Bye Buy Zero Lower Bound on Nominal Interest Rates?

It sure looks like it, and with that goes an enormous literature on the consequences of an absolute zero bound on nominal interest rates.  In the 1990s we saw occasional episodes where some rates would go negative in Japan, with Japan curiously still in the positive range in the current situation, if just barely on all its bonds.  The US had a few brief episodes at certain points on certain bonds at times, first in 2004.  In 2009, the Swedish central bank actually set a target interest rate of negative 0.5% at the worst of the financial crisis as it engaged in a massive monetary stimulus, but I am not sure how negative rates actually got. 

However during the last few weeks and accelerating last week and into today, a raft of nations have been selling bonds at negative nominal yields.  The current list of recent ones includes the US, Switzerland, Germany, France, Finland, Austria, Denmark, and the Netherlands.  While most of these have been just barely below zero, the Swiss have sold two-year bonds as low as -0.45% recently.  The barrier has been broken, even as some other members of the Eurozone are experiencing record high interest rates.  For a week-old discussion see http;//www/mindfulmoney.co.uk/?lid=13003 (not sure that is right) .

I think that the deeply entrenched refusal to admit that this can happen is part and parcel of the long and somewhat equivalent refusal by most economists to admit that prices can be negative.  Standard economic theory simply assumes that negative prices do not exist, and when we see someone paying to give something away, we define it as a "new good," such as water removal or garbage removal.  The problem is that sometimes we see the same good sold for both positive and negative prices within the same market at the same time, with this happening occasionally in real estate (notable example was in the former East Germany after the reunification and some properties were saddled with environmental cleanup costs).  A literally classic example is bridal markets from Babylon reported by Herodotus.  Potential brides would be reportedly lined up and auctioned off.  The most desirable would draw forth positive prices, but as one went down the line to the dogs, the prices would go negative.  As it is, we see this now, but it is usually in different societies, with some having "bride prices" and others "dowries" (groom prices), with some modern societies such as the US muddying up the picture thoroughly with an implicit market (mostly dowries effectively given the norm that bride's family pays for the wedding, but groom's side is supposed to cover rehearsal dinner).  In any case, this is now called the "Herodotus Paradox," and it is about time that economists got over their long entrenched prejudice about the limits on what prices can be.

Now, having stated that negative nominal interest rates make a mess of this massive literature based on the zero lower bound, I shall admit that I think that this literature remains somewhat relevant.  This is because what we are looking at is probably still a form of a lower bound, only that it has become fuzzy.  The old arguments against negative nominal interest rates still carry some weight, but must be noted to have their limits also, not that rigid or absolute.  So the old standby is that one can always hold cash.  Well, if it is in the form of demand deposits in a bank, well, there is always the issue of the riskiness of the bank, and what lies behind most banks ultimately are government bonds, which may be risky as well.  And as for literal cash itself, well, it is not risk free either, whether in a mattress or cookie jar.  There are dangers of theft or fire or whatever.   However, while such risks exist, they are not huge, which may be why we have not clearly seen negative rates below -0.5% to my knowledge, although we are close to that now in some places.  Maybe we can go lower, but I think it is unlikely that we will ever see sustained rates lower than say 1%.  In the past, such episodes of negative nominal interest rates have been fairly short-lived. 

But, whether such rates are good or bad (and that obviously that depends on whether one is a lender or a borrower), this supposed bound has been much more widely and substantially breached than ever before.  We are living in a new world in financial markets.

More Guns, More Equilibria

There is an enormous literature on multiple equilibria in socially interactive dynamic situations on crime, tax-paying, transitional economy outcomes, and many other things. A prominent example of this was Robert Putnam's 1993 book on Democracy in Italy in which he invoked the concept of social capital to explain sharply differing political-economic-social outcomes in northern vs southern Italy.  An example I am a coauthor on that focuses on transition economy outcomes and provides a theoretical model (originally due to Brian Arthur of the Santa Fe Institute), as well as empirical results can be found at my website, http://cob.jmu.edu/rosserjb , partway down, "Mutltiple Unofficial Economy Equilibria and Income Distribution Dynamics in Systemic Transition," 2003, JPKE, 25, 425-447.

