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Readers will not be surprised to know that I am not normal.  Indeed, I have not been normal for a long time as this post from 4 years ago attests:

Roosevelt and the Great Depression

I was amused to see Conrad Black writing with shock:

Jim Powell of the Cato Institute (cited approvingly in a recent column by Robert L. Bartley) argues in a new book that FDR actually prolonged the Depression!

Of course, Powell is correct. Imagine, increasing the power of
unions to strike and raise wages during a time of mass strikes and mass
unemployment. Imagine thinking that cartelizing whole industries
thereby raising prices and reducing output could improve the economy.
Not everything Roosevelt did was counterproductive – he did end
prohibition (although in order to raise taxes) – but plenty was and
worst of all was the uncertainty created by Roosevelt’s vicious attacks
on business. (See, for example, the work of Bob Higgs especially this important paper and historian Gary Dean Best’s overlooked classic Pride, Prejudice and Politics.)
Business investment failed to recover because business people
legitimately feared a regime change like that which had occured in
Germany and Italy. Sound extreme? Roosevelt himself threatened/promised
this in his first inaugural:

…if we are to go forward, we must move as a trained and
loyal army willing to sacrifice for the good of a common discipline,
because without such discipline no progress is made, no leadership
becomes effective. We are, I know, ready and willing to submit our
lives and property to such discipline, because it makes possible a
leadership which aims at a larger good… I assume unhesitatingly the
leadership of this great army of our people dedicated to a disciplined
attack upon our common problems….in the event that the Congress shall
fail to take one of these two courses, and in the event that the
national emergency is still critical, I shall not evade the clear
course of duty that will then confront me. I shall ask the Congress
for… the power that would be given to me if we were in fact invaded
by a foreign foe.

Michael Elsby says no.  In his view, if downward nominal wage stickiness is a potential problem, the relevant class of firms will simply start workers off at a lower nominal wage, raising it over time as need be.  The result will be "wage compression."

Elsby also claims that the Phillips curve trade-off between inflation and unemployment is not stronger at low levels of price inflation.  That suggests that nominal wage rigidity doesn’t much matter at the macro level.  If it did, proximity to that zero nominal cut point ought to boost the benefits of inflation, but it doesn’t seem to.

I am surprised by this argument, but I don’t (yet?) see reason to reject it.

For a few weeks twice a year, after Ramadan and before Christmas,
thousands of Lebanon’s young men return from jobs abroad – and run
smack into one of the world’s most aggressive cultures of female
display.  Young women of means have spent weeks primping and planning
how to sift through as many men as possible in the short time
available.  The austere month of Ramadan ended a week ago.

The
country’s high rate of unemployment pushes the young men to seek work
elsewhere, sometimes in Western countries like France and Canada, but
mainly in the United Arab Emirates, Saudi Arabia and the other oil states on the Persian Gulf.  The women, inhibited by family pressures, are generally left behind.

MR readers will not be shocked to learn these women strongly prefer the Lebanese men with foreign jobs and foreign incomes; here is the full story of competition and rent exhaustion.

My simple theory of where the women are attractive has two variables: income inequality, and the willingness of wealthier men to marry beautiful women from the lower income and social classes.  Women then compete for lucrative marriage prizes.  That puts Cuba (the wealthy men are the tourists) and Brazil near the top of the list, where they belong.  New York City isn’t bad, and this mechanism won’t hurt China either.

It’s common to be told that a problem
with the GDP statistic is that natural disasters increase measured GDP. Sadly, even some textbooks say this but as a
general matter it’s false. The broken
windows fallacy is a fallacy for measured as well as real GDP because the money
spent on new windows would have been spent on other goods and services.

Imagine that you are your friends are going to see a jazz
concert but on your way to the concert you have a little disaster, a fender
bender. Instead of seeing the show, you
and your friends have a miserable time waiting for the tow truck to come to
have your car fixed. Spending on the tow
truck and the auto repair counts as
GDP but it does not add to GDP
because it is counter-balanced by a decrease in spending on jazz, wine and cheesecake. Nothing Tyler says (see above) about
gross substitutability changes this fact.

