Republicans' Latest Existential Crisis

No One Makes You Shop at Wal-Mart

Tom Slee: No One Makes You Shop at Wal-Mart: The Surprising Deceptions of Individual Choice: Chapter 1 — A World Of Choice:


We live in a world of choice.

We make choices every day. We choose the clothes we wear, the way we travel, the movies we watch, and the places we shop. From time to time we make bigger choices as well: the neighbourhoods we live in, the jobs or universities or schools we go to, and even the cultures we identify with. These choices give us a measure of control over our lives, and it seems natural to believe that individual choice is, almost by definition, a good thing.

A 'Jobs Council' is not an Economic Council

Eve Troeh:

The president's Council on Jobs and Competitiveness is set to end tomorrow. It came together two years ago, to generate ideas and policies for accelerated job creation. I asked economist Gary Burtless at the Brookings Institution what he thought about the president's jobs council calling it quits.

"Well, as probably more than one economist would remark to you, I didn't even remember we had one," he says.

Most of the American public would answer the same, though the 26 members of the council did include some big names, mostly CEOs from companies like GE, Intel and DuPont. Burtless says the general idea was to have leaders in the business community offer advice to the president on how jobs could be created more quickly with government help.

But he says those leaders had a hard time seeing past their own interests. Their insights and suggestions mostly applied to their own companies.

The lesson here is that business leaders have no special insight into the macroeconomy. This is not, of course, news, but it bears repeating because the fallacy that the economy is solely composed of businesses, and therefore business leaders are the great sages of the economy as a whole, is ruthless and persistent.

Obviously, most business leaders are smart people, so it makes some sense that they are included in discussions of the macroeconomy. Their precise expertise is microeconomic in nature, however. That is, they can tell us something about the decision-making of individuals and firms. But, while a nuclear biologist could tell you something about the composition of muscle cells, you wouldn't ask her to perform your heart surgery.


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Repost: MLK Day Every Day

Today I am reposting an essay I wrote last year on the occasion of Martin Luther King Day. I don't have much to add, except some edits for clarity.

MLK Day Every Day

Today, our nation honors its single greatest citizen, Dr Martin Luther King, Jr. Dr King seized upon the ideals of the founders and sought to bring intellectual honesty to the precept, "Justice for all." Like so many people of beneficent conscience, he sought to remake the world in the image of what it could be. Unlike so many before or since, he succeeded, at least in moving our society toward that goal, chiefly through the relentless courage of his convictions.

In the immediate aftermath of the Second World War, black Americans who'd served overseas began to agitate for the sort of equality to which they'd been exposed in Europe. They came to realize that, if they were to fight and die for the American cause, perhaps that cause ought to include their interests. From this burgeoning movement emerged Martin Luther King. A young minister with a degree in divinity, he was radicalized by the rampant culture of abuse inflicted upon American blacks, particularly in the south. His expansive philosophical interest led him to, among others, Henry Thoreau, whose views on the tyranny of the majority were the intellectual foundation of Dr King's interpretation of the problem faced by black Americans, and Mohandas Gandhi, whose philosophy of non-violence was the inspiration for Dr King's solution.

The importance of the cultural shift under way in the 1950s to the effectiveness of Dr King's message cannot be overstated. In the years after the Second World War, Americans collectively enjoyed a growth in prosperity previously unseen. As more and more white Americans escaped poverty and enjoyed President Roosevelt's "freedom from want," it became increasingly clear to non-whites that they were not to be included. The expansion of radio and the advent of television hammered home the point that economic security and middle class luxury in 1950s America were monochromatic. Radio and television also provided the viscerally powerful orator an audience wider than that enjoyed by earlier prophets.

In 1965, Dr King's focus on social improvement expanded to include the economically disadvantaged, regardless of race. The escalation of the war in Vietnam struck at the heart of Dr King's fervent belief in non-violence. He also came to see conscription, as practiced in 1960s America, as an unfair burden upon the less fortunate, and blacks in particular. His inclusion of poor whites in the pantheon of the dispossessed whose lot he sought to improve posed a particular threat to the political and economic establishment because then, as is still so sadly the case now, this establishment relies upon poor whites as their agents of oppression, forming a bulwark against the political and economic gains of poor minorities.

