Correction of Brad DeLong
He is wrong to suggest that I am calling for deflation. He draws his conclusion by citing advice which is a thought experiment and which I call "patently absurd" elsewhere in the post. I also left this comment on his blog:
I am not calling for deflation, this is simply a misinterpretation of what I wrote. Further an unemployed person with debt is even worse off than an employed person at a lower wage. *And* even our fairly wimpy Fed is not going to allow a high rate of deflation and thus a big real increase in the debt burden.
Here is an earlier column of mine, entitled "How a Little Inflation Could Help a Lot." While I am increasingly unsure how much good such inflation would do, I have been arguing for a year that it is worth trying and for instance just yesterday I wrote in the Brad-cited post "I favor a more expansionary monetary policy".
Strange North Korean headlines
"Talks about Talks Yield No Talks"
Yet somehow it all makes sense. For the pointer I thank Peter Komarek.
Assorted links
Spontaneous order on the road
Here’s a video of a small town in Britain that turned its traffic lights off. Order ensued.
The experiment is not unique. Tom Vanderbilt wrote an excellent piece in The Wilson Quarterly a few years ago on traffic revolutionary Hans Monderman (see also this NYTimes piece) who has redesigned a number of city centers:
At the town center, in a crowded four-way intersection called the Laweiplein, Monderman removed not only the traffic lights but virtually every other traffic control. Instead of a space cluttered with poles, lights, “traffic islands,” and restrictive arrows, Monderman installed a radical kind of roundabout (a “squareabout,” in his words, because it really seemed more a town square than a traditional roundabout), marked only by a raised circle of grass in the middle, several fountains, and some very discreet indicators of the direction of traffic, which were required by law.
As I watched the intricate social ballet that occurred as cars and bikes slowed to enter the circle (pedestrians were meant to cross at crosswalks placed a bit before the intersection), Monderman performed a favorite trick. He walked, backward and with eyes closed, into the Laweiplein. The traffic made its way around him. No one honked, he wasn’t struck. Instead of a binary, mechanistic process–stop, go–the movement of traffic and pedestrians in the circle felt human and organic.
A year after the change, the results of this “extreme makeover” were striking: Not only had congestion decreased in the intersection–buses spent less time waiting to get through, for example–but there were half as many accidents, even though total car traffic was up by a third.
The experiments are interesting in their own right but they are also very good illustrations of spontaneous order; how order is possible without orders.
Hat tip: Dan Klein.
What’s the actual problem in the labor market?
David Leonhardt has a very good piece which presents some relevant facts about unemployment. Felix Salmon summarizes one part of the piece as follows:
In 2008, only 13.2% of the labor force was unemployed at some point. That compares to 18.1% in 1980, and 22% in 1982.
Real wages, which normally fall during recessions, have risen in this one. Even nominal wages are up.
Also from Felix:
The overriding impression is of most Americans actually doing OK, with an unemployable underclass bearing the brunt of the recession.
To those observations I would add that corporate profits are doing fairly well.
Those facts, in a nutshell, are why I am not AD-obsessed when it comes to explaining the current economy.
Furthermore, I don't buy the idea that so many of the unemployed are stupidly and stubbornly holding out for a higher wage than they can get, while at the same time they can be reemployed by a mere bit of money illusion. There are so many blog posts written to the Fed, to Bernanke, etc. "Hey guys, goose up the money supply! Bernanke, read your old writings!"
Yet I have seen not one such post to the unemployed: "Hey guys, lower your wage demands! It's good for you! You'll get a job and avoid the soul-sucking ravages of idleness. It's good for the country! It's good for Bernanke, you'll get those regional Fed presidents off his back! Why not? The best you can hope for is to get tricked by money illusion anyway! Show up those elites and get to that equilibrium on your own! Take control!" and so on. If such posts would seem patently absurd, we should ask what that implies for our underlying theory of current unemployment.
I sooner think of these unemployed individuals as having gone down economic corridors which are no longer promising and not facing any easy adjustment to set things right again. Furthermore I consider that portrait of their troubles to be more consistent with the general tenor of liberal, left-wing, and progressive thought, not to mention plain common sense.
Elsewhere, Matt Yglesias has an interesting post on the recalculation argument and its relation to political ideology. He claims that promoting the argument will make people like capitalism less and that may well be true. I would add:
1. The Industrial Revolution also was a tough slog for quite a few decades. Yet it was both worthwhile and it gave capitalism a bad name for a long time.
2. Alexander Field argues that the Great Depression brought greater productivity improvements than any other decade in U.S. history.
3. If one wishes to consider state intervention, in light of recalculation, one is pointed in the direction of direct employment of the struggling workers; the recalculation argument does not rule out intervention per se. This advice could potentially be useful and I don't see why even libertarians should consider it necessarily worse than $800 billion of fiscal stimulus.
4. Like Matt and many others, I favor a more expansionary monetary policy. But the last stimulus was oversold and there is no reason to oversell this one. We really don't know how well it will work (and I'm not referring to liquidity traps). But if the Fed tries more monetary expansion, we'll see how much of the current employment is cyclical and AD-related in the traditional sense.
5. By its very nature, a recalculation argument ought to be somewhat agnostic as to how much (and what kind) of recalculation is actually required. See #4.
Addendum: Bryan Caplan comments, non-ironically.
Betting markets in everything
Think you're going to ace freshman year? Want to put money on that?
A website called Ultrinsic is taking wagers on grades from students at 36 colleges nationwide starting this month.
