Putting too much faith in employment "Recalculation"

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I have great sympathy for Arnold Kling's "Recalculation Story" of high unemployment. But he shoe-horns in some foolishness into his otherwise sound theory to try to head Keynesian interventions off at the pass. The main shoe-horned foolishness is that, magically, businesses will hire back everyone laid off, and hire also new workers entering the job market. I ask, Why? It does not follow at all - Businesses have never had so many techniques for keeping their staffs low, and all the techniques are improving in quality, as well.
The interventions to "cure" high unemployment _will_ be Keynesian. Because every other race of economists pretends that high unemployment is not a problem. I am exaggerating, but only a little bit.

I would not mind a "better" form of Keynesian, but those who are in the best position to provide those improvements are too busy pretending that high unemployment is not a problem. Or that businesses have techniques to turn marginal employees into highly productive employees, and they will use those techniques instead of the tried and true methods of raising productivity and shedding employees at the same time. Because of the time wasted on these fallacies, we will get the old Keynesian cure from the old Keynesians, because the Keynesians are immune to these particular fallacies (being too busy with their own fallacies).

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The interventions to "cure" high unemployment _will_ be Keynesian, whether I like it or not, whether anyone likes it or not. Prepare accordingly - labor legislation in the United States _will_ greater resemble Continental Europe - because the current and expected social costs of high unemployment are very real (including lost taxation and lost consumer demand, besides criminality induced by idleness).

The Job Assignment Problem, Arnold Kling | EconLog | Library of Economics and Liberty: "
> I agree that high productivity growth is very good news and that it portends increases in hiring.
Running a business, if I have productivity growth, and, for whatever reason, I wanted productivity to go back down, the fastest way to do it would be to hire more employees.
I am not supposed to admit this, but I feel compelled to be honest. Higher unemployment and higher productivity growth have no demonstrated inverse relationship.
When the social costs of unemployment come home to roost, we will see legislation to enforce lowered productivity. I can complain about it, but it would be foolish to not see it coming. Somehow, I will be compelled to hire more employees, and productivity will go down. Because employees bring with them the burden of mandated entitlements and the burden of their own inner sense of entitlement. Like it or not, it is foolish for me to pretend otherwise.
> What people are calling a "jobless recovery" is what I would call the market taking a long time to solve the job assignment problem.
The market has solved the job assignment problem by not hiring. And productivity has increased. During the 'good times', the market was more tolerant of low productivity - now less so. Businesses act accordingly. Because, at this time, businesses are not compelled to bare a share of the current and expected social costs of high unemployment (including lost taxation and lost consumer demand, besides criminality induced by idleness).
"

A depressing follow-up to a reply to my comment:

> I disagree with manuelg' first comment regarding legislation to compel more utilization of human capital - that's been attempted by, among others, the Luddites, the Wobblies, and the Communists.

I didn't say it would work as advertised! ;-) It will "work" to reward a particular voting block, as one would expect. High unemployment provides the "cover".

> ... the workforce will either develop or rediscover markets that require human capital (R&D, personal service) or the supply will re-train to enter other labor markets a la buggy whip makers and farmers

Or neither. New positions never opening up at an adequate rate is a distinct possibility. Take R&D - why not use 40 Indian PhD's to do the work of 60 US PhD's? Take personal service - a goodly portion of the work of a personal assistant can be done remotely - again employing someone without the same expectation of quality of life and compensation in a place with a much lower cost of living.

The majority of the work will be of poor quality, but the cost savings will be compelling. Like the craftsmanship of a pocket-watch compared to the time display on a plastic cell phone. People spend a smaller fraction of their income on telling the time (pennies out of the cost of the phone and service), and lose daily contact with items to true quality, and that prior level of quality becomes a boutique luxury item, and employs far fewer people.

> ...re-train to enter other labor markets...

It may in fact be easier to "retrain" a US worker to become a ethnic Chinese worker (chopstick skills, walking stooped to pass through lowered doorways, reading/writing Chinese letter-forms) than it would be to retrain a US worker to have the skills and sense of responsibility and lack of sense of entitlement that the new employment positions opening up require. Look at the malaise of Japan's labor economy as the positions disappeared for lifetime employment by a single employer, never to return. Even after years of a desperate situation, it is not 100% certain that a human will change their attitudes to match a new reality.

