Month: August 2011

Sticky wages and unemployment

In my post ZMP vs. sticky wages I argued:

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.

At lunch with Tyler today discussing his recent post I expanded on this point arguing that since a large fraction of GDP is wages that a 5% cut in the wage bill is a very big number and that even a large cut in the wages of the unemployed just isn’t enough. Scott Sumner wasn’t at lunch but nails it with a simple example:

Nominal wages are fixed for the employed. NGDP falls 5%, and 5% of workers are laid off. Now the unemployed workers lower their wage demands by 20%. Why not by even more? Because of minimum wage laws, unemployment insurance, fear of loss of prestige, etc.

Suppose companies are not worried about workers making invidious comparisons (a big if, but I’ll grant this point to my opponents.) In the best case scenario firms lay off 4% percent of their workers and hire back the 5% who are unemployed at the same total wage bill. The excess unemployment is now 4% instead of 5%. The total unemployment rate falls from 10% to 9% (assuming 5% is the natural rate.) No big deal, we are still deep in recession. Thus wage flexibility among the unemployed doesn’t really help very much. If all employed workers accepted a 5% pay cut (or if the government ordered such a cut) and the Fed kept targeting inflation, we’d experience rapid economic growth.

See Scott’s post for more.

Note that this doesn’t mean that I think sticky wages are necessarily “the answer” or even the most important problem (sticky debt is an issue as well etc.) but the evidence for sticky wages for the employed is very strong and it certainly is a problem.

Why philosophers should care about computational complexity

In a new paper, Scott Aaronson reports:

One might think that, once we know something is computable, how efficiently it can be computed is a practical question with little further philosophical importance. In this essay, I offer a detailed case that one would be wrong. In particular, I argue that computational complexity theory—the field that studies the resources (such as time, space, and randomness) needed to solve computational problems—leads to new perspectives on the nature of mathematical knowledge, the strong AI debate, computationalism, the problem of logical omniscience, Hume’s problem of induction, Goodman’s grue riddle, the foundations of quantum mechanics, economic rationality, closed timelike curves, and several other topics of philosophical interest. I end by discussing aspects of complexity theory itself that could benefit from philosophical analysis.

Here is some comment on the paper, and whether waterfalls play chess.

Assorted links

1. Are virtuousos now a dime a dozen?

2. The rules of blind cricket: “…the bowler must shout ‘Play!’ as he releases the ball. The delivery is required to pitch at least twice when bowled to a completely blind batsman (once when bowled to a partially sighted batsman), but must not be rolling. Totally blind batsmen cannot be out stumped, and must be found to be LBW twice before going out. Totally blind fielders are allowed to take a catch on the bounce.”  The game is especially popular in Australia.

3. There is no great stagnation (robot video).

4. Negative interest rates for Switzerland?; is the currency 71 percent overvalued?  Wow.

5. How well do GPS systems work and how do they shape us?  An extended essay (by the way, do you know of other good readings on this topic?  I am interested, thanks.)

Fear without Function: Do Sex Offender Registries Reduce Crime?

Sex offender registries contain a disturbing amount of information about sex offenders. The Washington DC, registry, for example, provides photos of sex offenders and will map their homes and workplaces down to the block level. The CA registry includes photos and maps unique home addresses. In some states, neighbors are notified by telephone when a registered sex offender moves into the neighborhood.

Sex offenders are often also highly restricted on where they can work and live–so much so, that in some states they have been effectively banished. In CA, sex offenders must be monitored via GPS for life. Many states allow sex offenders to be kept in prison past their sentences, based only on a judge’s opinion that the sex offender might commit a future crime. Bear in mind that teenagers having sex with other teenagers, hiring or trying to hire a prostitute and even streaking can make a person fall under the sex offender statutes. Moreover, contrary to popular belief, sex offenders have low recidivism rates, much lower than for most other crimes.

Why the obsessive focus on sex crimes? I see it as coming from deep and primitive feelings and fears about sex, after all we don’t have homicide registries. At least not yet. Sex offender registries, however, may be the thin end of the wedge. How long will it be before we require monitoring of all convicted criminals? Will we soon wear augmented reality spectacles that list the criminal history of individuals as they pass by on the street (and perhaps also their credit ranking?). Is this really a good idea? At the very least, it’s important to know whether these laws deter crime and if so whether they are cost effective. Two new papers in the Journal of Law and Economics examine these issues.