I bring this apparently  esoteric example up due to its relevance to the problem of guns in America and the recent tragedy in Aurora, CO.  This model of multiple equilibria applies to guns.  There are societies with few guns and strict regs on them.  Think Japan.  Most of their gun deaths are socially approved suicides derived from the Samurai code of honor and Seppuku.  But, in general, the rate of gun ownership and gun violence in Japan is extremely low.  Many other nations on this planet resemble Japan in this generally, although varying in details on many important aspects.  These societies are in the "good" equilibrium, where general social disapproval of guns combined with strict laws regulating them has led to few around, while organized crime and selected others can get them, but the rate of gun deaths is low by global standards, and certainly compared to the rate in the US.

OTOH, the US is clearly stuck in the "bad" equilibrium, derived from a long individualistic frontier history of widespread gun ownership, reinforced by the Second Amendment with its two parts, one emphasizing the right to own guns, recently raised above the other part by the US Supreme Court against long established precedents, with the other emphasizing the need for state level militias to be supported by a gun-owning citizenry in a society without a federal national defense (uh huh, compare 1787 national military [basically zero] to current DOD, duh).  The control variable is the number of guns out there per capita, and the long US history favoring guns has meant that the barn door was torn off long ago and guns are everywhere, with no chance to go to the low gun "good" equilibrium anytime in the near future. Local efforts to control guns are hopeless as they pour in from other parts of the country, such as Virginia supplying the gangs of New York, with newly revived relaxations against the pleas of law enforecement officials to the northeast, but, hey, here in Virginia, the NRA really has the legislature in its grip to kill kill kill.

However, this most recent shocking event makes clear that even if the US has no hope of ever getting to that "good" equilibrium, maybe we are going too far into the bad equilibrium zone, and that more and more guns do not lead to less crime at all.  What can we do? 

Well, there is one obvious move.  Reinstate the previously existing ban on assault weapons.  The evidence is clear that when that ban was in place, there were fewer deaths from such weapons.  The main weapon that James Holmes used in his invokation of the Joker was an assault rifle banned under the previous ban on assault weapons, left to expire.  This ban must be reinstated.

Th\is involves the NRA and its despicable leader, Wayne LaPierre.  This man worked up his supporters into a frenzy that Obama would "take away our guns."  Of course Obama, totally cowed by the awesome power of the NRA in this path dependent "bad" equilibrium (even though a majority of voters support stronger gun control) did nothing about this. Given the "failure" of Obama to come through with any obvious anti-gun efforts, LaPierre (always out to keep the suckers sending him the money), concocted a totally ridiculous theory.  The Fast and Furious program in Arizona, an earlier version of which ran in the Bush admin only to be pretty quickly put down by higher ups once they firgured out it was going on and how totally stupid it was, did a a rerun under the Obama admin: put in by the pleas of the ATF gang in Phoenix, only to be shut down by the higher-ups once it became clear what a total loser it was. 

That would have been that, except that this time NRA boss LaPierre declared this one to be a plot in favor of gun control.  Supposedly, Obama and AG Eric Holder were guilty according to this absurd conspiracy theory, leadiing to the NRA robots in Congress arguing that indeed Obama and Holder were really pushing LaPierre's conspiracy theory of doing Fast and Furious to bring about greater gun control.  This is the sort of utterly ludicrous nonsense that a nation can be led into when it is really going whole hog into the "bad" equilibrium on this matter (and we have never previously seen a nation go so completely bonkers on this issue ever in all of world history, really).

