Food stamps cause global depression ?

by John Quiggin on November 2, 2012

Chicago is about as close to the American heartland as you can get and still be in a major city (the infamous Heartland Institute is located there, for example), but even so, I’d expect a professor at the University of Chicago to be aware that the USA is not the only country in the world. That’s not true, apparently, of Casey Mulligan, who claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ” greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.”

Mulligan’s claims about US policy are dubious at best (see over fold), but there’s a much more critical problem with his argument. If US unemployment is caused, not by a demand shock but by the mistaken policies of the Obama Administration, why did unemployment move in the same way, and at the same time, in many different countries? Did Iceland expand its food stamp program? Does Estonia pay unemployment bonuses? Sadly, no. And 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. An even clearer demonstration is given by the Great Depression, where nearly all governments pursued austerity policies after 1929 (Mark Blyth’s soon-to-appear Austerity: The History of a Dangerous Idea tells the story)>

This isn’t just a problem for Mulligan. The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).

Responding more specifically to Mulligan’s claims, his suggested mechanisms don’t fit the data. As is usual in a recession, the period of eligibility for unemployment insurance was extended to a maximum of 99 weeks in the aftermath of the financial crisis. However, this extension has gradually been withdrawn, and an additional Federal benefit is due to expire at the end of this year. Yet the employment-population ratio has remained at low levels not seen for decades (the increase over the late 20th century reflects women’s entry to the workforce). Mulligan could still claim vindication if employment were to jump dramatically in 2013, but it’s notable that he predicts nothing of the kind.

As for food stamps, the expansion in the number of recipients is not due to changes in policy but to the fact that, thanks to mass unemployment, many more people are eligible under existing rules.

{ 157 comments }

1

Andrew Smith 11.02.12 at 7:11 am

Oy! Missing a title?

2

John Quiggin 11.02.12 at 7:16 am

Having trouble with autosaves! Fixed now, I hope

3

Andrew Smith 11.02.12 at 7:28 am

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?

4

NomadUK 11.02.12 at 7:41 am

You are aware, right, that you’re talking about the University of Chicago? And you’re surprised by this why, exactly?

5

JaaaaayCeeeee 11.02.12 at 7:46 am

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/

6

bad Jim 11.02.12 at 8:03 am

It’s probably just me, but whenever the right wing darkly refers to “Chicago” I immediately think of idiotic economics rather than corrupt politics.

7

Jeremy 11.02.12 at 8:37 am

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.”

8

Chris Bertram 11.02.12 at 8:48 am

The current British version goes something like this: “we” (the UK but the rest of the developed world) face competition from India and Brasil and this is what explains the pervasive unemployment. To cure this and to compete effectively, people need to be “incentivized” to work harder and this requires making the consequences of unemployment ever more painful so that the threat of destitution gets people to work harder and harder in worse conditions for less. (That’s a rough summary of David Cameron’s recent conference speech as I remember it.)

9

Tim Worstall 11.02.12 at 9:05 am

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.

10

reason 11.02.12 at 9:10 am

John Q,
this is beneath you to be honest. Attacking Mulligan is like attacking a kindergarten kid. Mulligan has been pilloried by everone, including the economists. Leave him alone, he does more good for our side than even Krugman does. He makes them look like idiots to everybody.

11

reason 11.02.12 at 9:11 am

oops
I should proof read more

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

12

reason 11.02.12 at 9:13 am

Tim,
I’m not sure how often you have read Mulligan, but his schtick is to pretend that these minor micro-economic effects are all that is happening.

13

Katherine 11.02.12 at 10:00 am

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?

14

Salem 11.02.12 at 10:15 am

“The simultaneous occurrence of a sustained increase in unemployment in many countries, with different institutions and policies undermines any explanation of unemployment that works at the national level. That includes all forms of New Classical Economics, in which unemployment arises from labor market “distortions”, as well as Real Business Cycle theories (except if you stretch the idea of a technology shock to the point where “technology” effectively means “aggregate demand”).”

Hang on a second!

“Aggregate demand” explanations work at a national (or currency-zone) level too. Aggregate demand is MV. So if you argue that labour market distortions can’t be the cause of the unemployment, because the labour market and associated laws are (roughly) national, then you must argue that aggregate demand can’t be the cause either, because monetary and fiscal policy are (roughly) national. Your argument works just as well against you as it does against Mulligan.

Secondly, I don’t believe this is an RBC recession for a second. But your argument actually supports RBC theory, not undermines it. 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.

The general problem with your argument is that in most of the developed world, the institutions and policies are really very similar. Therefore you aren’t seeing 40 separate experiments with results robust across different situations, you’re seeing the same experiment being run 40 times. I happen to agree with your aggregate demand explanation for the most part, but the only way to make it work is to note that the ECB, Fed, BoJ, etc, are all, independently, pursuing tight money, and look at countries where different policies are pursued (such as Australia, as you are of course aware). But that’s hardly the only similarity between those countries – for example their labour laws are quite similar too! Moreover, that’s hardly Australia’s only idiosyncracy, and there are counterexamples (e.g. the UK). Therefore this “transnational” argument actually does very little work; we’re just back to general macroeconomics.

Furthermore, you are strawmanning the “labour market distortion” argument. Why does falling aggregate demand cause unemployment, rather than just a lower price level? In other words, why are wages (or prices, depending on your theory) sticky? That’s a micro question, and it’s at least plausible that labour market distortions play a large role.

15

John Quiggin 11.02.12 at 10:17 am

@Reason No, I think it’s you who’s being unfair to Mulligan. His policy conclusions are shared by Lucas, Barro, Hubbard etc. 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.

16

John Quiggin 11.02.12 at 10:18 am

One implication of the crisis is that a large proportion of the Econ Nobel prizes of the last 30 years ought to be revoked or maybe that the whole idea of giving Nobel awards in a social “science” is a bad one.

17

Hidari 11.02.12 at 10:34 am

@ 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.

18

Del Cotter 11.02.12 at 11:32 am

Soup kitchens caused the Depression!

19

marcel 11.02.12 at 11:34 am

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!

20

marcel 11.02.12 at 11:35 am

I my previous comment, I closed the italics one sentence prematurely!

21

bexley 11.02.12 at 12:01 pm

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.