Not to put too fine a point on it.

Why do Libertarians need Natural Rights?

Libertarians will talk about "Natural Rights" until they are blue in the face.

My question/comment:

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The Government/Slavery Analogy, Arnold Kling | EconLog | Library of Economics and Liberty: "

Why does *anyone* need to umpire disputes? Life is not fair, and the concept of 'fairness' was invented by those who desired for the power of the umpire.

That is the most confusing thing to me about libertarians. Why the need for a third party to enforce contracts? 4 billion years of life without the need of an umpire, then, less than 10,000 years ago, some umpires talked themselves into a job and never left. And they guard their position jealously.

I am supposed to be grateful to these umpires for the lack of anarchy around my person, ignoring the fact that I have exactly as much anarchy around my person as I can stand to tolerate. I don't remember any useful order around my person that I didn't have to work and plan for, at great cost to my own leisure.

"

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Once bought a book at Tower Records (back when there *was* a Tower Records) titled _The Myth of Natural Rights_. [ The Myth of Natural Rights and Other Essays - L.A. Rollins http://www.amazon.com/Myth-Natural-Rights-Other-Essays/dp/061519298X ].

The essay/book asked valid questions: why would anyone care about Natural Rights, and could any inalienable Rights provided by Nature be of practical interest? L.A. Rollins is Holocaust denier, or some kind of Holocaust provocateur. (Ugh, how I hate people who are glib about hot-button issues. Who the hell has the time to ape skeptical poses to gain hostile attention? I wish they could have been adequately breast-fed as infants, so their psychological lack wouldn't be pressed upon society, as imbecile gurgling of would-be controversies.) I read it, it made a valid argument, but I cannot endorse the anything else the man may have written.

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Live your life like Diogenes the Cynic, or accept the consequences - your choice. There are no Natural Rights to ensure your good results in life. (I love this picture of Diogenes in his tub, surrounded by dogs.) [Edit] My snarky comment got an emotional, but honest, reply:

Rajeev writes: Manuelg, how many countries in South America, Asia, and Africa have you lived in? Better yet, have you lived in any of the inner cities of the US? Have you been bullied in kindergarten? I live in South Asia, and I can assure you that you have inherited, not created, most of the useful order around your person. If you lived in some parts here, you would quickly find you need an umpire, or suffer severe physical violence. Posted November 19, 2009 10:18 PM

My reply back:

> If you lived in some parts here, you would quickly find you need an umpire, or suffer severe physical violence. How shall I distinguish these helpful umpires from the other potential bullies? Hold out hope that whomever isn't assaulting me physically - at just that very moment - is in fact a well disguised blessed umpire with only my best interests at heart? I do not possess infinite stores of credulity. I see stationary bandits exacting protection monies from those under threat from roving bandits. The monies seem to be enough - I will deny them my gratitude.

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[ I maintain this extreme position as an intellectual exercise. Only to remind myself what I must give up when I _choose_ not to live my life like Diogenes the Cynic - in a gutter, living off of wild onions, with wild dogs. I cast no judgment on a man who chooses to be grateful to the agents of justice and equity, even though I, personally, am cynical. Cheers. ]

This is my newly learned argumentative technique of backing off my extreme positions at the end of a communication. I have heard the people in my life call me crazy so many thousand times, it finally sank in. As a human, I cannot support my most extreme positions in the face of other humans who are earnestly opposed. [ Why the question of being bullied in kindergarten? Are libertarians predominately victims of bullying, who still feel the sting of that past bullying? I guess it is a way to form intellectually something constructive from the experience. As a response, I cannot find must to recommend it, though. Does it lead to less anxiety and more positive outcomes? As opposed to assuming the lion share of a human's potential positive outcomes will come from self-mastery from inside that human. ]

Arnold Kling: Status Competition

Arnold Kling: Status Competition: "Arnold Kling's blog posting --

Gordon Wood, in Empire of Liberty, writes:

After all, wealth, compared to birth, breeding, ethnicity, family heritage, gentility, even education, is the least humiliating means by which one person can claim superiority over another; and it is the one most easily matched or overcome by exertion.

