Say's Paradoxe and the Paradox of Jean-Baptiste Say

Ces moyens, en quoi consistent-ils ? En d'autres valeurs, d'autres produits, fruits de leur industrie, de leurs capitaux, de leurs terres: d'où il résulte, quoique au premier aperçu cela semble un paradoxe, que c'est la production qui ouvre des débouchés aux produits.

One cannot escape the impression that the promulgators of what has come to be known as "Say's Law" may not have actually read Say's Treatise. If the translation is any reflection on the original French, Say wrote beautifully. He was also in possession of an intellect generous enough to have not been bothered by the hobgoblin of consistency. At one point in the Introduction, he writes, "In any investigation, to treat dissimilar cases as if they were analogous, is but a dangerous kind of empiricism, leading to conclusions never foreseen." Later on, he protests, as if there was "a perfect analogy between the finances of a nation and those of an individual":

...a statesman who should venture to affirm, that there is a perfect analogy between the finances of a nation and those of an individual, and that the same principles of economy should regulate the management of the affairs of both, would have to encounter the clamours of various classes of society, and to refute ten or a dozen different systems.

In objecting to Ricardo's reasoning "upon abstract principles to which he gives too great a generalization," Say observes:

The science of political economy, to be of practical utility, should not teach, what must necessarily take place, if even deduced by legitimate reasoning, and from undoubted premises; it must show, in what manner that which in reality does take place, is the consequence of other facts equally certain. It must discover the chain which binds them together, and always, from observation, establish the existence of the two links at their point of connexion.

It is fitting, then, that Say introduces the idea that production opens up the opportunity to sell products as un paradoxe rather than une loi générale;

A man who applies his labour to the investing of objects with value by the creation of utility of some sort, cannot expect such a value to be appreciated and paid for, unless where other men have the means of purchasing it. Now, of what do these means consist? Of other values of other products, likewise the fruits of industry, capital, and land. Which leads us to a conclusion that may at first sight appear paradoxical, namely, that it is production which opens a demand for products.

In Chapter Seven, Say rehearses another application of this paradox, pertaining to the effects on employment of the introduction of labor-saving machinery:

The multiplication of a product commonly reduces its price, that reduction extends its consumption; and so its production, though become more rapid, nevertheless gives employment to more hands than before.

As applied to labor, the paradox can be restated as "a cheap market will always be full of customers," as Dorning Rasbotham summed it up 23 years before publication of Say's Treatise. Sixty-two years later, W. S. Jevons was to refer to this argument as "a principle recognized in many parallel instances.":

The economy of labour effected by the introduction of new machinery throws labourers out of employment for the moment. But such is the increased demand for the cheapened products, that eventually the sphere of employment is greatly widened.

Jevons. of course, went on to apply Say's (or Rasbotham's) paradoxical principle to fuel: the "Jevons Paradox" (Polimeni, et al. discussed the connection between "Say's Paradox" and Jevons in The Jevons Paradox and the Myth of Resource Efficiency). As I wrote a little over three years ago, "the Jevons Paradox is a special case of Jean-Baptiste Say's Law of Markets..." I should have wrote, Say's alleged law.

Imagine a Möbius strip made from a piece of paper that had "law" written on one side and "fallacy" on the other (or "myth" and "reality"). When joined together, the two sides become one continuous side with a single edge: this is the paradox. Now imagine a second Möbius strip made from a piece of paper with "economy of fuel" written on one side and "economy of labor" on the other.

Say's Bye-Law

Il est bon de remarquer qu’un produit terminé offre, dès cet instant, un débouché à d’autres produits pour tout le montant de sa valeur. En effet, lorsque le dernier producteur a terminé un produit, son plus grand désir est de le vendre, pour que la valeur de ce produit ne chôme pas entre ses mains. Mais il n’est pas moins empressé de se défaire de l’argent que lui procure sa vente, pour que la valeur de l’argent ne chôme pas non plus. Or, on ne peut se défaire de son argent qu’en demandant à acheter un produit quelconque. On voit donc que le fait seul de la formation d’un produit ouvre, dès l’instant même, un débouché à d’autres produits.

Google translates un débouché as "an outlet." In the above paragraph, Jean-Baptiste Say said nothing about any "law." He did, however, use terms such as désir and empressé, which would seem to refer to subjective drives rather than to objective causes.

In his introductory textbook, Principles of Economics (1927), Raymond Bye wrote, "...every product is a demand for, and a means of purchasing, another product.... The total demand for goods is the total goods produced" (emphasis in original).

This is not to unduly credit Bye with originality. The injunction against the possibility of overproduction was already referred to as "Say's Law" by Karl Rodbertus in 1898 (Overproduction and Crises) and by John Badlam Howe in 1878 (The Political Economy of Great Britain, the United States, and France, in the Use of Money). Howe asserted that most writers  in the United States and Britain (presumably on economics) repeated "Say's abstract law." Both Rodbertus and Howe, however, were intent on refuting the alleged law they attributed to Say.

In fact, unoriginality is the mode here. Say didn't invoke a law. Those who subsequently repeated Say's Law don't appear to have given it that name. The appellation comes from critics. Perhaps the allusion to supposed law-like inevitability is meant to be ironic.

Are there economic laws?

