TheMoneyIllusion

  A slightly off-center perspective on monetary problems.

46 Responses to “Does unemployment actually lag output?”

1. Gregor Bush
   18. January 2011 at 07:07
   

   Scott,
   You should ask Tyler and Arnold how they account for the massive increase in the correlation between the S&P 500 and TIPS breakeven inflation spreads that has persisted since the onset of the crisis. To me, this is extremely strong evidence in favor of the AD shortfall view and against the “recalculation” view. Under normal circumstances the correlation is zero or slightly negative (stocks abhor high inflation) but over the past year it’s been about 0.7. What story, other than weak AD, could possibly explain this?

   I find it amazing how economists have bent over backwards to attempt to create new theories during this recession when the standard theory of a drop in AD fits the data almost perfectly. I’ve come to the conclusion that most people simply refuse to believe that nominal shocks have real effects. “You can’t create jobs by printing money” seems to be the standard mantra.

2. Bill Gee
   18. January 2011 at 07:52
   

   I believe that elite macroeconomists preside over the economy like “high priests”. History has shown that true paradigm shifts usually occur during total regime changes and are rarely the result of internal reforms to an established world-view.

   It would be interesting what would make up the President’s Councel of Economic Advisors if Ron Paul were to win the White House.

3. StatsGuy
   18. January 2011 at 08:25
   

   Some notes:

   1) The Fed has a series of incentives, and you would be a strange economist to ignore their incentives in trying to unravel their decisionmaking. Certainly, finding the truth is part of that system of incentives, but they are a risk averse bunch of individuals. They have certain constituencies (including academia), certain concerns (reputation, job stability, institutional credibility, legacy, self esteem), and certain cognitive biases. My own error was failing to recognize in 2008 all these factors, and just how long it can take for the truth to win through.

   2) I remain sympathetic to Cowen’s MP of labor concern, although there lies a slippery slope that leads us very quickly to Marx’s industrial reserve army. Join a company, and you’ll quickly see that a lot of people are “busy”, but don’t actually gets tuff done. When pressed, they seem to find spare to time to get things done they said couldn’t be done – up to a point. This recession has squeezed out a lot of slack, but technology has allowed us to build up quite a bit of slack over the last several years since much of our productivity/output is not visible to managers. It’s not just the unions (if there are any left outside the public sector) – indeed, industrial unionization is lower than it’s been in decades and yet the unemployment problem is worse, not better (hmm….). Since you obviously don’t think that lower unionization is causing the unresponsiveness of employment, you have to consider other options.

   3) Having said that, you are somewhat correct about the data – and I’ll add one point.

   One of the things that’s probably a bit unique about this recession is the sheer quantity of “off books” activity that is going on. A lot of housing contractors are still working, but their sourcing jobs through unofficial channels, taking lower pay, and getting paid in cash (to avoid taxes). I don’t think the reduction in output as been quite as severe as the official numbers are stating.

   Consider another example of switching of output from official to unofficial channels. If a new car sells at a lot, it’s recorded in official numbers. If an old car is repaired at a shop, that repair is often done in cash. We know that people are shifting from new cars to keeping old cars longer, but how much of the cost of repair are we failing to pick up in the numbers? As a crude indicator of the impact, consider the increase in sales at parts dealers (like Autozone).

   http://www.bizjournals.com/memphis/news/2010/12/07/autozones-sales-income-keep-humming.html

4. Mark A. Sadowski
   18. January 2011 at 09:37
   

   I’m a little perplexed that Tyler Cowen thinks he’s discovered something new, when it seems to me to be something rather old (MPL falls in a recession). There are many research papers that suggest that MPL is a function of AD. So what’s the point of the ZMP argument, if MPL is simply a function of monetary policy? Rather than an argument against a negative shock to AD as the cause of the recession, it’s an argument in favor of it.

   And if I’m reading Cowen’s argument correctly, doesn’t the apparent fact of exploding productivity growth suggest that we may be suffering from a positive AS shock? That would imply that the inflationary consequences of additional monetary stimulus would be even more muted.

5. scott sumner
   18. January 2011 at 09:40
   

   Gregor, Good point, there is no need to look beyond AD. In fairness, Tyler Cowen does think it’s partly AD, just not as much as I do. And Kling thinks stimulus is worth a shot.

   Bill Gee, Not me, perhaps Bob Murphy would be picked.

   Statsguy, You said:

   “1) The Fed has a series of incentives, and you would be a strange economist to ignore their incentives in trying to unravel their decisionmaking.”

   Commenters have offered lots of theories, all of them lousy. Some say the Fed wants to screw Obama. But the tight mony started when McCain was running, and it sank his campaign.

   Some say the deflation after September 2008 was to help creditors, but then why not do it in 2005? Even worse, it hurt most creditors, as loan defaults soared. If someone has a good public choice theory, I’d love to hear it. I’ve met a number of Fed Presidents, and spoken with them. I’ve read the transcripts. I think what they say is what they believe.

   You said:

   “Join a company, and you’ll quickly see that a lot of people are “busy”, but don’t actually get stuff done. When pressed, they seem to find spare to time to get things done they said couldn’t be done – up to a point.”

   This is a common argument, but wrong. Companies fire workers that they think are not getting things done–it happens all the time. Yes, there are workers who are not getting things done, but they would not be working unless the company thought they were going to be productive. It’s like an argument my dean used to make. He claimed the MC of one additional student was zero, since most classrooms had empty seats. But we cap our enrollments at 35 per class, so each new student creates a 1/35th chance that we’ll need to hire an extra teaching slot. It’s all about expectations.

