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A simple and common justification for public sector unions is that the government is a monopsonist for many occupations, meaning they are the only employer. Just as a monopolist will set prices above an efficient level, a monopsonist will set wages below an efficient level. Unions can bargain wages up to a more efficient level in this case. So the logic is that the government will set monopsonist wages unless a public sector union exists to bid them up to the efficient level. In short, the government can’t be trusted to set wages efficiently.
Yet when a natural monopoly exists, it is the government we often seek to entrust with the power to set prices at the efficient level, and we assume they will behave as a benevolent dictator. There are many places where we trust the government to benignly set prices if they are going to fulfill some valuable role. For instance, gas taxes and road tolls. Yet we don’t worry that the government will behave as a monopolist here and set prices inefficiently high. In fact, in these cases quite the opposite occurs.
An empirical problem with this argument for public sectors is that there is a clear public sector union wage premium just as there is in the private sector. If wages were being bargained up to market level, then this wouldn’t be the case.
I believe the debate on public sector unions is strongly influenced by status quo bias. If they did not exist, I doubt many would be arguing that for economic reasons they should come into existence.
Economists have been so busy in recent years fighting over government policy that we have forgotten to take time to do what we do best, freakout people of all political stripes with our hyper-rationality. I will take this opportunity.
Lots of things have been said in the wake of the Arizona shootings about the need to rethink congressional security, gun laws, etc. Most of this has gotten some pushback except for the idea that the shooting is a reason to tone down rhetoric. This has lots of people nodding.
But is it true? Is the shooting a reason to tone down rhetoric?
One of the things that got everyone in a tizzy over the last few years is the debate over ObamaCare. I have argued that this is a much smaller deal than people believe because health insurance is a much smaller deal than people believe. In particular I argued that health insurance is not very effective at delivering health and so either way you slice it, its hard to break something that doesn’t work very well to begin with.
However, this is a minority view. Most people think health insurance does matter. And, indeed I could be wrong. If health insurance does matter then our health insurance policy likely matters. Especially if what is on the table is the potential to expand health insurance coverage or institute death panels. The Urban Institute for example estimated that 22,000 people a year were dying because of a lack of health insurance. Those people are just as dead as people who are murdered by a gunman. Lets use those numbers as our health insurance baseline.
Now, suppose that you have the choice of providing gruesome rhetoric that will increase the probability of a killing spree but will also increase the probability of the passage of Universal Health Insurance. Suppose using the Arizona case as a baselinewe say that the average killing spree causes the death of 6 people. Then if your rhetoric is at least 6/22,000 = 1/3667 times as likely to produce a the passage of universal health insurance as it is to induce a killing spree then you saved lives by engaging in fiery rhetoric.
Let me go over this again. Suppose that every politician and pundit chose to” tone it down” out of fear of a killing spree. Now suppose that because of that ObamaCare did not pass and the Urban Institute is correct that 22K people died every year as a result. However, the tone down also worked and there were no killing sprees. Then because of the choice of everyone to tone it down 19,994 people more people died. That is, the toning down of rhetoric killed nearly seven times as many people as were killed on 9/11. This would be among the worst policy choices available.
I used numbers that argue in favor of universal health insurance because they were easily at hand. However, the same thing holds for those who believe that Universal Health Insurance would worsen the quality of care. They too believe that at stake is the lives of thousands of people and so sensibly engage in hostile rhetoric.
One of those two positions is wrong. On net passing ObamaCare must either increase, decrease or hold constant the number of premature deaths. However, the key is to realize that its really bad to be wrong. Not that it’s really bad to engage in hostile rhetoric.
If there is one thing to take away from the shooting its that being wrong has consequences. And, if you genuinely care about the shooting death of six people then you ought to really, really care about endorsing wrong public policies which will result in the premature death of vastly more people. Hence you should devote yourself to actually discovering the right answers to these questions, rather than than coming up with ad hoc rhetoric – violent or polite – in support of the policy you happend to have been attracted to first.
Matt Yglesias embraces dovishness
Another way of looking at this is that we don’t really know what the world will look like in 25 years. But it’s predictable that whatever military challenges we face, they’ll be easier to deal with if we have a better-educated crop of twenty-somethings rather than a worse-educated one. That they’ll be easier to deal with if we have a productive economy with a modern infrastructure than if we don’t. . . . Obviously the long run does you no good if your country can’t defend itself in the short-term, but a strategy based on perpetually higher commitments to defense spending is self-defeating over time.
