Category: Current Affairs

Sticky wage transmission mechanisms

by  Alex Tabarrok in

The most obvious way in which sticky wages impede employment is by keeping the cost of hiring workers above the equilibrium wage. The standard story explains that sticky wages increase unemployment. The standard story, however, is not the only and perhaps not the most important transmission mechanism.

Wages are the largest component of costs thus sticky wages keep costs high and profits low.  The point is obvious once stated but it has implications for how we look at sticky wages.  Tyler, for example, writes:

[Consider] illegal immigrant Mexican construction workers, a group which lost jobs in large numbers following the crash. Are they — who often came from $1 a day environments — also supposed to have sticky wages? They are out of work in massive numbers.

The focus here is on the unemployed workers with the argument implicit that it's the stickiness of their wages which counts (which makes sense given the standard story).  But suppose that the problem is that firms can't get capital to expand–perhaps because the banking system is not working well–then what matters for firm expansion is free cash flow.  But sticky wages keep firm costs high, reducing free cash flow and inhibiting expansion. In this argument, the stickiness that matters is the sticky wages of the employed workers.

A story which focuses on employed workers has several advantages.  First, the wages of employed workers are clearly more sticky than the wages of unemployed workers–in fact, if you are employed real wages are up slightly. Moreover, since more than 90% of workers are employed this type of argument has leverage.  

If there are fixed costs, new firms do not arise instantly so infra-marginal sticky wages can be important for a number of "balance-sheet" reasons in addition but related to the free cash flow story such as debt constraints or various coordination and risk reasons.  

One green shoot

by  Tyler Cowen in

Ireland climbed out of recession on Wednesday with the economy
returning to growth in the first quarter [2.7 percent], after suffering one of the
deepest downturns of any advanced industrialised economy.

Don't get too giddy with optimism: the Irish economy had declined fifteen percent.  Still, it's far too early to judge the Irish experiment in pre-emptive fiscal austerity to be a failure.  The full story is here.

The Haitian social fabric is fraying

by  Tyler Cowen in

You may recall that the immediate aftermath of the earthquake brought relatively high levels of order and even a decline in crime.  Yet norms are evolving to meet the new and desperate environment which most Haitians face.

The Haitians are now figuring out how to rob and murder visiting Americans; the body count is suddenly at four.  The level of rape is escalating.

The Haitian Presidential election is now set for November 28, and that is likely to bring a good amount of violence.  And since so many voting records have been destroyed, it will be difficult to limit fraud, accusations of fraud, and the winner may not be seen as legitimate.

One simple hypothesis is that people behave fairly calmly, and even passively, during shocking experiences and in their immediate aftermath.  The medium-term response can be quite different.

Most people are ignoring the Haitian situation, as they have mistakenly concluded it has stabilized.  It has not.  You still have a milion and a half people, in a basically untenable situation, more or less homeless, with the heart of the country destroyed and not much ongoing reconstruction or reform.

Secession

by  Alex Tabarrok in

In advance of July 4, Patri Friedman and co-bloggers are discussing secession (remember, we call it the American revolution they call it secession) at Let a Thousand Nations Bloom.  Here is Patri on secession as a startup: 

America did not merely secede and copy the governing documents or style of the United Kingdom. Rather, it innovated, creating a system based on the English Common Law, yet different, one with explicit checks and balances to restrain government, and with no place for a monarch. It was an experiment with a more radical form of democracy than existed anywhere in the 18th-century world.

And it was an incredibly successful experiment, as the combination of that innovative rule-set and the empty frontier resulted in America growing rapidly in population, wealth, and influence. During the open immigration periods of the 19th century, some years saw over a million new immigrants arrive “yearning to breathe free”. As a result, the new American state had influence far beyond its shores.

This influence occured in two major ways. First, America served as a test of the brand-new American Constitution, and the Founding Fathers’ philosophy about the role of government. By showing that it worked well in practice, political philosophers, politicians, voters, and revolutionaries around the world were (slowly) convinced that this was the best government technology to be had. Second, America dramatically outcompeted existing states, based on the simple metric of net migration. Those million+ people a year who went to America can be thought of as customers of government services voting with their feet, which means that other countries were losing market share.

You may not be used to thinking of government in this sort of economic and business framework, but it is a core part of our philosophy here at Let A Thousand Nations Bloom, and we find it provides a unique and refreshing angle on government. In this case, it shows us the invisible, long-term effects of the American Revolution.

They are covering a lot of other related material such as the optimal size and number of nations this week as well.  Here is a guide.  On a related point, I argued earlier for The Great State of Northern Virginia.

Finally, don’t forget: If at first you don’t secede, try, try again.

