Month: July 2015

Monday assorted links

Maurice Obstfeld is new chief economist of the IMF

Obstfeld is the former chair of the department of economics at the University of California, Berkeley. He is currently a member of President Obama’s Council of Economic Advisers.

Like Blanchard, Obstfeld’s background is largely as an academic economist.

He is the co-author of two textbooks on international economics—Foundations of International Macroeconomics with former IMF chief economist Kenneth Rogoff, and International Economics with Paul Krugman and Marc Melitz.

Here is the FT coverage, here is the IMF announcement, and here is Obstfeld’s home page.  He wrote this on the eurozone.  Overall I would say this reflects the continuing preeminence of MIT-style macroeconomics in the current policy community, his MIT Ph.d. is from 1979 and his work has been very much in that vein.

The Happy Meal Fallacy

Some restaurants offer burgers without fries and a drink. These restaurants cater to low-income people who enjoy fries and drinks but can’t always afford them. To rectify this sad situation a presidential candidate proposes The Happy Meal Act. Under the Act, burgers must be sold with fries and a drink. “Burgers by themselves are not a complete, nutritious meal,” the politician argues, concluding with the uplifting campaign slogan, “Everyone deserves a Happy Meal!”

happy-mealBut will the Happy Meal Act make people happy? If burgers must come with fries and a drink, restaurants will increase the price of a “burger.” Even though everyone likes fries and a drink they may not like the added benefits by as much as the increase in the price of the meal. Indeed, this must the case since consumers could have bought the meal before the Act but chose not to. Requiring firms to sell benefits that customers value less than their cost makes both firms and customers worse off.

The Happy Meal Fallacy is fairly obvious when it comes to happy meals but now let’s consider the debate over the gig economy and the hiring of employees versus contractors. Employees are entitled to benefits that contractors are not. Thus the standard conclusion is that classifying workers as contractors “is great for employers but potentially terrible for workers.” Wrong. Employees get their wages with fries and a drink while contractors get wages only. Would a law requiring firms to provide all workers with fries and a drink help workers?

If firms are required to provide benefits to contractors they will lower the contractor wage. But how do we know the extra benefits aren’t worth the reduction in wages? If the extra benefits were worth more to workers than they cost firms, firms would have eagerly provided these benefits as a way of increasing profits. Firms can profit whenever buyers are willing to pay more for a product than its cost. Benefits are a product that workers buy from firms.

Workers buy benefits from firms by offering to work at a lower wage. Firms are happy to sell benefits when workers will accept a wage reduction that covers the cost of the benefit. Thus, if workers value a benefit by more than its cost, there is a mutually profitable deal to be made. The firm will provide the benefit and wages will fall by more than the cost but by less than the value of the benefit. Both firms and workers will be better off. It’s implausible that firms and workers will overlook mutually profitable exchanges. Thus requiring firms to provide benefits with every job means requiring firms to sell benefits that workers value less than their cost and that makes both firms and workers worse off–just like requiring restaurants to sell burgers with fries and a drink makes firms and customers worse off.

If the cost of the benefits far exceed their value to workers, the firm will close. But even if the firm doesn’t close, firms and workers will both be worse off. The exact division of the burden will vary depending on particulars but the workers who value wages the highest and benefits the least will be the most burdened. Often these will be the lowest income workers.

The Happy Meal Fallacy can lead to very unhappy firms and workers.

Addendum: The theory of compensating differences in wages with benefits was pioneered by Adam Smith. See Matt Kahn for a short overview and Sherwin Rosen for a full treatment of the theory. Jonathan Gruber and Craig Olson offer empirical evidence. The MRU video, The Tradeoff Between Fun and Wages presents another application.

All-robot Japanese hotel

robothotel

There is no great stagnation:

The English-speaking receptionist is a vicious-looking dinosaur, and the one speaking Japanese is a female humanoid with blinking lashes.

“If you want to check in, push one,” the dinosaur says.

The visitor punches a button on the desk, and types in information on a touch panel screen.

