Wednesday, October 30, 2013

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


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.

Sunday, October 27, 2013

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.

Friday, October 25, 2013

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...

Thursday, October 24, 2013

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!).

Wednesday, October 23, 2013

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.

Monday, October 21, 2013

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.

Thursday, October 17, 2013

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.

Monday, October 14, 2013

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

Congrats to Fama, Hansen, and Shiller


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.

Saturday, October 12, 2013

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.

Friday, October 11, 2013

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).

Thursday, October 10, 2013

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.

Monday, October 7, 2013

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.

Friday, October 4, 2013

Thursday, October 3, 2013

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.