Month: January 2011

What I’ve been reading

1. John B. Thompson, Merchants of Culture: The Publishing Business in the Twenty-First Century.  By an order of magnitude, this is the best book on the economics of contemporary publishing.  It covers the UK scene as well.

2. Adam Feinstein, A History of Autism: Conversations with the Pioneers.  A lengthy and informative treatment of how thought on autism evolved, and most of all a tale of how badly science can misfire, even "these days."  I am not sure how much the portraits of researchers are intended as positive, but overall I take away from this book the message that many of them are arrogant and also partially incompetent.  It is possible that this is a better book (and for different reasons) than the author himself realizes.

3. Wallace Stegner, The Gathering of Zion: The Story of the Mormon Trail.  An excellent book, based on a blockbuster combination of writer and topic.

4. Jean-Christopher Valtat, Aurorarama.  Think French steam punk, Inuit characters, a strange dark ship hovering over an ice-locked retro-futuristic town, and a plot which might have come from an incoherent Japanese anime movie.  So far I like it and it's also my favorite book cover in some time:


There were other books which I put down quickly or not quickly enough.  I'm also reading more Thomas Bernhard, never a mistake.

Duvalier returns to Haiti

It reads like a tragic film:

Duvalier's years of living in a chateau outside Paris and a luxury Riviera villa ended in costly divorce and tax disputes, leaving him near broke.In recent years journalists tracked him down to a small, sparsely furnished two-bedroom apartment in a far from chic arrondissement. The modest rent of a few hundred euros a month was paid by supporters, including Haitian taxi-drivers and waiters living in France who propped up Duvalier morally, physically and financially.

At one point the former president was so desperate he took university classes to improve his "leadership skills" and placed an advertisement seeking work in a local paper in the south of France. [TC: which of those two acts is more desperate?  You could think about that question for a while.]

He has not been arrested in Haiti.  Haiti is demographically a young country, and many Haitians do not remember, or never lived through, the tyrannies of his regime, which ended in 1986.  For those who do remember, the standard of living then probably was higher.  Furthermore, it is not obvious that anyone is currently in charge of Haiti, so who is to make the decision to arrest? 

Is Duvalier shrewd enough to understand that, or is this simply desperation and the desire for an approving audience?  Years ago, when you went to a Michelle Martelly (Sweet Mickey) concert, the audience was full of Duvalierists, and now he is in the run-off to lead the country.  Richard Morse is covering Duvalier's visit on Twitter.

Request for movie opinions

From DL, a loyal MR reader and correspondent and link sender: "Mine [request] would be: what movies have you seen recently and were they good or not? I have recently seen Black Swan, The King's Speech, The Fighter, Rabbit Hole, Casino Jack and Somewhere."

I wrote: "Aronofsky's *Black Swan* = *Red Shoes* + *Repulsion* + Cronenberg + Tchaikovsky + something else too."  Overwrought, but I liked it.  The King's Speech was an extremely well done hammy manipulation, tugging on all the right strings and targeting the American soft spot for Brits.  True Grit suggests the Coen brothers are more superficial than they seem, rather than the contrary; rewatch the original for a better time.  The rest remain below my watch threshold for now, though Somewhere is due to come to Fairfax.  Even good movies about boxing I don't seem able to enjoy.  Political biopics I never like.

U.S. fact of the day

American schools are more segregated by race and class today than they were on the day Martin Luther King, Jr. was killed, 43 years ago. The average white child in America attends a school that is 77 percent white, and where just 32 percent of the student body lives in poverty. The average black child attends a school that is 59 percent poor but only 29 percent white. The typical Latino kid is similarly segregated; his school is 57 percent poor and 27 percent white.

Overall, a third of all black and Latino children sit every day in classrooms that are 90 to 100 percent black and Latino.

That's via Ezra Klein, Dana Goldstein post here, source here.  In the meantime, and quite on point, here is one of Chris Christie's biggest mistakes.

Addendum: Here is from Matt Yglesias, another contender for U.S. fact of the day:

If the country as a whole had the same average population density as New Hampshire (!) it would contain about 522 million people…

Where in the federal government do the economists work?

There has been so much talk lately about ethics and economists and now there is a whole new book out it, the new and useful The Economist's Oath: On the Need for and Content of Professional Economic Ethics, by George F. DeMartino.  I was intrigued and surprised by the p.24 chart about where economists (as defined by title, not Ph.d.) work in the federal government, not counting the Federal Reserve System.

