Food stamps cause global depression ?

Oy! Missing a title?

It its interesting that employment-population ratio peaked in 2000. It does show the economy in the US has been worse for employment for 12-odd years. Which is a bit scary.

Anyway, it shows your overall point. If it were Obama’s policy, why has it been a 12 year long trend?

Why is it that explanations, in plain English, that voters need to know to debunk campaign propaganda, are in blogs, not the news!?! This is so well written. I just asked the same question on the nytimes editorial page editor’s blog, that explains how Mitt Romney doesn’t just lie about how he’ll keep auto jobs from going to China, but explains in detail how his tax proposals encourage offshoring: http://takingnote.blogs.nytimes.com/2012/11/01/how-romneys-tax-plan-would-encourage-offshoring/

Yeah, I think I’ve heard reference to Obama’s “Chicago boys” and had to remind myself that that’s a completely different reference than Pinochet’s “Chicago boys.”

Mulligan’s views aren’t entirely outrageous. Here’s Richard Layard:

http://cep.lse.ac.uk/pubs/download/occasional/OP015.pdf

“The rationale for welfare-to-work is simple. If you pay people to be inactive, there
will be more inactivity. So you should pay them instead for being active – for either working
or training to improve their employability.
The evidence for the first proposition is everywhere around us. For example, Europe
has a notorious unemployment problem. But if you break down unemployment into shortterm
(under a year) and long-term, you find that short-term unemployment is almost the same
in Europe as in the U.S. – around 4% of the workforce. But in Europe there are another 4%
who have been out of work for over a year, compared with almost none in the United States.
The most obvious explanation for this is that in the U.S. unemployment benefits run out after
6 months, while in most of Europe they continue for many years or indefinitely.
The position is illustrated in Figure 1. The vertical axis shows how long it is possible
to draw unemployment benefit, and the horizontal axis shows how long people are actually
unemployed, as measured by the percentage of unemployed who are out of work for over a
year. The association is close, and it remains close even when we allow statistically for all
other possible factors affecting the duration of unemployment.1”

The extension of unemployment benefits will have had some effect. And there has indeed been a notable rise in long term unemployment in the US which at the very least correlates with the extension of those benefits.

Do note that Layard isn’t some Chicago School rightist at all. Very Centre Left in fact.

That the extension was the right thing to do in my opinion (for whatever tiny amount anyone cares about that) is one thing. But to claim that it won’t have any effect on the duration of unemployment is another.

oops
I should proof read more

That second line should read…
Mulligan has been pilloried by everyone including the “The Economist”. …

And there has indeed been a notable rise in long term unemployment in the US which at the very least correlates with the extension of those benefits.

Does it perhaps also correlate with the worst recession in living memory?

@ Tim Worstall

Your argument has a certain point in the United States. But in Britain we still have (and I can’t really believe I am saying this in the 21st century) a landed aristocracy and a Royal Family. All of whom are, essentially, ‘paid to be inactive’. And yet at least in the case of the Royals, they are not inactive (more’s the pity). So either there is something wrong with the theory or else the Royals Family (and their hangers on) should be abolished. And yet no one on the (non-libertarian) Right would ever dream of proposing such a thing.

Andrew Smith wrote:

It its interesting that employment-population ratio peaked in 2000. It does show the economy in the US has been worse for employment for 12-odd years. Which is a bit scary.

Anyway, it shows your overall point. If it were Obama’s policy, why has it been a 12 year long trend?

Talk about a slow, hanging curve…: Rational Expectations since 2000 about Obama’s election in 2008 and the policies that he would pursue!

Preach on Brother Tim. We desperately need a welfare-to-work program in the UK. Perhaps it could be called the Works Progress Administration and employ the long term unemployed on useful projects and pay a living wage to get us back towards full employment.

It’s a standard trick though, even here in Greece right-wing pundits insist on claiming that unemployment benefits and the new 6-day/48-hour week law that allows for instant firing of workers without compensation should be passed because this is what is responsible for the 25% unemployment we face and if you dislike the change in the labour laws you are heartlessly promoting the interests of the privileged (the still employed) versus those of the non-privileged, the unemployed. It’s almost comical how this line gets parroted at most news channel every night.

in Europe there are another 4% who have been out of work for over a year, compared with almost none in the United States.

It depends what you’re measuring and how you’re measuring it, surely. In the UK there’s one very simple and straightforward measure, the claimant count, which gives a precise and reliable count of the people who are out of work and claiming benefits related to being out of work. If anyone is deemed ineligible for whatever reason, they drop off the count. There’s also ILO employment data, which are survey-based estimates of the numbers in full-time work, in work but under-employed, out of work and seeking work, and out of work and not seeking work.

The Layard quote seems to imply that there is almost nobody in the US who stays in categories 3 or 4 for over a year. Is this right, or are we looking at a drift out of 3 (seeking work) into 4 (given up) – or an even cruder ‘claimant count’-type effect? (If benefits aren’t available after 52 weeks, there certainly aren’t going to be many people claiming benefits for over a year.)

Alternatively, if it is right, are we looking at a tough-love benefit system that coaxes and coerces people back into a productive working life, or just at people drifting out of 3 (seeking work) into 2 (under-employed scutwork) and back again?

Oh, but you forget: A good leader would be able to insulate the domestic economy from any international economic events. And you call yourself an economist!

“or else the Royals Family (and their hangers on) should be abolished”

I thought they were sorta your team mascot.

If food stamps were eliminated, at least 1/4 of Wal-Marts would become unprofitable overnight. But somehow, according to the aptly-named Mulligan, this would result in huge number of new jobs. But the worst part of that post is the idea that businesses won’t hire because food stamps, but if people were starving on the streets they would engage in massive hiring because there’s so much labor available. Keep in mind that this guy is a tenured professor at one of the top economic programs in the US.

Tim, from the study you linked to and quoted @ 9:

“The position is illustrated in Figure 1. The vertical axis shows how long it is possible to draw unemployment benefit, and the horizontal axis shows how long people are actually unemployed, as measured by the percentage of unemployed who are out of work for over a year. The association is close, and it remains close even when we allow statistically for all other possible factors affecting the duration of unemployment.”

There’s a cluster in the middle of Figure 1 consisting of four countries – Norway, Finland, Australia and Denmark. None of these countries has a maximum duration on unemployment benefits, and nor did they in 1998/2000. They all belong right at the top of the chart. Who knows how the author managed to muck that up, but it paints a very different picture. The association isn’t close to my eyes, and it certainly doesn’t remain close.

Well, if the standard of living in the US was reduced so much that labor costs went below those in China, Vietnam and Burma, then, I suppose, the economy would’ve grown indeed, on account of exports to Europe, Japan, Canada, Russia, Middle East, and other more advanced regions. So, he’s right, in a sense.

