The facts are real wages moved very strongly with employment across regions. Nevada was hit very hard by the recession, for example, while Texas was hit much less hard. Wage growth, both nominal and real, was about 5 percent higher in Texas than it was in Nevada during the Great Recession.
Pointer from Tyler Cowen.
The point is that we do not have a single aggregate economy. If you think that every state faced identical demand conditions, then the state with the higher real wage growth (Texas) should have had the worse unemployment. And Hurst goes on to point out how the regional data make it difficult to defend the view that wage stickiness is the cause of unemployment. In fact, he refers to work, which I noticed earlier, that suggests a PSST story.
I’ve got to really buckle down in the office, so you won’t be seeing much from me in the next few weeks. Here are some links to keep you from losing it.
==> My flights got screwed up so I missed this live, but Lew Rockwell gave a great antiwar talk on Saturday for the Ron Paul Institute.
==> My reflections on 9/11 and the political uses of crisis.
==> A really interesting Sowell column on income inequality statistics. I didn’t know some of these.
==> Tom and I talk about lead poisoning and Republicans on the latest Contra Krugman.
==> I sure hope Scott Adams wasn’t one of my students:
One of the the most important things I learned while getting my degree in economics is that economies are driven by psychology. If people expect tomorrow to be better than today, they make investments. If they think things are in decline, they wait it out, and that lack of investment makes things decline further. Psychology rules. Almost everything else is just scenery.
==> I know some might regard this as nitpicking, but the following from Scott Sumner really frustrates me:
For several years the Fed has been tightening monetary policy. This started with tapering, then with signals of an increase in interest rates, then an actual increase in interest on reserves. Now Fed officials are signaling that more rate increases are likely to occur. The Fed does this for one reason, and one reason only, to prevent overshooting of their target. If they were in fact “struggling” to hit their inflation target, it’s not clear how they would respond. But one thing that is 100% clear is that if they were truly “struggling”, THEY WOULD NOT BE RAISING THEIR FED FUNDS TARGET INTEREST RATE. This is a really basic point, which is taught in every single EC101 textbook. The Fed raises rates to prevent high inflation, not when it is struggling to achieve it. If you don’t believe me, look at the monetary policy chapter of any recent econ text. No central bank that is raising rates is also struggling to hit its inflation target. They may be failing to hit it (I agree with that claim) but they are not “struggling” to hit it.
OK, I have no problem with the above, *except* for the fact that if I wrote the following, or if (say) someone in Bloomberg wrote the following, Scott would go ballistic and wonder why he and Milton Friedman are the only decent economists since Hume.
[HYPOTHETICAL COMMENTARY THAT WOULD MAKE SUMNER FLIP OUT, WRITTEN CIRCA 2013]: “For several years the Fed has been loosening monetary policy. This started with signals of rate cuts, then rate cuts, then massive expansions of the monetary base. Now Fed officials are signaling that more asset purchases and possible rate cuts (negative rates) could occur. The Fed does this for one reason, and one reason only, to prevent undershooting of their target…This is a really basic point, which is taught in every single EC101 textbook. The Fed cuts rates to stimulate a weak economy, not when it is trying to stifle growth. If you don’t believe me, look at the monetary policy chapter of any recent econ text. No central bank that is cutting rates is also causing a recession. They may be failing to prevent it (I agree with that claim) but they are not causing the economy to tank.”
I have a Catholic friend who sent me the link to this essay (though she warned there are a lot of typos from whoever webbed this). Peter Kreeft had been Protestant and converted to Catholicism, so he has an interesting take. (I was raised Catholic and currently consider myself Protestant so that’s why this is particularly intriguing to me.) An excerpt:
There are at least four things wrong with the sola scriptura doctrine. First, it separates Church and Scripture. But they are one. They are not two rival horses in the authority race, but one rider (the Church) on one horse (Scripture). The Church as writer, canonizer, and interpreter of Scripture is not another source of revelation but the author and guardian and teacher of the one source, Scripture. We are not taught by a teacher without a book or by a book without a teacher, but by one teacher, with one book, Scripture.
