I think a paper disucssing the relationship between the thinking of Beveridge, Hutt, Oi, and Kalecki on slack capacity would be really interesting...

As of right now I can only muster a modest discussion of the first two with passing references to the second two in this chapter for Guinevere Nell.

I wasn't even aware of Oi's work (a lot of it building on Hutt) until I did some googling after his death.

Some links

- The Herndon, Ash, and Pollin response to Reinhart and Rogoff is going to be coming out in the Cambridge Journal of Economics, a fine publication if I do say so myself which focuses a lot on Keynesian, Post-Keynesian, and Classical economics.

- David Henderson has a nice tribute to Walter Oi, who passed away on Christmas Eve. David has written a lot on Oi's work on the all volunteer force and ending conscription. I've personally got a lot out of his work on labor as a quasi-fixed factor of production (it's sort of the starting point in the lit review of my apprenticeship chapter of my dissertation).

- Kitchens and Fishback have a new working paper on rural electrification.

- Hanushek et al. have a new working paper on variability in returns to skill across countries - variability is surprisingly high and current estimates underestimate the lifetime impact of skills.

Super-duper inside Austrian baseball

There has been a recent spat on the intertubes between some people associated with the Ludwig von Mises Institute and some people associated with George Mason. In this matchup the Mises Institute people are supposed to be the boorish rubes and the George Mason people are supposed to be the serious academics.

In some ways, the stereotype makes sense. All Austrians are fairly political, but the Mises Institute people take it to a whole new level. Sometimes it's that they mix their ideology/political philosophy thinking in with their economics - and they take both seriously. Sometimes it's because they're not very serious and they just take breaks from their Ron Paul boosting and statist (i.e. - non anarcho-capitalist) bashing to talk about economics. There's a range in Auburn just like there is anywhere.

But what I think there George Mason crowd misses in many cases is that as far as scholarly engagement goes, for the most part they aren't especially distinguishable from Auburn. The biggest distinction is on the ideology front.

Painting in broad strokes, of course there are more firebreathers in terms of their actual ideas in Auburn, but the Auburn crowd has been nicer to me personally than the George Mason crowd.

If you look at their treatment of non-Austrians (particularly Keynesians), the George Mason crowd seems equally dismissive to me. They make idiotic or rude comments about Krugman or DeLong with equal frequency as far as I can tell that doesn't speak well to their commitment to "civil intellectual engagement". The public choice facets of the George Mason camp if anything make them more likely to attribute disagreement to bad faith or impure motives on the other side. And that gets old really fast.

As far as basic facts they seem to botch other ideas with equal frequency.

I'm reading Living Economics right now by Peter Boettke to review for Free Liberal, and while he has some great intellectual history in there he also has the EXACT same claims that we see all the time from internet Austrians.

You cannot convince me that Walter Block or Robert Wenzel are any more less civil than a handful of GMUers (the usual suspects... I'm not going to name names, because UNLIKE Block and Wenzel some of these guys will actually throw a hissy fit if I name them). And of course there are gems too. Pete Boettke (the GMU axis) and Bob Murphy (the Mises Institute axis) are both guys I disagree with a lot but perfectly civil.

So as much as I like to see them beat each other up, there seems to be a huge presumption by a lot of people that it's just obvious that we should be more dismissive of the Mises Institute people than the GMU people. It seems to me that a lot of GMUers who might not realize it should hear from an outsider that the distinction is not as strong as they seem to think. And they should probably be more critical of their own bad actors.

Reindeer Caroline

The Washington Post should really get a regular person to read headlines before they put them up

...not sure if this is the same as in the print edition

Questions on James Buchanan

Does anyone know if he ever had any dealings with:

1. The Reagan administration
2. The Federalist Society
3. State politics (in Virginia or elsewhere)
4. Desegregation issues

This is what austerity looks like...

And yet for some reason Bob Murphy thinks that this graph is proof AGAINST Krugman's concerns!

The post linked above is an excellent demonstration of the gaping chasm that exists between different peoples' interpretation of what's been going on. I sort of wish now I talked more about current events in my class. I talked about the evolution of growth theory and about the Lucas critique on the last two days of class, respectively, but I kind of wish I kept the Lucas critique and spent the other class period talking about the Great Recession and the policy response as they relate to Keynes and Hayek.

As it stands I was very skimpy on policy in the Hayek lecture and in the Keynes lectures. For Keynes we did an overview day, a day on consumption theory, a day on investment theory, and a day on interest rate theory - with some monetary policy discussion coming in on the interest rate theory day and a brief mention of fiscal stimulus on the consumption day when we derived the multiplier. Hayek didn't have any direct policy talk.

Perhaps this was a mistake.

This graph screams austerity but for some reason people are caught up on the fact that it did not actually decrease and ignoring the fact that the last five years look very, very different from the preceding fifty.

Maybe I was too subtle in that last post...

Bob Murphy commented:

"Obviously there are no IUCs possible, but to the extent that we operationalize "who cares more about liberty?" I don't even see how this can be close. I just scrolled through your blog and in the first 3 pages, the only mention I see you making of liberty is to mock/criticize the people who have devoted their lives to defending it. And it's not "Hey guys I strategically disagree with your wonderful aims" but rather "I think these guys are either naive or lying."

Look, I clearly don't care as much about racial bigotry as people working at the NAACP. That doesn't mean I'm a racist or that I hate black people, it just means it's clearly not as high a priority to me as to them.

By the same token, you clearly care more about economic theory and your kid than liberty. In contrast, I care about liberty, Krugman, and karaoke.

None of this is a judgment, and I'm not saying you're a closet totalitarian, but I can't believe you're acting as if you and your social network care as much about "liberty" as the people I know who do things like move their families to a different state etc. for it."

Here's the thing - I don't (and I think most people don't) look at Bob Murphy, fantastic guy that I think he is, and think "there's a man that's devoted his life to defending liberty". We look at him and think "there's a guy that's devoted his life to fighting the state". And maybe he's OK with that and thinks the two are synonymous, but what he and other libertarians need to recognize is that it's not just that we think the second one (that he devotes himself to fighting the state), but we do not think the first one accurately describes him.

If you are suspicious of Abraham Lincoln, you are going to have a hard time convincing me you care more about liberty than me.

If you are suspicious of the Civil Rights Act and other anti-discrimination, you are going to have a very hard time convincing me you care more about liberty than me.

If you are a pacifist in the face of fascism that threatens the liberty of millions, you are going to have a very hard time convincing me you care more about liberty than me.

And this doesn't even get into the much trickier questions about the tangled net of positive and negative liberty that we're faced with when past inequalities of opportunity generate present inequalities of outcomes. But if you scoff at that as a problem you're going to have a very, very, hard time convincing me you care more about liberty than me.

Which makes me wonder if Bob is in the naïve/ignorant camp more so than I thought. It's one thing to disagree with me. That's allowed. I know he holds a different view and I've always known that and I disagree with him. But he doesn't even seem to be aware of the issue.

A question for libertarians

I feel like I've seen the phrase "liberty movement" crop up a lot lately - more than usual. I'm a little puzzled by the uptick, although maybe I'm just imagining it.

In any case, it's certainly not used as often as simply talking about "libertarianism", and I had always assumed the reason it wasn't used as often is because of the way it sounds to me (and by extension, all reasonable people of any political persuasion).

Whenever I hear "liberty movement" used as a synonym for "libertarian" it strikes me as either naïve/ignorant or deliberately distortive and opportunistic.

I always felt like this sense of the phrase was confirmed by the fact that you largely heard it in the context of Libertarian Party political events, Ron Paul stuff, etc.

So my question is - what do libertarians think of the phrase "liberty movement" as a synonym for libertarian? Do you sort of have my impressions (which is what I've always assumed because most of you don't use it all that much), or am I completely off base and you too think this is a good synonym.

I should add this isn't like my concern with the use of the word "classical liberal" to mean "libertarian". Whatever my disagreements with that usage, "classical liberal" is simply terminology and what's at stake to a large extent is dueling claims to a historical and intellectual pedigree. But "liberty movement" isn't just terminology. It's not just a label, in other words - it pretty clearly means "this is the group of people that like liberty" as a way of distinguishing that group from other groups.