22

sherparick1 11.02.12 at 12:39 pm

@hidari
Right now, we have class of people energetically establishing an Aristocracy of Wealth in the U.S., but with an ideology built on “Ayn Rand,” not “noblesse oblige.” I have argued with a few friends that the rise of the Tea Party confirms certain Tory views that we Americans would prove incapable of Self-Government. Is it to late to reverse that 1776 thing? Maybe one of those long lost Plantagenet heirs in Australia would not mind becoming King.

23

Yannis 11.02.12 at 1:28 pm

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.

24

Tim Worstall 11.02.12 at 1:29 pm

“I’m not sure how often you have read Mulligan”.

Somewhere between never and very rarely so far as I know.

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

It does indeed which I why I said I thought the extension was a good idea. That doesn’t mean that good ideas can’t have bad effects (even if not as large as the good things that come from the good ideas….the balance being what makes them good or bad ideas).

“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).”

Personally I’d argue the other way around. Make the Royals absolutely the only people who are allowed to do any of this medals and representing the country stuff, turning up at the Olympics and celebrating “Cool Britannia”. The politicians get none of that at all and then we can judge them on their ability to keep the drains cleared as we ought to.

25

Phil 11.02.12 at 2:31 pm

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?

26

MPAVictoria 11.02.12 at 2:57 pm

“Make the Royals absolutely the only people who are allowed to do any of this medals and representing the country stuff, turning up at the Olympics and celebrating “Cool Britannia”. The politicians get none of that at all and then we can judge them on their ability to keep the drains cleared as we ought to.”

I actually really like this idea Tim.

27

SB 11.02.12 at 3:20 pm

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!

28

Cynthianne 11.02.12 at 3:34 pm

Not an economist (thank god for small favors), but have been reading economy-related blogs for years (Angry Bear, Krugman, Mark Thoma, etc.). I had, however, never before encountered this Casey Mulligan guy. When I read a post by Mulligan here a while back, I thought it was some kind of lame parody and the author’s name was a joke (Mulligan?!? how many do-overs does he get?) because he seemed to be forming a pretty outlandish conclusion and then selecting (and torturing the facts) in order to fit the argument, ie., the Procrustean Bed school of Economics.

Then I read the comments, and found Mulligan (real name) had an actual degree in Economics. Sheesh. If Mulligan is fair example, I now understand why Krugman in particular seems to have such thinly-veiled contempt for the “Chicago school.”

I confess I haven’t actually read this current post, and don’t intend to- once was enough, thank you very much. Just went straight to the comments- very entertaining!

29

Anderson 11.02.12 at 3:39 pm

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

I thought they were sorta your team mascot.

30

Coulter 11.02.12 at 4:05 pm

Jaaaaycee,

it is why fact checkers don’t work, because the facts they check are never neutral… How much are foreign profits taxed today? 0%, how much under romney’s plan? 0%. If romney’s plan will encourage more offshoring, it isn’t because the rate is lower, because it doesn’t change …

As for Jeeps, 100% of Jeeps sold in China were made in North America. Going forward that number will be 0%. How you can’t call this offshoring, but Romney’s plan to allow corporations to repatriate profits at the same 0% tax they currently pay IS offshoring is silly…

31

fledermaus 11.02.12 at 4:29 pm

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.

32

Patrick 11.02.12 at 4:39 pm

Clearly Casey believes that the global economy just can’t seem to function if the US’s welfare queens are not part of the workforce. Apparently, they’re the lynchpin that holds our whole system together.

33

Nick 11.02.12 at 5:30 pm

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.

34

rootless (@root_e) 11.02.12 at 6:19 pm

‘In my opinion ther’s too much of this ‘ere eddication, nowadays,’ remarked old Linden. ‘Wot the ‘ell’s the good of eddication to the likes of us?’

‘None whatever,’ said Crass, ‘it just puts foolish idears into people’s ‘eds and makes ‘em too lazy to work.’

35

Mao Cheng Ji 11.02.12 at 6:28 pm

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.

36

Tim Worstall 11.02.12 at 6:34 pm

“There’s a cluster in the middle of Figure 1 consisting of four countries – Norway, Finland, Australia and Denmark. “

Denmark’s the only one I know anything about. And it has excellent retraining programs for the unemployed which is I think what is usually credited there.

37

rootless (@root_e) 11.02.12 at 7:15 pm

Mao Cheng Ji @34

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

38

Donald A. Coffin 11.02.12 at 7:49 pm

I suppose we can excuse Richard Layard’s comments (as noted in #9 above) about the lack of long-term unemployed in the US on the basis that he was writing in 2001. But even then, those unemployed for 27 weeks or longer (in January 2002) plus discouraged workers were 18% of the total of the unemployed plus discouraged workers. In October this year, it was 45%…So he’s missing something, I’d say, and the political point it makes is not exactly a progressive one.

39

Wonks Anonymous 11.02.12 at 8:25 pm

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?

40

Omega Centauri 11.02.12 at 9:03 pm

“If it were Obama’s policy, why has it been a 12 year long trend?”
Why obviously the market anticipates the future. Thats why the economy started to really nosedive as 2008 ran along, the markets were in a panic becuase Obama might soon be elected.

And thats why stock markets drop during Republican administrations, and rise during Democratic administrations, the market is anticipating the next change of party!

41

John Quiggin 11.02.12 at 9:54 pm

@Salem I’m not following your argument. The standard Keynesian story for both this depression and the Great Depression is that

* The initial shock to the US financial system is rapidly transmitted through the global financial system affecting many countries at once

* Negative demand shocks are transmitted internationally through reduced demand for imports

So, Keynesian theory, unlike RBC and New Classical models predicts that, with high levels of trade and financial integration, business cycles will be correlated across countries.

42

John Quiggin 11.02.12 at 9:55 pm

@OC 39 I suspect you are being ironic but, as I pointed out in Zombie Economics, Mulligan made exactly this claim to explain the 2008 financial crisis – business feared Obamacare and similar, and this produced a self-sustaining bad equilibrium outcome.

43

JW Mason 11.02.12 at 10:42 pm

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.

