10/21/10 7:52 PMThe Three Musketeers vs. Teh Macroeconomic Ignoramuses, Part CXIV - Grasping Reality with Both Hands

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Grasping Reality with Both HandsThe Semi-Daily Journal of Economist J. Bradford DeLong: Fair, Balanced, Reality-Based, and Even-HandedDepartment of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 7080467; delong@econ.berkeley.edu.

Economics 210aWeblog ArchivesDeLong Hot on GoogleDeLong Hot on Google BlogsearchSeptember 18, 2010

The Three Musketeers vs. Teh Macroeconomic Ignoramuses,

Part CXIV

Nick Rowe looks at Catherine Rampell's truly excellent NFIB chart:

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10/21/10 7:52 PMThe Three Musketeers vs. Teh Macroeconomic Ignoramuses, Part CXIV - Grasping Reality with Both Hands

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He muses on the great puzzle: Jean-Baptiste Say and John Stuart Mill could recognizein 1829 that in Britain in 1825-1826 an excess demand for money had produced anexcess supply of currently-produce goods and services--that the problem was not oneof structural unemployment (too much demand for goods workers could not make andtoo little demand for goods that they could) but of deficient demand in general.

So why do so many economists have a problem recognizing that the same thing?

Trained incapacity is the answer.

An education devoted to making sure that they cannot understand the economy that isout there, but only their ideological vision of an economy that simply does not exist.And an education devoted to making sure that they are not allowed to look at the worldoutside the window.

Nick Rowe:

Worthwhile Canadian Initiative: Labor Quality: The Dog that Stopped Barking: Isee something a bit different in that [Catherine Rampell] graph that all the macro-bloggers have been blogging about. Sure, I see the "poor sales."... But what about"quality of labour"?... It's usually, in normal times, seen as a problem by a lot morebusinesses. That tells us something important....

[B]ooms [are] times when it's easier to sell stuff... recessions are times when it isharder to sell stuff.... By "stuff" I mean both goods and labour.... The importantdistinction is between money and everything else.[1] It's money that is hard to"buy" in a recession; everything else is easy to buy.

So firms are telling us that it's hard to sell goods and it's easy to buy good quality

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labour.

Yep. That sounds like an excess demand for money and an excess supply ofeverything else.

Standard Keyneso-monetarist recession. Not structural unemployment, wherefirms can't find the right sort of labour....

In an update Nick sends us to Daniel Kuehn, who

picks up on [my] post and makes explicit a point I really should have emphasisedmore, and repeated. This data goes right against the recalculation story (or what Icall "structural unemployment"). If recalculation was the reason for increased USunemployment, more firms should be saying that finding good quality labour istheir most important problem. But we see the exact opposite. In other words, atthe margin, recalculation looks less of a problem now than it usually is. (Though, ifwe solved the deficiency of demand problem, it might of course become aproblem; which is why I said "at the margin".)

Daniel Kuehn:

Facts & other stubborn things: One more NFIB chart post...: Nick Rowe looks atthe same data and makes a point not many other people have been making: theconcern about "quality of labor" has gotten a lot lower since the beginning of thedownturn. That militates against Arnold Kling's "recalculation story". I wonder ifhe'll pick this up. How does this relate to ABCT? Well, Yglesias thinks ofrecalculation and ABCT as one and the same. I've said in the past that that's alittle strong but there are clearly common threads. And let's be honest -"recalculation story" just means "contracting for specific assets". It's a fairly non-controversial point that does have a lot of common ground with the Austrians too.There's nothing wrong with the way Kling approaches the issue - it's simply aquestion of how important of a factor it is in the current recession. Do we havenear 10% unemployment because of a matching problem or because of somethingelse? Nick Rowe suggests it's something else. So another question now - why thesudden interest in the NFIB survey? I've been pointing to this data for months andYglesias and Krugman have pointed to it in the past too. I guess Rampell has a lotof influence on what gets blogged about.

And Nick sends us to Niklas Blanchard, who:

has found a much better chart to show what I wanted to show, and coloured it into make it clearer. It's all much clearer now. (How come other people can do suchthings??)