Take a good look backwards as well as forwards in the economics of the minimum wage

Don Boudreaux links to Bryan Caplan, who has an interesting post up pointing out that we need to consider the dynamic response to a minimum wage announcement. I only call it "interesting" because I'm not entirely sure what I think of it yet, but I think it's worth thinking about.

The point is that if a minimum wage hike is passed in advance firms can gradually adjust through reduced hiring and attrition (if indeed that's the direction they would respond - of course if the monopsony model is correct there may be increased hiring gradually). The point is, by the time of the actual discontinuity in the law everything might have happened already.

Maybe.

The trouble I'm having with this is that I'm not sure what would cause the gradual response. If you were making major transitions to capital-intensive production I could see doing that gradually, but presumably that's not what we're talking about in many of these cases (although I suppose that's an empirical question). If you're not doing the same thing, more capital intensively, why not just pay the same amount of people low wages until the minimum wage goes into effect and then pull up stakes? In the high turnover world of fast food franchises (as in, for example, the Card and Krueger study) that seems very reasonable. What glide path are we really thinking of in the Card and Krueger case??

But as I say - it's interesting. I don't quite know the answer.

This reminds me of a post I had a couple weeks back on the minimum wage noting that we have to follow things forward in time before we pass judgment. Why? Because different monopsony models imply different long run effects. If it's a straightforward market power model then the minimum wage (as long as it's modest) should be good in the long and short run. If it's a fixed labor cost version of the monopsony model it will have good short run and bad long run effects. So you need to look a while out to really get a sense of what you're dealing with.

It's an ex-post dynamic response explanation. Here, Bryan and Don are talking about an ex-ante dynamic response. But it's still the same sort of idea.

I would think if there's one single thing an economist should be able to do better than anyone else, it would be identifying a serious risk of endogeneity and calling it out: John Cochrane edition

John Cochrane thinks two New York Times articles are a sign of cognitive dissonance on health economics.

I do not.

My new Critical Review article is out

Share far and wide.

Many readers of this blog gave me reactions to this, and for that I am very grateful.

I hope people will be interested in it. I like to think of it as a thoughtful analysis of Hayek's business cycle theory. I come out liking his capital theory for both theoretical and empirical reasons, and not liking the business cycle theory for both theoretical and empirical reasons.

I offer what I think is a new way of putting what I think is wrong with his business cycle theory that I think is right with Keynes, and it connects both of them back to their Wicksellian roots. I don't mention Wicksell specifically so as not to overcomplicate the argument. I had been planning on including it, and it was certainly in the back of my head when I was writing it.

I also think it's a nice paper in that it collects and reviews the scope of the empirical literature. I don't do that in grueling detail (it's really not the venue for that), but I think that my separation of the studies into what can be thought of as reduced form and structural analyses helps a lot to clarify what we do and don't know.

And if nothing else I provide what I think is the most or at least one of the most comprehensive empirical lit reviews.

Cranky about Franky

This has been a cranky week for libertarians, between people suggesting that maybe it would be nice if workers could be in a position to stay with their families on holidays, maybe we shouldn't be so consumption focused over the holidays, and maybe exclusion of the poor is a problem in market economies.

It is the last point that I want to talk about a little and provide a quick quote I like.

Pope Francis's recent pronouncement was admittedly overwrought (like Greg Mankiw, I thought the discussion of "trickle down" in a Vatican document looked ridiculous. But I don't get the uproar over the broader point.

People act like the pope was denying that markets raise people out of poverty. It seems to me he wasn't denying that at all. I can't even imagine what would get people to think he was saying that except they're on a hair-trigger and jump at anyone questioning a libertarianish party line as being entirely anti-market.

It seemed to me all the pope said was that market economies will produce winners and losers, and that a group of people - by circumstances of birth and disadvantage relative to the wealthy - can be left out of a lot of the gains of the market economy.

This seems to me to be obviously true.

It's not a statement that markets fail to reduce poverty. I obviously thinkl markets do reduce poverty, but I also think they exclude people. The two are not contradictory. I highly doubt Pope Francis misses this point. When markets were under threat, the papacy did not have any trouble standing against socialism. I doubt there's a major about face now and there was certainly no indication of that in what I read.

I promised a quote. I particularly liked this one:

"Just as the commandment “Thou shalt not kill” sets a clear limit in order to safeguard the value of human life, today we also have to say “thou shalt not” to an economy of exclusion and inequality."

Some links

1. C-SPAN aired an excellent hearing today on abuses of presidential power specifically in the area of encroachments on legislative power.

2. Ben Harris (Urban Institute/Brookings Tax Policy Center) explains why the next debt ceiling fight is likely to be worse than the latest one.

3. A summary of a recent discussion by Mike Rowe on elitism in employment and education, and what you could call non-academic skilled work. Richard Vedder is on Rowe's side, which was nice to see - I usually don't find a lot to agree with from Vedder.

4. The New York Times on apprenticeship. Great article. It quotes the chair of my dissertation committee on the first page.

5. Speaking of my chair, vote for his daughter's group - Maya and the Ruins - at Folk Alley's 2013 listener poll. It's a few steps... you've got to register, confirm an email they send, and then click on it again to vote. But I know 90% of my readers are not doing anything particularly productive with their time. Willie Nelson is also on the list, which gave me pause, but I felt OK voting for Maya and the Ruins cause I don't think it'll put much of a dent in Willie's career.

Paula Stephan on the Endless Frontier: Self Recommending

Here.

If I'm not mistaken a young Paul Samuelson worked on the report.

Another interesting glimpse into how well Bryan Caplan would do on a Turing test

The question he asks is what evil in plain sight today will be abhorred by our descendants. Interestingly, he frames this in terms of political ideologies - liberalism, conservatism, and libertarianism. He claims that liberalism offers us the problem of cruelty to animals, conservatism offers us the problem of abortion, and libertarianism offers us the problem of our treatment of foreigners.

The really odd pair are the liberal/libertarian options. Before getting to that I want to say that he makes a good point on abortion. I'm pro-choice, but I've come around to the view that pro-lifers (I used to be one of them too!) have a potentially legitimate case. Of course it all depends on personhood which is not an easy thing to know what to think of. Having been through a pregnancy and having a child now I still don't know what to think of the question of personhood. Indeed that's a big part of why I'm pro-choice. In the face of such a contested question I find it hard to tell everyone to follow one viewpoint. But if the conservative view is correct this is a monstrosity.

OK, back to liberalism and libertarianism.

The liberalism one was weak and the libertarian one was confusing.

We're animals, and animals eat other animals. Most liberals are happy to eat other animals for exactly this reason. Tough luck - you're below us on the food chain. Of course outright cruelty to animals isn't a good thing, but that's not what Bryan is talking about and do you really have to be a liberal to think that cruelty to animals is bad? I hope not. Bryan takes some unusual life-style choices that are plausibly more common among liberals and invents a moral problem where there really isn't one.

The libertarian case - our treatment of foreigners - is confusing because I think of this as being a liberal thing as much as a libertarian thing. And indiscriminate pacifism on the part of some libertarians (and liberals) is not better treatment of foreigners, it's worse treatment. It's not that this isn't characteristic of a lot of libertarians (although many are anti-immigration), but it just doesn't seem as distinctive as Bryan would like it to be.

There is a very obvious liberal option that is different from conservatism or libertarianism: concern for individuals who happen to be disadvantaged due to the circumstances of their birth. I'm not just talking about feeling bad for the disadvantaged any more than Bryan is talking about just feeling bad for slaves. Everyone feels bad for the disadvantaged. I'm talking about using the coercive power of government to put a stop to a barbarity. Presumably Bryan is supportive of legally barring the ownership of other human beings. He is contemplating legally barring abortion.

The willingness to use the power of the state to help those who are disadvantaged by chance is something that I think our descendants are going to look back on and be shocked that we didn't do more to address.

My last slide on Hayek today

The Hayek lecture today is going to start with a brief run through of the Austrian school from Menger to the present (we've already covered Menger and Bohm-Bawerk), followed by a brief bibliography of Hayek, one student talking briefly about his long essay on the socialist calculation debate, and then the bulk of the lecture will be on ABCT.