Worrying obsessively about particular problems you might encounter in the future will undercut your ability to deal with the generalized problems that will definately occur in the future. In general the best way to deal with the future is to work on problems that actually exist today, so that you have more capacity to deal with the unexpected problems of tomorrow. Now to convince the world that this argument applies equally well to the deficit and climate change.
Greg Mankiw has an essay on economic morality that essentially outlines a Just Deserts Theory of morality. Under this conception there is nothing wrong with people getting fabulously wealthy, its only bad when people cheat their way to the top. Greg also brings up an argument that I used to be attached to, that charity is a public good – no one wants to see poor people but we would all prefer that someone else do something about it – and as a public good is rightfully financed by government spending.
I’ve moved away from this view. Greg is right that it reflects common intuition. The problem is that this intuition does not survive introspection. It works so long as you don’t think too much about it. As you think more and more you are forced either into something like a consequentialist camp, that is to say that it matters who ends up with what. Or, you are forced into miniarchist camp. That is, that there should be almost no government at all. It’s hard to keep the idea that there should be some public goods if you are not explicitly conditioning your idea of a good society on what society actually exists.
Imagine for example the case of wounded vets. Almost all of us would feel bad if there was wasn’t descent medical care for wounded veterans. We feel a duty towards them. Not everyone does, however. Some people don’t care at all. How then can we justify forcing those people, via their tax money, to pay to support our value – helping wounded vets.
We lean, as Greg does it parts of his essay, on the notion that without public support there wouldn’t be enough private charity. Of the majority of us who do care about wounded vets, most of us might give. Yet, still other people – people who like us care about wounded vets – would not give because they hoped that someone else would give in their place. People would free ride on helping vets.
Wounded veterans suffering because of free riders seems horrible. However, this is only a moral problem if we are concerned about the actual amount of care that vets end up with. That is, in order to justify publically funding wounded veterans, we must care about the consequences of our public policy choices, not just about fairness of the process.
Once you opened the door to caring about the consequences of public policy choices that door is hard to shut. For a while I argued that this “slippery slope” meant that we had to embrace some from of anarcho-capitalism. Opening the door to any evaluation of consequences meant that we were in a full-blown consequentialist paradigm. That I thought was clearly bad.
Yet, over time that bullet proved too hard to bite. consequences did matter. Once I accepted that, the question then switched to “how do we evaluate when consequences are good or bad”
This leads me into something that is more or less Rawlsian. That is, that society should function so as to help out the least advantaged. That’s a hard switch, I admit, but the middle ground is not stable. The middle ground only works we you don’t spend too much time thinking about what you are endorsing.
I have some technical issues with Rawls. I don’t think maximizing the welfare of the least well off is appropriate even under the scenario that Rawls sets out. However, its hard to argue that concern for the least well off is not an important part of evaluating whether we are living in the society we want.
This leads me to a social view similar to Krugman where he states
The point is that you don’t, in fact, have to be that radical once you drop the rigidity of the conservative position. If you admit that life is unfair, and that there’s only so much you can do about that at the starting line, then you can try to ameliorate the consequences of that unfairness.
Importantly this unfairness need not, and in general is not, man-made. One of the problems I have with the approach taken by some on the left is the assumption that life is unfair because of racism, oppression, kleptocracy, etc. These things clearly exist but are not the primary source of unfairness. The primary source of unfairness is the fact that nature simply has no inherent justice. Contrary to common human intuition there is no cosmic balance or karma. Bad things happen to good people all the time and there is no point at which any natural force will rectify this.
In extreme cases, children are born with horrible genetic diseases. This is certainly not a punishment for offenses in a previous life. However, it’s not a lesson or a test from which better things will come either. They are just screwed. Life is just unfair.. Unless other human beings take action no entity is coming to help and things will not get better. Indeed, as I have said before the one thing that you can count in almost any situation is that ultimately things are bound to get much worse. This is no one’s fault and it’s not something we deserve. It’s just that we were born into the world and the world is thus.