Second, sola scriptura is self-contradictory, for it says we should believe only Scripture, but Scripture never says this! If we believe only what Scripture teaches, we will not believe sola scriptura , for Scripture does not teach sola scriptura.
Third, sola scriptura violates the principle of causality: that an effect cannot be greater than its cause. The Church (the apostles) wrote Scripture, and the successors of the apostles, the bishops of the Church, decided on the canon, the list of books to be declared scriptural and infallible. If Scripture is infallible, then its cause, the Church, must also be infallible.
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My latest at IER. (See David R. Henderson’s follow-up regarding Gordon, which is amazing because I realize I shouldn’t have given Gordon the benefit of the doubt. I made a better case for him in my IER piece, than he did when responding to David.)
I don’t mean to beat a dead horse, but apropos this stuff: In his reason [sic yes they don’t capitalize it] clarification, Gary Johnson said, “[A carbon tax] sounds good in theory, but it wouldn’t work in practice. I never called it a tax. I called it a fee…So, no support for a carbon fee. I never raised one penny of tax as governor of New Mexico, not one cent in any area. Taxes to me are like a death plague.”
So that’s why Johnson’s statement starting around 1:05 in this clip was so interesting.
If someone whose last name rhymed with Dump had pulled a move like this, I believe a lot of Johnson’s supporters would go nuts and wonder how Republicans could support such an obvious liar. *Picture Kermit drinking tea.*
I feel that I’ve lost my objectivity when it comes to Gary Johnson, and so I’m only going to share this here (as opposed to social media). Incidentally, see if you can pass the Turing Test on me: How did I react around 1:05?
BTW, the stuff about Muslim immigrants and what they did in Germany–I am not endorsing this guy’s view that someone who allows immigration is obviously non-libertarian. (You could use the same approach to argue that allowing women to have babies is unlibertarian, since some grow up to be murderers and rapists–a point from Block and Callahan, both of whom now kinda sorta support Trump, in an interesting turn of events.)
Anyway, do with this what you will.
This is quite strange. It shows the versatility of economists and how they can always make it sound like they’re winning the argument, no matter what happens.
Earlier this month, Arnold Kling wrote:
So to avoid confusion: In the above excerpt, Kling starts out with a quotation from Erik Hurst, and then Kling says, “The point is that we do not have a single aggregate economy…”
I’ve put in bold “The point is” because Scott Sumner then proceeds to change what Kling’s point (allegedly) was. Sumner writes in response:
I’ve done a lot of posts on wage stickiness, but misconceptions keep popping up. The sticky wage theory of the business cycle is based on the notion that only a fraction of wages get adjusted each period. This leads to some odd results. The bigger the fall in the equilibrium wage rate, the bigger the fall in the actual wage. That’s no big surprise.
But what does seem to surprise people is that the bigger the fall in the equilibrium wage, the more that actual wages exceed equilibrium wages. That means that, according to the sticky wage theory, during periods where wages fall most the rapidly, we should expect to see the highest rates of unemployment. The same is true regarding cross sectional data.
Thus suppose that Nevada was hit by a severe real estate collapse, and its equilibrium wage fell by 10%. Also suppose that at the same time Texas was buoyed by an oil boom and its equilibrium wage rose by 4%. Finally, assume that due to sticky wages, the actual wage only moves by 1/2 of the amount that the equilibrium wage moves, in a given period. In this example, Nevada’s actual wages would fall by 5% and therefore end up 5% above equilibrium, leading to mass unemployment. Texas wages would rise by 2% and end up 2% below equilibrium, leading to a tight labor market.
Now consider this example, when reading the following comment by Arnold Kling, who is discussing some research by Erik Hurst…
And then Sumner quotes the excerpt that I put up, originally. Sumner then concludes, “Actually, that’s exactly what you’d expect if sticky wages caused business cycles. And for similar reasons, interest rates tend to be at their lowest when they are the furthest above the Wicksellian equilibrium interest rate.”
