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*Confessions of a Sociopath*

I suspect nothing in this book can be trusted.  Still, it is one of the more stimulating reads of the year, though I have to be careful not to draw serious inferences from it.  Does its possible fictionality make it easier to create so many interesting passages?:

I can seem amazingly prescient and insightful, to the point that people proclaim that no one else has ever understood them as well as I do.  But the truth is far more complex and hinges on the meaning of understanding.  In a way, I don’t understand them at all.  I can only make predictions based on the past behavior they’ve exhibited to me, the same way computers determine whether you’re a bad credit risk based on millions of data points.  I am the ultimate empiricist, and not by choice.

The author argues that sociopaths are often very smart, have a lot of natural cognitive advantages in manipulating data, and are frequently sought out as friends for their ability to appeal to others.  It is claimed that, ceteris paribus, we will stick with the sociopath buddies, as we are quite ready to use sociopaths to suit our own ends, justly or not.  It is claimed that for all of their flaws, many but not all sociopaths are capable of understanding what is in essence the contractarian case for being moral — rational self-interest — and sticking with it.  Citing some research in the area (pdf), the author speculates that sociopaths may have an “attention bottleneck,” so they do not receive the cognitive emotional and moral feedback which others do, unless they decide very consciously to focus on a potential emotion.  For sociopaths, top down processing of emotions is not automatic.

We even learn that (supposedly) sociopaths are often infovores.  It seems many but not all sociopaths are relatively conscientious, and the author of this book (supposedly) teaches Sunday school and tithes ten percent to the church.  It just so happens sociopaths sometimes think about killing or destroying other people, without feeling much in the way of remorse.

I can also recommend this book as an absorbing memoir of a law professor and also of a Mormon outlier.  It is written at a high level of intelligence, and it details how to get good legal teaching evaluations, how to please colleagues, how to evade Mormon proscriptions on sex before marriage, and it offers an interesting hypothesis as to why sociopaths tend to be more sexually flexible than the average person (hint: think more systematically about what abnormal or weakened top-down processing of emotions might mean in other spheres of life).

The author argues that sociopaths can do what two generations of econometricians have only barely managed, namely to defeat the efficient markets hypothesis and earn systematically super-normal returns.  What does it say about me that I find this the least plausible claim in the entire book?

Here is a useful New York Times review.  Here is the author’s blog, which is about being a sociopath, or about pretending to be a sociopath, or perhaps both.  Here is the book on Amazon and note how many readers hated it.  I say they just don’t like sociopaths.

One hypothesis is that this book is a stunt, designed as an experiment in one’s ability to erase or conceal an on-line identity, although I would think a major publisher (Crown) is not up for such tricks these days.   An alternative is that a sociopath — not the one portrayed in the book — is trying to frame an innocent person as the author of the book (some trackable identity clues are left), noting that the book itself discusses at length plans to destroy others for various (non-justified) reasons.  Or is it a Straussian critique of the Mormon Church for (supposedly) encouraging sociopathic-related character traits in its non-sociopath members?  Or all of the above?

You will note that the book’s opening diagnosis comes from an actual clinical psychologist in the area, and the Crown legal department would have no interest in misrepresenting him in this manner.  So the default hypothesis has to be that this book represents some version of the truth, at least as seen through the author’s eyes.

Some version of the author, wearing a blonde wig it seems, appeared on the Dr. Phil show, to the scorn of Phil I might add.

I cannot evaluate the scientific claims in this book, and would I trust the literature on sociopaths anyway, given that the author claims it is subject to the severe selection bias of having more access to the sociopathic losers and criminals?  (I buy this argument, by the way.)  It did occur to me however, that for the rehabilitation of sociopaths, whether through books or other means, perhaps they should consider…a rebranding exercise?  But wait, “Sorry, I could not find synonyms for ‘sociopath’.”

If nothing else, this book will wake you up as to how little you (probably) know about sociopaths.