Then I have a slide at the end to motivate discussion until the end of class. I thought you all might be interested in it. We talked about Vernon Smith when we discussed "modern Smithians" in the Adam Smith lectures, so they are familiar with constructivist vs. ecological rationality.

The important things for me are for them to understand Hayek is making more than just a libertarian claim - he's making a claim about spontaneous order and planning. Second, I want them to just think through all the things economists have said that we've discussed and how it applies to the Fatal Conceit quote, and third I want to challenge them to not take Hayek at face value.

Exactly why isn't a radical change to the evolved social order like libertarianism in flat contradiction of the point Hayek is trying to communicate here?!?!

Most of the lecture is straight up ABCT, but I think this will be a discussion they will be more interested in ending with.

For those of you out of the loop on my slow posting...

This is a big reason why... although there's been a ton of other work too.

The only thing sadder than me doing my first post in over a week griping about a Wikipedia entry...

...is Bob Murphy doing a post griping about me griping about a Wikipedia entry.

(784% longer than my original post, too!)

Wikipedia fail

15% of the Wikipedia article on liquidity preference is about Rothbard.

Internet Austrians are completely delusional about the extent to which what they think matters.

A question for readers who know what's going on internationally better than I do

Do you know of a good resource for information on sub-national labor market policies - especially employment protection policies or anything impacting turnover rates - in:

1. Germany
2. Switzerland
3. Austria
4. Canada
5. Austrailia

Also do you know of excellent up to date books on labor markets and labor market policies in the first three?

My third essay, I think, is going to have a strong comparative component to it and I need to bone up on some other labor markets

How economists think about market imperfections: an anecdote

You'll often hear from libertarians that "mainstream" economists are preoccupied with market imperfections because it's an excuse to push policy, criticize the market, or both. A good example was Don Boudreaux the other day thinking that Alan Manning was criticizing markets in general just because he has issues with models of perfect competition. Of course just about any non-libertarian is more willing to muse on certain types of policy options than libertarians, but generally speaking I think that understanding of mainstream economics of imperfect competition is silly.

I've got a good anecdote from yesterday's labor class where we were talking about asymmetric information and statistical discrimination. It was a great discussion, but we didn't say a single word about policy or government. We never mentioned it once. The more active parts of the discussion revolved around:

1. Making sense of some of the odd diagramming approaches in Cahuc and Zylberberg.

2. Me bitching (believe it or not, I do that in class too) about some assumptions in the textbook treatment that higher productivity workers would have higher reservation wages. I think outside options are much more sensible way of motivating how asymmetric information leads to adverse selection. It's a little different from the lemons model in that sense.

3. Real world examples.

We also got off topic (we do that) and talked about the IZA labor conference on Monday, our papers, classes next semester, and of course Caroline.

We didn't talk about public policies to address imperfections in the entire two and a half hour class.

I do not think this is unusual.

We deal with these models because they are good at explaining the way the world works, period. To the extent that we care about policy of course models that explain how the world works are the ones you should use to inform policy.

Four thoughts on Cochrane on New and Old Keynesianism

It's an interesting post but I disagree with him on (at least) four counts:

(1.) Nobody really thinks (well, maybe Cochrane does) that the NK consumption function is exactly right. We bring in intertemporal optimization because people do plan for the future, but people still think that current or at least near/medium term income matters for psychological/behavioral reasons if nothing else,

(2.) so with MPC = 0 if government spending doesn't crowd out you've still got a case for government spending. The problems only come in if government crowds out. Insofar as government commits to major investment programs, and insofar as we think investment is governed by expectations of future demand, you get positive multipliers again (of course, by a different mechanism than the Old Keynesian multipliers).

(3.) The whole MPC/income thing goes out the window when we consider credit constrained, paycheck-to-paycheck people, which leads me to

(4.) It's true politicians talk like Old Keynesians. I think economists do this less - they focus on my (2.). When we do talk about MPC it's almost always with reference to something like (3.).

So it's a good post laying out the issues, although I don't buy all the "you silly Old Keynesian" implications. I agree with Krugman that the Old Keynesian intuitions hold up surprisingly well, even if the mechanisms do change.

Great post from Don Boudreaux on Ken Arrow and the Virginia election

Here.

I kind of take this point like I take Sraffa's critique of Hayek or certain criticisms of marginalism: it's a good reminder to avoid sloppy talk.

I think we can make statements about the public good, we just have to recognize two things:

1. There is no actual actor that is the collective, and
2. What we identify as the public good is of necessity normative even if it is informed by everyone else's utility function.

So I would feel perfectly comfortable talking about the need for an egalitarian society and potentially legislation to achieve that as being in the public good or even an American ideal. I might use language Don would consider collectivist.

I can make the claim quite legitimately that I come to this conclusion based on some sort of aggregation of what other Americans think. It's a rough, back of the envelope aggregation on my part, but it's legitimately an aggregation of individual preferences.

But it's not some sort of objective, uncontestable aggregation of those preferences. Instead it's an aggregation based on my some of my own values as well (which, in fair divinations of the public spirit, is itself derived from public values and virtues). This isn't a useless way of talking about the public good, but it isn't objective either - not in the same way that my preferences are (they are subjective of course, but I can objectively say "Daniel prefers X").

Similarly when we get an election result it's tough to say that it is the public's will. What we have to recognize is that it is one aggregation of individual preferences, and the aggregation is done according to the dictates of a certain set of democratic institutions.

THAT is a fair, objective claim about what this "public will" is.

As Ken Arrow and Don Boudreaux discuss, it's not legitimate to talk about this as an actual sensible preference set on its own. It isn't.

As individuals and as citizens, what we have to decide is whether those mediating democratic institutions aggregate preferences in a way that we like or not.

I am confident al the people that drone on about the alleged significance of the racist roots of progressivism will repost this IMMEDIATELY

Here.

Field Turing Tests

So you've all heard of Turing tests, but what's probably more important is Field Turing Tests - similar to the distinction between experimental and field tests elsewhere.

A Turing test is useful because it gives you a sense of whether the other person really comprehends what they're arguing with. That's helpful in assessing the quality of the process by which they form arguments, etc.

But it doesn't necessarily mean that they're good interacting with people in the marketplace of ideas. For that, you need a field Turing test. Out in the wild, do people present the ideas they disagree with in a way that would convince someone from the  other side.

This just comes to mind as a result of (what I hope is the end of) a long set of diffuse interactions with Don Boudreaux over monopsony. My concluding thought has been "my God I hope nobody just reads Café Hayek and doesn't read this blog to understand what I think about this issue". There's been some really awful misrepresentation from Don.

I've had similar fears in the last few months about my immigration work - I hope people don't just read stuff at Brookings, ITIF, or from Vivek Wadhwa on our immigration work. If they do they're going to completely miss the point.

The way around that is to be well engaged and a self-promoter of course. I've been in dialogue with people at Brookings and ITIF (Vivek infuriates me too much to talk with, although ITIF has been almost as bad - perhaps that's wrong of me). I've published at EPI, EconLib, and Cato on the issue which I think is very helpful.

But then there are good actors too - people you never have to worry about. David Henderson and Bryan Caplan always represent the other side pretty accurately. Any quibbles with their accounts would be idiosyncratic - not systematic. Bob Murphy is usually great, although I find some of his Krugman posts not just cases I disagree with, but very odd in their reading of Krugman (but we can bracket those off for the sake of this argument). Ryan Murphy and Jonathan Catalan are always great at this among us junior bloggers.

Those are the obvious ones on the libertarian side of things. Cochrane and Williamson are usually quite good on this count too. Horwitz can be OK on more analytical pieces but pretty bad on polemical pieces. This is a huge weak point for Boettke who I think is best read for his brilliant expositions and deep knowledge of his own side. Russ is in the same boat as Don.

Who do you think is especially good at this or especially bad at this on either side?

I think I'm pretty good. I provide accounts of the other side that I know they don't like (for example, the whole point about libertarianism vs. propertarianism and the idea that "liberty movement" is pure euphemism), but I hope I'm clear that this is my take on their position and not the position they are under the impression that they hold. Perhaps making that distinction clear is all that a successful performance in a field Turing test requires.

Instrumental variables get a pass on rigor because economists essentially use them for personal entertainment...