Do you see the problem? Kling was saying “The point is” that the regional differences in unemployment and wage growth show that we don’t have one giant, homogeneous economy that faces a single Aggregate Demand curve. Yes, Kling says that Hurst “goes on” to talk about wage stickiness, but there’s more to the argument–seriously, click the link and search for “stick” to see how many times “stickiness” or “sticky” appear. The guy’s estimating model parameters etc.; the quick snippet from Kling’s quotation wasn’t about wage stickiness.
OK, so thus far you might think that all I’ve done is show that Sumner changed what Kling was arguing about, with that specific quotation. But it gets much odder.
You see, Sumner is making it sound like his own model–which he’s been tirelessly explaining, and quite frankly is frustrated that so many other economists still don’t get!–is perfectly able to handle an outcome like a real estate bust hitting Nevada harder, and thus causing higher unemployment there. Right? That’s clearly what Sumner is saying.
And yet, back in 2010, Kling was offering his same “Recalculation Story” about the sluggish recovery, and how the housing crash meant workers were in the wrong spots in the country, and that’s why unemployment was higher in states that had had bigger housing bubble peaks. At that time, Sumner certainly didn’t say, “Of course, that’s exactly what you’d expect from my sticky wage model.”
No, at that time Sumner totally rejected Kling’s misallocation of resources story, and said his sticky wages / Aggregate Demand story fit the facts better:
There’s no question that Arnold Kling’s recalculation view is more intellectually appealing than the messy arguments about wage stickiness used by us “GDP factory” proponents…
Yes, macroeconomics should be all about specialization and trade. Except business cycle theory, which needs a special ad hoc sticky wage/price model. Why? Because the evidence simply doesn’t fit any other approach. Here’s Kling on the construction bust:
I want to suggest that the output that is “lost” is output that people do not want. In 2008 and 2009, Americans do not want 2 million houses to be built. So I do not think that it is right to speak of a shortfall in output. Instead, we should say that the people who were building houses have not found a pattern of trade in which they can produce something that people want.
Yes, housing output was low in 2009 and unemployment was high. But is there a causal relationship? I say no. Housing starts peaked in January 2006, and then fell steadily for years:
January 2006 — housing starts = 2.303 million, unemployment = 4.7%
April 2008 — housing starts = 1.008 million, unemployment = 4.9%
October 2009 — housing starts = 527,000, unemployment = 10.1%
So housing starts fall by 1.3 million over 27 months, and unemployment hardly changes. Looks like those construction workers found other jobs, which is what is supposed to happen if the Fed keeps NGDP growing at a slow but steady rate. Then NGDP plummeted, and housing fell another 480,000…The reason housing fell far below normal is because the severe fall in NGDP created a deep recession. Unemployed factory and service workers aren’t going to buy new houses.
Most importantly, the huge run-up in unemployment did not occur when the big fall in housing construction occurred, but much later, when output in manufacturing and services also plummeted.
I realize I threw a lot of stuff at you, and I am 99.4% sure that Scott Sumner would read all of his quotations above and respond, “Yes, I was dead right in 2010 and I’m dead right today. What’s your point?”
My point is that Sumner back in 2010 was saying Kling had to be wrong, and only the sticky wages story made sense, because (he argued) unemployment had nothing to do with housing.
Now, in 2016, Kling is pointing to unemployment being tied to regional housing markets, and Sumner is saying, “Yes, that’s exactly what the sticky wage model predicts.”
Both of those stances can’t be right.
P.S. If you want to see my reaction to the Kling/Sumner battle last time, read this. I think Kling threw in the towel prematurely.
Sure I’ll go ahead and post this on a Sunday. Listen to two Catholics talk about Thor. (Joking aside, this is really good stuff.)
I worry that this trailer gives away too much, but probably on balance it will goad more of you into watching the movie.
This is a surprisingly good movie. It was not the cheesy, preachy kind of “Christian” film. It had good acting (especially the lead role) and did a good job of making the Resurrection into a dramatic mystery.
So, if you are vaguely interested but need a nudge, I’m giving the nudge.