ZMP workers and morale externalities

On Twitter, Bryan Caplan asks me to clarify why zero marginal product workers do not clash with the notion of comparative advantage.  The point is simple: some workers destroy a lot of morale in the workplace and so the employer doesn’t want them around at any price.

Most of us buy into “morale costs” as a key reason behind sticky nominal wages.  If your wage is too low, your morale falls, you produce less and so the wage cut isn’t worth it.  Well, what else besides low wages makes people unhappy in their workplace?  Very often the quality of co-workers is a major source of unhappiness; just listen to people complain about their jobs and write down how many times they are mentioning co-workers and bosses.  (I do not exempt academics here.)  A “rotten apple” can make many people less productive, and you can think of that as a simple extension of sticky nominal wage theory, namely that installing or tolerating a “pain in the ass” is another way of cutting wages for the good workers, they don’t like it, it lowers their productivity, and thus it is not worth tolerating the rotten apple if said apple can be identified and dismissed.

There is no particular reason to think that ZMP workers are especially stupid or in some way “disabled.”  If anything it may require some special “skills” to get under people’s skins so much.  (Of course there are some individuals who, say for health reasons, cannot produce anything at all but they are not usually in or “near” the active labor force.)  To draw a simple analogy, the lowest-publishing members of academic departments are rarely those who make the most trouble.

To the extent production becomes more complex and more profitable, ZMP workers are more of a problem because there is more value they can destroy.  The relevance of these morale costs also varies cyclically, in standard fashion.  A company is more likely to tolerate a “pain” in boom times when the labor itself has a higher return.

Note also the “expected ZMP worker.”  Let’s say that some ZMPers destroy a lot of value (that makes them NMPers).  You pay 40k a year and you end up with a worker who destroys 80k a year, so the firm is out 120k net.  Bosses really want to avoid these employees.  Furthermore let’s say that a plague of these destructive workers hangs out in the pool of the long-term unemployed, but they constitute only 1/3 of that pool, though they cannot easily be distinguished at the interview stage.  1/3 a chance of getting a minus 120k return will scare a lot of employers away from the entire pool.  The employers are behaving rationally, yet it can be said that “there is nothing wrong with most of the long-term unemployed.”  And still they can’t get jobs and still nominally eroding the level of wages won’t help them.

In the perceived, statistical, expected value sense, the lot of these workers is that of ZMPers.

One policy implication is that it should become legally easier to offer a very negative recommendation for a former employee.  That makes it easier to break the pooling equilibrium.  There also are equilibria where it makes sense to “buy the NMPers out” of workforce participation altogether, pay them to emigrate, etc., although such policies may be difficult to implement.  Oddly, if work disincentives target just the right group of people — the NMPers — (again, hard to do, but worth considering the logic of the argument) those disincentives can raise the employment/population ratio, at least in theory.

Addendum: Garett Jones offers yet a differing option for understanding ZMP theories.

Wolfgang Münchau on wealth disparities in the eurozone

This highly stimulating column — one of the best of this year — may be gated for you (try googling “The riddle of Europe’s single currency with many values”), so let me redo my own version of the argument (modified a bit from his claims):

1. Wealth measures in the eurozone portray Germany as relatively poor.

2. Germany cannot be so poor and Spain and Cyprus cannot be so rich.

3. Therefore there must already be “more than one euro” in the eurozone.

4. Therefore the “value of a euro in Spain” must fall relative to the value of a euro in Germany, so that (eventually) Germany rightfully appears to be the wealthier country.  The single currency has to break up, and/or we need to see a mix of high inflation in Germany (unlikely) or extreme deflation in Spain, Cyprus and other locales.

