On Wisconsin

For those who are unaware, street protests have come to Wisconsin. Literally tens of thousands (a local Fox news affiliate admitted they numbered at least 70,000 on Saturday) for what is now at least 4 consecutive days of protests in Madison, Milwaukee, and other cities.  The issue that has brought them out is a proposal that recently elected Republican governor Scott Walker made and looked ready to jam through the Wisconsin legislature (Republican majority) without hearings was allegedly a deficit-reduction budget bill.  But the bill contained provisions to outlaw or severely curtail the rights of public employees to collective bargaining. It is an interesting situation. 52 years ago, in 1959, Wisconsin became the first state to allow unionization and collective bargaining by state and local employees. Now the governor wants to lead (?) by abolishing it.  For more on the protests in general see most any major news outlet.  Here are two reports: ABC News and CNN. This is a significant issue and possible turning point in American political economy.  The proposals to end public employee collective bargaining and the protests are spreading to other states such as Ohio, Indiana, Tennessee, and Nevada.

Most of the national news coverage is taking the governor’s claims at face value. In particular the assertion that the state faces a severe deficit, that public employees are “overpaid” and have too-rich benefits, that the only way to balance the budget is to cut benefits, and that only by ending collective bargaining can that happen.  As usual, the news media have failed.  The facts are otherwise.  I turn to Menzie Chinn, one of the country’s premier econometricians, who happens to be on the scene (he teaches at Univ Wisconsin Madison) for a few of his recent dispatches from the front.

First up, the governor had carefully planned this.  Including alerting the National Guard well over a week ago:

From The Isthmus:

The Wisconsin National Guard has not been activated but it is on alert.

“Plan for the worst, expect the best,” Gov. Scott Walker explained to a jam-packed press conference this morning in the State Capitol.

It was the official roll-out of his broad rollback of collective bargaining rights for unionized government employees, part of his budget repair bill, seeking to resolve a $150 million shortfall in the next five months.

Walker said he was well aware that “some union leaders will try to incite their members.”

Next, the governor and Republicans (and Fox news) are repeating ad nauseum the assertion that public workers, both in Wisconsin and in general, are overpaid and overcompensated when compared to the private sector.  The only studies I’ve seen that draw that conclusion are studies that compared the compensation per job of college-educated full-time public employees to non-educated part-time private sector employees.  Menzie Chinn (he is an econometrician) crunches the numbers and finds public workers are lower paid than comparable private sector employees:

Using the March 2010 CPS data, regression analysis controlling demographic characteristics (full-time, education, years of economic experience, gender, race, citizenship, and organizational size) confirms that total hourly compensation for Wisconsin public sector workers is 4.8% lower than for private sector (-5.1% for Wisconsin State workers, and -4.7% for local government). The differentials are bigger for annual compensation. These estimated differentials are statistically significant, as shown in Table 4. (graphs and tables at the link)

On Friday, the unions called the governor’s bluff.  They proposed to accept the benefit cuts (the financial part) if the governor would give up on the ending collective bargaining. Again Menzie reports:

From Milwaukee Sentinel Journal:

…The Walker statement was in response to a statement earlier Saturday from [State senator] Erpenbach, who said he had been informed that all state and local public employee unions had agreed to the financial aspects of Walker’s budget-repair bill. Erpenbach added in his statement that the groups wanted, in turn, for Walker to agree to let labor groups bargain collectively, as they do now.

Since collective bargaining rights do not in themselves have direct budgetary implications, then it is unclear — from a fiscal perspective — why agreement can not be made.

Local Fox news affiliate estimates the anti-bill crowd at 70,000, and tea party supporters of the governor’s bill in the hundreds.

If the governor has rejected this proposal, then it is clearly NOT about the money or the alleged deficit.  It is about power and breaking unions. It is interesting then that the governor, whose real intent is now clear (break the unions) did not try to propose and argue a change in collective bargaining on any merits of it’s own. Instead, he claimed it was necessary because of money, not because he wanted to argue the inherent rightness or desirability of ending collective bargaining. It is not surprising then that we find that even the claim of deficit and the necessity of trimming state spending was false.  In fact, while Wisconsin faces some deficit – with 9% national unemployment, all levels of government are short of revenue, it was in relatively good shape until Scott Walker came into office as governor in January.  Among Walker and his legislature’s first actions in January were to make the deficit worse by giving tax breaks to special corporate interests. The Cap Times reports how “Walker gins up crisis to reward his cronies”.  It turns out that the $137 million deficit Walker claims is the reason for breaking the unions, is actually the result of the $140 million dollar special interest tax breaks bill passed by Walker and his Republicans. As recently as January 31, the state of Wisconsin was forecasted to end the year with a surplus, not a deficit.

