Category Archives: PSST and Macro

The Book on SecStag

Posted on by

Timothy Taylor writes,

Coen Teulings and Richard Baldwin, who have edited a useful e-book of 13 short essays with a variety of perspectives on Secular Stagnation: Facts, Causes and Cures. In the overview, they write: “Secular stagnation, we have learned, is an economist’s Rorschach Test. It means different things to different people.”

Read his whole post.

The interesting secular trends include low real interest rates, low productivity growth, and declining labor force participation among prime-age workers.

From a conventional AS-AD perspective, low real interest rates are a demand-side phenomenon. The other two are supply-side phenomena. I wish the secstag folks would get together and sort this out.

I think that the most important secular trends are:

1. The New Commanding Heights. That is, the shift in the economy toward a lower share of goods consumption and a higher share of consumption of education and health care services. The New Commanding Heights are sectors in which productivity is difficult to measure and government interference is rampant.

2. The Great Factor-price Equalization. That is, the ability of workers with a given level of skills in China and India to compete with workers of equivalent skills in the U.S. This benefits the median worker in China and India as well as high-skilled workers in all countries, but it threatens the median worker in the U.S.

3. Vickies and Thetes. Or what Charles Murray calls Belmont and Fishtwon. In the U.S., there is extreme cultural sorting going on. People with high intelligence and conscientiousness are moving in one direction, and people who are low in those traits are moving in the other direction.

I think that (1) explains the low productivity growth. It could be partly a measurement problem and partly a problem of government putting sand in the gears.

I think that (2) and (3) explain the labor force participation problem.

What about low real interest rates? This one has puzzled me for a decade. Is it possible that (1) is the explanation? That is, the New Commanding Heights are not nearly as capital-intensive as the old commanding heights of steel, electric power, and transportation. Also, investment may be deterred because of the way government affects these sectors.

Trends and Cycles

Posted on by

Tyler Cowen writes,

The arrival of the cyclical event, in due time, makes the negative underlying trend more visible. At first people blame everything on the cycle/crash, but a look at the slow recovery, combined with a study of pre-crash economic problems, shows more has been going on.

Read the whole thing. I found it difficult to excerpt.

If you insist on Keynesian methodology, then trend and cycle are separate by construction. You wait until there is full employment, and then you draw a line connecting the full-employment dates and call that the trend.

In real time, this does not work so well. In the 1970s, we never got back to what was thought to be full employment. So economists had to first re-define full employment as the NAIRU and then allow for drift in the NAIRU. In fact, to speak of NAIRU drift is to speak of a phenomenon that is neither purely trend nor purely cycle.

From a PSST or Schumpeterian perspective, there is no distinction between trend and cycle. There are booms, during which new projects are launched with optimism while the businesses they are destined to destroy continue in blithe ignorance or denial. There are busts, during which out-moded businesses get shut down but entrepreneurs have not yet figured out uses for the resources that have been freed, and for various reasons unemployed workers appear to have higher reservation wages than their value to firms.

The idea that what is described as a cycle is more like the recognition/amplification of a trend makes sense to me.

Note also the new paper by Acemoglu, Autor and others on the role of imports in what they call the “employment sag” that has taken place since 2000. The macroeconomic story may ultimately be less about the 2008-2009 financial crisis and more about the challenges that the economy faced in dealing with the great factor-price equalization.

Experts Surveyed on the Future of Work

Posted on by

From Pew, which says

We call this a canvassing because it is not a representative, randomized survey. Its findings emerge from an “opt in” invitation to experts who have been identified by researching those who are widely quoted as technology builders and analysts and those who have made insightful predictions to our previous queries about the future of the Internet.

Respondents gave their answers to the following prompts:

The economic impact of robotic advances and AI: Self-driving cars, intelligent digital agents that can act for you, and robots are advancing rapidly. Will networked, automated, artificial intelligence (AI) applications and robotic devices have displaced more jobs than they have created by 2025?

Please elaborate on your answer: Describe your expectation about the degree to which robots, digital agents, and AI tools will have disrupted white-collar and blue-collar jobs by 2025 and the social consequences that will emerge from that.

Bonus question: To what degree will AI and robotics be parts of the ordinary landscape of the general population by 2025? Describe which parts of life will change the most as these tools advance and which parts of life will remain relatively unchanged.

Here is how I would have answered (note the PSST slant):

1. In a market economy, trade takes place in order to gain from specialization and comparative advantage.

2. There are always such gains to be had, so in principle everyone can always participate in the market economy. In a frictionless economy, meaning that all adjustment to change takes place immediately and costlessly, everyone would do at least some market work.