Consider a bigger disaster, the 9/11 attack. First, the point already mentioned, the
resources used in the cleanup count as GDP but don’t add to GDP to the extent
that they would have been employed on other projects. Now it is true that some of the workers could
work overtime which they otherwise would not – this would tend to increase
measured GDP more than real GDP since leisure is not measured in the national
income and product accounts. Even this
factor, however, must be balanced against the overwhelming fact that the
destruction of the twin towers meant that tens of thousands of the most
productive people in the United States were forced into unemployment or death. Since GDP can also be measured as the sum of wages, rents, interest etc.
the immediate effect of all the unemployed and dead was to reduce GDP. Similarly, Hurricane Katrina has destroyed
more jobs in New Orleans than it
has added (and not all the added jobs represent real additions) hence the
Hurricane reduced measured and real GDP.

Also it is not true, as some sources claim, that destroyed
resources don’t count in the NIPA statistics – firms and the government count at
least some (but not all) destroyed resources as depreciated capital and thus measured Net Domestic Product automatically decreases with a disaster.  (n.b. corrected from earlier where I had said GDP instead of NDP).

Tyler asks “if a new hotel is
built, why should the gdp consequences depend on whether the lot had always
been vacant or a previous hotel on that lot was destroyed by a storm?” Answer: it doesn’t. In neither case can you assume that GDP goes
up. GDP is analogous to an individual’s
expenditures on goods and services. If Tyler buys a new CD does that raise Tyler’s
expenditures? Not if it doesn’t raise
his income. If all you did to measure
GDP was to count new hotels, new shopping malls, new spending then you would
far over-estimate GDP. GDP is a net
concept you have to count all expenditures precisely because some of the new
spending is offset by reduced spending elsewhere in the economy. It’s only after you have totaled that you can
calculate the increase in GDP.  (Note also Tyler’s error, if the new CD doesn’t represent a net increase in expenditures it can’t increase income on net either.)

If you follow through on the false logic you will
find yourself saying crazy things like crime increases GDP because of the money that people spend on locks. Of course, locks count as GDP but if people
weren’t buying locks they would be buying other goods so locks don’t add to GDP. GDP measures production it doesn’t measure
how production contributes to happiness.

There are plenty of problems with the GDP statistic and Tyler and I agree
that it’s conceivable that through a Keynesian effect or intertemporal substitutability
of labor that GDP could rise from a natural disaster but for this to work is
has to outweigh all the effects that I have listed and this is unlikely. Thus what we should teach our undergrads is
that measured and real GDP falls with a natural disaster.

Dani Rodrik reports:

South Africa has undergone a remarkable transformation since its
democratic transition in 1994, but economic growth and employment
generation have been disappointing.  Most worryingly, unemployment is
currently among the highest in the world. While the proximate cause of
high unemployment is that prevailing wages levels are too high, the
deeper cause lies elsewhere, and is intimately connected to the
inability of the South African to generate much growth momentum in the
past decade.  High unemployment and low growth are both ultimately the
result of the shrinkage of the non-mineral tradable sector since the
early 1990s.  The weakness in particular of export-oriented
manufacturing has deprived South Africa from growth opportunities as
well as from job creation at the relatively low end of the skill
distribution.  Econometric analysis identifies the decline in the
relative profitability of manufacturing in the 1990s as the most
important contributor to the lack of vitality in that sector.

Here is a non-gated version of the paper.  The bottom line is that South Africa is de-industrializing. 

Edmund Phelps.  Here is the announcement from Sweden. 

Here is his autobiography.  He was born in Chicago in 1933 and now teaches at Columbia.  Here is his CV, and here is another version.  Here are recent papers.  His Wikipedia entry is a short stub, but watch it grow.

