Real shocks vs. NGDP shocks (and their effect on unemployment)

Real shocks are far, far more important that nominal shocks, for long run growth in living standards.  But for the business cycle, and especially for fluctuations in the unemployment rate . . . well, it’s all about the musical chairs model.  Here are two more recent examples.

Let’s start with Australia, which has been hammered by a global commodity downturn, especially by falling Chinese imports of iron and coal.  In the past when I praised the RBA of Australia for keeping a rising trend of NGDP during the global crisis (after a small blip), people scoffed that the Aussie’s were just lucky.  Even then that argument made no sense.  Australia has no had a recession since 1991, but in theory a country susceptible to commodity shocks should have more recessions than the US.

And now the evidence is even weaker.  Look at the unemployment rate in Australia since the commodity bust began:

Screen Shot 2015-10-15 at 4.15.50 PMIt bounces around, but I see no significant trend.  Ironically, Aussie unemployment had a mild upward trend before the commodity bust:

Screen Shot 2015-10-15 at 4.17.52 PMThat was probably due to the slower than trend rate of NGDP growth.

And then there is Texas.  Recall that progressives keep telling us that the Texas miracle is due to oil.  Obviously there’s a grain of truth in that.  Texas does have lots of shale oil.  But so does Europe, and so does California.  The difference is that Texas actually believes in producing it.  I said a “grain” of truth, because most of the Texas growth is due to other factors.  It’s not oil, and it’s not weather (which is actually worse than many other slower growing states.) Nor is it housing, which is just as cheap in neighboring slow growth states. It’s good economic policies.

Now that we have had a big oil bust, the progressives were probably expecting a recession to hit Texas.  And yet the unemployment figures keep getting better and better:

Screen Shot 2015-10-15 at 4.21.53 PMNotice that between February 2008 and June 2008, Texas unemployment actually rose from 4.3% to 4.7%, despite soaring oil prices.  The reason? US NGDP growth was slowing sharply.  Then in the second half of 2008, unemployment soared much higher, as NGDP fell (as did oil prices.)  Over the past year, the unemployment rate has continued to decline, and is now at 4.1%, just above the all-time record low of 4.0% of late 2000.

Bottom line:  Real shocks, and “reallocations” resulting from real shocks, generally don’t significantly impact the overall unemployment rate.  It’s changes in NGDP (monetary policy) that drive the business cycle.  On the other hand, real shocks can have a modestly larger impact on Texas RGDP, as the drop in oil output affects RGDP more than employment.  It’s a capital-intensive industry.

PS.  Over at Econlog I have a post on a big breakthrough for market monetarism.


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41 Responses to “Real shocks vs. NGDP shocks (and their effect on unemployment)”

  1. Gravatar of W. Peden W. Peden
    15. October 2015 at 13:45

    Very interesting. I wonder if this still holds up if you look at hours worked rather than the unemployment rate.

  2. Gravatar of Ray Lopez Ray Lopez
    15. October 2015 at 17:55

    You got to be kidding. But this is Sumner blogging, no joke, except it is unintended humor.

    First, Sumner says for his ‘musical chairs’ model, “unfortunately, in the real world wages and prices are slow to adjust”, yet just the other day he said that prices are not as sticky, if at all, as wages. Btw, why wages and unemployment are even important is never discussed by Sumner (except in reference to the Fed ‘dual mandate’ on occasion), apparently Sumner does not seem to understand –similar to Marx–whether machines (capital) or people (labor) are doing the work in producing GDP is increasingly irrelevant in today’s robotic driven economy.

    Next Sumner extrapolates from two geographical regions, Texas and Australia, for the rest of the world, when these regions comprise populations in the mid 20 millions. So 7 billion equals 2 times 20 million in Sumner’s mind. Yet Sumner ignores small populations when he points to the large population UK, US going off the gold standard as stimulative and indicative of ‘Golden Fetters’, when in fact other countries of smaller populations stayed on the gold standard and also began to recover in the Great Depression [ignore this aside if you’re not up to speed on Eichengreen’s ‘gold was bad during Great Depression’ theme]

    Then Sumner makes a strawman howler: “but in theory a country susceptible to commodity shocks should have more recessions than the US” – ??? after in another comment correctly saying that there’s no such thing as Dutch Disease and a ‘resource curse’ if a country is well managed (citing Norway; contra Africa which is not well managed)!

    Finally Sumner directs us to Econlog (where I am banned) where he opines that a form of Neo-Fisherism supposedly makes Sumner’s variant of monetarism more ‘mainstream’?!