Mao Cheng Ji @34

Assuming that those countries would still be purchasing imports despite the collapse of their biggest export market.

Mulligan blames “Keynesian policies”, but I don’t think there’s anything inherently Keynesian about changes in marginal tax rates. Something extreme like burying money underground to dig up, or dropping it from helicopters could be stimulative without changing one’s incentives to work. I haven’t read Krugman’s book, but is his emphasis on keeping public sector workers employed + building infrastructure, or means-tested transfers? Scrapping means-testing would be more “Keynesian” under any rubric I can imagine Mulligan using while also being a “supply side” improvement. And since Mulligan has said the government should produce more debt (since there’s lots of market demand for it), on what grounds could he object to that?

JQ-

What Salem is saying, I think, is that the “Keynesian” story of fluctuations is that they are the real effects of monetary disturbances, i.e. changes in M. And since M varies independently across countries (or currency unions), as it’s basically set by central banks, the “Keynesian” story also has no explanation for why the downturn is global. It would seem to require simultaneous policy errors by central banks all over the world.

Of course this is silly. As you say, demand is transmitted both by the financial system and by trade, just as you say, and there is no such thing as “M” — but Salem is only repeating what’s taught in any respectable economics program these days. His mistake is that he thinks his macro classes were making substantive claims about the world, and not just setting out the rules for playing Economics.

Salem at 14,

The more that unemployment is a worldwide phenomenon across many different institutions, the more that suggests that there has been a fundamental shock to supply – e.g. we’ve run out of oil, or lost some key technology. This is not the case, but it could be one day.

We haven’t run out of anything, but we are running extremely tight markets worldwide in a number of crucial commodities. Jeremy Grantham – no one’s idea of a pinko greenie – documented the very fast rise in world commodity prices between 2002 & 2008. These prices include oil, food, cement, rubber, coal, steel, etc. I don’t know if that rise is fast enough or sharp enough to count as a “demand shock” for the Holy & Apostolic Macro Faith, but it’s important to note that the Long Depression isn’t lowering those prices.

Casey Mulligan’s explanatory style is weird, though, as Quiggin notes, not particularly at odds with the way other leading economists talk, on the rare occasions they can be prompted to use ordinary narrative language in public.

One aspect of the weirdness is the way he simply ignores events, which seem salient to ordinary people. Financial crisis, in which the Chairman of the Federal Reserve tells Congress that the global financial system may completely fail within a couple of weeks — well, that makes an impression on ordinary people. And, they kind of expect an explanation of subsequent events to incorporate that event.

Consider perfectly ordinary, conventional narratives that trace financial events and their effects on aggregate demand: the triggering, for example, of a severe inventory cycle, in which orders from retailers to manufacturers ceased for a time, as retailers adjusted inventories to a new, lower level of demand; or, the wealth effects on consumer confidence and spending of the disappearance of a trillion dollars in home equity; or, the effect on consumer spending, as households tried to repair their balance sheets. The mechanisms are observable. The magnitudes are observable and proportional, and the magnitudes flow through time and space. One can see the dominoes falling, as the auto industry teeters on the edge of bankruptcy and liquidation, for example.

I don’t see the correlations between countries as being particularly important or dispositive — it is not experimental evidence, in any case. What I read into Quiggin’s narrative, rightly or wrongly, was the observable flow of effective demand.

As is usual with Casey Mulligan’s explanations, the reader must choose to believe Mulligan or her own lying eyes.

‘I don’t get all this hate for Casey Mulligan. She was great in “Never Let Me Go” and pretty good in “An Education”.’

The real Casey Mulligan is great in everything. Also, ‘Tell No One’, best film of past 100 years

Explanations, in narrative style, on the Right in Economics — Lucas, Barro, Cochrane or Mulligan — have in common, reliance on what I would call, moral causality, an emphasis on qualitative factors, having an impact as they pass through the independent free will of agents to manifest as economic activity. These qualitative factors may be identified as signals or incentives, embodied in policy, and the critical mode of action is, somehow, their moral quality. Agents are presumed to be sufficiently unconstrained, that their behavioral response can assume any necessary or sufficient magnitude to match the occasion.

The belief that government austerity will evoke the confidence fairy to inspire job creators to invest, and drive a booming recovery, seems to be a virtual template for this kind of explanation. Nowhere are there any concrete events or quantitative flows. Austerity is virtuous in itself, and its virtue will inspire confidence, another virtue, which will drive good and virtuous behavior: investment in wealth (and job creation, natch, just as long as we get rid of the minimum wage and Social Security).

For Casey Mulligan, there’s only one apparently functional relationship that matters: marginal incentives. Lower marginal tax rates will call forth labor effort. I would submit, though, that this only looks like a functional relationship, on the surface. Mulligan treats it like a deeply meaningful one. He’s quite convinced, apparently, that government transfer payments, because they are not an exchange of cash for effort or product, will be an ineffective stimulus.

Notice how his emphasis on moral causality turns the views of a conventional Keynesian on its head. A conventional Keynesian would say that a transfer payment to the poor will be a very effective stimulus, because the money will almost certainly be immediately spent, and enter and expand the circular flow of aggregate demand, income and business activity. The conventional Keynesian thinks the economic behavior — spending — of the poor person is income and budget-constrained. Quantitative constraints explain quantitative behavior.

Mulligan, by contrast, seems to think that the poor person has a kind of moral free-will, which will allow her to take the transfer payment as an incentive to go on vacation, and the consequence will be to depress economic activity.

Elsewhere, you can find strong vocabularies of moral meaning in the writing of Barro and Cochrane. Cochrane’s rants against the Obama stimulus were all about the moral imperatives, which he sought to vindicate, and seldom engage the arguments of DeLong or Krugman about quantitatively affecting aggregate demand, a quantity. Barro’s railed against the effectiveness fiscal stimulus as a policy, ignoring arguments about quantitative context — the difference between depression and the zero-bound at one extreme and the maximum national effort of 1942-44 — he’s asserted that the multiplier on government spending is depressed by ontological contamination: gov’t is inherently bad, and its spending conduct always renders a multiplier of less than 1.

This is crazy talk, as far as I’m concerned. But, correlation of results across countries, except for the tendency of the socialist hellholes of Scandanavia to perform well, seems irrelevant.

The real Casey Mulligan is great in everything. Also, ‘Tell No One’, best film of past 100 years

Casey Mulligan is, from what I can tell above, an idiot, but Carey Mulligan is great in everything (viz, Doctor Who’s ‘Blink’ from 2007), though she was not in Tell No One, which was a French thriller.

‘though she was not in Tell No One, which was a French thriller.’