Niklas Blanchard:

Sales vs. Labor Quality: In a fairly textbook recession (adverse shock to aggregatedemand), demand for money increases, while demand for everything elseproduced in the economy decreases. This raises the real value of money, producingthe macroeconomic dislocations resulting from what is popularly known as “pricestickiness”. This phenomenon is similarly true (perhaps even more-so) within thelabor market. An increase in demand for money reduces the demand for labor,which increases the quantity (and thus average quality) of labor available.

Nick Rowe noticed this phenomenon in the popular small business survey chartthat is running around the blogosphere. He then said that if he were moretechnically capable, he would produce a graph of “poor sales minus labor quality”.

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I was going to produce one for him, but luckily I found this.... There is such a starkinverse relationship between the two answers that a separate index is hardlynecessary (although I took the liberty of coloring the chart myself). As you willnotice, taxes are always a favorite, and since the start of the Great Moderation,interest rates have hardly been of concern...

[1] As Nick knows, I think this way of expressing it is slightly infelicitious. Right now itis easy to get liquid cash money--the Federal Reserve has flooded the zone withmedium-of-exchange and means-of-payment assets. What it is hard to get are safe-store-of-value assets--the things you want to hold if you are subject to John MaynardKeynes's "precautionary motive" for wanting to hold money. The key is that safe assets--money, Treasury bonds, bonds securitizing conforming mortgages--are "in request"and that economic agents have cut back on their spending to try to build up theirstocks of such assets.

Brad DeLong on September 18, 2010 at 09:41 AM in Economics, Economics:Economists, Economics: History, Economics: Macro, Utter Stupidity | Permalink

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Comments

Ken Houghton said...Finally. A set of economists who know the definition of "Structural Unemployment."

Reply September 18, 2010 at 10:26 AMDrDick said...As Upton Sinclair observed, "It is difficult to get a man to understand something whenhis paycheck depends on not understanding it."

Reply September 18, 2010 at 11:18 AMsave_the_rustbelt said...Structural underemployment has been a chronic problem for a decade and structuralunemployment will be with us whenever this recession really ends. If and whenworkers are rehired many will be working below their skill levels or out of their fieldsentirely. This is in a way good for small business, but hell for workers.

(Yes, selling fishing licenses at Wal-Mart is a job, just a really lousy job compared tomanufacturing or carpentry.)

That poor sales is the dominant concern at this point is belaboring the obvious.

The universe of small businesses is so wildly divergent that drawing broad conclusionsfrom this data is very dicey.

Reply September 18, 2010 at 11:30 AMsave_the_rustbelt said...I should have pointed out an important factor that is not discussed in polite company,anyone who has been a union member is unlikely to be hired for a comparable job.

A former UAW member will probably never get a manufacturing job, no matter howqualified. The employer would rather hire a unskilled worker or two than hire a skilledworker with a union background.

So in a country with millions of former manufacturing workers NAM is complainingabout the lack of manufacturing workers. Structural? Call it what you will.

Reply September 18, 2010 at 11:50 AMJed Harris said...You say "Trained incapacity is the answer" and I think you are right as far as that goes.

But as an economist, you are trained to build equilibrium models, so I ask you: "Why istrained incapacity the equilibrium in the economics discipline?" Or even weaker "Whyis trained incapacity a possible equilibrium in the economics discipline?"

From the perspectives of future disciplinary health OR social welfare contributions byeconomists OR social policy toward economists (Ignore / Abort / Retry) these seemlike the important questions.

Reply September 18, 2010 at 11:59 AMDrDick said in reply to Jed Harris...See mine at 11:18.

Reply September 18, 2010 at 12:06 PMRob said...How can it be a skills mismatch as long as H1-B visas are not fully used?

Reply September 18, 2010 at 01:28 PMRobert Waldmann said...

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I'm kicking myself. I noticed the quality of labor fact and thought that it proves (again)that N Kocherlakota is full of it. But I didn't blog about it.

I just add that missmatch unemployment can also appear as a problem with the cost oflabor. In theory they aren't separate problems -- you can always hire high qualityworkers if you offer a million an hour and almost all firms will have problems withlabor quality if they hire at the minimum wage.

fortunately the graph correctly puts one right above the other and shades themdifferent shades of blue. Therefore it is easy to see that small firms are not refrainingfrom hiring because they are suffering from the blues.