And so starts your stay.  All or most of the other functions are automated in some manner or another.  This bit is clever:

Another feature of the hotel is the use of facial-recognition technology, instead of the standard electronic keys, by registering the digital image of the guest’s face during check-in.

The reason? Robots are not good at finding keys, if people happen to lose them.

The establishment is called Weird Hotel.  Snacks are delivered by drones, but the robots still cannot make the beds.

You will find additional details here, good photos here, and a room goes for only $73 a night.

For the pointer I thank the excellent Mark Thorson.

Sunday assorted links

1. Cass Sunstein on Gone With the Wind.

2. These people need the Pigou Club.  Or maybe this is the Pigou Club?  But no, it is the “Sea of Death tourist resort.”  Are you sure it’s not the Pigou Club?

3. Medical bill for a rattlesnake bite.

4. Is it possible to privatize marriage?

5. “She Loves You, yeah, yeah, yeah.

6. The most common and distinctive ingredients by cuisine.  For which cuisine is egg the most common element?  And profile of Daniel Kahneman.

7. The hitchhiking robot.

The *Pride and Prejudice* of Singapore

The book is Crazy Rich Asians, and the author is Kevin Kwan, who grew up in Singapore and also Texas.  It is a fun and popular “beach read” in its own right, but also more subtle and sociologically intriguing if you know a bit about Singapore.  I found it difficult to put down and it even made me laugh in a few places, which few novels do.  By the way, the female protagonist is an economics professor at NYU.

Here is one excerpt:

“Every time any Asian guy so much as looks in your direction, you give them the famous Rachel Chu Asian freeze-out and they wither away before you give them a chance…Honestly you are the most self-loathing Asian I have ever met.”

[the protagonist, Rachel] “What do you mean? I’m not self-loathing at all.  How about you?  You’re the one who married the white guy.”

“Mark’s not white, he’s Jewish — that’s basically Asian!  At least I dated a lot of Asian guys in my time.”

Singapore is the only place I know where you can meet someone who has an economics degree from Stanford, and have her tell you that she has a liberal arts background.

Anyway, I recommend this book to about one-quarter of you.

Yesterday I was visiting Kinokuniya, the largest bookstore in Singapore.  I asked the literature specialist which Singaporean novels I should buy.  Without irony he responded “I don’t know, for literature we are a small provincial backwater.”  But I hope that is wrong.  And after all, he didn’t mention Crazy Rich Asians to me.

But I have a question for you, dear readers — which are the Singaporean literary works to buy, read, and perhaps reread?  Amanda Lee Koe?  How about Alfian Sa’at?  Oddly enough, or perhaps appropriately enough, he published a famous poem “Singapore You Are Not My Country,” well-written, far too negative in my view but at least he mentioned easy access to all the MRT stops and also seems to understand the difference between gnp and gdp.

Please leave your Singaporean literature recommendations in the comments.

Wage stickiness and unflattering accounts of the unemployed and poor

It is common for left-wing progressives to complain that conservatives serve up unflattering accounts of the unemployed and poor, such as by calling them “moochers” and the like.

But many versions of the standard Keynesian account, once we deconstruct them a bit, don’t paint such a flattering picture of the unemployed either.  In one Keynesian scenario, many of the unemployed have lacked jobs for years because they have sticky nominal wage demands.  Under one scenario, they could find jobs for $x an hour but won’t take the work.  If government policy could reflate the economy enough, those jobs in nominal terms would offer more and the unemployed would be in essence fooled into taking the offer.  The job would be paying the same in real terms, so the ex ante stubbornness is a big mistake, at least under this account of the matter.

Such a mistake is made throughout years of material suffering and psychological deprivation, including serious problems for one’s children.  Yet a mere nominal trick, by boosting pride just a bit, will move them back into a job.

It is of course a well-known stylized fact that, at least in America, unemployment rates for the poor and undereducated are much higher than for wealthier or better educated people.  So a general citation of “money illusion” won’t rescue the victims from the rather unflattering Keynesian portrait painted here.