I know, I know. Though what did you think of it, out of curiosity

Using the logic that food stamps and unemployment insurance gives the unemployed the incentive to languish lazily in the languid life of luxury provided by government assistance, and thus to not go out and get work, we have the basis for a new job creation approach. The government should confiscate the savings of all the unemployed, and any other properties whose comforts would ease the pain of poverty. These unemployed would all suddenly change from being lazy slackers into dynamic productive workers charging into the offices and factories of the kindly job creators who have been trying desperately (honestly) to hire them all, but had received no applicants because these laggards hadn’t yet spent their entire savings and retirement funds yet. This disposessing of the savings and comfort overhang would spur job takers into action. This new GOP full employment plan would have the same chance of working as their ideas about food stamps and unemployment insurance, except it would function on a broader scale.

The truly amazing factor here is how savings and investment, normally considered a prudent and virtuous way to hold and enjoy the fruits of labor, suddenly overnight become a crippling disincentive to work when somone loses their job. Perhaps Mr. Mulligan has an explanation for this “discontinuity of incentive” effect?

Yeah, but if unemployment rises despite national policies it also rises despite whether the choice if rather towards austerity or boosting ‘local’ demand. The truth is unemployment rises in the traditional economies because employment rises in developing economies – & this is a good thing as long as it is a temporary settling into a new balance. Whether it is of that nature or whether it is just a global impoverishment depends on the success of more global policies with respect to money. As long as money moves more freely than people it is hard to see how the dynamics of change will not lead to resonance.

There are some signs national governments are willing to work together to outlaw the fact that individuals choose to physically stay in the country with the best security but can move their money around regardless of that choice. But the signs are clearly much too weak to make a difference. It is nevertheless a point where traditional economies – out of need – and developing economies – out of tradition – might find common ground. For now the irony is that it are the traditional economies with their capital-dominated democracies that prevent global regulation of money flows whilst the deregulation has been hurting them the most.

In one of Krugmans earlier books, he talks about how diff economist view deficits and tax changes, and Krugman describes how different economists, including the very distinguished R Barro of harvard.
iirc, Krugman’s explanation of Barro’s view is that Tax cuts or raises don’t matter, because ordinary people will figure out how the tax cut (raise) will affect interest rates or takehome pay in the next few years, and they will adjust their spending accordingly.

And Krugman comments, (i paraphrase) why would anyone advance such a silly argument, that an ordinary person would pay attention to what the Fed Res is doing, and figure out how Fed actions will change the economy, and adjust their behaviour.
And part of Krguman’s explanation is that economist like to push ideas that involve rational decision makers, and Barro’s argument is the ultimate in rationality: ordinary people look at changes in gov’t policy, or Fed policy, determine how the change(s) will change things like interest rates, and adjust their behaviour accordingly.

I think the relevance is that a lot of economists seem to have this rational person disease – almost like a phlogiston of economics. And the views of C Mulligan seem in this vein.

PS: in regard to the Chile thing: I think this is a ref to M Friedmann helping Augusto Pinochet’s govt after the coup. And I have read on the web, famous last words, that MF wasn’t really a big helper; he happened to be in chile giving a scheduled lecture at a university shortly after the coup, and when asked, offered some advice.
Perhpas a person with knowledge in this area can comment.

@Worstall #9

Without in anyway impugning Richard Layard’s integrity or economic smarts, the mind sort of boggles at the idea that anyone would grant any useful authority in the present debate to a paper published in January 2001, and which has as part of its assumptions base that:

“But in Europe there are another 4% [in the unemployment statistics] who have been out of work for over a year, compared with almost none in the United States.”

Guido Nius @ 57:

Why do you refer to the economies of the West as “traditional”? I have always heard “traditional” economy used in opposition to capitalist, as in pre-capitalist. When did this usage come about or is it your term? I ask because I regard neoliberalism as a short-lived aberration, the opposite of a tradition.

For now the irony is that it are the traditional economies with their capital-dominated democracies that prevent global regulation of money flows whilst the deregulation has been hurting them the most.

Again, the opposite is true. Global financial deregulation helped the West the most at the cost of tremendous pain to poorer countries and to the poorest of the poor within them.

Yasha Levine’s rant against the Nobel Prize in Economics is silly. Since when is it a criterion for honoring an outstanding piece of work that the author/inventor’s subsequent life lives up to it — in any way? We don’t have to look to Economics for examples: take John Bardeen, who invented the transistor (would anyone claim that was not worthy of a Nobel prize?) and later wrote racist screed? Isaac Newton, who is on every short list of the greatest scientists who ever lived, wrote hundreds of thousands of words on mysticism … does that make Newton’s laws of motion wrong?

This article falsely assert that “while many countries adopted Keynesian policies in the immediate aftermath of the Wall Street meltdown, others did not, and most have now switched to the disastrous policy of austerity.”. Wrong, wrong, wrong.

“Keynesian policies” means deficit spending by the government. And that is precisely what virtually all national governments in the West have done, and continue to do, during this depression.

Keynesianism has manifestly failed, once again, just as it did during the Great Depression. Keynesianism causes soup kitchens.

Jeff Johnson @57
” The government should confiscate the savings of all the unemployed”

Starting with Paris Hilton’s.

“Pretty much all economic argument is argument from a moral quality.” — Didn’t economics used to be known as “moral economy”. According to wikipedia:
“Prior to the rise of classical economics in the eighteenth century, the economies in Europe and its North American colonies were governed by a variety of (formal and informal) regulations designed to prevent ‘greed’ from overcoming ‘morality’.”

(I love the way they put quotations around the words designating those quaint and outdated concepts: greed and morality.)

William Zame is mistaken about John Bardeen. John shared the transistor Nobel with William Shockley and Walter Brittain. It was Shockley who later published tripe about race, IQ, and genetics. John Bardeen later shared a 2nd physics Nobel for the theory of superconductivity and is the only individual to have won 2 physics Nobels.

Great article.
Without wanting to troll, and coming from the left (and not being an economist), I just want to ask one question. The article, and the report from LSE seem to support the idea that a less cuddly welfare state lowers the unemployment and in general creates a less distorted economy. But since my arrival to the US I am surprised of the food stamps-SNAP programs, that account not only to the people which could be considered “in risk of social exclussion” but to low and low-middle class. In my oppinion, this creates both a distortion of the wage market in the US (many people could not live without the SNAP, and many employers could not hire in those conditions without the state paying for it), but also a cronification of the situation, the same that it critizided in the LSE paper. Not only that, this may create a pull-down effect on all wages. I would like to know your thoughts, maybe I am missing something.

Keith M Ellis “However, my own experience is that economic moralizing is not peculiar to the right. ”

Of course all economics is moralizing, in the sense that it is a science with a goal — a moral, just organization of the world. “Pragmatism”, in the sense that it distinguishes itself by claiming it doesn’t moralize, that it has no moral goal, is a lie — the worst of the worst in that sense, self-righteousness combined with self-delusion.