Another serious matter is the end of a long-held delusion by the NRA and its many supporters, the idea that more guns will lead to less violent gun-related crime.  I shall not go through this debate in all its details.  However, I shall note that the main studies by John R. Lott, Jr. on this, widely spread by the NRA, have been seriously discredited.  I shall simply suggest you go to the Wikipedia site for "John Lott" to see the details, but I completely concur with the critical assessments found there.  Basically, it gets down to that his results depended on the extremely special case of Florida, and that case is now an embarrassment for the advocates of totally free guns, now that it has become clear that Mr. Zimmerman is mentally disturbed.  Is there in any real difference between Zimmerman and Holmes?  No.

In particular, this tragedly in Aurora makes clear that all the yapping by NRA propagandists that individuals carrying guns can/will stop madmen from killing lots of people (something we heard from these people after Cho shot up VA Tech, only to have the VA legislature fall all over itself genuflecting to the most ridiculuous and osbscene requests from the NRA), does not cut it.  Holmes could not be stopped by all these junior Zimmermans and fantasists training so hard to protect "us" from whomever they thought were threatening us.  No way.  This guy had body armor, and that is how it will be in the future.  This particular fantasy of the NRA and its bootlickers is dead in the aisles of Theater 9 of Aurora, Colorado.  Sorry guys, grow up.

My final point is to any true believer in the super sanctitiy of gun rights.  Sorry, but this is not a universally recognized right.  The only other nation that has similar legal views to the US in the entire world is Honduras, whose gun dealers compete with ours for supplying the drug cartels in Mexico..  If any of you are proud of this, so be it. I am not. The US was arguably the major inspiration for individual human rights in the world, with the French Declaration on this following after ours, and the 1948 UN Declaration clearly modeled on ours as well.  But none of those, and nobody else's (except world-inspiring Honduras!), has followed us on this particular matter, where our ancestors' "need" to keep injuns, slaves, wetbacks, and other potentially troublesome people from our"frontier," in line.  Again, this last jibe on my part is simply a recognition of the power of path dependence and the historical record of the US that makes it so difficult to do anything about this, even such screaminlgly obvious things as banning assault weapons that no civiliian has any obvious or legitiimate use for is at least one obvious move that might improve things.

The Problem with Microfoundations: Bad Micro

Noah Smith, Simon Wren-Lewis and Paul Krugman have already weighed in on this in different ways, but maybe the time has come to be excruciatingly blunt.  Microfoundations for macroeconomics are fine in principle—not indispensable, but useful.  The problem is that what passes for microfoundations in the universe of orthodox macro is crap.

There.  I said it.  I used the “c” word.  But not the “s” word.

It’s nothing more than robotic imitation of teaching exercises to improve math skills, without any consideration for such mundane matters as empirical verisimilitude.  I will mention three crushing faults, each sufficient by itself to blow a wide hole in a supposedly useful model.

1. Utility theory.  Andrew Gelman calls this “folk psychology”; that may be generous.  It is rife with anomalies (see “behavioral economics”), and, most important, it is oblivious to the last several decades of work in psychology, evolutionary biology, neuropsychology, organization theory—all the disciplines where people study behavior in a scientific way.

2. Mono-equilibrium assumptions.  There are no interaction effects to generate multiple equilibria in the microfoundations macro theorists use.  Every individual, firm and product is an isolated atom, floating uninterrupted through space until it bumps into another such atom in the marketplace.  Social psychology, ecology, nonconvex production and consumption spaces?  Forget about it.  In evolutionary biology, by contrast, fitness surfaces are assumed nonconvex from the get-go; it’s central to the discipline.  Failure to recognize the interactive character of economic life leads economists to ask fundamentally wrong questions, like “what’s the equilibrium?” and “what’s the optimum?”  If this isn’t obvious to you already, you can get a longer version of the argument here.  (Note for those who are wondering: no, nonconvexity stemming from interaction effects has nothing to do with market failure.  The existence of externalities is neither necessary  nor sufficient for these effects.  See for yourself.)