44

gordon 11.02.12 at 11:02 pm

From “In These Times” report on the World Bank’s “Doing Business” report which “…quantifies the regulatory “burden” that investors may face in various countries”:

“…The World Bank has taken the extremely dubious science of deregulation one step further by creating a guide, known as the Doing Business report, that quantifies the regulatory “burden” that investors may face in various countries. The 2013 report was released this week. Echoing the corporate “job creator” mythology of the Washington consensus, Doing Business encourages financiers and governments to erode public-interest protections, including safeguards for unions and workers…”.

http://www.inthesetimes.com/working/entry/14092/world_banks_anti-labor_index_is_a_dirty_business/

Entertainingly, the International Trade Union Confederation (ITUC) says that this report actually contradicts two other World Bank reports – the World Development Report (2013) and an evaluation panel (the Independent Evaluation Group) within the Bank. If the ITUC is right, the World Bank is peddling different messages to different audiences without a hint of shame.

http://www.ituc-csi.org/world-bank-s-doing-business-2013.html

45

Joshua Holmes 11.03.12 at 1:19 am

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.

46

Bruce Wilder 11.03.12 at 1:51 am

In 2008, Bernanke did, in fact, run up against the global commodity ceiling. As early as 2007, Bernanke was trying to respond to expectations of bank failures with pre-emptively loose money and credit, to minimize the knock-on effects of those failures. Some salient Bear Stearns funds had failed in the Summer of 2007, and the writing, as they say, was on the wall. Loose money, though, was hijacked by speculators to finance a wave of commodity speculation in a global economy near its cyclical peak, and commodity prices rose precipitously in the first six months of 2008, triggering a global food crisis (which, in turn, triggered, among other things the Arab Spring). In the U.S., the effect of rising gas and food prices on consumer budgets and consumer spending was the proximate cause of the economy’s accelerating turn toward recession. But, the inflation spike, caused by commodity speculation, set up exactly what Bernanke feared most: a moment, however brief, of deflation. “What goes up, must come down” is not an adage that always applies in economics, but it applied to the commodity inflation that took off in early 2008, as the U.S. economy was gradually sliding into recession. After the peak in commodity prices passed, the inevitable decline in prices meant that several weeks of deflation could not be stopped. And, the result was the financial crisis, in September and October.

47

Bruce Wilder 11.03.12 at 2:14 am

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.

48

tomslee 11.03.12 at 2:22 am

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

49

rf 11.03.12 at 2:34 am

‘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

50

Red 11.03.12 at 2:41 am

I see that Casey Mulligan is listed 450th in the September 2012 ranking of economists (http://ideas.repec.org/top/top.person.all.html). Actually, that’s pretty good: this is a very long list. I do wonder what this says about the profession. Or of rankings, of course.

51

Bruce Wilder 11.03.12 at 2:57 am

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.

52

Omega Centauri 11.03.12 at 3:42 am

J.Q. Of course I was being sarcastic about markets reacting to political developments years in advance.

Bruce, I can understand how the moral casuality schtick could make great politics, as few low information voters understand (or have respect for) quantitative modeling, but everyone has strong moral senses. But, I am continually perplexed how many of the people I hang around with -physicists and engineers whose math skills are far greater than anything you’d need to do quantitative economics, are completely taken in by this. Its analysis with the Amygdala bypassing the logical parts of the brain altogether. And these are people who could easily construct and solve mathematical models.

53

NomadUK 11.03.12 at 7:42 am

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.

54

Peter Whiteford 11.03.12 at 8:27 am

Carey Mulligan was extraordinarily good in “Never Let me Go”, however she wasn’t all that good in Wall Street 2 – she was too easily moved to tears for my taste. (I actually thought that Andrew Garfield was even better in ” Never Let Me Go”)

55

rf 11.03.12 at 9:52 am

‘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

56

NomadUK 11.03.12 at 12:27 pm

Though what did you think of it, out of curiosity

I confess I haven’t seen it, but it is in my LoveFILM queue, along with the other 500+ films I’m unlikely to ever get through before I shuffle off this mortal coil (mostly because they keep churning new ones out, so I’ll never manage to catch up).

57

Jeff Johnson 11.03.12 at 12:28 pm

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?

58

Rick C 11.03.12 at 12:54 pm

Excellent points made. Raised the question in my mind, that if Obama is the “food stamp president”, how many other leaders worldwide are also presiding over record level social assistance in their own countries?

59

Guido Nius 11.03.12 at 2:27 pm

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.

60

Ed 11.03.12 at 3:51 pm

Off topic, but in comment # 16 John Quiggin said:

“One implication of the crisis is that a large proportion of the Econ Nobel prizes of the last 30 years ought to be revoked or maybe that the whole idea of giving Nobel awards in a social “science” is a bad one.”

There is no “Econ Nobel prize” or giving “Nobel awards in a social science”. Here is an explanation of why people think or pretend to think there is one: http://www.alternet.org/economy/there-no-nobel-prize-economics?paging=off

May I criticize the blog? I think too much of the bloggers’ and commentators’ is spent reposting stupid arguments from commentators on the right, and then hitting them with sticks as if they were a pineta. I don’t see what this accomplishes. This sort of thing is not even meant to convince. The idea is to give businessmen talking points to shut down discussion about the lack of jobs in case someone happens to bring it up at their country club. I agree with Cynthianne at #28. Its possible to have a good discussion of the steady drop in the labor force participation rate in the US without hanging the whole thing on some piece of right-wing propaganda.

61

ezra abrams 11.03.12 at 4:35 pm

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.

62

ezra abrams 11.03.12 at 4:39 pm

Ed @ 58
I agree wholeheartedly with your last paragraph.
The “left” spends way, way to much time knocking right ideas, eg, if you look at say http://www.thinkprogress.org, it is almost 100% comments on people like M Bachmann.

At the moment, the most useful thing liberals can do is work with their congressional delegation, to ensure, eg, no cuts in social security, increased spending on environmental monitoring of pollutants, increased access to abortion (I have read that Woman on active duty in war zones, if pregnant as a result of rape, *have to pay for the abortion themselves* due to limits on fed spending for abortion. Seems like a good thing to write your congress person about)

63

arbitrot 11.03.12 at 5:50 pm

@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.”

64

El Cid 11.03.12 at 5:55 pm

Clearly the presence of all these ambulances at this intersection proves that an over-supply of ambulances caused this enormous traffic accident.

65

lupita 11.03.12 at 6:29 pm

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.