That Dr King was killed before his job was done is not to be mourned. It is not appropriate, either, to draw primary inspiration from his tragedy. It is a disservice to his legacy to focus our attention too greatly on any aspect of his story beyond his message. Dr King was no utopian; he lived in, and was of, our time. He did not advocate equality of result, merely equality of opportunity. Much of the last forty years has seen the rise of philosophies committed to the maintenance of the status quo, such as free-market fundamentalism. While this would surely sadden Dr King, it is important to take a long view, as Dr King acknowledged when he observed that “The arc of the moral universe is long, but it bends toward justice." To recognize that our society has come so far in furtherance of the betterment Dr King envisioned is not to blindly settle for what progress has been made, but rather to understand how much more is possible.

The holiday in honor of Dr Martin Luther King, Jr comes once a year, in January. Every day that we consider the plight of the poor and of the disadvantaged and work toward improving our shared prosperity, however, is Martin Luther King Day.

"True compassion is more than flinging a coin to a beggar; it comes to see that an edifice which produces beggars needs restructuring."

Adam Ozimek Just Can't Help Himself

In a nutshell, Mr Ozimek sees an attempt at legislation that is likely to help workers and acknowledges that workers may in fact be made better off, but his Republican instincts just can't be kept down. In other words, "workers' improvement is always and everywhere baaaad."

Should Employers Be Allowed To Prevent Workers From Sharing Their Salary Information?There are a variety of social norms around talking about wages and salaries. It's often considered rude to ask someone what they are paid, and this is sometimes true within workplaces. In fact some employers go so far as to not permit workers to share wage and salary information with each other. Employers would be banned from doing this by the Paycheck Fairness Act, which has failed to pass in congress twice. Is this a good idea? 

The case for this law is pretty common sense: knowing what their coworkers make will give employees bargaining power, and may even prevent discrimination. However, I think there is a not-so-obvious case for why this aspect of the law may be a bad idea: it could allow fairness norms to increase unemployment. 

Consider a simple case where an employer has market power. In this case they will set wages like a monopolist, which will put wages and employment below efficiency level. However, this assumes that employers must pay a single price for workers. If workers can price discriminate by offering marginal employees lower wages, then market power need not create unemployment. This is a specific example of the general rule that price discrimination can increase everyone's welfare by increasing output. 

So why wouldn't employees do this? Fairness norms may make paying some employees less than others untenable in the workplace. This can matter in situations other than marginal hiring decisions as well. In a recession it can be difficult for employers to cut wages, and it seems obvious that this would be even more true when wages need to fall unevenly, e.g. not 5% for all workers, but 10% for some and 0% for others. Fairness norms may prevent employers from making these cuts and instead forcing them to rely on firing some workers. If workplaces can prevent wage and salary information from being shared, it may stop fairness norms from getting in the way of employment maximizing wages. 

Some important caveats are obviously in order. First, I am not presenting a concrete case against this law, as there are many other provisions in it. Second, I am not even presenting a concrete case against the specific aspect of the law discussed above. I am simply offering a possible downside to this law. It very well may be the case that sharing of wage and salary information would not lead to much or any extra unemployment.  The upsides would be that workers may better learn about their marginal productivity, and it could thus lead to more efficient allocations of labor. Or perhaps it would lead to the harmless redistribution of rents from firms to employees. But is important we consider all possible effects of this law, and this is one of them.

The only "argument" Mr Ozimek can muster assumes monopsony power on the part of the employer. Leaving aside the fact that many (most?) employers do not enjoy such power, Mr Ozimek's contention seems to be that, given inordinate market power on the part of employers, the proper "solution" is not to seek to abrogate that power, but rather to ensure that all employees everywhere are kept from information that would help their negotiating positions and aid potential discrimination lawsuits.

"Pay no attention to Montgomery Burns behind the curtain!"

Why We're Here

"The body politic is formed by a voluntary association of individuals: it is a social compact, by which the whole people covenants with each citizen, and each citizen with the whole people, that all shall be governed by certain laws for the common good."

-excerpted from the Preamble to the Constitution of the Commonwealth of Massachusetts.

A Brief Note on Connecticut

I'm not going to go deeply into the tragedy today in Connecticut, but I wanted to expand upon what Ezra Klein said this afternoon, that those who reflexively call for a moratorium on so-called political issues after events like this are, in fact, politicizing the event themselves.

