"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK
- Krugman comments on a post by David Andolfatto on the worker flows (hiring, firing, etc.) that we would expect to see in a recession. Krugman writes: "Andolfatto correctly points out that different stories about the fall in employment have different implications about hiring and firing. If you believe that we’ve suffered an overall fall in demand, you’d expect to see hiring plunge and firing rise; it’s ambiguous what should happen to overall job separations, because you’d also expect fewer people to quit, given the lack of available jobs... Hiring plunged; job separations also mostly fell, but that was due to a fall in quits rather than layoffs, which rose during the worst of the crisis, then returned to normal levels. In all such exercises, you’re looking for the “signature” associated with one or another story; and the signature here is clearly the one you’d expect with a general fall of demand. Keynes roolz." This note from Andolfatto first caught my attention because these gross flows are what I'm interested in doing work on. I think Krugman was right to criticize Andolfatto's initial focus on changes in labor force status (unemployed to employed, unemployed to out of the labor force, etc.) and focus instead on hiring, separations, quits, etc. Krugman was probably also right to demonstrate that a simple restructuring argument would not be sufficient to introduce a simultaneous fall in hiring and rise in separations. But Krugman is wrong to conclude from all this that Keynes was right. Krugman is a theorist, not an empiricist, and he often makes the mistake on his blog of confusing corroboration with proof. Reduced hiring during a recession is the dominant feature of all gross worker flow data that any theorist has to explain. It's like volatile investment and realtively smooth consumption over the business cycle. Almost every business cycle theory explains these facts because they would be immediately rejected if they didn't. Some, like the readjustment story, can't explain the hiring data on its own - so it's often paired with other points or explanations. This does corroborate Keynes, but Krugman doesn't prove anything by it.
- Nick Rowe has a great post up in an ongoing dialog with Brad DeLong that should be a clarion call for Keynesians blaring: "Keynesianism is liquidity preference theory: don't forget that". Rowe's post does a great job distinguishing Keynes on money from monetary disequilibrium theories. I think it's fair to say that most modern macroeconomists are monetary disequilibrium theorists of some variety. Some people may not realize this, but Malthus won that debate pretty handily - so handily that many question if Say ever really disagreed with him. Keynesians add liquidity preference to the mix, which raises the question: are we observing an increase in the demand for money or an increase in the demand for liquidity? To make piece or common cause with monetary disequilibrium theorists, we often treat these as if they're synonymous - but they're not, and they can imply different solutions. Rowe presents the differences and alternatives with a very clear analogy.
- Finally, Brad DeLong reproduces one of my favorite letters by Thomas Jefferson to James Madison while Jefferson is in France. The letter is on the causes and consequences of inequality in France. I had read Jefferson's letter discussing how the earth belongs to the living a long time ago, but reading this letter really drove home for me the connection between Jefferson and Paine on the centrality of time and the legal fiction of property rights in their political philosophy. I discuss this here, and elsewhere as well. Jefferson, I think, was the most brilliant mind of the founding era - no spunky young constitutionalist or sagacious old womanizer comes close in my opinion. He placed an extremely high premium on liberty - and rightly so - but I fear we've dumbed down his intellectual legacy.
Quote of the Week
3 hours ago