That last line isn't entirely fair. There are some good IV studies out there, but IMO they are the ones that use a bazillion different robustness checks to assure you they're not full of shit.

So take that as poetic license and shift attention to the first part of the title.

I'm doing some work right now for a class paper (and hopefully a publication some time in the future) on within-study tests of propensity score matching. Similar papers are out there for other methods but I'm working with PSM. As anyone that's worked with the method before knows, it's decent enough but very dicey. You have to really know what kinds of selection mechanisms are in play to make it useful because it's simply not a solution to the problem we worry about most: selection on unobservables. It ONLY works for selection on observables that we're not good at modeling. In a panel framework you can make the case that selection on unobservables is accounted for by using past data (i.e. - I don't see my unobservables but I match on wages at t-1 and since I'm interested in wages at t+1, all the unobservables I think affect wages at t+1 are also affecting wages at t-1 in the same way, so by matching on t-1 I'm OK).

We've learned much of this about PSM from random assignment studies that use PSM to test a result with real world data (lots of this can be shown with simulation, but simulation isn't necessarily relevant to outcomes in the real world).

This is true of most quasi-experimental methods. There's usually a literature on within-study tests of the method comparing to random assignment. This is a great way to learn about the limits of our quasi-experimental options, and that's always good to know especially when we only have quasi-experimental options).

As far as I know, though, there's no such within-study test of IV estimators. There's lots of within-study comparisons to OLS but that's a different exercise entirely. If they're both biased then who cares if it's close to OLS or not?

I'm not entirely sure why this is, except that IVs aren't generally used for evaluations where you might have random assignment. Instead they're used for more fundamental scientific questions. But at least in the returns to education literature you'd think this could be possible.

One more reason to have a healthy skepticism of IVs.

Quick note on Mario Rizzo and food stamps

Mario Rizzo argues here that foodstamps are becoming a new entitlement, highlighting the fact that their use has not declined with unemployment, suggesting that they are not offering a counter-cyclical stabilizer the way Keynesians suggest.

This is a perfect example of where it's important to use employment to population ratios rather than unemployment rates. If you use the latter you probably think we've been going through a slow but steady recovery. If you use the former you think we've been virtually at a standstill for the last couple years.

And note that's the behavior of food stamp participation - it's growing, but the growth has leveled off as declines in employment have leveled off. Think about what you're measuring. The unemployment rate is an important indicator but if you're concerned with economic hardship more generally - or with the volume of employment (the Keynesian concern) there are probably better statistics particularly in a recovery like this one.

As Rizzo notes, there are changes associated with benefit take-up. That might imply a leveling up of food stamps (and if we like the eligibility rules now and after this recession is over, what's the real problem with robust take-up?). But as far as the counter-cyclical question he raises, I don't see any reason to believe it's not just as counter-cyclical as ever. That's because he and I seem to have different perspectives on where in the cycle we are exactly.

I find his discussion at the end about the self-generating recovery nature of Keynesian policies very odd. But then again, he thinks we've had a lot of stimulus and I don't see much evidence for that after 2009/early 2010. That's on top of the fact that liquidity traps and financial crises are going to be especially hard to climb out of even in the best policy environments.

HET class blog post of interest

We talked about the early monetarists on Friday and I posted this question. It's pretty straightforward for most readers of this blog, but perhaps some will get something out of it. Still always good to remember:

Accounting identities/Tautologies vs. Behavioral laws

Posted by Daniel Kuehn at Sunday, November 3, 2013 4:59:15 AM EST

In class we went briefly over how the quantity theory of money is just an accounting identity, and how Wicksell, Fisher, and Keynes pointed out that it's dangerous to draw conclusions from accounting identities without having specific economic theories about the behavior of the variables in the identity.

Another identity you're all familiar with (that we'll work with in studying Keynes in the next couple weeks) is the national income equation:

Y = C + I + G + NX

If I were to present as my argument "The national income equation shows us that if you increase G, government spending, you will increase Y, national income, so policymakers should increase spending in a recession", is this a good or a bad argument for fiscal policy? More importantly (because obviously I wouldn't be asking the question if it was a good argument!): why is or isn't it a good argument, and if it isn't a good argument what would a good argument look like?

One more point on perfect competition (and why I think Don Boudreaux has been so confusing)

Textbook perfect competition really boils down to two things: (1.) nobody has market power, and (2.) nobody can earn an economic profit.

If  you are criticizing someone who is simply saying that most people have market power and lots of people can earn an economic profit, then don't be surprised when people think you are presenting a naïve perfect competition view in contrast to the way competition works in the real world.

Against "perfect competition"

On the comment thread of a post by David Henderson, Don Boudreaux shares a great blurb for Alan Manning's book "Monopsony in Motion" that drives home an important point:

"What happens if an employer cuts wages by one cent? Much of labor economics is built on the assumption that all the workers will quit immediately. Here, Alan Manning mounts a systematic challenge to the standard model of perfect competition. Monopsony in Motion stands apart by analyzing labor markets from the real-world perspective that employers have significant market (or monopsony) power over their workers. Arguing that this power derives from frictions in the labor market that make it time-consuming and costly for workers to change jobs, Manning re-examines much of labor economics based on this alternative and equally plausible assumption."

If you've read the book, you know that Manning hits this idea of perfect competition hard in the first chapter, pointing out how broad the use of it is in textbook economics and how little time is spent with monopsony cases (of course, quite a bit more time is spent with monopoly - he's thinking in terms of labor texts).

The conversation with Don has been confusing to say the least. On David's thread he was reading this as Manning criticizing markets. At the time that struck me as Don confusing blackboard perfect competition with markets, and I told him as much. Now he's got a post on his own blog saying precisely the opposite - contrasting perfect competition with market competition in the real world.

So now he seems on board with Manning and me, but he still seems to think he's not on board.

So I'm hopelessly confused by Don now, but the fact remains that it's critical to draw this distinction between perfect competition like you learn in Econ 101 and market competition, which is full of frictions and irregularities and which unfolds over time as a part of a process of social interaction. In the market you are always dealing with a lot of market power - monopolistic and monopsonistic. Entrepreneurs (among employers and employees, I should emphasize) spend their time doing two things - (1.) figuring out how to compete away the market power of others, and (2.) figuring out how to gin up some market power for themselves. Any time you do something to make yourself indispensable you're generating market power for yourself. You have monopoly rents over what you have to offer, to say nothing of the power over the information about yourself in your brain. And we use that power all the time in the real world.

So the real world is very much Alan Manning's world. Markets are a process where people figure things out and develop new advantages for themselves. It's not textbook perfect competition.

The best that can be said for perfect competition is that it can offer a useful simplification in a bigger model in some cases. Old Keynesian theory worked that way. It used perfect competition assumptions because it was easy, others were assuming it, and the focus was elsewhere. Both Post Keynesian and New Keynesian analysis has dropped those assumptions because we can do better. But the assumptions served their purpose for a time (and they're still useful when you're introducing people to Keynesian ideas). There are presumably other examples like this.

But never mistake the occasional pedagogical value of perfect competition for a picture of the real world.

Some links

- David Henderson makes much the same point I did earlier about Don Boudreaux's weak case against monopsony in minimum wage labor markets.

- Jared Bernstein on the problem of the coincidence of market failure and government failure. Surprisingly, a lot of people see government failure and suggest we should just institutionalize it rather than try our best to do something about it.

- Cash for Clunkers is not good at creating jobs. This should surprise no one, I hope. Blinder's justification is that it gave the auto industry a boost at a very rough time. I suppose that's plausible, but it's awful fiscal stimulus.

Professional whereabouts/updates

Interesting stuff going on.

First, both my Review of Black Political Economy article with Marla McDaniel and my Journal of Economic Behavior and Organization article with Signe-Mary McKernan and Caroline Ratcliffe are out as of this week. They've been online for a little while, but it's always nice to see the issue come out.

Second, I'll be at two conferences this week. I'll be presenting my job creation tax credit work at the Society for Government Economists meeting on Wednesday. The plan is to revamp this paper in the spring to get it in its final form as a dissertation chapter. Then on Friday I'll be chairing and presenting on a high skill immigration panel at the Association for Public Policy Analysis and Management conference. The first conference is relatively small, but the latter is the major public policy scholarly association. I'll be talking about the F-1, the OPT, and the issues around connections between school and work for foreign students with particular reference to the H-1B.

