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Sometimes I think if Jamie Galbraith were as heterodox in the conservative direction as he is in the liberal direction he would be mercilessly skewered in the econ-blogosphere. What is the conservative equivalent of “deficits never matter”? It’s probably somewhere between “cutting taxes always raises revenues” and “FDR caused the Great Depression”.
That, again, was my initial reaction when I read his proposal (via Mark Thoma) that we shouldn’t be cutting medicare and social security, but expanding them. Then, much to my surprise, somewhere about halfway down the page I found myself somewhat convinced, or at the very least intrigued and open to persuasion, by part of it.
He argues that we should lower the social security age to 62 for three years. This would allow older workers to leave the workforce, and would open up job vacancies for younger workers. You can see some appeal to this. If you have to subsidize the unemployment of some workers, it should be the older ones who no longer need to accumulate skills.
Right now one thing we are witnessing is older people hanging onto their jobs longer, and so younger people can’t begin climbing up the ladder. Younger people are thus suffering from decreased work experience and bouts of unemployment or very low-skilled work. This is at best delaying the accumulation of human capital and so lowering the present value of their lifetime earnings, but also likely causing them to forego investing in, or even destroy, human capital. Giving old people the cushion to leave their jobs like they otherwise might have can help prevent some of this. If you think hysterisis is a serious threat, this plan looks even better.
An alternative plan is to directly subsidize human capital accumulation of young people by paying for more education or training. But this involves the government making many decisions and creating many (more) marginal distortions in human capital investments of young people. In contrast, lowering social security age creates much less of these distortions.
There’s a cleanness and a simplicity to lowering the social security age that I find very compelling. Maybe Jamie Galbraith isn’t crazy, and this is a reminder of the value of having heterodox thinkers like him around to come up with ideas like this that conventional economists wouldn’t dream up. Or maybe I’m just crazy too, and this is a terrible idea. Somebody talk me out of this.
Bryan Caplan and Arnold Kling, among others, should be very pleased by the news about public sector wage cuts:
Local and state governments, as well as some companies, are squeezing their employees to work the same amount for less money in cost-saving measures that are often described as a last-ditch effort to avoid layoffs…
Pay cuts are appearing most frequently among state and local governments, which are under extraordinary budget pressures and have often already tried furloughs, i.e., docking pay in exchange for time off. Warning that they will have to lay off people otherwise, many governors and mayors are pressing public employee unions to accept a reduction in salary of a few percentage points, without getting days off in exchange.
The article provides only anecdotal data, but references a “new report” (which is neither identified by name or linked to) showing a drop in hourly wages. Actions like these could prevent large drops in government employment that keep hearing are around the corner, but it won’t prevent a huge drop in income, so it’s unclear whether this helps us dodge any macroeconomic bullets.
In addition to governments, businesses are cutting wages to. But the wages they are cutting are not what you’d expect:
While most of the pay cuts seem to hit unionized workers, David Lewin, a professor of management at the University of California, Los Angeles, who has written extensively on employee compensation, says some cuts are also quietly taking place among nonunion employers.
For public sector jobs one can see why this might occur: around 37% of the jobs are union. But in the private sector somewhere around 7% of jobs are unionized and they should be more difficult to lower wages for. So why are union jobs being more affected?
One argument is that non-union workers get fired when the firms demand curve shifts leftward, and the higher marginal productivity of the remaining workers means that wages don’t have to fall. Union workers, in contrast, can’t get fired, so wages have to fall. Another possibility is the threat of replacing everyone with scabs or going out of business is a parameter in union wage bargaining but not the non-union wage bargaining, and while lower marginal productivity of labor is pushing everyones wages down, these threats are further reducing union equilibrium wages.
The simplest explanation is just that the industry composition, e.g. the large share of manufacturing and construction, of union jobs versus non-union jobs is driving it.
Either way, I would prefer to see public sector unions lose power rather than wages, since their power simply means that the wages will return to trend once the recession is over. I think a large state and local government aid package conditioned on power being taken from public sector unions would be a good bargain for republicans to make. Not going to happen though.
I am a very enthusiastic reader and follower of conspiracy theories. The crazier the better. I particularly enjoy CT’s that have to do with large networks of secret societies that work toward World GovernmentTM. Even better if they incorporate alien technology, celestial predictions about the year 2012, or other nefarious government plots to keep boot on our collective faces.