At some point, we as a nation are going to have to decide to take these tragedies seriously. There is no one solution to this problem, and anyone who tries to tell you that there is is lying to you, or to themselves.

We need to improve our mental health screening processes. We need to vigorously enforce our existing firearms laws. These are non-negotiables if we want to reduce gun violence, especially that of the mass, nonsensical variety that is increasingly common in this country.

But inescapable from this issue is our self-annihilating relationship with guns. We cannot stop these absurd tragedies until we decide to stop sacrificing our fellow citizens on the altar of an unfettered Second Amendment. Our freedoms are sacred to us in this country, and mostly for good reason, but the cost of this stubbornly archaic interpretation of this particular freedom is paid by the people killed in these shootings and by their families. Anyone who thinks this interpretation is defensible ought to try and defend it to them.

Richard Posner on the Electoral College

Richard Posner offers a defense of the Electoral College in Slate. While acknowledging the faults of the barbarous relic, Judge Posner makes a solid point on demographics and geography. The Electoral College discourages candidates from campaigning in 'safe' states, forcing them to win over skeptical swing-state voters. I find this idea especially persuasive given the rise of monolithic 'movement conservatism.' It's not hard to imagine a candidate such as Senator Santorum spending all of his time working his base up into a thorough lather, while never venturing north of Louisville or west of Amarillo.

I disagree with Judge Posner's assertion that swing-state voters are the best voters. Here I feel he wades into dangerous voter analysis territory. This tracks with his admitted ambivalence to serious democracy, but no one's perfect, as they say.

Post-Election Roundup

Ta-Nehisi Coates' big picture review: Hippies Wander Into the Lions' Den, Maul Lions

Who voted for Mitt Romney? Funny you should ask... (Tom Scocca)

http://www.slate.com/articles/news_and_politics/scocca/2012/11/mitt_romney_white_voters_the_gop_candidate_s_race_based_monochromatic_campaign.html

Also, Ezra Klein on the, uh, optics.

http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/11/07/the-romney-campaigns-biggest-mistake-in-the-election/

Paul Krugman, quickly

Greg Ip on the validation of macroeconomics

Ezra Klein's got a posse, and they have charts.

Randall Munroe delicately and patiently explaining in precise detail the dissonance between the 'numbers' guys and the diviners of 'momentum.'


Note: Sorry for the ugly links. Blogger will not currently allow those links to, you know, link.

Repost: Evan Soltas, An Alternate View of Markets

If the average student remembers anything from a single-term economics course over the long run, it is the basic model of supply and demand.

He or she is taught that there exist microeconomic, and macroeconomic aggregate, supply and demand functions which codetermine the combination of real output and price for any particular good or service, and across the entire economy. He or she is taught that these forces push markets to equilibrium by draining surpluses through underproduction or price cuts -- or in the face of scarcity, expanding production or hiking prices. He or she is taught to think about markets as, in a word, orderly.

But what if that's wrong? Or, more precisely, what if the orthodox view of markets as self-organizing and equilibrating systems captures but the smallest sliver of their behavior? What if the vast majority of market behavior does not fit into such a model? What if the truth is that markets are ultimately more disorderly, more behavioral, more unstable, and more path-dependent than a primarily supply-and-demand framework allows us to understand?

Brittle, fragile, and chaotic is an entirely different characterization of markets, so much so that I find these the two visions difficult to reconcile. To get there, you may have to adjust your view of human nature -- we can't be, or maybe can't all be, intemporal optimizers in such a world. By teaching the orderly former so early on and so unequivocally, and to the near-total exclusion or extreme delay of the disorderly latter, it's worth asking if the emphasis on the supply-and-demand framework blinds economists, or if it leads them to dependably misperceive the economic systems they study.

It's worth asking, in fact, if economists have it backwards, if rather than living in a neoclassical world with some non-neoclassical phenomena happening in the footnotes -- imperfect information, money illusion, noise traders, loss and risk aversion, herding instinct, etc. -- we live in the non-neoclassical world with a limited amount of neoclassical phenomena sprinkled on top.

Basic behavioral intuition would seem to reinforce the notion that we are cognitively biased to see a neoclassical economy and confine the disorder to footnotes, considering the well-documented and broad tendency of humans to perceive ordered phenomena where there is none, or their persistent overestimation of confidence in order or pattern.