Finally, an interesting development is that I've picked up some contract work from the National Academy of Engineering looking at the engineering technicians and technologists labor market. Most of the work will be in the spring - should be interesting.

The importance of the context provided by the history of economic thought

Many of my students were a little confused in my class on "modern Smithians" when we talked about Romer and Krugman's work on growth and trade theory, respectively, as being two of the preeminent examples of modern Smithian economics. They didn't see division of labor anywhere in either of those works - at least not obviously so.

We just got into neoclassicism yesterday, after having spent two classes on marginalism (neoclassicism, for these purposes, effectively covered the marginalists after the marginal revolution). In the intervening weeks they learned about how Smithian productive efficiencies quickly gave way to diminishing returns in Malthus and Ricardo. Both of these economists used diminishing returns because it was plausible, but also because it provided a stable solution to the problems they were considering: population and rent.

We left that aside for a couple weeks working through Mill and Marx, but then came back to these assumptions when we started into the marginalists. Mixing together primary sources, some standard intermediate micro problems, and out history of thought text the importance of diminishing returns really started to crystalize for them.

Then in steps Marshall and others who applied these tools to problems of interest. Marshall tells one particular story using the language of marginalism, but it's a story about how some industrial districts seem to be characterized by increasing returns. Assume spillovers. Assume nice pinned down firm behavior with the activity of other firms bleeding over into each others' cost functions. Now we have a case that bucks the trend of diminishing returns we've been seeing week after week after week. Smith was so nice and positive - Malthus and Ricardo were both downers. And here comes Marshall with a happy result again that is very reminiscent of Smith.

Where have we heard something like this before? I asked.

And then several students' eyes lit up. That's why Krugman and Romer made a big splash. It seemed so different from Smith at the time because the story was in a different language, but after trudging through Malthus, Ricardo, Mill, and the marginalists and understanding the importance of the increasing/diminishing returns divide, Marshall's spillovers seemed refreshingly Smithian. It's not just increasing returns either, it's the idea that productivity goes up with densely populated areas too.

Anyway, this connect the dots exercise is obvious for economists. But if you've read a little Smith on the division of labor and you don't have the context of the next hundred years of economic thought it's not exactly clear why I said what I said earlier in the course.

I am not one of those people that says that all undergrads should take history of thought. I think that's an overstatement and unnecessary. In a progressive science (NOT Whiggish... just progressive) we shouldn't have to study the history of thought to be good scientists. But, the fact remains that if you do know history of thought you have a much richer and more contextualized understanding of the science as it's practiced today.

Thoughts on health reform

None of these thoughts are new from me, but recent events brings them to the forefront.

It's always seemed to me health reform should have the goal of lowering costs, expanding coverage, and leveraging competition (both public and private). In practice, expanding coverage seems to dominate the other two for the administration. This is a short-term view. In the long-term lowering costs is supposed to come too. It may, but we'll have to see.

It seems to me the heart of all this is the mandates - not necessarily the individual mandate, but the coverage mandates.

A much more balanced solution would have been to:

1. Mandate a minimum of catastrophic coverage. This is a lot of what we care about - going bankrupt for medical circumstances outside of your control. Mandate no denials on the basis of pre-existing conditions, but provide a public catastrophic option.

2. Subsidize low income families for any type of insurance (not just catastrophic), end tax breaks for employer provided plans.

3. Subsidize all these things that are currently mandated. If you think certain coverage is a good thing, subsidize those private plans.

4. Have a public option, or perhaps what's equivalent, just let people buy into Medicaid (with their subsidies) at some actuarially sound rate (i.e. - don't let public options kill the private market through subsidies that aren't available in the private market).

5. Allow considerable state variation of terms and experimentation above this coverage floor.

6. Ultimately, deal with fee for service payment systems. This is almost certainly the bedrock problem with cost issues in the U.S. as far as I can tell.

The rollout record seems to be mixed for Obamacare, which isn't surprising to me because I've always thought the law was mixed. But where problems are raised (aside from silly accusations that Obama somehow lied about keeping coverage) it's usually around the coverage mandates and what they're doing to private plans.

I can see why coverage mandates are desirable, but what's the argument for that rather than minimal mandates plus subsidies? This isn't typically how we do social safety nets in this country, so why are we doing it this way with health reform?

Bryan Caplan on general training

Here.

He suggests students can be more intuitive about general training than economists sometimes. It's interesting, but I'd suggest the story runs a little differently. The student's answer, of course, is a classic answer by economists to the problem. So what's Bryan's concern? The concern is that we all still cite Becker, essentially.

But that's because of the way we structure these discussions. Normal science is puzzle-solving, so we have a tendency to pose ideas as puzzles and then pose solutions. So the puzzle is that that in a simple world firms shouldn't provide general training but in the real world it seems like they do. There are a number of reasons for this - one is delaying wage increases to split the cost of training (Bryan's answer), or we could also think of bundling specific and general human capital.

Those are classic economist answers, we just approach the question with this puzzle/solution framing. We don't cite Becker because we think that's the end of the story. We cite Becker because it highlights the significance of the response.

This has applications to Fama/Shiller too. We don't cite any of this perfect rationality stuff because it's literally right. We cite it because it's a very reasonable baseline that poses a puzzle and focuses us on what appropriate solutions to that puzzle are.

Monopsony and expectations about the minimum wage

There are two understandings of monopsony power - each quite different. The first is a raw market power model, comparable to monopoly. This is the one most people are familiar with (if they're familiar with monopsony at all). The second is based on fixed costs associated with labor. In the case of the low wage labor force these are typically hiring and firing costs, although for higher wage labor forces training costs can be substantial. These fixed costs are taken into account in the long run but they are considered sunk in the short run, driving a wedge between marginal revenue product and the wage rate.

This is important in considering what to expect from minimum wages because it's not clear that the two cases will have the same effect (and of course in reality any given employer/employee relationship is going to have a mix of sheer market power and fixed costs in play).

The market power case is fairly simple - a minimum wage is good for wages and good for employment. We're just eating into the monopsonist's surplus, but she has no reason to pull out of the market unless the minimum wage is set too high (which of course is a very real possibility, particularly when the federal government is setting it for a broad array of occupations and jurisdictions).

The turnover cost case is trickier.

At a first approximation, we should not be so sanguine about the minimum wage if most monopsony power comes from turnover costs. In the short run, yes, firms will increase employment in the form of reducing separation rates (assuming most of the costs are on the hiring end) and raises will rise and everything will be great. But in the long run there's a much greater incentive for reducing employment - maybe.

There is also an incentive to reduce turnover or invest in human capital to make up the difference. That's the thing about fixed costs - you don't have to cut jobs. Since they're associated with hiring and firing you can also amortize them over longer periods of time. So in this monopsony model we have the potential for something bad - reducing employment in the long-run as a result of the minimum wage, or something really good - increasing employment and job tenure for low wage workers.

So monopsony makes the minimum wage waters murkier than a lot of people appreciate. And the monopsony argument is more complex than a lot of people appreciate.

This makes testing on multiple outcomes - long term employment effects, turnover rates, on the job training rates, etc. very important.

Marx as Public Choice Theorist

But not of the sort you'd get at GMU:

"The question to what extent these state influences, public debt, taxes etc., grow out of the bourgeois relations themselves -- and hence, e.g. in England, in no way appear as results of feudalism, but rather as results of its dissolution and defeat, and in North America itself the power of the central government grows with the centralization of capital -- is one which Carey naturally does not raise." - The Grundrisse, Notebook VII

There are very real questions about the robustness of libertarianism that public choice theorists do not concern themselves with sufficiently. This is what Marx is getting at here. There are also applications of public choice theory to austerity that are not being probed.

If these sorts of things aren't addressed, public choice theory is going to be more of an ideological backwater than a scientific enterprise. These questions matter a great deal, and they'll be taken up by people who label their work "political economy" or "institutional economics" if the people who label their work "public choice" ignore them.