How this all turns out will, I think, have significant repercussions beyond Wisconsin.  The governor of Wisconsin has even managed to anger the Super-bowl champion Green Bay Packers.  I don’t think that’s a good move in the cheese state.


Why the Austerity Talk?

Brad DeLong is as puzzled as I, but is more eloquent in expressing it.  In so doing he does my classes a favor in expressing a quick version of the history of addressing macro economic crises.

For nearly 200 years economists from John Stuart Mill through Walter Bagehot and John Maynard Keynes and Milton Friedman to Ben Bernanke have known that a depression caused by a financial panic is not properly treated by starving the economy of government purchases and of money. So why does “austerity” have such extraordinary purchase on the minds of North Atlantic politicians right now?

Let me speak as a card-carrying neoliberal, as a bipartisan technocrat, as a mainstream neoclassical macroeconomist–a student of Larry Summers and Peter Temin and Charlie Kindleberger and Barry Eichengreen and Olivier Blanchard and many others.

We put to one side issues of long-run economic growth and of income and wealth distribution, and narrow our focus to the business cycle–to these grand mal seizures of high unemployment that industrial market economies have been suffering from since at least 1825. Such episodes are bad for everybody–bad for workers who lose their jobs, bad for entrepreneurs and equity holders who lose their profits, bad for governments that lose their tax revenue, and bad for bondholders who see debts owed them go unpaid as a result of bankruptcy. Such episodes are best avoided.

From my perspective, the technocratic economists by 1829 had figured out why these semi-periodic grand mal seizures happened. In 1829 Jean-Baptiste Say published his Course Complet d’Economie Politique… in which he implicitly admitted that Thomas Robert Malthus had been at least partly right in his assertions that an economy could suffer from at least a temporary and disequliibrium “general glut” of commodities. In 1829 John Stuart Mill wrote that one of what was to appear as his Essays on Unsettled Questions in Political Economy in which he put his finger on the mechanism of depression.

Semi-periodically in market economies, wealth holders collectively come to the conclusion that their holdings of some kind or kinds of financial assets are too low. These financial assets can be cash money as a means of liquidity, or savings vehicles to carry purchasing power into the future (of which bonds and cash money are important components), or safe assets (of which, again, cash money and bonds of credit-worthy governments are key components)–whatever. Wealth holders collectively come to the conclusion that their holdings of some category of financial assets are too small. They thus cut back on their spending on currently-produced goods and services in an attempt to build up their asset holdings. This cutback creates deficient demand not just for one or a few categories of currently-produced goods and services but for pretty much all of them. Businesses seeing slack demand fire workers. And depression results.

What was not settled back in 1829 was what to do about this. Over the years since, mainstream technocratic economists have arrived at three sets of solutions:

  1. Don’t go there in the first place. Avoid whatever it is–whether an external drain under the gold standard or a collapse of long-term wealth as in the end of the dot-com bubble or a panicked flight to safety as in 2007-2008–that creates the shortage of and excess demand for financial assets.
  2. If you fail to avoid the problem, then have the government step in and spend on currently-produced goods and servicesin order to keep employment at its normal levels whenever the private sector cuts back on its spending.
  3. If you fail to avoid the problem, then have the government create and provide the financial assets that the private sector wants to hold in order to get the private sector to resume its spending on currently-produced goods and services.

There are a great many subtleties in how a government should attempt to do (1), (2), and (3). There is much to be said about when each is appropriate. There is a lot we need to learn about how attempts to carry out one of the three may interfere with or make impossible attempts to carry out the other branches of policy. But those are not our topics today.

Our topic today is that, somehow, all three are now off the table. There is right now in the North Atlantic no likelihood of reforms of Wall Street and Canary Wharf to accomplish (1) and diminish the likelihood and severity of a financial panic. There is right now in the North Atlantic no likelihood at all of (2): no political pressure to expand or even extend the anemic government-spending stimulus measures that have ben undertaken. And there is right now in the North Atlantic little likelihood of (3): the European Central Bank is actively looking for ways to shrink the supply of the financial assets it provides to the private sector, and the Federal Reserve is under pressure to do the same–both because of a claimed fear that further expansionary asset provision policies run the risk of igniting unwarranted inflation.

But there is no likelihood of unwarranted inflation that can be seen either in the tracks of price indexes or in the tracks of financial market readings of forecast expectations.