One that I hadn’t noticed, or heard about, was recently reported by Kevin Drum…and according to a House Representative, seems to be instrumental in his failing to win a primary to a Tea Party candidate:
I sat down, and they said on the back of your Social Security card, there’s a number. That number indicates the bank that bought you when you were born based on a projection of your life’s earnings, and you are collateral. We are all collateral for the banks. I have this look like, “What the heck are you talking about?” I’m trying to hide that look and look clueless. I figured clueless was better than argumentative. So they said, “You don’t know this?! You are a member of Congress, and you don’t know this?!” And I said, “Please forgive me. I’m just ignorant of these things.” And then of course, it turned into something about the Federal Reserve and the Bilderbergers and all that stuff. And now you have the feeling of anti-Semitism here coming in, mixing in. Wow.
I immediately recoiled in horror. How could I not have heard about such an incredibly nefarious plot by bankers to OWN PEOPLE?! That even incorporates the notion of modern-day slavery, and the prospect of a giant casino where the Illuminati go to option babies, and trade revenue streams on everyone from bums to programmers.
After settling down a bit, I realized that I recognized this story. It’s relates fairly closely to the plot of The Unincorporated Man, by Dani and Eytan Kollin (reviewed by Robin Hanson here). The difference is that this is of course simply bankers that own…something (which is wildly unclear), whereas in The Unincorporated Man, various actors own portions of your income.
And so I am relieved that this idea is not-so-original.
The current question being debated by the “Economics by Invitation” panel is:
Are current deficit reduction plans likely to boost growth?
Perhaps unsurprisingly, I was not invited to this panel. But I want to share a comment anyway.
Pursuant to Brad Delong’s post here, in which he answers the question: “David Altig of the Federal Reserve Bank of Atlanta has just convinced me that the answer to this question is ‘yes’.”. I believe that this question is highly incomplete. Let us ask a similar question…if the Federal Government were to pull the plug on Fannie and Freddie, would it cause a severe enough nominal shock to pull us into a deep recession again?
That question is similarly incomplete. The operative question is what reaction the central bank will have to the developments on the fiscal side of government. If, indeed as Scott Sumner has theorized, there was a very large risk of (actual) deep deflation resulting from larger shocks (nominal or real), I believe that the Fed would be moved to act in a way to accommodate the demand for money. Further, I believe that this would force the hand of central banks around the world to become more accommodative in their policy. Bafflingly, Alerto Alesina believes that since European monetary policy is “easy” currently, that liberalizing supply-side burdens along with austerity in automatic spending programs will produce growth. I don’t happen to think that monetary policy is “easy” in Europe, nor do I believe that reducing automatic spending programs will work to alleviate the demand for the medium of exchange in Europe — which seems to be quite high in countries wrecked by fiscal problems.
The failure of Lehman Brothers forced the hand of the Federal Reserve, but the damage of tight money had already been done, and the Fed failed to accommodate a large increase in the demand to hold the medium of exchange. Instead, the Fed focused on propping up “credit channels” (unsurprisingly, as much of Bernanke’s academic scholarship has to do with credit and lending), and in doing so, seemed to confuse credit and money. So the proper question to ask in this instance is:
“Is it likely that current decifit reduction plans will cause central banks to ease monetary policy in a way that satiates the demand for the medium of exchange?”
If your answer to that question is ‘yes’, then austerity will, indeed, have “boosted” growth. If your answer is no, then it won’t. Indeed, causality may be attributed to the austerity measures either way, but the real proximate cause is the central bank’s reaction function.
The demonstration that the differences between socialists and non-socialists ultimately rest on purely intellectual issues capable of a scientific resolution and not on different judgments of values appears to me one of the most important outcomes of the train of thought pursued in this book.
— F. A. Hayek: Law, Legislation and Liberty
Frum argues Barack Obama is no socialist and that the goal of a revived free market party is not in opposing liberal goals but in ensuring that are implemented in a free market friendly way. The Money Quote:
When asked: Has government given the middle class short shrift? 70% of Republican-leaning independents say “yes.” In 1997, when Bill Clinton was president, only 55% of Republican-leaning independents answered that question “yes.”
And you know what? It’s not a crazy answer! At the peak of the Bush economic expansion in 2007, the typical American worker earned less (adjusting for inflation) than the typical American worker earned at the peak of the Clinton expansion.