Two articles of interest in the recent Review of Austrian Economics

1. The empirical relevance of the Mises-Hayek theory of the trade cycle, by Robert B. Lester, Jonathan S. Wolff

I need to reread this one. They don't find evidence of the price and quantity effects in different stages of production predicted by ABCT (they're actually one of the few empirical studies of ABCT that don't find it), and yet they say in the abstract that evidence is therefore "mixed". I'm wondering if I missed something or if reviewers had problems with it and made them add caveats. Anyway, this is of interest to me because it is one of twenty empirical papers looking at ABCT that I discuss in my forthcoming Critical Review paper. I just turned the proofs back in a couple days ago, so at this point it's just a matter of waiting for the issue to come out.

2. The (quantity) theory of money and credit by Anthony J. Evans, Robert Thorpe

This is of interest because one of the authors is a regular commenter here. I don't think his identity is a particularly tightly kept secret, but in case it is I'll let him worry about taking credit for it. I classify the point here under the same heading as things like Sraffa's critique of the natural rate, in that the authors are definitely right that the simple stories you hear are actually wrong. Any quantity theory needs to be expressed in terms of the volume of transactions, NOT nominal GDP as you often see it. In most applications, as with the natural rate of interest, I think the nuanced version of the theory is unnecessary to derive important insights. It's one of those things that nobody should feel guilty about teaching in an intro course, for example (it's nice to motivate the LRAS with a naïve quantity theory). But if you do get into the details you really need to treat it more carefully.

This is why libertarians can't have nice things

Why cite economists doing literature reviews on the minimum wage when you can cite a report by Republican politicians? This seems to be Don Boudreaux's perspective.

There are literature reviews compiled by economists on this. My understanding of these literature reviews is that there are a lot of studies with small positive effects, a lot of studies with small negative effects, none with particularly big effects, and it kinda centers on a zero effect. This suggests to me that a simple competitive supply and demand model of the minimum wage is missing something because there should not be an average zero effect (much less the presence of some clear positives in some cases) if that model were true. That's why I think the monopsony model makes a fair deal of sense. With a monopsony model you're not guaranteed to get a positive effect of course. If the minimum wage increase is sufficiently large given the production technology and market conditions of an individual firm, some firms may indeed reduce their employment as a result. But it explains why we'd see these mixed and weak findings.

I said as much in my response to the question Don posed to me the other day on the minimum wage. I'm still curious what his response is (I emailed it to him and he responded, so I know he saw it).

Two brief political thoughts

1. It occurred to me the other day that both centrists and libertarians claim the territory of being fiscally/economically conservative and social liberal. That's kind of interesting.

2. It also occurred to me that there's a strong probability I'll have to vote for the libertarian in the governor's race. I mentioned that to Kate last night and she said "oh it's that bad, huh?". It made me think that it wouldn't turn out so bad - he's not off the walls, and anyway the General Assembly wouldn't let him do anything to crazy. Libertarians in a divided government might do alright. And then I remembered the shutdown and how many libertarians online were actually encouraging that as a good thing - and in that case all it took was giving libertarians a small foothold in the Congress. So I don't know...

Two recent 1921 mentions...

James Pethokoukis is familiar with my work on the 1921 depression.

Tom Sowell, I'm assuming, is not (because clearly if he was there would be no lingering disagreement!).

None of them along the line know what any of it's worth

The greatest hesitation I have about the market economy is the wedge between demand and the willingness to pay that is the ability to pay. This is, after all, why full employment is so important. This is why opportunity and equality are so important. Even if we were to put aside interpersonal utility comparisons, this wedge seems to present insurmountable problems when dealing with any kind of welfare claims about the market economy. At best we can say that given these constraints individuals do their best. We can't say anything about the quality of the system as a whole that isn't contingent on implausible assumption about the quality of the distribution of the ability to pay.

The trouble is the ability to pay is tied up with productivity, and this doesn't seem to be a justifiable basis for distributing well-being. At the same time allocating productivity efficiently is the only chance of getting a surplus in the first place to distribute.

If we have robots, robot socialism is probably an answer. Until then I just don't know. Advocacy of market economies in a lot of ways is fundamentally practical. There's no particular reason to like their results except that their results just seem so good in practice. Since that's largely what we have to go on it's not a trivial point.

Lawrence Klein has died

Sad news. His book The Keynesian Revolution (1967) catapulted me from the point where my relation to The General Theory was that it was a book I read and was broadly impressed with in 2006 because I wanted to give it a more thorough read after the spot-treatment I got in my history of thought class to the point where Keynesianism was a major intellectual interest. It's really a phenomenal book that gives you the analytics, an appreciation of the intellectual response, and a good sense of the intellectual history of Keynes. It was also written before the rational expectations revolution or even Friedman-Phelps really came into the picture, so it is a nice statement of Old Keynesianism. That's not to say New Keynesianism is some kind of problem (as some would have it). I don't think that. It's just a nice unalloyed picture of Keynes as we saw him from the vantage point of the 1960s.

Klein is the epitome of big macroeconomic models that would later come in for such abuse for having neither the microfoundations demanded by the Lucas critique nor the elegance you expect in modern reduced form macroeconometrics. He had a hand in a lot of the major efforts of this sort, at the Cowles Foundation, at the University of Pennsylvania, and at Brookings. This is what he was eventually cited for in his Nobel prize.

Things I like better than the minimum wage to help low income workers

- Policies that help them find good job matches including job search assistance and unemployment insurance.

- Investment in education, particularly drop-out prevention and mid-level skills.

- Moving our public training policies closer to providing skills that firms demand. WIA has a good start on this, but efforts like apprenticeship (which don't even have to be public - or they can be private with a small public subsidy) would be good too.

- Macroeconomic policy aimed at full employment (i.e. - not the austerity we've seen since ARRA).

- I would have said job creation tax credits a couple years ago except the results I'm getting for my dissertation chapter on this policy are changing my priors... not sure what I think now. I'll report back a couple years from now.

- Early interventions like Head Start, WIC, food stamps, etc. that ensure that cognitive development of children from low-income families is not hampered by circumstances outside of their control.

- Earned income tax credit and other labor supply policies. Extended time out of the labor market can lead to a lot of human capital depreciation. Even if we think demand-side problems are the biggest problems right now, this is important for that reason.

- Repeal of a lot of stupid licensure requirements.

- Maybe not being so ridiculously lop-sided in treatment of corporate labor (unions) relative to treatment of corporate capital. I was skeptical of unions for a very long time, but Richard Freeman is starting to change my priors on that.

There's certainly others.

Boudreaux on a quick comment of mine on the minimum wage.

I left a short comment on a recent post by Don Boudreaux on the minimum wage where he invoked the law of demand to defend the idea that minimum wages reduce employment for low skill workers. I wrote:

"The demand curve is downward sloping in models where minimum wages have a positive effect. I know you know this. Could you PLEASE stop citing the law of demand when you argue this point?"

My reasons for writing it were relatively narrow. Don has a big audience and I feel like he dumbs down ideas that he disagrees with a lot to give the impression that anyone that thinks those things just doesn't understand economics or doesn't appreciate that you can no more repeal the laws of economics than the laws of nature. This bugs me a lot, and in this case I know he knows that the demand curve is downward sloping in the monopsony model so I thought it was worth raising the point.

That's all that motivated me, but he responded with a much longer post that provides an opportunity to unpack a few more things about the minimum wage. So why not! First he writes:

"First, Daniel mistakenly assumes that the majority (or even many) supporters of minimum-wage legislation have the monopsony model in mind as the basis for their support."

Not true. I don't assume this - I agree with Don completely on what motivates most supporters of the minimum wage. It's not clear what Don's point is with this, though. I'm sure a lot of Americans think human life is valuable because as many as two thirds believe that God created human beings rather than evolution by natural selection (other polls, thankfully, come in lower). Surely Don wouldn't begrudge an evolutionary biologist his or her commitment to the value of human life because the majority derive their sense of value from divine creation? Or to put it more simply: Don needs to take that up with the people that think that way. The fact is most people take positions on economic policies without good economic reasoning. So? What possible relevance could that have for me making my case, as an economist.

