Results for “zero marginal product” 119 found
Libra and remittances
Dante Disparte, as interviewed by Ben Thompson ($$, but you should subscribe to Ben):
One example is the use case of international money transfers or remittances. Globally, the remittance cash flow is projected to be about $715 billion in 2019, and on average…you are seeing between seven and ten percent of transfer costs, and in some instances much higher than that in the teens. For a product and an outcome from the sender and receiver point of view, that is not only very slow, it often takes a few days to clear on the receiving end, it is [extremely expensive]. There are direct payment rails that are just technology powered that do a lot in terms of advancing efficiency, but pre-blockchain it would have been very, very hard to conceive of a network of international payments that could do that at near zero cost instantaneously while at the same time not sacrificing the type of ledgering and transaction information that would enable the world to begin to do that securely. So that would be one amazing use case that could put billions and billions of dollars back into the market by eliminating as many of these fees as possible, while at the same time putting billions of dollars into the hands of people around the world in real time.
Here is my current understanding of Libra/Calibra, at least within this particular context, noting again that my understanding may be wrong or incomplete. These transfers would not go through the current banking system as we know it, but rather through a blockchain with say 100 or so (quite legitimate) participants enforcing some kind of “proof of stake” standard. Some form of “proof of stake-equivalent of mining fees” would have to be paid, either explicitly or implicitly, and those arguably could be much lower than current remittance costs, noting that the actual operation of proof of stake in this setting remains to me murky. Still, it would largely avoid the current mining fees associated with Bitcoin. On net, one is trading in the current regulatory and clearing and Western Union branch costs for these future proof of stake costs. Do you think the Libra Association can run a proof of stake system for less say than $100 billion?
“But don’t you have to convert your Libras back into mainstream fiat currencies?” Well, maybe you might, but that is simply the cost of showing up at the relevant financial institutions and claiming redemption. Those costs also could be much lower than the current fees associated with remittances. What is sent through the blockchain network simply can be Libras, as I understand it, with varying assumptions on how much people will hold Libras rather than converting them.
To use a historical analogy, think of this as substituting “the transfer of paper claims to gold” for “claims to gold,” but in a one hundred percent reserves setting. It can be (and indeed was) much cheaper to send around the paper than the gold, and yet the paper still was a claim to the gold. The Libra is a kind of parallel, redeemable currency, legally not within standard banking systems, but still redeemable in terms of mainstream fiat currencies which are within standard banking systems. “Create a synthetic claim which can be traded more cheaply” would be my version of the ten-word slogan.
Another slightly wordier slogan might be: “let’s actually separate the means of payment from the medium of exchange by creating a new synthetic asset, because those two things actually should not be the exact same asset.”
Of course it still remains to be seen in which countries regulators will allow this to happen. How persuasive is the promise of one hundred percent reserves? I don’t mean to speak for Libra/Calibra here, but I believe they are suggesting (or implying?) that the proof of stake system for making and validating transfers could in essence enforce relevant regulations against money laundering, illegal transfers, and the like.
It is a quite separate (but possible) claim to believe that libras could serve as an effective medium of exchange at a retail level, and perhaps I will cover that in a separate post. That would mean that both the medium of exchange and means of payment should be new and different assets, a much stronger claim.
Here are my earlier questions about Libra, with responses.
Gross Domestic Error
Pierre Lemieux at EconLib catches a surprising error from The Economist which wrote this week:
There was some head-scratching this week, as data showed Japan’s economy growing by 2.1% in the first quarter at an annualised rate, defying expectations of a slight contraction. Most of the growth was explained by a huge drop in imports. Because they fell at a faster rate than exports, gdp rose.
Nope. Imports do not influence Gross Domestic Product, at least not in the mechanical way suggested by The Economist. Here’s how Tyler and I explain it in Modern Principles:
It’s important to remember the Domestic in Gross Domestic Product. When we add C+I+G we are adding up all national spending but some of that spending was on imports, goods that were not produced domestically. So we subtract imports from national spending to get national spending on domestically produced goods, C+I+G – Imports.