3. Path dependence.  Microfoundations means general equilibrium theory, but the flavor it uses is from the mid-1950s.  The Sonnenschein-Debreu-Mantel demonstration (update to the 1970s)  that initial conditions and out-of-equilibrium trades alter the equilibrium itself (they assume away problem #2) has turned GET upside down.

Notice that I haven’t mentioned the standard heterodox criticisms of representative agents and ergodicity.  You can add those if you want.

Now here’s the clincher.  As Krugman points out, faced with the choice between addressing the evidence or maintaining consistency with their microfounded models, macroeconomists as a herd have gone for the second.  This is because they believe that the micro theory they use is really, really, really true, and that no model that cannot be yoked to it can be considered scientific.  And if we actually knew with certainty that mid-50s general equilibrium theory with optimizing agents and no interactions outside the market was the only acceptable framework for thinking coherently about economics, they’d be right.  But they’re not.

Like I said, their microfoundations are crap.

The Economy, the Election, and Why the Rest of Us Need a Super-PAC

The latest New York Times poll makes for dismal reading.  Support for Obama rises and falls with perceptions of how the economy is doing, and the latest numbers show a majority think he has bungled it.  This gives Romney, for all his faults (some of which are clearly noticed by the electorate), a real shot at winning, at least now.

The frustrating part is that the public is right: the economy is in terrible shape and Obama deserves much of the blame.  All available energy has gone into rescuing the financial system, but it has turned out that what was seen as necessary for economic revival is nowhere near sufficient.  The Obama crowd could be saying that they wanted to do more but were blocked by the Republicans (only partially true), but they are not saying this.  Instead, Trust Us: We Are Recovering is the banner under which Democrats are rallying.  They could just as well change it to Kick Me.

One way to think about the core problem is that we depend on the two parties to each make their case to the electorate: the Republicans and their tagalong billionaires get to say what they want, and the Dems and their smaller coterie of tycoons get to say their shtick.  The public is supposed to weigh the two sides and make its choice.  This makes those of us who understand how truly deranged the Republican party has become hostage to the messaging of the Obamanoids, and their message isn’t working.

What we really need is an opulently financed independent voice that can say what needs to be said: the economy is bad, it hasn’t been handled well, but Romney would make it worse.  It should be said over and over, with clever scripts, emotive actors, endearing fuzzy pets, whatever, until it becomes conventional wisdom.  Taking the mike away from Obama, or at least drowning it out, is the best way to resist Romney.

Words to Hide the Obvious in Economics

One way to reveal the history of the changes in the economic landscape is to study how official meanings to key concepts have been altered over time.  "Knowing things that ain't so", as Josh Billings once said, presents much more trouble for folks as their simply being "ignorant".  

I present a selection of words - here used in the context of the writing of others - that I believe present great danger to the reader in their ability to hide the 'obvious':

“Oil” (2007 and after)

“… the definition of "oil" was changed in 2007 to include synthetic liquids.[*]…” [1]

[Not to confuse ‘oil’ with ‘energy’]

“…there are at least 3 factors that are ignored in the total liquids graphs …. One - NGL's and ethanol have only 70% the energy that crude contains. Two - the EROEI of all liquids is dropping - fracking and deep water drilling, just to name two, require much greater inputs per unit of return than does conventional on-shore. Three - the population continues to grow, so per capita available net energy is what matters. And as a corollary to that, the portion of the global population that is reliant upon and has lifestyle expectations based on readily available liquid energy grows every year, so the call on the decreasing net available energy grows even more rapidly than does population itself.