Jean-Baptiste Say Did Not Believe In Say's Law

There has been a lot of discussion recently on the econoblogosphere and the History of  Economics list about Say's Law, much of it quite heated.  I just want to add one relatively minor point: Jean-Baptiste Say did not believe in Say's Law.  To be more precise, while he made many statements that look like it, and I would say that he believed in it in the long run and maybe even the medium run, he was fully aware that it may not hold in the short run.  He provided numerous examples of exceptions to it from historical cases, situations where for one reason or another citizens would hoard cash and not spend it.  So, he was very aware that in the short run supply may not lead to an equal demand.  A general glut may be possible, at least for awhile.

BTW, while his law regularly is invoked by those who deny any efficacious role for fiscal policy in macroeconomic stabilization, during the post-Napoleonic War economic slowdown and high unemployment, he in fact sided with Malthus rather than Ricardo and supported public works spending to, yep, you guessed it, help to those who had become unemployed as a result in the reduced military spending with the end of the war.  Say was in fact quite practical about public policy and not just someone constantly reciting his own law to deny reasonable policy.  But one rarely hears of this.

Barkley Rosser

Fred Hiatt Doubles Down On Dissing Obama Over Social Security Indexation

Two days ago I dissed Washington Post's Editorial Page Editor, Fred Hiatt, for attacking President Obama for dropping the proposal to change the COLA index for social security to the chained -C-CPI-U measure, that would reduce future benefits by an estimated 0.3% per years.  I said he had "lost his cookies."  I shall not reiterate the arguments there, but now note that he has doubled down today in a signed column on the matter entitled "Is there Change Obama Can Believe In?"  This column does cover other issues, mostly Syria where Hiatt complains that Obama has not supported "free markets and democracy" there, while not remotely addressing how difficult and complicated that issue is.  He also lists a boilerplate set of issues that he says Obama is supporting, but dismissively notes that these are popular, with some of them even supported by Republicans.

However, he starts with his complaint about Obama dropping the chained index proposal, which clearly has him really upset (those darned cookies).  He quotes Obama from 2009 and also  from 2010 stating that (from 2009), "To preserve our long term fiscal health we must address the growing costs of Medicare and Social Security."  He does briefly admit that "Defenders would say that...he's done his bit for entitlement reform with cost-bending measures in Obamacare."  Hmmm, "bit"?  In fact, the change in the medical care cost curve (which also affects Medicaid) has completely transformed the future deficit outlook, drastically reducing those projections.  The few percents impact the chained index change would make would be utterly trivial by comparison, but this is not good enough for Hiatt.

Two further points.  One is that he is all upset that supposedly in 2011 for political reasons "Obama cold-shouldered the fiscal commission he appointed..."  That would be the Bowles-Simpson one that Hiatt as a deep-dyed Washington VSP just loved to bits.  However, as Dean Baker has repeatedly noted, that commission never issued a formal report.  Why?  Because some of its GOP members, led by Paul Ryan, refused to sign off on it because it (eeeek!) contained tax increases.  There never was a formal report, and what Hiatt is referring to was a statement put out by Bowles and Simpson, but that document never had any official backing from the commission.  Getting worked up about Obama's reaction to it is a joke, and, of course, until  recently, Obama was offering the essence of the deal, this chained index proposal if only Republicans would accept some tax increases.  But, they have said no, so why is Hiatt getting so indignant that Obama has pulled back on his offer?

The other is the idea that somehow Obama got elected to propose this.  In fact, during the primary campaign against Hillary, he shifted his position to one of strictly defending Social Security as it stood and stands.  Thus, for all Hiatt's whining, Obama has returned to his position during his initial run for president: to preserve and protect Social Security as it is.  Hiatt and his fellow VSPs need to drop their silly hysteria over the Social Security issue, the sooner the better.

Barkley Rosser

WaPo's Fred Hiatt Loses His Cookies Over Obama Abandoning Chained CPI For Social Security Indexation

Several commentators have already applauded President Obama for not including a proposal to use the C-CPI-U (aka "chained CPI") price index for COLA adjustments of US Social Security payments, including Bruce Webb, Paul Krugman, and Dean Baker.  Longtime Social Security defender Webb declares "we won," referring to those opposing cuts in future SS benefits.  Krugman calls it "the end of BowlesSimpsonism." Dean focuses on a Washington Post (aka "WaPo") news story on the matter, finding it just falling all over its own face with silly claims and analysis.  I am in complete accord with all of them on this matter, but want to note further the discombobulation and outright visceral anger in an unsigned editorial column today in WaPo that is certainly by Fred Hiatt, WaPo editorial page editor, and one of the most relentless and influential of Washington VSPs pushing for cutting future Social Security benefits in any way possible.  It is because of him that the WaPo editorial page has housed several otherwise nominally liberal columnists who have pounded away over and over on this matter spouting his views, including Robert J. Samuelson and Ruth Marcus, none of these people exhibiting a shred of understanding how distorted and silly their position has been over time.

So, Hiatt's editorial is really seething.  The subtitle, referring to Obama, is "His surrender on entitlements will make a bad situation worse."  After noting his backing off from including the chained CPI proposal (which he still officially supports in principle), Hiatt intones that "This is a huge disappointment,"  this followed shortly by the claim that this will cost "$162.5 billion over the next decade."  Somehow he fails to note that this amounts to about $16 billion per year, on the order of 3-4% of the US current budget deficit, in short, a drop in the bucket.  But who cares, this is a matter of Hiatt not getting his way here, goshdarnit! 