   You said:

   “One of the things that’s probably a bit unique about this recession is the sheer quantity of “off books” activity that is going on. A lot of housing contractors are still working, but their sourcing jobs through unofficial channels, taking lower pay, and getting paid in cash (to avoid taxes). I don’t think the reduction in output has been quite as severe as the official numbers are stating.”

   Good point, but these sorts of things only explain a modest portion of the lost output. Still, I agree that the actual fall has been substantially less than the measured fall in output.

   I agree with the first commenter–it’s a normal AD shock, nothing mysterious to explain. This is what AD shocks look like.

6. scott sumner
   18. January 2011 at 09:43
   

   Mark, I guess it’s the zero MP that is novel. I don’t see productivity exploding, but I guess others look at the data differently than me. Yes, if productivity was exploding, I’d think you want to boost AD. I suppose the argument is that the unemployed workers are much less productive than the employed workers.

7. Morgan Warstler
   18. January 2011 at 10:24
   

   Scott, I’m repeating this because I want and answer and I really don’t understand… please explain why my guaranteed income (an improvement over Milton’s negative tax rates) doesn’t solve overnight:

   http://biggovernment.com/mwarstler/2011/01/04/guaranteed-income-the-christian-solution-to-our-economy/

   Seriously WHY? Why do you say I’m dreaming? Why isn’t the entire debate simply about making a policy change to UI and Minimum Wage.

8. marcus nunes
   18. January 2011 at 10:35
   

   Do elite macroeconomists and Fed officials enjoy presiding like high priests over a mysterious macroeconomy, or do they actually want to discover the truth?

   High priests over a mysterious economy wins HANDS DOWN!

9. david
   18. January 2011 at 10:47
   

   Okay, to be less rude to Warstler this time around:

   (1) because the minimum wage is non-binding for the levels of unemployment we are seeing. The vast majority of positions pay well above minimum wage – we are talking >97% here – yet there is still unemployment among these groups. The conclusion, therefore, is that an excessively high minimum wage is not the cause.

   (2) UI is also not the problem, since UI has begun to run out for increasingly many former workers, and the apparent response has been lacklustre.

   (3) existing wage and unemployment policy in the US (1) has not changed substantially since the beginning of the recession, and (2) is substantially less tolerant of reliance on government support than policies elsewhere in the world. Comparing the US of 2010 to the US of 2006 suggests, immediately, that since microeconomic policy changes were not the cause, microeconomic policy changes will not be the solution. There are ways to model unemployment so that it IS the solution, but such models would generally conflict with prevailing macroeconomic intuition.

   (4) more specifically as to your proposed solution: as I have noted before, it is workfare, not guaranteed-income; the Milton Friedman version of guaranteed income is guaranteed to all individuals regardless of their job status – including employed and non-labor-force individuals. Since you want to limit it conditional on participation on government-mediated, work, it is not guaranteed income. Workfare has been proposed before and is both politically unpopular and inhibits job-matching (since it forces individuals, even skilled individuals, to work in easy-to-match menial jobs rather than jobs that may match their particular skillset).

   Second, your particular form of workfare is badly-designed; if the problem is a shortfall in aggregate demand (see Sumner’s own posts for this), and you propose to pay individuals to participate in job-matching programs, then all you observe is existing (employed) individuals in menial jobs being retrenched and replaced by others found via job-matching. An employer would rather pay $0.01 than pay $5, and if paying $0.01 will find $5 worth of employees, they will switch. So all you are doing is encouraging retrenchment and a move of current employed to your new unemployment program, where their former employers will re-employ them, relying on the government to make up the difference. Existing unemployment will remain, since UI and the minimum wage is non-binding.

10. david
    18. January 2011 at 10:54
    

    (if someone wants to translate the New Keynesian/quasi-monetarist argument over how price stickiness causes a reduction in employment into laymen English for Warstler’s benefit, please do; I fear such translation is beyond my skills.)

11. david
    18. January 2011 at 11:32
    

    Also, Warstler: Labeling your solution as “Christian” is not likely to work, since the Christian right is well aware of the concept of conditioning benefits on accepting any available job offers – workfare is not a new concept – and doesn’t like it.

    You may recall the panic about this, back five years ago. It was where my remark about daughters and handjobs came from, by the way.

12. Contemplationist
    18. January 2011 at 12:01
    

    I think Gregor Bush nails it. I’m a hardcore libertarian who leaned towards the Austrian explanation for recessions. I still think Austrians have a very useful framework, but the AD-NGDP view explains a lot as well.
    Nominal shocks have real effects – this is what we have to keep repeating.
    Nominal shocks have real effects.
    Nominal shocks have real effects.
    …

13. Wonks Anonymous
    18. January 2011 at 12:45
    

    Tyler Cowen says the recession has cut health spending:
    http://www.marginalrevolution.com/marginalrevolution/2011/01/one-way-to-cut-health-care-spending.html

14. Tom Grey
    18. January 2011 at 13:51
    

    a) yes – elite macroeconomists and Fed officials enjoy presiding like high priests over a mysterious macroeconomy,
    and (not or) b) they actually want to discover the truth?

    They want the truth, so as to preside with more authority.
    If there is conflict between presiding and truth, they usually choose presiding.

    This was gov’t – activist Keynes big advantage over Hayek, a gov’t policy to Do Something (anything!) that might work.

    My challenge to Scott — what works if the economy is full of overpaid workers, due to successful industrializing alternative global economies? (I don’t think “anything” works, but guess that money-printing with recalculation is the least painful way for very painful adjustments.)