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The alleged goal of reducing economic inequality is trumpeted by people who want to strengthen inequality of political power. The goal is to entrench Harvard while delegitimizing those who are less educated. When push comes to shove, political income redistribution favors Insiders over Outsiders. Thus, the bailouts and the continued support for 'too big to fail.' In my view, the biggest threat to America's democratic tradition is not concentration of wealth. It is concentration of political power."

My comment:

> The alleged goal of reducing economic inequality is trumpeted by people who want to strengthen inequality of political power.

I consider myself a "Progressive", but I would nominate your statement as "Really Existing Progressivism described in 25 words or less".

Add " serving themselves" to the end, and you got a winner.

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Anyone who claims to be "Progressive" should explicitly state how they will avoid (or at least mitigate) a self-serving political regime. It is hardly "Progressivism" if the only thing guaranteed is self-serving arrangements by the well-connected self-described "progressives".

Will chariable healthcare giving to the poor materialize?

Comment to Arnold Kling's EconLog post on health care, where Kling makes a statement about health care charities materializing if the government stopped supplying health care.

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> If you took away government, then my guess is that a lot of charity would go toward health care for people with low incomes...

I am not so sure.  That would depend on a large number of Americans acting with economic irrationally, and I am not aware of the evidence of such Americans existing.

Lets peg current monetary charitable giving in America, from all sources, at $350 billion.  Lets consider the 30 million Americans living under the poverty line.  Lets spend on each $1500, less than half of the $3600 that Canada spends on each citizen, on average.  So we are counting on over 12% more charitable giving to take place, to fund this calculated $45 billion.  We will assume that much more than this is relieved from the tax burden, so tax payers have more money in their pockets, to spend as they wish.

No matter what a person thinks of the poor receiving health care, a single person's contribution would have no measurable effect.  Whether an individual gives or not, the poor will still have the same access to health care.  So it is irrational for an individual to give charity.

You would have to rely on a group of people that have, as a compelling component of their identity, the need to contribute to the welfare of the poor.  We hope for something substantive, not at all like Mother Teresa's charity in Calcutta.  Mother Teresa's charity in Calcutta, while being a sincere expression of great sacrifice, made no statically significant improvement to the lives of the poor there, because, measurably, only palliative measures were given out to a statistically tiny number of poor.  Nothing like a functional health care system for Calcutta's poor came out from it.  We need tens of billions given, with regularity so building projects and professional salaries can be funded, to realistically call it a medical health care system.

Is there any evidence of a large enough number of Americans, large enough to fund a poverty health care system, that have the irrational compulsion to give to charity, because they have as a compelling component of their identity the need to contribute to the welfare of the poor?  I am not aware of any evidence.  I don't even see evidence of $100 million in charitable giving for American health care for the poor.  At at least $500 million, it would be significant enough to break out as a health care funding source, and there is no evidence that anything approaching that exists.  I doubt the poor state of current government health care programs would be enough to totally squelch their concern for the poor receiving adequate health care, if that concern really existed.  So, where are the hundreds of millions, already being giving now?  (We are talking about a reduced level of giving because funds are already coerced away by the government).

However I feel, morally, about the poor having access to health care, I don't place any faith in economically irrational behavior, here.  The human causes of economically irrational behavior are finite, when we limit ourselves to causes that are sufficient to surrender tens of billions of dollars from wallets, with the quarterly regularity to fund systems that include buildings and medical supplies and medical technology and thousands of professionals.  Such economically irrational behaviors have present day and historical consequences we can see.  They seem, to me, to be very well hidden, if in fact they exist.

Kling's writings on health care get more ridiculous, amazingly

Very simplistic and trivially inadequate statement on "Some Libertarian Basics [on providing health care]" from Arnold Kling.

My comment:

> In an environment with a level playing field, perhaps charities that provide health care to the very poor and the very sick would be better funded and more effective than the existing government programs.

How is an employer supposed to be cheered by this statement of "libertarian basic" thought on health care?  I compete against manufacturers in different countries, and a larger percentage of my gross goes to keeping my employees healthy and their families healthy.  If my employees have to take a second mortgage and time off to provide health care for a relative, that clearly will affect productivity, because I cannot fully staff with heartless sociopaths, and wouldn't wish to, besides.  I don't see too many charities springing up to help me with my utilities expenses, or office supply expenses.  So if the libertarian answer is for me to wait for nonesuch health care charities to materialize from thin air, so that I can adequately compete and bring in US tax revenue and wages to US citizens, then, I am underwhelmed.