He continues that "Mr. Obama's rationale for taking the idea out of his budget was openly political," which is true, except that the actual economic case that the C-CPI-U is appropriate for being applied to old people has never been made and in fact does not exist, there being an experimental CPI for the elderly, a chained version of which would clearly be superior, but would raise payments rather than cut them, so must be rejected by the "screw the old people" crowd that Hiatt has been leading for so long.  After noting that leftier Dems are pushing for benefit increases and also accepting that Republicans simply are not going to accept the tax increases on the wealthy that Obama had asked for in exchange for his past support of the C-CPI-U, Hiatt complains that facing possible loss of Dem control of the Senate in November, "Mr. Obama has apparently concluded that the expedient course is to bash Republicans rather than to resist bad policy ideas emanating from his own camp," failing to note that Obama is not supporting this benefit increase proposal by lefty Dems and completely ignoring that while Republicans claim never to support tax increases, they did so over a year ago in voting to undo the fica tax cuts that had been part of the stimulus package.

Prior to 2008 there was a case to made for BowlesSimpsonism in broad terms, some sorts of spending cuts to be traded off for some sorts of tax increases in order to reduce the large budget deficits that had emerged during the W. Bush presidency following the surpluses he inherited, thanks to his tax cuts for the wealthy plus wars in Afghanistan and Iraq, etc.  Nothing ever came out of those commissions officially because at least some Republicans simply refused to sign onto any tax increases no matter what, even though later they were eager to make the regressive hike in fica taxes without batting an eyelash over their hypocrisy or being taken to task for this by practically anybody in the media, and certainly not Mr. Hiatt or his WaPo Social Security bashers.

However, even prior to the crash when all this whomping up and down about deficit reduction became ridiculous, these commentators, including Bowles and Simpson themselves, continued to tell horror stories about future growth in entitlements, which were ovewhelmingly due to projected increases in Medicare and Medicaid costs, but then say nothing about doing anything about them and focus in public commentary on Social Security, in effect making a political judgment that Republicans would be more willing to raise the regressive fica tax in exchange for cutting future benefits, despite this not being remotely a serious problem in and of itself, rather than doing anything about reining in future medical care cost increases.

The situation has totally changed on several fronts, but Hiatt and his gang of outraged remain stuck in that now ancient and irrelevant time.  Amazingly enough, despite its flaws, Obama's ACA appears to have bent the curve of medical care cost increases, or at least that curve has bent, even if it is not entirely due to Obamacare, that horror of horrors.  No mention of this in Hiatt's editorial, but this has completely undone the hysterical future stories about deficits, with this being the real reason BowlesSimpsonism is now dead as a doornail, on top of the reality that austerity in Europe has led to renewed recession so that Hiatt's pushes for more austerity are simply silly, despite all his self-righteous huffing and puffing.  

Let me close by simply supporting that the most appropriate index be used for Social Security COLA adjustments, an argument that has simply disappeared in this flurry of political flying back and forth.  Without doubt this would be the chained version of the experimental CPI for the elderly.  Yes, it is true that chained indexes are more accurate than the unchained ones, but the one that should be used is the one that really measures cost-of-living changes for Social Security recipients.  That would be this experimental one for the elderly.  But consideration of it has never even been on the table.

As it is, maybe Hiatt and his pals will stop and look more carefully at their general push for cutting future benefits for Social Security recipients, now that the C-CPI-U verson of the chained index seems to have been removed from the table for now.  If they are really worried about improving future SS budgets, let them call for raising the income cap on fica taxes, which would help alleviate the general income inequality situation we face, although at the moment we do not need any further moves to austerity.  As it is, I have not seen any of them mentioning that idea, although Republicans have been keen on cutting benefits for better-off seniors, understanding that this would undermine political support for the program in the future.  Even if we cannot seriously hope for greater sanity or even reasonableness on the part of these VSPs, at least for now it looks like their threat to damage future Social Security benefits has receded, and for that at least we can be thankful.

Barkley Rosser

Krugman on HearSay Economics

"The fact is that the fallacy Keynes called Say’s Law was and is a powerful force in economic discourse, seriously hampering our ability to respond rationally to economic troubles."

Sandwichman said it first: Yasraeh's Law and Say against Say: lower wages won't clear labor markets (It's the law!)

On Cap & Trade and the Price of Emissions

Mark Thoma featured a very interesting discussion of the lack of political will to impose either Pigou taxes or cap & trade by Jeff Frankel, which led to some commenter who must have it in for Paul Krugman who a few years ago sensibly wrote about James Hansen:

he’s now engaged in a misguided crusade against cap and trade, which is — let’s face it — the only form of action against greenhouse gas emissions we have any chance of taking before catastrophe becomes inevitable. What the basic economic analysis says is that an emissions tax of the form Hansen wants and a system of tradable emission permits, aka cap and trade, are essentially equivalent in their effects ... A tax puts a price on emissions, leading to less pollution. Cap and trade puts a quantitative limit on emissions, but from the point of view of any individual, emitting requires that you buy more permits (or forgo the sale of permits, if you have an excess), so the incentives are the same as if you faced a tax. Contrary to what Hansen seems to believe, the incentives for individual action to reduce emissions are the same under the two systems ... The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price. Yes, this means that if some people do more than expected to reduce emissions, they’ll just free up permits for others — which worries Hansen. But it also means that if some people do less to reduce emissions than expected, someone else will have to make up the shortfall. It’s symmetric; there’s no reason to emphasize only one side of the story. And as far as I can see, the question about uncertainty is secondary; the fact is that cap and trade works. Hansen admits that the sulfur dioxide cap has reduced pollution, but argues that it didn’t do enough; well, it did as much as it was designed to do. If Hansen thinks it should have done more, he should be campaigning for a lower cap, not trashing the whole program.