There is an explanation for this disappointment: the rapid increase in health care costs in the 2000s crowded out wage increases. But it’s not “socialist” to feel the disappointment – or to wish to do something about it.
We care about markets because we care about the poor and the downtrodden. Even under communism the elite led lives of relative comfort.
I’ve had some interesting side conversations regarding my concerns, and at this point I am willing to say opposition, to Elizabeth Warren’s appointment as head of the CFPB.
Here my key take away: Is there anyone who disputes that Elizabeth Warren has signaled that she will be a crusader on behalf of consumers; that she views consumers as having gotten a raw deal from the financial system and that she intends to do what she can to change that?
I understand that there are those on the left who have no problem with this. What bothers me is that I see relatively little open opposition from the free-market and rule-of-law center. Now perhaps I missing something but it looks to my eyes like Elizabeth Warren is set to assemble an agency with the explicit mission of fighting Wall Street on behalf of consumers. Said another way she is putting together an agency with the express mission of favoring one set of citizens over another.
In case, it doesn’t make sense to why this bothers me let me contrast it with what I see as the appropriate role of government. My ideal vision of the government is as an institution that is a fair and neutral arbiter of disputes. One that ensures that fraud, deception, bullying and coercion don’t go on.
No one doubts that fraud, by both borrowers and lenders went on during this crisis. We may dispute how important that was as a cause but I think few of us believe that it should be standard practice. Ideally, any new regulatory powers would be aimed at curing that fraud.
What that agency should not be doing is taking explicit sides and aiming for explicit outcomes. It should not take the position that big banks are the villains and that consumers are the victims. It should enforce rules that ensure all players treat each other fairly.
I had concerns about this when the CFPB was first floated but I was assured by many on the center-left that all we were trying to do is establish a well functioning market. This was a classic information problem and there was a role for the government in helping solve this.
I increasingly have the feeling that I was sold a bill of goods. That what we are going to get is a crusader looking to take on Big Finance. I am somewhat upset about the bait-and-switch but I am more concerned that so few in the center seem to care.
The National Bureau of Economic Research’s Summer Institute has ended and I’m back at my office in Chapel Hill. Nonetheless, posting will probably still be light as I decompress from the conference, catch up on correspondence and get up to speed on the blog cycle.
When that’s done I can let you guys in on some of the more interesting research that’s currently being worked on.
As a teaser some new work suggests that the effect of unemployment insurance extensions on the unemployment rate is pretty low. This is based on German data but its not immediately obvious why the US would be much worse.
If anything unemployment seems stickier in Europe.
In attempting to pin down the causes and pre-conditions of the financial crisis, it is important to look at cross-country comparisons. Karl has pointed out that cross-country comparisons do not provide an easy explanation for the housing crisis, and a new paper suggests the same is true for the global financial crisis in general. The authors report:
It is natural for economists to generalize from experiences of a few particularly salient countries to make generalizations, though it is often inappropriate. Our poor regression results are simply telling us that the pre‐conditions for the crisis in the United States (or Iceland, or Latvia, …) often do not describe other countries particularly well. Credit growth was high before 2008 in Australia, Canada, and South Africa, yet these countries seemed to have weathered the crisis well. Real housing prices actually fell in Japan, Germany and Portugal, yet these countries were hard hit. Since it is difficult to understand the cross-country incidence of the great recession even in retrospect, we are dubious about the potential for comparable “early warning” forecasting model going forward.
The paper also includes the following scatter plots which illustrate this lack of obvious relationship between 2008 to 2009 growth and a variety of potential predictors:
Perhaps the best outcome of this recession would not be a macro which is better at predicting the future, but a macro which recognizes the futility of attempting to predict the future.
I often make the claim that there is no dearth of imagination in the ways in which humans can find to utilize other human labor. Many times, I use this fact to argue against protectionists. I also use this statement to illustrate that deep recessions are caused by monetary disequilibrium in the demand to hold the medium of exchange.
Here, I want to provide you with proof that humans can, and will, always find ways in which to waste eachothers’ time:
Monkeys hate flying squirrels, report monkey-annoyance experts.
Presumably, these ‘experts’ were paid for their research.
[H/T Tyler Cowen]
In an very nice article, David Leonhardt examines a study done by Raj Chetty regarding how adult outcomes correlate with early childhood education, and the study seems to draw conclusions that are in line with my own rough theory of early education.