Only a graph that takes into account energy density, net energy and population can accurately paint a picture of the global liquid fuel situation.” [2]

“Retirement age”

In the United States, while the normal retirement age for Social Security, or Old Age Survivors Insurance (OASI), historically has been age 65 to receive unreduced benefits, it is gradually increasing to age 67. For those turning 65 in 2008, full benefits will be payable beginning at age 66.[**] In France, the retirement age has been extended to 62 and 67 respectively, over the next eight years.[***]  In Spain, the retirement age will be extended to 63 and 67 respectively, this increase will be progressively done from 2013 to 2027 at a rate of 1 month during the first 6 years and 2 months during the other 9.[****]  [3]

[**]  Normal Retirement Age [NRA]

http://www.ssa.gov/OACT/ProgData/nra.html

 [***]  "Pension rallies hit French cities". BBC News. September 7, 2010.

http://www.bbc.co.uk/news/world-europe-11204528

[****]  "Spain to Raise Retirement Age to 67". The New York Times. January 27, 2011. http://www.nytimes.com/2011/01/28/world/europe/28iht-spain28.html

“Inflation”

“The government used the same calculation for the CPI from 1913 to 1980.  In 1980, after seeing ....inflation in late 1970s, the government changed the calculation and dropped food and energy from the Core Inflation Index

While the U.S. government repeatedly states that we currently [2011] have about 1% inflation, by using the older pre-1980 government calculation of inflation, we find that the true inflation rate is closer to 10.7% as of May 2011 based on the SGS “Alternate CPI” calculation from shadowstats.com. [4]

“Unemployment”

“…estimated long-term discouraged workers… were defined out of official existence in 1994 [in the US].

Short term discouraged workers are not included in the US ‘monthly headline number’ (U3) but only in the government’s broadest measure of UE at the Bureau of Labor Statistics (U6). [5]

“Employed Person”

US term for an individual 16 years old or older who, in a given week, (a) works minimum one hour for an emolument or minimum 15 hours of unpaid work in a family business, or (b) who is not working but has a job or business from which he or she is temporarily absent, whether or not being paid for the time off. [6]

“Capitalism” (1955)

capitalism, n.

…. the concentration of capital in the hands of a few, or the resulting power or influence…... a system favoring such concentration of wealth.[7]

“Capitalism” (1941)

“…An economic system in which capital and capitalists play the principal part; specif., the system of modern countries in which the ownership of land and natural wealth, the operation of the system itself, are effected by private enterprise and control under competitive conditions.” [8]

_________________________________

REFERENCES :

[1]  [*]  International Energy Statistics

As quoted in ‘Peak Oil’ Wikipedia, Monday 16^th July 2012

http://en.wikipedia.org/wiki/Peak_oil

[2]  clifman on February 25, 2012

http://www.theoildrum.com/node/8959#more

[3]  Retirement, Wikipedia 18^th July 2012.http://en.wikipedia.org/wiki/Retirement

[4]  ‘Lessen the load of Rising Inflation - How to maintain purchasing power’. Whiteside Wealth Management, Inc.  http://www.whitesidewealthmanagement.com/risinginflation.pdf

[5]  Alternate Unemployment Charts.http://www.shadowstats.com/alternate_data/unemployment-charts

[6]  ‘Employed Person’.  http://www.businessdictionary.com/definition/employed-person.html#ixzz20yfACtBJ

[7] The American College Encyclopedic Dictionary, 1955

As quoted in:

Economics: changing definitions

WEDNESDAY, APRIL 22, 2009

http://badgermum.blogspot.com.au/2009/04/economics-changing-definitions.html

[8]  Webster’s Collegiate Dictionary, Fifth Edition, “date unknown as the relevant page is missing, but the latest population information in the back of the book is from 1941”

As quoted in:

Economics: changing definitions

WEDNESDAY, APRIL 22, 2009

http://badgermum.blogspot.com.au/2009/04/economics-changing-definitions.html

Mankiw on the US Olympic Uniforms Made in China

Greg picks on Senator Reid:

Will some enterprising reporter please ask Senator Reid for the opportunity to inspect the senator's closet and check the labels of his clothing to make sure they are all American-made? I look forward to seeing Mr. Reid's bonfire. In the alternative, I would be happy to send the senator of copy of my favorite textbook. He should pay particular attention to Chapters 3 and 9.