The Dave Weigel resignation

by  Tyler Cowen in

One summary of the details is here (I don't know whatever inside story there may be), but the bottom line is that he had to resign from The Washington Post because of negative comments he made about conservative figures on a supposedly private email list.  Weigel's job for the Post was to cover the conservative movement and it seems the Post expected him to maintain a more objective stance, including in his private emails.  Matt Yglesias has more extensive coverage of the episode and here is Ross Douthat.  Here is Weigel's account and apology, which includes the postings which got him into trouble.  And here is a detailed Politico article.

It is likely I prefer Weigel over his replacement, and if you're wondering I don't know Weigel well, even though he lives nearby.

At a more general level this is a tax on journalists, who now have a greater fear of being fired for past actions.  It's also a tax on the moody, the volatile, the web-savvy, the non-mainstream, and a subsidy to in-control smooth talkers and careful writers.

The Washington Post wrote:

“But we’re living in an era when maybe we need to add a level” of inquiry, he [a WP web site managing editor] said. “It may be in our interests to ask potential reporters: ‘In private… have you expressed any opinions that would make it difficult for you to do your job.”

I'm not sure what kind of answers they expect to that question nor what they understand by the word "private" in that context. 

Conceptually, the core problem is that the distinction between the private and public spheres is breaking down, but at different rates for individuals and mainstream institutions.  The practical question is what an equilibrium would look like for the WP, given that the paper courts advertisers, relies on political contacts, and wishes to avoid becoming a target for right-wing (and left-wing) media.  It's easy to imagine the targets of Weigel's criticisms citing them repeatedly against the Washington Post and questioning the Post's objectivity.  "Oh, that was written by the guy who said that…"

One possible outcome is that the current public code of behavior becomes applied to writers' private lives and I suppose that is what we are seeing and it is also what a lot of "common knowledge" models would predict.  That is, most of us know that many writers say such things in private, but that's tolerated as long as it doesn't become common knowledge about any particular writer.

Common knowledge mechanisms often lead to inefficient (and unfair) outcomes, in part by non-convexying returns with regard to the actions of the individual.  Maybe we would like taxes to be linked to individual type, but common knowledge mechanisms tend to link the actual "tax" to how social forces process information about an individual.  A polemicist who is secretly taped encounters a greatly different outcome.than a polemicist who is not taped.

One option is for public institutions to adopt a "statute of limitations" for private remarks and with a short time window.  That would not help in this case, since Weigel's relevant postings do not predate his Post employment; still it might be a good reform.  Another option is for public institutions to adopt different norms for their web writers.  There are already different norms to some extent (web writings receive less editing, for instance), but it is hard to spread the different norm for the writing to become a different norm for the writer.  Web traffic is already massive for newspapers, and most readers probably do not distinguish between different kinds of paper employees, such as web vs. non-web.  Anyway, it's a fuzzy line if a writer has both web and non-web output.

A more radical change would move away from the manufactured image of the objective newspaper, but this is especially difficult for the Post, given that it relies on both conservative and liberal sources for its key political coverage.

Overall, we need more incentive-compatible, generalizable organizational reforms which will allow mainstream institutions to have more flexible relationships, and indeed sometimes more distanced relationships, with their writers.  Yet reputational forces are often quite blunt, and grossly calculated, and mainstream institutions are not very far along on making such reforms work.

The economics of *Le Monde*

by  Tyler Cowen in

It seems the newspaper is going under.  Here is one snippet:

In France, firing a printing plant employee is hugely expensive. The gent is paid €50,000 per year, works 32 hours per week and 164 days per year. Firing him costs about €466,000 – that’s a  French government estimate…

It is worth reading the article in full, as it makes many other points.  For the pointer I thank Sam Bishop.

Obama’s Oil Speech: Old not Bold

by  Alex Tabarrok in

Here is my reaction at the NYTimes:

President Obama lost his cool last week when – sounding like the old president – he said he was looking for some “ass to kick.” He didn’t regain any lost cool in Tuesday’s oil speech, which also made him sound like his predecessor: “Make no mistake: we will fight this spill with everything we’ve got for as long it takes,” he said, emphasizing “We will make BP pay….” Call it President’s Obama’s war on error.

Turning to energy, the president called for innovation and hard choices but offered little new or courageous thinking of his own. Instead, he went back to the same well he has drawn from repeatedly; blame the previous administration and their “failed philosophy.”

Whether justified or not, this refrain is getting old. Even the president’s appeals to America’s greatness sounded old. Can his speechwriters really do no better than 'remember when we won World War II and put a man on the moon?'

Most important, nowhere did the president mention two hard ideas that the public must accept if we are to move to a cleaner energy future: nuclear power and carbon taxes.

More here.