Doesn't this statement simply cede substantive discussion about health care to all parties _except_ libertarians?  I hope that this is a grossly oversimplified statement of a more realistic libertarian stance on health care.

I would feel more confident in a purely market solution where there was no government enforced medical provider monopoly, and no government enforced pharmaceutical and medical device patent monopoly.  I expect to see ubiquitous effective medical charities, legal unlicensed medical providers, and free licensing on all medical patents, and I expect them to descend to earth on the same fiery heavenly chariot.

A partial defense for Arnold Kling's views on heathcare

A comment to Patriot's Quill unfairly titled "Arnold Kling does not understand the concept of insurance":

I will not defend the totality of Arnold Kling's views on health care.  It is indefensible.  A single payer has more leverage to attempt to reduce prices, and no market-magic-mumbo-jumbo can deny that fact.  That is why a company of several hundred employees does not have every employee buy their own desk at Ikea or Staples, and then reimburse them by adding to next month's paycheck.  Kling cannot address this simple issue because then he would lose valuable "Going-Galt" points with his friends at the Libertarian Cato.  (To be fair, it is also true that single payer is not a magic solution either.  If there is no accountability for incompetence or graft with the legislated single payer, a market solution can look pretty good.)

Back to the post.  I read Kling's point here as more nuanced.  It is transparently true that Americans, as a nation, consume health care with some personal irresponsibility.  Consider health care costs as percentage of GDP.  How much could be saved by personal lifestyle changes with regards to health, like diet or eschewing a sedentary lifestyle?  How much could be saved by people, as individuals, choosing less expensive treatments, treatments that are less expensive but still effective.  Without a component in a nationwide health-care plan that rewards for using less expensive treatments over the course of a lifetime, we could have functional single payer system, but still with the tragedy of America, as a whole, paying much more for health-care and getting much less for it.  Co-payments can be an effective incentive.  Co-payment rates based on evidence of healthy lifestyle choices can be effective.

Why historically based valuation can lead to taxpayer looting

Comment to Arnold Kling's Econlog "William Isaac is Wrong on Market Value Accounting":

[ Kling referrs to George Akerlof and Paul Romer paper "Looting", and links to this New York Times writeup ]

Kling:

> Historical-value accounting was an invitation to bankers to loot.

Grant:

> OK, why? You can obviously have any sort of value accounting scheme without the looting of taxpayers.

If I understand, it is because with historical-value accounting, players make absolutely no claim about future returns, and so the players can take on all kinds of business that no one can defend as being sustainable, as that business grows and grows and grows.

The usual analogy is jumping off of a 50 story building.  When you reach floor 20, you have 30 stories, historically, of fine results.  But nobody could defend your continued descent as sustainable.

The politically enabled players take on all kinds of business, for short-term gain, then walk away before the inevitable crash, for the taxpayers to pay far, far above the total sum of the payday of the players.

If the players have to defend a future value to the marketplace, they have _some_ responsibility to demonstrate sustainability, as they take on more and more and more business.

What leads to looting of taxpayers is: (1) not having to defend *any* reasonable story about future returns (2) politically enabled players taking a short term payday on a huge amount of unsustainable business (3) with the players knowing somebody else will pay for the ultimate massive shortfall, a shortfall much more massive than the monies actually looted.

[ Additional comment ]

> Right, but make banks defend this to investors, not regulators. So if we should make Mark to market a requirement for banks to disclose to investors looking to put in capital, but not for capital requirement ratios.

Mark-to-market requirements can have different objectives.  If one of the objectives is preventing the looting of taxpayers, then we are most definitely talking about capital requirement ratios.

Because, as we are currently experiencing, the buck stops with the taxpayer.  Investors in banks have no ultimate responsibility to pay for all bank shortfalls; the worst that can happen is the complete devaluation of their investment, which in this case is small compared to the loss.