15. Declan Trott
    18. January 2011 at 14:43
    

    Scott,

    “If the Fed suddenly imposes 10% fall in NGDP, it is not true that factory workers can keep their jobs by accepting 10% wage cuts. . . . The aggregate wage will fall 5% and we’ll have a severe recession.”

    Could you please explain why you think the aggregate wage is the important thing for the employment of particular groups of workers? I can see that lower employment in the groups whose wages are not cut (if the demand for their labour is elastic) might lead to lower demand for the goods and services of workers whose wages are cut, but OTOH there should be some substitution effect in their favour due to the relative price shift. (Personally I think the elasticities of substitution between different occupations are quite low, but I didn’t think that was a widely held view.) If a 10% cut wouldn’t do it, would a 20% or larger cut?

    I guess I am asking, is your logic simply about the scale effect being bigger than the substitution effect in the SR, or am I missing some monetary subtlety?

16. Morgan Warstler
    18. January 2011 at 16:55
    

    David, you are wrong. You aren’t even close to thinking about this like free market economist. Milton Friedman in the days to the Internet would have adopted my idea instead. I solve for ALL job matching – it is done online – as all government will be sooner than later. (more on Milty in a moment).

    Ebay is my proof, auction pricing is a STRONG way to sell excess inventory man-weeks. This kind of web environment would quickly show:

    1. At minimum $1 per hour, on minimum 40 hour weeks, in work from home, we’d quickly end all of India’s call center business… and we’d pick up a nice piece of per-piece manufacturing in China.

    2. At $1 minimum, we’d see 100% hiring and probably see $2-3 blanket offers from national companies.

    3. Registrants MUST be willing to work – this replaces UI and Minimum Wage. Altho, quickly, it would becomes the basis for other aid programs. Only the incapable would have paid free time.

    4. It works like Paypal, employers deposit money before work is done, the workers get their own debit card.

    5. The DATA tracking is outstanding – across ages, to the zip code, the economists will have a field day. Simply because at $1 per hour HUGE numbers of people are suddenly int he market for cheap labor.

    6. My $ numbers assume 20M recipients, not 15M unemployed and the costs are negligible.

    In any general examples you use, where you don’t try to find some squirrelly daughter-is-a-whore response, this solves NICELY.

    The politics are genius. It has a very strong “Why Not?” about is – it screws liberals, and keeps the Fed from printing money.

    The Tea Party and the rest of the right, save the hardened “no aid whatsoever” folks will happily take this… read the responses at the site.

    The likely voters want a magic bullet for “full employment” – this is it.

    What I really want is Scott’s take. He claims to be a Friedmanite. As I said Milton would love this, because it solves for the “matching” issue – and there’s no chance of it providing a disincentive to work. He’s REALLY like the creation of low end economies – keeping the cheap jobs here, makes all kind of productivity gains for the middle class.

17. david
    18. January 2011 at 17:36
    

    @Warstler

    If you want to analogize to ebay-like auction markets, yours works like this: let us say that we observe that there are too many apples – apples on sale are going unsold. You propose that the government buy apples at $5 per apple, and sell them at auction at any price, even below the cost price of growing apples.

    What do you think will happen?

    Now add in aggregate demand shortfalls. Let us say that apples were going unsold because it so happens that nobody in our fictitious economy eats apples (think about why businesses employ labor); they only buy them to make apple juice and the price of apple juice is too high, so not enough people are drinking apple juice to justify buying more apples. Suppose the price of apple juice remains unchanged. What effect does your proposal have on the amount of apples purchased?

    (the answer, by the way, is that the amount of apples purchased will remain unchanged, and all that we will observe is a movement by the juicers from buying apples on the open market, to buying apples from the government at a lower price, at the expense of the taxpayer. That’s your marvelous proposal.)

    Weirdly enough, your proposal would work better if the economy were more Keynesian – in which case we are essentially encouraging downward labor-cost adjustment by making the state pay the difference. But the problem here is not wage rigidity but price rigidity, and so attempting to tweak at wage problems – problems of dubious existence to begin with – will not help.

    By the way, you seem to be under the impression that existing unemployment insurance programs don’t require job-searching on the part of the recipient; this is generally wrong. Also, I reiterate the point that the minimum wage is non-binding and removing unemployment insurance has generally made its former recipients leave the labor force, not seek employment at lower wages.

18. scott sumner
    18. January 2011 at 18:36
    

    Morgan, I answered that earlier today–I came up with the same idea 35 years ago. It’s fine.

    marcus, I was pretty sure that’s what my commenters would say. You guys aren’t as naive as I am.

    Contemplationist: I agree.

    Tom, We had a globalized world economy in April 2008, and 4.9% unemployment. That is not the problem, in theory or in practice.

    Declan, You said;

    “I guess I am asking, is your logic simply about the scale effect being bigger than the substitution effect in the SR, or am I missing some monetary subtlety?”

    No subtlety, just focusing on the scale effect. And I might add that even in the flexible wage sector the wage cuts are no where big enough. But yes, there is some wage cut that might restore employment for those workers. But there’s also a free rider problem. Suppose the auto and steel workers accept wage cuts, but the auto parts suppliers decide not to in order to free ride?

19. OGT
    18. January 2011 at 18:46
    

    Sumner said: “During recessions people cut back on car purchases much more than health care (often paid for by insurance or Medicare), so it will be the factory workers losing their jobs, despite their willingness to take pay cuts. ”

    Right. That’s one thing about the ‘wage stickiness’ frame that I’ve never liked. At other times you’ve made comparisons to wages a Bentley and an 8% fall in NGDP. However, if enrollment and revenue at Bentley has increased from say MBA students waiting out the recession, I don’t see a clear reason your salary should be cut. Surely a Professor at a school struggling during a recovery would not be successful, (perhaps the opportunity cost of leaving the workforce for a few years is now thought too high).

