The Independent Institute has produced a 5-video series called "Love Gov." It's a series of humorous skits in which the government is personified. I've seen only the first but it's excellent.
It also hits one of co-blogger Bryan Caplan's main themes: about the value or absence of value in going to college.
My comments follow the video below.
What I like about the series so far is the whole idea of personifying government. Indeed it reminds me of something I wrote in The Joy of Freedom: An Economist's Odyssey:
We have had government needling us and interfering with and threatening us for the whole of our lives, starting, for most of us, from the time we hit kindergarten, letting up some when we graduate from high school, and then eating away at us day to day for the rest of our lives. So we become oblivious to it--it just seems like the way things are. But a recent Candid Camera skit reminded me of how really outrageous the government is. In the skit, a waitress told people who ordered a dish on the menu that they couldn't have it because it wasn't good for them. Instead, she'd bring what she thought was good for them. People got very incensed about it. Many of them defended their right to order what they wished and got up angrily to walk out. It's the most animated I've ever seen real, everyday people in defending their rights. Virtually everyone in the episode felt the same way: "How dare this waitress tell me what I can order, what kinds of goods I can ingest in my body, and how to spend my money on food!"
But guess what. Government acts like that waitress all the time. Government often intervenes in annoying ways that are none of their business. It prevents us from buying cheap oranges that might look a little blemished, but are perfectly safe. It also is currently trying to rig the rules so that almost the only kind of cheese we'll be able to eat is processed American cheese. As my late friend Roy Childs pointed out, government is incredibly petty, threatening us with fines and even prison sentences for doing things just a little different from the way some anonymous government official wants it. Government routinely makes even bigger decisions for us, from how we save for our retirement, to what kinds of changes we can make to our houses, to what kinds of prescription drugs we may take. Government, by and large, is full of strangers who often have little expertise in the areas they regulate and have virtually no knowledge of your particular goals, interests, capabilities, or concerns. Nor do most government officials even care about these things. Government is like the waitress, but with this crucial difference: The waitress was an actress, and her "victims" could easily leave the restaurant; the government is all too real and insists on controlling us as long as we stay in the country.
In America, the government heavily subsidizes the provision of "health care." (The scare quotes will be explained later.) For example, roughly 40% of the cost of health insurance for middle class families is paid for by the government, via tax deductions for health care costs. This partly explains why Americans spend far more on health care than residents of other countries. One of the few good provisions in Obamacare is a tax on "Cadillac" health plans, which is scheduled to begin in 2018. This will basically offset the subsidy, so that consumers would face the true cost of the health insurance they purchase (at the margin.)
Here's an example of waste. One of my few luxuries is daily wear soft contact lens, which cost about $600/year. That's actually more than I'm willing to pay for a slight improvement in quality of life, but this cosmetic purchase is considered "health care" and thus taxpayers pick up 40% of the bill via a "flexible benefits program." At a price of $360/year, it's worthwhile for me to buy this product. Indeed most of the health care expenditures that I've made over my life would not have been incurred if I had to pay out of pocket, even though I could have easily afforded all of them. The subsidy was the deciding factor. Economic inefficiency.
When Obamacare was being debated I got into some arguments with commenters, who told me that I should support the plan because it had the sort of cost controls I favored. I replied that the controls were delayed until 2018, which meant they probably were not going to be implemented. This tax is an arrow aimed right at the heard of the medical industrial complex, which absorbs 18% of GDP. I found it hard to believe that this sort of cost control could survive special interest politics. Here's a story that suggests there is increasing opposition to the tax on expensive health care plans, just as I expected:
The so-called Cadillac tax was meant to discourage extravagant coverage. Critics say it's a tax on essentials, not luxuries. It's getting attention now because employers plan ahead for major costs like health care.
With time, an increasing number of companies will be exposed to the tax, according to a recent study. The risk is that middle-class workers could see their job-based benefits diminished.
First to go might be the "flexible spending accounts" offered by many companies. The accounts allow employees to set aside money tax-free for annual insurance deductibles and out-of-pocket health costs. That money comes out of employees' paychecks, and they're not able to use it for other expenses. Savvy consumers see it as a way to stretch their health care dollars.
The catch is that under the law those employee contributions count toward the thresholds for triggering the tax.
There are other wrinkles: Companies in areas with high medical costs, such as San Francisco, are more likely to be exposed to the Cadillac tax than those in lower-cost areas like Los Angeles. Ditto for employers with unionized workers who won better benefits through bargaining.
Republicans in Congress and a sizable contingent of Democrats are calling for repealing the tax. Hillary Rodham Clinton, the front-runner Democratic presidential candidate, says she's concerned and would re-examine the tax. Since it doesn't take effect right away, it's an issue for the next president.
"As currently structured, I worry that it may create an incentive to substantially lower the value of the benefits package and shift more and more costs to consumers," Clinton said in response to a candidate questionnaire from the American Federation of Teachers.
Oddly, this story makes me slightly more optimistic that I was wrong, and that real cost controls will occur. Note that Hillary Clinton says she would "re-examine" the tax. That suggests to me that she supports it, as otherwise she would have taken the politically popular stance. But I remain concerned that it will be watered down under pressure from the health care industry. Even worse, I expect them to make it more complex, carving out exemptions for favored types of health care.
The GOP opposition is disappointing, but the Democrats also share some of the blame. In 2008 John McCain proposed switching the tax deduction for health insurance into a lump sum credit, which would have controlled costs even more effectively than the Obamacare plan. Obama opposed the idea. In addition, McCain's proposal was intended to be more revenue neutral, whereas the Obama approach incurred the wrath of Republicans by raising taxes. Nonetheless, the GOP would make a big mistake if they repeal the tax, as the rising cost of healthcare is one reason why living standards for the middle class have risen more slowly in recent decades. Some of the increase in "real total compensation" is being gobbled up by rapidly rising health care costs.
PS. Just to be clear I have nothing against rising health care costs, if they reflect the decision of consumers who bear the cost of their purchases. My concern is that the massive government subsidies (as well as other policies like barriers to entry into health care provision, and mandates that health insurance cover all sorts of ordinary expenditures that shouldn't require insurance) have led to an enormous amount of wasteful excess spending.
PPS. I despise flexible saving accounts. For me, the benefits in tax savings are almost entirely offset by a lot of annoying and confusing paperwork. It's what economists call a "deadweight loss", just pure economic waste produced by foolish government policies. The private sector has these too, with things like $25 rebates on the contact lens, but only after lots of silly paperwork. I do see the price discrimination argument in favor of rebates, but if my time filling out the forms is worth $24 it's worth doing, and yet almost a complete waste of resources from a social perspective.
Those of you who, like my wife and me, are big fans of the TV show The Big Bang Theory, might get a kick out of this title. I've changed the "have always been" that Sheldon says in this segment to "are" to make it more accurate. (If you're in a hurry to see the relevant quote, go to the last 12 seconds of the video above.)
These are the refugees who've made it to Germany. And waiting to greet them are scores of volunteers standing next to trestle tables piled with clothing, food and supplies.
As a little girl with dark hair tries on some tiny second-hand shoes, one of those volunteers tells me they're here to meet every train. "It's our turn to help," says Colin.
And:
Surveys suggest the vast majority of Germans agree. In almost every town or city, people are giving their time, donating food and clothing, even opening their homes to the thousands of asylum seekers who arrive here every day.
A few days ago, I met a man called Hasseen with sad, tired eyes. He'd just stepped off a train and set foot in Germany for the first time.
He fled Afghanistan, he told me, after the Taliban threatened to kill him.
But when I asked him about his hopes for the future, his expression changed. Smiling, he said: "I'm so happy to be here. The German government welcomes refugees, gives them a home here."
And, broadly speaking, he's right. Last week, for example, the government indicated it would grant asylum to Syrian refugees regardless of how they'd entered Europe.
Do I suspect that the German government is giving taxpayer-funded aid to these refugees? I do and, of course, I oppose that. That's not charity: it's forced distribution.
But if that's all you see going on, you're missing the big picture: the German government being willing to let these refugees in and many of the German people being personally generous and welcoming.
1. Employers sometimes yell at workers for small mistakes; workers aren't supposed to yell at employers no matter how big the employers' mistakes.
2. Employers sometimes demand job applicants' bodily fluids; applicants fear to ask prospective employers for a cup of coffee.
3. Employers sometimes demand that workers stay late; workers rarely demand to leave early.
Scott takes these as strong symptoms that the supply-and-demand model of labor markets is deeply wrong. The asymmetries exist because each worker needs his employer a lot more than his employer needs him.
Now let's consider two other bargains with similarly funny features. First, the patron-waiter relationship.