    No need to visit The Onion today; I got my laughs here.

  3. Gravatar of benjamin cole benjamin cole
    15. October 2015 at 17:57

    Texas has cheap housing. But I would rather live in Barcelona than Houston. I would also prefer to kiss a beautiful woman on the lips than to kiss a pig’s sphincter.

  4. Gravatar of Dots Dots
    15. October 2015 at 22:57

    rather the beaut’s sph..

    even the pigs r better in Barcelona. they feed them chestnuts, or something

    if u have kids, get them into nursing. this great country has bases all along the Med, all with hospitals to staff

  5. Gravatar of benjamin cole benjamin cole
    16. October 2015 at 00:06

    Dots—
    I hear only good things about Spain… too bad the ECB wants to suffocate Spain…my guess is people enjoy life more in Spain than the US…as they should…

  6. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    16. October 2015 at 04:25

    Prof. Sumner, can you elaborate a little more on this: “Ironically, Aussie unemployment had a mild upward trend before the commodity bust: … That was probably due to the slower than trend rate of NGDP growth.” Do you have the actual NGDP data for Australia in the period unemployment went up? It would be nice to see both graphs together. Thank you.

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2015 at 06:01

    Having spent a fair amount of time in Barcelona, I can say it’s not much like Scarlett Johansson and Penelope Cruz’s experiences. More like Whit Stillman’s.

  8. Gravatar of Justin D Justin D
    16. October 2015 at 06:03

    Scott,

    NGDP growth in Australia was extremely slow over the past year (2014Q2-2015Q2), up just 1.6%, slower than the 3.6% growth over the prior year, and yet unemployment was rising in the prior year and stabilized in the most recent year. How do we account for that in the market monetarist framework?

  9. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2015 at 06:30

    OT, but since we talk about Denmark often here;

    https://niskanencenter.org/blog/double-edged-denmark/

    ‘The lesson Bernie Sanders needs to learn is that you cannot finance a Danish-style welfare state without free markets and large tax increases on the middle class. If you want Danish levels of social spending, you need Danish middle-class tax rates and a relatively unfettered capitalist economy. The fact that he’s unwilling to come out in favor of either half of the Danish formula for a viable social-democratic welfare state is the best evidence that Bernie Sanders is not actually very interested in what it takes to make social democracy work. The great irony of post-1989 political economy is that capitalism has proven itself the most reliable means to socialist ends. Bernie seems not to have gotten the memo. But Bernie Sanders isn’t the only one failing to come to terms with the implications of Danish social-democratic capitalism.

    ‘The lesson free-marketeers need to learn is that Denmark may be beating the U.S. in terms of economic freedom because it’s easier to get people to buy in to capitalism when they’re well-insured against its downside risks. That’s the flipside irony of free-market “socialism.”’

  10. Gravatar of Scott Sumner Scott Sumner
    16. October 2015 at 06:55

    Ray, You said:

    “yet just the other day he said that prices are not as sticky, if at all, as wages.”

    Very funny. Where’d I say that? Let me guess—nowhere. On the other hand just the other day I said prices were sticky, responding to Nick Rowe. Funny you missed that post.

    You are starting to sound desperate.

    Jose, You should be able to google the data—NGDP growth slowed after 2012. Not to be rude, but I’m always really busy, so I’d prefer commenters google the data themselves, rather than have me do the work. I rely on memory–it saves a LOT of time.

    Patrick, I loved that Stillman film.

    Justin, Good question. The decline was due to sharply falling prices of commodity exports, which has little impact on employment. That’s one reason I suggest that commodity exporters target total labor compensation, not NGDP.

  11. Gravatar of SeanV SeanV
    16. October 2015 at 08:20

    This is the best explanation for low real rates:

    http://bankunderground.co.uk/2015/07/28/drivers-of-long-term-global-interest-rates-can-changes-in-desired-savings-and-investment-explain-the-fall/

  12. Gravatar of dw dw
    16. October 2015 at 08:24

    as a very long time resident of Texas, i can tell you what we have going for us. oil helps to keep taxes down (and it only really makes us middle of the pack at best), but it funds just about all of the state government (including the 2 biggest state universities) even though we have among the highest property taxes in the country. what really makes us ‘special’ is the low cost employees, along with equally disposable employees. if you get injured on the job in Texas, odds are that you will end on disability because there is no worker comp (not really). employers have opted out of it, and what they have in place lasts at most 2 year, or if they stayed in, insurance companies have bought assistance from prosecutors to fight claims (even when they are valid). and in this state businesses can blow most if a city, and get no penalty for doing so.