Okay, that was the shameless self-promotion, on to the article!
Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.
All else equal, they were making about an extra $100 a year at age 27 for every percentile they had moved up the test-score distribution over the course of kindergarten. A student who went from average to the 60th percentile — a typical jump for a 5-year-old with a good teacher — could expect to make about $1,000 more a year at age 27 than a student who remained at the average. Over time, the effect seems to grow, too.
The economists don’t pretend to know the exact causes. But it’s not hard to come up with plausible guesses. Good early education can impart skills that last a lifetime — patience, discipline, manners, perseverance. The tests that 5-year-olds take may pick up these skills, even if later multiple-choice tests do not.
Notice the bolded. These aren’t categories where kids are actually learning “something” like math, science, or language arts…they’re learning mannerisms. They’re learning how to unconsciously act as a member of society.
Is it 1+1 that is important to adult outcomes? Or is it the implicit knowledge that it is not okay to run down the street pushing people and screaming?
Does an interview hinge on a potential candidates’ knowledge of “past participles” or whether the candidate made eye-contact, spoke confidently, and had an inviting (non-threatening) demeanor? Or rather, did the person learn the proper mannerisms in which to conduct himself in a professional situation.
There are people that don’t learn these things, and they are oftentimes very awkward in social situations — and many times, they remain unsuccessful in both professional and personal aspects. Of course, the implications of this being true are highly politically unpopular.
Leonhardt also highlights what amounts to nothing but a large number:
Mr. Chetty and his colleagues — one of whom, Emmanuel Saez, recently won the prize for the top research economist under the age of 40 — estimate that a standout kindergarten teacher is worth about $320,000 a year. That’s the present value of the additional money that a full class of students can expect to earn over their careers. This estimate doesn’t take into account social gains, like better health and less crime.
Hmm, if only there was a sector of the economy that took illiquid and intangible assets, and converted their future revenue streams into a net-present value and worked to diffused risk. Okay, that was a cheap shot, the point is there is a problem* with this assertion: this is not the way the financing structure of education is currently set up (at least at the primary and secondary levels).
*There is also another problem: Despite the morally irksome nature of the proposition, this, of course, is not the way in which labor is valued in a market economy.
Earlier last week, Paul Krugman took Scott Sumner to task for the assertion that the Bank of Japan didn’t actually want inflation, and instead, purposefully engineered price stability with a year-over-year average of -.1% CPI deflation.
Hmm. I see that Scott Sumner has a post heatedly attacking the idea that Japan is stuck in a deflationary trap; he insists that Japan has deflation because that’s what the Bank of Japan prefers:
[Sumner] I was under the impression that the Bank of Japan was an ultra-conservative bank, and liked mild deflation. Indeed I thought that was pretty widely understood. I guess not.
He guesses right: that’s not at all the view of those who have been following Japanese monetary policy since the 1990s, and have even talked to BOJ people now and then. I’m sorry to say that the fact is that Japan is in a deflationary trap.
Fast-forwarding to yesterday, Krugman seems to be making the very same argument that Sumner was making in a post (rightly) chastising Dallas Fed President Richard Fisher for being completely passive in the face of deflation:
Now, he does say that “Neither inflation nor deflation will be tolerated.” But I’ll make a prediction: once we’re experiencing deflation, with conventional monetary policy still up against the zero bound, Fisher will still be against doing anything unconventional; instead, price stability will be redefined to be consistent with gradually falling prices.
Or rather, what Sumner has identified as opportunistic deflation. This view has been supported by numerous quotes and actions from central banks around the world, and throughout history. I have claimed before, in other venues, that this “no inflation at all costs” ideology is a relic of 1970′s-era thinking regarding inflation fears. These fears were “caused” by theories that posited “long and variable lags” in response to policy shifts, as well as only having backward-looking (extremely imprecise) indicators of inflation and NGDP growth. So instead of looking to markets to infer macroeconomic trends, economists looked to models alone.
Of course, there are plenty of people making predictions based on models today, as well…and some of them are predicting wild inflation as a result of both monetary and fiscal policy. That is, of course, not what any forward-looking markets are telling us.
How is it that the BOJ can be so feckless in the face of deflation, such that they are innocent bystanders in a “deflationary trap”, while the Fed is actively choosing a deflationary path, and redefining a “new normal”.