…Here is a mistake to avoid. The national spending approach to calculating GDP requires a step where we subtract imports but that doesn’t mean that imports are bad for GDP! Let’s consider a simple economy where I, G, and Exports are all zero and C=$100 billion. Our only imports come from a container ship that once a year delivers $10 billion worth of iPhones. Thus when we calculate GDP we add up national spending and subtract $10 billion for the imports, $100-$10=$90 billion. But suppose that this year the container ship sinks before it reaches New York. So this year when we calculate GDP there are no imports to subtract. But GDP doesn’t change! Why not? Remember that part of the $100 billion of national spending was $10 billion spent on iPhones. So this year when we calculate GDP we will calculate $90 billion-$0=$90 billion. GDP doesn’t change and that shouldn’t be surprising since GDP is about domestic production and the sinking of the container ship doesn’t change domestic production.
We continue:
If we want to understand the role of imports (and exports) on GDP and national welfare. We have to go beyond accounting to think about economics. If we permanently stopped all the container ships from delivering iPhones, for example, then domestic producers would start producing more cellphones and that would add to GDP but producing more cellphones would require producing less of other goods. If we were buying cellphones from abroad because producing them abroad requires fewer resources then GDP would actually fall—this is the standard argument for trade that you learned in your microeconomics class. The standard answer could change, however, if there were lots of unemployed resources, an issue we will discuss in Chapter 32 and later chapters. The point we want to emphasize here is not whether trade is ultimately good or bad but rather that Y+C+I+G+NX is an accounting identity that can’t by itself answer this question.
*Bull Shit Jobs: A Theory*
That is the new and entertaining book by David Graeber, probably you already have heard of it. Here is a brief summary.
Coming from academia, I am sympathetic to the view that not everyone is productive, or has a productive job. And my ongoing series “Those new service sector jobs…” is in part reflecting the wonder of the market in providing so many obscure services, but also in part a genuine moral query as to how many of these activities actually are worthwhile. You are supposed to have mixed feelings when reading those entries, just as with “Markets in Everything.”
Still, I think Graeber too often confuses “tough jobs in negative- or zero-sum games” with “bullshit jobs.” I view those as two quite distinct categories. Overall he presents the five types of bullshit jobs as flunkies, goons, duct tapers, box tickers, and taskmasters, but he spends too much time trying to lower the status of these jobs and not enough time investigating what happens when those jobs go away.
He doubts whether Oxford University needs “a dozen-plus” PR specialists. I would be surprised if they can get by with so few. Consider their numerous summer programs, their need to advertise admissions, how they talk to the media and university rating services, their relations with China, the student lawsuits they face, their need to manage relations with Oxford the political unit, and the multiple independent schools within Oxford, just for a start. Overall, I fear that Graeber’s managerial intelligence is not up to par, or at the very least he rarely convinces me that he has a superior organizational understanding, compared to people who deal with these problems every day.
A simple experiment would vastly improve this book and make for a marvelous case study chapter: let him spend a year managing a mid-size organization, say 60-80 employees, but one which does not have an adequately staffed HR department, or perhaps does not have an HR department at all. Then let him report back to us.
At that point we’ll see who really has the bullshit job.
One estimate of the rate of return on pharma
…return on investment in pharma R&D is already below the cost of capital, and projected to hit zero within just 2 or 3 years. And this despite all efforts by the industry to fix R&D and reverse the trend.
That is from Kelvin Stott. Keep in mind this is during a time when global demand has been growing, which suggests the supply side is all the more constipated.
The Rise of Market Power?
I am referring to the new Jan De Loecker and Eeckhout paper that is starting to get some buzz (ungated versions here). Their major result, quite simply, is:
In 1980, average markups start to rise from 18% above marginal cost to 67% now.