1. Patrons sometimes yell at waiters for small mistakes; waiters aren't supposed to yell at customers no matter what.
2. Patrons sometimes ask waiters for elaborate special treatment (e.g. no nuts, extra nuts, sauce on the side, gluten-free sauce...); waiters aren't supposed to ask patrons for the smallest favor (e.g. a tiny bite of their dessert, or "Kindly eat over your plate").
3. No matter how diligent waiters are, customers are still allowed to tip them zero.
Second, consider the customer-Big Box Store relationship.
1. Customers can buy an item, try it, decide they don't like it, then get a full refund.
2. Customers can ask store employees to help them find a product, but store employees would never ask customers to help them stock the shelves - even for a minute.
3. Customers can be rude to the store manager, but the store manager still has to be polite to customers.
In all three cases, of course, economists have a standard mantra: it's all reflected in the price. If being an employer is pleasant and being a worker is unpleasant, labor demand goes up, labor supply goes down, and the wage goes up. If being a patron is pleasant and being a waiter is unpleasant, demand goes up, supply goes down, and the price of restaurant meals goes up. If store customers and stores know they can return anything they don't like, demand goes up, supply goes down, and the price of store products goes up. Why exactly is it so important to restaurant patrons that waiters never ask them for a bite of their dessert? Norms, psychology, and status all play a role. But as long as asymmetric conditions are reflected in the price, who cares about their source?
A few weeks ago, Alexis Tsipras called a new election in Greece, appealing to voters for a new leadership mandate. Most of the mainstream press praised this move of Tsipras, who rapidly moved from the persona of wanna-be communist revolutionary to the image of a "man we can do business with": a "moderate" left-winger who can ensure Greece stays in Europe and within the Eurozone.
Now The Wall Street Journal reports that the polls signal a very small lead (between 1% and 3%, which is an elegant way to say pollsters don't have a clue) for Tsipras's Syriza over New Democracy, the right-of-center party closely associated with the pre-Tsipras management of the Greek crisis.
The good news, for Tsipras--but also for Greece's creditors--is that "Popular Unity," the group formed by those who deserted Syriza "on the left," is credited with 3-5% of the votes. Not an irrelevant number, particularly because this will be their first act with the new brand, but still not a major drain for Syriza.
A good percentage of Greeks polled say they are still uncertain, or they won't vote.
The most likely outcome, were the polls to be confirmed by the actual vote, is a grand coalition. Will other, more moderate coalition members accept Mr Tsipras's leadership? Will he be interested in supporting a cabinet he doesn't lead? We'll see. Elections are set for September 20.
Though it was meant as irony, there was an essential (if accidental) truth behind the speech [in the movie American Beauty]. The technology behind plastic grocery bags is so useful it won a Nobel Prize. Employing an unimaginably small amount of base material, manufacturers can create tools of surprising strength and durability. Far from being the environmental threat activists make them out to be, plastic bags are not particularly to blame for clogged sewers, choked rivers, asphyxiated sea animals, or global warming. Instead, they are likely our best bet for carrying all of our junk in a responsible manner.
This is the closing paragraph in Katherine Mangu-Ward's article "Plastic Bags Are Good for You." It's in the October issue of Reason. It's subtitled "What prohibitionists get wrong about one of modernity's greatest inventions." And she backs every claim in the above paragraph.
One excerpt:
[Julian] Morris and [Brian] Seasholes reconstructed an elaborate game of statistical telephone to source this figure back to a study funded by the Canadian government that tracked loss of marine animals in Newfoundland as a result of incidental catch and entanglement in fishing gear from 1981 to 1984. Importantly, this three-decade-old study had nothing to do with plastic bags at all.
Porpoises and sea turtles are undeniably charismatic megafauna--the pandas of the deep--and it's understandable that environmental groups would want to parade them around in a bid to drum up sympathy, almost certainly driven by the sincere belief that plastics put the beloved animals at grave risk. But in the end, there's little evidence that that's true. As David Santillo, a senior biologist with Greenpeace, told The Times of London, "It's very unlikely that many animals are killed by plastic bags. The evidence shows just the opposite. We are not going to solve the problem of waste by focusing on plastic bags. With larger mammals it's fishing gear that's the big problem. On a global basis plastic bags aren't an issue."
Mangu-Ward is one of Reason's best writers. This piece is no exception. Along with the various myths she slays, she also tells an exciting entrepreneurial story. I'm a sucker for such stories: the mix of accidental discovery and purposeful leveraging of a discovery.
One amazing fact:
Here is a list of things that are thicker than a typical plastic grocery bag: A strand of hair. A coat of paint. A human cornea.
Tyler Cowen linked to a recent paper by Jonathan L. Willis and Guangye Cao, out of the Federal Reserve of Kansas City. Here's the opening paragraph:
Over the past three decades, the U.S. economy seems to have become less responsive to monetary policy. Slow recoveries followed recessions in 1990-91, 2001, and 2007-09, a contrast to the much more rapid recoveries that followed pre-1990 recessions. These slow recoveries occurred despite sizeable monetary accommodation from the Federal Reserve, primarily through reductions in short-term interest rates.
At first glance that looks like reasoning from a price change. But they later provide a standard 3-equation model (IS, Phillips Curve, monetary policy function) and thus I'll assume that what's really going on here is that the authors are assuming the economy responds to shocks to the gap between the policy rate (fed funds rate) and the Wicksellian equilibrium rate. That's a plausible model. And perhaps the economy is less responsive to that gap than before.
Even in that case, however, I have some reservations. There should be no surprise that the recovery from recent recessions has been slower than from earlier recessions such as 1981-82. If it does appear to be a surprise, that's probably because monetary policy is misidentified. Monetary policy has clearly been less expansionary during recent recessions, and that's why the recoveries have been slower. I use the Bernanke/Sumner technique for identifying the stance of monetary policy, looking at NGDP growth/inflation, not interest rates.
I see a couple potential problems with this sort of research. Those with a better understanding of modern macro should please correct me if I'm wrong:
1. The authors find a lower level of responsiveness to interest rates after 1985. Does that date ring a bell? One of the most important and surprising developments in modern macro has been the astounding decline in the Wicksellian equilibrium interest rate over the past three decades. We can't measure that rate with absolute precision, but it has clearly fallen very dramatically. Now think about how that might confuse policymakers. You cut rates the standard X% during a recession. You expect a certain response, assuming that you have not accounted for a long term decline in the Wicksellian equilibrium rate. But in fact, your policy is less expansionary than you assume, as the cut in interest rates is occurring against the backdrop of a declining Wicksellian equilibrium rate.
2. Let's suppose I'm right, and that expected future NGDP is the best measure of the stance of monetary policy. Then during a recession, when expected future NGDP is also falling, it's likely that the Wicksellian equilibrium rate is falling faster than the policy rate. So in that case money is actually getting tighter. The Fed sees its interest rate cuts in 2008 and 2009 as rescuing us from a recession caused by bad bankers. I see the Fed as having caused that recession through tight money. During 2008 the Fed cut rates more slowly than the Wicksellian equilibrium rate was falling, and hence money got tighter. BTW, as far as I know I've just described the Milton Friedman/Ben Bernanke interpretation of 1930-31. Is it so far-fetched to think that it might also apply to 2008?
On page 20 the authors say:
In comparison, the negative response of the 10-year yield to an unexpected decline in the federal funds rate is significant much earlier in the pre-1985 period than in the post-1984 period. This suggests that the transmission of monetary policy from short-term to longer-term interest rates occurs with a longer lag in the post-1984 period. This evidence is also in line with comments made by then-Chairman Greenspan in 2004 regarding the "conundrum" of longer-term yields not initially moving in the same direction as short-term rates.
Market monetarists would have a very different interpretation. First note that on some occasions long-term rates move in the opposite direction from a surprise move in short term rates. But why do they often move in the same direction? The authors imply that a cut in short-term rates gets "transmitted" to longer-term rates. I think that's wrong. A truly easy money policy would cause long-term rates to rise, as we saw in the 1960s and 1970s. So what explains the correlation? Suppose AD falls due to some previous error of monetary policy. We start to slide into recession. The Fed cuts rates, but not enough to keep monetary policy from tightening. So short-term rates fall because the Fed is cutting them because there is a recession. And long-term rates fall because there is a recession (because they didn't cut rates enough). The Wicksellian equilibrium rate is expected to be lower over the next few years, and that leads bond markets to reduce yields on the 10-year. Thus it wouldn't surprise me at all to see short and long-term rates move in the same direction, as both are responding to the same fundamentals. As a broad generalization, monetary policy is usually too tight when rates are falling, and too easy when rates are rising. Not always (and perhaps not this September) but on average.