Bounty Hunting in Pakistan

by  Alex Tabarrok in

Gary Brooks Faulkner, an American citizen who told police he was
searching for Osama Bin Laden, has been arrested in northwest Pakistan
armed with a gun, a sword, and Christian literature.

More here.  Clearly, this guy is a bit of a nut.  Nevertheless, bounties have been quite successful at capturing terrorists.  I'd like to see the $25 million bounty on Bin Laden raised to say $500 million.  We could have avoided several wars at that price.

Previous MR posts on bounty hunting here.

Credit crunch in Spain

by  Tyler Cowen in

Government bonds were sold off sharply as the Spanish Treasury secretary and a leading banker admitted companies and banks were having difficulties raising funds.

Francisco González, chairman of BBVA, Spain’s second-biggest lender, said: “For the majority of companies and Spanish financial firms, international capital markets are closed.”

Carlos Ocana, treasury secretary, said the credit freeze affecting Spanish banks and corporations was “definitely a problem”.

The article seems to blame this outcome on Spain's fiscal austerity drive; I'll note that's not the only possible interpretation of the data.  El Pais for instance suggests that not enough fiscal austerity has been forthcoming and they seem to be working with the same sources but with more detail.  In any case, markets are demanding something.  By the way, the Spaniards are planning a general strike for September; I'm sure the markets found that reassuring.  This German article, from FAZ, suggests that something will need to be done about Spain very soon.

P.O. O'Neill, by the way, has a good post comparing Spain and Ireland.

The blockade of Gaza and the ongoing relevance of Edmund Silberner

by  Tyler Cowen in

This is not a surprise, but it is worth keeping in mind:

The blockade has also decimated Gaza's private sector, key to weaning the territory from its dependence on imports and aid. The merchant class here has long provided a chunk of Gaza's employment, and it is one of the few sectors that fostered constructive contact with Israel, through trade.

"This is like a death penalty for us," says Mohammed Al Telbani, chief executive of Al Awda Factories Co., a cookie and ice-cream maker.

Businesses can't import raw materials or export finished goods. Since the blockade, more than 3,000 private-sector enterprises, including factories and small businesses, have closed, contributing to an unemployment rate of 44%, according to the United Nations Relief and Works Agency in Gaza.

Many of the businesses that have managed to stay open have turned to smugglers to bring in machines, spare parts and raw materials from Egypt, severing trade ties between Gaza and Israeli manufacturers and traders.

All this has bolstered Hamas, businessmen here and aid agencies say. Hamas exerts oversight over the tunnels and their operators. It has expanded its own public-sector payroll, earning local praise for creating new jobs. It has also extended economic tentacles into new businesses.

Yaser Alwadeya, chairman of Alwadeya Group, a 54-year-old trading and manufacturing conglomerate, calls the new economic reality here "the Hamas private sector." Before the blockade, his company made 171 different brands of food, including chips and candy. Some 60% of his products went to Israel or the West Bank.

Much of his manufacturing line was destroyed by Israeli airstrikes during the December 2008-January 2009 Gaza war, he says.

Facilities that survived are now starved of basic raw materials like cocoa powder, reducing his product line to just 11 items. That includes ice cream sold in clear plastic bags, because, Mr. Alwadeya says, Israel won't allow in proper packaging.

He no longer exports anything, and he now employs 45 people, down from 276 before the blockade. "Where do you think they are?" asks Mr. Alwadeya of the employees he has had to fire. "Either on the streets or with Hamas."

Edmund Silberner's classic treatment of trade and war remains relevant and of course he was also a prominent Zionist, albeit a mostly forgotten one today. 

Most journalistic coverage, by the way, focuses on diplomacy and negotiations. Perhaps it refers to concepts such as "strengthening the hard liners," but often it goes no further.  Yet frequently the real action stems from how policies shift the relative balance of power among interest groups, a point which Silberner understood well.  There is much related information here, from The Jerusalem Post, which notes that 95 percent of the factories and workshops in Gaza have had to close.  Furthermore:

Before 2007, 70 trucks laden with export goods such as furniture, clothing and produce left Gaza daily for Israel. Now, only the export of strawberries and flowers to Europe is allowed in certain instances…

I wonder if anyone in Israel right now is reading or citing classical liberal Edmund Silberner.  Here is a good, short piece on Silberner (in German), although it focuses on his work on socialism and anti-semitism rather than the roots or war.

Concerning BP: very good sentences

by  Tyler Cowen in

And if we aren’t careful, we will encourage companies that have enough money for collection to leave the drilling to those that don’t.

That's from Richard Thaler and the entire column is worth reading.  Here is his wise conclusion:

We are left in a difficult place. Neither the private nor the public sector seems up to handling these kinds of problems. And we can’t simply wait for the next disaster, because, as people might say if they had to use G-rated language, stuff happens.