Lessons of the Financial Collapse

[From an attempted comment to Arnold Kling's post (Amar Bhide Monday) about Amar Bhidé's Wall Street Journal article "Don't Believe the Stimulus Scaremongers" and Econtalk podcast "Bhide on Outsourcing, Uncertainty, and the Venturesome Economy"]

MHodak:

> Only a people as ignorant of history as they are of economics can consider the current boom-bust cycle a failure of laissez-faire.

I wouldn't express it this strenuously, but it is difficult to argue with.

[but, be aware: if boom-bust cycles cannot confute laissez-faire markets, then, equivalently, boom-bust cycles cannot confute market regulation.  If market regulation does not stop boom-bust cycles, but meets other social goals, then regulation is working as _designed_, if perhaps regulation is not working as it is being _sold_ to the voters.]

I appreciate being on this side of the financial bubble.  I now know the hard limitations of many financial innovations:

* cheap cheap cheap lending as social policy

* credit default swaps

* mortgage securitization, or other alchemy used to turn shit into gold

* more alchemy: thinking that deregulation and/or regulation can turn shit into gold

* swapping really existing heavy tails with negligible light tails in modeling, for ease of modeling

* borrowing to invest, which was always speculation and always will be speculation, begin tarted up as "savvy leverage"

* hand-waving away concerns about alleged "systems of trust" that only reward for short-time-horizon goals

* relying on rating agencies in the pocket of those being rated

* not treating liquidity as a scare resource (in reality, you should force people to pay dearly for liquidity *now* as opposed to liquidity later); thinking that you can pull liquidity out of your ass

* in general, trying to profit from financial instruments that *you* don't personally understand

I didn't have the chops to puzzle out all these myself, and now I don't have to.  I am standing on the far side of the bubble.

I am weathering this current storm, not badly, not because of my smarts, but because my father and wife are fanatically risk-adverse, and I don't have enough energy to take them both on simultaneously.  So I am in a position to profit from lessons I am unworthy to have granted to me.

Kling lets his inner Libertarian Crank come out, at the worst possible time.

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I endorse Arnold Kling's "macroeconomic" analysis of the current crisis.  Quoting myself in a comment on Will Wilkinson's blog:

http://www.willwilkinson.net/flybottle/2009/02/04/macroeconomics-as-mind-control/

Arnold Kling's "Macro out of the mouths of children of the Austrian School" makes the most sense, in my uneducated opinion:

http://econlog.econlib.org/archives/2009/02/my_current_outl.html

summarized as:

#1) The way out of the recession will be powered by business profits (as usual). A targeted macro solution: tax cut on the payroll tax (profits go up, and only after the profits have been locked in, employment will go up)

#2) Nobody wants leverage. Let the modern finance system built on leverage die, quickly and painfully, because drawing it out will only be more painful (like removing an adhesive bandage). Nobody wants leverage, people will only pay attention to profits (see #1)

But Mr. Kling recently wrote a really unfortunate post "Stimulus Bill or Reparations Bill?".  I will quote the worst bits, because I think it is a candidate to fall into the Memory Hole by Kling deleting it (he already blocked further comments).

I think the answer is that it is a reparations bill, not a stimulus bill. People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic. [my emphasis]  To the Democrats, the Bush tax cuts were a heinous evil, comparable to Germany's violation of Belgian neutrality in World War I. Now, they are demanding reparations, with hundreds of billions of dollars to be paid into teachers unions and other members of the coalition that won the election.

[Aside:  To be perfectly honest, Libertarians are much less likely to use the Memory Hole than Leftists.]

The problem here is that there is a net flow of federal taxes out of the Blue Democratic states, and a net flow of liabilities in the form of subsidies into the Red Republican states.  You can make some more subtle argument here, maybe by claiming federal taxation is mainly on the back of Republican businessmen working in Democratic states, but, make the argument.  You can't just assert this crap and think people outside of right-wing shout-o-sphere will buy it.

[Edit:  found some base statistics from Joseph Fried: Democrats and Republicans - Rhetoric and Reality, p. 154 (via Google Book Search)

http://books.google.com/books?id=wGtJ66o3EyIC&printsec=toc&dq=REPUBLICANS+WHO+PAYS+MORE+TAXES+DEMOCRATS&source=gbs_summary_s&cad=0#PPP10,M1

"Does the government collect more from people in the blue states than from people in the red states?  The answer is "yes," and the reason is obvious: People in blue states tend to earn more  than people in red states.  However, this does not mean that Democrats pay more taxes than Republicans...