There is one difference between the two regimes, which we need to mention in light of some nonsense from Stanley Reed and Mark Scott:

Still, Europe’s carbon market, a pioneering effort to use markets to regulate greenhouse gases, is having a hard time staying upright. This year has been stomach-churning for the people who make their living in the arcane world of trading emissions permits. The most recent volatility comes on top of years of uncertainty during which prices have fluctuated from $40 to nearly zero for the right to emit one ton of carbon dioxide. More important, though, than lost jobs and diminished payouts for traders and bankers, the penny ante price of carbon credits means the market is not doing its job: pushing polluters to reduce carbon emissions, which most climate scientists believe contribute to global warming.

In terms of Paul’s demand curve for emissions, Reed and Scott were talking about a drop in this demand curve – likely generated by the Great Recession and reduced economic activity that would lead to pollution. Paul captured this with his:

If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.

Now had policymakers decided to adopt the suggestion to lower the cap, which Jeff notes isn’t exactly the current thread of Tea Party politics and global warming deniers, the price of emissions would have gone back up. Or we could have had Hansen’s fee and dividend program – which is essentially Greg Mankiw’s Pigou tax – with the same effect. But consider the alternative shock to Paul’s demand for emissions curve, which did occur at least on a global basis when China and India developed so rapidly at the turn of the century. The demand for emissions went up. Under the tax proposal championed by Hansen, we would see a rise in polluting activities as the price remained constant. Had we imposed globally a cap & trade regime – the price of emissions would have risen instead.

Senator Jeff Flake – NPR Free Rider

Paige Lavender provides us with this tidbit:

Despite voting against providing federal funding for National Public Radio while serving in the House of Representatives, Sen. Jeff Flake (R-Ariz.) admitted he's "an NPR listener" during an appearance on “Wait, Wait … Don’t Tell Me” on Feb. 15.

Hey – I also free ride National Public Radio. But then I understand that such free riding is an example of the positive externalities that result from the production of public goods. The private market tends to undersupply such public goods, which is why we want the government to fund them. And yet Senator Flake chooses to vote against such funding even as he enjoys NPR?

The Jilted and the Landless

Britain has gone to pot and its the fault of the baby boomer generation says two media journalists (Ed Howker from 'The Spectator' magazine and Shiv Malik from the 'Sunday Times' and 'Prospect' magazine).  If it wasn't for the short-term horizons and rampant consumerism of the British people from my generation then those young adults of today - those born from 1979 and later - would be enjoying a good supply of cheaper, better quality housing, as well as jobs that paid a reasonable remuneration and were also secure.  It is claimed that the denial of those things has led to their "postponement of adulthood" and a lifestyle of poverty and aimlessness. [1]

The crisis in Britain, as described in Malik and Howker's book 'Jilted Generation' is particularly relevant because it is also mirrored in most so-called 'first-world' nations today.  I have no real argument against their description of the predicament of the post 1979ers but a lot of the analysis of this book lacks depth and historical understanding.

It may be quite normal for young adults to pin the blame for things gone wrong on the generation who came before and I can relate to that.   Who would argue against the proposition that there aren't, indeed, huge numbers of baby boomers who should be accepting a great deal of responsibility for the dire situation that our offspring find themselves in now.  Many boomers have wielded high levels of decision-making power in our political and social institutions.

Howker and Malik, however, fail to describe the global trends and forces that acted upon the their parents' generation. In addition, they fail to acknowledge the extent to which many baby boomers very actively engaged in a rebellious backlash against the very unsustainable materialistic lifestyle and attitudes that these same authors rage against now.  There did exist, after all in the 1960s and 1970s, a notable counter-culture stratum of society, and it wasn't ever all about drugs and other politically naive distractions.  One of the most fundamental aspects of the youth counter-culture, for instance, was the 'Back to the Land Movement'. [2]  In the 1960s and 1970s young people flocked to rural areas with the aim of creating a simpler, better way of existing free from many of the constraints of what they saw as a dysfunctional and (ultimately) unsustainable mainstream society.  Though 'back to the land movements' have existed long in time

"...what made the later phenomenon of the 1960s and 1970s especially significant was that the rural-relocation trend was sizable enough that it was identified in the American demographic statistics..."[2]

A strong belief existed  in the 1970s that a movement onto rural land would result in lower housing costs, better living standards, improved health, and general wellbeing.  One would engage directly in organic agriculture and home building and, through these actions, earth-centred lifestyles and communities would become self-sustaining.  The hope existed that a new culture would emerge and spread quickly and widely enough to avoid a 'limits to growth' catastrophe in the new millennium.

Needless to say, that dream didn't pan out.

Time and opportunity constraints mean that the full explanation of political and social trends that begin to explain the failure of counter-culture (such as concentration of power, consumerisation of politics etc) cannot be explored here.  However, the issues that relate to the availability/cost of land are, perhaps, where it might be the most fruitful for an inquirer to explore reasons for the degeneration in civil life and the severe depletion of common wealth (in the 'rich' industrialised nations at least).