That sounds like big news, and probably it is. But I don’t think the authors are doing enough to interpret their results. There are two ways these mark-ups go could up: first there may be more outright monopoly, second there may be more monopolistic competition, with high mark-ups but also high fixed costs, and firms earning close to zero profits. The two scenarios have very different distributional implications, and different policy implications as well.
Consider my local Chinese restaurant. Maybe the fixed cost of a restaurant has gone up, due to rising rents and the need to invest in information technology. That can mean higher fixed costs, but still a positive mark-up at the margin. The marginal meal ordered there probably is taken from food inventory, representing almost pure profit. They are happy when I walk in the door! Yet they are not getting super-rich, rather they are earning the going risk-adjusted rate of return.
Now, if the economy is moving more toward monopolistic competition, higher mark-ups don’t explain other distributional changes in the macro data, such as the decline of labor’s share, as cited by the authors.
The authors consider whether fixed costs have risen in section 3.5. They note that measured corporate profits have increased significantly, but do not consider these revisions to the data. Profits haven’t risen by nearly as much as the unmodified TED series might suggest. I do see super-high profits in firms such as Google and Facebook, however. Those companies for the most part have lowered margins compared to the status quo ex ante when the relevant service cost infinity. “Mark-ups over time” measurements become very tricky when new products are being introduced.
The authors argue that the rising value of the stock market (plus dividends) is further evidence for rising profits. Maybe, but keep in mind that the public market is less and less representative of corporate America. It also has significant survivorship bias, based on size, as superfirms are rising and the number of small and mid-sized companies listing has plummeted since the 1980s. I suspect what has really happened is that large firms are way more profitable, partly because of globalization, not because they are doing such a major rip-off of American consumers. In most areas we have more choice, maybe much more choice, than before. I would be very surprised if it turned out that most good ol’ normal mid-sized service sectors firms saw a nearly fourfold increase of the profit rate relative to gdp since 1980, as the authors are suggesting might be true for the American economy as a whole. Health care, maybe, I grant that.
Or consider old-style manufacturing. The authors report that “Markups have gone up in all industries…” This is in an environment where numerous other highly credible empirical pieces, backed also by good anecdotal observation, cite rising competition from Chinese and other global suppliers. How does that all square? I side with David Autor on that one, yet it is reported that those mark-ups, in the sectors where American business now competes with the Chinese, are rising as measured. I am worried the paper does not at all try to square this tension. Surely it means the measures are significantly wrong in some way.
Similarly, the time series for manufacturing output is a pretty straight upward series, especially once you take out the cyclical component. If there is some massive increase in monopoly power, where does the resulting output restriction show up in that data? Once you ask that simple question, the whole story just doesn’t add up.
Or ask yourself a simple question — in how many sectors of the American economy do I, as a consumer, feel that concentration has gone up and real choice has gone down? Hospitals, yes. Cable TV? Sort of, but keep in mind that program quality and choice wasn’t available at all not too long ago. What else? There are Dollar Stores, Wal-Mart, Amazon, eBay, and used goods on the internet. Government schools. Hospitals. Government. Did I mention government?
I do think concentration in the American economy is up modestly, as I argue in The Complacent Class, and probably profits are up too, including relative to gdp. Hospitals are the most significant practical problem in this regard, and again that squares with the anecdotal evidence. As it stands, I don’t yet see that this paper has established its central claim that measured rising mark-ups indicate truly higher profits in a significant way.
Addendum: The section on macroeconomic implications I think is premature (they cite the declining labor share, declining capital share, decline of low skill wages, declining LFP, declining labor market flows, declining migration rates, and slower productivity growth). They should try to calibrate this, to see if the postulated effects possibly might work out as suggested, and by the way RBC research really is useful. And timing matters too! Given the mechanisms the authors cite, what kind of timing lags are possible? It would seem for instance that when mark-ups rise, real wages fall right then and there, due to the higher prices. Is that what the data show? Do the productivity growth effects, and their weird timing with 1973 and 1995-2004 breaks, fit into the same framework? And so on. I would be very surprised if the pieces fit together in even a crude sense.