Hey – I think we all get the point about comparative advantage. Larry Popelka made the case for Greg:

Garment manufacturing is a low-cost commodity business. Most of the value in the apparel industry comes from design, technology, sales, marketing, and distribution—not manufacturing. The successful players in apparel, such as Ralph Lauren and Nike (NKE), figured this out long ago

. Look – we all understand that Ralph Lauren did what was best for Ralph Lauren and if the US Olympic Committee wanted these uniforms to be both designed by both Ralph Lauren and Made in America, maybe the contract with Ralph Lauren should have said so. But Larry also noted that politicians in BOTH parties are angry at Ralph Lauren. So why is Greg lecturing Senator Reid and not certain Republicans. For example, Donald Trump loves to China bash even though his clothing line is also Made in China. Of course, Trump is not the GOP Presidential candidate – that would be Mitt Romney:

On the campaign trail, Romney labels China’s leaders as “cheaters” and “currency manipulators.” His ads say the Republican nominee would be a president who “stands up to China on trade and demands they play by the rules.” He has vowed to issue, on his first day in office, an executive order labeling China a currency manipulator.

One Small Reason Why it Would Be Better if Romney Lost

If Obama is re-elected, we might since a continued prosecution of the culpable in the LIBOR scandal.  If Romney wins, very unlikely.

Will ObamaCare Make Us Fat?

Miles Kimball reports on a paper co-authored by Isaac Ehrlich entitled The Problem of the Uninsured—Implications for Health Insurance:

Sam Peltzman’s argument that requiring people to wear seat belts would make them feel safer, and therefore lead them to drive faster. This is now called the Peltzman effect, and I will refer you to Greg Mankiw’s post on “The Peltzman Effect” for a discussion of it. In his presentation, Isaac points out that there will be the same kind of effect if you require people to have health insurance. They will feel safer in relation to their health, and so will take more risks. For example, a young person who has to pay full price for the visit to the doctor for antiobiotics to treat an STD may be more careful to use or insist on a condom. He and his coauthor Yong Yin have a theoretical model showing that such effects can be substantial in size. Notice that it should be possible to get good empirical evidence on such effects.

In other words, Ehrlich is claiming now that the poor have health insurance, they will work out less and will eat more junk food. Isaac Ehrlich – where have we heard this name before? His 1975 publication The Deterrent Effect of Capital Punishment is often cited by advocates of capital punishment but be mindful of the various critiques of Ehrlich’s alleged evidence, which we noted here. Miles notes that this paper is not readily available yet and admits it is only a theoretical argument. I just hope that those who decide to do empirical work are mindful of what Ed Leamer wrote years ago.

Economics, an Almost Social Science (or, the Foundations of Liberal Ideology in Second Order Conditions)

This is the title of the paper I presented in Paris last month.  It was written in one day, unfortunately, due to other, competing deadlines.  But it's not too bad, and it does a better job of saying in more-or-less plain language what I've been trying to say for years about what I see as a central blindness in mainstream economics.  I apologize for the lack of references; if it looks like there's an appropriate venue for this piece, I'll throw a few in.

Read and enjoy.

Bad Lieutenants

Somebody should do a long piece about the atrocities committed by police under the command of liberal Democratic mayors.  Every political convention features such hijinks, and will again.  Over the past year we have the numerous crimes of violence committed by police against the Occupy people.  Just today I'm reading about the use of "stinger balls" in L.A. against dangerous chalk artists.  (Hola, Mayor 

Antonio Villaraigosa! How's the family?)

Curiosity got the best of me. What in the world are stinger balls? The answer is, if you like rubber bullets, you'll love rubber pellet grenades.  For when you really don't care who the hell you assault.  They are supposed to be non-lethal, though the outfit selling them cautions:

"IMPROPER USE OF THE STINGER GRENADE CAN RESULT IN DEATH OR SERIOUS BODILY INJURY

"WARNING: This product is to be used only by authorized and trained Law Enforcement, Correction, or Military Personnel. This product may cause serious injury or death to you or others. This product may cause serious damage to property. Handle, store and use with extreme care and caution. Use only as instructed."