Alternatively, the relevant mechanism may operate through the demand for labor, rather than the supply.  Perhaps low-skilled workers cannot be employed at lower wages because their resentment at the low wage would be so high that they would impose unacceptable morale costs on the organizations employing them.  In other words, insult them with a sub-par wage offer and they turn destructive toward the entire organization.  Companies of course prefer to keep these workers at arms’ length under this hypothesis.

If Charles Murray had come up with that hypothesis, he would have been savagely attacked for it.  Yet there is growing evidence, for instance from the work of Alan Blinder, that it is a major cause of wage stickiness.

Left-wing Keynesians are reluctant to acknowledge their own implicit unflattering treatment of the poor, which I should add came (in part) from snobby and elite British economists, including Keynes.  Often microfoundations are considered an embarrassing topic, and the emphasis is on “well, we know that wages are sticky,” with a desire not to look too closely under the hood, or to consider how those stories jive with other deeply held views, many of which try to raise the relative status of the poor and unemployed.

Bryan Caplan is consistent and is also happy to satisfy the publicity condition.  He believes in nominal stickiness as a driver of unemployment (under many circumstances) and he holds a relatively skeptical view of the decision-making capabilities of many (by no means all) of the poor.

The most flattering macro theories toward the poor, undereducated, and unemployed are the complementarity, increasing returns, and RBC “the poor are maximizing given some bad constraints” approaches.  Insider-Outsider models make the unemployed victims of exclusion who don’t even get a chance, rather than potential troublemakers ready to sabotage an enterprise at a moment’s notice.  The same can be said for Scott Sumner’s “musical chairs” account.  As for schools of thought, the rational expectations theorists provide the most flattering picture of the poor, yet in the context of macroeconomics they are very frequently mocked for their unrealistic assumptions.  Search theory models of unemployment, which for instance I have tried to promote, also paint a not unfavorable picture of the jobless, but they too are not very popular in the New Old Keynesian economics.  If I were to generalize, and yes there are many exceptions, but still I would say that these more flattering pictures of the unemployed are more likely to be associated with or embraced by the political Right.

Consistency is hard to come by, and probably always will be.

Mood affiliation isn’t always bad

That was my response to reading Ta-Nehisi Coates’s Between the World and Me.  We all overinvest in non-diversified mood affiliation portfolios, so why not read someone else’s non-diversified mood affiliation portfolio from a less common point of view?

The writing I thought was superb and also original, so I agree with the take of Christopher Hayes on Twitter:

Read book because the writing itself is in many ways more important and essential than the *argument* it’s making.

Many of you will object to this book, and not entirely for incorrect reasons.  This is a fire hose but there is not much if any engagement with potentially contradictory facts.  And if you read only this book, and otherwise would know nothing of America, you would not come close to guessing national black per capita income.

Still, if you’re wondering whether or not you should pick it up, I will nudge you in the direction of “yes.”

Here is a good article on the author.

Saturday assorted links

1. A new tactile alphabet, and is Braille obsolete?

2. Will neuroscience help us with sports?

3. Weak currencies don’t cause persistent trade surpluses: “Is there any field outside of macroeconomics where the so-called experts make more elementary errors in opinion pieces?”

4. Arnold Kling on the Iran deal.

5. Why can’t you default on the IMF?, except when you can.  By the way, it’s the ECB who owes the IMF, ultimately, not Greece.  With complications.

6. A.O. Scott on Comic-Con, one of the best pieces I have read this year.

7. Are the standards for political science majors too low?

Scream it from the rooftops (all in one breath)

Gary Burtless writes:

Instead of subsidizing low-wage employers, most [government] assistance programs reduce the availability of low-skill adults who are willing to work for low pay and lousy benefits. By shrinking the pool of workers willing to take the worst jobs, the programs tend to push up rather than push down wages at the bottom of the pay scale. Low-wage employers do not receive an indirect subsidy from the programs. Many must pay somewhat higher wages or recruit more intensively to fill their job vacancies.

There is much more at the link, including a considerations of programs which are an exception to this generalization, such as EITC.