The point of Bruce’s comment that distinguishes right-wing economic moralizing from other, is that it moralizes about individuals rather than social systems — it ignores the structural constraints that don’t depend on rational or moral individual choice, and instead posits a free individual who is capable of unconstrained free action in response to conditions, even when that is manifestly untrue. From that, it tries to derive that virtues conditions lead to a just system — which again, is a manifestly untrue assumption.

Basically, right wing moralizing assumes that you can derive mass behavior from individual behavior — that the former is just a sum of the latter. That’s just complete nonsense, at about the level of claiming that evolution could be derived directly from quantum mechanics.

I think the point arbitrot was making is the same one made by Donald Coffin @38 and myself @25. The categories I’m referring to are respectively “employed”, “under-employed”, “seeking work” and “not working, not seeking work”.

The Layard quote seems to imply that there is almost nobody in the US who stays in categories 3 or 4 for over a year. Is this right, or are we looking at a drift out of 3 (seeking work) into 4 (given up) – or an even cruder ‘claimant count’-type effect? (If benefits aren’t available after 52 weeks, there certainly aren’t going to be many people claiming benefits for over a year.)

Alternatively, if it is right, are we looking at a tough-love benefit system that coaxes and coerces people back into a productive working life, or just at people drifting out of 3 (seeking work) into 2 (under-employed scutwork) and back again?

lupita @ 65:

I think it’s pretty standard to call Western capitalist economies as the established or the entrenched or the traditional forces. I also hope neoliberalism is a temporary aberration but I don’t think it is (yet) the standard core of policies in the West on any non-hysterical reading of the facts.

Whether this makes me popular or not I do think globalization/delocalization did help emerging (or developing or non-traditional) countries in a net-net kind of way. It did it in a very crude and suboptimal way but, unless you hold a very romanticized view of a pre-industrial society, it did help those countries to move along and increase the level of education for instance. The countries that lost out are the ones in the West, mainly because of a country-to-country competition for lower regulation organized by money flowing across borders without any checks or balances.

Anyway, whatever is the appreciation of how we got to the current state and how bad it is, the point is how we improve it. And I think we can improve it by introducing checks and balances on the flow of money across borders (as long as we don’t do it unilaterally because that would take us back to imperialism & provincialism).

The idea that anything global or pan-European or supra-national is a threat is the real threat we face. The current imbalances and risk of further resonance is, precisely, due to the lack of supra-national regulation.

The one thing that discussions regarding “austerity” miss is that austerity is a plan for the wealthy to keep their wealth in the short sighted belief that keeping what they have will somehow make them better off in the future. Inflation saps the value of money that is held as money or debt owed to them. Poor people don’t hold much money or debt. They earn and spend money, so as long as inflation is lower than or equal to the increase in their incomes they want it because it lowers their debt.

The thing the rich don’t understand is that as civilization degrades and stability decreases, they will suffer tramendously.

Watson, I think you must be answering someone else, but Rembrandt depended on commissions from the municipality and couldn’t sell his paintings. He was poor. Later people collect them but they were not as expensive as today (Handel owned some). Conspicuous consumption was explicitly contrary to Calvinism. Of course, that didn’t mean that Dutch people didn’t consume (not too conspicuously) . The innovation was that in Holland it was burghers who were consuming, not aristocrats. ( Consumption by ordinary people began in the 19th century). The whole moral rationale of capitalism, as I always understood it, was that capitalists reinvested money productively rather than wasting it in buying objects. Rich or poor, you were supposed to give any excess money to the church, public works, and/ or charity. Even John Locke recommends this. Mandeville’s argument — that vice (i.e., consumption) had positive consequences was considered outrageous. It is now orthodoxy!

Mulligan’s “economic theory” is not an economic theory; it’s a moral theory.

And to Beard this moral theory (“to not work is a moral wrong committed by way of a moral failing”), with a frighteningly familiar Rightest fog of pseudo-economics trappings, M’s first (and last) resort (common to so many of his ilk) is simple-minded post hoc ergo propter hoc of the lowest, silliest “wag the dog” order – to wit: “we have an economic decline; more people are eligible for and receiving food-stamps. Ergo, food stamps are the root cause of the economic decline” (any questions? This will be on the final!(at Hillsdale, one assumes)).

Thus croweth the Rooster to raise the sun.

Further, The Magnificent M cherry-picks out of all possible caustive factors and all observable effects one government program (though, yes, his intention is to implicate all government programs of relief, support, amellioration in the moral collapse of the economy (or, if you prefer, “the apple impact on the collapse of the orangery”).

This is not economics, this is not argument, this is not reasoning.

It’s preaching.

And, classic American preaching at that – the fervid rantings of yet another god-struck splay-eyed thumper on a rant on a soap-box on a corner not far from Time’s Square, angrily, repeatedly slapping his tattered copy of ATLAS SHRUGGED against his palm as he harranges the harried quotidian-ridden hordes ignoring him on their fallen, degenerate, immoral way to … work.

Jamie Dimon is the chief executive officer of JPMorgan Chase, one of the Big Four banks of the United States, and has served as a Class A director of the Board of Directors of the New York Federal Reserve since January 2007. His early career was in association with Sandy Weill, whom he assisted at American Express, and, later, in the series of mergers and acquisitions, which eventually broke the Glass-Steagall Act and formed Citigroup. Weill fired Dimon in 1998, and Dimon went to BankOne, which merged with JPMorgan Chase in 2004; Dimon has been CEO of the combined companies since 2006, and Chairman of the Board, since 2007 (at which time he also became a Class A member of the New York Federal Reserve Doard of Directors).

He had a summer job once at Goldman Sachs.

You can’t know the players without a program, I guess.

Bruce Wilder, but in the art books I read, Rembrandt spent the last decade of his life poor, not because he spent too much and bankrupted himself but because he stopped painting what the ‘real’ Amsterdam burghers – the ones who commissioned work from him and paid him – wanted.

If recession in America means Americans are buying less wine from France, why does that mean unemployment in France, as opposed to more wine for the French?

Indeed, if you assume full employment, then unemployment will be hard to understand.

:-)

PS Nick@33 – that chart associating benefit levels and unemployment levels is a particularly crude confusion of correlation and causality.

And Tim, Denmark was probably the country Layard placed most wrongly on that chart. In 1998, its unemployment insurance was available for a full five years:

http://economix.blogs.nytimes.com/2010/08/16/why-denmark-is-shrinking-its-social-safety-net/

You’ll see that this chart (or the author’s interpretation, at least) commits the same error of reasoning. Of course it spikes at 4 years…you can see for yourself why clearly in this case, yes? (hint: ‘self-support’). The article also fails to recognise Denmark still offers additional unemployment assistance (as it did in ’98, but now filed under ‘social assistance’) indefinitely beyond its unemployment insurance benefits. There’s a safety net beyond the safety net.