Land, the authors of 'Jilted Generation' acknowledge,  is "the major cost in the purchase of a home" [3].   Lack of land (in terms of decentralised ownership) may be the very reason why 93% of homes built in London between 2000 and 2010 have been "poky one and two-bedroom flats." [4]  The fact that less than one percent of Britain's population own it entire base of farmland [5] might explain why a 'back to the land movement' cannot exist there.

For surely land is the only form of genuine cultural escape when we find ourselves living out an empty materialism - expressed as 'consumerism' - in a deprived 'dollars-and-cents' reality.
Brenda Rosser

REFERENCES:
[1]  'Jilted Generation - How Britain has Bankrupted its Youth' by Ed Howker and Shiv Malik.  Icon Books Ltd, Omnibus Business Centre.  Published 2010.  ISBN: 978-184831-198-5

[2] Back-to-the-land movement, Wikipedia
 http://en.wikipedia.org/wiki/Back-to-the-land_movement

[3]  Page 41:   'Jilted Generation - How Britain has Bankrupted its Youth' by Ed Howker and Shiv Malik.  Icon Books Ltd, Omnibus Business Centre.  Published 2010.  ISBN: 978-184831-198-5

[4]  Page 213:   'Jilted Generation - How Britain has Bankrupted its Youth' by Ed Howker and Shiv Malik.  Icon Books Ltd, Omnibus Business Centre.  Published 2010.  ISBN: 978-184831-198-5

[5]  Reclaim the Fields
Ed Hamer discovers a European youth movement taking action on the issue of access to agricultural land.  http://www.thelandmagazine.org.uk/articles/reclaim-fields

Paul Krugman Incorrectly Claims Credit For Calling Worsening Income Distribution "Fractal"

Paul Krugman has just claimed primacy in identifying a lengthening upper tail in income distibution to mean that income distribution is "fractal."  He did so in 1994 in his book Peddling Prosperity.  I have just tried to make the link, but as so often seems to happen, it is not working. So, here is the url that any of you can go get at to check, http://krugman.blogs.nytimes.com/2014/02/11/me-and-me-blogging-inequality-metaphor-division . (Maybe it will work now)

Anyway, it may well be that he independently came up with this link.  But he certainly was not the first one to make the link.  That would be the person who coined the term "fractal," namely the late Benoit Mandelbrot in his 1982 book, The Fractal Geometry of Nature. Among other matters he discusses in that book is Pareto's power law distribution that was initially developed to model income distribution, with Pareto inaccurately arguing that he had found a universal law.  Such distributions are notable for their upper tails that are longer than such alternatives as the log-normal or Boltzmann-Gibbs.  As it was, Mandelbrot used the term "fractal" as applying to such power law distributions, so he did it first.

Barkley Rosser

Pseudonym 'Myrtle Blackwood'

I'm writing under a pseudonym 'Myrtle Blackwood' (the names of two of Tasmania's most popular trees) in order to avoid name confusion with another 'B Rosser' posting on Econospeak.
Brenda Rosser

Nelder: Peak Oil Isn't Dead

Chris Nelder's article: 'Peak oil isn't dead; it just smells that way' is a helpful and relatively recent update on the peak oil discussion.

Since at least 2005 there has been a massive increase in the financial investment to fund production in oil.  This has been paid for by higher prices for fuel.  The result, however, has been merely a rough global plateau of production in crude oil since that time.  Global demand keeps rising as population and expectations rise also.  So other forms of liquid fuel (such as ethanol) have been employed to supplement supply.  However the energy intensity and the energy return on energy invested (EROEI) of these alternative fuels is significantly lower than for crude oil.

The world, in summation, already has an energy-related transport crisis in the respect that the fuel we use to run our vehicles is now much, much more expensive than it was compared to a decade ago and the prices continue to rise at a faster rate than our incomes do.  The result can only be reflected in a lower general standard of living without changes in lifestyle.

Does Romneycare Tell US About What The New CBO Report Means For Employment?

Maybe, but not necessarily.

So, we have just had one of the worst outbreaks of misreporting of a careful study, followed up by a whole new political propaganda meme that we shall certainly hear at least through the fall election.  "Obamacare will cost 2.5 million jobs!"  Oh gag.  So, sure, most economists and at least some commentators caught that this was about labor supply rather than the far more unpleasant labor demand side of things.  Nevertheless, some economists and others have continued to argue that the labor supply side of things is still a big deal, a problem that we should all be shaking in our shoes about, indeed, yet again meaning we should be rushing out to repeal this awful socialist horror.

Prominent in this is a Wall Street Journal column yesterday by Joseph Rago, who praises the labor supply studies of Casey Mulligan, long one of the advocates of the "recession is due to lazy workers" meme [sorry, failed to make link work].  Rago has him "exposing Obamare" along with denunciations of both David Cutler and David Gruber for supposedly telling everybody pollyanna stories about jobs and Obamacare.  Shame on them!  They are now supposed to go hide their heads under covers and never comment anywhere ever again on this, now that Mulligan has shown them up.  Indeed, he estimates that the labor supply effects will be twice what the CBO says, those latter economists just too wimpy to face the Awful Facts.

However, even if these labor supply effects are as strong as claimed, whether by CBO or Mulligan, for quite some time to come there is little doubt that the employment problem we face is one of insufficient labor demand.  To the extent workers not fearing loss of health care cut back their labor supply, there will be plenty of unemployed ones willing to step forward to replace them.  Maybe there is a longer run problem of less potential output in the future, although personally I suspect that the reduction in capital investment we have been experiencing will reduce that future potential more than any reduction in labor supply due to these changed incentives related to health care availability.