Liberal Dems always seem to get a pass on this bullshit. Oddly, or ironically, the best work on full-spectrum police criminality is coming from libertarian Radley Balko. He has a book in the works.

I've seen worse

Greetings, EconoSpeakers. As a special bonus for your devoted attention to this blog, you have the privilege of enduring me for the next few days.  Who am I?  Don't ask.  Those who tell don't know, those who know don't tell.  Of course for many it will be perfectly bleeding obvious, just STFU about it, okay?

We've all heard of the Great Recession and more recently, the Little Depression.  These days I'm reading Hyman Minsky, so I'm inclined to think neither phrase is appropriate.  More apt would be "Business as usual."  By Minsky, the sort of collapse we are currently experiencing is not a bug, it's a feature of unregulated capitalism.  If you doubt the ubiquity of such events, you should consult "This Time It's Different," by Reinhart and Rogoff.  In the most basic sense, this is normal.  It sucks, it's worse now than usual, but it's normal.  Deal with it.

R&R do not mention Minsky -- theirs is an exhaustive empirical work with some theoretical b.s. included, and little in the way of policy remedies.  In theoretical terms it is shallow.  Minsky is deep.  He gets into the pores of the financial system, long neglected in macroeconomic theory.  I hope to have more to say about him in due course.

Time for breakfast . . .

adventures in teaching principles

I put a parabolic Marginal benefit of a wing schedule up, first rising and then falling. The MC of a wing is horizontal and starts above MB and intersects the latter twice, at 5 and 15 wings, respectively. The area between MC and MB from 0 to 5 wings is clearly less than the area between MB and MC from 5 to 15 wings. OK, class how many wings shall I eat if I want maximize net benefits?

Response: Don't eat the first 5!!

Economy: Lives of Quiet Desperation

This is a short post to celebrate the birthday (12th July) of writer Henry David Thoreau who was born in Concord Massachusetts USA in 1817.

An economics blog appears to be an appropriate forum for referring to Thoreau's first chapter in his book  'Walden'.  It is titled 'Economy' and explores concepts related to how time, life endeavours and objects are valued.  What is essential to life versus what is frivolous:

"Most men lead lives of quiet desperation..."
"At the present day, and in this country, as I find by my own experience, a few implements, a knife, an axe, a spade, a wheelbarrow, etc., and for the studious, lamplight, stationery and access to a few books, rank next to necessaries, and can all be obtained at a trifling cost.  Yet some, not wise, go to the other side of the globe, to barbarous and unhealthy regions, and devote themselves to trade for ten or twenty years, in order that they themselves may live, - that is, keep comfortably warm - and die in New England at last....Most of the luxuries, and many of the so-called comforts of life, are not only not indispensable, but positive hindrances to the elevation of mankind..."

Economists could read this book and it would be time well spent  ;-)

Pay for Oppression: Do Workers in Fairer or Safer Jobs Make Less Money?

The debate over worker rights on the job has taken an interesting turn with Tyler Cowen’s defense of the compensating wage differential argument.  This, for those who have not run into it before, says that workers, whether through bargaining or the labor market, get a certain amount of utility.  They can take that utility in money or in better working conditions, but the sum has to add up the same.  This means that workers in safe jobs, all other things being equal, will make less than workers in dangerous ones; workers subject to bosses’ sexual advances will make more than those in more respectful organizations; and so on.  There are four conclusions you would draw from this if it were true:

1. Dangerous or demeaning work is not a problem per se.  The workers in those jobs are just as well off as they would be in a better setting.  Don’t worry about them.

2. Employers have a financial incentive to make jobs better—safer, fairer, etc.  That way they have to shell out less cash.  In fact, they have just the right incentive, the amount of money workers are willing to give up in order to get better treatment.

3. Regulation can’t make anything better, but it can make things worse by taking away an option that would otherwise be available to workers.  Some workers would rather have the money and put up with the dangers and indignities of a crummy workplace.