And here are remarks by Rohan Shah. I thank Alex and Robin for useful comments and discussion, of course without implicating them.
How to think about charity: my response for Jeff Bezos
I was sent an email asking what I myself thought of the recent Jeff Bezos charity query, and that email contained a number of questions. I’m not at liberty to reproduce it, but with some minor edits I think you will be able to make sense of my responses, as given here:
- Since the marginal value of extra consumption by him (or even far less wealthy people) is essentially zero, there are many “good enough” charitable ventures.
- The rate of abandonment is high for charitable support.
- Often the key is for a super-productive person, with lots of stimulating opportunities at his or her disposal (if only running the status quo businesses, or say meeting other famous people), is to find something charitable that will hold his or her interest. But how can it possibly be as fun as the earlier successes and extending them?
- I disagree with your descriptions of the philanthropic strategies offered in your email. I suspect that most or all are attempted examples of my #3, namely what is actually short-run thinking.
- They are all super short-term strategies, once the attention constraint is measured.
- In this regard, there is nothing strange about Bezos’s plea and expressed desire to do some good in the short term, except its transparency.
- Perhaps earlier philanthropists, such as Carnegie, had many fewer opportunities for fun, if only because their times were so primitive and backward. That made it easier for them to keep up enthusiasm for truly long-term projects.
- I still think the real opportunities are for *true* long-run thinking, admittedly subject to the constraint that it keeps one’s short-term interest up.
- Cultivating one’s own weirdness, or having a lot of it in the first place, is one way to ease the congruence I mention in #8.
- Even truly smart and wise people often “give to people” rather than to projects. This is for one thing a strategy for keeping one’s own interest up.
So to tie this all back in to Jeff Bezos, I don’t know what he should do. I don’t know him personally, nor do I even have an especially strong knowledge of the second-hand sources about him.
But I think he is exactly on the right track to be thinking about what motivates him personally, and what is likely to hold his attention. And I don’t think his approach is any more “short term” than most of the other philanthropy of the super-rich.
Where do sheepskin effects come from?
From a loyal MR reader:
I’m very curious about the macroeconomics of the sheepskin effects. Traditional productivity forecast research tends to assume the wage premium is entirely human capital. Eg, Bosler/Daly/Fernald/Hobijn use a mincer equation with five education dummies http://www.frbsf.org/economic-research/files/wp2016-14.pdf Jorgensen’s approach dividing workers into types also assumes this is not an issue.
If sheepskin effects are purely relative status effects, then the impact on total output and income should be zero, right? This implies increasing educational attainment will have a much smaller impact on productivity and output than typical productivity forecasts imply.
But it seems to me like showing you are “high ability”, if that’s all it does, makes you able to be slotted into higher ability jobs, and that this won’t simply give you a leg up on other workers but increase the number of higher ability jobs filled.
Anyway, I’m sort of thinking out loud but would be curious to read a blog of your thoughts on this, so consider this a bleg!
In the simplest Spence signaling model, the output goes to workers, and if one more worker sends the signal and boosts his or her wage, the non-signaling workers will receive an equal amount less. That is an equilibrium condition, but it makes less sense as an account of dynamics. As a practical matter, it’s not clear why the employers should revise their opinion downwards for the marginal products of these less educated workers. You could say that competition makes them do it, but it’s tough to have good intuitions about an equilibrium that is hovering between/shifting across a varying degree of pooling and separating.