John Quiggen @15
“The only difference is that Mulligan is willing to defend those conclusions while the others (except for the occasional throwaway piece) are not. Admittedly, Mulligan’s arguments are lame, but that’s not because he’s overlooking better ones.”

That is exactly why Mulligan is such an asset to the social democrat side. Read the comments on his NY Times blog. He is really hard to defend.

Frighteningly absent in 102+ comments is the discussion of why Labor supply>labor demand in a growing economy.

Disincentives to hire ranging from heatlhcare uncertainties, to minimum wages to employment practices liabiity suits (the fastest growing area of tort claims) trumps ‘retraining’ and too much UI benefit by a mile.

Every candidate talks about ‘creating jobs’ as if there is some big bucket of work that is going undone if not for Evil corporations unwillingness to hire…no one seems prepared to tackle that source of unwillingness.

The much maligned offshoring is the means to avoid the regulation and lawsuits which are just as much a cost as wages and coffee….its Econ 101 to avoid frictional labor costs, particularly ones as unquantifiable as healthcare…minimum wage increases….the tort bar.

Trader Joe, it should not be surprising, when we are discussing the ideas of a clown (Casey Mulligan), who has proposed no real idea (beyond the title of his book, which I mentioned above) about why Labor Demand < Labor Supply. You, yourself, throw in a number of other "disincentives to hire", alleged regulatory burdens on big business corporations, etc, which are simply extensions of the absurd explanatory framework, used by Mulligan, without even mentioning the biggest "disincentive to hire" of them all, and the explanation favored by Krugman: there simply isn't enough business, enough money demand in the U.S. or global aggregate for goods and services, to put everyone, who wants to work, to work.

In the lee of the financial crisis of 2008, and the political decision made at that time, to keep the banksters whole, transforming trillions in fraudulent financial claims into obligations of the U.S. government, a significant chunk of people’s incomes are being diverted from consumption (where it would become business revenue and demand for goods and services, the production of which would employ people), into paying off this paper debt. Or, to put it another way, the incomes of the bottom 50% of U.S. households are being ground down, to finance upward redistribution to the 1/10th of 1%.

Mainstream economics, with its conversation or debate or dialectic, or whatever you want to call it, between folks like Krugman (or Brad DeLong or Mark Thoma) and folks like Casey Mulligan (or Robert Barro or Glen Hubbard or Greg Mankiw), isn’t particularly helpful or enlightening. The Right-wing half of this conversation is simply corrupt; their viewpoints and rhetoric are not founded on any kind of tempermental or philosophical conservatism — they are bought and paid for servants of the plutocracy, who will say anything for a buck, and get quite a few bucks for saying what they do.

The soi disant Left half of the conversation (with which I, myself, am in general political and partisan sympathy) are weak-minded fools, whose understanding of economics has been racked and ruined by 40 years of being locked into a dialectic with the (corrupt) Right. The conservatives won the fight, by the conquest of methodology — the price of entering the mainstream of economics was accepting the conservative agenda, and when the Left accepted those terms, they checked their brains at the door. Krugman, tellingly, can say something sensible, something Keynesian, only because he can reach back more than 30 years, to a now 75 year-old model he learned about in graduate school, a model, by Krugman’s own testimony, is simply dismissed, untaught, in half of the graduate econ programs in the country. It is not even a particularly good model — IS/LM is little more than a kludge. But, I digress.

You complain that we haven’t discussed why Labor Demand < Labor Supply in over a 100 comments. That's a bit of an exaggeration, since there have been allusions, at least, in some of the comments to relevant factors. But, more frightening, I think, is that mainstream economics hasn't discussed the problems we now face in the global and U.S. economy, in more than 30 years, never mind 100 comments on an obscure blog. The academic profession we entrust to know about this stuff, inform us, and train the experts — they know nothing, they don't care, and they've done little, but evil.

So, you might ask, why is Labor Demand < Labor Supply? Why is the global economy flirting with depression? What should we be discussing?

Two big issues: plutocracy and upward redistribution of income and wealth; and global resources limits, aka Peak Oil and Peak Everything Else. Two things are going on. First, we've reached significant limits on the earth's resources, and particularly on fossil fuel energy; it is simply not possible to "grow" the global economy, without respecting these limits, try as we might. The U.S. economy is being dampened, to prevent the global economy from hitting that ceiling. Among other things, this enables Big Oil to very profitably export petroleum products from the U.S.

Second, the global financial system — the dollar — has been tilted (manipulated, managed, choose your own verb) to enable massive disinvestment and upward redistribution of income. Globalizaton to avoid taxes and regulation — which you mentioned — is part (a consequence, a symptom, again choose your noun) of that financial tilt. The Labor share of total U.S. incomes — already at an historic low — has to remain low, or even fall to support the extreme concentration of income in the hands of the (1/10 of) 1%. The only way to channel that much income to the top is to shrink the capital stock — cash out, disinvest, deplete natural resources and run-down public infrastructure. Wages must fall, and they are, steadily, ground down by high unemployment rates and a relentless political campaign against unions, against public education, against public investment, against Social Security.

So, Remember, Remember the Fifth of November, the Gunpowder Treason and Plot

Whether you vote for Romney, the Vulture Capitalist, or Obama the Betrayer of Liberal institutions, remember . . .

In the lee of the financial crisis of 2008, and the political decision made at that time, to keep the banksters whole, transforming trillions in fraudulent financial claims into obligations of the U.S. government,
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That’s just made up whole cloth. Most of the financial claims transferred to the government, like those transferred to the government under FDR were perfectly sound but undervalued by an irrational/over-leveraged market in a panic. Oddly “the left” has apparently adopted right wing market fetishization as a principle and decided that market judgement must be correct, by definition. Or as you put it:

“The soi disant Left half of the conversation (with which I, myself, am in general political and partisan sympathy) are weak-minded fools, whose understanding of economics has been racked and ruined by 40 years of being locked into a dialectic with the (corrupt) Right.”

Exactly. As another example:
” explanation favored by Krugman: there simply isn’t enough business, enough money demand in the U.S. or global aggregate for goods and services, to put everyone, who wants to work, to work. ”

is based on credulous acceptance of the standard econ model that refuses to distinguish types of demand and that pretends investment decisions are mechanical products of demand. For the first, we are supposed to believe that demand for luxury goods and military equipment at $n is functionally equivalent to the same demand for food and low income housing. For the second, we are asked to believe that the managerial classes who determine corporate & government investment are solely motivated by some known current/future demand instead of being motivated by self-interest, class interest, ideology, power, tax and other government policies, fantasies, and sheer error.