TC: Now that is either somewhat false, or perhaps a new and Nobel-worthy theory of exchange rate movements, with added oomph for the wealth and perceived relative wealth variables.  Since I do think the euro is likely to split into pieces, I do not disagree with the conclusion, but I am less sure about this stated reason. Here is one excerpt from the article:

Since the start of the eurozone, wages and consumer prices have remained broadly constant in Germany. In southern Europe, the general level of wages and prices has increased year-in, year-out. Over the period, this persistent inflation gap has led to a large discrepancy in asset prices. This is why an apartment in Milan costs much more than one in Munich, the city with the highest property prices in Germany. A German euro buys more real estate in Munich than an Italian euro buys in Milan.

You will note, by the way, that this differs from the usual story of these economies being whacked over the head with the deficient aggregate demand hammer (thank goodness we are getting away from that distorting obsession, though let’s not throw out the bebe with the bathwater).

In any case, I would redo the argument with these:

5. The extent of labor migration from Spain to Germany will be high and is being underestimated, precisely because Germany is so cheap in some parts.

6. Spain, Cyprus and other countries are not as wealthy as is currently measured by market prices.  The world has (perhaps) not yet seen that those locales are due to lose a permanent 15% to 20% of wealth or more, relative to current measurements.  How does this sound: “We are not as wealthy as the ECB research department thought we were”?

6b. Average, marginal, total, private vs. social value, what do those home prices really mean? Keep in mind that varying home ownership rates are driving the varying wealth measures.  Recently I read this: “German house prices are actually lower in real terms than they were in 1970” and thought it was a sign of German wealth and wisdom rather than poverty.  I thought it was a sign that in Germany the young are not merely in thrall to the elderly.  The correct metric here is lifetime consumption and by that measure I strongly suspect the Germans come ahead of most of the other European nations.  Still I find it a residual puzzle that the higher Mediterranean wealth measures do not get converted into higher lifetime consumption (if indeed they do not).

7. Most wealth is held in the form of human capital, and that is another unmeasured plus for Germany.  (By the way, there is a recent claim that the Irish are the most educated people in the EU.)  Let’s compare two societies.  In one you move to Stuttgart to learn how to become a Flugzeugmaschinenmechaniker.  In the other you hang around Genoa to rent-seek and make sure you inherit Daddy’s paid-off house.  The latter may produce higher measured net median wealth, but the resulting society will be less flexible and produce lower positive social externalities from such “labor market decisions.”

8. #5-7 together.

9. We badly need new theories of how Mediterranean Europe can have positive inflation (for the most part), nominally overinflated wealth levels, and yet be crushed by some kind of destructive economic process that we don’t yet have a good enough label for.

10. Wolfgang Münchau, despite his considerable plaudits, remains a remarkably underrated columnist.  There is no one better to read.

Addenda: Don’t forget pension funds, and also that German households start earlier, which makes the median poorer.

A United Kingdom spending update

Remarkably, public spending actually went up last year as a share of our national income, according to a devastating analysis by the OECD.

In a spreadsheet buried deep on its website and annexed to its latest Economic Outlook, it says that public spending hit 49pc of UK GDP last year, a shocking increase on the 48.6pc of GDP spent by the state in 2011.

You should note that differing figures from the UK government show somewhat of a decline in spending in real terms, unlike this estimate.  It would be interesting to read a detailed explanation of why the OECD figures differ.

I would also note that, according to these estimates, UK public spending was 36.6% of gdp in 2000, and had edged up over 50% by 2009 and 2010 and now is still in the range of 49% or so.  Most of the run-up came over the bubbly years of 2000-2006.  Let’s start by calling that an unsustainable mistake.  I would say that, looking back, they didn’t get very much for this spending boost, did they?  That’s fact #1 that should start off any analysis of British fiscal policy looking forward.

Take a look at the recent sectoral details.  Public investment in varying forms is way down, and benefits and public pensions are way up.  It is correct to note that the decline in public investment, and its deleterious consequences.  It is also correct to see the British budget as illustrating David Brooks’s thesis — seconded by many conservatives — that benefits are eating our future.