As a more general extension of Spence, a richer model will have market power and payments to capital and labor. If one more worker finishes school, that worker is paid more and the higher wage serves as a tax on production. Yet it is a tax the boss does not perceive directly. The boss thinks he is getting a better worker for the higher wage, but in the counterfactual with more weight on the pooling solution, the boss would have hired that same person, with the same marginal product, at a lower wage. The “whole act of production” will be and will feel more costly, including at the margin, but the boss won’t know how to allocate those costs to specific factors. By construction of the example, the boss however will think that the newly educated laborer is the one factor not to be blamed. So he’ll cut back on some of the other factors, such as labor and land. Labor in the company will be relatively more plentiful, and the marginal product of labor in that company will fall. So the incidence of a boost in the sheepskin effect falls on the land and capital that have to move elsewhere, plus to some extent the declining marginal products and thus wages for the remaining workers in the firm under consideration. Note that outside firms are receiving some influx of capital and land, and so in those firms the marginal product of labor and thus its wage will go up somewhat.
Or so it seems to me. The trick is to find some assumptions where the hovering between/moving across a varying degree of pooling vs. separation is not too confusing.
Who wants more coal company pollution in water streams?
That is one of the news stories of the end of this week, namely that the Trump administration eliminated a previous Obama administration ruling on this, see Brad Plumer for details. That sounds horrible, doesn’t it?
I took a look at the cost-benefit study (pointed out on Twitter by Claudia Sahm, or try this link, and please note it was prepared by consultants, not by the government itself). I spent some time with these hundreds of pages, and they are not always easy to parse (my apologies to the authors for any misunderstandings). Anyway, I quickly came upon this and related passages (p.45, passim):
In summary, the Final Rule is expected to reduce employment by 124 jobs on average each year due to decreased coal mined while an additional 280 jobs will be created from increased compliance activity on average each year.
Of course those “newly created jobs” are a cost, not a benefit, and should be switched to the other side of the ledger. That is not what this study did. And if I understand p.4-31 correctly, this study is using a multiplier of about 2. This approach is completely wrong, and if it were right Appalachia would love a lot of this coal regulation for its job-creating proclivities, but of course the region doesn’t.
The claimed annual benefit from the changes, from the side of coal demand (not the only effects), is $78 million, fairly small potatoes. Note the study doesn’t consider what are commonly the most significant costs of regulation, namely distracting the attention of managers and turning companies into legal and regulatory cultures rather than entrepreneurial cultures. The study does mention uncertainty costs from regulation, although I could not find any quantification of them.
Furthermore, I am not able to scrutinize the introductory section “SUMMARY OF BENEFITS AND COSTS OF THE STREAM PROTECTION RULE” and figure out the final assessment of net benefits for the rule and where that assessment might come from. I find that worrisome, and paging through the study did not put my mind at ease in this regard.
Now, I know how this works. Many of you probably are thinking that we need to do whatever is possible to attack or shrink the coal industry, because of climate change. Maybe so! Maybe we want to stultify the coal companies, for reason of a greater global benefit. But a) there is still a role for evaluating individual policy changes by partial equilibrium methods and reporting on those results accurately, and b) “putting down the coal companies,” as you might a budgie, is not what the law says is the proper goal of policy.
Imagine holding an attitude that places the Trump administration as the actual defenders of the rule of law! Besides, don’t get too worked up (p.174):
Our analysis indicates that there will be no increase in stranded reserves under any of the Alternatives.
There is, however, a very small decline in annual coal production (pp.5-20, 5-21) from the rule that had been chosen. Water quality is improved in 262 miles of streams (7-26), in case you are wondering, that’s something but hardly a major impact and that almost entirely in underpopulated parts of the country. All the media coverage I’ve seen implies or openly states a badly exaggerated sense of total water impact, relative to this actual estimate (are you surprised?). Returning to the study, there is also no region-specific estimate of how large (or small) those water benefits might be, at least not that I could find (again, maybe I missed it, but I did find some language suggesting that no such estimate would be provided).
Chapter seven calculates the benefits of the resulting carbon emissions, but after reading that section my best estimate for those marginal benefits is zero, not the postulated $110 million. The “social cost of carbon” is actually an average magnitude, and it does not measure benefits from very small changes. Again, you might think there is an imperative to consider “this policy is conjunction with numerous other anti-coal changes,” but that is not what the law stipulates as I understand it and furthermore it hardly seems that many other anti-coal regulatory changes are on the way.