But Don is getting ahead of himself anyway. Later he refers to me as one of these supporters of the minimum wage. I'm not. I'm of the opinion that it's a pretty dumb policy to help low income workers. I don't worry about it as much as Don does because the literature suggests to me that it's not particularly destructive. Modest minimum wages may even help a little due to monopsony effects (but we have to keep in mind that in many states there are very immodest minimum wages). So to me, from my read of the literature, it's not something I lose sleep over. But it's not something I get excited about or support either.

I'm a labor economist and I'm interested in understanding how labor markets work. I raise the point of monopsony because I am presented with two basic theories: competitive markets and monopsonistic markets, and the data. The best empirical studies seem to be scattered right around a zero employment impact of the minimum wage. Some excellent studies are just above and some excellent studies are just below. This is not what we would expect to see if these labor markets are competitive. Why aren't all of them below zero? I am forced to conclude that there is some monopsony power so that in many of these cases the minimum wage hits in that sweet spot where employment can be raised. The minimum wage isn't shockingly high in all cases, after all. Think about trying to live on that sort of wage. So it's not implausible that it would hit this sweet spot. I don't see how I can reject the monopsony model without being disingenuous.

And this is even before getting to the large literature on monopsony power in labor markets that has nothing whatsoever to do with the minimum wage! That's independent confirmation! If you find evidence of monopsony power in work completely unrelated to the minimum wage you validate monopsony power as an explanation of the cluster-around-zero findings in the minimum wage literature.

But enough about my motives here - more from Don.

Don then proceeds to ask what I think is a pretty dumb question: "Why do you not start your own businesses to hire these workers?". The answer for me and presumably a lot of people is that I have no particular skills in starting up and running a business of any kind. I do decently in certain narrow areas. I've got a pretty good track record competing for research contracts, and in conducting and writing up labor market research. I have no reason to believe I could run a fast food restaurant or big box retail establishment. There are people that are good at this, that pay people a higher than minimum wage and get value for it. I'm not one of them. Not everyone has access to the same production function, though. That's where entrepreneurship comes in.

This gets problematic, and the misstatement here really gets to the heart of the whole monopsony point:

"If your monopsony theory accurately describes the reality of the market today in the U.S. for low-skilled workers, why do you not make yourselves richer while simultaneously breaking the monopsony that you believe justifies legislation through which government, with your blessing, orders all low-skilled workers who cannot persuade employers to hire them at the ‘minimum wage’ to remain unemployed?"

Ignore the second half - as I said above Don is misattributing a policy stance to me. I have concerns about the whole "make yourselves richer" thing. The profits to be gained by a monopsonist come from exercising their monopsony power. It makes no sense for profit-seekers to go out and pay workers their marginal product in order to get rich. That is the whole problem of monopsony. Profit seekers exercise the monopsony power that is available.

I'm concerned about this misstatement because it makes me wonder if we're really on the same page. Assume for the sake of argument that monopsony power exists. Assume firms are profit-seekers (as Don exhorts me to be - he wants me to seek out my riches). IF there is monopsony power AND firms are profit-seekers, what do we expect to see? NOT what Don wants to see here. If monopsony power could just be competed away it wouldn't be monopsony power.

Don then makes a point I entirely agree with. Minimum wages imposed on firms with monopsony power can lead to substitution towards capital goods. This is true. The labor market would be more efficient but it would result in lower levels of employment (at least in partial equilibrium... unless Don is ready to cry "technological unemployment" he needs to be careful with this point).

He concludes by pointing out that monopsony in the labor market does not imply monopoly in the goods market. I'm having a little trouble right now understanding why this would matter (I'm sure he's right that it does), but I have trouble with the premise. I usually assume that almost all markets in modern commercial economies are characterized by monopolistic competition, and that there is a decent range of monopoly power that firms exercise unless they're producing commodities or something like that.

I was wrong. I admit it now. Say's Law is correct.

Congrats to Fama, Hansen, and Shiller

Here.

It's an interesting prize both for the Fama/Shiller contrast (reminiscent of Hayek/Myrdal), and for throwing Hansen into that mix. Hansen is one of those guys that does a lot of stuff so although the pairing for "empirical analysis of asset prices" surprised me, I just marked that up to "Lars Hansen has forgotten more about economics than I'll ever know". He is probably best known for his development of generalized methods of moments techniques, and has been cited as a potential laureate, but usually under the assumption that it would be a straight econometrics prize.

Thoughts on the Nobel

In 2010 I correctly predicted Pissarides and Mortensen as the Nobel winners (which was particularly exciting because I wasn't seeing anyone else mentioning them but me). I have not been able to reproduce the feat, but in hopes of another correct call I'll offer some thoughts of who I think would be particularly deserving.

I would like to see (and I think there's a fair chance at it) a microeconometrics prize for Angrist, Card, and Krueger. This is not as anomalous a prediction as Pissarides/Mortensen - many people have been mentioning it. The fact is, microeconometrics has undergone an enormous revolution over the last twenty-five years but this area hasn't been recognized with a prize since 2000. That prize was awarded for work done many decades earlier on selection and discrete choice.

Those are very old problems.

In the ensuing decades much of the progress has been in dealing with endogeneity and a lot of the work in that area is attributable to Angrist, Card, and Krueger.

Since the Heckman/McFadden prize of 2000 we've had two prizes for empirical macroeconometrics. Some people are talking about a Hendry, Pesaran, and Phillips prize but I really can't see how another macroeconometrics prize can be justified before catching up with the backlog in recognition for microeconometrics.

So that is both my hope and prediction.

The other one you hear a lot is Romer. As readers probably know I'd love to see that as well. In fact I'd like to see Barro-Romer, both because Barro deserves one and he contributed to this literature, and also because if he gets the prize for endogenous growth then he doesn't need to get explicitly recognized for his fiscal policy and Ricardian equivalence work!

Of course Barro could deserve a prize on his own for rational expectations, but the political fallout of that could be nicely avoided by giving him his deserved Nobel for work outside of short-run macro :)

The weakness of the "bootleggers and Baptists" line

Like a lot of you, I love the whole "bootleggers and Baptists" observation of Bruce Yandle. I used it recently, in fact, in my Cato piece on immigration not just because I love it but because I knew the audience there loves it too.

That's why it pains me to discuss what I've felt for a long time about it and what I think anyone honest with themselves should also feel about it: it's awfully weak as an analytical tool, but it's great as a rhetorical tool.

The thing is, almost any policy you could think of invoking it for is a contested policy. Public policy is naturally contested space, and the sorts of policies we talk about are especially contested. That means that there are bootleggers and there are Baptists on both side of any issue in all likelihood. What got me writing this was a recent post by Don Boudreaux using bootleggers and Baptists to talk about the minimum wage. There is another application here, though.

As far as I can tell Don Boudreaux doesn't mean any ill-will to low income working families. I don't think Walter Williams means any ill-will to low income blacks either. He does flood my email after I repeatedly tell him that I never signed up to get his email and that I would like to be unsubscribed, but this is a minor frustration - I don't think he is a man overflowing with ill-will.

Boudreaux and Williams are the Baptists. They are sincerely seeking out what they see as the good.

But there are other elements pushing their view on the minimum wage as well, principally employer interests that would like to keep labor costs as low as possible. These are the bootleggers. They have a pecuniary interest in policy that weakens labor and they'll team up with Baptists who have no interest whatsoever in hurting low income working families but are aligned on policy questions because they are under the impression that they are pursuing the good.

This isn't some leftist fantasy either. Adam Smith made precisely this point in his discussion of wages. He was firmly of the opinion that well-meaning people had a tendency to side against the interests of labor not out of any ill-will but out of a somewhat confused sense of what constituted the public good (when labor fought for its interests it was usually far more visible and perceived to be far more threatening), and that employers of course were more than happy to go along with this.

It's obvious to most people today, and not just restricted to the far left today either. It's clear to most people unless you're the sort of "Baptist" whose view of the good coincides with interest of employers.

See - it doesn't really get us anywhere analytically.

Now if Don sees this he's going to come up with all sorts of reasons why the case I outline here is different. Of course he is. All Baptists do. Do you think minimum wage advocates see Don's post any differently?