What makes the market monetarist explanation better is that we can also explain why long rates sometimes move perversely, the so-called "conundrum." In January 2001, and September 2007, and December 2007 the long rate moved in the opposite direction from what conventional economists would have expected, given the policy surprise. Easier than expected policy made long-term rates rise (Jan. 2001 and Sept. 2007) and tighter than expected money made long-term rates fall (Dec. 2007.)
To summarize, it's possible that the economy is becoming less responsive to gaps between the market and Wicksellian equilibrium rates, but it's very difficult to prove that. Fortunately, even if the economy is becoming less sensitive to interest rate gaps, it's not becoming less sensitive to monetary policy. Shocks to expected future NGDP impact RGDP just as much as in the old days. The recession of 2009 was about as deep as one would expect, given the amount by which monetary policy reduced NGDP. In that most important respect, monetary policy is just as effective as it's ever been.
Since there is a pretty good possibility that Prime Minister Benjamin Netanyahu and Israel are likely to "take" a nuclear bomb down the gullet thanks to the ignorant naivete of the president and sycophants like [Gwen] Ifil, that particular tweet might come back to haunt Ms. Ifill one day.
It seems in context that by "possibility," Mr. Moran means probability.
So how probable? And in what time frame?
I propose the following bet.
I bet $500 that the Iranian government will not attack Israel with nuclear weapons before September 2, 2025. If I win, I win $100. If Mr. Moran wins, he wins $500.
Markets are just amazingly wise. But that shouldn't be surprising, because they must be smarter than us in order to make it tough to get rich. And that's because if it were easy to get rich we'd quickly run out of steel to build 500 foot yachts. To prevent that steel shortage, markets are incredibly subtle and wise, far ahead of our pea brains.
Of course I'm half joking, but there is a serious point here. Markets are aware that their behavior affects others, and they take that likely affect into account when they respond. Two of the key "others" affected by markets are consumers and the Fed. Thus when markets fall on bearish aggregate demand forecasts, they calibrate that fall to account for the likely response of the Fed. Just imagine if this were not the case. Then after any market crash you should buy stocks, as the market would rebound when the Fed rushed in to cut rates, in order to reassure investors (as they did after the 1987 crash.) Even the recent mini-crash caused the probability of a September rate hike to fall modestly. And of course markets also take account of the fact that consumers will become more bearish if stocks crash. The crash takes account of the likely consumer response, for the same reason it takes account of the likely Fed response.
David Glasner seems to feel that it's not rational for consumers to change their views on the economy after a stock crash. I will argue the reverse, that rationality requires them to do so. First, here's David:
Third, EMH presumes that there is a direct line of causation running from "fundamentals" to "expectations," and that expectations are rationally inferred from "fundamentals." That neat conceptual dichotomy between objective fundamentals and rational expectations based on fundamentals presumes that fundamentals are independent of expectations. But that is clearly false. The state of expectations is itself fundamental. Expectations can be and often are self-fulfilling. That is a commonplace observation about social interactions. The nature and character of many social interactions depends on the expectations with which people enter into those interactions.
I may hold a very optimistic view about the state of the economy today. But suppose that I wake up tomorrow and hear that the Shanghai stock market crashes, going down by 30% in one day. Will my expectations be completely independent of my observation of falling asset prices in China? Maybe, but what if I hear that S&P; futures are down by 10%? If other people start revising their expectations, will it not become rational for me to change my own expectations at some point? How can it not be rational for me to change my expectations if I see that everyone else is changing theirs? If people are becoming more pessimistic they will reduce their spending, and my income and my wealth, directly or indirectly, depend on how much other people are planning to spend. So my plans have to take into account the expectations of others.
An equilibrium requires consistent expectations among individuals. If you posit an exogenous change in the expectations of some people, unless there is only one set of expectations that is consistent with equilibrium, the exogenous change in the expectations of some may very well imply a movement toward another equilibrium with a set of expectations from the set characterizing the previous equilibrium. There may be cases in which the shock to expectations is ephemeral, expectations reverting to what they were previously. Perhaps that was what happened last week. But it is also possible that expectations are volatile, and will continue to fluctuate. If so, who knows where we will wind up? EMH provides no insight into that question.
Let me start with a jellybean example. All citizens are told there's a jar with lots of jellybeans locked away in a room. That's all they know. The average citizen guesstimates there are 453 jellybeans in this mysterious jar. Now 10,000 citizens are allowed in to look at the jar. They each guess the contents, and their average guess is 761 jellybeans. This information is reported to the other citizens. They revise their estimate accordingly.
Now imagine a Lucas-type "archipelago economy." There are 300 million people with access to one island, their local "retail island." There are another 10 million people with access to two islands, call them a retail island and a much bigger wholesale island. Each person only observes his or her little corner of the world. But the 10 million who have access to two islands trade stocks, the value of which depends on many factors, including the amount of economic activity that is occurring in aggregate. No individual knows the truth, but collectively they do know. The wisdom of crowds.
How should the other 300 million people respond if they wake up and see that stocks have fallen sharply? It would be rational to assume that the more informed traders have seen something that they (collectively) have not seen---worrisome signs in the wholesale sector. (Here you could obviously add a foreign sector, such as China.)
So the type of behavior that David sees as problematic for the rational expectations/EMH model is actually necessary for it to work effectively.
At a superficial glance, the good news scenario is if the Fed's decision doesn't matter much for the markets. Woe unto you if your economy is so fragile that a quarter point or so in the short rate, mixed in with some cheap talk, were to matter so much.
So if at first prices were to stay steady, following any Fed decision, then equities should jump in price. That is the "no news is good news" theory, so to speak. It's a better state of the world if it is common knowledge that the Fed's actions don't matter so much in a particular setting.
What if prices jump right away, following a Fed decision? The market might then see that price jumps rely on the Fed making good decisions, whatever those might be. The risk premium might then go up. It is even possible that prices should on net fall in response to that, but in any case it seems that some further price adjustment is in order, perhaps in the downward direction. (That ought to come rapidly.)
Most generally, it seems the initial price move, in response to the Fed's choice, cannot itself be correct, but that first price move must itself induce further price movements. The price move in response to the Fed's decision is the economy telling us how much it is relying on the Fed, which right now we do not know.
I think Tyler is also over-thinking the problem. Markets don't just have views about the world; markets have views on how markets respond to news. Markets are not waiting to find out if markets care about a measly 1/4% rate increase, markets already know how they feel about that issue, they swing wildly on every little facial twitch by Stanley Fischer. What markets want to know is what the Fed plans to do about NGDP. Markets understand that NGDP is really important, and that the Fed's annoyance at having to hold rates at zero is not important. The markets really hope the Fed will pay attention to the important thing (NGDP) and not the unimportant thing (annoyance at rates being low for so long). The markets are merely waiting to find out what the Fed thinks. If we had conditional stock derivatives we could already know the expected market reaction for each of the two options (no change, up 1/4%.)
PS. Can anyone see any similarity between this post and the previous post in this blog? (Bryan Caplan's far better post on labor economics.)
To recap my last post, Scott Alexander's critique of libertarian labor economics amounts to a critique of mainstream labor economics itself. If Scott were in my labor economics course, I could spend hours of classtime responding to his thought-provoking critique. Since he's not, I'll do it here. Scott's in blockquotes, I'm not.
It is frequently proposed that workers and bosses are equal negotiating
partners bargaining on equal terms, and only the excessive government
intervention on the side of labor that makes the negotiating table
unfair. After all, both need something from one another: the worker
needs money, the boss labor. Both can end the deal if they don't like
the terms: the boss can fire the worker, or the worker can quit the
boss. Both have other choices: the boss can choose a different employee,
the worker can work for a different company.
The first sentence is needlessly philosophical. If I pay you $100 an hour to hop on one foot, is that "equal"? Is it "fair"? But the rest of the paragraph is correct. The key intuition of labor economics is that employers pay workers to do
things that employers value more than workers disvalue. "Value," as usual in economics, is equivalent to "willingness to pay." The deals they strike may violate norms of equality or fairness, but remain mutually beneficial.
And yet, strange to
behold, having proven the fundamental equality of workers and bosses, we
find that everyone keeps acting as if bosses have the better end of the
deal.
Everyone talks as if bosses have the better end. But talk is very different from action. If everyone were trying to start their own businesses and hire workers, that would count as "acting as if bosses have the better end of the deal." Most workers, however, make no effort to become entrepreneurs. You could object that most workers don't have the money to open their own businesses, but most rich workers make no effort to become entrepreneurs either.
During interviews, the prospective employee is often nervous; the boss
rarely is.
True. The boss has different negative emotions, especially fear of hiring a bad worker.