One thing that unites both left and right economists is a steadfast insistence on refusing to understand how market participants make decisions. Profit is not always the goal and when it is the goal profit and time interact in complex ways. The interests of corporate management and the long term interest of the firm are often far from alignment. Different groups of shareholders value returns versus time differently, and corporate management is often not so bright or well informed. Furthermore, corporate decision making is strongly dependent on perceptions of government policy/strength. As an easy example, if the US government appeared to lose power/interest in enforcing US IP laws in China, that would change investment decisions – just as the inability of western nations to enforce corporate property rights in Russia has changed investment decisions.

I should add that it is perfectly possible, in principle, for a rise in wages to reduced desired investment (by capitalists) more than it raises desired consumption (by workers), thereby lowering aggregate desired expenditure and contributing to a downturn, as was arguably true in the 1970s. It is also of course possible for a rise in wages to raise desired consumption by more than it reduces desired investment (or even to raise desired investment as well), thereby contributing to a recovery. Similarly a change in the supply of credit (or “money”) from the financial system can change desired expenditure, when the availability of finance is an important constraint on economic units’ expenditure decisions. But neither of thee factors is logically necessary for fluctuations. All that is logically necessary is that economic decisionmakers are not choosing an intertemporal expenditure path based on a lifetime or permanent budget constraint, but are choosing current levels of expenditure based (at least in part) on current income.

Ok but how does it happen that desired expenditures are less than total income?

D = f(Y), 0 < df/dY Y* tends to raise desired expenditure, while the deflation at Y<Y* certainly lowers it. Today, we rely on benevolent central banks to keep us in the neighborhood of Y*; in the old days we relied on the gold standard and an exogenous supply of outside money. (Poor salem is still learning gold-standard macro, humorously decorated with fancy math.)

I recommend you read Capitalism Since 1945 by Armstrong, Glyn and Harrison, the best work of macroeconomic history I know — you will find it congenial since it is written from a broadly Marxist perspective. One thing they make clear is that it is quite possible for capitalism to suffer crises because wages are too high, as well as because they are too low. Let us not buy into the liberal theodicy in which conditions of stable accumulation must be what's best for everyone.

Thanks I will certainly look for the book (though I do not understand what Y and df are in your comment, is Y something like total income?)

Y is actual income, D is desired expenditure, f is just a function. The point is that income influences expenditure and expenditure determines income.

Watson-

It’s just aggregate expenditure — that includes government spending, investment, consumption and everything else. I am just explaining the Keynesian logic at its simplest and most abstract level.

If executives continued to sponsor CNC development despite years of setbacks, is that evidence of irrational obsession or far-sighted pursuit of their interests?
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It’s a fascinating book on many levels, but what I wanted to here was the inadequate nature of “demand” in determining investment. Managers of capital make investment decisions for all sorts of reasons. The military sector managers “private” and government invested in CNC machinery because they needed to machine fighter jets at tolerances that standard tools could not. This is to meet a purely policy driven demand. The civilian manufacturers wanted to improve efficiency AND weaken unions and, as Noble shows, often were willing to sacrifice profits to improve the position of management – a decision not within the imagination of economic theories in which the interests of the firm are identified with the interests of management. The Roger Smith era GM’s investments in robotics was an enormously expensive failure driven pretty much totally by management efforts to break the union – something they achieved later by a combination of losing market share to non-unionized “rivals” and by off-shoring. So efforts to understand investment decisions of US firms in terms of aggregate “demand” are doomed.

BTW: the collapse of the US machine tool industry, the core manufacturing industry, is also a complex story which cannot be explained by demand or comparative advantage or other economics fables. See for example http://www.manufacturingnews.com/news/10/0305/fiveaxis.html

Ok but how does it happen that desired expenditures are less than total income?

We have:

D = f(Y), with df/DY greater than zero and less than one.
Y = D
. . .
The point is that income influences expenditure and expenditure determines income.

I’ve never thought the Keynesian algebra was particularly clear or helpful, with its strange muddle of accounting identities with a mixture of “equilibrium” concepts. At least not helpful in cultivating a broad intuition.

In an economy founded on the capital sunk into production systems, inventories and consumer durables, people have a lot of discretion about the timing of their expenditures. Though the needs driving consumption may be continuous in real time — you need to eat, get dressed, move around, communicate, entertain yourself, etc. every day — expenditures to produce the goods and services to satisfy those needs — the expenditures which make people’s incomes — are subject to a lot discretion. You can put off buying a new car, or a new shirt, or going to the dentist for a teeth-cleaning. And, a firm can manage its inventories, or its marketing, or its capital expenditures.

And money just adds another layer of discretion, a further disconnection between production and consumption, as people can accumulate financial claims on future consumption. And, make complex deals and commitments to finance capital investment in speculative production, well in advance of the realization of final demand for consumption. So, money is not only enabling discretion in timing, but papering over a lot of risk associated with discretion over timing.

The very fact that there is a stock of houses or automobiles, which ages, means that there will be cycles of demand for these goods. All the intertemporal optimization in the world can not possibly make the demand for houses or autos follow a straight, stable trend line; the cosine will out.

And, then, there’s money. For demand to be effective, it has to be financed, in a money economy. People can need things desperately, want things passionately, but, in the market economy, cash-in-hand makes such demand effective, whether that cash comes from current income or savings or credit or government grants.

With so much discretion and disconnection over timing, it is a genuine mystery, why anyone would think that the rates at which people want to spend money would fortuitously be sufficient to match the rates at which people wanted to earn money. What, if anything, would coordinate the decentralized behavior of millions?

The classical answer was that market prices — including the price of money, itself, in money or financial markets: interest rates — brought the whole economy into equilibrium: the system of markets could achieve, it was asserted, a general equilibrium, in which every market reached a market-clearing price, simultaneously, without glut or shortage in evidence.

Without saying so explicitly, Casey Mulligan seems to be subscribing to something like the Classical view of the economy as a system of markets forming a decentralized intelligence, adapting rationally to every local circumstance, in adjustments of market price to bring supply into equilibrium with demand. If there’s disequilibrium in evidence, Mulligan thinks a reasonable hypothesis should always be formed around the possibility that some fumbling government policy is interfering with the ability of a particular market to reach a market-clearing equilibrium in price. Unemployment is a labor market failing to clear, and Mulligan wants to identify and remove the obstacle to a market-clearing equilibrium (wage).

If the classical model of a general equilibrium in a system of markets were correct, then the aggregate or macroeconomy would be composed of a simple, arithmetic assembly of its component, individual markets. Efficiency in the whole would be achievable as efficiency in the parts. Casey Mulligan would be a genius. If . . .