1. Department of Labor, 1262 economists, 30.5 percent of the total, 1208 of those are at the Bureau of Labor Statistics.

2. Agriculture, 533 economists

3. Treasury, 473

4. Commerce, 462

5. Defense, 225

6. Energy, 168

7. EPA, 163 (is that enough?)

8. HHS, 137

9. Transportation, 88

10. Interior, 86

11. FTC, 74

12. HUD, 62

13. Justice, 61

14. FDIC, 61 (do bank examiners produce the real value there?)

15. All others, 275.  The total is 4130 economists in the Federal government, as of 2008, and I believe those numbers are not counting consultants.

Should we make them swear an oath not to act against the truths of their discipline for political gain?

ZMP v. Sticky Wages

I find myself in the unusual position of being closer to Paul Krugman (and Scott Sumner, less surprising) than Tyler on the question of Zero Marginal Product workers.

The ZMP hypothesis is too close to a rejection of comparative advantage for my tastes. The term ZMP also suggests that the problem is the productivity of the unemployed when the actual problem is with the economy more generally (a version of the fundamental attribution error).

To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so. One reason employed workers are still fearful is that they see the unemployed and think, "there but for the grace of God, go I." The employed are right to be fearful, being unemployed today has less to do with personal characteristics than a bad economy and bad luck (including the luck of being in a declining sector, I do not reject structural unemployment).

To see the importance of sticky wages consider the following thought experiment: Imagine randomly switching an unemployed worker for a measurably similar employed worker but at say a 15% lower wage. Holding morale and other such factors constant, do you think that employers would refuse such a switch? Tyler says yes. I say no. If wages were less sticky the unemployed would be find employment

By the way, the problem of sticky wages is often misunderstood. The big problem is not that the wages of unemployed workers are sticky, the big problem is that the wages of employed workers are sticky. This is why stories of the unemployed being reemployed at far lower wages are entirely compatible with the macroeconomics of sticky wages.

Although I don't like the term ZMP workers, I do think Tyler is pointing to a very important issue: firms used to engage in labor hoarding during a recession and now firms are labor disgorging. As a result, labor productivity has changed from being mildly pro-cyclical to counter-cyclical. Why? I can think of four reasons. 1) The recession is structural, as Tyler has argued. If firms don't expect to ever hire workers back then they will fire them now. 2) Firms expect the recession to be long – this is consistent with a Scott Sumner AD view among others. 3) In a balance-sheet recession firms are desperate to reduce debt and they can't borrow to labor hoard. 4) Labor markets have become more competitive. Firms used to be monopsonists and so they would hold on to workers longer since W<MRP. Now that cushion is gone and firms fire more readily. What other predictions would this model make?

It would be interesting to know why Paul Krugman thinks productivity has become counter-cyclical but I believe he has yet to address this important topic.

Addendum: Paul Krugman gives his answer and The Economist offers a review with many links.

How to become sophisticated?

J., a nascent MR reader, requests:

Which journals, magazines and blogs should a 15yo read in order to be considered a widely sophisticated and educated person 20 years later (not necessarily to show off or to impress others but for one's own good feeling)?

I do not have a concrete answer.  When I was 12-13, I was very interested in chess and not so interested in culturally sophisticated outputs, unless you count the Beatles and jazz guitar and baseball.  I am glad that I spent most of my time then reading in those areas because I cared about them deeply at the time.  Those investments will then help us learn other areas, so it is learning about how to learn.  At age 21 it was all about German Romanticism for me, and at 22 analytic philosophy.  Find grooves, and push on them until your ardor abates.  Until the very end, there is always time to learn more areas, and always a very large number of areas one does not know at all.

It has become a cliche, but Samuel Johnson was close to the truth when he wrote:

"A man should read as his fancy takes him, for what he reads as a chore will do him little good."

I don't recommend that attitude for mastering technical subjects, but for general sophistication it is right on.  The most sophisticated person is someone who really loves an area and has pursued it, and that's also the best magnet for attracting interested and interesting others.  On related topics, here is Modeled Behavior and here is Robin Hanson.

The silent bank run continues

Ireland’s central bank increased its provision of emergency liquidity support to its domestic banking system in December, as the country’s financial crisis intensified and bank deposit withdrawals rose.

Irish banks have become increasingly dependent on central bank support to fund their balance sheets, as they lose business and retail deposits and are unable to refinance maturing bank borrowings.

The article is here.  This is one reason why the status quo cannot last forever, unless you think Ireland has the political will to transition to not having its own banking system.  If you're a business or even Irish upper middle class, why put most of your money in an Irish bank?