3. In practice, the economy is not frictionless. One of the big frictions is that market work is taxed, whereas non-market work is not taxed. Among those who face the highest tax rates for market work are poor households who receive subsidies that disappear rapidly as income rises. This is not to say that the subsidies are bad policy (although in my opinion they are very poorly designed) but simply to report the fact.

4. Another source of friction might be termed discovery-process friction. Sustainable patterns of specialization and comparative advantage are only revealed gradually, through a trial-and-error process of new ventures launched and old ventures shut down.

5. Holding the discovery process and other frictions constant, more rapid technological change may lead to higher rates of unemployment, on average. With more rapid technological change, the economy is likely to spend more time out of adjustment than in a state of near-full employment.

6. Looking ahead, I would not rule out technological changes that help to improve the discovery process and thus reduce economic friction. For example, it might be the case that as more business data is collected and analyzed in real time, entrepreneurs will become more accurate in choosing profitable business opportunities and avoiding unprofitable ones.

7. However, I would not rule out the possibility that government policy will become increasingly dysfunctional and thus increase economic friction.

8. I think that the more fundamental question is to what extent valuable skills and capital in the economy will tend to become highly concentrated among a small elite rather than dispersed. I certainly think that this is one scenario. Thus, even though everyone may participate in the market economy, some of us could be Vickies and some of us could be Thetes.

9. Which brings me to my answer to the bonus question. I would suggest that Neal Stephenson’s The Diamond Age is more insightful than any science fiction that I might write.

Edward Lazear on JOLTS

Posted on by

He writes,

During the typical month when jobs increase by about 100,000, 5.1 million workers are hired and five million separate from their jobs, resulting in a net change of +100,000 jobs.

…more hires are needed, specifically about 5.2 million in the average month. We are just past the halfway point in getting hiring back to normal levels.

Pointer from John Cochrane.

The AS-AD story is that there is still not enough aggregate demand to stimulate enough new hires per month to overcome (new job separations per month + labor force growth + excess workers accumulated over the past six years of weak AD).

The PSST story is one of huge frictions that keep people from working in the market economy. One friction is that as technology and other factors change in the economy, the discovery process of new ventures does not keep pace. Another source of friction is government policies that reduce supply and demand in the labor market.

I doubt that there is an empirical method of distinguishing between these two stories. However, I would note that in the post-2008 period there are relatively few cases of workers getting laid off and returning to their old jobs. If there were large numbers of such cases, that would suggest that the problem of discovering new patterns of sustainable specialization and trade was relatively unimportant, and it would incline me toward the AS-AD story.

Nick Rowe on Monetary Theory

Posted on by

He writes,

2.1 Home production increases in a recession. People grow their own veggies, cook their own meals, fix their own cars, and go back to school. Because investment in human capital is a form of investment that requires mostly one’s own time, on top of inputs bought for money. Home production of investment goods rises, even as all other forms of investment fall.

2.2 If trade were harder in a recession, we would expect to see trade in all goods falling, and not just trade in newly-produced goods. And, as far as I can tell, that is what we do see. It gets harder to sell old houses, as well as newly-produced houses.

2.3 Barter increases in a recession, as far as I can tell. Barter is usually very difficult, but some barter exchanges are more difficult than others. If recessions were caused by something that made monetary exchange more difficult than normal, we would expect to see abnormally high levels of barter in a recession. I think we do.

2.4 Some goods are easy to sell for money even in a recession. Which goods are those? It is those that are traded in organised central markets, where problems due to asymmetric information are small, and where prices are very flexible. It is precisely those goods that are more like money, where if all goods were like that we wouldn’t need money as much to help economic coordination. It is those goods that are traded in markets that approximate the market of the Walrasian auctioneer. If all goods were like that, and if all markets were like that, we wouldn’t observe recessions. And we wouldn’t need money.

But we don’t see increased use of foreign currency in a recession. We don’t see increased use of buying on credit–we see the opposite. And as for point 2.3, as far as I can tell, the use of barter in the 2008-present episode has been minimal.

Later, he writes,

Lots of things can cause coordination failures. Not all coordination failures are monetary coordination failures. There are many coordination failures that monetary policy cannot cure.

I don’t think that the last six years represents an example of the latter.

The Macroeconomics of Unobservable Expectations

Posted on by

Scott Sumner writes,

A big demand slump isn’t just an economic disaster; it’s also a prediction of an economic disaster. And that means it’s a prediction of policy failure. At least that’s the implication of the Woodfordian view of macro (which I accept.) Changes in current AD are mostly driven by changes in the future path of AD. Changes in near-term NGDP are mostly driven by changes in expected NGDP 1, 2, 5 and 10 years out in the future. Call it the term structure of NGDP. And those are driven by the future expected path of monetary policy.