The answer is that the BoJ’s previous behavior is being mimicked by the Federal Reserve. Both central banks have made a choice, no long-run* “trap” involved.
Update: Stephen Gordon has posted an informative profile of Robert Fisher. Here is a quote that may surprise a lot of people:
… I am not a trained economist and make no pretense whatsoever of being a formal practitioner of the dismal science….I came to economics and the markets late in life. I started out as a midshipman at the Naval Academy, then migrated from learning to navigate the seas to navigating through the undergraduate basics of economics at Harvard. After a brief detour to Oxford—principally to find my wife and perfect my taste for good beer—it was onward to Stanford Business School,…
The late Earl Thompson is not famous, but was a vocal opponent of the undue influence of bankers (as opposed to monetary economists) on the FOMC.
*Using “long-run” to indicate “after prices and wages have mostly adjusted to the original shock”.
No, not that Family Ties… A new paper from Alberto Alesina and several coauthors posits that strong familial relationships increase the demand for restrictive labor regulations:
Flexible labor markets requires geographically mobile workers to be efficient. Otherwise, firms can take advantage of the immobility of workers and extract monopsony rents. In cultures with strong family ties, moving away from home is costly. Thus, individuals with strong family ties rationally choose regulated labor markets to avoid moving and limiting the monopsony power of firms, even though regulation generates lower employment and income…
There is a lot of intuitive appeal to this theory, and the authors provide empirical support as well. This is reminiscent of work which argued that being married reduced mobility and thus allowed employers to bargain for lower wages, although I can’t remember any particular papers on this to link to at the moment.
My question is whether this phenomenon partly explains the political persistance of the mortgage interest tax deduction? Baseless cosmopolitan liberals like Ryan Avent, Matt Yglesias, Felix Salmon, and myself argue that a downside of homeownership is that it increases geographic immobility, which is desirable in a labor market. Thus it is in societies interest overall not to encourage homeownership with this tax deduction. But if 51% of people won’t ever want to move regardless of local economic conditions because of close family ties, then we could end up with this policy even though it is against everyone’s economic interest. This policy magnifies the labor immobility effects of family ties by encouraging more people to undertake large sunk costs in housing than otherwise would. In addition, regardless of family ties, people will support the law once they become homeowners, which expands the constituency beyond those with family ties.
More reason to be skeptical that the mortgage interest tax deduction is going anywhere anytime soon.
Individuals more paternalistic than I think that soda, salt, cigarettes, and booze are dangerous enough to merit taxation and regulation. But the fact is an individual can use all of these things within the law and with moderation very safely, in which case the regulation and taxation is inefficient. The utilitarian question for paternalists then is what proportion of consumers use the product safely, and what proportion use it unsafely.
One product characteristic that I have not seen criticized on these grounds is top vehicle speed. My casual observance is that most new cars and trucks have top speeds well over 100 mph, with speedometers that go up to 120 or 140. Yet, for the vast vast majority of consumers, the vehicle cannot be driven at this speed legally, and doing so brings significant risk to other drivers. I am not sympathetic to paternalistic policies, so I don’t think limiting car speeds is good public policy. But I am puzzled that more paternalistic types do not argue for laws requiring manufacturers to sell vehicles with maximum top speeds set at 80 mph.
This map from wikipedia shows that in most areas in the country, you can’t drive at speeds over 75 mph, and nowhere can you take it over 80:
So why can you buy a product with a feature that cannot be used legally? Some consumers may take their cars to race tracks where you can legally exceed 80 mph, but this is probably a very small percent of drivers. And for this small minority you could make the top speed a default option that consumers can opt out by having a dealership remove the speed governor if they can prove they will use it at a race track. And really, are any drivers taking their 109 mph minivans to race tracks?
The case for more strict speed regulations is much stronger than many paternalistic regulations because, unlike salt, sugar, and tobacco, it causes a clear externality. Research has shown that the risk of being in an accident increases exponentially when a driver is going faster than the average speed, and that accident severity increases with speed. In 2007, 13,040 traffic fatalities, which is 31% of the total, were classified as speeding related. Contrast this with the 10,000 gun homicides in the U.S. each year.
So my question for paternalists is, would you support a law that required to a low maximum top speed to be built into all cars? If not, why?