Assorted links

1. Virginia isn't the South any more.

2. Where people buy their hair.

3. Ezra considers issues of mandates and regulations (contra my earlier claim of "underreported").

4. Unemployment rates by profession.

5. Pecuniary externalities in Berlin lead to non-pecuniary externalities in Berlin: "…wealthy newcomers to districts like the now fashionable Prenzlauer Berg have been treated to an often weekly ritual of car torching."

6. Did the hard core left disappear from the blogosphere?  If so, why?  I believe this post is quite wrong but it is thoughtful and interesting and worth the read.

Sumner and Krugman on zero MP workers

Scott's post is here, Krugman's is here.  (My first post on the topic is here, my last post here).  Let's start with Scott, excerpt:

This post by Stephen Gordon shows US employment in 2010:3 falling about 5% below its 2008:1 peak, while output seems to have declined only about 0.7%.  This is what Cowen finds puzzling. 

But I don’t see any puzzle at all.  If employment didn’t change, I’d expect US output to grow at about 2% a year, which is the trend rate of productivity growth.  Because we are looking at a two and a half year period, you’d expect output to grow roughly 5% with stable employment.  Now assume that employment actually fell 5%.  If the workers who lost jobs were similar to those who remained employed, I’d expect output to be flat over that 2.5 year period.  Because output fell slightly, it seems like the workers who lost jobs were slightly more productive than those who remain employed.

Do I believe this?  No, for several reasons I think they were less skilled than those who remained employed.  Labor productivity growth (assuming we were at full employment) probably slowed in the most recent 2.5 years, as investment in new capital declined.  Measured productivity continued to rise briskly, partly because technological progress continues in good times and bad, and partly because those workers still employed are somewhat higher skilled, or perhaps are trying harder in fear of losing their own jobs.  So Tyler is probably right that those workers who lost their jobs have a lower than average marginal product.  I just don’t see why zero is the natural starting point for consideration of the issue, as you only get that number by making some fairly extreme assumptions about technological progress coming to a screeching halt after 2008:

A few points:

1. The claim is that some workers have zero marginal product (net of employment costs), not all workers (as Krugman inexplicably ponders for two full paragraphs), and not even all unemployed workers.  Just as a hypothetical example, if unemployment is 9.5 percent and the natural rate is 5.5 and zero MP helps account for half of that difference, that's two percent of the labor force at zero MP.  Try hiring labor for a while and see how crazy that sounds.

2. Zero MP is a property which may hold in an AS-AD equilibrium, it is not a substitute for an AS-AD view.  Krugman mischaracterizes the hypothesis here, by identifying it with "AD denialism."  In my post which Krugman links to (and indeed for years), I've made it clear that demand matters in any coherent account of the equilibrium.  

Oddly, Krugman himself stated one of the coherent versions of the Zero MP view in July 2010, and then he considered it possible and appropriately, he expressed uncertainty about what might be going on.

3. The Zero MP hypothesis is simply another way of talking about "labor hoarding," a well-known and time-honored idea, except that the labor is not in fact hoarded.  It doesn't encounter strange paradoxes and it is more intuitive than when the labor is hoarded (which appears to violate first-order conditions).  There is plenty of very specific and indeed striking evidence that the "previously hoarded labor" isn't being hoarded any more.  That same link implies that Krugman's invocation of 1983 is a red herring and probably not a good instance for finding many zero MP workers.  The "oughties" job market differs in a number of other "real" ways from the 1980s, including the fact that we've had no net job growth over the last decade, not even pre-crisis.  Here is further evidence on how productivity patterns were different during the early 1980s.

4. For another take on #3, during the job-destroying periods of 2009, per hour labor productivity growth is rising at astonishing rates, try 3.4, 8.4, 7, and 6 percent, each quarter, annualized.  That's not just the regular accretion of technological progress (though some of it may be), it is an artifact from dumping lower quality and zero MP workers.  If I look in the second quarter and see labor hours go down 7.9 percent and see per hour productivity rise 8.4 percent, well, that's no proof but I sure go hmm….

5. I would not take it for granted that "normal" productivity growth continues in times of shock and crisis.  Maybe yes, maybe no. Scott's talk of the "trend rate" is assuming that the growth and cyclical components are separable and that is begging part of the question.

6. The zero MP hypothesis helps explain why unemployment is so much more severe among the less educated and the lower earners.  In contrast, Krugman writes: "As Mike Konczal points out, basically everyone’s unemployment rate has doubled, no matter their education level or location."  In reality, that kind of multiplicative relationship is very much consistent with joint AS-AD determination, including a zero MP for many workers in the equilibrium.  I'll write an entire blog post on that question soon, and then we'll see that this result actually discriminates against pure AD theories or is at best a neutral pointer.