Nevertheless, you listen to the speeches of North Atlantic policymakers and you read the reports, and you hear things like:

“Obama said that just as people and companies have had to be cautious about spending, ‘government should have to tighten its belt as well…’”

Now there were—and perhaps there still are—people in the White House who took these lines out of speeches as fast as they could But the speechwriters keep putting them in, and President Obama keeps saying them, in all likelihood because he believes them.

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, as a mainstream neoclassical economist. Right now the global market economy is suffering a grand mal seizure of high unemployment and slack demand. We know the cures–fiscal stimulus via more government spending, monetary stimulus via provision by central banks of the financial assets the private sector wants to hold, institutional reform to try once gain to curb the bankers’ tendency to indulge in speculative excess under control. Yet we are not doing any of them. Instead, we are calling for “austerity.”

John Maynard Keynes put it better than I can in talking about a similar current of thought back in the 1930s:

It seems an extraordinary imbecility that this wonderful outburst of productive energy [over 1924-1929] should be the prelude to impoverishment and depression. Some austere and puritanical souls regard it both as an inevitable and a desirable nemesis on so much overexpansion, as they call it; a nemesis on man’s speculative spirit. It would, they feel, be a victory for the Mammon of Unrighteousness if so much prosperity was not subsequently balanced by universal bankruptcy.

We need, they say, what they politely call a ‘prolonged liquidation’ to put us right. The liquidation, they tell us, is not yet complete. But in time it will be. And when sufficient time has elapsed for the completion of the liquidation, all will be well with us again.

I do not take this view. I find the explanation of the current business losses, of the reduction in output, and of the unemployment which necessarily ensues on this not in the high level of investment which was proceeding up to the spring of 1929, but in the subsequent cessation of this investment. I see no hope of a recovery except in a revival of the high level of investment. And I do not understand how universal bankruptcy can do any good or bring us nearer to prosperity…

I do not understand it either. But many people do. And I do not understand why such people think as they do.


No do I understand why they think that way.  But I suspect that it has to do with political and rich elites preferring to have a more dominant share of a smaller pie than to rationally wanting to share a larger one.  As one of the commenters to Brad’s post put it:

We’ve been down this road before. “Auterity” is just a euphemism for getting the ignorant and foolish to support their own ruin in the name of wealth transference to the already wealthy by destroying government programs and services that benefit the middle class and needy.



Micro Theory vs Reality: Baseball Edition

From James Kwak at Baseline Scenario:

“No, No. It’s Already Priced In. ” That was undoubtedly the response of theoretical law and economics devotees to the premature retirement of Kansas City Royals pitcher Gil Meche a few weeks ago, which we discussed in one of my classes last week. Meche signed a five-year, $55 million, guaranteed contract before the 2007 season, which would have paid him $12 million in 2011 simply for showing up, despite a broken-down shoulder that made him an ineffective pitcher. Yet Meche decided to retire, giving up the $12 million. Meche said this:

“Once I started to realize I wasn’t earning my money, I felt bad. I was making a crazy amount of money for not even pitching. Honestly, I didn’t feel like I deserved it. I didn’t want to have those feelings again.”

One of the topics of the class was non-economic preferences, particularly preferences for fairness, which have been a staple of psychology and behavioral economics over the past decade. Classical theory says that Meche should have kept the $12 million for two reasons. The obvious reason is that $12 million is more than zero, and almost certainly more than the disutility of having to show up to work for another eight months. (Although maybe his marginal utility of money is very low at this point, after four years of his big contract.)

The slightly less obvious reason, which is drilled into law students’ heads in the first semester, is that the risk of career-debilitating injury is already priced into the contract. On this theory, parties are free to bargain for whatever contract terms they wish. In Major League Baseball, the standard for free agent contracts is that they are guaranteed, meaning that they cannot be terminated due to injury (and, I believe, only for cause, where cause includes things like going to jail or getting injured in specifically prohibited activities like dirt-bike racing). So, the argument goes, baseball players chose to bargain for contract guarantees, and in return they are getting less of something else that they want — presumably less money. Put another way, the risk of injury is already priced into the contract. If a player goes through his contract without injury, and remains productive, the team is not going to pay him more money simply because of that. (The player will get more money eventually, either by renegotiating partway through or by getting a bigger contract at the end of the current one, but presumably that’s priced in as well.)

This all may be right. More importantly, it provides a powerful justification for taking the money. It’s hard to stand up and say, “I’m taking the $12 million because it’s in my contract, and I want it, and it’s legally mine.” It’s a lot easier to say, “Teams and players are free to contract however they want, and I accepted less money each year because I got a guarantee, so the $12 million is not only legally but morally mine — it’s just like the payout on an insurance contract, where the reductions in my salary each year were the premiums and the $12 million is the payout.”