If it were up to me, I would not have overturned the coal/stream regulations, and my personal inclination is indeed to fight a war on coal. But if you look at the grounds for evaluation specified by law, and examine the cost-benefit study with even a slightly critical mindset, we don’t know what is the right answer on this individual policy decision. The study outlines nine different regulatory alternatives and it is not able to conclude which is best, nor is the quantitative thrust of the study aimed toward that end.
Mood affiliation aside, to strike this regulation down, as the Trump administration has done, is in fact not an indefensible action.
On a more practical political level, Trump wishes to send a signal to Appalachian voters that he is looking out for coal and looking out for them. This is actually a very weak action, and it was chosen because for procedural reasons it was quite easy to do. The more you complain about it, the stronger it looks, and that’s probably a more important fact than any of the particular details of this study. Whether you like it or not, the coal debate is not really one that favors the Democrats.
Addendum: Here is the CRS paper, which seems to be derivative of other work, most of all this study.
Criminal Politicians
In India, a whopping 21% of the Members of Parliament have serious criminal cases against them. Why are criminals successful in politics? Writing in the FT, David Keohane reviews Milan Vaishnava’s excellent new book, When Crime Pays: Money and Muscle in Indian Politics.
Vaishnav’s main explanation for the continued electoral success of criminally tainted politicians is quite simple: They provide services the state does not.
In short, the state has failed to keep up with its voters’ expectations and that failure — of the rule of law along with many basic services — has allowed criminal politicians to serve in lieu of the state: providing protection, social welfare of a sort since the state makes it hard to get even a drivers license without paying a bribe, dispute resolution in the absence of a functioning court system etc. As Vaishnav says, the corrupt politician becomes “the crutch that helps the poor navigate a system that gives them so little access” in the first place….
In no time, Dagdi Chawl became ground zero for Mumbai’s notorious underworld. From his fortress-like compound, Daddy dispensed patronage, protection, and even justice to local residents. Journalists who came to interview Gawli wrote of the hundreds of men and women — unemployed youth, ageing widows, aspiring gangsters, and established politicians — who queued up on a daily basis in front of the iron gates of Gawli’s compound just for a few minutes of face time in the hopes of being showered with Daddy’s munificence. They came seeking building permits, ration cards, welfare payments, employment — a things the state was meant to provide but was either unable or unwilling to.
So, “a reputation as a matabhare (literally, ‘heavy handed’) person is considered to be an asset” in India because the state is so absent in so many ways.
Monday assorted links
1. “With Choi Soon-sil-gate, Park Geun-hye put the entire country into the Tyson Zone.”
2. Transmissible vaccines? (speculative)
3. Will machines run Singaporean food courts?
4. Daniel Drezner, The Ideas Industry, due out in April you can now pre-order.
5. Zombies for organ donation.
6. The flattening of the internet through video. And is it better to record reel-to-reel than digital?
Should entrepreneurs prefer a rising or shrinking population?
Adam Ozimek raises that question. You might think a growing population is obviously better for business, but it’s actually not so clear:
It’s true bigger places have advantages in terms of being able to offer a greater variety of consumer options and niches. But marginal population growth doesn’t do all that much to change the relative size of a place. A small city growing fast takes a long time to become a mid-sized city, and so forth.
Yes, a growing population means greater demand, but it also means greater supply. So if you are a lawyer, and you care about the relative scarcity of lawyers then it doesn’t really matter if the overall population is growing. It’s really about the population of lawyers relative to the rest of the population, eg customers.
If a growing population brings growing supply and demand in equal proportion, then a business person should be indifferent between growing and shrinking. Given that land prices will be falling in shrinking places, you might even think they have an advantage.
He suggests that competing for new customers may be easier than competing for already-attached customers, and thus entrepreneurs should prefer a growing population.
I say it is fixed costs and minimum scale. If population is shrinking, the marginal costs of your company typically are rising (the higher cost of competing for already-attached customers can be one example of this). With a rising population, marginal cost is falling and for sectors with reproducible outputs marginal cost will be zero or near-zero.