66

William Zame 11.03.12 at 6:34 pm

“I see that Casey Mulligan is listed 450th in the September 2012 ranking of economists (http://ideas.repec.org/top/top.person.all.html). Actually, that’s pretty good: this is a very long list. I do wonder what this says about the profession. Or of rankings, of course.” What should make you suspicious about such lists is not that Mulligan is 450th but that Robert Aumann and Lloyd Shapley, who are genuinely great economists and Nobel Prize winners are below him — and below me, for that matter.

67

William Zame 11.03.12 at 7:17 pm

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?

68

Harold 11.03.12 at 7:52 pm

Neo-liberal economies style themselves both as “traditional” and as “reformed”.

69

Joel 11.03.12 at 9:36 pm

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.

70

Keith M Ellis 11.03.12 at 10:00 pm

Bruce Wilder, that’s an interesting analysis and I think you’re correct, as far as it goes.

However, my own experience is that economic moralizing is not peculiar to the right. Granted, the economically-literate left tends to Keynesian pragmatism. But everyone else sees all economics, and all economic analysis, as essentially moral. The clearest example on the left is Marxism, of course. Marxism and Hooverism are really just sides of the same coin of seeing economic activity as moral activity and economic analysis as moral philosophy cum social engineering.

In that context, which is that there’s a very deep human intuition that economic activity is an essential, perhaps the essential human moral activity, then it’s no surprise that a purely descriptive, scientific analysis of economic activity holds little interest or credibility to most people, and a pragmatic policy on its basis, even less so.

I don’t disagree that social justice, which is of course a kind of moral philosophy, requires that certain judgments be made about economic policy. In this sense, of course economics can not be completely divorced from moralizing.

But what’s frustrating especially frustrating to me, and which the Great Recession has so thoroughly demonstrated, is that even the things about which we all really should be able to agree (people shouldn’t starve and shouldn’t be unemployed) are completely distorted by seeing all economic analysis through a moral lens. It’s no accident that moral hazard is a technical economic term — what pretty much everyone seems to do is believe that every small policy decision is the first step down a slippery slope; that if one fails to examine the moral nature of an economic analysis/policy, then corruption will soon follow. So no question, no issue, exists outside of a moral analysis and, often, an identification of villains. This is really not very much less true on the left than it is on the right; and, of course, in particular contexts it’s much more true. Such as, for example, discussion about bailing out the banking behemoths.

I find the Chicago-style abstracted and obfuscated version of what is often simple moralizing to be repugnant; but it’s not really fair or true to claim that this is a disease of just the right. Pretty much all economic argument is argument from a moral quality.

71

Grizzled 11.03.12 at 10:40 pm

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

Starting with Paris Hilton’s.

72

Salem 11.03.12 at 10:50 pm

@Salem I’m not following your argument. The standard Keynesian story for both this depression and the Great Depression is that
* The initial shock to the US financial system is rapidly transmitted through the global financial system affecting many countries at once
* Negative demand shocks are transmitted internationally through reduced demand for imports

Less demand for imports is not an aggregate demand story. 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? You can make a structural argument here, that the French economy is unable to repurpose its resources quickly enough, leading to a supply/demand mismatch in France – this is basically Arnold Kling’s “PSST” story (see http://www.econlog.org) – but that’s about as far away from a Keynesian story as possible. There’s no “general glut” implied. And it doesn’t really comply with the data.
The Keynesian (or monetarist) aggregate demand story says collapsing V in an individual country/currency zone, plus sticky P, leads to falling Y. But then you have to ask – OK, why did that country not take counterbalancing measures? Just because V is falling, doesn’t mean MV has to. And if the same story plays out in country after country, the answer has to be something about similar institutions. And in fact you see that the Fed, the ECB, and the BoJ are all inflation targeters – boom, there’s why it’s a global depression. And in those countries where the central banks have maintained nominal spending, no depression.
In any case, RBC very much does predict that business cycles will be correlated across countries. Technology doesn’t stop at national borders.

73

Harold 11.03.12 at 10:55 pm

“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.)

74

Barry 11.04.12 at 1:52 am

11.02.12 at 1:29 pm

“I’m not sure how often you have read Mulligan”.

Tim Worstall : “Somewhere between never and very rarely so far as I know.”

Then you might want to read up. Start with Krugman.

See you later.

75

Craig Nelson 11.04.12 at 3:25 am

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.

76

The Tragically Flip 11.04.12 at 4:19 am

The only place the Chicago boys apparently do believe in demand side economics is employment. If only there were more demand for jobs, you see, there would somehow be a bigger supply of them.

I’m being glib because I’m not actually sure they think kicking people off food stamps and making them desperate enough to work any job whatsoever will actually create addtional jobs. It will drive down wages though on the existing jobs, which really has to be the point of ending the obviously needed and infrequently abused safety net.

Adding more players to a game of musical chairs really is a shitty way to make sure everyone gets to sit.

77

Quevedin 11.04.12 at 6:13 am

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.

78

Hidari 11.04.12 at 7:44 am

“” The government should confiscate the savings of all the unemployed”

Starting with Paris Hilton’s.”

Yes. A reminder that while the US does not have an “official” aristocracy it very much does have an “unofficial” one, whose more or less permanent “unemployment” doesn’t seem to greatly exercise the Great and the Good (Ms. Hilton’s “career” notwithstanding).

79

joe 11.04.12 at 9:55 am

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.

80

Tim Worstall 11.04.12 at 10:39 am

“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,”

I dunno. If you want to talk about the impact of welfare policies on employment/unemployment it seems reasonable enough to at least consider the views of someone who has spent a couple of decades studying the impact of welfare policies on employment/unemployment. It certainly doesn’t sound all that odd an idea somehow.

And Layard has been studying such things for that sort of period of time. Mid-80s he was teaching us LSE undergraduates all the same points out of his already published textbook on the subject.

In fact, his logical points are even more important now I would think. For much of the current discussion around US employment rates looks at those discouraged from even looking for employment: that difference between the U-6 rate and the reported unemployment rate. It’s exactly this that Layard is looking at.

He argues that work skills degrade over extended periods of unemployment. That employers will, whether they should or not, prefer to hire those newly unemployed rather than those who have been long term unemployed (say, a year or two). Thus, if there is long term unemployment for whatever reason it’s extremely difficult for those long term unemployed to get back into the labour market. So, if there is (for whatever reason) some occurrence of large scale long term unemployment- say, the worst economic crisis for several generations- then we’re going to end up with some significant number of those long term unemployed permanently on the scrap heap.