The classical model is wrong. And, not just a little wrong, it is a practical and logical impossibility. Some markets do not clear — that’s just a fact. (In fact, in an economy in which sunk-cost investments in processes demonstrating increasing returns is fairly common, quite a few markets do not clear and cannot reach a stable equilibrium in price in any finite period of time.) Consequently, the whole system of markets can never reach a general equilibrium — at least, not as a consequence of market price adjustments.

And, it turns out money cannot not be only a simple token or numeraire. In a world of uncertainty, anything even vaguely resembling a general market equilibrium would require extremely elaborate financial markets and lots and lots and lots of insurance, so that bets are made on the basis of expectations, untainted by risk aversion. Casey Mulligan’s general idea, to reduce or eliminate social insurance at every turn, is exactly the wrong thing to do, from the point of view of improving the efficiency of a decentralized market system. (Shocking, I know. Such are the mysteries of genuine orthodoxy — Chicago, today, is always wrong.) But, I digress.

The key Keynesian insight is that the macro economy is not a simple sum of numerous individual markets. If the macro economy is far enough away from full-employment, adjustments to market prices will not bring it back to full-employment in any finite amount of time.

In the Great Depression, in the U.S., high rates of unemployment meant a lot of pressure in individual markets to reduce wages. But, the only feasible full-employment equilibria were at much higher wage-rates, reflective of very high and rising labor productivity in a broad range of manufacturing. In electric generation and distribution, massive investment in new capacity was required, but carried an expectation of much lower prices for service, and rates of return on invested capital. In agriculture, the sector’s increasing productivity was increasing financial risks of investment, due to overproduction depressing commodity prices, and sinking a large part of the population into hopeless poverty.

I suppose that the attraction of Keynes, for many, is that he was able to abstract away from the detailed problems of the micro-economy, and focus on the general problems of money and aggregate demand. But, this approach left the notion of a feasible, general equilibrium unrefuted. Too many labor under the delusion that the New Keynesian’s “sticky prices” are a micr0 problem, which needs to be fixed, and if it were “fixed”, the macro problem would solve itself. This is idiocy, but Econ 101 does not show adequately that it is idiocy.

rootless: “Most of the financial claims transferred to the government . . . were perfectly sound but undervalued by an irrational/over-leveraged market in a panic.”

“sound” and “over-leveraged” cannot be simultaneously true. And, millions and millions of foreclosures are hardly evidence of soundness.

On neoliberalism and its market fetish, though, and David F. Noble’s Forces of Production, I’m with you all the way.

BTW: the collapse of the US machine tool industry, the core manufacturing industry, is also a complex story which cannot be explained by demand or comparative advantage or other economics fables.

In Forces of Production Noble notes that foreign manufacturers were already outstripping US CNC tool manufacturers in the 1970s, because their tools had capabilities and costs suited to producing mass-market goods. The pioneering US manufacturers built for the most advanced capabilities and the most capacious military budgets, and were unwilling to pursue higher-volume, lower-margin business until it was too late.

This is one instance of a repeating pattern of military money distorting product development. Manufacturers building for military needs are often building products that are excessively capable, and far too expensive, to fill a corresponding civilian niche. Civilian customers generally don’t need their equipment to have EMP-hardened electronics, operating temperature ranges spanning the Arctic to the Sahara, or resistance to bullets. They want equipment that is affordable to purchase and operate, reasonably reliable, and easy to use.

Defenders of military spending often highlight technological dividends from research, but a lot of that is stuff that civilians will never ever use, like miniaturizing nuclear weapons or hiding aircraft from radar. And some of what could actually benefit civilians, like better imaging of the Earth’s surface from satellites, is kept classified for so long that researchers outside the MIC have to re-invent it from scratch. Market distortions like tax credits for wind power are ghostly pale in comparison.

And the idea that union-busting is a manifestation of management’s pursuit of their selfish interest at the expense of capital (if I understand you correctly) is frankly laughable.
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It may be laughable, but it has been well documented. Management is neither disinterested nor rational ( in fact, it’s a hilarious feature of standard economics that the basic presumption of markets being made up of self-interested economic units involves pretending that a firm is a person with a single goal as if individual managers did not care about maximizing their own individual returns). If you read Nobles book you can find examples of highly productive/profitable plants being dismantled because of management’s unwillingness to accept worker participation in “management decisions”. And inspection of e.g. LBO behavior shows management is often willing to totally fuck over shareholders and bondholders in pursuit of personal advantage.

” in fact, it’s a hilarious feature of standard economics that the basic presumption of markets being made up of self-interested economic units involves pretending that a firm is a person with a single goal as if individual managers did not care about maximizing their own individual returns”

Nobody is pretending that a firm is a person; it’s a much more primitive organism, but otherwise I don’t see the contradiction. It seems perfectly possible to model an environment with individuals and firms all ‘caring’ (in a sense) about their own interests. Similar to, say, wolfs and wolf packs.

“If you read Nobles book you can find examples of highly productive/profitable plants being dismantled because of management’s unwillingness to accept worker participation in “management decisions”.”

If you choose to attribute this to managers’ personal whim, then yes, it’ll look irrational, capricious. But that probably means that you just need a better set of tools to analyze these things.

“And inspection of e.g. LBO behavior shows management is often willing to totally fuck over shareholders and bondholders in pursuit of personal advantage.”

But LBO is not an example of economic activity. It’s parasitic financial activity.

“This is basically the theme of Dilbert: managers, especially in complex areas like the technology, make the decision which preserves their authority and status rather than the one that might maximise company profits”

I haven’t seen anything in Dilbert supporting your “rather than”.

Wouldn’t it make more sense to think that personal qualities of individuals raising to management posts are a consequence of selection by the firm pursuing its interests, rather than assuming that managers are narcissistic megalomaniac assholes for no reason whatsoever? After all, there is no such assumption for the hierarchy in academia, for example…

Wilder, rootless et al

Thanks for the contributions…there was more discussion of the real issues behind labor supply/demand in the last 25 posts than the prior 100…imagine what would happen if anyone remebered to bring data rather than just theory.

Wilder – Left, Right, Middle – I’m all of the above depending on the issue…what seems to elude demagogs on all sides is that positions change with perspective, particularly in economic matters and that data is the whip of all, but the tool of none.

I believe in free markets…but there hasn’t been a ‘free’ one in over 200 years – just free speech.

A firm certainly is an organism, with the goal, in the environment called ‘economy’.
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Analogical thinking is a prime source of error.
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Explaining economic phenomena by such causes as ‘Bill Gates was constipated that week’ is really a sign of ridiculously bad approach.
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That would be a bad approach, fortunately, nobody has taken that approach.