In some subfields of economics -- that is, besides the direct behavioral/cognitive/neuro research -- supply-and-demand is not seen as quite so regnant. I'm thinking, in particular, of the economics of exchange rates.

Here I find a rather close analogy to the view that supply-and-demand explains relatively little: the rejection of perfect and continuous purchasing power parity (PPP) hypothesis, which said that exchange rates should always adjust such that identical goods available in different countries cost the same amount, i.e. such that there is no room for further arbitrage trade.

Kenneth Rogoff, in a 1996 paper quoted in this PPP literature review in the Journal of Economic Perspectives, wrote: "While few empirically literate economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-run real exchange rates." That is, perhaps, a similar destination for this alternate view of markets: supply-and-demand "as an anchor for long-run" prices and quantities, hardly operating "as a short-term proposition." This dimmer view of PPP comes from a recognition of a variety of influences which consistently push foreign-exchange markets out of PPP equilibrium: interest rate differentials, real growth differentials, risk premia, all of which influence capital flows and trade balances.

It is not challenging, as a theoretical matter, to render a supply-and-demand equilibrium unstable through the addition of other forces. Let's look at one stylized models with some interesting, but I think plausible, assumptions.

Consider the possibility that price can influence demand -- more specifically, a microeconomic demand function which is determined to a significant extent by recent changes in price. When prices are rising, the entire demand function moves out; when prices are falling, the entire demand function falls back. There is, in other words, a component of demand which responds to the direction of price changes; in a traditional supply-and-demand model, the demand function is independent of price, and it is quantity demanded which is dependent upon price. In the case of the housing market, where demand is appears strongly governed by expected appreciation or depreciation of that asset, that modification of the model strikes me as reasonable, especially in the context of risky, limited arbitrage. Under these assumptions, partial equilibria are unstable, sensitive to movements in prices, and the market as a whole looks much like our brittle-fragile-chaotic story, rather than self-ordering and equilibrating.

Without implicating him in any way, I thank Miles Kimball for helpful comments and suggestions via email in advance of this post.

Update (8/4/12): Noah Smith makes a similar point in an old post, writing that:

[t]he whole notion of thinking of each interesting feature of the economy as a "friction," and then of considering only one or two "frictions" at a time, has been very detrimental. For one thing, it makes it hard to develop a useful model of the economy, since the actual economy contains many, many "frictions" (so many that the "frictions" together are usually more important than the "frictionless" dynamics that supposedly "underlie" them). Also, the "one friction at a time" approach makes it very difficult to generate any alternatives to the classical "core theory" of Walrasian general equilibrium.

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Voting Information

In one week's time, the 2012 iteration of our greatest national holiday, Election Day, will be upon us. As many states have instituted Early Voting, the wonders of the ritual are available to be enjoyed for as many as thirty days in advance of the day itself.

Conscience Warrior encourages all whom this post may reach to do the most patriotic act an American can do: Vote! Familiarize yourself with your choices and find your local polling place here.

Mankiw Reality-Disconnect of the Day

From an outpost on the narrow edge of the fever swamp:

Woodward seems to believe that if we had a President more like Bill Clinton, a fiscal deal could have been struck. President Obama is described as distainful of schmoozing with other pols, as mishandling the negotiation process, and as unwilling to move sufficiently toward the political center to get a deal done. One gets the sense that the Democratic President who signed the 1996 welfare reform would have more easily reached a compromise with House Republicans.
This story brought to my mind recent research by Baker, Bloom, and Davis, which suggests that policy uncertainty has impeded the economic recovery. If Baker et al. are right that uncertainty depresses the economy, and if Woodward is right that the uncertainty we now face with the upcoming "fiscal cliff" is attributable mostly to the inability of Barack Obama to work with Congress, then the implication is clear: The meagerness of this recovery is not simply a hangover from a financial crisis, but rather a reflection of a fundamental political failure. The price of politics, indeed. [link and emphasis added]

There are several obvious rebuttals to this idea; my favorite comes to us via the Heritage Foundation. Take it away, Senator:

If you didn't immediately recognize him, that was Senator McConnell of Kentucky, the Minority Leader. That these people are continually reelected is testament to the validity of Jay Gould's Law.