Category: Economics

Denmark has as much labor mobility as the United States

by  Tyler Cowen in

According to Daniel Schwammenthal (WSJ, April), about 30 percent of the Danish work force changes jobs each year.  There are few guarantees of job security, and the Danish government spends a great deal of worker retraining.   These training recipients face strong moral and financial pressure to take jobs which are offered to them.  There is also a new NBER paper on the miracle of the Danish labor force.

…we briefly describe some key features of the labor market in Denmark, some of which contribute to the Danish labor markets behaving quite differently from those in many other European countries…We show that mobility is about as high, or even higher, as in the highly fluid U.S. labor market. Finally, we describe and examine the wage structure between and within firms and changes therein since 1980, especially with an eye on possible impacts of the trend towards a more decentralized wage determination. The shift towards decentralized wage bargaining has coincided with deregulation and increased product market competition. The evidence is, however, not consistent with stronger competition in product markets eroding firm-specific rents. Hence, the prime suspect is the change in wage setting institutions.

Starting in the late 1980s, wage bargaining in Denmark became increasingly decentralized, and that is considered to be a major reason for Danish labor market successes.

fatty snacks!

by  Angus Grier in

From today’s WSJ (gated but a free preview is available) : "With Corn Prices Rising, Pigs Switch to Fatty Snacks".

This is a convoluted one, but I’ll give it a try. The US seeks "energy independence". Our government has decided corn based ethanol is the way to go and subsidizes gasoline made from it to the tune of around $0.50 per gallon. However, BRAZILIAN corn ethanol is NOT the way to go and we have placed a goodly sized tariff thereon. Thus the price of corn in the US is off the hook as the kids like to say. Commercial farmers, who like to fatten their charges as quickly and cheaply as possible and traditionally use 30-60 percent corn diets for their pigs and cows have turned to another, now cheaper, proven form of quick fattening: JUNK FOOD!! Cheese curls, tater tots, cookies, candy bars and french fries are now on the menu for our future food.  Pig farmer / comedian Alfred Smith says of the practice "I’ve heard no complaints".

counting unhatched chicks

by  Angus Grier in

I should preface this post by stating the obvious. I am not a trade guy. But I do think its interesting how trade agreements like NAFTA have already been judged as either failures or successes before the full agreements have ever been implemented! Consider the example of trucking in NAFTA.  Even though NAFTA "began" in 1994, Mexican trucks were supposed to be granted access to US highways in 2000, Bush finally made a move in that direction this spring, but given the latest Congressional action it doesn’t look like its going to happen. Among the new requirements: Mexican drivers should be fluent in English.  Interestingly, I believe that Mexican trucks were allowed to drive in the US in the 1970s, at least the linked article implies that was the case. In any event, the full implementation of NAFTA is scheduled to occur in 2009 (a 15 year implementation period) and trucking is not the only item way behind schedule.

Danish economists

by  Tyler Cowen in

1. Esther Boserup: A female economist from the 1970s, she revised Malthus and her book argued that population pressures stimulated technological progress in agriculture.  She was a precursor of Julian Simon and also a pioneer of work on economics and gender.

2. Frederik Zeuthen: A mathematician and early game theorist from the early 20th century.  He developed the idea of a bargaining zone, how to incorporate "free" commodities into general equilibrium theory, and refined the theory of monopolistic competition.

3. Carl Iversen: He wrote in the 1930s on international capital movements and was a founding member of Mont Pelerin.  A neglected and underrated figure.

Jesper Jespersen is a reasonably well-known post-Keynesian.  More recently there is Bjorn Lomborg, who am I forgetting?

China fact of the day

by  Tyler Cowen in

Trier is a worthy destination by any standard, having impressive and
important Roman ruins as well as an 11th century cathedral built in the
very place where Emperor Constantine’s mother first built a church in
the fourth century.

But the Chinese clearly come to see the
place where Marx was born in 1818 [my emphasis], and the local authorities try to
take full advantage of it, promoting their city in China itself and
with the travel agencies that serve Chinese tourists.