He then goes on to consider this as being a very bad idea indeed and suggests solutions to this problem. Like make work jobs for those long term unemployed, or subsidised training programs, or possibly even mandatory jobs/training. In order to reconnect those long term unemployed with the labour force that is likely to be hired in the general economy.

One can disagree with him, for sure. But to reject his analysis as not even worth being discussed just at the time when we actually would rather like a solution to the problems he identifies does seem a little odd.

The US really does have a problem that it hasn’t had for many a decade: large numbers of long term unemployed. Looking at suggestions of how you reduce the number of long term unemployed seems reasonable enough, no?

81

Phil 11.04.12 at 10:44 am

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?

82

kdog 11.04.12 at 10:57 am

Re the argument advanced by Tim Worstall @9 citing Layard:

I think it’s true, as you say, that a wide range of economists would agree with the general principle that UI benefits cause higher unemployment. But an this leaves a lot of room for disagreement about the size of the effects, and the circumstances under which the effects might be greater or smaller. In the current crisis, labor demand is well below supply, so perturbations in supply aren’t going to have much effect (and as discussed above, this is an idiotic explanation of the crisis itself). But at the end of the day, this seems to be an empirical question.

One paper you might be interested in is this one by Jess Rothstein, which finds that the effects of the UI extension are unemployment are less than a half percent, *and* the majority of that effect comes not from discouraging labor market participants from accepting work, but rather, from encouraging unemployed workers to stay in the labor market.

http://www.nber.org/papers/w17534.pdf

Mark Thoma discussed the paper here:
http://economistsview.typepad.com/economistsview/2011/10/unemployment-insurance-and-job-search-in-the-great-recession.html

83

Guido Nius 11.04.12 at 12:26 pm

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.

84

Watson Ladd 11.04.12 at 2:18 pm

Harold: Dutch burgers of the 17th century had very high spending on conspicuously consumable goods, like Rembrants and other such things. Crassus was a very wealthy man, whose love of gold is proverbial.

Salem: No, the Fed aggressively cut rates and boosted the money supply, and inflation targeting is not what the Fed does. Absent from your picture is a fiscal component, in which the US government rather then attempt to bost V as well when Fed policies ran into the zero bound, instead targets fiscal consolidation. The actually taken actions of the Federal Reserve show they believe in your theory of causation of the crisis.

85

Arshemble Divilich III 11.04.12 at 2:44 pm

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.

86

Omega Centauri 11.04.12 at 3:08 pm

Joe @79, Isn’t this a bit over the top?
““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.”
I would say the main difference between pragmatic moralizing, and moralizing aimed at individual actions, is that the former chooses as its goal the optimization of some system level aggregate goal (the greatest number employed, or highest per capita GDP, lowest poverty statistic etc.), whereas the later simply wishes to award/punish each individual action, and simply assumes that righteousness creates the best possible world. One aspect of the later, is that any action which increases public debt is rejected as immoral (because debt is assumed to be immoral), without regards for what is being purchased with that debt accumulation. Consider an investment in a public good which would return in revenues to the government in excess of any debt costs, the former would enthusiastically embrace it, the later uncategorically reject it.

87

Harold 11.04.12 at 4:29 pm

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!

88

Batson 11.04.12 at 4:34 pm

This is so true, I have heard rumors that Jamie Dimon of Goldman Sacs is considering leaving his job at GS so he can benefit from food stamps.

89

J T GILLICK 11.04.12 at 7:16 pm

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.

90

Don Fitch 11.04.12 at 8:42 pm

Retraining:

It’s been more a few years since I looked carefully at the situation, but I really doubt that there’s been much change. In general (& perhaps almost entirely), these “Retraining” programs for people who have become unemployed train them, in the course of two or three years, to fill jobs for which there were many vacancies two or three years ago. Really, you know, that simply doesn’t make sense in the first quarter of the 21st Century.

Look you: We currently have an economic situation in which there are many more people who want, need, and can perform well in, jobs, than we have jobs. It does not seem to me that “let enough of them starve to death that there is not an excess of human workers” is a practical solution  to this problem. With proper sifting, we can pretty well establish which people are (for various reasons) incapable of holding down a job, and I think that our society really needs to do this and to provide adequate (if modest) support of them, indefinitely. (Since we can imprison an undeclosed & unlimited number of people, indefinitely, without trial, I see no reason why we would have any difficulty with this.)

But then, I also see no reason why we should not remember the fifth of November.

91

Bruce Wilder 11.04.12 at 9:22 pm

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.

92

Bruce Wilder 11.04.12 at 9:38 pm

Rembrandt was far from poor, though he did manage to bankrupt himself with over-spending, and spent the last decade of his life in straitened circumstances. He was a portraitist, who sold many paintings, and, in his prime, earned a very substantial income, and was a burgess of Amsterdam.

93

Alice 11.04.12 at 10:11 pm

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.

94

Harold 11.04.12 at 11:45 pm

Bruce Wilder and Alice — I think I read the same art books as Alice — and also saw a number of documentaries that stressed the poverty of Rembrandt’s final years. I also visited his house in Amsterdam, now a museum. However, on checking, it seems Rembrandt did initially earn a decent income — his etchings, certainly were always popular. He certainly was not as prosperous as Rubens, whose house/museum in Antwerp we also visited, and who had royal and church patronage. Much of my information about consumer goods comes from reading Peter Burke’s Popular Culture in Early Modern Europe.

95

JW Mason 11.05.12 at 12:02 am

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.

:-)

96

derrida derider 11.05.12 at 12:34 am

Tim Worstall cites Dick Layard as saying incentives matter. Well Mulligan is claiming that incentives are ALL that matter – I won’t bother piling on with everyone else about how deeply dishonest that caricature of a Chicago economist in fact is. Instead let’s talk about Layard’s claim. Let’s talk microeconomics, not macroeconomics.

What we’re seeing with things like the temporary extension of unemployment insurance in the US is something I spent a lot of time arguing about in the 1990s – that the prospect of mass unemployment causes politicans to improve unemployment benefits, as well as the other way around, and that econometric studies of unemployment that treat the level and coverage of benefits as exogenous will therefore give heavily biased results. They’ll show incentives matter to the aggregate level of unemployment far more than they actually do.