Maybe I can forestall some of the usual objections to my UK posts simply by noting there are many different ways to measure austerity, and if you use the word in a particular way (“the UK should have had more public investment given its place in the business cycle”), you can claim the UK had austerity relative to that ideal.  Plus taxes went up a lot, most of all the VAT.

Still, these numbers should be put on the table.  Instead, I very often see these numbers being swept under the proverbial rug.  Perhaps it is believed they might confuse people.

Libertarianism and the Workplace II

Over at Crooked Timber Chris Bertram, Corey Robin and Alex Gourevitch are upset about what they call lack of freedom in the workplace. (Tyler offers his excellent comments immediately below.) They give a grab bag of peculiar examples such as workers can be fired for donating a kidney to their bosscarrying on extramarital affairs, participating in group sex at home, cross-dressing, and more. They seem especially incensed that workers can be commanded to pee or be forbidden to pee. (I will put aside that mandatory drug tests are greatly encouraged by the war on drugs.)

In other words, the CTrs have discovered that the most basic US employment law is at-will employment which means that workers can be fired for just about any reason, outside of a few protected categories such as race, sex, and age. Simply put, an employer can fire you if she doesn’t like you. This is a surprise? No one has a right to a job, a job is an agreement to exchange services for cash and compensation and both parties must agree to the exchange to make it legitimate.

The CTrs do not adequately acknowledge that workers have the same rights as employers. Workers can quit for any reason and they can refuse to work for any employer. If you don’t like the politics of Monsanto, or the NRA or Georgia-Pacific you don’t have to work or even apply for those jobs. Indeed, workers have more rights than employers since workers are not subject to anti-discrimination law; that is, employers are prohibited from discriminating against African American workers but workers are not prohibited from discriminating against African American employers.

If you think that the freedom to quit is without value bear in mind that under feudalism and into the early 19th century in the U.S. and a bit later in Britain employers and even potential employers could prevent workers from quitting and from moving. The freedom to quit was hard won. We should not disparage the liberation brought by a free market in labor.

Turning to the economics, the CTrs are so outraged by an employer’s legal possibilities that they fail to notice that most employers do not in fact fire their workers for having extra-marital affairs. Why not? The reason is that these rights are often more valuable to the employee than to the employer and thus both employee and employer can be made better off if the employee keeps the rights. If the employer values the right more than employee then the employer buys the right with a higher wage. If the employee values the right more than the employer then the employee retains the right at an otherwise lower wage. The employer gets the right only when the employer pays. The same thing is true of control rights, residual rights not explicitly noted in the contract (because of complexity and unforeseen events). The employer buys these rights from the worker when doing so maximizes the total value of the exchange. This is not to say that abuses do not occur, they do, as in all relationships and on both sides, but the CTrs lump abuses and mutually profitable exchanges together–that’s dangerous because in regulating abuses it is very easy to do away with mutually profitable exchanges.

The greater the productivity of workers and the higher their incomes the less workers will be willing to sell rights for higher wages (i.e. the more willing they will be to pay for better working conditions with lower wages). Workers gain more autonomy as they and their society become more productive. Thus, the best protector of worker autonomy is high productivity and economic growth. (The best protector not the only protector, unions can also serve a useful purpose in this regard as can shareholders and human resource departments.)

If the CTrs were merely arguing for greater economic growth there would be little with which to argue –who doesn’t want  bigger televisions and better working conditions? The CTrs, however, confuse wealth and political freedom. Bigger televisions don’t make you more free and neither do better working conditions, even though both goods are desirable.

A job is an exchange with mutual consent and benefits on both sides of the bargain. The freedom is in the right to exchange not in the price at which the exchange occurs. A worker who is paid for 8 hours of work is not a serf 1/3rd of the day. We all sell our labor and we would all like to sell at a higher price but that does not make any of us serfs. From the minimum wage waiter to the highly-paid sports superstar there is dignity in work freely chosen.