So maybe Meche should have taken the money. But at the same time, theoretical law and economics doesn’t dictate our societal norms, at least not yet. As he said, “It’s just me getting back to a point in my life where I’m comfortable. Making that amount of money from a team that’s already given me over $40 million for my life and for my kids, it just wasn’t the right thing to do.” It sounds like he just decided he was happier without the $12 million than he would have been with it.

James Kwak On Measurement and Bad Data

James Kwak writes about how bad data and mismeasurement in almost any field of endeavor leads to not only bad decisions but misaligned incentives and bad behavior. Whether it’s for productivity, employee performance, baseball, or the macroeconomy, measure matters. Our abilities using computers and the net are (mis)leading us in many perverse ways.  Just because we have the data, doesn’t mean it’s right or that we should do what it first implies.


Democracy, Economic Growth and Development: Do They Fit?

The following is an excellent and thought-provoking post at Washington’s Blog.  It is about a puzzle. And, in light of the successful revolutions in Tunisia and Eqypt, and the protests now occurring in Bahrein, it is quite timely.

The puzzle is this: Why, if the U.S. is supposedly all about democracy, why does the U.S. persistently support authoritative regimes that are anti-democratic?  Why despite our rhetoric and our own national mythos, has U.S. policy for at least 70 years supported authoritative anti-democratic regimes throughout the world? The post is about a relatively new study and book about the issue. As usual, economic models and faulty models in particular, are at center of the story. In a paragraph, the authors of the new book, Halperin and Siegel, sum it up as:

Today, it is politically incorrect to extol publicly the virtues of autocracies — countries where leaders are not popularly elected nor subject to meaningful checks and balances. Nonetheless, the view that these governments do a better job of promoting economic growth and stability among
poor countries remains firmly entrenched in the minds of many world leaders, economists, national security advisors, business executives, political scientists, and international civil servants. According to this perspective, promoting democracy in poor countries is naïve and potentially dangerous.

The complete story is after the fold.

The Faulty Economic Model Behind America’s Support for Dictators (Instead of Democracies)

It is obvious that America has long supported dictators, instead of democracies, in developing countries.


Is it simply – as Noam Chomsky asserts – that America supports strong men who will ensure that their country acts as a “client state” to the U.S., and moves to crush countries which refuse to act as satellites to the U.S.?


But – as usual – faulty economic models are part of the problem.

Specifically, Morton Halperin, Joe Siegel and Michael Weinstein co-wrote a book called The Democracy Advantage: How Democracies Promote Prosperity and Peace, published by the Council on Foreign Relations in 2005, which provides insight into the economic model used to justify America’s historic support for dictators.

Continue reading

Is Our High Unemployment Structural?

So following up on my post on the types of unemployment, when unemployment is high, how do we know if it’s due to structural or cyclical causes?  The answer is important because it tells us what kind of policy actions to take.  Do we need stimulus? (addresses cyclical), or do we need job-retraining, relocation, and education? (targets structural).  There is no clear cut way to tell how much of each type exists.

For example, suppose unemployment is 9%, much as it is today.  Let’s assume that this is a seasonally adjusted number, so we can assume that none of the 9% represents seasonal.  Let’s further assume, just for the sake of arguement, that 5% points of the 9 points represent frictional unemployment.  I should note that this is a somewhat controversial point.  I do not personally think that frictional is in fact that high nor that it we cannot get below that point. Personally I don’t see why frictional should be greater than 2-3%. My views on this are heavily influenced by Bill Mitchell and the MMT people. But since mainstream economics since Milton Friedman has defined it so, let’s accept frictional unemployment as being 5% just for the sake of this argument.  That means there’s another 4% points of the 9 points that must be either structural or cyclical. How can we tell the difference?

There’s no clear-cut way to tell as in doing some direct survey.  Instead we need to look at some indirect indicators.  Two of the more indicators we could look at are: the job seekers  to job openings ratio and unemployment by industry or state.  If our high unemployment is primarily due to structural factors then we should see a low ratio of job seekers to open jobs, and we should see wide differences in unemployment by industry or geography.  If we see low ratio of job seekers to job openings, then that means there are jobs in aggregate but apparently those seekers (unemployed) are unqualified. If we see wide differences in unemployment by industry or geography, it indicates again that jobs exist but they aren’t where the workers are.  On the other hand if the seeker-openings ratio is high, then that means there just aren’t enough jobs period – workers outnumber jobs.  If unemployment is high across all industries and locations, then again there is no unsatisfied sector. There is no structural unemployment.