And Layard, for all his support of UK Labour, was heavily implicated in these faulty studies, especially through his & Nickell & Jackman’s influential book “Unemployment” and through the dreadful hatchet job that was the 1994 OECD Jobs Study.

97

derrida derider 11.05.12 at 12:50 am

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

98

Nick 11.05.12 at 3:39 am

dd, yep…that’s how it appears. My reference for the policies at the time was here, btw:

http://www.oecd.org/els/socialpoliciesanddata/benefitsandwagescountryspecificinformation.htm

Admittedly, I was making an assumption none of those countries had ‘loosened up’ their policies in the two or three years previous. I’d be very surprised to find that were the case. Phil @ 25 was spot on, I think. It seems remarkably coincidental that every country with an unemployment scheme of 12 months or less showed low percentages of unemployment beyond 12 months, while the rest ran the gamut.

99

Nick 11.05.12 at 4:29 am

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.

100

Bruce Wilder 11.05.12 at 4:41 am

Casey Mulligan, in the column in question, is touting a new book, which he titled,
The Redistribution Recession

It is hard to disagree with the title.

101

reason 11.05.12 at 9:17 am

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.

102

Tim Worstall 11.05.12 at 10:32 am

@ 82.

“One paper you might be interested in is this one by Jess Rothstein, which finds that the effects of the UI extension are unemployment are less than a half percent, *and* the majority of that effect comes not from discouraging labor market participants from accepting work, but rather, from encouraging unemployed workers to stay in the labor market.”

That’s pretty much where I started out up thread. To say that there is no effect is incorrect. There is some. But given the possible effects of not extending it’s better to extend.

103

Trader Joe 11.05.12 at 4:09 pm

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.

104

rootless (@root_e) 11.05.12 at 8:31 pm

the things we learn in Econ 101
are neither true nor much fun

105

Bruce Wilder 11.05.12 at 9:17 pm

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 . . .

106

William Timberman 11.05.12 at 10:34 pm

While you’re at it, you might also remember 1914, and then go have a look at the Pentagon’s plans for what to do when the chickens come home to roost, the shit hits the fan, etc., etc. (As Bruce says, pick your metaphor.) If you think the evil gummint is handcuffing the noble entrepreneur now, jes you wait.

107

rootless (@root_e) 11.05.12 at 11:22 pm

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,
—-

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.

108

Mao Cheng Ji 11.05.12 at 11:27 pm

“…its Econ 101 to avoid frictional labor costs…”

It’s Econ 101 (or, if not, it should be) to do anything to increase profits. And the minimum wage has nothing to do with it, they outsource software development, to India. As long as they are allowed to chase the lowest labor/environmental costs in the universe, they will.

As I see it, there are two ways to deal with it. One is to prevent them from doing it (protectionism), and the other is to compete with India and Vietnam by reducing wages and standard of living in general to their level (neoliberalism). I don’t think it’s much more complicated than that.

109

rootless (@root_e) 11.05.12 at 11:39 pm

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.

110

JW Mason 11.05.12 at 11:43 pm

I suppose it’s obvious to everyone worth talking to, but recessions are not, in general, labor market phenomena. The basic mechanism is that desired expenditure is less than income at full capacity; given a stable relationship between current income and desired expenditure such that the latter changes positively but less than proportionately with the former, this means that macroeconomic equilibrium (i.e. expenditure = income) requires a level of activity below full capacity. In such an equilibrium, all factors of production — not just labor — are underutilized. This should be Econ 101, even if it isn’t.

111

JW Mason 11.05.12 at 11:52 pm

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.

112

Random lurker 11.06.12 at 12:07 am

@JW Mason 110
Ok but how does it happen that desired expenditures are less than total income?
The only mechanism that I can think of is that poor people tend to spend everything they get while wealthier people tend to save or invest a substantial share of their wealth. If inequality rises more income goes to savers (or investors it is the same for me) and, absent a growth of debt, a crisis happens. Since inequality is very much a labor market issue, I would say that a weak labor market (meaning one where wages for unskilled workers are very low) leads to weak economies and frequent crises (or financial bubbles if the growth of debt is used to fill the demand gap).

113

JW Mason 11.06.12 at 12:20 am

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.

114

JW Mason 11.06.12 at 12:26 am

Shoot, I forgot that greater and less than symbols get interpreted as formatting. Half the comment got eated. Let’s try again:

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

There is only one level of Y that will satisfy this system, so that we have macro equilibrium with desired expenditure equal to actual income. In general, there is no assurance that this level of output will be equal to full employment. (I.e. if we add the condition Y = Y*, the system is overdetermined.) Nor is there any automatic market mechanism that moves toward Y*. The inflation that occurs when Y is above Y* tends to raise desired expenditure, while the deflation at Y below 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.

115

Random lurker 11.06.12 at 12:34 am

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?)

116

rootless (@root_e) 11.06.12 at 12:58 am

Here’s a book on actual investment decision making.

http://books.google.com/books/about/Forces_of_Production.html?id=PdWlPAYMwU8C

117

JW Mason 11.06.12 at 2:39 am

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

118

Watson Ladd 11.06.12 at 3:49 am

JW Mason: One gaping hole is investment in that model. I don’t see a way to put in government spending or interest rates in any principaled way.

rootless: There is a lot of literature on all the topics you cited, many active areas of econ research.

119

JW Mason 11.06.12 at 3:59 am

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.

120

Matt 11.06.12 at 5:57 am

Here’s a book on actual investment decision making.

[David F. Noble’s Forces of Production]

This is a fascinating book. I’ve read it 3 times since I discovered it 10 years ago. I didn’t realize there was a new edition in 2011; does it follow up on developments since the original?

An early part of the book tells how process control computers revolutionized chemical plants in the oil and gas industries: strikes were broken, plant workers were eliminated by the thousands, throughput increased, and product uniformity increased. This happened in just a few years. Owners and executives gained tremendously, hourly workers lost just as tremendously.