To understand freedom and true coercion let us remember that American workers have the freedom to bargain and exchange with American employers, a freedom that gun, barbed wire and electrified fence deny to many millions of less fortunate workers from around the world.

Slow Speed Rail and the Infrastructure Deficit

High speed rail, especially California’s project, looks to me to be monorail economics, a costly boondoggle whose appeal lies not in rational calculation (also here) but in the desire of some politicians (and voters) to feel visionary and sexy. In theory, CA HSR  might work but the inevitable reviews, delays, lawsuits and special interest payoffs make the prospects of a beneficial project look dim, demosclerosis kills.

Slow speed rail, however, i.e. freight transport, isn’t sexy but Warren Buffett is investing in rail and maybe we should as well. In particular, there are basic infrastructure projects with potentially high payoffs. Congestion in Chicago, for example, is so bad that freight passing through Chicago often slows down to less than the pace of an electric wheel chair. Improvements are sometimes as simple as replacing 19th century technology with 20th century (not even 21st century!) technology. Even today, for example:

…engineers at some points have to get out of their cabins, walk the length of the train back to the switch — a mile or more — operate the switch, and then trudge back to their place at the head of the train before setting out again.

In a useful article Phillip Longman points out that there are choke points on the Eastern Seaboard which severely reduce the potential for rail:

…railroads can capture only 2 percent of the container traffic traveling up and down the eastern seaboard because of obscure choke points, such as the Howard Street Tunnel in downtown Baltimore. The tunnel is too small to allow double-stack container trains through, and so antiquated it’s been listed on the National Register of Historic Places since 1973. When it shut down in 2001 due to a fire, trains had to divert as far as Cincinnati to get around it. Owner CSX has big plans for capturing more truck traffic from I-95, and for creating room for more passenger trains as well, but can’t do any of this until it finds the financing to fix or bypass this tunnel and make other infrastructure improvements down the line. In 2007, it submitted a detailed plan to the U.S. Department of Transportation to build a steel wheel interstate from Washington to Miami, but no federal funding has been forthcoming.

Longman points out that:

Railroads have gone from having too much track to having not enough. Today, the nation’s rail network is just 94,942 miles, less than half of what it was in 1970, yet it is hauling 137 percent more freight, making for extreme congestion and longer shipping times.

I believe that there are valuable infrastructure projects but I am dispirited by the fact that these projects have been valuable for a long time and progress is very slow. Why haven’t the gains from better infrastructure already been taken? Why haven’t the $500 bills been picked up? It’s worrying that the bullet boondoggles get all the attention while simple things like updating 19th century technology is ignored. And it’s not just rail, sewers and the water supply are another example. Consider:

The average D.C. water pipe is 77 years old, but a great many were laid in the 19th century. Sewers are even older. Most should have been replaced decades ago.

Does that sound like the infrastructure of an advanced nation?

We need better, more trustworthy, institutions for infrastructure investment. As I said in Launching:

Our ancestors were bold and industrious–they built a significant portion of our energy and road infrastructure more than half a century ago. It would be almost impossible to build the system today. Unfortunately, we cannot rely on the infrastructure of our past to travel to our future.

Hat tip: Mark at Observation Epidemiology.

Work as a censor

Working as a censor is interesting. “I like this work. It gives us experience, information and we always learn something new. It takes about a year or a year and a half to become a censor, as the person is first employed as a censor assistant. The employee first starts slow in reading and it takes him a week or days to finish a book. Also, beginners are not given political or religious books in the beginning as these are difficult. Instead we give them children’s books or some scientific books, which are easy,” said Dalal.

In some religious books, the censorship department cooperates with the Ministry of Endowments. “Religious opinions may differ and that’s why we demand a professional explanation, although we have some censors who are graduates of the Faculty of Islamic Law. Some religious issues are transferred to the Ministry of Endowments and Islamic Affairs. The banned books include publications printed in Israel, Christian missionary and Jewish books and other similar books,” she noted.