The boss can ask all sorts of things like that the
prospective pay for her own background check, or pee in a cup so the
boss can test the urine for drugs; the prospective employee would think
twice before daring make even so reasonable a request as a cup of
coffee.
True. But prospective employees routinely ask for things much more expensive than a cup of coffee. They bargain over salary. They ask about health insurance and other benefits. At the same time, bosses fail to demand many other valuable concessions. For example, they could charge applicants for the time they spend interviewing them.
I'll admit that the details of the hiring process are complex. If I were a job candidate, I wouldn't ask for coffee either. But if the reason is deep fear of unemployment, why do I have the courage to inquire about salary and benefits? This sounds more etiquette than "bargaining power."
Once the employee is hired, the boss may ask on a moment's
notice that she work a half hour longer or else she's fired, and she may
not dare to even complain.
This is true on some jobs. But workers frequently respond to such requests with complaining or excuses. Like, "I have to pick up my son." Employers' threats to fire workers are much rarer than workers' complaining and excuse-making.
On the other hand, if she were to so much as
ask to be allowed to start work thirty minutes later to get more sleep
or else she'll quit, she might well be laughed out of the company.
Again, true on some jobs, especially when team production is important. But requests to arrive late and leave early are common in most workplaces.
A
boss may, and very often does, yell at an employee who has made a minor
mistake, telling her how stupid and worthless she is,
True on some jobs. But as competent workers know, there are also plenty of bosses who turn a blind eye to incompetence out of pity.
but rarely could
an employee get away with even politely mentioning the mistake of a
boss, even if it is many times as unforgivable.
Simple explanation: If a worker messes up, the employer doesn't get what he paid for. If a boss messes up, the employee still gets paid.
The naive economist who truly believes in the equal bargaining position
of labor and capital would find all of these things very puzzling.
"Very puzzling"? No, only mildly puzzling. Remember: If employers value a conventionally "unequal" or "unfair" outcome more than workers disvalue it, we should expect employers to ask for it and workers to accede in exchange for money. The central question for all of Scott's stylized facts, then, is: "Do employers plausibly value this outcome more than workers disvalue it?" This framing doesn't clearly predict Scott's observations (or at least suitably toned-down versions thereof), but it doesn't predict the opposite either.
Let's focus on the last issue; a boss berating an employee, versus an
employee berating a boss. Maybe the boss has one hundred employees. Each
of these employees only has one job. If the boss decides she dislikes
an employee, she can drive her to quit and still be 99% as productive
while she looks for a replacement; once the replacement is found, the
company will go on exactly as smoothly as before.
This argument proves too much. It also implies that store owners will feel free to berate their customers. After all, if the store loses one customer, it still has plenty left. Indeed, Scott's 99% argument implies that waiters will feel free to berate restaurant patrons. After all, if one offended customer fails to tip you, you still get tips from your next 99 tables.
A far better story: Whenever people trade money for complex goods, the people who pay money feel free to berate and the people who receive money hold their tongues. Why? Because the people who pay cash for complex goods have plenty of good reasons to feel like they haven't gotten their money's worth. The recipients of the money, in contrast, have little reason to complain as long as they get the pay they bargained for.
We previously proposed a symmetry between a boss firing a worker and a
worker quitting a boss, but actually they could not be more different.
For a boss to fire a worker is at most a minor inconvenience; for a
worker to lose a job is a disaster. The Holmes-Rahe Stress Scale, a
measure of the comparative stress level of different life events, puts
being fired at 47 units, worse than the death of a close friend and
nearly as bad as a jail term. Tellingly, "firing one of your employees"
failed to make the scale.
Being fired is definitely very stressful. Rather than keep their workers on edge, however, most firms informally provide some insurance against this bad outcome. It's called "job security" and most workers feel like they have some (see e.g. GSS variable identifier JOBSECOK). Why do employers go out of their way to reassure their workers? The standard labor economics story: Workers value job security more than it costs employers, so employers provide job security in tacit exchange for lower wages.
It's worth adding, moreover, that firing workers is no walk in the park. Almost every workplace employs some visibly bad workers. Why haven't they been fired? Employers' squeamishness, or firing aversion, is the simplest explanation.
This fundamental asymmetry gives capital the power to create more
asymmetries in its favor. For example, bosses retain a level of control
on workers even after they quit, because a worker may very well need a
letter of reference from a previous boss to get a good job at a new
company.
This "level of control" is trivial. How often do employers hit their past workers up for time or money?
On the other hand, a prospective employee who asked her
prospective boss to produce letters of recommendation from her previous
workers would be politely shown the door; we find even the image funny.
Yes, it's funny. But it doesn't mean much. Informally talking to the prospective employer's current and past employees is much more informative. Again, this looks more like etiquette than "bargaining power."
The proper level negotiating partner to a boss is not one worker, but all workers. If the boss lost all workers at once, then she would be at 0% productivity, the same as the worker who loses her job. Likewise, if all
the workers approached the boss and said "We want to start a half hour
later in the morning or we all quit", they might receive the same
attention as the boss who said "Work a half hour longer each day or
you're all fired".
This is definitely much more favorable for workers. But why is this the "proper" negotiating level? Would "proper" customer-CostCo relations require that all customers negotiate as a bloc with CostCo?
[...]
The ability of workers to coordinate action without being threatened or
fired for attempting to do so is the only thing that gives them any
negotiating power at all, and is necessary for a healthy labor market.
"Any negotiating power at all"? Absurd. Most workers in the U.S. aren't in unions. Most aren't even close to being in unions. Yet most U.S. workers earn well above the minimum wage. A simple supply-and-demand story can explain this. Scott's story doesn't. Furthermore, Scott's story ignores all the collateral damage of this "worker coordination," especially unemployment.
About three hundred Americans commit suicide for work-related reasons
every year - this number doesn't count those who attempt suicide but
fail. The reasons cited by suicide notes, survivors and researchers
investigating the phenomenon include on-the-job bullying, poor working
conditions, unbearable hours, and fear of being fired.
I don't claim to understand the thought processes that would drive
someone to do this, but given the rarity and extremity of suicide, we
can assume for every worker who goes ahead with suicide for work-related
reasons, there are a hundred or a thousand who feel miserable but not
quite suicidal.
If people are literally killing themselves because of bad working
conditions, it's safe to say that life is more complicated than the
ideal world in which everyone who didn't like their working conditions
quits and get a better job elsewhere (see the next section,
Irrationality).
Sensible points. But the same holds in romantic relationships, too.
In both cases, people are free to leave and find something better.
When they're miserable, most workers and lovers exit. Some don't.
Why don't they leave? Most obviously, because their alternatives are worse than the status quo. This isn't a problem with the
labor market or the dating market. It's a problem with having little
to offer.
I note in the same vein stories from the days before labor regulations
when employers would ban workers from using the restroom on jobs with
nine hour shifts, often ending in the workers wetting themselves. This
seems like the sort of thing that provides so much humiliation to the
workers, and so little benefit to the bosses, that a free market would
eliminate it in a split second. But we know that it was a common policy
in the 1910s and 1920s, and that factories with such policies never
wanted for employees.
"Common"? Very hard to believe. But if Scott's history checked out, the question would remain: Why didn't the firms give their workers bathroom breaks in exchange for lower pay? Scott's appeal to unequal bargaining power explains nothing unless the workers in question are earning the legal minimum wage.
The fundamental problem with Scott's bargaining power story is that it predicts that workers will receive similarly crummy treatment regardless of their skill. If labor markets work poorly because employers don't need any single worker very much, why do major employers of corporate lawyers treat them so much better than they treat their janitors? If you say, "Because corporate lawyers have better outside options," you're almost a mainstream labor economist. Invoke supply-and-demand and you're there.
Scott's counter, perhaps, is that unemployment is much worse for janitors than corporate lawyers. Objectively, that's right. But subjectively, the difference is muted. An unemployed corporate lawyer, like an unemployed janitor, feels like his whole world is collapsing. If he doesn't find another job quickly, he risks his home and his family.
More importantly, the "unemployment is worse for janitors than corporate lawyers" story implies that employers prefer to hire desperate workers. In the real world, the opposite is true. Employers favor currently employed applicants over unemployed applicants, and short-term unemployed applicants over long-term unemployed applicants. That's why workers who are desperate for a new job doctor their resumes to look less desperate, not more.
Scott's challenge to labor economics made me think. And in one sense, we agree. The longer I study labor economics, the more convinced I am that the supply-and-demand model is too simple. Yet the complications that count are almost the opposite of the ones that Scott discusses. The chief failure in labor markets is that wages tend to be too high, leading to durably high unemployment.