7. What does the zero MP hypothesis add?  First, the zero MP hypothesis explains why wage adjustments can't do the trick for a lot of the unemployed, as wages won't fall below zero.  Second, the zero MP hypothesis explains why you need steady real growth, boosting the entire chain of demand, to reemploy lots of workers and reflation alone won't do the trick.  (I still, by the way, favor reflation because I think it will do some good.)  Those predictions are not looking terrible these days.

8. The AD-only theories, taken alone, encounter major and indeed worsening problems with the data.  Year-to-year, industrial output is up almost six percent, sales up more than six percent, but the labor market has barely improved.  How does that square with the AD-only hypothesis?  Has it been seriously addressed?  Arnold Kling also has relevant comments and in passing I'll note that the "increases in the risk premium" factor is being neglected in this discussion of Kling's points. 

9. Krugman (not Scott), in particular, is proposing an alternative view with a) upward-sloping AD, b) downward-sloping AS, c) the implication that huge boosts in the minimum wage would restore the economy and employment, and d) requires a tight liquidity trap when the theoretical literature distinguishes between "interest rates literally at zero" and "interest rates near zero."  His comparison of ZIRP and ZMP does not raise those issues on the other side of the ledger.

I think Scott is underplaying some of the more detailed facts about labor markets, such as mentioned in #3, #4, #6, and #8.  Krugman simply isn't considering the stronger versions of the zero MP hypothesis and thus he is dismissive rather than confronting the very real problems in the AD-only point of view.

Addendum: Arnold Kling has more.

Mandates don’t stay modest, a continuing series

This remains an underreported story:

Should health insurers have to cover treatment of Lyme disease? What about speech therapy for autistic children? Or infertility treatments?

Can they limit the number of chemotherapy rounds allowed cancer patients? Or restrict the type of dialysis offered to people with kidney disease?

This week an independent advisory group convened by the Obama administration launched what is likely to be a long and emotional process to answer such questions…

Under the health-care overhaul law, beginning in 2014 all new insurance plans for individuals and small businesses will have to include a package of minimum "essential benefits" falling into 10 general categories – ranging from hospitalization, to prescription drugs, to rehabilitative and habilitative services. But Congress largely left it to Secretary of Health and Human Services Kathleen Sebelius to decide how detailed to make the essential benefits package and what exactly to put in it.

Defenders of ACA do not in general like to confront the "at what margin?" question.  The rhetoric used to argue for the bill usually suggests that the mandate must indeed be extended.  I will keep my eye on this issue.  Here are previous installments in the series.

*The Return*

The author is Daniel Treisman and the subtitle is Russia's Journey from Gorbachev to Medvedev.  Is this the first non-fiction book to be making my "Best of 2011" list?  Most of all, it argues persuasively that, rather than botching the transition away from communism, the Russians/Soviets did a remarkably good job, relative to what could have been expected.  It's also the best all-round book-length treatment of what the subtitle indicates and it is readable as well.  Excerpt:

But [under Putin] did the bureaucracy become more effective and the population safer?  The state certainly grew.  In Putin's eight years as president, about 363,000 additional bureaucrats were hired, mostly federal agents stationed in the regions.  Law enforcement mushroomed.  In the United States, there are two judges and prosecutorial employees per 10,000 residents.  When Putin took over, Russia had eight; when he left, it had fourteen.  Federal spending on law enforcement and national security rose from $4 billion in 1998 to $26 billion in 2007.

Despite this influx of resources, most indicators suggest the state became less, not more, effective.  It built less housing, paved fewer roads, and laid fewer water mains and gas lines per year than under Yeltsin.  The number of public schools and buses in service fell faster than before.  Reforms of the education and health systems were repeatedly postponed…As for keeping citizens safe, few saw any improvement.

Here is a recent review of the book from the WSJ; I liked the book more than he did.

When will people move away from pure AD theories of unemployment?

Commerce department figures on Friday showed that total sales in 2010 were up 6.8 per cent from 2009, marking the sharpest such increase in more than a decade…

Industrial output is up by 5.9 per cent year-on-year.

Yet the labor market is still "eh."  Here is more, but again note it is wrong to reject the AD factor altogether, though it seems to be becoming less relevant over time.  Arguably AD and AS are interacting in unusual and presumably deleterious ways.

I have read too many blog posts attacking a caricatured version of either RBC theory or a narrowly defined notion of "structural unemployment" which requires excess demand for labor in significant parts of the economy.  As Arnold Kling points out, the labor market shock can be asymmetric in its effects.

From a different direction, here is Scott Sumner criticizing the recalculation argument.  I read Scott as establishing the conclusion that both AD and AS must be at work.