This difference of opinion is often - in the circles Don runs in - interpreted as a lack of appreciation for public choice principles. In reality I don't think it's anything of the sort, and indeed leveling that sort of complaint exhibits an immature appreciation of the sort of public choice problems that crop up. What's usually going on, I think, is a difference of opinion on the most sensible application of public choice principles. An area that I think is particularly rife with this problem is explaining fiscal austerity. The root of the austerity problem is a public choice problem: political interests in austerity that conflict with the interests of society. Unfortunately there is no research on this that I am aware of among public choice scholars because of the narrow application of those ideas. Other economists interested in "political economy" have taken up this work, but they generally aren't associated with the public choice school. If you raise these concerns with them you get told you're missing something about public choice. One thing you don't usually get (I'd love to learn of exceptions) is reflection that maybe there's something stale about that research agenda and that looking into austerity is long overdue.

I've gone a little far afield here, but the fundamental point I think is the same: there is a strain of libertarian economics that runs on metaphors: Baptists and bootleggers, for example. The communication value of these metaphors is often very high, but the analytic content is much lower, I think, and it's usually because of a surprisingly narrow view of how the principles at hand are best applied, and a surprising lack of appreciation that others would apply it differently.

With grandad

The hat's pretty cute if she just stopped scowling about it...

Klassy Krugman

Thank goodness.

For some reason there's been a spate of nastiness lately. I don't know why - maybe it just got kicked up by Ferguson. One thing I do know is that if it escalated I'd feel obligated to read up and comment. Krugman's relative patience in the face all the haters is otherworldly. Very impressive. And when he's not patient, the times when he is makes it more forgivable.

I'm with Noah Smith, though. I'm personally more of a DeLong yes-man than a Krugman yes-man. Krugman is more likely to overstate his case or comment prematurely. Makes it harder to be a good yes-man. I guess I'm technically still in the "claque" though (I did not know this was a word before reading Ferguson [well, the beginning of Ferguson... I couldn't stomach reading too far], so that's at least something he offers).

Some links

1. Jonathan Catalan has a great post on Akerlof's lemons paper, criticizing some skeptics. I think if most economists really thought about it they'd be in Jonathan's group 3 (accept the conclusions of the paper and think for the most part we have private solutions). I think people get a sense that most economists are in his group 2 (seek out public and private solutions) because the thing about private solutions is that they kind of take care of themselves. Plausible public solutions are in our face precisely because these are the cases that don't solve themselves (or at least not as easily). But that's not the case for most asymmetric information problem (or any other "market failure"). I'd differ a little with Jonathan on his point at the end that we don't see a lot of markets characterized by a lemons situation. He seems to conclude that Akerlof thought markets for lemons would eventually collapse. But this is only one outcome. It all depends on the critical points in the distribution of quality and expected quality and peoples' demand for quality. For certain critical values, in the Akerlof model, markets for lemons can be and are sustained indefinitely. Presumably many such markets exist and we just deal with it (or else we solve the asymmetric information problem).

2. Kevin Quinn has a really excellent paper in the latest issue of Critical Review on Adam Smith and education. I want to assign it to my class, since we spent a lot of time talking about the relationship between the division of labor and Smith's egalitarianism. Alas we're past Smith and I'm probably assigning too much anyway.

3. Gene Callahan on the Mises/Hayek divergence.

4. Yesterday J. Michael Dunn, of Indiana University, lead the discussion in our Infometrics Seminar. Unfortunately I don't have a link to the talk (although it looked like it was being taped), but you can find info on his work in the link above. Our seminar is basically on information theory, and he spent a lot of time connecting the math of information theory to code and computation.

If Marx had a greater appreciation of subjective value...

...then we would have C-M-C' in addition to M-C-M', and all these internal contradictions and such would be a lot less scary.

The worst rise to the top...

When you don't treat your workforce well you lose high quality workers. Federal workers have lived with almost four years of pay, hiring, and promotion freezes. Many agencies have had furloughs this summer and all are experiencing some level of furlough now. Oh, and a large portion of the public - frothed up by extremists in the GOP - act like the work they do is worthless.

That's not an environment that people with outside options like to stay in for very long, and the people with outside options are the high quality workers.

Kate just heard of a third case of one of the more competent workers in her department leaving for the public sector since the beginning of this sequester mess a couple months ago. No hiring, still. Which means more work for her when she gets back from maternity leave. Precious little appreciation except from some of her superiors who can only show appreciation when they get a chance to catch their breath from all the work there is to do.

It's not a good situation, and the eventual result of all this is that the worst will rise to the top.

Shutdowns, sequesters, pay freezes, etc. make for bad governance.

Josiah Neeley and Adam Gurri do the Lord's work...

... defending Constitutional institutions such as the presidential system from their detractors (here and here).

It's very easy to think the division of powers is just an archaic hassle in times like this, but it's worth remembering that if we had a prime minister instead, for example, it would not be Prime Minister Obama making sure that none of this silliness goes on. It would be Prime Minister Boehner, constantly looking to the maintenance of his coalition.

You think he's desperate to keep the speakership?!? What do you think will happen if you make him head of government.

When an institution works this well for over two hundred years I'm personally wary of dispensing with it so completely.

ALL THE THINGS!!!!

My favorite picture of Caroline so far

A few labor market links

- I don't entirely agree with LK's thoughts on Hutt here. I will concur that there is a rose-colored glasses view of unemployment in his Theory of Idle Resources and I also agree that it is over-touted as a refutation of Keynes (by Hutt himself and by his fans), but if we put that aside the idea is essentially sound. In fact, I'm near finishing a chapter on the ways we think about unemployment that discusses Hutt and Beveridge as having broadly similar approaches to the question which lay the foundations for modern search theories (where unemployed workers are not "idle" because they are searching for work), and Beveridge obviously is no thorn in the side of Keynesianism.

- Bryan Caplan has good thoughts on "malemployment" (I always thought this was just called "underemployment", although I suppose that has specific connotations about hours worked... or maybe "mismatch"?). I advise that people approach the "Team Georgetown" that Caplan discusses carefully. They are active in the STEM workforce debate and can be similarly misleading on these skilled labor classification questions.

- Obamacare and doctor shortages (HT Ryan Long). Readers know I don't think much high skill labor shortage claims, but this is one area where the problem is very real, largely due to AMA regulations.

- I am quoted in this article on the impact of the shut-down. There's nothing wrong with what is attributed to me but I don't think it really captures the details I communicated to the reporter. For those that are interested, here's our email exchange:

- What are you studying at AU? How many years left do you have and are student loans a concern?
A: Economics Phd, two or three years left, student loans not a concern.

- Do you and your family live in the District? How does this impact your household finances and ability to pay loans, a mortgage or rent?
A: We live in Falls Church, VA. The shut-down itself doesn't threaten our bills too much. We've saved, I have some grant income, and in all likelihood we should get backpay from the shutdown.

- Are you worried about the impact on household finances immediately or in the future? Do you have vacations or plans you need to cancel that are paycheck dependent?
A: This is the right question. What I'm really worried about is what this indicates about the future. I'm increasingly concerned about not raising the debt ceiling and more continuing resolutions as a result of these political dynamics. That puts increasing pressure on us. We have definitely scaled back vacation and been more frugal over the last several years because of this. This is what I think a lot of people don't understand. This is coming on top of years of pay freezes, hiring freezes, and a summer of furloughs for federal workers.

- How are your child care needs impacted?
A: Nothing directly yet. I work a lot from home and can take care of our newborn, and my wife is on maternity leave right now. This definitely will reduce our ability to pay for child care as our daughter gets older if the continuing resolutions and pay freezes continue.

- Where is your wife working? Has she already been hit by sequester-related furloughs and now facing another furlough through shutdown?
A: National Defense University. She has been hit by sequester, and she also hasn't had a raise since she's been hired. This is despite the fact that she is taking on more and more work because of the hiring freezes that are in place.

- Did you save money in the event of a shutdown impacting finances?
A: Not with a shut down in mind, but yes, we are very conscious of trying to save money.

- Who do you blame for the inaction in Congress? Do you see it getting better in Washington, or is this rock bottom? Will elections in 2014 turn things around?
A: The Republicans without exception. There is room for improvement on the Democratic side, but the only reason why this is an issue is that it is tied to the ACA, and that falls directly in the lap of Republicans. Republicans are also chiefly to blame for the fiscal austerity of the last several years.