... on average, Republican men paid about 70 percent ($2,900) more in federal income tax than did Democratic men, Republican women paid about 53 percent ($1,700) more than Democratic woman, and, on a gender-neutral basis, Republicans paid about 62 percent ($2,300) more."]

The bigger problem is that Reparations already has a meaning in American politics: Reparations for slavery.  In that light, Kling's comments come off a very ugly.

Libertarians are cranks.  They are not always cranks, but none fail to indulge in crankishness.  See Denailism Blog for their "Unified theory of the crank".

Libertarians exist as a meaningful social entity because they provide intellectual cover for the worst abuses of majorities abusing minorities, corporatism, and folk paranoia.  And majorities interested in abusing minorities, corporatists, and folk paranoids have considerable political power.  That isn't all Libertarians do, proving intellectual cover for this crap, but they are completely ignored by their benefactors for their other work.  So they can get paid (supported, published, otherwise compensated) for their politically convenient statements, and the other 95% of their writings never interferes with getting paid.

They are never punished for crankishness, they are sometimes rewarded for it, so they develop themselves into better cranks.  Along with the definition of the crank from the Denailism Blog, I would add:

• ignorance of all human activities outside of their small area of personal interest (example: Kling having no idea that Reparations has a prior definition)
• Holding themselves to a very low intellectual standard at the exact moment that they should be holding themselves to a very high one, to secure influence in the broader world
• repetition of shouted talking points from their little worlds
  

And I am rooting for Kling.  His analysis of the alleged Obama stimulus package is correct.  His suggestion for the best way out of the crisis is correct.  His take on the limits of macroeconomics is correct.

And he knows he has to hold his own side to a higher intellectual standard to secure influence after the market crash.  Kling didn't let Fama's lame analysis pass without critism: "Boo, Eugene Fama".

Readers of this blog know that I am against the Paulson/TARP bailout thingy and against a big stimulus. Some of you may also have read that distinguished (some would say Nobel caliber) financial economist Eugene Fama has a new blog, where he wrote a post against bailouts and stimulus. I did not link to that post, because I did not think that he contributed to our economic understanding of the issue. Today, I want to go further, because it occurs to me that we should not just leave it up to ideological opponents of Fama, such as Mark Thoma or Brad DeLong, to bear the sole burden of pointing out the vapidity of Fama's analysis.  [my emphasis]

But, at heart, a Libertarian is a crank.  That crankishness has to come out.  Always at the worst time.

Heckman on Inequality

via Arnold Kling "econlog" - _Heckman on Inequality_

Schools, Skills, and Synapses - James J. Heckman - May 2008

http://ftp.iza.org/dp3515.pdf

Heckman:

"...interventions early in the life cycle of disadvantaged children have much higher economic returns than later interventions such as reduced pupil-teacher ratios, public job training, convict rehabilitation programs, adult literacy programs, tuition subsidies or expenditure on police."

Kling interpreting Heckman:

"An important inference to draw from the paper is that trying to reduce economic inequality by, say, subsidizing more young people to go to college, is likely to be very ineffective. Even interventions at the primary school level are mostly too late." "One of Heckman's themes is that while IQ is difficult to change with intervention, it is possible to affect what he calls socio-emotional skills, and those in turn will affect performance on test scores and overall achievement."

Heckman:

"Programs that target the early years seem to have the greatest promise... Programs with home visits affect the lives of the parents and create a permanent change in the home environment that supports the child after center-based interventions end. Programs that build character and motivation that do not focus exclusively on cognition appear to be the most effective."

Kling discussing Heckman:

"In the conclusion to his paper, Heckman stresses making sure that these early interventions "respect the sanctity of early family life and...cultural diversity." It is not clear that the basis for this concern is practical, or whether it is because Heckman is experiencing queasiness over promoting state intervention into family life. I can appreciate a libertarian concern with having the state take a large role in child-rearing. I am less persuaded if the concern is one of political correctness, where you want the state to intervene but then fret about the self-esteem of the families or groups where the intervention is undertaken."

My aside: Kling has a readership obsessed with _The Bell Curve_. _The Bell Curve_ is a dead end, if you are interested in the genetic component of life success.