Here is his summary of his research.  Here is another good summary of his work.  This summary, from Sweden, is the best and most comprehensive, albeit more technical.

His main contribution is a better understanding of the Phillips curve and the dynamics of short-run unemployment and the concept of the natural rate of unemployment.  He gave the Phillips curve microfoundations and developed the "expectations-augmented Phillips curve."  As the name suggests, the level of inflationary expectations matter for how money will influence output.

Here is his memoir on developing the idea of the natural rate of unemployment.  His most influential 1960s work suggested that economies possess a natural rate of unemployment, monetary policy can reduce unemployment only temporarily (NB: in his view this is a conclusion, and should not be an axiom in economic models), monetary policy can reduce unemployment temporarily, and Keynesian economics should not treat the rate of unemployment as arbitrarily at the whim of monetary and fiscal policy.  He was also concerned with how the natural rate of employment can change over time; here is his 1997 paper on that topic.

The evolution of Phelps’s thought on how money can matter is complex.  His later work stresses monetary non-neutrality, mostly through non-rational expectations and non-synchronized wage and price setting.  His work in the 1980s focused on what the concept of rational expectations means in such complex environments.   

Do not assume that early Phelps and late Phelps are saying the same things or arguing against the same opponents.  Sometimes it is argued that he redefined macroeconomics twice.  After criticizing Keynesianism, he later turned against the "rational expectations"  point of view.  He is a complex thinker, although it can be hard to divine his "bottom line."  He fails to fit inside the "macroeconomics boxes" that have developed since the early 1980s, namely real business cycle theory vs. neo-Keynesianism.

Phelps’s work was considered revolutionary in the 1960s, though the subsequent work and influence of Milton Friedman have brought related ideas into the mainstream some time ago.

He also has done work on economic justice and how a Rawlsian maximin analysis might modify the idea of a zero rate of marginal taxation on top earners, as had been suggested by James Mirrlees.  Phelps believes that considerations of justice and distribution are important, and neglected, in economic thinking.  Once he had a piece in the Journal of Philosophy on ideas of justice in public finance.

He also wrote some well-known papers on what intergenerational justice means, the optimal accumulation of capital, and whether those allocations will prove sustainable and consistent over time.  He asks what kind of principles should govern how much capital we should leave for the next generation.  His 1961 work on capital theory formulated the notion of a "golden rule" of capital accumulation.  It asked what savings rate would maximize per capita income on an ongoing basis.  The concepts behind this work remain important for work on capital accumulation and also the sustainability of natural resource use and environmental policy.  Phelps also generated the counterintuitive result that the savings rate can be too high, and that all generations could be better off with a lower savings rate.  He does not, however, seem to think that this latter idea is policy-relevant.  The best summary of this work on capital theory is here, scroll through a bit.

Lately he has been working on the possibility of subsidies for hiring low-wage labor and Eastern European transitions.  Here is his book on wage subsidies.  Here is a more popular Phelps piece on wage subsidies.  He has also done work on the structural dynamics of economies and the underlying factors behind economic innovation.  Here is an early Phelps paper on technological diffusion; surprisingly it is his most frequently cited work according to scholar.google.com.  He looked to education and population size as key factors driving the rate of economic growth; this piece is a precursor of later work on endogenous growth theory.

Phelps also wrote a 1972 paper on statistical discrimination, one of the earliest formal economic treatments of that topic.

Here is Phelps on Project Syndicate, the link offers numerous essays on current events.  The European malaise stems from lack of dynamism.  He opposed the Bush tax cuts.  Here is Phelps on the rise of the West and the need for humane capitalism.  He has a broadly classical liberal slant but has adopted the modern liberal idea that distribution requires government intervention into labor markets and other parts of a modern economy.  He has a strong concern with the moral foundations of a free society.

