about where you were born, where you grew up, where you live now, and in the latter case how specific should the location be? In Ghana I should say "Washington," though in Portland that answer fails. In North Carolina I can say "northern Virginia." In Arizona I should say "Virginia." In El Salvador I try "Falls Church.")
I answered, after a pause, with a feeling of insecurity:
TC: "New Jersey"
Server: "Really. You look like a farmer!" (pronounced as if the concept were a deeply alien one)
"I thought you were from California or something."
Mandatory national origin labels
Bryan Caplan asks:
Is anyone willing to often even a semi-plausible economic argument in defense of mandatory national origin labels?
I oppose the policy, but the obvious argument in favor is that the practice can partially cartelize consumers and oppose market power. The label, if it discourages some customers at the margin, could induce lower prices and higher quantity (and quality) from the foreign firms with market power.
In opposition, I would note that many of these markets (e.g., textiles) are quite competitive or that sometimes labels will boost the market power of the producers who are not discriminated against. Or if the label means some customers won't buy the foreign product no matter what, it could be the inelastic customers are left in the market and prices go up. Ethically speaking, the whole idea rubs me the wrong way, as it does Bryan.
Without any law, the "desired" countries and regions of origin will add a label voluntarily, and consumers will make inferences against non-labeled products, thus offering most of the benefits a coercive policy might bring.
Assorted links
1. Another view of zero MP workers.
2. New paper on racial inequality, and also here.
3. What are consumers spending more, and less, on. Read also the discussion of aggregate expenditures.
4. More evidence of labor market mismatches.
5. Via numerous MR readers, alleged proof that P = NP. Here is one skeptic.
How economists (and how many) advise the President
Keith Hennessey serves up a first-rate post; to excerpt it would diminish the impact. Read the whole thing.
Weight Loss and Incentives
Ted Frank reports on his 60k weight-loss bet with Ray Lehmann:
In late 2008, Ray Lehmann and I made an audacious bet: we would put up $60,000 that we would lose 60 pounds in nine months, and pay each other $1,000 for each pound the other lost.
…I lost 32 pounds, Ray lost 41, and we were on pace to lose 60 each. StickK.com was offering to make us their official spokespeople.
Then things fell apart. We couldn't negotiate an appropriate contract with StickK, which wanted exclusive rights to our story without any compensation. The delay caused us to stop writing about the diet while we had false dreams of fame and glory from StickK promotion, and then we both got distracted with starting new jobs and the disappointment of shattered expectations when StickK stopped returning our calls.
Alex Tabarrok correctly predicted that the danger of the two-person bet was that we would collude not to enforce it.
And, indeed that was what happened. We started gaining weight, and started pushing back the goal-line for the end of the bet…neither of us held the other's feet to the fire….
Professor Tabarrok's solution was to create a third-party Leviathan to enforce the bet: he facetiously offered to pay us $500 to be the collector [not facetious, Ted!, AT]. Of course, that was a negative-expectation transaction for each of us, unless we thought we had a 90%+ chance of succeeding…Even the threat of public humiliation on Marginal Revolution wasn't enough to stop us from colluding.
But Ted isn't giving up. He is looking for other people to take the bet to reduce the possibility of collusion or he would like to auction off leviathan rights.
Are there three other people out there willing to wager that they can lose 50 pounds over a reasonable amount of time? (Forty? Sixty?) Who's in, and under what conditions?
…In the alternative, how much is someone willing to pay to be Leviathan and have the opportunity to collect tens of thousands of dollars from me or Ray for failing to lose weight? I suppose I could put Leviathan rights up on eBay; if Marginal Revolution and a few other blogs publicized it, we could reach a good solid equilibrium price. What do people think?
I see this is as a good case study in the difficult of setting up an appropriate incentive scheme and also the difficulty of losing weight. When I put on my Tyler hat, however, I have to wonder whether all this effort put into clever incentive schemes is not a way of avoiding the real issues. "Less blogging, more jogging," my friends.
What Ted and Ray are trying to do is to sail between Scylla and Charybdis by offsetting the pull of food with the pull of lost money. Carrot cake versus stick. But in this tug of war, how long will the balance last? How permanent will the weight loss be?
The real trick in weight loss, as in other areas of life, is to change wants not oppose them. Unfortunately, Seth Roberts nothwithstanding, this is a struggle with no easy solutions.
Nevertheless, I have proudly helped others to lose weight with unusual incentives, and my $500 bid for leviathan rights over Ted and Ray still stands. Good luck guys.
*Winston’s War: Churchill 1940-1945*
The author of this book is Max Hastings. Although this topic may seem like well-trodden ground, this is so far one of my favorite non-fiction books of the year. Excerpt:
It was remarkable how much the mood in Washington had shifted since January. This time, there was no adulation for Churchill the visitor. "Anti-British feeling is still strong," the British embassy reported to London, "stronger than it was before Pearl Harbor…This state of affairs is partly due to the fact that whereas it was difficult to criticize Britain while the UK was being bombed, such criticism no longer carries the stigma of isolationist or pro-Nazi sympathies." Senator Allen Ellender of Louisiana declared sourly there "there was little point in supplying the British with war material since they invariably lost it all."
Among other things, it is an excellent book for communicating how military alliances actually work and how much humiliation a nation feels if it keeps on losing military battles or is unable to fight in response. I also had not realized what a folly British policy toward Singapore was. Definitely recommended. Here is one review of the book. Here is an excerpt.
Not everyone in Australia likes Max Hastings.
View of Jimmy Carter and his Presidency
That was a reader request. Matt Yglesias offers some background, as does Kevin Drum. On the plus side there was airline deregulation, support for Volcker and disinflation (later), willingness to lose the Presidency to see disinflation through, and he didn't push for a large number of Democratic ideas that I would disagree with, though he did create the Department of Education. Recall that he came from a party of McGovern and Kennedy and you can think of him as a precursor of the better side of the Clinton administration. Price controls on energy were a big mistake and that idea is hard to justify.
I'll call his support for the Afghan rebels a plus, because it helped down the Soviet Union, but I can see how you could argue that one either way. His conservation efforts could be called mamby-pamby but still they were a step in the right direction. He gave amnesty to Vietnam draft dodgers, a plus in my book, as was giving away the Panama Canal and bribing Egypt into better behavior.
At the time I thought Carter was a reasonably good President and it was far from obvious to me that the election of Reagan would in net terms boost liberty or prosperity.
I do understand that he was a public relations disaster and he shouldn't have fired his entire Cabinet and that he botched the Iran invasion.
Still, I think of Carter as a President with some major pluses and overall I view his term as a step in the right direction. He also seems to have been non-corrupt — important so soon after Watergate — and since leaving office he has behaved honorably and intelligently, for the most part.
Good sentences about Japan
In Japan, psychologists evaluate astronaut candidates by, among other things, their ability to fold origami cranes swiftly under stress.
Here is more. The review has at least one other good sentence.