Hiding from Paul Krugman is Easy

Krugman has a recent post where he cites a SF Fed study regarding the unemployment rate among recent college graduates:

Mark Thoma leads us to new research from the San Francisco Fed showing that recent college graduates have experienced a large rise in unemployment and sharp fall in full-time employment, coupled with a decline in wages. Why is this significant?

The answer is that it’s one more nail in the coffin of the notion that employment is depressed because we have the wrong kind of workers, or maybe workers in the wrong place.

And asks:

The right question to ask, with regard to all such arguments, is, where are the scarcities? If we have the wrong kind of workers, then the right kind of workers must be in high demand, and either be in short supply or have rapidly rising wages. So where are these people?

Now, not to diminish the fact that what most people refer to as “The Recession” was, in fact, the result of a demand deficiency (or more aptly, a large increase in the demand for money not accommodated by the Fed), I’d like to point to some anecdotal evidence that in reality there is a problem a skill mismatch and “recalculation” that is proving difficult to tract. To the extent that this is the problem, rather than a problem, I’m not quite sure. From David Andolfatto:

For the 15 million Americans who can’t find jobs, the labor market is like an awful game of musical chairs. There are many more players than there are available seats.

Yet at Extend Health, a Medicare health insurance exchange firm in Salt Lake City, Utah, the problem is just the opposite—a growing number of chairs to fill and not enough people with the skills to fit the jobs.

“It seems like an oxymoron in this environment that you can somehow be challenged to find great workers,” CEO Bryce Williams admits, almost sheepishly.

Extend Health’s call center workers help retirees navigate the process of signing up for commercial Medicare Advantage and drug coverage plans.

For this fall’s Medicare Enrollment season, the firm will need close to a thousand workers. The ideal candidate is over 40, with a background of financial services in order to qualify for insurance licensing.

“They need to be able to pass the state of Utah exam, which is not easy,” Williams explains. “They need to have a background in comparing the financial metrics of trying to help someone compare and analyze and give great advice.”

Andolfatto has a link to another story along the same lines regarding manufacturing workers (a field which has become highly specialized). There is also the two facts that college degrees are large fixed investments in skills that may be reduced in demand. This is something that I’m largely familiar with, as I was in school for a prized IT career before the tech bubble burst. As I know Mark Thoma has noted (though I can’t find the link), we have a disproportionately high amount of graduates in business and finance, which is probably still true, and a low proportion of graduates in applied sciences. This of course leads into the next issue: the squeezing of efficiency out of a smaller workforce. How does that relate to the degree profile of our college graduates? Because it is comparatively easy to squeeze extra efficiency out of people who work “in business”. Much easier than, say, squeezing extra efficiency out of an existing construction or manufacturing worker. So if more people are specialized in business or finance, areas that took a major hit, and also an area where substitution is comparatively easy, then there is likely a skills mismatch between there.

So yes, I believe that there is more than trivial problem of skills mismatch, which I think was nearly the whole story up until late 2008, when the large fall in expected NGDP caused various financial obligations to be much harder to service (that tends to pin people down, and reduce employment options). That is a demand story. However, as we slog out of this recession, real job growth may remain low even as we return to previous trend NGDP. We should be at least prepared to discuss the supply side when that happens.

P.S. If anyone was wondering, I’m starting to feel better, though I haven’t gotten a diagnosis as to what is wrong with me, still. Been keeping busy with confusing insurance statements, school, and work. I think I’m at the point where I can end my hiatus from blogging, and write a few things. Glad to be back =].

P.P.S. For a long time I’ve been trying to find oddball diagnoses that fit my symptoms. Doctors hate that, by the way…but I do it anyway. In any case, I’ve been stuck on Whipple’s Disease for a while. Symptoms fit like a glove.

Demand and Denialism

Krugman blogs on demand-deniers, those who don’t believe that recessions are caused by a fall in Aggregate Demand.

Third, monetarists — old-style Friedman-type monetarists who focus on monetary aggregates, or the new style which says that the Fed can and should target nominal GDP — are, whether they realize it or not, part of the axis of monetary evil as far as the demand-deniers are concerned. They may believe that they can limit the scope of demand-side reasoning, making it a case for technocratic policy at the central bank but no more than that. But from the point of view of those who can’t see how demand can possibly matter, they’re essentially in the same camp as Keynesians. And you know, they are; once you’ve accepted the idea that inadequate demand is the problem, the role of fiscal as opposed to monetary policy is just a technical detail (albeit one of enormous practical importance).

At first I thought he meant those who focus on monetary policy were inadvertently pumping up the demand-deniers. A re-reading revealed that he meant that the monetarist were on the same side as Krugman – and thus evil in the minds of the demand-deniers.

In a recent email to a fellow economist, I pointed out that as soon as you accept that the Federal Reserve has control over the overnight interest rate almost all of the Aggregate Demand conclusions fall out as a matter of basic intertemporal optimization.

Said more explicitly:

If the Fed  tries to increase interest rates by shrinking the money supply then folks will try to buy less and save more.

If the market functions smoothly and perfectly then buying less will drive prices down. Saving more will drive the interest rate back down and almost everything will go back to the way it was before the Fed did anything. The only difference will be lower prices.

Thus the Feds effort to raise interest rates would fail.

For the Fed to even be able to alter interest rates there has to be some frictions in the market.

Now you might think that the distortions involved in monkeying with the money supply are so bad is not worth it, but you are in the technocratic world now. You are debating the merits of various demand side policies – not whether or not they are logically possible.