Of course these effects will vary across sector. In New Zealand, a small country, the lamb meat is of high quality. It is not only the proximity of the source, but this is not an increasing returns to scale sector; if you wish to sell more lamb meat, you have to raise another sheep. In contrast, a newspaper fares much better with a larger population, as does a bookstore or movie and television production.
As population shrinks in many countries, reproducible cultural enjoyments are more likely to come from abroad. The shrinking countries however will offer relatively favorable conditions for innovating domestically with high-quality raw materials, or in other words you have to visit small/shrinking countries to really enjoy what they have to offer. Like lamb meat in New Zealand. Lower land prices in shrinking countries will further boost this tendency to focus on quality raw materials production and manipulation. In other words, Italian food in Italy might stay good for a long time to come.
I’ve already argued that you should visit small countries and territories now, because their special cultures will be overwhelmed and expire more rapidly than is the case for larger units. This mechanism, outlined above, is another reason for why you really need to be there. In other words, your trip to Africa can wait, Naples beckons.
The macroeconomics of firing aversion
I am indebted to Bryan Caplan for developing and popularizing the idea of “firing aversion.” The core notion is that employers often do not wish to fire people for one of the same reasons they do not wish to cut nominal wages — it can demoralize their broader workforce. Furthermore, some bosses simply may feel squeamish about the idea of firing people they know and like.
In the old days, bosses might have enjoyed “busting heads” to keep all the workers in line, but in this softer millennial age, well firing aversion is the order of the day, if only to ease future recruitment and boost intangible capital and institutional continuity.
Now imagine a macroeconomy where firing aversion is present. At time period zero, a boss hires one hundred workers, who at the time are perceived as being of roughly equal quality and thus are offered the same wage. After a few years on the job, however, some are “keepers,” while others are being paid more than their marginal products.
Because of firing aversion, they are not fired. Because of sticky nominal wages, they also do not take a pay cut. If the economy is imperfectly competitive, and times are good, this nonetheless can be a stable equilibrium.
Now let’s say a negative shock comes along: demand, supply, maybe a bit of both, as is usually the case. At some margin these workers can no longer be carried and the firing aversion of the boss is overcome and they lose their jobs. Then, a few points:
1. They’re not getting those jobs back.
2. They’re not worth a comparable wage elsewhere in many cases.
3. Per hour productivity likely will rise, even adjusting for ex ante measures of changes in worker composition.
4. Companies won’t want to pay higher wages to lure these workers out of leisure, rather they are branded as less productive than average and properly so.
5. These workers will have to lower their wage expectations for the next job by an above-average amount. That is one reason why their reemployment may be slow. And they won’t re-enter the labor market at anything like their old wages.
6. As the economy returns to full employment, you won’t observe rising wages in the traditional sense because these workers are pulling in relatively low wages.
7. The more that Charles Murray is right in his Coming Apart, the stronger some of these effects will be. Yet none of it requires a “sudden attack of laziness.”
8. The more the employer can tell apart the quality of different workers, the slower the recovery will be and the less pro-cyclical wages will be. Arguably we have been seeing this difference at work since the G.H.W. Bush recession.
OK, now maybe you don’t buy firing aversion, fair enough. Just sub back in the traditional assumption that bosses study and scrutinize worker quality more in tough times, when revenue is tight, and you get essentially to the same place and the same conclusions as listed above. Firing aversion is simply one way of stylizing a pretty simple incentive effect, namely that the weaker workers have a better chance when cash is flush.
Addendum: How many blog posts have I read asserting “Since wages are not rising, etc., therefore various conclusions including lack of full employment, etc.”? Hundreds, I believe, mostly from the Keynesian bloggers. But in the data, real wages were never very cyclical in the first place. And in theory we should not expect much if any real wage cyclicality either. Most of all, the more employers can measure worker quality, the less cyclical real wages will be. And yes I know real wages just rose a lot (see the next blog post to come), if anything that is a sign recovery has been here for some time, not that finally recovery is arriving.