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People don’t have class interests, classes do. Same category error, right there.
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Agreed – same error. A “class” is an abstraction, not a living thing. People who belong to privileged classes especially tend to defend their “class interest”. This is, for example, why management of the auto companies supported Republican politicians who blocked health reform, even though the US health care system was an enormous expense for the companies they were supposed to represent. As human beings, they have agency, while the auto company and the class do not.

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Nevertheless, functioning of a pack has its own logic, that can be analyzed without paying much attention to personalities of its members.
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This is a strange take. I assert that it is self-evident that managers have mixed incentives rather than being subsumed by their supposed role as advocated for the firm and you take this argument as a claim that personality quirks are not part of economics.

“As for the LBOs, I don’t get the point. LBO is not a firm, it’s a financial operation. ”

The claim is that firms operate according to market incentives. Yet we see numerous examples of firms operating according to the self-interest of their management despite significant penalties for the firm, the workers, the shareholders, and the bondholders. LBOs provide a rich source of such examples – in which management operates the firm to benefit itself, often causing the firm to become a distressed asset in the process. There are, of course, non LBO examples as well. One need only consider the behavior of the executives managing Lehman Brothers or AIG. What’s amazing is that this obvious fact was well known to e.g. Adam Smith, but has been ruled ideologically unacceptable in standard economics.

http://krebscycle.tumblr.com/post/14069624685/delongs-error-financial-corporation-edition

rootless: Plenty of bad managers exist. But being against them is hardly a Leftist position: plenty of libertarians have called for reforms to proxy votes. Once more, agent-principal problems are part of many standard econ texts.

The issue of class struggle is not about management vs. the rest of us. Rather it’s about who deserves the fruits of the economy and who has the power to change society. Higher wages mean less in profits: it is as simple as that.

Higher wages mean less in profits: it is as simple as that.
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No. It’s not as simple as that, and it’s not even true.

It’s sometimes true, sometimes not.

An increase in wages has the following effects:

1. Higher consumption (given a higher marginal propensity to consume out of wages than profits; this is generally, but not absolutely always, true).

2. Lower profit share; lower profit margins assuming productivity fixed (which is a safe assumption int eh short run).

3. An indeterminate effect on investment, given 1 and 2. In general, we think investment is a function of both demand (or capacity utilization) and profitability. Capitalists will add to the capital stock only when (a) increasing output is sufficiently profitable; (b) increasing output requires larger K (i.e. the current capital stock is fully utilized); and (c) investment can be financed out of the current flow of income available to them. Higher wages help on (b) but hurt on (a) and (c), tho the latter effect is also mediated by the financial system.

4. An indeterminate effect on total demand, given 1 and 3. Obviously if both desired consumption and desired investment rise, total demand will rise, but if consumption demand rises and investment demand falls, total demand may go either way.

5. An indeterminate effect on real output. Whatever the change in demand under point 4, this will be reflected in a change in both output and the price level. The fraction that shows up as each will depend how far the current level of output is from full capacity (a fuzzy but not meaningless concept), how flexible are prices, and how elastic are expectations (of future income by households, and of the return on assets for firms) with respect to current output.

6. An indeterminate effect on the profit rate, given all of the above. A lower profit share is always negative; higher demand — if it results! — is positive. Also, the more open the economy is to trade, the more likely higher wages are to reduce profits, since the lower profit margins are the same but the boost to demand is less, the more of the higher consumption falls on imports.

This would be a lot easier to show with algebra, but Bruce W. doesn’t like algebra. :-)

So the statement “higher wages mean lower profits” is wrong. The statement “higher wages don’t mean lower profits” is also wrong. It depends — but not in a fuzzy, obscurantist everything-depends-on-everything-else way. It depends on a specific set of factors. In general, we would expect higher wages to be good (or less bad) for profits when: the economy is operating far from capacity; there is a sharp sociological divide between the wage-receiving and profit-receiving classes; the credit system is highly elastic; the economy is relatively closed; investment is currently low; and profits are currently high. We would expect higher wages to be bad for profits when those conditions don’t apply.

For the US today, I think the argument that higher wages would not be bad for profits and growth is reasonably strong, though far from certain. I think it was almost certainly correct in the 1930s. But I think the opposite case — higher wages mean lower profits and growth — has also been true at various times and place historically.

reason @ 132

Yes, which is why the corridor hypothesis seems like an effective gambit. The cooridor hypothesis says that the economy moves in a cooridor along the Solow Growth path, and within that cooridor, markets can adjust as they do, and these adjustments will add up to something like a move toward the one true, general equilibrium. The Market God is appeased.

But, if a “shock” takes the economy outside the cooridor, and markets are far from equilibrium, the adjustments in individual markets might not work to bring the economy toward a full-employment “general equilibrium”.

Ultimately, though, I think the Friedmanite idea that the economy seems stable because it is an emergent, natural order moving toward an optimal equilibrium is pernicious and false. The Solow growth path is, itself, a silly idea, which obscures the essential dynamics and central conflicts of the economy.

In my view, if the economy seems reasonably stable for a period of time, it is due to a kind of dynamic stability, like the gyroscopic stability of a bicycle in forward motion, due to the success of a scheme of institutional containment.

This would be a lot easier to show with algebra, but Bruce W. doesn’t like algebra. :-)

I love algebra.

Forces of Production is a great book. So is America by Design, which a lot fewer people seem to have read. A World Without Women, on the other hand, is … not so good.

A World Without Women should have been a great book – but it was not.

Algebraic definitions are easy. Deriving functional relationships is hard.

The colonial system looks to low wages, necessarily followed by an inability to devote time to intellectual improvement. Protection looks to high wages that enable the labourer to improve his mind, and educate his children. The English child, transferred to this country, becomes an educated and responsible being. If he remain at home, he remains in brutish ignorance. To increase the productiveness of labour, education is necessary. Protection tends to the diffusion of education, and the elevation of the condition of the laborer….

If we desire to raise the intellectual standard of man throughout the world, our object can be accomplished only by raising the value of man… throughout the world. Every man brought here is raised, and every man so brought tends to diminish the supposed surplus of men elsewhere. Men come when the reward of labour is high, as they did between 1844 and 1848. They return disappointed when the reward of labour is small, as is now the case. Protection tends to increase the reward of labour, and to improve the intellectual condition of man.

Henry Carey.

I have only recently noticed Keynes defense of protectionism, but it’s worth looking at.

Mulligan responds to Quiggin:
http://caseymulligan.blogspot.com/2012/11/professor-quiggin-could-learn-lot-from.html
Still no response to everyone who complained about his “Who Cares About Fed Funds?” argument. Although while searching for it on his blog I found he argued in 2011 “At this point, an inflation that harmed banks and helped homeowners might be an overall improvement.” Don’t tell his colleague John Cochrane.