From Kuwait, here is more.  By the way, “a philosophical book needs about four days to read,” Dalal added.”

Hat tips go to Bookslut and @StanCarey.

Black market Tide free banking

From Cory Doctorow:

The Daily‘s M.L. Nestel cites law enforcement reports from across America describing a crime-wave of Tide detergent thefts, including claims that bottles of easily resellable, name-brand washing soap can be bartered for meth and heroin in Gresham, OR.

He cites this article:

Tide has become a form of currency on the streets. The retail price is steadily high — roughly $10 to $20 a bottle — and it’s a staple in households across socioeconomic classes.

Tide can go for $5 to $10 a bottle on the black market, authorities say. Enterprising laundry soap peddlers even resell bottles to stores.

“There’s no serial numbers and it’s impossible to track,” said Detective Larry Patterson of the Somerset, Ky., Police Department, where authorities have seen a huge spike in Tide theft. “It’s the item to steal.”

Why Tide and not, say, Wisk or All? Police say it’s simply because the Procter & Gamble detergent is the most popular and, with its Day-Glo orange logo, most recognizable of brands.

For the pointer I thank Ken Feinstein and Pamela J. Stubbart.

Is it easy to guarantee Italian debt?

No, no no, says I.  Here is a recent post by Karl Smith, another by Brad DeLong.  In those posts there is not enough emphasis on public choice problems and the longer term and the forward-looking nature of markets.  The Italian economy does not have per capita growth over the last twelve years, and it is increasingly thinkable it won’t have growth any time soon, even apart from recent problems with aggregate demand.  Population is aging and shrinking and institutions remain dysfunctional.  In the comments, Morgan Warstler put it well:

There’s no free lunch – this is not about past debts (debt can be written off), it is about accepting the inevitable future…

There is the same problem over time for any ECB strategy; it’s not enough to break the back of the speculators once or twice.  Karl writes:

…Italy doesn’t actually need anyone to transfer real resources to it. It simply needs someone to manage resource distribution among bondholders. The ECB can do this at virtually no direct cost.

I would have written:

Italy is in primary surplus now but the economy is a train wreck which will only worsen; markets see this.  Italian politics still seems quite dysfunctional.  Even managing resource distribution among bondholders is going to be problematic, as this redistributes wealth away from German and other AAA citizens and becomes institutionalized quickly, also cutting off chances for reform in Italy.

If Germany and a few other, smaller AAA countries were to guarantee or monetize the debts of Italy, Spain, and possibly France and Belgium, never mind Greece and Portugal, Germany would not be AAA itself.  The German median voter has very little interest in guaranteeing the above-mentioned debts.  If German yields are flipping upwards, it is, in my view, because investors now see the whole euro deal as unraveling and don’t want to deal with the complexities and flak.  A big chunk of the German auction didn’t sell at all.  You don’t have to think that Germany is ripe to default to see that markets are warning Germany not to take on the whole burden.

Furthermore, there is no “half hearted recovery” in the offing, not even with better AD policy.  A lot of institutional arrangements were set up in an unstable fashion and now they are unwinding, as indeed they had to do, with economic carnage along the way.  The periphery countries all thought they were wealthier than they in fact are, and behaved as such, but now is the painful unwinding, including the collapse of a lot of ultimately unworkable EU governance structures.  Markets now see this, and the ECB cannot so easily reverse it.

Addendum: You don’t need complicated arguments why I am wrong in my europessimism when there is a simple argument.  If countries are willing to dig into their wealth, they can pay off their debts.  Basta.  At the core it is a public choice problem, not an accounting argument.  The optimistic forces can win the accounting argument, but so far the optimistic forces have called the crisis wrong every step of the way.

Kantoos adds comment.