The question before us, is that given that we were all born into this world – which is neither friendly nor hospitable nor ultimately even survivable – what can we do about it? What we can do is build a society that alleviates as much pain as we can and provides some people with the opportunity for genuine happiness. To do this its helpful to redistribute some wealth. We can’t make everything better through redistribution and too much redistribution will actually make things worse. However, we can make things a little less painful, we can provide a bit more joy and that’s a good thing. That’s a slightly better world, which is what we should be aiming for.
Importantly, we don’t redistribute because the people who have wealth have done anything wrong. Indeed, they have done good. We are glad to have them. We can, do and should honor them. However, we also note that taking a portion of what they have can ease the suffering of others and that’s also a good thing. Ultimately, it’s a balancing act. We can and should debate where the correct balance is.
What we should not do is pretend that there is some inherent justice in the market system. The market, when it is working well, reflects the actual costs and benefits of action in the real world, but the real world is deeply, deeply unjust.
A few people asked me a while back how we would know that Quantitative Easing was working. I said inflation expectations will rise. Most were unsatisfied with that and I think wanted a clearer positive mechanism – small business credit might ease, mortgage rates fall, etc. The problem with those measures, however, is that they are confounded. In particular think about mortgage rates. In the process of spuring economic growth the Fed tries to drive down interest rates. However, if people believe that it will be successful then expectations of inflation will rise which will tend to drive up interest rates. So you can’t just look at interest rates to tell if its working.
Inflation expectations, however, are fairly decent gage of whether we are achieving what we hope to be achieving. Raising the rate of inflation is important is because there is a short-run tradeoff between inflation and growth. Indeed, we can see that as inflation expectations have risen, initial claims for unemployment insurance have fallen
Here is the are the initial claims for unemployment graphed against the Cleveland Fed’s estimate of one-year inflation expectations (inverted)
Initial claims shot upwards as inflation expectations collapsed in late 2008. There is a little rise (showing as a dip because the axis is inverted) when investors wrongly thought that we were out of the woods. It quickly reversed itself, however. One might be tempted to say that what this really shows is that inflation expectations are driven by the state of the economy. When the economy is doing well people expect businesses to try to raise prices. When the economy is doing poorly people expect business to lower prices. That’s fine as a shortcut way of thinking but as long as you believe that ultimately inflation is controlled by the Fed, then you must believe that proximately the Fed controls the state of business. That is, if inflation is driven by the Fed, but inflation expectations are controlled by the state of business, then people must be expecting that the Fed is controls the state of business.
Also as a side note, it seems that the professional forecasting community is using the Tax Cut deal as an excuse to upgrade its forecasts. Which is to say that they didn’t have the faith in theory to upgrade on QEII itself. I thought the deal was good. I was especially for the payroll tax cut but still the driver here is QEII. Cutting taxes just serves as a way to smooth out the diffusion mechanism. Rather than waiting for financial prices to work their way through the economy you just cut checks.
Lastly, we need not stop here. Faster growth is good but even faster growth would be better. This is especially true because as the recession drags on long-term unemployment will turn into structural unemployment. Again we don’t really know why. I know its tempting to say its because people loose skills etc. Maybe that’s true. Its sounds plausible to me. However, we don’t know its true. All we know is that the data suggests that hysteresis is real and the longer we wait the worse it gets.
From Tyler Cowen comes a tale of how the end of U.S. horse slaughterhouses has made things worse for horses, as owners ship old horses to Mexico for slaughter because euthanizing them is expensive. Tyler asks the following questions:
What does ethics look like when there are many more beings than can be supported alive by available resources? How much of the animal kingdom falls under this designation? How much of human history? Or does this question not apply to humans?
If I am not mistaken (and it’s been some time since I’ve seen it, so I may be) this was one of the ethical quandaries posed by the film Soylent Green. Dead people are a valuable commodity, and so people can sell their corpses in exchange for a (more) peaceful death. U.S. slaughterhouses are just Soylent Green for horses. We agree that horses can be made better off through others profiting from their corpses, but what about people?
With all the preparing, burying, and storing, our society spends an awful lot of resources on our corpses, and furthermore we outlaw the profitable exchange of them. Would you like to buy my corpse from me in advance by paying me in advance of my death? Well you can’t.