    People tend to respond to recessions in relatively predictable ways, fewer durable goods purchases, less spending at restaurants, buying more generic products, and so forth. So that a nominal shock is very likely to have some employment effect even if wages a very flexible because spending is lumpy.

    Not that I am denying a wage flexibility effect is just seems to not be the whole story and a bit confusing to some people.

20. Morgan Warstler
    18. January 2011 at 18:54
    

    david, most of your response is jibberish. Skewed thinking layered on skewed thinking. It makes me think you aren’t being honest.

    “Weirdly enough, your proposal would work better if the economy were more Keynesian – in which case we are essentially encouraging downward labor-cost adjustment by making the state pay the difference.”

    lol. that’s great! That’s exactly why it is politically palatable.

    But in fact, it is LESS Kensyian that what we currently have IF we don’t buy this out of your mouth:

    “By the way, you seem to be under the impression that existing unemployment insurance programs don’t require job-searching on the part of the recipient; this is generally wrong. Also, I reiterate the point that the minimum wage is non-binding and removing unemployment insurance has generally made its former recipients leave the labor force, not seek employment at lower wages.”

    Please go look in the mirror and say out loud without smirking, “if I could hire someone to clean my house for $2 per hour x 40 hours a week, I would not do it.”

    There are thousands of other jobs that become viable at $2 per hour, so ya know David, there comes a time in argumentation where you have to start at first principles, or be considered ridiculous. And one such first principle is that at $1 per hour – there will be no unemployment, because people will be hired to do all kinds of shit that isn’t doable at MW + all the other costs (which my system evaporates).

    Say it with me, EBAY / PAYPAYL – you pay only the per hour cost – you get a week of human labor. THERE WILL BE NO UNEMPLOYMENT.

    —–

    Now perhaps you’d like to discuss how $2 per hour maids, drive down the labor value of other maids – that’d be at least true.

    And yes, it’d likely make being an illegal immigrant far less palatable, after all they CAN”T pick grapes for $1 per hour, like our unemployed can.

    And there’s definitely some more NGDP, as imagine V would increase, and our trade deficit would get cut.

    But I think the signalling is actually really important – with a simple formula that incetivizes the worker to to make $$ instead of $3 and $5 instead of $4…. suddenly everyone at the bottom of the ladder really defines out what jobs are better than others to have.

    But mostly it’s the productivity bump… you have to admit it would be HUGE, I mean think of all that excess capacity – and I don’t mean the unemployed construction worker – we don’t need new houses yet.

    I mean your productivity, when she can pay the ex-construction worker to fix up the house, so you don’t have to, and you can spend more time online and say smarter things than this,

    “You propose that the government buy apples at $5 per apple, and sell them at auction at any price, even below the cost price of growing apples.

    What do you think will happen?

    Now add in aggregate demand shortfalls. Let us say that apples were going unsold because it so happens that nobody in our fictitious economy eats apples (think about why businesses employ labor); they only buy them to make apple juice and the price of apple juice is too high, so not enough people are drinking apple juice to justify buying more apples. Suppose the price of apple juice remains unchanged. What effect does your proposal have on the amount of apples.”

    The apples are already grown. This is funded out of current GVT spending. They are laying on the ground, and you are arguing we should destroy them, less anyone who can’t normally afford apple juice get to buy it.

    The rest is jibberish.

    Stick to macro, its less transparent.

21. david
    18. January 2011 at 19:02
    

    Cowen is willing to assume wage adjustment across sectors presumably because even the New Keynesians presume wage adjustment across sectors; you have to be very, very Keynesian to argue the (heterogeneous) labour market is so dysfunctional that the standard Walrasian adjustment process doesn’t hold (“there is no means of securing uniform wage reductions for every class of labour”, etc. – and then the standard Keynesian result obtains, except only for the SR rather than LR).

    But your particular paragraph on factory workers and wage cuts seems to mix sticky (healthcare worker) wages and sticky (healthcare) prices, so I’m not sure which narrative you’re going with here. Or maybe you’re invoking both? It’s entirely possible to have a mix, I suppose.

22. Morgan Warstler
    18. January 2011 at 19:03
    

    Scott,

    The why are you a macro-economist?

    I mean, here’s an immediate thing you thought of 35 years ago, that ENDS unemployment.

    And instead of championing a SIMPLE policy change, you create an eggheaded rube-goldberg forumla that requires YEARS AND YEARS of blogging that causes 99.9% of the population’s eye to glaze over.

    Aren’t you flat out admitting agent-bias?

    It works. You agree it works. And it puts the Fed into a straight-jacket, they have only a single mandate again!

    It sounds like you want to still matter, even if we have to have 20M unemployed for that to happen.

23. david
    18. January 2011 at 19:46
    

    @Warstler

    The minimum wage is not binding.

    Your argument is that the minimum wage is binding and thus that there are enough jobs to provide employment for all the unemployed, except that those jobs would pay below minimum wage. But the minimum wage is not binding. The minimum wage is not binding. Do you understand what that means?

    First, that people who earn far above minimum wage – who could accept a pay cut and still earn far above minimum wage – were retrenched anyway, and second, that removing the minimum wage doesn’t miraculously generate thousands of maids scurrying about to clean your house for $2/hour; for evidence of this, you only need to look at any jurisdiction where the minimum wage does not apply for the jobs you are proposing. There is no minimum wage for domestic workers in New Brunswick, Manitoba, or Quebec. That doesn’t erase Canadian unemployment, or even New Brunswickian, Manitoban, or Quebecois unemployment.