Here are his cites on scholar.google.com.  4600 is a relatively low number for a Nobel Laureate.  Vernon Smith for instance has over 40,000.  In part this relatively small number reflects the older nature of Phelps’s major contributions, and that often his ideas have been absorbed but without citation.  Furthermore Phelps does not always write within the context of the most contemporary debates.

Over the last twenty years Phelps has spent a great deal of time in Europe.  In general his European influence and reputation is stronger than in the United States.

My take: It is hard to argue with this pick.  It is a good selection.  His 1960s macro work was true, important, and extremely influential.  The capital theory work endures and provides a foundation for subsequent theory.  The overall scope is impressive, and Phelps’s concerns never strayed far from the real world.

But Phelps is not an economist who has influenced my own thinking much if at all.  His major contributions were absorbed, and were standard fare, by the time I was a young’un.  For instance I drunk the same macro milk through the writings of Milton Friedman.  I find him to be a murky writer, and often he is frustrating to read and hard to pin down.  His advocates would characterize him as a "rich" thinker.

What this Prize means: The big questions still matter.  Unemployment, economic growth, labor markets, capital accumulation, fairness, discrimination, and justice across the generations are indeed worthy of economic attention.  Phelps contributed to all of those areas.   Normative questions matter.  Relevance and breadth triumph over narrow technical skill.

Addendum: The U.S. has now won six Nobel Prizes in a row, but I bet we don’t get the Peace Prize this year.

MaxSpeak is pushing a letter from economists, already signed by notables Alan Blinder, Clive Granger, Rebecca Blank and others, to raise the minimum wage.  Don’t worry, I won’t bore you with the usual story about unemployment.  A small increase in the minimum wage will have only a small unemployment effect, nuff said.  Nevertheless, parts of the letter strikes me as absurd.  The letter says, for example, that "The minimum wage is also an important tool in fighting poverty."  Rubbish.  But don’t take my word for it. 

The minimum wage is a blunt instrument for reducing overall poverty, however, because many minimum-wage earners are not in poverty and because many of those in poverty are not connected to the labor market.  We calculate that the 90-cent increase in the minimum wage between 1989 and 1991 transferred roughly $5.5 billion to low-wage workers…. an amount that is smaller than most other federal antipoverty programs, and that can have only limited effects on the overall income distribution.

The source? Card and Krueger in Myth and Measurement (p.3).

The letter also states that most of the people earning the minimum wage are adults.  Most workers are adults so this is hardly surprising.  What is more surprising is that 25% of the workers earning the minimum wage are teenagers, even though teenagers are a much smaller percent of the workforce.  In addition, over half the workers earning the minimum wage are younger than 25.  The letter can spin things how it wants but it would be more informative to say that most of the workers earning the minimum wage are young workers who with a little age and experience would have their wages increased in anycase.

That brings me to a second strange statement, the idea that "the minimum wage helps to equalize the imbalance in bargaining power that
low-wage workers face in the labor market."  One wonders how bargaining power is defined.  Do these economists really believe that the fat cats are getting rich slurping up surplus from the low-wage workers?  If you measure bargaining power as a difference between wages and marginal productivity it is surely high wage workers who lack bargaining power.

The real rebuke, however, to the bargaining power idea is this: a lot of people earning the minimum wage are teenagers but more than 90 percent of working teenagers earn more than the minimum wage.  Either most teenagers are very good bargainers or wages depend less on "bargaining power" than on productivity.  Either way the letter is confused.

The debate over the minimum wage is more about rhetoric than reality. 

Via Brad DeLong:

Income inequality soared in the late 1990s.  Why?  A decomposition by
region and sector can tell you pretty much exactly: it was the tech
bubble and the stock boom. Capital gains and stock options
realizations.  Much of it in just five places in the whole country:
Manhattan, King County WA, and Santa Clara, San Francisco and San Mateo
Counties, CA.  Take out those five, as Travis Hale and I showed in a
paper, and the between-counties component of income inequality (which
isn’t all of it, but it isn’t chopped liver, either) doesn’t go up at
all.