J.J. Prescott and Jonah Rockoff find that registries can have a modest deterrent effect on crime but that notification laws can increase recidivism. Notification laws and other such punishments can increase recidivism because they make it much harder for registered offenders to find a job and reintegrate into society.

I especially like Amanda Agan’s paper Sex Offender Registries: Fear without Function?. Agan writes:

I find little evidence to support the effectiveness of sex offender registries, either in practice or in potential. Rates of sex offense do not decline after the introduction of a registry or public access to a registry via the Internet, nor do sex offenders appear to recidivate less when released into states with registries. The data from Washington, D.C., indicate that census blocks with more offenders do not experience statistically significantly higher rates of sexual abuse, which implies that there is little information one can infer from knowing that a sex offender lives on one’s block.

Agan’s paper is unusual in that it uses three different datasets and a variety of empirical strategies. It also makes clever use of geocoded crime data and the aforementioned sex offender home and work addresses from the DC registry.

Full Disclosure: Agan’s paper was written, under my direction, when she was an undergraduate at George Mason University. Amanda is now nearing her graduation from the PhD economics program at the University of Chicago.

How are nominal wages sticky for the *unemployed*?

There are good arguments that wages are sticky for (many of) the employed.  Observed wage changes cluster in funny ways, indicating an unwillingness of the boss to change the nominal wage at all, and employers testify to morale problems from wage cuts (see Alan Blinder’s work).  In terms of the financial crisis, Keynesian theory explains the initial lay-offs fairly well, but it — at least the sticky nominal wage version — has a tougher time explaining unemployment persistence at such a high level.

Why don’t the unemployed lower their wages to find a job?  The more tragic you think unemployment is, the greater the puzzle here, and yet the people who stress the tragedy are often least likely to admit the positive puzzle (and vice versa).

There’s pretty clear evidence that, during the crisis, when the elderly wanted to work more, the elderly were able to work more.

I hear various arguments in response:

1. Falling wages can lead to a downward deflationary spiral, but a) these wage cuts would be for only a few percent of the workforce, b) let’s not confuse the wage rate with the total wage bill, and c) our Fed, however weak, is committed to stopping a downward deflationary spiral.

2. Maybe firms don’t have enough money to take on more workers, especially since the wages of the employed are fairly sticky.  Yet businesses are sitting on record-high levels of cash.  So while #2 may make sense in theory, it takes a lot more work to apply it to 2011.  I don’t see people even trying.

3. In a few unionized sectors, hiring lower-wage add-on workers may antagonize the incumbent workers.  Yet a) these sectors are not creating many jobs anyway, and b) in most modern sectors the real morale problem comes when you hire the newbies at higher wages, not lower wages.

4. Another claim is that it is hard for workers to signal that they are willing to work for twenty percent less, or whatever it takes.  How about applying for a job at a Washington non-profit?  Every time you do so you are signaling an ability to work for considerably less than what you are worth elsewhere.  Yet this labor market seems to hire as many people as its revenue stream can support and employers do not throw out all applications.  More generally, in down times the unemployed worker doesn’t need to signal much of anything.  The worker applies for a job.  The employer knows there are a number of workers competing for the job.  The employer makes a low-ball wage offer.  The worker accepts the offer.  End of story.

5. Often I get arguments which either refer back to nominal wage stickiness for the employed, or it is observed that lots of people are out of work so the nominal wage story must be true somehow.  Those responses are signs of a weak paradigm.  Another set of responses point to and then attack some excessively strong version of the nominal flexibility view, such as mocking the view that the Great Depression was a big voluntary holiday.  Another sign of a weak paradigm, don’t fall for it.

One simple view is that Keynesian economics holds true in the short run — it explains a lot of layoffs — but it doesn’t explain longer-run unemployment, precisely because wages are sticky only for a while.  That’s what most neo-Keynesian models imply and for the most part those are good (but not perfect) models.  What we’re seeing is a previously rejected form of Keynesianism, applied across increasingly long and increasingly implausible time frames — suddenly pretending to be the mainstream view.  It’s not and has not been for a long time.

In other words, Keynesianism is morphing into a theory of the long run.