Why? Mostly because so many workers view employers with resentment and suspicion. To contain this resentment and suspicion, employers compress wages and avoid wage cuts even when there's high unemployment. The unintended effect is to make unemployment far higher - and hence more traumatic - than it needs to be, especially for the least-skilled. It's the Tinkerbell Principle at work. Involuntary unemployment, free labor markets' chief shortcoming, exists largely because workers believe that free labor markets are bad for workers.
Over at Marginal Revolution, Tyler Cowen has asked people to propose questions for him to ask Luigi Zingales next week. I'm a big fan of Zingales's book A Capitalism for the People: Recapturing the Lost Genius of American Prosperity. I reviewed it positively in Policy Review in December 2012. (There are a lot of typos in the linked review that were not there originally.)
Rather than suggesting questions on issues on which Zingales and I agree, I'll quote from the parts of my review of his book where I disagree. I think some of the questions that would follow will be fairly obvious but I will pose them anyway.
I was disappointed that Zingales didn't address other regulations that promote fraud in companies -- two in particular. Section 13(d) of the Williams Act of 1968, for example, requires that investors who garner five percent or more of the shares of a company must announce that fact within ten days. That one law makes it virtually impossible for an entity that wants to take over another company to do so cheaply. Once it is known that an investor has over five percent, the price of the company's shares rises because there is now a higher probability of a takeover attempt. The increase in share prices of the target company discourages people from attempting takeovers in the first place. Also, a slew of state anti-takeover laws passed in the 1980s also make takeovers harder. Why does this matter? Because takeovers and threatened takeovers are a way of disciplining firms that are destroying shareholder value, fraudulently or otherwise.
Question: Do you favor repeal of Section 13(d) of the Williams Act of 1968? If not, why not?
So, what is Zingales's case for reintroducing Glass-Steagall? He hints at a reason: A mandatory separation would undercut the financial industry's lobbying clout -- a clout that I agree has been, on net, bad. In a recent op-ed, Zingales gave another reason. He admitted that a better way to deal with excessive risk-taking by banks is to remove deposit insurance. His only argument against doing so is that he doubts that "commercial banks are ready for that." But so what? Does Zingales, who is an outspoken enemy of cronyism, advocate that we cave to the banking lobby? Moreover, even if we worry, as he does, about political feasibility, there's another way to make banks and depositors bear more risk from banks' bad lending decisions: Leave the depositor with some of the risk. Marc Joffe and Anthony Randazzo of the Reason Foundation, for example, advocate adding "a 10 percent co-insurance feature to fdic insurance for deposits above $10,000." Under their proposal, depositors with $11,000 in a failed bank would receive $10,900, and those with a $250,000 balance would get $226,000. That would give depositors an incentive -- they have virtually none now -- to monitor the banks that hold their deposits.
Question: You have argued that commercial banks are not ready for removing deposit insurance. Do you think that is a good enough reason not to do so?
Ironically, one interesting piece of evidence for Zingales's idea that even a smart ethical person can let biases creep in is a section of this very chapter in which Zingales himself pulls his punches. He quotes a Federal Reserve governor who, in December 2006, pooh-poohed housing-price data on the grounds that such data, because they're imperfect, are not very useful. Zingales does not name the Fed governor, but does footnote the web site where one can find out. It was Randall Kroszner. Why is that demurral significant? Because Kroszner is one of Zingales's colleagues.
Question: Why did you not name your colleague, Randall Kroszner, as the Fed governor who pooh-poohed housing-price data in 2006?
When he ventures outside his expertise, though, Zingales sometimes makes important mistakes. For example, he states that the antitrust law was passed in the late 19th century to increase competition. But Loyola University economics professor Thomas DiLorenzo, in some pathbreaking research in the 1980s, showed the opposite. Between 1880 and 1890, he found, while real gross domestic product rose 24 percent, real output in the allegedly monopolized industries for which data were available rose 175 percent, seven times the economy's growth rate. In six of those seven industries, inflation-adjusted prices fell, which is strong evidence against the view that the large firms were monopolizing. DiLorenzo shows that a key faction lobbying for antitrust laws were small firms that had trouble competing with big firms with large economies of scale, and these small firms wanted less competition, not more. It's still true today that some of the main bringers of antitrust suits are companies suing their competitors. They don't want their competitors to charge even lower prices.
Question: In light of research by Thomas DiLorenzo and similar work by your University of Chicago colleague Lester Telser (A Theory of Efficient Cooperation and Competition), do you still think that antitrust law was passed in the late 19th century to increase competition?
Last year I did a number of blog posts criticizing the consensus view that Japan had fallen into a recession. Many people assumed that two consecutive declines in real GDP meant that Japan was in recession. I argued that the two consecutive quarter criterion was not reliable, for instance RGDP did not fall for two consecutive quarters in the 2001 recession in the US. The NBER is considered the official arbiter of business cycle dating in the US, and they look at a wide range of indicators.
In the US, unemployment always rises sharply during recessions, and I believe that's the stylized fact that people should focus on. Obviously people are free to define recessions as they wish, but our models of recession are typically aimed at explaining big increases in involuntary unemployment.
At the time, some commenters suggested that unemployment was a lagging indicator, and that my claim of no Japanese recession was premature. Here's the Japanese unemployment rate over the past 10 years.
As you can see, unemployment does increase in an actual recession like 2008-09. However in the three subsequent pseudo-recessions the rate of unemployment did not increase. In the most recent case, Japanese consumers bought lots of goods right before the April 1, 2014 sales tax increase, and GDP fell immediately afterwards. Firms didn't lay off workers, knowing that it was simply a timing issue, not an actual recession. Massive natural disasters like the 2011 tsunami also don't impact unemployment in a big, diversified economy.
Today one can find many news reports that Canada has fallen into recession. My prediction is that a year from today we'll know that this was also a pseudo-recession. Unlike in 2008-09, Canada will not see a significant rise in its unemployment rate (which has been stuck at 6.8% for the past 6 months.)
Canada's RGDP fell due to a weak commodity sector. However commodities are land and capital intensive, not labor intensive. So relatively few jobs are lost when commodities decline. Even Texas is still gaining jobs. The fall in Canada's real GDP is an optimal response to the negative commodity shock, and should not be addressed with monetary policy. Indeed in the past I've suggested that major commodity exporters should target something like total labor compensation, or average wage rate, rather than NGDP.
For big diversified economies like the US and China, it probably doesn't matter. In those two cases a significant fall in RGDP would probably represent a recession (indeed even a small increase in RGDP in China might be viewed as a recession.)
To summarize, don't obsess about words such as "recession". Words can get in the way of meaning. The concept we are interested in is a general fall in economic activity across a wide range of industries, leading to a big rise in unemployment. Between January 2006 and April 2008 we saw US housing construction fall in half. But that was not an economy-wide phenomenon; it simply represented the after-effects of misallocation of resources into housing (or at least misallocation is the standard view, Kevin Erdmann would argue otherwise.) But regardless of what caused the housing slump, unemployment merely rose from 4.7% to 5.0% over 27 months. That's not significant, as recessions in the US are caused by monetary shocks that reduce NGDP, not reallocation of resources. When actual recessions occur, unemployment rises by at least 200 basis points
PS. If you don't accept my definition of recession, then call a generalized fall in business activity a "banana". Then my claim is that tight money causes bananas. (Does anyone recall where I got the term 'banana'?)
I enjoyed Bryan Caplan's post early this morning. In my view, the best comments so far are by Daniel Fountain and by Thomas B, although Mike Hammock and Hasdrubal make good points also.
I look forward to reading Bryan's responses to Scott Alexander. Meanwhile, I have my own anecdote.
I have an office in downtown Monterey where I hide out to get work done. For some reason, even though I have communicated it to them, some of the small-business people with offices in the same building keep forgetting that, with the particular windows I have, I can hear everything when they talk on the landing outside my office. Even when I try to concentrate on my work, I still hear it clearly.
About a week ago, one of these small business people brought one of his employees out on the landing to ream him. The problem? The employee had refused to work on a joint project with another employee because he didn't like him. The employer handled it beautifully. He explained that the employee he was talking to was a first-rate employee. He explained that he knew the friction between the two and that's why he put them on separate projects. But every once in a while, he explained, he needed them both on one project and this employee he was reaming couldn't, as he had, simply refuse to show up.
Well, he didn't quite handle it beautifully. As I told him later, he shouldn't have handled it with me listening, and as I explained to him, that's why I went out to the landing: to remind him that I was in there and also, by the way, because the young employee was getting so animated that I was afraid he was going to punch the employer. My appearing when I did did seem to break up the tension.
I'm getting sidetracked. Here's what came out of the discussion with his employee. The employer was trying to keep all 5 employees fully employed and, because of a drop in their business and some unanticipated major expenditures on equipment, he had cleared only $7,000 so far this year. Of course, he could have made that up. But when I asked him about it later, he said it was true. I've gotten to know him over a few years and I think he's honest.