They even
offer cultural sensitivity training for merchants, restaurateurs and
others in Trier, instructing them in the finer points of dealing with
Chinese customers. The number 250, for example, which is a kind of
slang for "stupid" in Chinese, is to be avoided, and so is wrapping
paper in white, the color of funereal robes, or yellow, by custom
reserved for the emperor. It is also important to hand over visiting
cards rather formally, with two hands, not just one.

Here is the full story.

No one makes you shop at Wal-Mart

by  Alex Tabarrok in

In increasing order of seriousness.

As noted, the heart of the book is a well-written primer on let’s call it new economics.  As such, this book would make a good supplement to an advanced undergraduate class.  But the activism and attacks on MarketThink are occasionally distracting.  Chapter 1, for example, opens with a
denunciation of inequality.  Nothing wrong with that but Slee doesn’t even attempt to show that there is any
connection between rising inequality and the failure of MarketThink theories.  He just lumps things he doesn’t like into one pile. If there were no asymmetric information, no
herding, no coordination problems and so forth I guarantee that there would
still be plenty of inequality.

For the most part, Slee illustrates the new economics with insightful, interesting and often new examples.  But there are clunkers.  I almost threw the book at the wall when he started talking about QWERTY.  Surely, Slee knows that this worn-out example is a joke?  The supposed superiority of the DVORAK keyboard was shown in studies conducted by … Dvorak.  See here.  It’s especially annoying that Slee did not reference, Winners, Losers & Microsoft.

As primer, it’s fine to illustrate with examples and move on but as an attack on markets one expects a balanced consideration of opposing theories.  For example, Slee looks at beer micro-breweries vs. mass brewers arguing that we are currently stuck in the bad mass-equilibrium because micro-breweries rely on word-of-mouth but the institutions which sustain the word-of-mouth equilibrium only work when there are already lots of micro-breweries about which one can talk.  Nice, but here is an alternative theory.  Economies of scale made mass produced beer cheaper and when push came to shove consumers chose the cheaper good product over the more expensive but slightly better product (I don’t eat at 5 star restaurants every night).  New technologies, however, have made micro-brewing more economic and as they have done so we are moving to the mass-customization world that Slee prefers.  Consumers have gotten the best of all worlds – given scarcity – in both time frames.  The beer activists in England that Slee likes moved the process along but in the direction that it was already going.

There is no comparative analysis in the book at all.  No discussion, for example, of how free riding, asymmetric information, herding etc. distorts government choice.  Also, no appreciation that what some of us MarketThink people really advocate is civil society which includes non-profits and voluntary collective action of all kinds.  And, no we are not all corporate shills (p. 106). 

It’s true that outcomes do not always illustrate preferences but often they do.   Maybe people really do not want to walk to school.  It’s subtle but Tom seems all too eager to call in the government to force us into the better equilibrium.  I worry when people start talking about how government can help us to express our true preferences.  Isn’t this what dictators always say?  True freedom is oppression. 

The chapter on power is terrible, I did throw the book against the wall.  Perhaps in order to prepare us to welcome government as the deliverer of our true preferences, Slee wants to diminish the distinction between liberty and coercion.  But a true liberal should never write things like this:

…the formal structure of democracy and free markets is not enough to rule out exploitation and plunder – characteristics usually associated with repressive regimes.

If Tom visits GMU (I happen to know he reads MR) he should watch out because I shall kick him in the shins stating, "I refute you thus."

More seriously, repressive governments around the world threaten, rob, torture and murder with impunity.  Courageous individuals have died trying to escape such regimes while others have died fighting for their rights.  No matter how great are differences in wealth, it is morally wrong to equate what goes on in repressive regimes with capitalist acts between consenting adults.    

Ben Bernanke is not a Credit Snob

by  Alex Tabarrok in

Ben Bernanke argues that subprime mortgage lending is a natural and positive outgrowth of financial innovation.  Although some problems have occured they are being self-corrected and do not threaten the financial system.