Yunnan notes

yunnan

In the summer, up to half of a multi-course meal may consist of mushrooms, the best I have had.  Fried goat cheese is served, and the ham exceeds that of Spain in quality.  I had not thought that buckwheat flour pizza, dipped in fresh honey, would be a staple in Chinese food.  There is also flower soup of numerous kinds, corn dishes, pumpkin, and donkey.

Even the largest city in Yunnan — Kunming — has fresh air, a rarity in China.  The weather is perfect year round, and the faces have Burmese, Tibetan, Thai, and Mongolian features.  About one third of the population is explicitly classified as “ethnic minority,” and most of the others look like a blend with Han Chinese.

Dali, the second largest city, is nestled into a lake and mountains as a Swiss city might be.  You could explore the neighboring villages around the lake for months.  I recommend Xizhou, stay at Linden Centre.

The population is pro-American, not always the case in China, and the Flying Tigers, who flew bomber missions against Japan from Yunnan, are cited frequently, including in dinner toasts to visiting scholars.

Yunnan University has a significant program in cultural economics, and as my hosts I thank them for the invitation and for their extreme hospitality.

Yunnan is arguably the nicest province in China to visit, and one of the best trips in the world right now.  The quality of infrastructure and accommodations is good, but exoticism and surprise remain high, the perfect combination.  Go before it’s too late.

Infrastructure words of wisdom

The chief problem with our airports is not (pace Larry Summers) that they’re not as sleek and modern as the vast white elephants you’ll find in East Asia. Rather, it is that they are congested, and the reason they are congested is that the federal government doesn’t provide for market-rate pricing for take-off and landing slots. This straightforward reform would greatly increase the productivity, not to mention the pleasantness, of our aviation system. Yet it doesn’t involve spending billions of dollars and cutting ribbons, so politicians are by and large not interested.

That is from Reihan Salam.

Friday assorted links

1. European identity and redistributive preferences.

2. More from Uwe Reinhardt on Korean drama and Kimchi (pdf).

3. Markets (hierarchies) in everything, IBM style.

4. Ian Bremmer on the Iran deal.  And Jeffrey Lewis.

5. China’s municipal debt problems (NB: boring link, pdf too).  And what is wrong with Chinese gdp and inflation measures?, by Christopher Balding, plus David Keohane on same here.  And more Keohane here, an overview, skip this stuff at your peril it is the most important economics in the world right now.  All are excellent pieces.

6. Stereotyping diners — “Southern dad is always a winner.”

Open borders for a year?

There is debate over Open Borders vs. more restrictive immigration, but how about some combination of the two options?  Please note, I am not advocating this, I just would like to see the discussion become a little broader and also less emotional.

What about open borders for a solid year, followed by a more restrictive immigration policy?  This would encourage the arrival of those migrants who were decisive and could get their act together quickly.  Of course you can think of many variants on this idea.

I started thinking along these lines in response to the well-known claims that Puerto Rican immigrants under-perform in terms of income because they can so easily go back and forth.   So the goal with this proposal is to select for those people who are relatively sure they wish to come and stay.

Another variant therefore would have an exit fee for those migrants who sought to leave and return to their home countries.  Imagine a bond posting, with the bond forfeited if the immigrant does not stay say five years.

What about open borders for a month?  A week?  Who would show up if they had only twenty-four hours to slip in?

The culture that is Singapore

The Commuter Graciousness Index, now in its third year, found that graciousness levels rose to 61.3 per cent in 2014, up from 42 per cent the year before. In 2012, the index stood at 38.6 per cent.

The index measures the perceived change in behaviour of commuters on public transport, and looks at three core behaviours: queuing up and giving way to fellow commuters, giving up seats to those who need them more, and moving in to allow more passengers to boardthe bus and train.

…In 2014, the LTA launched five cartoon mascots to promote more gracious behaviour among commuters: Stand-up Stacey, Give-Way Glenda, Move-in Martin, Bag-Down Benny and Hush-Hush Hannah.

They will continue to front the graciousness campaign, the LTA said, with a new three-dimensional look.

The full story is here, via Andrew Jackson.