The new “free lunch” economics
…what’s happened since 2009 involves not just one, but at least five new types of voodoo:
1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD.
2. The claim that extended unemployment benefits—paying people not to work—will lead to more employment, by boosting AD.
3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible.
4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity.
5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ?
In all five cases there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against. There were 5 attempts to push wages higher in the 1930s, and all 5 failed to spur recovery. Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians. The austerity of 2013 failed to slow growth, contrary to the predictions of Keynesians. Britain had perhaps the biggest budget deficits of any major economy during the Great Recession, job growth has been robust, and yet productivity is now actually lower than in the 4th quarter of 2007.
There is more at the link. And here is Scott from the comments:
As I recall, productivity did well during the 1930s. Why? If falling AD hurts productivity, then shouldn’t productivity have done very poorly during the 1930s?
See also my earlier post “Not all complaints can be true at the same time.”
My current pet peeve is advocacy of fiscal stimulus without even bothering to consider whether the economy might be at or very close to full employment, much less considering whether the stimulus will target unemployed resources.
We do in fact need a good aggregate demand-based macroeconomics; the topic is far too important to allow it to become so politicized.
Some Good News on Organ Donation
Representative Matt Cartwright (D-PA 17th District) has introduced the Organ Donor Clarification Act. The act would:
- Clarify that certain reimbursements are not valuable consideration but are reimbursements for expenses a donor incurs
- Allow government-run pilot programs to test the effect of providing non cash incentives to promote organ donation. These pilot programs would have to pass ethical board scrutiny, be approved by HHS, distribute organs through the current merit based system, and last no longer than five years.
Importantly the legislation has been endorsed by the American Medical Association and a number of other groups including Fair Allocations in Research Foundation, Transplant Recipients International Organization and WaitList Zero.
See my piece on the organ shortage in Entrepreneurial Economics and previous MR posts for more.
John Cochrane on the safe asset shortage
I gave some comments on “Global Imbalances and Currency Wars at the ZLB,” by Ricardo J. Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas at the conference, “International Monetary Stability: Past, Present and Future”, Hoover Institution, May 5 2016. My comments are here, the paper is here
The paper is a very clever and detailed model of “Global Imbalances,” “Safe asset shortages” and the zero bound. A country’s inability to “produce safe assets” spills, at the zero bound, across to output fluctuations around the world. I disagree with just about everything, and outline an alternative world view.
A quick overview:
Why are interest rates so low? Pierre-Olivier & Co.: countries can’t “produce safe stores of value”
This is entirely a financial friction. Real investment opportunities are unchanged. Economies can’t “produce” enough pieces of paper. Me: Productivity is low, so marginal product of capital is low.Why is growth so low? Pierre-Olivier: The Zero Lower Bound is a “tipping point.” Above the ZLB, things are fine. Below ZLB, the extra saving from above drives output gaps. It’s all gaps, demand. Me: Productivity is low, interest rates are low, so output and output growth are low.
Data: I Don’t see a big change in dynamics at and before the ZLB. If anything, things are more stable now that central banks are stuck at zero. Too slow, but stable. Gaps and unemployment are down. It’s not “demand” anymore.
Exchange rates. Pierre-Olivier “indeterminacy when at the ZLB” induces extra volatility. Central banks can try to “coordinate expectations.” Me: FTPL gives determinacy, but volatility in exchange rates. There is no big difference at the ZLB.
Safe asset Shortages. Pierre-Olivier: driven by a large mass of infinitely risk averse agents. Risk premia are therefore just as high as in the crisis. Me: Risk premia seem low. And doesn’t everyone complain about “reach for yield” and low risk premia?
Observation. These ingredients are plausible about fall 2008. But that’s nearly 8 years ago! At some point we have to get past financial crisis theory to not-enough-growth theory.
I agree, here is the rest.