And of course whenever we have crashes like 1920-21, 1929-30, 1937-38, 2008-09, we also tend to have asset market crashes. Asset markets aren’t perfect (1987) but when there’s a very big economic slump on the way they are pretty good at sniffing it out.

Unfortunately, this puts a huge emphasis on something that is unobservable, namely “expected NGDP 1, 2, 5 and 10 years out in the future.” Any time you have a theory that relies on such an unobservable, you drift further away from the realm of science and nearer to the realm of circularity.

In Sumner’s defense, he wants expectations for nominal GDP to be observable, by having tradable NGDP futures contracts. Even so, it is rare for any such contracts to go out more than a year ahead.

Douglas Holtz-Eakin on Fiscal Stimulus

Posted on by

He writes,

Discretionary Keynesian stimulus is built on the notion of propping up the existing firms, labor market relationships, and purchase patterns. In the aftermath of the Great Recession and Obama Administration stimulus efforts, new-firm creation dropped dramatically in the U.S. and the recovery proved modest at best. This is not a coincidence. Interfering with the core mechanisms for reinvention harms the capacity of the economy to transform itself for the future.

Sounds like a PSST story.

Holtz-Eakin’s piece is on a new conservative web site called Opportunity Lives. I like the look of the site, and almost every link on the front page tempts me to click. However, I was a bit disappointed that some of those links took me to teasers that linked to columns published elsewhere. If you are going to tease-and-link, then do so in a blog-like manner, without making me waste a click on my way to the actual article. See Arts and Letters Daily.

Meanwhile, the IGM forum recently reaffirmed that the economists on their panel think that the fiscal stimulus was just the cat’s meow.

Scott Sumner on AS-AD

Posted on by

A good post. Read the whole thing. He ends up,

I’d like to dispense with all discussion of AS and AD, and replace it with nominal shocks and real shocks. A nominal shock is an unexpected change in NGDP. A real shock changes the price/output split for any given level of NGDP. As Tyler suggests, one type of shock is often entangled with the other. But it’s still important to keep them clear as a theoretical matter, so that we can think clearly about how monetary policy should respond (or not respond) to various types of situations.

PSST is all about real shocks. I am inclined to think of money and inflation as “consensual hallucinations.” That is, people get into habitual ways of undertaking transactions and adjusting prices. In the 1970s, these habits changed quite a bit. In other periods, they have been more stable. Often, the “noise” in prices (problems with measuring the “aggregate price level”) is large relative to any signal that might be inferred from changes in the measured rate of inflation. So I think that attempts to explain inflation on the basis of alleged causal variables, whether monetary or real (e.g., the unemployment rate) involve torturing the data to obtain a confession.

John Hussman on the Phillips Curve

Posted on by

He writes,

The resulting relationship can be stated very simply: wages rise, relative to other prices, when unemployment is low and labor is scarce; wages fall, relative to other prices, when unemployment is high and labor is abundant. The chart below nicely illustrates this relationship in U.S. data. It relates current unemployment to subsequent real wage inflation.

The charts (at the link) shows very noisy relationships between nominal variables and unemployment but a reasonably strong inverse relationship between unemployment now and real wage growth later.

Thanks to a commenter for the pointer. I remain concerned that macroeconomists have very elastic theories and empirical methods that can be used to confirm almost any story.

My Opinion of Labor Search Theory

Posted on by

Nick Rowe writes,

“search” theory should really be called “search/matching” theory. Because without heterogeneity of workers and jobs the search problem would be trivially easy. “You want a job?” “Yes. You want a worker?” “Yes.” “Done!”. And “search/matching” theory should really be called “wait/matching” theory. Because even if both sides of the labour market have perfect information about the other side — about who’s looking for a job and who’s looking for a worker — there might not be any suitable matches on the market right now, and one or other side might choose to wait until a better match appears on the market.

The big problem with search theory is that it assumes that jobs are given. The PSST story is that in order to create a job, you need to discover some sustainable pattern of comparative advantage.

I do not put much stock in the story of unemployment workers wandering around, lost, unable to find the jobs that are sitting out there. I put my emphasis on a story of entrepreneurs trying to figure out what sorts of profitable business enterprises can be assembled using the resources available, including the stock of unemployed workers. Nowadays, it’s hard to put together profitable enterprises with low-skilled workers, because you have to cover payroll taxes and health care costs, provide enough take-home pay to make it worth their while to forego government benefits, and compete with other businesses that can hold down costs through automation and/or outsourcing.