  13. Gravatar of Ray Lopez Ray Lopez
    16. October 2015 at 09:38

    @Sumner:

    What you said was, two blog posts ago:

    Sumner: “I should add that it’s not quite right to say that I think “nominal wages rather than nominal prices” are sticky. I do acknowledge that there is substantial price stickiness, ***but I don’t view it as being very important***.” (emphasis added)

    So there. I made the mistake of assuming something not being very important is the same as not existing, a reasonable mistake, but I stand corrected. Will you now apologize to me and shut down your blog? Thanks in advance.

    Do feel free to answer why you feel cutting workers who have sticky wages and replacing them with machines is a bad thing, if that’s what you think.

  14. Gravatar of Jason Jason
    16. October 2015 at 10:45

    Ray,
    I thought you were just a troll? Do you honestly think you are right and have a point every time you write here? I think you should demand a refund for that IQ test, it was clearly a fake.

  15. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    16. October 2015 at 12:05

    @Prof. Sumner
    No ofense taken, I thought you might have those handy. I don’t mind doing the work, I just don’t know where to get the correct data for Australia, and I don’t want to cause confusion by discussing wrong data.

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2015 at 14:38

    At 15 minutes into this Brookings video;

    http://www.c-span.org/video/?328747-1/discussion-banking-financial-markets

    John Taylor relates something said by James Tobin to Paul Volcker over drinks in 1982. Which was along the lines of;

    Tobin: ‘Why don’t you reduce interest rates, Paul.

    Volcker: “I don’t set interest rates. I determine the money supply and the market responds with movement in interest rates.’

    Apparently that was a conversation stopper.

  17. Gravatar of TravisV TravisV
    16. October 2015 at 14:58

    Donald Trump: Run for your lives, interest rates are artificially low!!!

    http://www.businessinsider.com/donald-trump-warns-low-interest-rates-yellen-fed-recession-2015-10

  18. Gravatar of TravisV TravisV
    16. October 2015 at 14:59

    Patrick R. Sullivan,

    Thanks, great find!

  19. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    16. October 2015 at 15:00

    Sorry for screwing up the quotation marks, should be;

    Tobin: ‘Why don’t you reduce interest rates, Paul?’

    Volcker: ‘I don’t set interest rates. I determine the money supply and the market responds with movement in interest rates.’

    Btw, later in the video, it’s pretty clear that Taylor doesn’t understand the implications of what Volcker told Tobin.

  20. Gravatar of Steven Kopits Steven Kopits
    16. October 2015 at 15:06

    California and Europe do not have a lot of shale oil.

    California, as it sits on a fault line, has fractured geological formations which have largely allowed volatiles–notably light oil and natural gas–to escape.

    Shale oil depends on natural gas as a driver of light oils–like a fizzy drink. California’s oil resources, as I understand them, as heavy oils which are extracted using enhanced oil recovery techniques. It’s not clear how much production could be increased there, but there does not appear to be an upside similar to the Bakken, Eagle Ford or Permian.

    Russia has substantial shale oil resources, and also substantial conventional resources. It also has all good things Russian, including governance.

    There are no material, low cost shale oil resources in continental Europe of which I am aware.

  21. Gravatar of Jose Romeu Robazzi Jose Romeu Robazzi
    16. October 2015 at 17:38

    @Prof. Sumner
    Marcus Nunes kindly pointed me to a RBA site where I got the data. Thank you Marcus. I am not good with graphs, but everyone can get there (http://www.rba.gov.au/statistics/tables/index.html#output-labour). I noticed NGDP rate came down from above 5% to almost zero from the 2nd quarter 2012 until the end of 2013 (I took the rate of change of 4 quarters over the preceding 4 quarters). That is the period when unemployment went up for the most part in your graph above. I had noticed that in Japan as well, in one of Sadowski’s post. It looks money is not superneutral after all. It looks like whenever NGDP growth rate is stable, the economy finds real variables (growth, employment) that remain stable, but whenver the rate of change of NGDP changes (2nd derivative), real effects show up …

  22. Gravatar of E. Harding E. Harding
    16. October 2015 at 17:39

    Yup. The oil price shock led to a .4 percentage point unemployment spike in North Dakota:
    https://research.stlouisfed.org/fred2/series/NDUR
    Similar to the somewhat stronger, but still mild recession in Russia (1.1 percentage point unemployment spike).