When I asked him about the $7,000, and he confirmed it, I asked him something else. I had noticed that in July he had one of his office workers training another young worker on the bookkeeping and appointment-making parts of the business because she, the person doing the training, would be quitting (or going on leave--I'm not sure which) to have a baby. Every day for about 3 weeks in July, I would go by on the way to the men's room and see her training the other young woman.
Then, when I returned from vacation in August, I noticed that the woman who had been trained was not there and there was a third woman, whom I didn't recognize, working there. I asked him what had happened. After all that training, it turned out, she had called in with about one minute's notice before work time and said that she had found another job. All that training--for which he paid the trainer and, I assume, the trainee--was out the window.
He told me that he frantically tried to replace her and had real trouble finding someone. Hopefully, he said, this new one would work out.
First, good students genuinely want to learn. They don't study material
merely because they see it on the syllabus or expect it on the test.
Second,
good students fight the natural human tendency to forget material right
after the final exam. Unlike most students, they consciously choose to
try to remember what they learn.
Third, good students strive for what educational psychologists call Transfer of Learning. They earnestly try to apply what they've learned outside the classroom.
Fourth,
and perhaps most importantly, good students put Truth first. They
aren't afraid to entertain and embrace socially unacceptable ideas.
I've never taught Scott Alexander, but when I read his take on labor economics, I immediately identified him as a most excellent student. It's an extensive critique of what Scott sees as the libertarian view of labor-capital relations. In truth, though, his critique is broader, because Scott targets models that economists across the political spectrum take largely for granted.
Since my latest labor economics class is now in session, this seems like a great time to sift through Scott's critique of my subject. Since most of you haven't read what he has to say, though, this post will merely reproduce his key sections. I'll respond later this week. Here's Scott:
2.5: How do coordination problems justify labor unions and other labor regulation?
It is frequently proposed that workers and bosses are equal negotiating
partners bargaining on equal terms, and only the excessive government
intervention on the side of labor that makes the negotiating table
unfair. After all, both need something from one another: the worker
needs money, the boss labor. Both can end the deal if they don't like
the terms: the boss can fire the worker, or the worker can quit the
boss. Both have other choices: the boss can choose a different employee,
the worker can work for a different company. And yet, strange to
behold, having proven the fundamental equality of workers and bosses, we
find that everyone keeps acting as if bosses have the better end of the
deal.
During interviews, the prospective employee is often nervous; the boss
rarely is. The boss can ask all sorts of things like that the
prospective pay for her own background check, or pee in a cup so the
boss can test the urine for drugs; the prospective employee would think
twice before daring make even so reasonable a request as a cup of
coffee. Once the employee is hired, the boss may ask on a moment's
notice that she work a half hour longer or else she's fired, and she may
not dare to even complain. On the other hand, if she were to so much as
ask to be allowed to start work thirty minutes later to get more sleep
or else she'll quit, she might well be laughed out of the company. A
boss may, and very often does, yell at an employee who has made a minor
mistake, telling her how stupid and worthless she is, but rarely could
an employee get away with even politely mentioning the mistake of a
boss, even if it is many times as unforgivable.
The naive economist who truly believes in the equal bargaining position
of labor and capital would find all of these things very puzzling.
Let's focus on the last issue; a boss berating an employee, versus an
employee berating a boss. Maybe the boss has one hundred employees. Each
of these employees only has one job. If the boss decides she dislikes
an employee, she can drive her to quit and still be 99% as productive
while she looks for a replacement; once the replacement is found, the
company will go on exactly as smoothly as before.
But if the employee's actions drive the boss to fire her, then she must
be completely unemployed until such time as she finds a new job,
suffering a long period of 0% productivity. Her new job may require a
completely different life routine, including working different hours,
learning different skills, or moving to an entirely new city. And
because people often get promoted based on seniority, she probably won't
be as well paid or have as many opportunities as she did at her old
company. And of course, there's always the chance she won't find another
job at all, or will only find one in a much less tolerable field like
fast food.
We previously proposed a symmetry between a boss firing a worker and a
worker quitting a boss, but actually they could not be more different.
For a boss to fire a worker is at most a minor inconvenience; for a
worker to lose a job is a disaster. The Holmes-Rahe Stress Scale, a
measure of the comparative stress level of different life events, puts
being fired at 47 units, worse than the death of a close friend and
nearly as bad as a jail term. Tellingly, "firing one of your employees"
failed to make the scale.
This fundamental asymmetry gives capital the power to create more
asymmetries in its favor. For example, bosses retain a level of control
on workers even after they quit, because a worker may very well need a
letter of reference from a previous boss to get a good job at a new
company. On the other hand, a prospective employee who asked her
prospective boss to produce letters of recommendation from her previous
workers would be politely shown the door; we find even the image funny.
The proper level negotiating partner to a boss is not one worker, but all workers. If the boss lost all workers at once, then she would be at 0% productivity, the same as the worker who loses her job. Likewise, if all
the workers approached the boss and said "We want to start a half hour
later in the morning or we all quit", they might receive the same
attention as the boss who said "Work a half hour longer each day or
you're all fired".
But getting all the workers together presents coordination problems. One
worker has to be the first to speak up. But if one worker speaks up and
doesn't get immediate support from all the other workers, the boss can
just fire that first worker as a troublemaker. Being the first worker to
speak up has major costs - a good chance of being fired - but no
benefits - all workers will benefit equally from revised policies no
matter who the first worker to ask for them is.
Or, to look at it from the other angle, if only one worker sticks up for
the boss, then intolerable conditions may well still get changed, but
the boss will remember that one worker and maybe be more likely to
promote her. So even someone who hates the boss's policies has a strong
selfish incentive to stick up for her.
The ability of workers to coordinate action without being threatened or
fired for attempting to do so is the only thing that gives them any
negotiating power at all, and is necessary for a healthy labor market.
Although we can debate the specifics of exactly how much protection
should be afforded each kind of coordination, the fundamental principle
is sound.
2.5.1: But workers don't need to coordinate. If working conditions
are bad, people can just change jobs, and that would solve the bad
conditions.
About three hundred Americans commit suicide for work-related reasons
every year - this number doesn't count those who attempt suicide but
fail. The reasons cited by suicide notes, survivors and researchers
investigating the phenomenon include on-the-job bullying, poor working
conditions, unbearable hours, and fear of being fired.
I don't claim to understand the thought processes that would drive
someone to do this, but given the rarity and extremity of suicide, we
can assume for every worker who goes ahead with suicide for work-related
reasons, there are a hundred or a thousand who feel miserable but not
quite suicidal.
If people are literally killing themselves because of bad working
conditions, it's safe to say that life is more complicated than the
ideal world in which everyone who didn't like their working conditions
quits and get a better job elsewhere (see the next section,
Irrationality).
I note in the same vein stories from the days before labor regulations
when employers would ban workers from using the restroom on jobs with
nine hour shifts, often ending in the workers wetting themselves. This
seems like the sort of thing that provides so much humiliation to the
workers, and so little benefit to the bosses, that a free market would
eliminate it in a split second. But we know that it was a common policy
in the 1910s and 1920s, and that factories with such policies never
wanted for employees. The same is true of factories that literally
locked their workers inside to prevent them from secretly using the
restroom or going out for a smoking break, leading to disasters like the
Triangle Shirtwaist Fire
when hundreds of workers died when the building they were locked inside
burnt down. And yet even after this fire, the practice of locking
workers inside buildings only stopped when the government finally passed
regulation against it.
Tyler Cowen has a new blog post that has 13 observations on the Fed's upcoming policy decisions. Most are reasonable, especially the first comment. But I strongly disagree with point 6:
6. Now the risks look fairly symmetric. The first reason is that zero short rates for so long might be encouraging excess risk-taking in the financial sector. This can be the "reach for yield" argument, which in spite of its lack of replicable econometric support commands a lot of loyalty from serious observers within the financial sector itself.
One of my great frustrations as a blogger is that I don't seem to be able to get people (even people often sympathetic to my arguments) to see that this assumption is wrong. Tight money leads to lower NGDP growth and lower interest rates over the sort of time period that matters for the issues that people care about. Tight money lowers the Wicksellian equilibrium interest rate. I don't think that's even controversial. And since actual monetary policy tends to adhere pretty closely to that rate, interest rates will be lower over the next 5, 10, 50, and 100 years with tighter money than with easier money. Only in the next year or maybe two would rates be higher.
The ECB thought otherwise, raised their target rate several times in 2011, and now Europe will probably have lower rates than America for many, many years out into the future.