It’s a slightly odd way to begin because much of the rest of the book emphasizes the detriments to managers and owners from trying to use CNC machines against the power of unionized machinists. CNC machines were expensive, finicky, and still needed skilled operators. Maybe the belief in the power of machines was unreasonable… Yet that example from the oil and gas industries shows precisely how machines could deliver stunning benefits to their owners. And today machinists are much less numerous and command a smaller wage premium over unskilled workers than before computerized machine tools became ubiquitous. If executives continued to sponsor CNC development despite years of setbacks, is that evidence of irrational obsession or far-sighted pursuit of their interests?

121

rootless (@root_e) 11.06.12 at 7:14 am

If executives continued to sponsor CNC development despite years of setbacks, is that evidence of irrational obsession or far-sighted pursuit of their interests?

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

122

rootless (@root_e) 11.06.12 at 7:44 am

I am just explaining the Keynesian logic at its simplest and most abstract level.
—–
I don’t see that Keynes would have agreed.

123

Bruce Wilder 11.06.12 at 8:22 am

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.

124

rootless (@root_e) 11.06.12 at 8:28 am

” I conceive, therefore, that a somewhat comprehensive socialisation of investment will prove the only means of securing an approximation to full employment; though this need not exclude all manner of compromises and of devices by which public authority will co-operate with private initiative.”

JM Keynes.

125

Bruce Wilder 11.06.12 at 8:31 am

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.

126

Mao Cheng Ji 11.06.12 at 8:36 am

“So efforts to understand investment decisions of US firms in terms of aggregate “demand” are doomed.”

Who ever suggested understanding investment decisions of US firms in terms of aggregate demand? 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.

127

Matt 11.06.12 at 8:56 am

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.

128

rootless (@root_e) 11.06.12 at 8:59 am

Sound investments with panic prices are a common feature of panics and flights into liquidity. For example, during the 2008 panic prices on Treasury 5 year TIPS bonds dropped so much that yield went from under 1% to over 4% in months. Obviously, the soundness of US bonds did not change so much in that period, but over-leveraged investors had to dump their bonds on the market to meet cash demands and panicked investors wanted cash too.

Most of what FRB purchased was Agency Bonds (which were at a much higher standard than privately insured mortgage bonds) and Treasury notes. Even with the “toxic assets” picked up from Bear-Stearns and AIG, the price was such a discount on the face value that FRB made money on the transactions. And the reason that the Fed was able to make money on the transactions was that there was a panic where investors prized liquidity over any other value and where too many over-leveraged investors (like AIG and Bear etc. ) had to dump enormous quantities of financial assets to raise cash. That’s exactly what the Fed was supposed to do. And I think the counter-factual argument by the supposed “left” that the government bailed out the banks at public expense with these purchases has been politically damaging.

Suppose A is a 100% safe 10 year bond for $100 paying 5% a year which therefore has a payout of $150 over 10 years.
During a boom, B who owns A and is not happy with a mere 5% borrows $90 from the bank which he uses as margin to make a $900 investment in Donald Trump’s latest venture BigScam IV.

De repente, there is a panic and everyone realizes Trump will go through bankruptcy for the 50th time, so Trump shares crater, the bank demands its $90 back and B has to sell A- sadly at the same time as a million other suckers. So even though A is still really worth $150 over ten years, nobody has 10 years and they need cash now. Since the bank really needs the $90 to meet its own over-leveraged obligations, the Fed takes A for $90, the bank gets paid, panic is averted, the public profits, and William Black and Yves Smith announce that it’s all a scam to benefit banksters.

129

rootless (@root_e) 11.06.12 at 9:09 am

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.
—–

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.

130

reason 11.06.12 at 9:55 am

JW Mason – @111
“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.”

Generally, I agree with the gist of what you are saying, but this is not quite right (or at least is a bit misleading). We have a recession now, not initially because of an initial change in income, but because of initial change in perceived wealth. What really mattered is that the lifetime budget constraint shifted. Since “one man’s expediture is another man’s income”, a fall in consumption based on the sudden shift in the lifetime budget constraint caused a fall in income – which further shifted the lifetime budget constraints because current income (and income in the immediate future) is indeed part of the lifetime budget constraint (more so in an aging society). Markets don’t clear instantly, adjusting to changes involves search costs and negotiation etc. Dynamically, it is not hard to explain. It is only hard to explain if you believe in magic instant and costless adjustment to a single knowable and calculable global equilibrium.

131

Mao Cheng Ji 11.06.12 at 10:00 am

” 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.

132

reason 11.06.12 at 10:05 am

Bruce Wilder @123
Yes very good. But to my view you could add the dynamic problem to it. Even if there were (with complete markets) a feasible equilibrium, it is not certain you could reach it – that the dynamic adjustment to massive disequilibrium would take you in the right direction.

133

Mao Cheng Ji 11.06.12 at 10:16 am

“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.

134

Pete 11.06.12 at 10:55 am

“Union-busting is a manifestation of management’s pursuit of their selfish interest at the expense of capital”

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. Even startup founders or people with heavily vested options aren’t immune from this, they only have to maximise the IPO price (Facebook passim).

It’s even worse in the public and public/private sector. The driving force behind privatisation of public services is union busting. Sometimes this reduces costs. Often it reduces quality. Sometimes you even get the worst of both worlds (PFI hospitals, G4S).

135

Mao Cheng Ji 11.06.12 at 1:00 pm

“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…

136

rootless (@root_e) 11.06.12 at 1:06 pm

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.
——————-

A firm is not an organism. It does not have goals or desires or a point of view. The people working for the firm have personal and class interests. The behavior of a wolf pack does not depend on personal tax laws or rules for conveyance. Wolves do not serve on boards of directors of competing wolf-packs etc.

And

——-
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.

Oh. If by definition, Management cannot take irrational steps but can only appear to take such steps and, by definition, economic activity that does not follow your theory is not economic activity, than you are, by definition correct.

137

Trader Joe 11.06.12 at 1:17 pm

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.

138

Mao Cheng Ji 11.06.12 at 1:49 pm

A firm certainly is an organism, with the goal, in the environment called ‘economy’. Explaining economic phenomena by such causes as ‘Bill Gates was constipated that week’ is really a sign of ridiculously bad approach.

People don’t have class interests, classes do. Same category error, right there.

Wolves certainly do have roles in the hierarchy of the pack, some lead and command, other follow and obey. And I’m sure packs often compete too. Nevertheless, functioning of a pack has its own logic, that can be analyzed without paying much attention to personalities of its members. And this logic is obviously affected by changes in the environment, the equivalent of tax laws and rules for conveyance.