4. You can measure the monetary value of such intangibles as the value of life, the value of not being harassed, of being able to pee when you want, etc.  It’s simply the difference in wages between jobs that offer more versus less, scaled by how much change in risk, harassment or whatever the worker is being compensated for.

Now it happens that this is a topic I know something about.  In fact, I wrote the book on it.  (OK, a book.)  For the full story, read the book.  Here I will make a few brief comments about the evidence.

I agree that fringe benefits that are essentially monetary in character, such as pensions and insurance, are subject to this sort of process.  Workers really do trade money in one form for money in another, and unions bargain explicitly over this.  It is also true that public insurance, like workers comp, is largely financed out of wages too, no matter how the laws are written.

It is not true that nonmonetary costs and benefits of work are compensated—not fully at any rate, and sometimes not at all.  For an empirical demonstration, see this old study I wrote with Paul Hagstrom that has, to my knowledge, never been rebutted.  Tyler links to a slightly less old Viscusi/Aldy lit review that cherry-picks shamelessly, not only in its selection of what counts as a valid study, but (especially) in which results of the authors they choose to report.

For those who don’t want to go to the sources, here are the two fundamental empirical problems with studies that claim to show wage compensation for things like occupational safety: (1) They use industry-based measures of which jobs are risky, but they ignore all the other industry-level determinants of wages, like concentration, capital intensity and percent unionized (usually).  (2) They show signs of potential publication bias, where specifications are selected that yield the “right” result.  What signs?  They don’t provide summary data on the full range of specifications tested (“taking the con out of econometrics”), so that the reader can determine whether the reported specifications are outliers or not, and the results are hardly ever tested on subsamples.  Think for a moment about this last point: if there are compensating wage differentials for women exposed to sexual harassment, this should apply to black women and white women, unionized women and nonunion women, women in blue collar jobs, white collar and pink collar, and other plausible breakouts.  If not, you would need to have a story to explain why some get it and not others.  (Or why some subsamples even have exacerbating differentials, which I found with occupational safety—the “sweatshop effect”.)  There is a small literature on subsamples in wage-risk regressions, and they are all over the map.

Note that the Joni Hersch study Tyler links to is vulnerable on all these counts.  It doesn’t consider interindustry differentials.  There is only one specification reported.  No subsamples.  Not convincing.

The bottom line is that skeptics have every reason to remain skeptical.  Actually, a world of compensating wage differentials would be better than the one we live in.  Some jobs are unavoidably difficult, dangerous or unpleasant, and they should pay more.  But there are also human rights, like freedom from abuse and freedom of expression, that shouldn’t be for sale, even when you’re on the clock.

Egypt's Economy Creates Power Vacuum

This week Bloomberg's Businessweek reports on how 'Egypt's power vacuum threatens the economy'. [1]  The author of this article, Alaa Shahine, quotes a number of economists who make the claim that it is the ensuing power struggle between political factions and doubt over the new president's ability to govern that may herald a 'disorderly devaluation' and big problems with Egypt's economy in general.


However, the basic question of how anyone could govern Egypt in its current economic context which is:
*  soaring and unsustainable borrowing costs, now at 16%
*  capital flight along with the abrupt disappearance of more than half of Egypt's foreign reserves
*  denial/delay of an IMF loan
*  massive privatisation of public assets
*  inflation of global food prices 


is never asked.


Egypt, alone, cannot stabilise its economy.   High levels of financial and commercial integration exist between it and the rest of the world.  It cannot, for example, choose its interest rate.  Egypt appears to have no means to enjoy a stable exchange rate and this nation also holds very little protection from capital flight by foreign investors.


An astute observer might say that it is the very structure of Egypt's economy that has created the basis for the power vacuum that exists there now.  Not the other way around, as this Bloomberg article asserts.


REFERENCE:
[1]  Egypt’s Power Vacuum Threatens the Economy

Bloomberg Businessweek, 2^nd-8^th July 2012.  Pages 37-39