Tyler mentions respectable arguments for raising rates in the near future, such as the tightening labor market. Reasonable people can disagree on whether it's wise. But it seems to me that it's not even debatable that if you are worried that low rates might lead to sloppy financial market decisions, misallocation of resources, etc., then you should be demanding easier money.
If the Fed wants 2% inflation over the next decade they shouldn't raise rates this year. If they want 1.5% inflation, they should raise rates. Which inflation rate is likely to lead to higher interest rates over the next decade or two?
Notice I haven't even addressed the issue of whether the Fed should care about interest rates (I don't think they should.) But again, if they should care about them, then they need to understand that Milton Friedman was right; tight money leads to very low interest rates. It did in the US in the 1930s, in Japan in the 1990s, and in the US after 2008.
I spent part of Sunday catching up on Wall Street Journals that had piled up when I was at my cottage in Canada. Some highlights, in chronological order.
Last year the Senate Finance Committee asked investigators at the Government Accountability Office, or GAO, to test the Affordable Care Act's internal eligibility and enrollment controls. So they created a dozen fictitious identities and applied for insurance subsidies--and 11 fake claimants got them.
The GAO didn't know ObamaCare's verification protocols in advance, so they weren't trying to exploit some known security hole. Online or over the phone, they simply supplied invalid Social Security numbers, doctored citizenship status or misstated their income on tax documents.
The federal exchanges paid some $2,500 a month or $30,000 per year to each John Doe. When it came time to re-enroll at the end of 2014, the 11 fake applicants were able to extend their plans and, in some cases, even received more generous subsidies without providing additional documentation.
The exchanges are supposed to verify income and identity because the dollar value of subsidies is tied to those data. If people can burn taxpayers for money they don't qualify for, ObamaCare will be far more expensive than it has already become.
Yet the GAO notes with its dry wit that "we circumvented the initial identity-proofing control," though the exchanges are "required to seek post-approval documentation in the case of certain application 'inconsistencies.'" The GAO also reports that the follow-up was often unclear or inaccurate and didn't turn off the subsidies. The GAO even includes transcripts of their sleuths bluffing the clueless customer service reps.
I checked the web for the whole GAO report and it's here.
One correction, though. I don't think the subsidies are $30,000 per year to each John Doe. That sounded suspiciously high. Here's what the GAO report actually says on page 6:
For the 11 applications that were approved for coverage, we obtained the advance premium tax credit in all cases. The total amount of these credits for the 11 approved applications is about $2,500 monthly or about $30,000 annually.
That sounds more realistic. It's still a huge problem, but why overstate by an order of magnitude?
PALO ALTO, Calif.--Auto makers have been laying the groundwork to seek relief from U.S. regulators on lofty fuel-economy targets. But Tesla Motors Inc. is rowing in the opposite direction, saying it wants to make the rules even tougher.
The Silicon Valley electric-car maker is preparing to make a public case this week for leaving mileage and emissions regulations intact, or making them even more stringent, a Tesla executive said. The company also will fight to keep other auto makers from loosening regulations in California, which has more ambitious targets than the federal government.
U.S. fuel-economy targets call for manufacturers to sell vehicles averaging 54.5 miles a gallon by 2025.
Tougher regulations could benefit Tesla, while challenging other auto makers that make bigger profits on higher-margin trucks and sport-utility vehicles.
Tesla's vice president of development, Dairmuid O'Connell, plans to argue to auto executives and other industry experts attending a conference on the northern tip of Michigan that car companies can meet regulations as currently written.
"We are about to hear a lot of rhetoric that Americans don't want to buy electric vehicles," Mr. O'Connell said in an interview ahead of a Tuesday presentation in Traverse City, Mich. "From an empirical standpoint, the [regulations] are very weak, eminently achievable and the only thing missing is the will to put compelling products on the road."
The presentation likely will further Tesla's reputation as industry agitator, a role often taken on by founder Elon Musk, who rankles rivals with proclamations about their apparent lack of progress in building viable electric vehicles. It also will mark a significant departure from other auto makers that historically have tried to soften fuel-economy regulations.
The industry typically has agreed to tougher standards under political pressure and only after thorough negotiations. In Detroit earlier this year, Mr. Musk urged auto makers to continue advancing electric vehicles amid falling oil prices, even while disclosing his company likely won't be profitable until 2020.
Bottom line: Elon Musk is a subsidy-sucker and a regulation seeker.
Tesla's $70,000 Model S is as much a "compliance" vehicle as the electric cars built by other auto makers. That's one truth the audience didn't hear from Diarmuid O'Connell, Tesla vice president of business development, who made a much-noted appearance at a Michigan automotive seminar this week.
Mr. O'Connell called on Washington to stiffen the already-stiff Obama fuel-mileage mandates. He criticized electric cars churned out by other car makers as mere "compliance vehicles" that are not "compelling" to consumers.
Uh huh. The kettle speaks. Tesla benefits from a $7,500 buyers tax credit, and generates millions in revenues by selling emissions credits to other car makers under California's zero-emissions-vehicle mandate and federal greenhouse rules.
Tesla is a compliance company. Don't take our word for it. Mr. O'Connell said if other makers don't want to build electric cars, "they can buy credits from us, and we will invest in electric vehicles for them."
As for the Model S, Tesla's big seller may be "compelling" to its customers but it's also an absurd, anachronistic take on the electric automotive future it's supposed to herald. Form eschews function: It apes the conventional sports car with a long, sweeping hood to conceal a powerful piston engine that isn't there. It appeals to confused consumers who simultaneously want to display ostentation and green virtue.
Which brings us to Mr. O'Connell's vocal support for increased mileage mandates. These, in theory, are a mixed bag for Tesla. They generate tradable credits but also pollute the market for electric cars with vehicles built and dumped at a loss. But the rules also prop up Tesla's share price by making the company a potential acquisition target for a full-line auto maker looking to offset its pickups and SUVs.
Bottom line: Elon Musk is a subsidy sucker and a regulation seeker.
4. L. Gordon Crovitz, "The Christie vs. Paul Debate," August 10 (August 9 on-line).
The highlight was Crovitz's cheap shot at the end. He wrote:
Mr. Christie responded, "The hugs that I remember are the hugs that I gave to the families who lost their people on Sept. 11." As Mr. Christie spoke, Mr. Paul ostentatiously rolled his eyes. Voters get to decide if it's reasonable to shrug off American deaths made possible by politicians who prohibit intelligence agencies from operating intelligently.
Really, Gordon? Rand Paul rolled his eyes at the murders of Americans on 9/11? It had nothing to do with Christie's emotional appeal?
Today's the first day of GMU's fall semester, and for some reason I'm thinking about a class I haven't taught in years: Industrial Organization. I wrote the notes when I was much younger and more enamored of theory. Much of the class was a critique of the Structure-Conduct-Performance model so prevalent at Berkeley and Princeton. Slogan version of the model, to paraphrase Orwell: "Many firms good, few firms bad."
While I hate to claim vindication by vaguely-defined events, the last two decades seem wildly incompatible with the S-C-P model. Many of our favorite new firms have no close competitors. What's the next-best-thing to Amazon? Netflix? Facebook? Starbucks? Even weirder, a sizable chunk of these apparent monopolies give their product away gratis. Meanwhile, the spread of occupational licensing and rise of Uber have raised awareness of the elephant in the IO room: governments' deliberate effort to make markets less competitive than they would naturally be. (And don't get me started on immigration restrictions).
Still, it's easy to see the intuitive appeal of S-C-P. Namely: If you are a monopoly, you'll charge high prices, and hence produce low quantity.
The problem with S-C-P is that it ignores an even more intuitive truism. Namely: If you want to become and remain a monopoly, you will produce high quantity, and hence charge low prices.
In short, the desire to become and remain a monopoly leads firms to do the exact opposite of what they'd do if their monopoly status were a law of nature - or the law of the land.
It seems that Asia has overtaken Latin America as the largest source of immigration to the US. Here's a recent example of that trend:
Mexicans still dominate the overall composition of immigrants in the U.S., accounting for more than a quarter of the foreign-born people. But of the 1.2 million newly arrived immigrants here legally and illegally counted in 2013 numbers, China led with 147,000, followed by India with 129,000 and Mexico with 125,000. It's a sharp contrast to the 2000, when there were 402,000 from Mexico and no more than 84,000 each from India and China. Experts say part of the reason for the decrease in Mexican immigrants is a dramatic plunge in illegal immigration.
The rest of this post will involve some ethnic generalizations, so I should probably add the usual disclaimer. Any generalizations merely reflect averages, and in some cases applies only to the subset of an ethnic group that self-selects to immigrate to the US.