  23. Gravatar of Major.Freedom Major.Freedom
    16. October 2015 at 18:18

    NGDPLT refuted in one sentence:

    Wage payments logically and temporally precede NGDP, therefore if NGDP declines, it is because wage payments first declined.

    ———

    NGDP does not increase without an increase of investment, namely, a spending increase in capital goods and wage payments.

    What Sumner sees as rising and falling NGDP, is the consequence of rising and falling nominal investment in capital goods and labor.

    This rise and fall in nominal investment in capital and labor is not due to any significant extent on expected NGDP either. NGDP as a factor of economic action is not taught at any schools, not integrated into any firm’s investment decisions, and not even thought about beyond fringe groups of people.

    Historically, the temporal correlation between wage payments and NGDP is not due to NGDP, but due to wage payments, since wage payments logically and temporally precede NGDP and nobody considers NGDP.

    Sumner has never even attempted to address the question of why it is every 5 to ten years, the “business cycle”, that the group of all investors together, all around the same time, raise their cash preference, and lower their nominal demand for capital goods and labor, given that they have the money and just choose not to spend it, thus leading to NGDP declines as a consequence.

    Sumner once claimed it doesn’t matter what causes such massive increases in cash preference, which is a foolish and yet eerily convenient belief to have. And then that was it. Not even an engaging of any test-ready theories for why that might occur. We are supposed to continue to conflate correlation between NGDP and wages as the future causing the past. Absurd.

  24. Gravatar of TravisV TravisV
    16. October 2015 at 19:13

    Has anyone reviewed Eric Rauchway’s new “Money Makers” book on FDR and Keynes yet?

  25. Gravatar of Ben J Ben J
    16. October 2015 at 22:38

    Major,

    Scott’s going to be so disappointed when he realises the incredibly profound flaw you have discovered in the NGDPLT framework. I almost feel bad for him. I suppose you probably should have noticed the huge flaw we were all hiding from you in the previous half decade you’ve spent peddling your weird Misesian nonsense here, but better late than never I suppose…

  26. Gravatar of TravisV TravisV
    16. October 2015 at 23:19

    Great stuff by Noah Smith:

    http://www.bloombergview.com/articles/2015-10-12/relax-we-ll-survive-china-s-sales-of-u-s-debt-

    http://noahpinionblog.blogspot.com/2015/10/in-miso-soup.html

  27. Gravatar of Ray Lopez Ray Lopez
    17. October 2015 at 03:00

    @Ben J – “Scott’s going to be so disappointed when he realises the incredibly profound flaw you have discovered in the NGDPLT framework” – of course you realize you’re being sarcastic and ironic, don’t you? You realize that Sumner has such a professional desire to see NGDPLT succeed that he is oblivious to any evidence that refutes it? Of course you do, since you would not write the way you did if not.

  28. Gravatar of Dan W. Dan W.
    17. October 2015 at 03:40

    “It’s changes in NGDP (monetary policy) that drive the business cycle.”

    This is a very poorly worded statement. What we do know is that in the absence of monetary policy changes, especially in the absence of monetary loosening, the business cycle (ie real economic forces) will influence liquidation and bankruptcy.

    The goal of Keynesians and Monetarists is to enact a macro policy that absorbs and offsets the business cycle. I find it curious that Scott now flips everything upset down and claims the economic world revolves around monetary policy. I suppose if one has a hammer the world is a nail.

  29. Gravatar of ssumner ssumner
    17. October 2015 at 07:02

    Thanks Sean, That looks excellent.

    dw, If you are a long time resident it’s time you learned something about your home state. Oil doesn’t fuel most of state government, and taxes in Texas (overall) are quite low.

    Ray, Yes, you made the mistake of assuming that when I explicit say that price stickiness does exist, that means I believe it does not exist. Do you have some sort of reading disability?

    You asked:

    “Do feel free to answer why you feel cutting workers who have sticky wages and replacing them with machines is a bad thing, if that’s what you think.”

    If you did know how to read, you’d know that I don’t think it’s a bad thing. I know that you find all of this very confusing—perhaps that’s God’s way of hinting to you that you are in way over your head.

    E. Harding, That’s about what I would have expected—thanks.

    Thanks Jose, That’s what I recall.

    Steven, I don’t agree. There tends to be “lots of shale oil” in locations where the regulatory structure doesn’t make it hard to produce shale oil. In fact, no one knows how much shale oil there is in either location. The estimates keep changing (as they do for North Dakota and Texas.)

    Patrick, That’s a great one.