More or less the same thing is true with deficit spending as well. You could believe that deficit spending today causes people to save more in anticipation of higher taxes tomorrow but it takes some pretty heroic assumptions to get all the way to the idea that deficits can’t possibly spur demand.

At the root, I agree, is the common tendency to deny that something is possible when what you mean is that it is undesirable. You might have a laundry list of reasons to think that deficit financed Aggregate Demand expansions are undesirable but that is different than saying that they are impossible.

Denialism, to be clear, does not market one as a crank or fool. Almost everyone does it. I have heard many people claim that violent crime, prostitution, drug abuse, etc could not be eliminated even if we removed all restraints on the state.

I’ve also heard people say that poverty could not be eliminated with a likewise abandonment of our basic principles of government.

All of these denials are almost certainly wrong.

I am tempted to describe the policies that I am confident would virtually eliminate crime and poverty but their draconian nature is so extreme that the description would cause people to recoil from my general case. Moreover, I adamantly profess that doing these things would make the world a much, much worse place.

And, that’s the point. If you don’t like deficits then you can and shouldmake the case  that the ultimate price is too high. You should feel free even  to make the moral case that these things shouldn’t be done even if they would improve the economy.

However, what we shouldn’t do is look away from the truth because the weighing of right and wrong is too painful.

Cats and Dogs Living Together

Paul Krugman is at it again with his calls, using a model based on what I believe to be an entirely flawed conception of monetary policy at the zero bound, to argue that China’s currency policy is harming the US:

So again, the Fed is moving in the right direction, both for US interests and for the sake of the world as a whole. China is beggaring its neighbors, which in this case means everyone else.

Krugman is continuing his call that we begin threatening to engage in protectionism through legislation aimed at Chinese products. Of course, this is wholly unnecessary. Matt Yglesias has the money quote:

The Chinese government’s discomfort with monetary stimulus is understandable. Monetary stimulus plus Chinese currency policy will equal an undesirably large amount of inflation in China. That means that in order to avoid an undesirably large amount of inflation, Chinese leaders will need to engage in a more rapid currency readjustment than they want to. That, however, merely underscores that unilateral monetary action is the right way for the US government to handle our concerns about China’s currency policy. We don’t need to threaten them, or bribe them, or cajole them, or go to “currency war” or anything. What we need to do is to adopt monetary policies that are appropriate for our economic situation. The Chinese will learn to deal with it, and in the longer term we’ll all be better off.

Which highlights the idea that beggar-thy-neighbor policies are anything but zero-sum games when it comes to money. All currencies can’t devalue against each other simultaneously, but all currencies can depreciate relative to goods and services…and that has a stimulative effect. Depending on the relative slope of your economy’s SRAS curve that either means higher inflation or higher real output. Monetary easing in the United States would likely mean higher real output in the US…but it would likely mean higher inflation in China.

What exactly does that do? It gives China cover to adjust their exchange rate policy. A policy of easy money in the US actually benefits both the US and China (assuming that China will follow an optimal policy regime).

What is embarrassing is that we live in a rich country, with a fiat currency, and we are still having a conversation about how to get the economy off the ground…and furthermore contemplating highly detrimental policies in order to do so.

Sales vs. Labor Quality

In a fairly textbook recession (adverse shock to aggregate demand), demand for money increases, while demand for everything else produced in the economy decreases. This raises the real value of money, producing the macroeconomic dislocations resulting from what is popularly known as “price stickiness”. This phenomenon is similarly true (perhaps even more-so) within the labor 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 chart that is running around the blogosphere. He then said that if he were more technically capable, he would produce a graph of “poor sales minus labor quality”. I was going to produce one for him, but luckily I found this in the report:

[Click Image to Enlarge]

There is such a stark inverse relationship between the two answers that a separate index is hardly necessary (although I took the liberty of coloring the chart myself). As you will notice, taxes are always a favorite, and since the start of the Great Moderation, interest rates have hardly been of concern — which one would expect from the smoothing of business cycles and increases in foreign exchange.

Did cash for clunkers hurt the poor?

A recent Edmunds report shows that used car prices are up on average 10.3%, and for some models over 30%, over the last year. This has been attributed by Radley Balko, Edmunds, and others partly to the governments cash-for-clunkers program. I was and am not a fan of cash-for-clunkers, but I don’t think we know how much of this is due to clunkers and how much is due to falling incomes. In fairness, neither Balko nor Edmunds try to lay the blame entirely on clunkers, and Edmunds even discusses the difficulty of isolating the effects, but it is worth explaining the economics of why else prices may have gone up.

It might seem like common sense that that when people’s incomes go down they decrease their demand for stuff, so prices of stuff should also go down. Thus, we would expect in a recession prices for used cars to fall.  But that is not always the case. There are three types of goods: inferior goods, normal goods, and luxury goods. When income goes up by, say, 10%, demand for inferior goods falls, normal goods goes up but by less than 10%, and luxury goods goes up by more than 10%. It is quite believable that used cars are an inferior good, so that the decrease in incomes has led to an increase in the demand for used cars, which could explain some unknown portion of the price increase we have seen. Without some empirical evidence it is premature to point at the 10% to 30% increases and blame it on cash-for-clunkers. This would make for a good paper topic for some enterprising student….. Or if someone wants to know bad enough to pay for it, I’d be glad to crunch the numbers.