Indeed, as Gruber and others have argued, I think that it is useful to look at what has happened in Massachusetts since Romneycare was adopted in 2006.  While a 2011 study from Suffolk University claimed there would be job losses due to higher health insurance costs, the experience there has simply not supported fears of impediments to job creation.  TalkingPointsMemo reported on an Urban Institute study that found MA job growth reasonably comparable to that of selected states and national averages [OK, another failed effort to link there, sorry].  Last year it was in line with national averages and greater than in any state northeast of Pennsylvania.  One can argue that MA has special advantages due to its high levels of human capital and excellent universities, but job creation simply has done very well and looks to continue to do so, eight years out from adopting Romneycare.

Now there are some complications here that must be noted when looking at Romneycare in comparison with ACA.  While I do not think this explains much because what is going on with observed employment is much more demand-side than supply-side determined, Mulligan has claimed as of last August that Romneycare has substantially fewer supply-side disincentives than ACA.  Maybe, but again, not a big deal, at least not anytime soon. 

The other matter actually tilts in the favor of ACA.  As noted in regard to the Suffolk U. study, the biggest criticism of Romneycare, also reflected in public polling, has been its failure to hold down insurance costs, despite it being in general popular.  However, on this matter, Jonathan Chait notes that it had no mechanisms that made any effort to hold down costs, whereas ACA does have such mechanisms, and whether or not the apparent bending down of the cost curve we have been seeing nationally is due to it or other factors, we seem to be seeing a different outcome than in MA.  Indeed, one of the less noted points in the CBO study is that it appears that the average premium on the new exchanges is coming in at 15% less than what was projected a few months ago, although obviously not all the data is in on that front.  Nevertheless, the main lesson from Massachusetts is that probably Cutler and Gruber are more right than Mulligan or the misdirecting headline screamers about the jobs impact of ACA.

Glad I managed to make one link work.  Sorry somehow not to get others to do so.

Barkley Rosser

Will Future Fed Policy Be Driven By Behavioral Macroeconomics?

Arguably it already is, although this has not been commented on particularly by many, but with the accession of Janet Yellen to be Fed Chair, the question becomes more pressing.  Yes, she will be surrounded by many who do not agree with her views on the FOMC and among those attending meetings of it not on it, but as Chair she will have more influence than in the past, and her husband George has declared that there is almost no difference in their views on macroeconomics.  While both of them have been labeled as "Keynesians," and some of their work has influenced the New Keynesian DSGE models now dominant in central bank research shops, increasingly Akerlof has identified himself as being  behavioral macroeconomist, with this even in the title of his Nobel Prize address published in the AER in 2002, "Behavioral Macroeconomics and Macroeconomic Behavior," reinforced a few years later when he argued that norms are the "The Missing Motivation in Macroeconomics" in his 2007 Presidential address to the AEA, these justifying a somewhat more Keynesian view of macroeconomic policy.

Of course, despite his claims about the closeness of their views, we must be careful not to impute too much from his views to hers, given that she will even more so be in an intense environment dealing with difficult situations and other decisionmakers who do not necessarily agree with her views, with the stock market decline on her first day in office and the apparent crises in foreign nations such as Turkey and Argentina putting her on the firing line immediately as she enters office. We should not expect her always to be following his line or views.  Nevertheless, looking particularly at their joint work, but also to some extent at his, may provide some orientation to her deeper views, whatever may come out when decisions must be made.  And, again, I suspect that the answer is that Fed policy already reflects behavioral macro views and arguments more than most realize, even if her moving to the top does not necessarily incease this by much.

Obviously foundational to all of this is his Nobel Prize winning paper on the market for lemons in 1970, formalizing the model of asymmetric information that had been batted around for some time by the likes of Hayek, Stigler,and Vickrey.  This would underpin some of his earliest and most important work with Yellen in such papers as theirs on efficiency wages in 1984 in the AER, and their famous "near rational" model of business cycles from the QJE in 1985.  Both of these would provide the underpinnings for sticky wage-price models, including "Calvo fairy" type gradual adjustment models that many hard core Minnesota type DSGEers ridicule for their lack of rigorous foundation.  However, in the original asymmetric information models the agents are rational, but boundedly so due to their imperfect asymmetric information.  But the key is that they know that they have such imperfectly asymmetric information.  Thus the buyer of a used car will pay less because s/he knows that s/he cannot know all the defects of the car, and employers will willingly pay current workers more than their MP so as to keep them because they know that they know more about the abilities (and lack thereof) of their current workers than they will of any new hires, at least up front.  The use of rules of thumb to deal with informational limits was shown to have first order effects on output with a monetary shock, even when such rules only have second order effects on the firms using them.

However, from a fairly early point, more behavioral aspects crept into their joint work, particularly as they recognized the role of norms and of how agents view each other, particularly in labor market settings.  One of the most important of these insights was in the paper on fairness and unemployment in 1988 in the AER.  This recognized what is going on with the widespread empirical phenomenon of the downward stickiness of nominal wages, with survey evidence gathered by Bewley and others that employers recognize that cutting nominal wages damages morale.  Workers considering what is "fair" implies application of worker norms, which reinforce both that downward stickiness and also the effiiciency wage argument.  Again, while these arguments can be seen feeding into NK DSGE modeling, they also implied further effects and policies.