  30. Gravatar of Ray Lopez Ray Lopez
    17. October 2015 at 10:04

    at Sumner (your own words, do you disown them?)

    Sumner: “I should add that it’s not quite right to say that I think “nominal wages rather than nominal prices” are sticky. I do acknowledge that there is substantial price stickiness, ***but I don’t view it as being very important***.” (emphasis added)

    You correctly acknowledge price stickiness is not important. Good. Now, again, please tell us why, in this robotic age, wage stickiness is important? Ford is building a new factory in Spain that will be robotic…how does wage stickiness matter (given, as YOU SAY), price stickiness does not matter? (The ? mark is rhetorical; I know the answer, do you?)

  31. Gravatar of Jon Jon
    17. October 2015 at 14:28

    Scott,

    I would place a negative outlook on the technology industry in California. Lets split it into three major parts: silicon, software, and devices and discuss each in turn.

    “Silicon valley” started with silicon. That portion of the bay area is gasping its last breath. In the eighties, california universities were the vanguard of silicon engineering education and research. But by the end of the 90s, the rise of India in this industry was very real–indeed the cream of india goes into silicon engineering. Meanwhile, 90+% of top US graduate schools in the field are credentialing Indian and Chinese students. When these students graduate they require visa and/or green card sponsorship. At the business level, this has been noticed. You can hire the same people before they leave India or China for about half the US engineering wage. You don’t have to pay legal costs to sponsor their immigration. Meanwhile, cost of living is much less than half in India and China. My firm now places 60% of engineering in india and china.

    Those buildings occupied by google in the bay area? That property was once owned by the major silicon oriented firms. It is emptying out, and in about 10-15 years, I expect it will be gone. This is known–see again the point about last major cohort of Americans in this field graduated in early 2000s. So we’re just waiting for the generation to clear out. The silicon venture capitals all made their money in the 80s. They are aging out too.

    The same story is happening in software. Silicon valley reinvented itself with the Internet in the late 90s. This has been very successful at minting rich people who then go and fund another cycle of companies locally. This is the network effect that keeps powering silicon valley. But the same story is playing out. Being a software engineer is the top profession in Eastern Europe. The salaries are about 1/4 the US equivalent. There are still strong network effects in the US. But software is not capital intensive. It is not team size intensive. So we’re already seeing the rich venture capitalists consolidate into clusters in Eastern Europe. The push to outsource software engineering is just as strong as on the silicon side, and it is common now to see venture funded companies with a US and eastern european co-founder. Again, at a major firm, we’ve now got close to 80% of our software engineering in Eastern Europe–with the shift happening mostly in the past five years.

    That leaves the last bastion: devices. Apple’s “designed in California”. Here you are closest to the mark. But still in the last few years we’ve seen samsung, LG, etc really start to make inroads here. In the past, the biggest moat has been understand cultural tastes of the west and making products to suit. But we do a very good job (via hollywood and the overall entertainment complex) of teaching the world about our cultural tastes.

  32. Gravatar of tim watson tim watson
    17. October 2015 at 16:30

    Scott,

    Australia’s terms of trade peaked in the September quarter of 2011, and unemployment has trended upwards ever since. This shock would have affected output under completely flexible prices. So not sure we have a nominal economy story for the increase in unemployment since the terms of trade bubble burst.

    Check out these charts, they may help update some of your views on the Australian economy:

    http://www.rba.gov.au/chart-pack/commodity-prices.html

    http://www.rba.gov.au/chart-pack/commodity-prices.html#4

    Probably the main argument against NGDP targeting in Australia is that it would require the RBA to lean against occasionally large and drastic shifts in the terms of trade. This would make monetary policy highly unstable during events such as the post-WW2 wool boom, and the recent commodities boom. Although NGDP targeting may have some claims to superiority at other times, it is these relatively infrequent terms of trade booms that invalidate it as a broader monetary policy strategy in the Australian context. Of course, we all hope that the RBA can maintain the economy on a stable NGDP level path all things considered. However dramatic changes in the terms of trade make this a difficult task at times for monetary policy in the Australian context.

    I think its great that you are reporting about the Australian economy to a wider audience, there is potentially a lot to learn about broader macroeconomic policy from the Australian experience, but please do a bit more homework before selectively picking data that seems to support your priors.

  33. Gravatar of ssumner ssumner
    17. October 2015 at 16:50

    Ray, You said:

    “(given, as YOU SAY), price stickiness does not matter?”