I'd add that I suspect that the large number who talk about "taxes" and "governmentrequirements" are like a pool of service people asked about their favorite and leastfavorite foods. The number 1 favorite food was "whole milk" and the least favorite was"skim milk." It's obvious the responses were strategic. They hoped they could convincethe brass to feed them whole not skim milk and knew that they weren't going to getspam replaced with sirloin.

I think it is clear that many small businessmen are describing problems which policymakers can do something about -- cut taxes and deregulate and they like that policyresponse. I'm not saying their lying. People naturally complain about things which canbe changed. Oh hell people naturally complain about taxes. Nothing to see there.

OK orange. I mean just look, the fraction complaining about insurance droppeddramatically exactly when Obama was elected. I'd say the small businessmen were overoptimistic about HCRs chances (although right in the end).

Both on the blues and the orange, I'd like to see a graph of naming things as "animportant problem" so that the total does not have to add up to 100%. I will blog onoranges -- locking the barn door after the Canadian horse scooped me.

Reply September 18, 2010 at 02:39 PMJed Harris said...@ DrDick: Arguably you are right that "who pays the piper calls the tune". I'd like toknow if DeLong agrees or if he disagrees what explanation he'd propose.

But there's a gap here. It isn't clear to me why the funding sources for economics wantto deny the possibility of a "general glut" (to use the evocative terminology of Say's andMill's era). Quite possibly admitting gluts are possible would indeed cut against thoseinterests but I can't make that connection myself.

I'd also like data. How much of economists' incomes come directly or indirectly fromentities that would benefit from to denying the possibility of a "general glut"? (Veryrough numbers would be fine.) Identifying the funding channels that contribute tothese problems would be a good step toward destroying them.

Finally, economics is impressive among academic disciplines in its ability to imposecognitive impairment on its practitioners: amnesia with respect to its own historicalunderstanding, and blindness with respect to recent phenomena. What accounts forthese unusual disciplinary powers? Maybe at least partial immunization is feasible.

Reply September 18, 2010 at 04:06 PMDrDick said in reply to Jed Harris...I would argue that the problem reflects the fact that, in economic terms, the market forfalse information is far greater than the market for accurate information and that thisimbalance reflects the benefits of each to the wealthiest Americans and corporations.

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Reply September 18, 2010 at 04:28 PMJed Harris said...@ DrDick,

Doesn't seem like "the market" puts a premium on false information about everything.There's a premium for accuracy when it helps enough sufficiently powerful or wealthypeople make money.

However maybe we can infer that accuracy in academic economics doesn't help peoplemake money -- at least not enough to outweigh the right sort of systematic inaccuracy.

This is getting close to the sort of equilibrium argument I was looking for. Tosummarize our hypothesis: - There's a fairly "efficient market" in economic theory. - This market values certain ideological uses of academic theory (especiallymacroeconomics) much more highly than its policy uses. - To the extent that theories serving these uses conflict, the market prefers theoriesthat support the right ideological or political positions to theories that are accurate andtherefore good for policy decisions. - From the perspective of the market, in this area "a good economist is one who staysbought" -- who endorses the ideologically useful theories regardless of circumstances. - The interesting cognitive impairments that we have recently seen amongmacroeconomists are predictable outcomes of market pressures to produce "goodeconomists".

I guess unlimited support of ideological positions may be a kamikaze mission on thepart of any given economist. From the market's point of view this is OK since they arereplaceable, and don't even get workman's comp for career damage in the line of duty.

Unfortunately this hypothesis predicts we won't see a spate of papers with titles like"The market for bias in economic models" even though the necessary data and theoryquite possibly are available. But we can hope.

Reply September 18, 2010 at 10:00 PMDrDick said in reply to Jed Harris...Ding!

Reply September 19, 2010 at 07:04 AMComments on this post are closed.

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Me: Economists:

PaulKrugmanMark ThomaCowen andTabarrokChinn andHamiltonBrad Setser

Juicebox

Mafia:

Ezra KleinMatthewYglesiasSpencerAckermanDanaGoldsteinDanFroomkin

Moral

Philosophers:

Hilzoy andFriendsCrookedTimber ofHumanityMarkKleiman andFriendsEricRauchwayand FriendsJohn Holboand Friends

Why Macro MattersSeeking Alpha - Oct 17, 2010No wonder Brad DeLong is always saying Krugman's right about everything. I agree,the Fed (like the Supreme Court) clearly does respond at least somewhat to ...Related Articles » « Previous Next »

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