    An inability to understand basic economic terminology does not mean that the terminology is gibberish; it just means that you do not understand basic economic terminology. When I say “the flaw in your case is that minimum wage is not binding”, I am not asking you to repeat an argument that assumes that it is. I am asking you to defend that it is binding, and this you have not done.

    These are just the theoretical problems; you still have yet to defend yourself from the obvious implementation flaws. I bid for labor at $10000/hour. My task: travel from New York to Los Angeles in an hour, as a mail courier. Clearly this is impossible; the problem is that your scheme has zero accounting for job difficulty.

    Or try another one: I bid for labor at whatever bid that wins. My task: you return me what I paid you and then we divvy up the government subsidy. I have no incentive to report this to the government and neither do you. How do you intend to enforce against this?

    FWIW, I would not, in fact, pay $80 a week to have my house cleaned, partly because I do not have a house so large that it takes 40 hours a week just to keep it clean.

24. Morgan Warstler
    18. January 2011 at 21:45
    

    “I bid for labor at $10000/hour. My task: travel from New York to Los Angeles in an hour, as a mail courier. Clearly this is impossible; the problem is that your scheme has zero accounting for job difficulty.”

    Jibberish.

    “Or try another one: I bid for labor at whatever bid that wins. My task: you return me what I paid you and then we divvy up the government subsidy. I have no incentive to report this to the government and neither do you. How do you intend to enforce against this?”

    Jibberish. David LISTEN TO ME. Think.

    On Day 1, a single US call center swoops in an bids $1 per hour on 50K unemployed. Immediately undercutting India, in a way they cannot compete with. India literally can’t undercut this rate. Meanwhile, hundreds of thousands of maids, and handymen are put into service. Daycare gets cheaper. The middle class becomes more productive.

    The fact that you don’t need $80 worth of personal services to fill a full week MEANS you are not THINKING.

    For $80 per week, you can have meals cooked, kids picked up, the dog walked, David you can have a full service maid. Of course, so many other people will want this, that the rate will quickly head above $2.

    6 months later, there’s NO ONE left at $1, maybe $2, maybe $3. Now watch: Food stamps, Section 8, Energy Assistance…

    “Oh have you signed up for the Guaranteed Income Program?”

    NOW, Public Employees are paid to chase down disability recipients and PROVE they can work from home, do ANYTHING for $1 per hour.

    Or they get nothing. Say it with me, “or they get nothing.”

    Did you say it?

    See David, words have meaning you SOD. And my ability to see through you silly JIBBERISH (with a J – sounds like a word, but isn’t even one) of econ babble and say, “is not binding,” it means you imagine there is such a person WHO meets all three of these requirements:

    1. At $1 chooses not to work.
    2. Is not able to feed or house themselves or their family.
    3. Is not disabled past any legitimate employer finding a margin above $1 per hour out of them.

    David, there is NO SUCH person. They can be any 2 of the 3 , but not all 3. You can be not disabled, and unable to feed/house your family, and with GI – you WILL work for $1 per hour. You can be unwilling to to work for $1 per hour and be disabled such that no one can make margin off your labor – it means you have some savings to live on still.

    You get this? Does LOGIC finally get through to you? Just start with the premise: Morgan wants to transfer the cost of a Livable Wage to the entire economy – we will pay for everyone from the general fund, but they will ALL push the wagon – and their labor will ALWAYS be profitable… and our current menial labor workers will be forced to make less or get smarter. Necessity is the mother of invention.

    See David you lose in this paradigm because you are focusing on the supply side, as if starving homeless capable people have any choice. They don’t. They have to work. That’s life. And I’m focusing on the demand side of the equation. Given that ALL people can be required to work for $1 – will the market find value in every single capable soul.

    Answer: yes.

    To win, you HAVE to argue that some people aren’t even worth $1 per hour, not that they won’t choose too earn it.

25. marcus nunes
    19. January 2011 at 03:13
    

    Scott: McKinnon´s view is that MP is too easy:
    “First, sharp general price increases in auction-market goods such as primary commodities or foreign exchange (i.e., a weakening dollar) is an early warning sign that the Fed is being too easy””a warning that the Fed is again ignoring as we enter 2011”.
    http://online.wsj.com/article/SB10001424052748704405704576064252782421930.html?mod=WSJ_Opinion_LEADTop#printMode

26. marcus nunes
    19. January 2011 at 05:49
    

    Scott: Things get confusing when you have “big names” going on in several directions. McKinnon (see above) and Mundell advocate stabilizing fx rates:
    http://www.marketwatch.com/story/leading-economist-warns-against-rapid-yuan-rise-2011-01-18?dist=afterbell
    Plosser does an update on Friedman (1968) and comes up with a recomendation that seemed to me nonsensical (actually shows that inflation targeting can be destabilizing in the presence of productivity shocks):
    “For example, if an adverse productivity shock results in a substantial reduction in the outlook for economic growth, then real interest rates tend to fall. As long as inflation is at an acceptable level, the appropriate monetary policy is to reduce the federal funds rate to facilitate the adjustment to lower real interest rates. Failure to do so could result in a misallocation of resources, a steadily declining rate of inflation, and perhaps even deflation.
    Conversely, when the outlook for economic growth is revised upward, real market interest rates will tend to rise. Provided that inflation is at an acceptable level, appropriate policy would be to raise the federal funds rate. Failure to do so would result in a misallocation of resources and, in this case, a rising inflation rate”.
    http://www.philadelphiafed.org/publications/speeches/plosser/2011/01-17-11_central-bank-of-chile.pdf