Just as Las Vegas sports books set odds on football games, Ultrinsic will pay you top dollar for A's, a little less for the more likely outcome of a B average or better, and so on. You can also wager you'll fail a class by buying what Ultrinsic calls "grade insurance."
CEO Steven Wolf insists this is not online gambling, which is technically illegal in the United States, because wagers with Ultrinsic involve skill.
Student users claim it motivates them to work harder. Here is the full story, here is another. Here is an Andrew Gelman post.
How do they avoid adverse selection? Is it that they lure failing fools, who think that money will make such a difference?
For the pointer I thank Max Levine, a loyal MR reader.
The culture that is Virginia
Virginia received $35 billion in defense contracts, supporting more than 530,000 contracting and associated jobs in fiscal 2008, Fuller said. About 70 percent of those dollars flowed to Northern Virginia.
He said three years of 10 percent cuts to military contracting, as announced by Gates, could swallow up as much as half of the economic growth projected for Northern Virginia in coming years.
Here is more.
Assorted links
1. Are TV viewings actually up?
2. Sounds like excess capacity to me.
3. At the State Fair: deep-fried butter and chocolate-covered bacon.
4. Where does the Laffer Curve bend? (prize for the best answer goes to Greg Mankiw)
6. Japanese aquarium features frozen fish.
7. Very good post on carbon tax and innovation.
German imports jump
On the imports side, the picture was even stronger – good for Germany and its European trading partners whose economies benefit in the German slipstream. Imports soared 31.7pc to 72.4bn euros, the Destatis statistics office said, the all-time record since figures were first compiled in 1950.
Don't overreact to one report, of course, but that is better than virtually everyone was expecting. The standard line had been that Germany's export prowess, combined with a longer-term move toward a near-balanced budget, was sucking air out of the global economy.
*Seeds of Destruction*
That's the new tract by Glenn Hubbard and Peter Navarro; the subtitle is Why the Path to Economic Ruin Runs through Washington, And How to Reclaim American Prosperity.
Beyond the usual market-oriented prescriptions, the book defends a price floor for oil imports, price indexing of social security benefits, it is anti-fiscal stimulus, anti-easy money, for job training programs, and for health care it advocates eliminating the tax deduction, removing state-level barriers to competition, and malpractice reform. The authors also devote special attention to criticizing Chinese protectionism as a reason why American job growth hasn't been better.
I take Hubbard to be a (the?) future "kingmaker" for economic policy within the Republican party, with possible competition from Douglas Holtz-Eakin. If you wish to know where those debates and proposals are headed, this is the book to pick up.
Will QE work?
Basile, Landon-Lane, and Rockoff have a new paper on the Great Depression. They conclude:
The main finding is that as we move away from short-term government bonds on the "liquidity spectrum" we encounter rates that appear to have been sensitive to changes in monetary policy, although the mortgage rates were an exception.
They note that Keynes himself did not believe America was in a liquidity trap, though some of the American Keynesians did.
Here is a new paper from the Kansas City Fed, by Taeyoung Doh, summarized by the Fed bulletin as such:
Doh uses a preferred-habitat model that explicitly considers the zero bound for nominal interest rates. His analysis suggests that purchasing assets on a large scale can effectively lower long-term interest rates. Furthermore, when heightened risk aversion disrupts the activities of arbitrageurs, policymakers may lower long-term rates more effectively through asset purchases than through communicating their intentions to lower expected path of future short-term rates.
I hold the default belief that such policies could prove effective today. There's also the broader point that QE can work by stimulating AD, without having to push around long rates very much.
My dialogue at Ess-a-Bagel
That's the excellent bagel and smoked fish shop at 3rd Ave., just north of 50th St.
I order my bagel from a gentleman with a thick New York accent and he eyes me suspiciously. Finally he grunts out, in a tone slightly less than that of accusation:
Server: "Where are you from?"
(I pause. There are different answers to this question, depending who is asking and where you are. Is it about where you were born, where you grew up, where you live now, and in the latter case how specific should the location be? In Ghana I should say "Washington," though in Portland that answer fails. In North Carolina I can say "northern Virginia." In Arizona I should say "Virginia." In El Salvador I try "Falls Church.")
I answered, after a pause, with a feeling of insecurity:
TC: "New Jersey"
Server: "Really. You look like a farmer!" (pronounced as if the concept were a deeply alien one)
"I thought you were from California or something."
Mandatory national origin labels
Bryan Caplan asks:
Is anyone willing to often even a semi-plausible economic argument in defense of mandatory national origin labels?
I oppose the policy, but the obvious argument in favor is that the practice can partially cartelize consumers and oppose market power. The label, if it discourages some customers at the margin, could induce lower prices and higher quantity (and quality) from the foreign firms with market power.
In opposition, I would note that many of these markets (e.g., textiles) are quite competitive or that sometimes labels will boost the market power of the producers who are not discriminated against. Or if the label means some customers won't buy the foreign product no matter what, it could be the inelastic customers are left in the market and prices go up. Ethically speaking, the whole idea rubs me the wrong way, as it does Bryan.
Without any law, the "desired" countries and regions of origin will add a label voluntarily, and consumers will make inferences against non-labeled products, thus offering most of the benefits a coercive policy might bring.
Assorted links
1. Another view of zero MP workers.
2. New paper on racial inequality, and also here.
3. What are consumers spending more, and less, on. Read also the discussion of aggregate expenditures.
4. More evidence of labor market mismatches.
5. Via numerous MR readers, alleged proof that P = NP. Here is one skeptic.
How economists (and how many) advise the President
Keith Hennessey serves up a first-rate post; to excerpt it would diminish the impact. Read the whole thing.