So with that in  mind, let’s look at the data.  First, via StateofWorkingAmerica.org, we have the job seekers-to-job openings ratio (called the JOLTS data series):

Job Seekers to Job Openings Ratio, US, 2001-2010














Yep, it’s pretty high – between five and six workers for every open job.  Next, let’s consider unemployment across industries.  This via Paul Krugman:

here’s the increase in unemployment 2007-2010 by industry of previous employment:


See the structural shift? Neither do I. As others have noted, basically unemployment doubled for every industry, every occupation, every state. Where are the sectors/occupations/regions gaining jobs? Nowhere to be found. There’s nothing structural about it.

But what about geographic mismatch? Let’s go to the state-by-state unemployment numbers from Calculated Risk:

Unemployment Rates by State, Dec 2010












Still no mismatch. Yes, there are three states under 5% and two more under 6%, but these states are the Dakotas, Nebraska, New Hampshire and Vermont.  Relatively speaking, nobody lives there.

So overall this means it’s not structural unemployment that is keeping unemployment high.  It’s cyclical unemployment.  That means the route to lower unemployment is more stimulus, not austerity. Better yet, a jobs guarantee program could work very effectively.

Types (Causes) of Unemployment

Economists classify unemployment into four types according to what caused the unemployment.  If we assume the goal is “full employment” (never mind how we might define or measure “full” right now – there’s mischief there), then what we’re really saying is that our goal is for the economy to create an appropriate a job for every willing and able worker. Then, if we find that the economy is producing some unemployment, we can and should ask ourselves: why hasn’t the economy produced an appropriate job for each worker?  We then essentially classify the economy’s failure to put every available worker into a job as due to one of four reasons.

  • Seasonal
  • Frictional
  • Cyclical
  • Structural

From a policy standpoint, two are troubling and two aren’t.  The two non-troubling causes or types of unemployment are seasonal and frictional.

Seasonal unemployment means the worker (and his/her skills) is unemployed because it’s the wrong time of year.  A classical example is a downhill ski instructor in July, or part-time holiday sales clerk in February. When time passes, winter for the instructor or November-December for the clerk, they’ll be employed again.  Employment data can be statistically massaged to remove the seasonality and so we typically look at unemployment data that is “seasonally adjusted” and we ignore seasonal unemployment.  Besides what kind of policy could we implement to fix it? Legislate Christmas in July? or pass a low mandating snow?

Frictional unemployment means that actually there is a job for the unemployed worker at the time we measured unemployment, it’s just that the worker and the job haven’t matched together yet.  Frictional represents people looking for jobs that are indeed out there for them.  Again, policy, at least at the macro level is not needed here. These workers will find their finds.  At any point in time in a healthy market economy there will always be some people between jobs.  That’s a good thing since it means people are getting matched to jobs where there’s a better fit. The only ways to drive frictional unemployment to zero is to either have instantaneous job searches or nobody ever moves to a better job.

That leaves cyclical unemployment and structural unemployment.  The difference is important in theory but difficult to identify in practice. Cyclical unemployment is workers who are out-of-jobs because employers cannot sell enough goods.  In other words, the economy is depressed. If it grows faster these people will get hired. Cyclical unemployment can fixed by appropriate macro-level stimulus policies.

Structural unemployment however, while of interest to policy-makers, cannot be fixed as easily by macro-level stimulus policies. Structural unemployment occurs when there is a mismatch at the individual worker-level between the skills, experience, qualifications, and location of the unemployed workers and what’s required for the open job opportunities. Examples of structural unemployment at the national level include:

    • technological obsolescence – we no longer need those skills (or as many with those skills). The classic example is horse livery workers once we switched to automobiles around 1910. A more modern example might include photographers or developers of film (the old silver-halide, analog stuff) after the world has switched to digital photography.
    • location mismatch – the unemployed workers live in one state and the open job opportunities exist somewhere else.
    • educational mismatches – the jobs being created require higher educational degrees or specific trainings, but the unemployed workers don’t have those qualifications.
    • inexperience – the firms hiring all want highly experienced workers or only workers who are currently employed.  The unemployed workers either don’t have experience or don’t have recent/current experience.

Structural unemployment can be reduced through policy actions, but they are different, more micro-level policies.  For example job retraining programs can reduce technological obsolescence. Programs to help people move and relocate will address location mismatch. Educational support and grants will address educational mismatches. Both government direct-hire jobs guarantee programs and employer willingess or incentives to do on-the-job training can address technological, educational, and inexperience issues.