Often when this topic comes up I feel I am playing a game of whack-a-mole.  Most of all, I am struck by how little attention people pay to their own sticky nominal wage hypotheses.  If that were the problem, and if unemployment were today’s biggest issue (a totally plausible claim), you might expect people to blog the microfoundations of nominal wage stickiness very, very often.  You might expect ethnography.  Micro-level data.  Lots of juicy anecdotes and journalistic features, not just on the unemployed but on the stickiness itself.  Perhaps some micro-level advice.  Dozens, no hundreds of blog posts on the all-important microfoundations of the #1 social problem of our time.

But no, there’s not much of those to be seen.  At some level it is understood, if only implicitly, that the sticky nominal wage theory is an embarrassment — when it comes to the unemployed across the longer run (but not the employed).  It doesn’t get too close a look.

What else?  Few people want to come out and utter the possibility: “They’re just too stupid and too stubborn to lower their wage demands.”  Mood affiliation reigns, and the prevailing mood is to express sympathy with the unemployed.  In fact that sentence is not my view, but it actually makes somewhat more sense than most of what is listed above.  A lot of people don’t like hypotheses which suggest the unemployed are not victims of the system, so it doesn’t get much of a hearing.

I think, by the way, that excess capacity theories are one of the most plausible attempts to explain continuing unemployment (you’ve already heart about PSST and ZMP, among others).  I’ll blog excess capacity more soon, but in the meantime note the hypothesis doesn’t rely on nominal wage stickiness.  The firm doesn’t want to produce any more output, so the worker’s wage demands don’t matter so much.  This will have real import for the analysis of monetary and fiscal policy, so the microfoundations really matter here.

In the meantime, beware of claims about sticky nominal wages among the unemployed.

Addendum: Arnold Kling comments.  And Brad DeLong responds but a) he cannot bring himself to tell us what makes wages sticky for the unemployed, and b) he simply misrepresents my point of view, plus he ignores #1.  Scott Sumner responds, but no need to fire the old workers to hire more and don’t reify NGDP!  Here is Matt Yglesias, the question is why the labor market adjustment isn’t quicker, unless you are assuming excess capacity.  As time passes, the gap should narrow, even for a given level of spending.  Kevin Drum seems to embrace excess capacity explanations.  Here is Karl Smith, and Ryan Avent, and Robert from Angry Bear.

What is the causal impact of researchers reading blogs?

Again from the World Bank, here is a study of that question, with the blog in question being Development Impact.  Summary excerpt:

There are large impacts on dissemination of research; significant benefits in terms of the bloggers becoming better known and more respected within the profession; positive spillover effects for the bloggers’ institutions; and some evidence from our experiment that they may influence attitudes and knowledge among their readers. Blogs potentially have many impacts, and we are only measuring some of them, but the evidence we have suggests economics blogs are playing an important role in the profession.

*The Institutional Revolution*

The author is Douglas W. Allen and the subtitle is Measurement & the Economic Emergence of the Modern World.  I thoroughly enjoyed this excellent book, here is a summary paragraph:

Having consistent weights and measures, like knowing the precise time, allowed for — almost by definition — more accurate and less costly monitoring.  The lowered transaction costs of measurement meant that institutions which relied on measurement could be used more effectively.  Productivity could be measured in terms of output per unit of time, speeds could be accurately recorded and tracked, commerce could flourish without confusion and error, land and buildings could be surveyed accurately, and fraud could be mitigated.  Today, these matters are dealt with easily and to a much tighter standard.  Without the ease of measurement, the variability of life would be drastically higher; we would be uncertain about what we were getting and giving in most exchanges.

Allen (p.177) argues that private lighthouses worked well when ships had to hug the coast, but less well when sail power improved and ship routes became more distant and more variable and less tied to port proximity and coast hugging.  Also good was the discussion of how Industrial Revolution factories were located in isolated areas to minimize theft costs (pp.214-215), and how this later changed.

The book is due out in December.

New books and notes on China

1. Run of the Red Queen: Government, Innovation, Globalization, and Economic Growth in China, by Dan Breznitz and Michael Murphree.  This book argues that China is not on the verge of making major product innovations, but is coming up with a healthy stream of product-cheapening process innovations.  Here is a good interview with one of the authors.  Reading it is not always a thrill, but it is full of substance and an important book.  It provides lots of evidence — from novel corners — for the “China as more decentralized than we think” view.

2. Tom Orlik, Understanding China’s Economic Indicators: Translating the Data into Investment Opportunities.  A very useful book, the title is much more accurate than the last three words of the subtitle.  I wish the book had more on believability, however.