The latter came about with the later paper by Akerlof, Dickens, and Perry at Brookings in 1996 when Yellen was on the Board of Governors, "The Macroeconomics of Low Inflation."  This paper must be seen as the origin of the nearly global adoption of a 2% target rate of inflation.  The argument derives from that strong tendency to downward stickiness of nominal wages with the microeconomic need for there to be real relative wage adjustments over time. So, these must come about from arguably "excessive" wage increases for some.  In the end it was a matter of judgment that said that a 2% inflation rate was the "Goldilocks" amount, not too much, not too little, that could bring about these efficiency labor market wage adjustments while keeping inflation low.  It is now well known that it was Yellen that year who convinced Alan Greenspan to switch to supporting the 2% inflation target from his previously desirved zero % target, with this later being taken up by Bernanke and many others around the world.  In this regard, behavioral macro is already profoundly influencing not just Fed policy, but macro policy around the world.

I shall conclude by simply listing some themes mentioned by Akerlof in his Nobel address and his AEA presidential address, which we should assume will be at least somewhat supported by the new Fed Chair, even if not necessarily all the time and fully vigorously when too strongly opposed.  So, in his his Nobel address he mostly recounted the points made above about efficiency wages and second order effects.  He exteneded these to question the solidity of the natural rate of unemployment argument, noting that deflation stopped after awhile in the Great Depression.  He also supported Shiller style arguments about asset markets being subject to irrational bubbles, something that may explain her being the first among top Fed policymakers to openly worry about the bubbly nature of the US housing market starting in 2005. Finally, he brought in the matter of undersaving, which reflected another behavioral argument of his from his 1991 Ely lecture on "Procrastination and Obedience.."  This made respectable the long ignored idea from Robert Strotz in 1956 about hyperbolic discounting, which has now become fully entrenched in respectability with such people as David Laibson at Harvard publishing on it in the AER, QJE, and other proper outlets.

Finally, in his presidential address he arguably became more openly behavioral with his emphasis on the role of norms, something that Yellen clearly agreed with him on in some of their joint work on labor markets.  He argued that this "missing motivation" underlay why five supposed "neutralities" of macroeconomics do not hold in reality.  These are the independence of consumption from current income, the independence of investment from fiancial decisions, that inflation stability can only hold at the natural rate of unemployment, that macro policy is ineffective due to rational expectations, and Ricardian equivalence.  Now, several of these were pushed to the side already by the NK DSGE modelers, but some others have continued to be used in such models, with the now-under-attack Euler equation that underlies the first point being an example.  My guess is that by now most of those participating in FOMC meetings have already absorbed that these five neutralities do not hold, even if they do not do so by reasoning from people following norms as Akerlof argues and Yellen may argue.  But, even as I have already said that current Fed policy to some extent already reflects the behavioral macro of Akerlof and Yellen, I suspect that we are likely to do so even more so, with this perhaps even becoming more openly so in the near future.

Barkley Rosser 

What the CBO Really Said About Obamacare and Future Employment

Did Dylan Scott really scoop economist bloggers as he refuted the latest GOP spin:

They had a new talking point: President Obama's hated health care reform law would cost more than 2 million American jobs. "Obamacare To Print Even More Pink Slips," read the subject of the Senate Republican conference email blasted out after the report's release. "Obamacare will cost our nation about 2.5 million jobs," tweeted Sen. Lindsey Graham

The CBO report can be found here. As Dylan succinctly noted:

Those lost hours will "almost entirely" be the result of people choosing to work fewer hours because of Obamacare -- not because they lost their jobs or can't find a full-time job.

If a Republican economist blogger has stepped up to the plate and been honest about what the CBO really said – I’d be impressed. I just checked the blogs of Greg Mankiw and John Taylor and nothing yet. But then this is still early in the discussion. To be fair - the CBO did talk about the substitution effect from higher marginal tax rate, which is something a conservative economist might want to emphasize. But the CBO discussion went further than that in discussing the multitude of channels as to how the ACA will affect labor markets including the income effect from better health care access. Don't trust the political spin and do read the CBO's interesting discussion.

Good Luck, New Ms. Fed Chair

And, yes, Janet Yellen, congratulations, but you certainly need some good luck, particularly given that the day that your worst enemy on the Board of Governors, Daniel Tarullo, swore you in this morning as new Fed Chair, the US stock market crashed worse than it has in a very long time.  In any case, I think you did well getting there, with your excellent hubbie, George Akerlof, present along with many others, and you maintaining an appropriate silence while smiling to the applause.  Yes, you will be up in a week for the House Financial Services Committee to defend the current compromise gradual taper, although today it seems interest rates are down, even though the first reports of the taper last May triggered long run interest rate increases. Heck, today we had one nation (Japan) whose market is falling because its currency is rising (eeeek,reduced future exports!) while two others have ones that are falling (Turkey, Argentina) because, well, you know, falling confidence (eeeeek, even though future exports are likely to rise!).  Such fun and games will be your regular fare.

There was a long and thoughtful front page story in the Washington Post today about Janet Yellen and her rise to her current position, by Ylan Q. Mui, who last summer was with only minimal filtering passing on various sexist rumors from insiders at the White House as part of its campaign to push Larry Summers.  But Mui presumably has figured it out now that Yellen is in, and Larry's old friend, the Olivia Pope of Fed media management, Michelle Smith, is now managing publicity for the new boss, Janet. All that cynical stuff said, the article is well done and provides interesting background that the very discrete and careful Yellen had kept under wraps until now, and she was not quoted in the article or openly cooperated with it, although some of the material in it is not necessarily flattering. Anyway, a major sub-theme is how she suffered from sexism over a long period of time.