Meanwhile, earnings inequality went down in the same time.  Why?  Full
employment.  This component of inequality is closely tied to utilization
rates and unemployment.  It varies with hours worked, and overtime
earned, more than anything else.  It is, in short, a macroeconomic
phenomenon.

Addendum: Here is more wisdom from that blog, on welfare reform, an overrated event in terms of its significance, though I will demur on the minimum wage question.

Gayle Allard and the ever-interesting Peter Lindert write:

How have labor market institutions and welfare-state transfers affected
jobs and productivity in Western Europe, relative to industrialized
Pacific Rim countries?  Orthodox criticisms of European government
institutions are right in some cases and wrong in others.  Protectionist
labor-market policies such as employee protection laws seem to have
become more costly since about 1980, not through overall employment
effects, but through the net human-capital cost of protecting senior
male workers at the expense of women and youth.  Product-market
regulations in core sectors may also have reduced GDP, though here the
evidence is less robust.  By contrast, high general tax levels have shed
the negative influence they might have had in the 1960s and 1970s. 
Similarly, other institutions closer to the core of the welfare state
have caused no net harm to European jobs and growth.  The welfare
state’s tax-based social transfers and coordinated wage bargaining have
not harmed either employment or GDP.  Even unemployment benefits do not
have robustly negative effects.

These are underexplored but not easy to explore questions; here is the paper.

I would feel better if Ireland were removed from the data set, since a booming economy can afford many sins.  After this adjustment, coordinated bargaining wouldn’t look as good.  And when we calculate average productivity, should not the unemployed count for "zero productivity," or even negative, in the appropriate measure?  I believe that tax rates matter, but only at particular thresholds.

I also would like to argue the following: "Don’t think we can pick and choose the egalitarian interventions which turn up as the very best in econometric studies.  We are unlikely to know in advance which policies are the least harmful and politics is even less likely to turn those proposals into legislation." 

But would I be committing The Libertarian Vice?

In a shocking op-ed in the NYTimes two well known liberals, Michael Dukakis and Daniel Mitchell (a former price-control Czar), acknowledge that the minimum wage creates unemployment.  Nevertheless, they are in favor of raising the minimum wage.  Why?  Because it will create even more unemployment among immigrants than among natives.

The mean-spirited, Machiavellian nature of their op-ed is chilling but I will give Dukakis and Mitchell this, their logic is impeccable.  The minimum wage creates unemployment among the low-skilled.  As a result, the minimum wage tends to create disproportionate unemployment among teenagers and young African Americans.

Similarly, since many immigrants have lower-skills than natives, Dukakis and Mitchell are correct that a well-enforced minimum wage will put immigrants out of work reducing the pull of the American economy to workers in foreign countries.

I wonder if the NYTimes would have printed an op-ed that advocated minimum wages as a way of creating unemployment among
African Americans and raising white wages?

(Long-time readers will know that the original proponents of the minimum wage had in mind exactly that so Dukakis and Mitchell are true progressives.)

My request for requests drew this topic.  I have two simple suggestions:

1. Use a multiplier of 1, not three or four.  The so-called multiplied funds are just sloshing around from one sector to another.  But if your economy is in deep Keynesian unemployment and the project is relatively large, use a multiplier of 1.3 to account for aggregate demand effects.

2. Compare your studied project to the best available alternatives.  Have you been hired to assess the benefits of a new stadium?  Perhaps you think the stadium would be better than the status quo.  But also list the forty-three projects that would be better than a stadium.

I am not aware of any economic impact studies that follow such procedures.  Too often such studies are political marketing rather than an attempt to discover truth.  Here is my previous post on the topic.

It’s interesting how new ideas are often tried first in out-of-the-way places.  Here’s Pablo Halkyard from the World Bank’s Private Sector Development Blog.