One of the reasons why the US is more unequal than a place like Germany, especially at the very top, is that the US is host to economic engines like Wall Street and Silicon Valley and Hollywood. I suppose you could throw in fracking. There's no particular reason why continental Europe couldn't have its own Wall Street, or Silicon Valley or Hollywood or fracking industry, but they don't. Britain has "the City" which is sort of the Wall Street of Europe, and that adds to inequality in Britain. But Europe failed to attract the other engines of wealth creation and inequality that are as dominant as the US examples. Europe's industries tend to be less of the boom/bust variety that often lead to great wealth, although they certainly have their share of billionaires.
In one case (fracking) that is due to environmental lobbying. Europe is more left wing and more densely populated, and similar areas of the US (New York, California) also don't do much fracking. But the other failures may have had more to do with other factors, such as regulation and taxes. And I would add to that mix of other factors "ethnic diversity." The US hosts a larger than normal group of high-achieving immigrants, who have moved here from all over the world. One early example is the Jewish scientists who fled Europe in the 1930s. But it's still happening today. Elon Musk is from South Africa. Peter Thiel is from Germany. And of course many highly skilled people have been arriving from Asia (and more than you might assume from Africa, Latin America and the Middle East.)
Even if these high skilled immigrant groups form a relatively low overall share of the US population, they can have a disproportionate impact on the sectors that create great fortunes, such as finance, technology, and the media. Fracking might be the one exception, and I suppose Germany with all its engineering talent would now have a thriving fracking industry if not for environmental restrictions. But in the other cases I think immigration may have played a factor in the success of the US economy.
The downside of this trend is that it increases inequality in the US. But that doesn't mean it hurts lower income Americans; just the opposite is the case. Many California public programs that benefit Hispanic immigrants (higher ed, medical programs, etc.), are made possible by taxing the enormous incomes earned by the top 1% in California. If Silicon Valley and Hollywood moved to Germany, then tax revenues would plunge, and California state spending would look more like Mississippi's. The money Hispanics spent on movies and software would not go to Europe. The same is true for Wall Street and New York State. And if the City of London financial firms moved to Paris, Britain would be more equal, but the working class in Leeds or Liverpool would be worse off.
In New York, Mayor Bill de Blasio is trying to hold back the progress of Asians via affirmative action programs for non-Asians. That's because 70% of students at elite public high schools like Stuyvesant are now Asian. (Many are so poor they qualify for free lunches.) But even that won't stop the progress of Asians, as education is mostly about signaling. Make it tougher for Asian students via quotas and discrimination, and whatever success they do have will look all the more impressive to potential employers.
As I said at the beginning, all these generalizations have exceptions. Chinese immigrants include scientists like my wife, and illegals from Fujian who wash dishes in Chinatown and sleep 8 to a room. But the number of high achievers among the Chinese immigrants (and even more so among Indian immigrants) is greatly disproportionate to their overall numbers in the US population, just as with earlier groups such as Jewish immigrants. Even black African immigrants do considerably better than native-born blacks. This trend toward high achieving immigrant groups will change America in many ways. We'll become less equal, and also a richer, more diverse, and more interesting place to live, to the benefit of everyone except those who "don't like foreigners."
PS. Bernie Sanders helped sabotage Ted Kennedy's immigration reform bill in 2007, perhaps because he has nostalgia for the 1950s---a time when the white working class did well, and everyone else was pretty much invisible. Now he's changed his tune, but which view do you think reflects his true beliefs about immigration?
In a response to, I think, me, although he doesn't make it clear whether he's responding to me, Robert P. Murphy writes:
I realized from Levi's comment that people are genuinely misunderstanding what I was trying to say in that op ed. I'm not going to try to go through it all right now, but check this out. Back in 2013, Ryan Murphy (no relation) was teasing me in the comments here, saying that I should be rich if I know the Fed is driving the stock market. I brought up that guys like Mark Spitznagel made a boatload of money from the two previous crashes, and Spitznagel is heavily guided by Austrian capital and business cycle theory. (Disclaimer: I was a consultant on that book.)
Ryan then said well let's see how he does in the future. OK, thanks to von Pepe, I see this WSJ story that Spitznagel's Universa Fund made a billion dollars on Monday (up 20% for the year). Does that count as "profiting from a prediction"? And no, if I understand his portfolio construction, he didn't give half of it back later in the week, because he didn't short the S&P;, instead he bought deeply out of the money put options. (Click through to the article if you want more details.)
To be clear, I'm not saying, "The scientific validity of Austrian business cycle theory rests on the shoulders of Universa's 3q performance relative to a passive mutual fund." And yes, maybe Spitznagel just keeps getting lucky. My modest point is that if you think you can dismiss my perspective with a one-liner, you're really not even trying to appreciate what I've been saying.
I haven't put in all his links. If you want links, go to his post.
Before continuing, let me explain puts for those who don't know. You buy a put option that gives you the right to sell a stock at an agreed upon price. All other things equal, the lower the price, the less you have to pay for the option. Then, if the market price falls below the agreed-upon price, you make money. This is what Universa did.
Would I have loved to have invested with Universa on, say, August 1? Of course I would. Their puts made a lot of money.
But go back to the problem I stated originally with Bob Murphy's op/ed. I wrote:
Let's say that you warn people that a price will fall. It keeps rising. Finally, years after your warning, the price falls. But it falls to a level well above the level it was at when you made your warning. How useful, then, was your warning?
I think not very.
How does this apply here? Well, imagine that Universa, like Bob Murphy had "been warning for years that the Federal Reserve was setting us up for another crash." Given that Universa's recent strategy was to buy puts that were "deeply out of the money," isn't it likely that they would have followed the same strategy all those years? So they would have bought a lot of puts that expired without their ever exercising them. That's a lot of money over the years. How does it compare with the $1 billion gain? I don't know. But I would like to know. Otherwise it's hard to judge their strategy, even ex post.
True story: A fellow Ph.D. from UCLA, back in the late 1990s, looked at the dotcom stocks and just knew, based on fundamentals, that the stocks were overvalued. So he took some of his two daughters' college fund and bought puts. The stocks kept rising. The puts expired. So he bought more. The stocks kept rising. The puts expired. Eventually, in early 2000, he was right. But by then, he had spent all of his daughters' college fund and had nothing left to buy the puts that would have made him real money.
Tim Sablik has an interesting literature review on secession on the Richmond Fed's "EconFocus." Sablik presents research relevant to the issue, including Alesina and Spolaore and Buchanan and Faith. He also deals with contemporary secessionist communities - like Catalonia and Scotland.
Sablik writes that "For secession to have the best chance of success, it takes consent on both sides." But of course that very rarely happens. The best (Perhaps only? I'd be interested in others) example of consensual "divorce" is Czechoslovakia.
Called the "Velvet Divorce," the secession was handled quickly and peacefully. But it's unclear what lessons from that event apply to today's movements. It was decided by leading politicians on both sides rather than popular referendum, which made it easier to reach agreement.
Sablik notes that the British government allowed the Scots to vote, whereas Spain ruled out any possible referendum for Catalonia. I suppose that we can compare the Scottish and the Catalonian secessionist movement insofar as their popular following and their political strength are concerned. Also, both nations are monarchies - which prompts another question. Is the royal factor increasing the likelihood of secession (because the reigning dynasty embodies the idea of a "foreign" domination) or decreasing it (because the monarch is a stronger symbol of unity that affects people's ideas?).
The question why the ones were allowed to vote, and the others were not, is indeed a very interesting one.
In part, it may have to do with the fact that "Resistance can usually be expected if the parent country would be made economically worse off by a region leaving," as Sablik points out. Perhaps among the British, the perception that they had not much to lose by Scotland leaving was so widely accepted that the referendum was politically acceptable. In Spain, it is a different story. And yet Scotland has oil ("Paul Collier and Anke Hoeffler of Oxford University linked the rise of the modern Scottish secession movement to the discovery of that oil in the 1960s," Sablik reminds us). I'd bet that voters tend to believe natural resources are something not to be separated from, inasmuch as it is possible.
In part, it may have to do with the fact the British Empire has long been falling to pieces, and so British voters are not particularly troubled from the idea of losing one more.
In part, it may have to do with the recent history of the UK and Spain. England takes pride in her legacy of liberty. Spain passed through the dictatorship of Franco. Its democratic constitution is quite recent and its leadership may feel that a Catalonian secession may be hitting too hard a still fragile body.
Both the Scots and the Catalonians promised their loyalty to the European Union. You would think that, if a transnational body like the EU has any sense at all, it would be at least somehow "regulating secession" within its territories, allowing for a constructive and properly ordered exercise of the right to vote yourselves out of a country. That doesn't happen. The EU is a cartel of states as they are, for which any change may sound frightening.
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