3. Aaron L. Friedberg, A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia.  I have yet to read this one.

Here are some interesting estimates:

Data from UBS show China’s bank-sector credit—a measure that includes bank loans and holdings of bonds—as a share of gross domestic product rising from 121% in 2008 to close to 150% in 2010. Taking account of banks’ off-balance-sheet lending, the number is even higher, closer to 180%, and the rate of increase in the last year sharper.

Such a rapid expansion in credit is risky. UBS points out that a 35 to 40 percentage-point increase in the credit-to-GDP ratio of other economies over a five-year period has often coincided with the arrival of a crisis. In China, fault lines in loans to the property sector and local governments are already starting to emerge.

As important, China is getting less growth bang for its credit buck than it used to. From 2003 to 2008, total social finance—a Chinese government measure that includes on- and off-balance-sheet lending by the banks as well as bond and equity issuance—expanded on average by 18% a year, supporting growth in nominal GDP of 17% a year. In 2009 and 2010, finance exploded 33% a year on average, but GDP growth slowed to 12%.

Sentences to ponder

Already, hundreds more American troops have been killed in Afghanistan during the less than three years of the Obama administration than during the eight years of the George W. Bush administration.

Here is more.  I don’t think that “# of Americans killed” is a good final standard for right and wrong, still I believe many Americans would be shocked to see this comparison.

Assorted links

1. Should we like Japanese markets in everything?

2. Via Chris F. Masse, legal tender Star Wars coins, coming to Niue.

3. A government-lite proposal for principal reduction.

4. My Economist video, chat with Ryan Avent.

5. What guides how much people pay at pay-what-you-want restaurants?

By the way, Richard Clarida and Jeremy Stein are floated names, and likely nominees, but they haven’t been nominated for the FOMC just yet.

Since the 1980s, spending cuts no longer cause riots

Interestingly, though, since the late 80s, this relationship has broken up and vanished. According to the results, in modern, industrial societies, there is no longer any palpable link between spending cuts and rioting.

In fact there is a correlation in the opposite direction, though it is not statistically significant.  Here is much more, about the study which everyone is citing.  It doesn’t show what people are saying it shows, unless they see today as like 1926.  Arguably the democratization of Eastern Europe is a key factor in changing the results.

Here is a new (short) Ed Glaeser piece on riots.

Richard Clarida, FOMC nominee

Here is his Wikipedia page.  Here is some bio.  Here is his 1999 survey on monetary policy.  Here is Google Scholar.  He is a very wise and very accomplished economist.  Here is his piece on what we’ve learned about monetary policy in the last decade, with special reference to the liquidity trap and zero bound.  Excerpt:

According to monetary theory, central banks have at least two powerful – and complementary – tools to reflate a depressed economy: printing money and supporting the nominal price of public and private debt. As Bernanke (2002) himself argues, a determined central bank can deploy both tools for as long as it wants regardless of 1) how credible its commitment is and 2) how expectations are formed or 3) how term or default premia are determined. There are two fundamental questions. First, can these tools, aggressively deployed, eventually generate sufficient expectations of inflation so that they lower real interest rates? Forward looking models generally predict that the answer is yes. However, the interplay between monetary policy and the yield curve can become complex when central banks are at the zero lower bound (Bhansali et. al. 2009) and central banks seek to provide a “deflation put.”

Also, as discussed above, given the prominent role that inflation expectations play in inflation dynamics, inflation inertia is the enemy of reflation once deflation sets in. A second question relates to the monetary transmission mechanism itself. In a neoclassical world that abstracts from financial frictions, a sufficiently low, potentially negative real interest rate can trigger a large enough inter-temporal shift in consumption and investment to close even a large output gap. But in a world where financial intermediation is essential, an impairment in intermediation – a credit crunch – can dilute or even negate the impact of real interest rates on aggregate demand. In the limiting case of a true liquidity trap, no level of the real interest rate is sufficient in and of itself to close the output gap and reflate the economy. Credit markets in the U.S. appear at this writing to be bifurcated.

There is more to say about Clarida but I have to run to dinner and the theater!

Basically I see it as that Obama and Bernanke have chosen two academics — two guys who think monetary policy really works, or at least can really work.  Odds are, they are Ben’s guys, and in my view that is good news.  By the way, Clarida I believe is a Republican.

Addendum: Dylan Matthews has good remarks.