The 57,000 Page Tax Return

The NYTimes reported earlier this year that through an extraordinary use of tax breaks and clever accounting:

[General Electric] reported worldwide profits of $14.2 billion, and said $5.1 billion of the total came from its operations in the United States. Its American tax bill? None. In fact, G.E. claimed a tax benefit of $3.2 billion.

The Times highlighted the skill of GE’s dream team:

G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm. Indeed, the company’s slogan “Imagination at Work” fits this department well. The team includes former officials not just from the Treasury, but also from the I.R.S. and virtually all the tax-writing committees in Congress.

More recently from The Weekly Standard we find what kind of effort it takes to pay no taxes on $14 billion in profits:

General Electric, one of the largest corporations in America, filed a whopping 57,000-page federal tax return earlier this year but didn’t pay taxes on $14 billion in profits. The return, which was filed electronically, would have been 19 feet high if printed out and stacked.

(FYI, the length of GE’s tax return has doubled since 2006 when it (first?) filed electronically at an equivalent of 24,000 pages.)

GE’s tax bill illustrates both why our corporate tax rate is too high and too low. The nominal rate is too high which encourages a real rate which is too low.

Consider the resources that GE spends to lowers its tax bill, not just the many millions spent on clever accounting and accountants and the many millions spent on lobbying but also the many inefficient ways that GE structures its businesses just to avoid paying taxes and the many millions it invests in socially wasteful projects just in order to produce privately valuable tax credits. Now add to that the allocational inefficiencies of taxing some firms at different rates than others and you have a corporate tax system which wastes a lot of resources and raises relatively little revenue. Indeed, a corporate tax system with a tax rate of zero could well be preferable as it would waste fewer resources and raise not much less revenue.

Hat tip: TaxProf blog.

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.

Lazy Boys Shakedown Chinese Furniture Makers

James Hagerty at the WSJ has an excellent piece showing how trade policy really works at the ground floor level:

Some U.S. furniture makers and their lawyers have found a reliable way to extract cash from Chinese competitors deemed by U.S. officials to have “dumped” their products in the U.S., selling them at unfairly low prices.

Each year since 2006, they have asked the Commerce Department to review the U.S. duties paid by Chinese manufacturers on imports of wooden bedroom furniture. Many Chinese firms, fearing a steep rise in duties, agreed within months each time to pay cash to their U.S. competitors in return for being removed from the review list.

“Everybody in the industry in the U.S. and China understands that these payments are clever shakedowns,” said William Silverman, a lawyer representing U.S. furniture retailers, big importers of Chinese products, at an October hearing of the U.S. International Trade Commission.

The Chinese firms have paid millions of dollars to Lay-Z-Boy (really, I am not making this up) other US furniture makers and to their bagmen lawyers to avoid having the ITC sicked on them. I suppose one could argue that the payments are an efficient way of redistributing the gains from trade. The question then becomes why are US firms assumed to own the rights to sell to US consumers?

Hat tip to Chuck Sicotte.

More on Arrow’s theorem

Dirk writes:

I vote that this post deserves a follow up post with more clarification. If anyone is against this please express your vote with inaction. Us laymen would like to understand this a little better. For the record, the reason I got on a tangent about the law of large numbers was that I watched Boudreaux's lecture and understood it in terms of 3 parties but kept thinking if there were 3000 parties it was unlikely that exactly 1000 would have preference A, 1000 preference B, and 1000 preference C. I guess I'm used to thinking in terms of run-off elections and not the sort in the example. That is why I couldn't grasp why things should "collapse" back to an island situation where n = 2 or 3.

Arnold Kling comments as well and not everyone is happy.  

Return to the oft-neglected difference between intra-profile and inter-profile versions of the theorem.  Most commentators and expositors have in mind an intra-profile version of the theorem.  They set up an example of people and preferences and show how cycling or some other paradox of choice or voting is possible.  Observers then wonder whether this cycling is likely as the number of people increases, or as preferences change, and indeed sometimes it is not, as Gordon Tullock pointed out long ago and as Dirk above wonders.