27. Rafael
    19. January 2011 at 07:07
    

    Scott,

    Some stuff about procyclical productivity (Susanto Basu is a clever guy):

    Procyclical Productivity: Increasing Returns or Cyclical Utilization?
    http://ideas.repec.org/p/nbr/nberwo/5336.html

    Why Is Productivity Procyclical? Why Do We Care?
    http://ideas.repec.org/p/nbr/nberwo/7940.html

    abstract for the first paper:

    It has long been argued that cyclical fluctuations in labor and capital utilization and the presence of overhead labor and capital are important for explaining procyclical productivity. Here I present two simple and direct tests of these hypotheses, and a way of measuring the relative importance of these two explanations. The intuition behind the paper is that materials input is likely to be measured with less cyclical error than labor and capital input, and materials are likely to be used in strict proportion to value added. In that case, materials growth provides a good measure of the unobserved changes in capital and labor input. Using this measure, I find that the true growth of variable labor and capital inputs is, on average, almost twice the measured change in the capital stock or labor hours. More than half of that is caused by the presence of overhead inputs in production; the rest is due to cyclical factor utilization.

28. Morgan Warstler
    19. January 2011 at 07:14
    

    Mundell brings clarity.

    His complaint we shouldn’t call ourselves free traders if we’re printing money is right on the money.

    And his 2% appreciate on Yuan per year sounds politically tenable (something China would do).

    And I’m 98% sure Mundell would urge the US to replace Minimum Wage with Guaranteed Income.

    Question: how do hard caps work in trade imbalances? what is the mechanism? Say one side is dumping steel, how do you know it is steel they are dumping?

29. ISLM
    19. January 2011 at 12:09
    

    Roger Farmer at UCLA has a fully articulated framework in which to analyze the current recession, the prior two recessions, and the Great Depression. It builds off of his (and others’) work in self-fulfilling prophesies. He basically rebuilds Keynesian AD and AS from microfoundations, the holy grail of macroeconomics.

    Mind you, he believes that the Fed should develop an additional policy tool: direct intervention in stock markets through purchases and sales to stabilize asset prices.

30. scott sumner
    19. January 2011 at 19:13
    

    OGT, Yes, I basically agree. But if everyone cuts wages by the amount NGDP falls, there will be no nominal shock and unemployment won’t rise.

    david, I was assuming sticky wages, prices, and expenditure in health care. In that case if NGDP falls 10%, it falls 20% in the flexible sector of the economy, and not at all in sectors like healthcare, teaching etc. It’s an oversimplification, but that’s my assumption.

    Morgan, There’s lots of things we don’t have that I wish we had. But it isn’t necessarily all that easy to implement, especially if the Federal government was involved. In principle it’s a great idea. Get rid of welfare, minimum wage, etc. Replace it with a system that guarantees a job to everyone that wants to work, and assures them a living wage.

    Marcus, I can’t understand McKinnon’s argument. If they don’t want inflation, just revalue.

    I’ve advocated a slow rise in the yuan, so I won’t complain too much about Mundell. But 2% is a tad too slow.

    Plosser’s just arguing for inflation targeting, and yes, during productivity shocks NGDP is much better.

    Rafael, I don’t get the strict proportion of inputs argument. On what basis can he assume that?

    ISLM, He’s on the right track, but NGDP futures are much better than stocks. But I understand the appeal of stocks, it gets around a lot of the weaknesses of interest rate targets. Nick Rowe has also discussed stocks.

31. david
    19. January 2011 at 19:21
    

    @Warstler

    Nope. Sadly, screaming “GIBBERISH!!” doesn’t make the problems in your idea disappear.

    It is actually very easy to imagine workers who will not work for $1, even if the alternative is starvation – namely, if it costs them more than $1 to travel to said work, or if begging closer to home and spending the rest of the time taking care of children/dependents is worth more than $1, or if petty theft or armed robbery earns them more than $1. Travel costs alone sinks any dreams of call center armies; the US is not as dense as India.

    Perhaps you intend to pay for transport and childcare, too? Atop the proposed payments?

    The second amendment presents a non-negotiable problem for any threat to starve significant proportions of the population, in particular.

    Your bidding mechanism still doesn’t take into account job difficulty, nor does it have any way to prevent trivial efforts at gaming the system. You fundamentally don’t have a reply to the situation where bidders post extremely high – and thus winning – bids and then demand impossibly difficult or demeaning tasks; in the free market, the market punishes this by allowing employees to refuse and quit. But you want to block that, don’t you?

    You know, there are Marxist groups who talk about guaranteed employment where anyone who wants a job, can get one, via government employment. If the government then auctions off all that labor, that gives us your idea! Except that there’s no good way to auction off labor, and you can’t credibly threaten to exclude non-participants from any social support whatsoever, so your idea sucks.

32. Morgan Warstler
    19. January 2011 at 19:47
    

    David,

    They are NOT being paid $1, they are being paid at minimum $6 – $240 every week put onto their debit card, and that’s if they can’t command more than $1 in the private market.

    I think it’ll easily see a floor over $2 ($7 – near the minimum wage – if not over it). Wrap you brain around this and HOLD ON to it.

    So you are wrong. They will work for $6-$7 when faced with starvation. Do you have a real point? You are getting whipped here.

    Read my article. I expect childcare prices to plummet – a tremendous win.

    Again, your silly demeaning task thing get handled by auction rules. There’s competition for the labor. As I said, YOU HAVE to argue that even at $1, there will be no takers.

    Because the moment there are takers, demand side competition kicks in.

    One guy wants David to do a hugely demeaning task for 40 hours per week. I’m still trying to imagine what this is, but ok let’s say your sick mind creates one.