    Is that really what I say? In any case, you are right that if all workers were replaced by robots then wage stickiness would not matter. But we are not QUITE there yet Ray, I think you jumped the gun. Yes, we are close to zero workers, but as of today we have about 140 million workers and it’s going up by more than 100,000 per month. So it looks like you might have to wait a few more months before we reach zero. Please be patient. Some day, in some universe, your ideas just might make sense.

    Jon, That’s funny, I was under the impression that Silicon Valley was booming, and that house prices were shy-high. Is that not so?

    Tim, Thanks for the charts, but as far as I can see they exactly confirm what I said in the post. Or am I missing something?

    You said:

    “I think its great that you are reporting about the Australian economy to a wider audience, there is potentially a lot to learn about broader macroeconomic policy from the Australian experience, but please do a bit more homework before selectively picking data that seems to support your priors.”

    If you are going to criticize me for not doing my homework, then perhaps you should also do a bit of homework and find out my views on optimal Australian monetary policy. I do not recommend that Australia target NGDP, for instance.

    You also have failed to point out any flaws in the post, that in any way reflect a lack of “homework.” If you have some data that undercuts my arguments I’d love to hear it, I’m always interested in finding out about one of my favorite countries. But instead you simply link to a graph showing the Australian boom and bust in commodity prices, which was the subject of the post. What exactly is your point?

  34. Gravatar of Lorenzo from Oz Lorenzo from Oz
    17. October 2015 at 17:02

    Tim Watson: “it would require the RBA to lean against occasionally large and drastic shifts in the terms of trade”. Doesn’t the RBA already do that? Given its target of maintaining “an average of 2-3% inflation on average over the business cycle” how could it not? The upsurge in unemployment coincides with NGDP growth a bit below trend. Why would not a commitment to explicitly maintain NGDP growth on a stable path not be (even more) stabilising?

  35. Gravatar of Jon Jon
    17. October 2015 at 21:37

    Scott, you write, “I was under the impression that Silicon Valley was booming, and that house prices were shy-high. Is that not so?” I dunno, what’s the net present value of those sky-high wages while they last? I hear the proper discount rate might be negative.

    Regardless, Malibu, SF, places with nice climates and significant building code restrictions. Aren’t you reasoning from price change? :-)

  36. Gravatar of What Evidence for Market Monetarism Sumner Giveth, Sumner Taketh Away What Evidence for Market Monetarism Sumner Giveth, Sumner Taketh Away
    17. October 2015 at 22:57

    […] for you to understand my point here, you’re going to have to roll up your sleeves and read Scott Sumner’s whole post, in which he presents two different lines of evidence to argue that “real” shocks […]

  37. Gravatar of ssumner ssumner
    18. October 2015 at 06:20

    Jon, Not just high prices, but rapidly rising prices. I don’t think the supply of land is rapidly falling. In any case, I will keep an open mind, but you haven’t dissuaded me from thinking that Silicon Valley is booming—you need to provide more evidence.

  38. Gravatar of Major.Freedom Major.Freedom
    18. October 2015 at 08:13

    Ben J:

    You haven’t shown anything in praxeology to be “nonsense.”

    Not being able to understand something does not necessarily make that thing nonsense. OK, you don’t really get it. Not sure how that is supposed to be a bad reflection on the theory.

  39. Gravatar of TravisV TravisV
    18. October 2015 at 08:47

    Here is a brilliant old Sumner post illustrating that real shocks, and “reallocations” resulting from real shocks, generally don’t significantly impact the overall unemployment rate.

    http://www.themoneyillusion.com/?p=20114

    “Money matters”

  40. Gravatar of Kevin Erdmann Kevin Erdmann
    18. October 2015 at 10:33

    I think Jon might have an interesting point. Anti-growth policies in Silicon Valley create rents for workers, landlords, and firms, much like geographical advantages allowed unions and city governments to extract rents from the auto industry. As long as those geographic advantages remain, rents flow to the local community. Since rents in Silicon Valley are created through the tight limit on housing, that is where a lot of the rents end up. If global competition reduces Silicon Valley’s geographical advantage to a level below the economic rents that are being extracted, the bottom will fall out because those sort of rents can be very sticky. If we don’t find a way to get housing expansion in SV to lower those economic rents, in 50 years SV will be the next Detroit. If that seems impossible to believe, we should go back 50 years and try to convince Detroit that it’s about to be depopulated.

  41. Gravatar of ssumner ssumner
    19. October 2015 at 08:23

    Kevin, Interesting point–and the Michigan analogy is good.

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