The dying are arguably society’s worst off, and by preventing the sale of their bodies we are taking something from them. Or are we very worried about unnecessarily incentivizing murder by allowing people to profit from death? Considering the numerous existing industries which profit from death (e.g., funeral homes), this doesn’t seem very compelling, however the existence of ghost bride murders in China suggests it is possible. Or, as in the ban on assisted suicide, are we trying to protect the dying from attempting to act overly-altruistic and dying early to save costs? Or do we just find it too repugnant?
Perhaps if Malthusians are correct in any sense about our future we will reconsider how we deal with death and corpses.
Robin Hanson asks
The second point seems easier to settle, as it is just an application of standard econ theory. Any other economists care to weigh in?
referring to this point
I say prices usually fall when a very elastic supply curve rapidly gets cheaper. Russ would probably agree for something like computer memory, but is reluctant to agree for wages – he doesn’t think cheap plentiful immigrants lower wages. I say that if trillions of immigrants willing to work for a dollar an hour were waiting just offshore, letting in as many as wanted in would lower wages to that level. So I say cheap [human intelligent] robots getting cheaper fast should rapidly lower wages for tasks they do. Russ objects “You can’t just say your wage will be driven down, because if there are complementary types of labor they’ll increase the wage rate of some people. … There’s all these complicated secondary effects.” I say all things considered, the likely effect is falling wages.
There are a few of ways of looking at this. Robin uses supply and demand. Another way to looking at it is noting that immigration doesn’t change the total number of people in the world, it just changes the distribution.
In a world were all institutional systems were equally productive immigrants moving to America would simply mean that new factories are built in America instead of factories being built overseas. Unless their are strong market constraints then either the job will move to the immigrant or the immigrant will move to the job but ultimately the same capital will be combined with the same labor.
Because some institutional systems are more productive, total world productivity can go up by moving both the immigrants and the capital to the better institutional environment. That’s the essence of why the world gets richer when people move to America.
However, in principle the same level of growth could result by porting the institutions to other countries. This is more or less the story of China and India.
When Russ notes that immigration makes everybody wealthier he implicitly noting the effect of improving the average institutional arrangement under which people live. Without that difference, immigration wouldn’t matter at all.
The second way to look at it is to note that in general equilibrium all profits accrue to the irreproducible factors of production. If human intelligent robots mean that labor is reproducible then natural resources become the only irreproducible factor.
Without government intervention, the real price of land in the robot future will skyrocket as the earth becomes populated by trillions upon trillions of human intelligent robot workers and the return to labor will fall to the marginal cost of producing a new robot.
Robin suggests that the real return on capital would skyrocket. I am not sure this is the case. The reason is that the robots support savings in the same way that humans do. So the demand for capital is racing outward as labor expands but so is the supply.
What is clear is that the real price of natural resources will skyrocket. In theory this could happen because prices of most goods are falling at a tremendous rate while the price of land and materials holds. I don’t think this could happen for monetary reasons. Piecing together optimal monetary policy in the singularity is a side project of mine and though it sounds silly possibly very important. 
So your house, for example, might still be worth 250K dollars but within a few years the cost of deconstructing your existing house and building a new house from the parts might be 500 dollars and could be done by several thousand robots in an afternoon. As you can see in a world of such cheap service the actual cost of materials becomes a huge consideration. Building an entirely new house and on new land is radically different proposition than reconstructing an existing house.
This is why everyone who owns something besides their own labor power would likely become very rich, very fast in the robot future.
To see how capital responds note that the total market cap of the US stock exchange would be exploding but this could occur as new companies are IPOed every few seconds. Thus the return to owning any particular company wouldn’t rise very fast even as the total capitalization of the economy was growing enormously fast.
One thing that is fascinating is that in some ways the robot future would seem more natural. It is a constant source of confusion to people that human time is vastly more valuable than natural resources.
People resist vehemently the fact that it is wasteful to build a careful quality-constructed thing once rather than to pop out thousands of cheap copies and then throw them away once they break. Our intuition places a really high value of materials and a comparably low value on human time. This is why recycling seems obviously efficient to most people but is profitable for no one but the homeless and then only after government subsidies.
The robot future would bring the world more into line with intuition. The price of human time would fall, the real price of materials would skyrocket and recycling in one form or another would be hugely profitable and indeed probably the basis for much if not most of the economy.
I imagine the robot economy as full of retoolers. Robots that are expert at finding new ways to use old stuff.