I confess to knowing both of them, but while I knew some of this, I did not know the full extent of it.  George and Janet are now the star couple of economics, with her reputedly the most powerful woman in the world, or mighty close, and he, well, a highly respected Nobel Prize winner.  Hard to top that. But they had their rough times.  The article brings out that he was turned down for his first effort to be promoted to Full Professor at Berkeley, despite having already published his slam dunk for a Nobel paper on the market for lemons previously, leading to a bout of depression and the end of his first marriage.  After being the only woman in her class at Yale, and one of only two women at Harvard, getting turned down for tenure there, with Harvard econ dept not tenuring a woman for another decade (and ironically her having then undergrad Larry Summers in one of her classes), they both were hanging out at the Fed around 1977, recovering from their respective traumas when they found love in the Fed cafeteria, now clearly the hottest power passion pit in Washington.

After a stint at LSE, where George got the job with Janet a "trailing spouse," they went to Berkeley where he got his promotion, but she was relegated to the Haas Business School, where she was only the second woman hired, and some there resented having her on board.  In those ancient days, there was no maternity leave, and when their son Robert was born in the early 80s, Janet got no leave and taught a full load of courses after his birth.

The turn in her career came with her appointment to the Fed Board of Governors by Clinton at the behest of Janet's colleague at Berkeley, Laura Tyson.  After that, she was on an upward trajectory, always fully supported by husband George, with the article making it clear that their marriage has been a great success, with them "in all but perfect agreement about macroeconomics" (according to George).  Taking that more seriously, while Yellen is usually described as a "Keynesian," her husband's Presidential address some years ago at the AEA was on "Behavioral Macroeconomics," and if one looks at their famous papers on labor market dynamics, while some involve mathematical technicalities, most are driven by behavioral economics concerns such as workers looking at each others' pay.  Indeed, the whole 2% inflation target itself comes from a paper by Akerlof with Dickens and Perry at Brookings in the mid 90s based on microeconomic relative wage adjustment arguments in the face of behaviorally founded downward stickiness of nominal wages, which Yellen sold to Greenspan shortly thereafter, from where it spread all over the planet.

I can note a silly personal observation on the change in their relative status at Berkeley after her 90s stint in Washington.  Even though he had the Nobel, he had arguably become the "trailing spouse," and the article notes that he has been very willing to follow her as she has moved about on her upward trajectory.  I happened to wander the hallways in the econ dept at Evans Hall at Berkeley during the brief interlude a bit over a decade ago when they had returned to Berkeley, but she had not yet been appointed as SF Fed President.  Neither of them were there when I did this, but I did observe office locations.  She had a corner office, and the word was she was about to be appointed Dean at the Haas School, where previously some had complained about her being hired at all.  George just had a regular sized office in the middle of the hall.  But then, in those days Berkeley had several other Nobel Prize winners, a dime a dozen there, while future Fed Chairs, well...  :-).

I shall close this by quoting from the piece by Mui, which reflects Janet's careful and discrete approach to dealing with the gender issue as she has risen, even as she is reported to having come to realize last summer that she had become a "role model" for women.

"Yellen's silence is a reminder that the workplace can still be treacherous terrain for many women.  She never spoke out, when President Obama mistakenly referred to her as 'Mr. Yellen,' nor when a few snarked that she wore the same outfit to her confirmation hearing and nomination ceremony.  Instead, Yellen - who declined to comment for this article - deployed the same strategy she has used for the past 40 years: letting her work speak for itself."

Barkley Rosser

The XL Pipeline Decision

I dislike disagreeing with my friends in the environmental movement, but I am going to come down for letting the Canadians build their XL pipeline in the US.  This is an issue where both sides have way overhyped the issue, with neither the environmental damages nor the supposed economic boost in teh US as bad or gas ood as either the critics or the supporters claim.  It is a mostly pretty small stuff, but huge noises and huffing and puffing have gone down on both sides, with it becoming highly partisan, just to totally distort things.  I would link to Jim Hamilton now, but his posts on this were ages ago, but this was his bottom line: this is a normal garden variety deal like what goes on in the US all the time (see fracking for oil and gas in North Dakota), turned into a big deal because it is a cross-border deal.

Cutting to the most recent chase is the freshly-delivered State Department report that says it essentially has no impact on global warming.  Why is that?  Because even if Obama kills it, the Canadians will still develop their tar sands and sell the output to China, probably sending the stuff across the Rockies to Vancouver to ship, either by train or pipeline, which will almost certainly entail a higher risk of ground environmental damage due to spills, plus damage to global warming due to or say "blame Canada," but they are currently the best friend of the US, despite a long history of the US ignoring their interests and violating trade and other treaties, with the US having a long history of sending pollution of various sorts, including acid rain, across our mutual border into Canada, damaging their forests and fisheries, which they are far more dependent on economically than we are in the US.

We have had a long history of ignoring them on such matters, and even though now our environmentalists might say that we are on the side of virtue for once, sort of, I do not see the damage to our relations with them worth the, frankly, zero gain to the environment that will occur by slapping them in the face on this matter.  Just say yes and build the damned thing. Those tar sands are going to get developed no matter what anyway.

Barkley Rosser