Month: August 2011

Kevin Drum has a very thoughtful response to the new Jones and Rothschild papers.  I am still more skeptical about the job-creating magic of stimulus, however, and here are a few reasons why:

1. Labor market polarization.  This is a very popular idea among the Progressive Left and rightly so; it seems to be true and increasing in importance.  Yet it gets dropped like a hot potato when discussions of stimulus come up.  A simple interpretation of the data, consistent with labor market polarization, is that we have a larger sum of money chasing the same set of well-qualified, easily-employable workers.  Polarization also means not so much substitutability and there is plenty of evidence in the Jones-Rothschild paper of employers finding labor markets — for what they want — somewhat tight.

2. The Jones-Rothschild paper has an estimate that only 42 percent of the job offers went to the unemployed.  A lot of the money also was spent on capital, land, raw materials, and other factors of production.  I’ve never seen good estimates here, but labor’s share is about seventy percent of gdp, actually a bit shy of that.  Let’s say seventy percent of the stimulus gets spent on labor at all, and only forty-two percent of that gets spent on unemployed labor.  (It’s actually worse than that because it is 42 percent of the job offers and may well be less than 42 percent of the revenue, most likely so if you think of the unemployed as bringing lower wage offers.)  That’s less than thirty percent of the initial expenditure being spent on unemployed labor and that is before any other problems with the expenditures kick in.  It’s hard for me to see that as a triumph of the program (NB: we are only talking about one part of ARRA here); would direct government employment have overhead costs that high?  How about monetary stimulus?  What’s the new calculation for cost per job saved per year?

3. Cutting nominal wages of workers hurts their morale and firing people hurts the morale of everyone left behind.  Employers weigh these morale costs carefully when making personnel decisions.  To get to the matter in question, when times are tight employers are often quite relieved when workers leave the firm voluntarily.  It eases their cash flow, prevents a firing, and everyone is happy, sort of.  Bad times are precisely when replacements of these workers do not happen.  (Another version of that argument: If Keynesians are right about labor hoarding, job shifters don’t get replaced very often.)  So the claim that an ARRA hire of an already-employed worker led to a replacement for that worker at the original firm is not so strong.  This happened during down times and very often replacement is postponed, perhaps indefinitely.  The Keynesian view, after all, stresses how AD problems hit virtually the entire economy.

4. Very often when the replacement does happen, the replacement is drawn from the pool of workers who are doing well.  Some of those workers will be unemployed.  But they are the unemployed who least need the help.  Their average search time goes down, and that is somewhat of a social gain, but it is hardly the goal of a fiscal stimulus program.  We’ve failed very badly at reemploying the hard-core unemployed and that is borne out by other numbers.  So of the forty-two percent of offers going to the unemployed, how many were going to the “don’t so much need the help but were searching” unemployed?  That will make the calculation look uglier yet.

Labor market polarization, labor market polarization, labor polarization.  Market-oriented economists don’t like to stress this theme, but it’s true and it’s a big reason why the stimulus didn’t work better.  It’s not an idea we should suddenly leave behind.

Now ACCO Brands Corp., based in this Chicago suburb and dubbing itself a “global powerhouse of leading office-products brands,” hopes Americans will embrace a snazzier clip costing more than 16 times as much.

“This is our reinvention of the paper clip,” says Carol Lucarelli, a brand manager at ACCO, as she hands a visitor a sheaf of paper held together by stainless steel clamps called Klix in shiny hues of red, purple, green, blue and “classic silver.” Klix, resembling small hair barrettes, make a snapping sound when closed. “It’s very fun,” says Ms. Lucarelli. “It’s this clickiness.”

It is claimed that traditional paper clips have been underperforming in the marketplace.

The eleven billion paper clips used each year in this country are made largely in the United States, perhaps because there are 100%+ tariffs on the import of paper clips from abroad.  Yet ACCO, the number one American clip maker, reports that paper clips account for less than one percent of their sales.  Some of ACCO’s 38 paper clip-making machines are more than fifty years old.  One rival company claims it does not understand how Americans use so many paper clips, namely 35 per American.

Some paper clips are used to unclog tubes of glue.

Plastic-covered clips are not covered by the tariff and they are manufactured largely in China.

The story is here and for the pointer I thank Brent Depperschmidt.

Here is some simple evidence of excess capacity and its relevance for unemployment.  I’ll give it more debate another time, and don’t too rapidly infer causal linkage from that graph behind the link, but at the very least it is not a crazy hypothesis.  Now that the gdp numbers have been revised downwards, and we see the U.S. economy has not reattained pre-crash output levels, the hypothesis that excess capacity is driving some of current unemployment is more plausible.

In one standard model, excess capacity renders nominal wage flexibility moot.  Workers could lower their reservation wages without it helping much.  Firms don’t want to produce any more, or they could produce more by working their current capital assets more heavily, rather than by hiring another worker.

Now let’s say there is a burst of inflation.  It might lower the real reservation wages of the unemployed, but employers still don’t bite, at least not until the excess capacity is worked off.  That can take a long time, especially if aggregate demand is low and the rate of innovation is sluggish.

There might be a stimulative effect if the nominal shock induces employers to expand output and, sooner or later, expand employment.  In other words, monetary policy must rely on the employers having money illusion.  Nonetheless employers are more likely to read financial news than are workers and arguably employers are less likely to be tricked by monetary policy.  Even if the employers are tricked, that just means they expand output, using spare capital, and work their way through the excess capacity more quickly; it doesn’t mean they hire more workers now.  Much will depend on capital-labor substitutability.  There is also the risk that employers will cut back on output once they see they were tricked by monetary policy; in contrast, workers who took a job under money illusion are not so likely to quit just because they pick up the WSJ and see that the nation has been suffering from hyperinflation or something like that.

Excess capacity is one reason why monetary policy isn’t always so effective, even when labor resources are unemployed.

Fiscal policy with excess capacity deserves a post of its own.  For now I’ll note there is a difference between hiring people to work directly for the government, contracting with firms to use some of their excess capacity, and contracting with the highest quality firms which perhaps do not have much excess capacity at all.

I again stress that microfoundations matter.  And please don’t read this post the wrong way.  I still favor looser monetary policy, but I view myself as lacking in real influence on the world and thus I am “working through the available variations” rather than propagadizing for my favorite policy.  If I were President of the United States, my blog posts would read somewhat differently.