Assorted links
Markets in everything
For the pointers I thank John Thorne, Trey Miller, Courtney Knapp, Catherine Rampell, and Chris Blattman.
Life mirrors…?
An Australian investment banker accused in his home country of locking a fake bomb to a teenager’s neck was ordered jailed Tuesday in Louisville, Ky., pending an extradition hearing.
Paul Douglas Peters’ appearance in federal court followed his arrest by the Federal Bureau of Investigation Monday at his ex-wife’s home outside Louisville. It culminated a chase across two continents, from an exclusive Sydney suburb where Mr. Peters, nattily garbed but wearing a balaclava helmet, allegedly fastened a black box around 18-year-old Madeleine Pulver’s neck on Aug. 3, to Debra Peters’ home in a quiet upscale neighborhood.
Here is more.
In defense of Texas jobs performance?
I have now read Matthias Shapiro (not a Perry supporter by the way) and he seems to have the best treatment so far. One excerpt:
Since the recession started hourly wages in Texas have increased at a 6th fastest pace in the nation.
Another:
We can see that Texas has grown the fastest, having increased jobs by 2.2% since the recession started. I want to take a moment and point out that second place is held by North Dakota. I added North Dakota to my list of states to show something very important. North Dakota currently has the lowest unemployment rate of any state at 3.2%. And yet Texas is adding jobs at a faster rate than North Dakota. How can this be?
The reason is that people are flocking to Texas in massive numbers…
As you can see, Texas isn’t just the fastest growing… it’s growing over twice as fast as the second fastest state and three times as fast as the third. Given that Texas is (to borrow a technical term) f***ing huge, this growth is incredible.
People are flocking to Texas in massive numbers. This is speculative, but it *seems* that people are moving to Texas looking for jobs rather than moving to Texas for a job they already have lined up. This would explain why Texas is adding jobs faster than any other state but still has a relatively high unemployment rate.
This piece encompasses, and responds to, all of the “Texas critiques” we have seen so far. And there are good graphs at the link. For the pointer I thank Nate Silver, a tough cookie when it comes to data; he calls it a “great piece.”
Scott Sumner on sticky wages for the unemployed
Scott writes (and Alex seconds, and here is a Woolsey response):
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.
Most of all, I praise Scott for being the only respondent, of many, to actually try and explain why nominal wages are sticky.
As the argument is presented, I would respond: “There is talk of fixed NGDP and talk of a fixed total wage bill. Both conditions are assuming away the possibility of an easy solution. An unemployed worker shows up, he and the employer cut a deal, a job is created, monetary velocity goes up, NGDP goes up, and the Pareto improvement occurs. To use a different terminology, velocity should be elastic with respect to available gains from trade and thus so is NGDP. More concretely, referring to the current day, employers are sitting on plenty of cash. There is nothing in the NGDP identities to prevent further hiring from that stash.”
You can read Scott’s not-easy to-summarize counter-response to a comparable comment of mine here. I do not interpret it as defending the relevance of nominal stickiness over the longer run or even as hoeing to the above passage. For instance Scott writes “the actual change in NGDP is a sufficient statistic for understanding the net effect of wage flexibility on NGDP, PLUS monetary policy on NGDP.” I believe Scott could have more accurately written”: “the actual change in NGDP is a sufficient statistic for understanding the net effect of labor market and other coordination breakdowns on NGDP, PLUS monetary policy on NGDP,” removing wage stickiness from the sentence altogether. We’re back to viewing wage stickiness as one component of GDP problems, without knowing how important wage stickiness for the unemployed is, which is precisely where we started.
Assorted links
1. How to run a class for 58,000 people.
2. The declining quantity of Freemasons.
3. Bob Murphy on who predicted what.
4. You have to sign a two-page contract to eat at DC’s hot new restaurant.
5. Are most modern humans just like Neanderthals?
6. Do high status people use pronouns less?, and other interesting results (caveat emptor, though).
A simple model of unemployment, wage stickiness and ZMP
Following up on yesterday’s discussion of wage stickiness for the unemployed and the employed (Tyler, Alex).
Imagine a farmer whose farm produces 100 bushels of wheat. He hires 10 workers to bring in the wheat, paying each of them 9 bushels. Thus, each worker carries 10 bushels, the wage is 9, the wage bill is 90, and the farmer earns 10.
Now suppose that due to climate change or a swarm of locusts the farm only produces 90 bushels of wheat. If wages were fully flexible then an equilibrium exists in which each worker is paid a wage of 8 leaving the farmer with 10 bushels as before. The farmer doesn’t want to reduce everyone’s wages, however, because that will reduce morale so he fires one worker leaving nine. Each worker now brings in 10 bushels, as before, and is paid a wage of 9, for a total wage bill of 81 leaving the farmer with 9 bushels. The unemployment rate is 10%.
The unemployed worker doesn’t want to be unemployed and offers to work for less, a lot less, say 5 bushels. Even at the lower wage, however, the farmer doesn’t want to hire the worker because the worker doesn’t generate enough additional output to justify even a low wage. In fact, in this scenario the worker has ZMP.