1: Whether the singularity is a time of skyrocketing nominal interest rates, rapidly falling prices, a decline or rise in nominal wages, etc will be vastly important in how it plays out for most people. If it happens as a relatively sudden collapse in nominal wages that could be disastrous for the social and political order as people see robots coming to replace them.
If on the other hand it happens as a time of rising nominal wages but ever accelerating real asset prices then it will look and feel to most people like a promised land where investing in certain things will lead to permanently increasing wealth.
At an NC Chamber yesterday morning I heard a common refrain: that unemployment was likely to remain high for years to come because to grow our way out of it in the next few years would require double digit growth rates.
Paul Krugman even said
Roughly, it takes two point-years of extra growth to reduce the unemployment rate by one point.
So, suppose that US growth is accelerating. Even so, it will take years of high growth to get us back to anything resembling full employment. Put it this way: suppose that from here on out we average 4.5 percent growth, which is way above any forecast I’ve seen. Even at that rate, unemployment would be close to 8 percent at the end of 2012, and wouldn’t get below 6 percent until midway through Sarah Palin’s first term.
Now I think that unemployment is likely to remain high for years to come but the growth line of reasoning is not an illuminating way to think about this. Paul reference forecasts but most people implicitly lean on certain intuitions about growth. 10% annualized growth seems crazy high for the United States and so it seems unlikely that we will get the growth we need.
However, 10% growth is crazy high for the United States because we usually don’t have a massive reservoir of untapped labor which could be easily mobilized.
10% growth is not crazy high for the Chinese economy because effectively they do have a massive untapped reservoir of labor. Workers migrating from extremely unproductive rural farm work to highly productive industrialized work along the coast is the source of China’s growth.
However, unlike normal circumstances the US does have a reservoir now. The massive unemployment we have is the potential feedstock for super-normal growth. In a basic sense economic growth either comes from more workers or higher worker productivity. Usually increasing worker productivity is hard and so the quick way to growth is to flood the industrialized areas of the economy with new workers.
A story in the Times today covers the ongoing attempts by politicians to decrease the pay and power of unions:
State officials from both parties are wrestling with ways to curb the salaries and pensions of government employees, which typically make up a significant percentage of state budgets….
But in some cases — mostly in states with Republican governors and Republican statehouse majorities — officials are seeking more far-reaching, structural changes that would weaken the bargaining power and political influence of unions, including private sector ones.
A raft of recent studies found that public salaries, even with benefits included, are equivalent to or lag slightly behind those of private sector workers.
An important note about these public sector studies is that I don’t believe that any of their authors are claiming that there is no public sector union wage premium. Just like in the private sector, being in a union raises your wages by over 10%.
Of course some of these studies explicitly control for union membership, which then tells you that public sector workers aren’t overpaid once you take their union premium into account. Not all studies control for unionization, which is an attempt to provide a measure of the overall wage premium for public sector workers, but I doubt that those authors would deny that there is still a public sector union wage premium.
So are public sector workers overpaid? It’s a tough question to answer because there are many perks for occupations, and also probably some selection bias. But I think we can say with a fair degree of certainty that , just like in the private sector, those in unions receive a substantial wage premium above market rates.
From a white paper from Gordon Hanson proposing a research agenda for economists studying immigration comes this important point:
While doubling the supply of illegal immigrants (currently 5% of US workers) in the US labor force would likely have at most second order effects on economic growth, doubling the supply of high skilled immigrants could have a first order effect.
Despite this, Hanson notes that the bulk of research -though of course not all of it- has focused on estimating the impact of low skilled immigration on the well-being of natives. Likewise, political discourse about immigration seems to exhibit a similar bias towards focusing on low-skilled and illegal immigration. Hanson argues that economists should change their focus, and I think this is probably true for pundits and journalists as well. This of course is not to say that low-skilled immigration isn’t an important issue, especially for humanitarian reasons. But when the issue is self-interested immigration, we should understand that the impacts of low-skilled immigration are likely to be minimal compared to high-skilled immigration, and the discussion and policies should reflect that fact.
This paper is part of a series on “grand challenges” in the social and behavioral sciences that the National Science Foundation requested in order to help them “to frame innovative research for the year 2020 and beyond that enhances fundamental knowledge and benefits society in many ways”. Other submissions from economists can be found here.