    David, you don’t have to take it! The demented guy offered $4 per hour, and some other guy is offering $3 – keep yer dignity.

    But then there is feedback reporting on both employees and employers (like Ebay ratings) so quickly the worst of the worst on both side are left with each other.

    BUT REALIZE, I am offer a SILVER BULLET ending unemployment, throwing out sticky wages, driving down low cost services, increasing American productivity, reducing the trade deficit, and the Fed’s mandate.

    And David is now talking about a couple of people feeling humiliated?

    Come on dude, have the dignity to knock over your king.

33. david
    19. January 2011 at 20:11
    

    Ahahahaha. You want to let people pick what job they take on the government labor auction, then?

    Let me tell you the equilibrium: people will put up tons of ‘jobs’ paying $1, other people will take those jobs and draw $1 + $7 government, and the tacit agreement will be that the job is “send me back a check for $4”.

    You won’t reduce unemployment. People are already running out of UI and there isn’t a miraculous reduction in unemployment. Why do you think that is, hmmm?

34. Morgan Warstler
    19. January 2011 at 21:25
    

    David, I ANSWERED this. But notice in one breathe you say, “people are not lazy and on the dole” and then when told they will be forced to work, you say, “they will cheat and steal!”

    You have only a knee jerk desire to wave off basic online business rule functionality. Systems and procedures for all of this work everyday.

    Someone producing nothing, selling nothing, and hiring ten people is as easy to root out as someone trying to hire themselves.

    Huge amounts of web tech investment have gone into tracking reputation tracking in auctions…. and that’s WITH anonymity across borders. LOOK at Paypal which deals with countless claims, fraud, and hooks your bank accts quite nicely.

    This is ONLY 20M people and maybe a couple million routine buyers – keeping track of them to the zip code – looking for fraud is much, much easier.

    And AGAIN, the worst you come up with is some baddies will steal?

    And that outweighs all my gains?

    Don’t be dumb David, we’re glad to have you aboard!

35. david
    19. January 2011 at 22:02
    

    No. In my original reply I mentioned multiple difficulties in your theoretical motivation and several more practical issues; your inspired response has been to cry “GIBBERISH!” rather than answer the points. So I’m going to repeat the same points until you actually answer them. “But that’s just one difficulty” isn’t going to save you here, sorry. There’s all the others which you ignored earlier.

    Please note that you will not only have to screen out a few “baddies” performing fictional jobs, but all the hundreds of thousands of jobs that are also merely very easy, etc., and so on, right up to jobs which would are worth nearly $7 to perform.

36. david
    19. January 2011 at 22:19
    

    @Warstler, cont:

    Incidentally, it is already the case that UI programs generally require that the recipient be conducting job search; the functional difference here is in (1) centralizing said job search in a government database, and (2) making accepting at least one of the jobs listed compulsory.

    The usefulness of (1) is dubious. (2) is neutralized by people signing on to “jobs” which would not exist in a free market – please do not claim that any bureaucracy can keep up with the market in inventing such jobs given your proposed incentives – or to the jobs they already have. Under a balanced-budget condition, the impact on unemployment is zero and you are merely transferring huge sums of money from taxpayers to the already employed and non-labor-force.

    You need to rethink your basic philosophy here; you do not understand unemployment. You could go Soviet crazy and simply force anyone who is physically fit and jobless to do hard labor; this would send unemployment to zero – by replacing it with underemployment. If the problem is wage rigidity, then you need to tackle wage rigidity among the employed, not the unemployed; if the problem is price rigidity, then no amount of flailing about in the labor market will do you any good.

37. david
    19. January 2011 at 22:53
    

    @Scott

    You endorse a job guarantee? Isn’t that a post-Keynesian sort of hobbyhorse?

    Isn’t the idea behind UI to aid job search, which a job guarantee militates against, regardless of the promised wage level? Post-Keynesians tend to presume that the “matching” bit is easy and we really only need to worry about effective demand, but I daresay you disagree.

38. Morgan Warstler
    20. January 2011 at 12:56
    

    David, c’mon man.

    “2) is neutralized by people signing on to “jobs” which would not exist in a free market – please do not claim that any bureaucracy can keep up with the market in inventing such jobs given your proposed incentives – or to the jobs they already have. ”

    The free market is no minimum wage and NO UI.

    Look, let me try this one more way. Some people, whether by bad matching, or lack of skills are not able to earn enough to pay for themselves.

    There is no magic wand we can wave, and say “minimum wage” and suddenly they are worth it.

    Worth it = someone else can figure out how to earn a profit, be satisfied with their labor.

    The beauty of this plan, is that it recognizes that we do have to make sure people have enough “income” to survive, ALL of society bares that burden, but it doesn’t not pretend that magically some genius businessman can earn a profit and pay Minimum Wage.

    So instead:

    1. We guarantee $5 per hour – IF you sign up as “want to work”
    2. At minimum bid $1, EVERYONE is called into service – $6 minimum paid out, and no one isn’t called up.
    3. Natural greed takes over. Jesus, for $2 or $3 per hour, you can get a full time childcare, you can start a babysitting service if you are REALLY entrepreneurial. This simple little thinking where everyone is naturally trying to arbitrage it leads to a beautiful market.

    Imagine each little neighborhood board that suddenly figure out they can afford $4 per hour to have a guy doing odd jobs. To him it’s like $7.75 a hour, but to the neighborhood, there’s no SS being paid, they aren’t dealing with taxes, any of that – they just swipe their credit card, put the money in the vending machine and keep their eye on the market, because if he does a shitty job, they can report him, and next week get someone else.

