- First, Steve Horwitz has some great thoughts on labor specificity and it’s relationship to the jobless recovery. It’s a rehashing of Kling’s “recalculation story”, which I think matters quite a bit. I have a few points on Horwitz’s post, including pointing out that you hear a lot about declining labor specificity, not increasing labor specificity. Jobs are more specialized today, but labor is less specified. At least that’s the general impression I’ve got from the literature. It makes sense too. If you have increased job specificity and if you want to maintain a robust, dynamic labor market, you’re going to expect to see workers with less specific human capital. Certainly in some industries the workers are specific as well. Jerry O’Driscoll shares a few anecdotal examples of this from the Wall Street Journal in the comment section. I think these provide a good case for developing mid-level skills, including relying more heavily on career and technical education in high school, community colleges, and apprenticeships. I don’t think this recalculation story completely explains the crisis. I certainly think that Tyler Cowen is very confused when he says that the nature of this jobless recovery invalidates aggregate demand theories. But I do think these recalculation ideas have an important role to play.
- Jonathan Catalan addresses Kling’s recalculation theory here, highlighting the difference between Kling and the Austrians. Basically, Kling cites technological change as the process that forces a readjustment, while Austrians emphasize the reallocation of malinvested resources following a credit expansion. I think this is basically right – Kling is simply retelling the old Schumpeter story and the Austrians are following in Hayek’s footsteps. I think Jonathan makes this point a little too strenuously as if the ideas are opposed or incompatible (of course, maybe I read Jonathan too strenuously). There really is a lot of common ground – they’re both dealing with the adjustment of a heterogeneous structure of production. They’re in the same family of theories – there’s a reason why Schumpeter was considered an Austrian economist (besides the fact that he was born in the Austro-Hungarian Empire). Moreover, there’s no reason at all to believe that both of these processes aren’t operating simultaneously. Nothing in one invalidates the other. Jonathan also piles on the truly awful post from Matt Yglesias yesterday.
- Brad DeLong critiques what he thinks Tyler Cowen is doing, namely expressing the rose-tinted view that says that if we just lower wages everything in the labor market will be great again*. DeLong makes the distinction between a “balanced deflation” (achievable by, say, devaluation) and the sort of imbalanced deflation that Cowen proposes (and that Kling has proposed in the past). In other words, it’s a general equilibrium world, people – you can’t forget that! DeLong also cites one of the most important sections of the General Theory – the chapter on nominal wages. He paints it how it’s often painted by guys like Krugman: that nominal wage reductions are self-defeating. I think this is a little strong. If you read the chapter, Keynes actually gives about seven conditions (with a few sub-conditions), some of which make nominal wage cuts effective and some of which make them ineffective. The thing is, we’re experiencing about all the conditions that make nominal wage cuts ineffective right now (unlike, say, 1920-21, where the conditions that would make nominal wage cuts effective generally held true).
- And one not quite as superb post: Going through these links I came across the piece that Kling wrote for AEI a couple days ago on recalculation. Did he really write this: "The economic mystery of 2010 is the persistence of high unemployment, in spite of stimulus that follows the prescription of the prevailing Keynesian orthodoxy". I don't know if this is willful ignorance or what, but it is incredible to me that people still think what we did was Keynesian policy. Absolutely incredible. It's like the willful ignorance that leads some people to call Hoover a Keynesian. Look, I'm fine with you telling people that it's not what you want. But the fact that it's not what you want doesn't mean it's what we want. (That and the idea that Keynesianism is an "orthodoxy" of any sort is pretty incredible to hear too).
*Tyler claims this is not what he’s saying at all. I think Tyler’s right, but the fact is it was a really unclear, shifty post from him. I don’t think he was saying what DeLong was suggesting he was saying, but it was honestly unclear what he was trying to say. Regardless, some people out there do hold this “just lower their wages” view – and for those people, DeLong’s response is important.
6 hours ago