That's interesting stuff, but those fun and practical-sounding expositions are not Arrow's theorem as Arrow wrote it up.  Think of Arrow's theorem as modal in nature: "Maybe there is no paradox with current preferences, but there exist possible preferences where everything goes screwy, under any decision rule satisfying a few criteria."  Arrow showed that claim is related to something like: "if we apply a specified decision-making procedure across all possible preference configurations, consistent application means the same person gets her way each time."

That's called Arrovian dicatorship, but it does not have to be either harmful or unjust or not even necessarily undemocratic.  It just means that one person — the same person — is always getting her first choice, across these modal worlds with differing preference configurations.

This more metaphysical and more originally Arrovian version of the theorem is perhaps why Arnold Kling finds it difficult to apply the theorem to practical problems.  It is not about the likelihood or relevance of cycling (though it is a jumping-off point for those analyses).  It is instead a deep result about the implications of consistency, combined with limited information about the value of ordinally ranked outcomes.

The intra-profile versions are still important.  For intra-profile versions of Arrow, start with Kemp and Ng (1976).  Here is a good summary article on that literature.  Samuelson, by the way, remained somewhat recalcitrant when it came to the theorem.

Allowing in even limited amounts of interpersonal comparability defuses the paradox, as shown by Kevin Roberts (ReStud, 1980) and Amartya Sen (see the essays in Choice, Measurement, and Welfare).  That said, interpersonability can lead to other paradoxes, as shown by Derek Parfit and his Repugnant Conclusion.  Paradoxes everywhere, and you must choose which ones to live with. 

I take the practical upshot of Arrow's interprofile theorem to be this: when you make a judgment, it is our assessment of the interpersonal comparisons (or intersport importance comparisons, for scoring a decathlon) which is doing all the work.  Be very careful with those. 

Neither Tullock nor Samuelson was happy with Arrow's theorem, especially when it came to practical implications, so it is fine if you wish to add your name to that list.  But I also think they each missed Arrow's point a bit and that of the major economists of his time he was probably the deepest thinker, albeit not the best practical thinker.

Underappreciated economists: Eric van den Steen

Can a professor at HBS be underappreciated?  I believe so.  Eric van den Steen is in my view one of the best young microeconomists.  He is not a mere technician but rather a dealer in ideas.  Oddly, I don't hear his name mentioned often by ordinary, non-frontier economists.

Here is his page of research papers.  I am most struck by his paper on the theory of the firm.  It is an explicitly Knightian and non-Coasian model of the firm.  Unlike many authors, van den Steen does not require that the "firm mode of organization" lower transactions costs in the traditional sense (ever try to get a favor from your purchasing department?).

Instead his model starts with the Aumann model of disagreement and he suggests that control rights in the firm follow from a (figurative) auction over who gets to rule the cooperative venture.  It's bidding on the basis of relative certainty to break the initial disagreement.  If you bid for the capital goods, and turn the relationship into a "firm," you have greater authority over the other agent, because you can threaten to separate that agent from the capital goods.  The winner then installs low-powered incentives because the loser still disagrees with him, and the winner doesn't want the loser to be too motivated to pursue his own vision, thus subverting the winner's orders and recommendations.  Overall, the firm increases cooperation among agents but lowers motivation for non-ruling agents and that trade-off determines whether or not a firm will displace a market transactions based on decentralized control of separate decisions. 

It's one of the few articles on theory of the firm which make sense to me, the other candidate being Julio Rotemberg's brilliant but poorly explained "A Theory of Inefficient Intrafirm Transactions."  I view the Coasian tradition as somewhat of a dead end in industrial organization.  Internally, firms aren't usually more efficient than markets although there are good non-transactions cost reasons — including rent-seeking — why they exist.

Here is Eric's paper on the costs and benefits of homogeneity.  It's worth reading just about all of his work.  Hail Eric van den Steen!