    Now overtime, you actually have guys with glowing recommendations and guys with 10-15 complaints, you have potential employers that no one complains about, and you have scammy bastards that every past employee is like, “he kept trying to get me to bath him.”

    What’s really happening is competitive intel. Very quickly, the folks who have been working form home making calls for $3 per hour, you can sort them, ID the one’s who have been there longest – and make them better offers (on the premise, if they held onto $3 for 4 months, they are probably worth offering $3.50.

    There’s total transparency, and almost any kind of gaming, cheating, is quickly exposed – as it happesn in online testing, online poker, and high frequency trading – AS LONG AS someone else who wants the cheap labor for themselves is looking for it.

    The point I’m making here is we can NOW have a completely different approach based on very basic, well known, easy and cheap to implement technology – the user base is actually pretty small, it is all REAL names, with social security numbers, auto-filing, reporting – it’s an Economist’s dream.

39. david
    20. January 2011 at 12:59
    

    Consider the free market for labor. You have been obsessing over the change in incentives for the unemployed. Now go consider the change in incentives for the current employed and the non-labor-force.

    Lesson one in designing government programs: unintended consequences.

40. scott sumner
    20. January 2011 at 14:22
    

    David, No, I don’t endorse a job guarantee, I said the sliding scale wage subsidy was a good idea. You would no longer need welfare, minimum wage laws, unemployment comp, etc. I also said there are practical problems with the idea. fraud might be hard to prevent.

    I would work better in New Hampshire or Denmark than NYC or LA or Miami.

41. anon
    20. January 2011 at 15:31
    

    3. Natural greed takes over. Jesus, for $2 or $3 per hour, you can get a full time childcare, you can start a babysitting service if you are REALLY entrepreneurial. This simple little thinking where everyone is naturally trying to arbitrage it leads to a beautiful market.

    You are underestimating the transaction costs of actually hiring someone, short of paying them under-the-table. Besides minimum wage, there’s Davis-Bacon (yum, bacon), union work rules, EEOC, diversity quotas, Obamacare etc. etc. etc. This is why Tyler Cowen’s ZMP theory is even plausible; there are plenty of marginally employable workers who cannot pull enough weight to cover these costs and hidden liabilities, especially given current economic climate.

42. Morgan Warstler
    20. January 2011 at 17:34
    

    “You are underestimating the transaction costs of actually hiring someone, short of paying them under-the-table. Besides minimum wage, there’s Davis-Bacon (yum, bacon), union work rules, EEOC, diversity quotas, Obamacare etc. etc. etc. This is why Tyler Cowen’s ZMP theory is even plausible; there are plenty of marginally employable workers who cannot pull enough weight to cover these costs and hidden liabilities, especially given current economic climate.”

    Exactly!

    And this shorts circuits all of it, POOF!, because everyone is in program is being auctioned off SANS anything past a swipe of the credit card.

    Suddenly the David-Bacon, diversity quotas, all of it disappears for the 20M unemployed… and getting them OFF the program nows drives us to examine all the costs – OR they topple the system.

    Their labor gets sold at auction at a minimum bid of $1 per hour for a 40 hour week…. The more of them there are, and the better than companies are at putting them to work…. Companies hiring from this pool, have no other costs. Which pool you going to hire from if you can?

    The quicker every other part of the economy feels wage pressures. We truly spread the pain.

    And I’ll never again have to listen to a macro-economist talk about sticky wages. That alone is worth the price of admission.

    —-

    Scott, don’t worry about fraud. It’s better to have $1 no show jobs, than union no show jobs.

43. david
    20. January 2011 at 20:11
    

    And I’ll never again have to listen to a macro-economist talk about sticky wages. That alone is worth the price of admission.

    (So that’s your motivation, is it? That’s totally okay, we’ll be over here talking about sticky prices instead. You may be pleased to know that New Keynesians – you know, Larry Summers, Christina Romer, Greg. Mankiw, etc. – blame sticky prices, not wages.

    Mankiw, 1988: “… one can obtain Keynesian results while leaving the path of wages completely indeterminate and completely irrelevant”.)

44. ssumner
    21. January 2011 at 06:36
    

    anon, Most of those items don’t apply to small businesses. I thought Morgan was allowing the private sector to participate.

    Morgan, OK, I won’t worry about fraud. 🙂

    david, You said;

    “Mankiw, 1988: “… one can obtain Keynesian results while leaving the path of wages completely indeterminate and completely irrelevant”.)”

    Not if you use interwar data, where the shocks were much larger and more easily identifiable.

45. Rafael
    22. January 2011 at 09:38
    

    I´m late but…

    You said: Rafael, I don’t get the strict proportion of inputs argument. On what basis can he assume that?

    Basu argues that: “The intuition behind this paper is that the available data on materials input make it possible to test for the existence of cyclical utilization of capital and labor and to measure their extent.
    In the process, we can also obtain a consistent estimate of returns to scale. The idea is a simple one: workers putting in longer hours and more effort, or machines being worked extra shifts, need more materials in order to create more output. Materials use is a convenient indicator of cyclical factor utilization because its input does not have an extra effort or time dimension. An hour worked may represent very different amounts of labor input and a machine may be operated at different intensities, but a nail, a sheet
    of steel, or a piece of lumber always makes the same contribution to output: no amount of coaxing can make one nut fit on two bolts.”

    Which seems reasonable to me. The measures of productivity Nick Rowe and the blogosphere are using doesn’t seem to adress this cyclicality problem.

    Cheers.

46. ssumner
    23. January 2011 at 20:02
    

    Rafael, I’m dubious, but I’ll reserve judgement.

Leave a Reply