…subprime mortgage lending began to
expand in earnest in the mid-1990s, the expansion spurred in large part by
innovations that reduced the costs for lenders of assessing and pricing risks.
In particular, technological advances facilitated credit scoring by making it
easier for lenders to collect and disseminate information on the
creditworthiness of prospective borrowers. In addition, lenders developed new
techniques for using this information to determine underwriting standards, set
interest rates, and manage their risks.

The ongoing growth and development of the secondary mortgage market has
reinforced the effect of these innovations. Whereas once most lenders held
mortgages on their books until the loans were repaid, regulatory changes and
other developments have permitted lenders to more easily sell mortgages to
financial intermediaries, who in turn pool mortgages and sell the cash flows as
structured securities. These securities typically offer various risk profiles
and durations to meet the investment strategies of a wide range of investors.
The growth of the secondary market has thus given mortgage lenders greater
access to the capital markets, lowered transaction costs, and spread risk more
broadly, thereby increasing the supply of mortgage credit to all types of
households…

The expansion of subprime mortgage lending has made homeownership possible
for households that in the past might not have qualified for a mortgage and has
thereby contributed to the rise in the homeownership rate since the mid-1990s…

As the problems in the subprime mortgage market have become manifest, we have
seen some signs of self-correction in the market. Investors are scrutinizing
subprime loans more carefully and, in turn, lenders have tightened underwriting
standards. Credit spreads on new subprime securitizations have risen, and the
volume of mortgage-backed securities issued indicates that subprime originations
have slowed. But although the supply of credit to this market has been
reduced–and probably appropriately so–credit has by no means evaporated.

More from Bernanke here.  Previous posts on credit snobs here, here and here.

Education as the critical problem behind current inequality

by  Tyler Cowen in

Here is an excerpt from my New York Times column today:

The return for a college education, in percentage terms, is now
about what it was in America’s Gilded Age in the late 19th century;
this drives the current scramble to get into top colleges and
universities.  In contrast, from 1915 to 1950, the relative return for
education fell, mostly because more new college graduates competed for
a relatively few top jobs, and that kept top wages from rising too
high.

Professors Goldin and Katz portray a kind of race. 
Improvements in technology have raised the gains for those with enough
skills to handle complex jobs.  The resulting inequalities are bid back
down only as more people receive more education and move up the wage
ladder.

Income distribution thus depends on the balance between
technological progress and access to college and postgraduate study. 
The problem isn’t so much capitalism as it is that American lower
education does not prepare enough people to receive gains from American
higher education.

Bottlenecks currently keep more individuals from improving their education…

Note that education is a fundamental issue behind the kinds of inequality we should worry about most, namely the failure of many poor people to do better over time.  It is not the fundamental problem behind every kind of measured inequality, as the column itself explains.  It does not, for instance, explain rising gains to the top one percent.  Inequality debates too often conflate different phenomena. 

Here is a non-gated version of the very interesting Goldin-Katz paper which I cover.

In a dynamic era does educational access have much of a chance of keeping up with technological improvement?  Even if we had optimal educational policies, which of course we don’t, modern technology goes "whoosh," education often just pokeys along.

Brad DeLong offers related commentary, though I think he is too quick to accuse Becker and Murphy of confusing the Marshallian scissors.  Mark Thoma offers commentary and relevant links.  Concerning Krugman’s claims, in general the data (see David Card’s Econometrica 2001 piece, plus the work of James Heckman) still find relatively high returns to additional education.

Cell phone monies

by  Tyler Cowen in

I heard a report that in northern Tanzania they are using cell phone credits in lieu of traditional money.  If you want to pay for something, just make a call to the provider and transfer cell phone credits to the other trader’s account.  Why should those credits be any less liquid than currency?  They are easier to store and transfer and just about everybody uses them.

Monetary economics in Africa is very, very difficult.  It must start with the presumption that money is the asset with the highest carrying costs, if only because your relatives find it so easy to take away from you.