As for the LBOs, I don’t get the point. LBO is not a firm, it’s a financial operation. Something that happens to a firm, from outside the firm. Who is acting irrational here? In the wolf-pack analogy, when a helicopter shows up and hunters open fire from the sky, the wolves might scatter around, and the pack might cease to exist, at least for a while. So, what does it prove, what’s the point here?

139

rootless (@root_e) 11.06.12 at 3:43 pm

A firm certainly is an organism, with the goal, in the environment called ‘economy’.

Analogical thinking is a prime source of error.

Explaining economic phenomena by such causes as ‘Bill Gates was constipated that week’ is really a sign of ridiculously bad approach.

That would be a bad approach, fortunately, nobody has taken that approach.


People don’t have class interests, classes do. Same category error, right there.

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.


Nevertheless, functioning of a pack has its own logic, that can be analyzed without paying much attention to personalities of its members.

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

140

rootless (@root_e) 11.06.12 at 3:59 pm

The whole concept of the “interest of the firm” is very much like “national interest” – something that is usually used to obscure the real interests at stake. Are the interests of the firm short term profits, long term sustainability, the interests of institutional shareholders, the interests of short term shareholders, the interests of bond holders, the interests of senior management … ? Most of these, not to mention interests of workers, communities, national states are in conflict and/or unclear or debatable.

141

Watson Ladd 11.06.12 at 4:04 pm

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.

142

rootless (@root_e) 11.06.12 at 4:15 pm

Higher wages mean less in profits: it is as simple as that.

No. It’s not as simple as that, and it’s not even true.

“Plenty of bad managers exist.”

The argument is not that managers can be bad, it is that the model of a firm as a market participant which does not take into account the varying motivations and incentives of firm decision makers is not likely to produce much illumination.

“Once more, agent-principal problems are part of many standard econ texts. “

As are externalities and imperfect information and so on. And yet we are repeatedly told that the macro workings of the economy can be explained by the effect of aggregate demand etc. as if all those things could be abstracted away from a still illuminating model.

143

JW Mason 11.06.12 at 4:52 pm

Higher wages mean less in profits: it is as simple as that.

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.

144

Lee A. Arnold 11.06.12 at 4:54 pm

I hadn’t bothered reading any Casey Mulligan until now. It looks like he has joined those who have compromised their intellectual integrities in order to serve political ends. I am curious to see if his new book continues the misleading implication that all fiscal policy is simple transfers such as unemployment insurance. This is another criticism, in addition to John Quiggin’s observation that Mulligan’s claim is wrong on the evidence because other countries with the same problems do not have the same transfers. But notice that Mulligan’s column also mischaracterizes fiscal policy by calling it “paying people for not working”; i.e. he very carefully implies that it is entirely composed of transfers. He does not mention jobs programs, nor infrastructure spending, nor the rehiring of teachers and firefighters, as Keynesian ways to prompt the demand-side. We may be witnessing an embarkment onto a larger project, which is to save supply-side Chicagonomics from its imminent demise by transforming it into a full-bore blabbering cargo cult. I won’t be reading Mulligan’s book, but it will be curious to see.

145

Bruce Wilder 11.06.12 at 5:39 pm

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.

146

Watson Ladd 11.06.12 at 5:41 pm

JW Mason, every time a union negotiates with a company, they are fighting over a fixed amount of money. Macro effects are secondary to the battle that happens every time a boss and worker negotiate.

147

Bruce Wilder 11.06.12 at 6:07 pm

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

I love algebra.

148

rootless (@root_e) 11.06.12 at 7:58 pm

JW Mason, every time a union negotiates with a company, they are fighting over a fixed amount of money. Macro effects are secondary to the battle that happens every time a boss and worker negotiate.
—-

Certainly not. They are also negotiating over expectations and even business process. Costco management claim that their higher than retail norm salaries are responsible for lower turnover costs and higher employee productivity. Considering their high profit rate, one might ask why that theory is not adopted by other retailers. And it should not escape your notice that management are also employees, but currently seem to be escaping the common downward pressure on salaries – worldwide.

149

JW Mason 11.06.12 at 8:14 pm

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.

150

rootless (@root_e) 11.06.12 at 8:25 pm

It’s sometimes true, sometimes not.

Agreed.
Obviously, paying high wages to Michael Jordan turned out to be associated with higher profits for the Chicago Bulls.

151

rootless (@root_e) 11.06.12 at 8:39 pm

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

152

Bruce Wilder 11.06.12 at 9:52 pm

WL: “. . . every time a union negotiates with a company, they are fighting over a fixed amount of money . . . “

Just as a matter of microeconomics, that’s not true, either. It is not necessarily a zero-sum game, of course, but even more important, it isn’t just a wage rate, which is being negotiated, but a set of contingencies, which distribute risk over time. The distribution of risk mirrors the distribution of income, and when the labor input isn’t the continuous flow of labor services, which the marginalists imagine, but, instead, labor is staffing a control function, it’s risk, which is the “incentive” that matters in shaping (strategic) behavior.

So, for example, the “efficiency wage hypothesis” suggests that the ability of a labor union to press against management’s inclination to slack, and use a low wage to enable a lazy management to waste labor resources, can improve efficiency and raise wages.

153

Bruce Wilder 11.06.12 at 9:56 pm

Algebraic definitions are easy. Deriving functional relationships is hard.

154

Cian 11.06.12 at 10:02 pm

So, for example, the “efficiency wage hypothesis” suggests that the ability of a labor union to press against management’s inclination to slack, and use a low wage to enable a lazy management to waste labor resources, can improve efficiency and raise wages.

Which is one explanation for Germany’s dominance of the machine tooling industry.

155

rootless (@root_e) 11.06.12 at 10:07 pm

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.

156

Fu Ko 11.07.12 at 2:28 pm

Mulligan has been rightfully roasted, and is beyond defense.

…But it is true that USA unemployment benefit rules create strong disincentives to take jobs. Especially, the rule that even one week of employment permanently removes eligibility for future unemployment benefits means that taking a job involves risking a loss of up to around $50k (under the 99 week extension).

157

Wonks Anonymous 11.07.12 at 7:31 pm

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.

Comments on this entry are closed.