The best the farmer can do in response to the lower wage offer by the unemployed worker is to fire an employed worker and hire the unemployed worker at the lower wage. Eventually this will restore equilibrium but it takes time to cycle through enough firings and hirings to reach full employment. Note also that in this model the farmer only has a weak incentive to do this since in the equilibrium with 10% unemployment he earns 9, almost as much as before. As an aside, also note that in my model the unemployed workers are simply unlucky (as I argued earlier). If they were to switch places with the employed, productivity would be just as high. The unemployed worker has ZMP but is not a ZMP worker.
Since the driving shock that lowers productivity in this model is a real factor (weather, locusts), this is a real business cycle model . That raises a very interesting point. The most that wage flexibility can do in this model is to restore full employment; wage flexibility cannot restore full output. Thus, the workers in this model have a very good reason to dislike wage flexibility. In the equilibrium in which wages fall the unemployed worker is better off by a lot but the 9 employed workers are all worse off than in the unemployment equilibrium. In contrast, in a Keynesian model wage flexibility can restore full output not just full employment. Thus, and somewhat surprisingly, it’s easier to justify wage stickiness in an RBC model than in a Keynesian model since the gains from wage flexibility are so much higher in the latter!
Even in a Keynesian model along the lines of the Sweeney/Krugman babysitter model it will still be the case that lower wages by the unemployed don’t get you far enough to restore equilibrium–although as noted, we will need a coordination failure story in the Keynesian model since in principle everyone would be better off in that model with wage flexibility.
Facts about Houston
Kevin Williamson informs us:
The typical owner-occupied home in Brooklyn costs well over a half-million dollars. In Suffolk County it’s nearly $400,000. In Houston? A whopping $130,100. Put another way: In Houston, the median household income is 39 percent of the cost of a typical house. In Brooklyn, the median household income is 8 percent of the cost of the median home, and in Boston it’s only 14 percent. When it comes to homeownership, $1 in earnings in Houston is worth a lot more than $1 in Brooklyn or Boston. But even that doesn’t really tell the story, because the typical house in Houston doesn’t look much like the typical house in Brooklyn: Some 64 percent of the homes in Houston are single-family units, i.e., houses. In Brooklyn, 85 percent are multi-family units, i.e. apartments and condos.
Hat tip goes to Tall Dave, who also has blogged high-IQ dating.
Why did Texas create so many jobs?
Advance warning: this is not a post about Rick Perry!
Matt Yglesias writes:
My view is that Texas’ robust job growth is a consequence of its robust population growth…
This is consistent with Paul Krugman’s column yesterday, and also consistent with Matt’s earlier writings praising Texas for not overdoing the zoning. I agree, but I wonder who should be reassured by this answer.
I’ve read a lot of blog posts lately painting Texas as a low benefit, low Medicaid, not so great system of public education kind of state. Let’s take this picture and run with it. People are moving into the state, in fairly large numbers, and that suggests the state is doing something right (again, I’m not suggesting Perry has anything to do with this.) By the way, Dallas-Fort Worth recently had 35 straight days of 100+ weather and that wasn’t even a record for the region.
I see four options:
1. Hispanics track other Hispanics to some extent, so if Hispanic population is going up, so is the population of Texas. For sure, but this is by no means the entire population phenomenon. Nor is New Mexico experiencing a comparably positive mobility effect.
2. Texas gets some policies right, some say low taxes, there is lots of debate here. Sometimes conservative commentators argue that “being tough on the poor” is in fact good for the poor themselves, given “poor on poor” local externalities.
3. Texas gets right a lower-zoning policy, which leads to cheap rents.
4. People are moving to Texas because fossil fuel prices have been rising. There’s something to that, but still those prices do not seem to predict employment in Texas, at least not in recent times.
Let’s treat #1 and #4 as exogenous to policy, for the sake of argument dismiss #2 altogether, and thus focus only on #3. Is this a result progressives should feel happy about?
I am not sure. There is no chance of Texas’s looser zoning being applied to Fairfax County; for one reason the “Mantua moms” (don’t ask) wouldn’t stand for it. It’s not even an issue and it doesn’t matter which party is in power. Those are the same Mantua moms who oversee and enforce one of the nation’s best public school systems. Now, as a general matter, should the influence of the Mantua moms be stronger or weaker?
Well, we’ve decided to live with the Mantua moms, for better or worse. The neighborhood is splendid, but boring, and the neighbors do not support good food. Texas, it seems, doesn’t give nearly as much political power to its equivalent of the Mantua moms, for whatever reason (can anyone tell us why?). That leads to cheaper land, cheaper housing, and inferior public school systems, not to mention better and cheaper food. And poor people are voting with their feet to choose it.
I am well aware that marginal migrants do not necessarily reflect the preferences of the infra-marginals. Still, I am not sure many of us should find this a comforting scenario.
I’m not sure that “don’t choose policies, choose interest groups” counts as a final truth, but it’s an interesting thought experiment to upset the usual ideological applecarts.
Sentences to ponder
Finally, even if Mr. Powdthavee is right about the unhappy effects of income comparison, you shouldn’t conclude that redistribution is the solution. Yes, you could fight inequality of income. But you could just as easily fight comparison of income. Instead of praising those who “raise awareness” about inequality, perhaps we should shame them, like the office gossip, for spreading envy and discontent. In the end, happiness research and history teach the same lesson: If you live in the First World, you should be very grateful for what you have. So cheer up!
That is from Bryan Caplan, here is more. I am still giggling over this earlier post of Bryan’s; it gives you a good idea of my typical day.
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.