Wednesday, May 11, 2011

Labor Fallacies

In micro, if supply increases and demand remains unchanged, then it leads to lower equilibrium price and higher quantity. Applied to labor it would say increased labor supply lowers wages, or would if it did not also increase demand. The question then is how much does it increase demand. In the infinitesimal limit supply and demand are simply additive and should have no effect on wages. This fails to be a good approximation at large scales however.

Increased labor supply lowers returns for productivity enhancing capital investment and human capital investment, and raises returns for resource producing or saving capital investment, or more simply, lowers the return to labor and raises the return to capital. In doing so, it will lower the growth of the labor supply and increase the growth of capital but this takes time. Increased labor supply increases output but diminishes the growth in output per capita as specialization is overrun by diminishing returns. Now larger markets afford greater specialization and specialization increases growth in output per capita, but specialization is more about technology than population even if population is the source of that technology. The path to growth of output per capita is better sought through technology than population.

Thursday, March 3, 2011

Depressions causes

Sticky prices and wages? Money? Necessary but not sufficient. Prices and wages are sticky and this causes adjustment problems during depressions, so lowering them will help, right? Yes and no. It helps to lower their real costs, not their nominal costs. Lowering their nominal costs can even make things worse as it boosts deflationary expectations and increase debt deflation. Nor would the result be equilibrium if they were perfectly flexible, but wild swings between self fulfilling deepest despair and exuberant euphoria. Sticky prices dampen reactions to fluctuations. A monetary depression can't occur without money but not many would wish to ban it to prevent them.

Depressions are examples of flee goods, seek money. The increase in money demand comes at the expense of the economy. Instead of being spent on consumption or investment, it is hoarded as fear grips the economy. Fear of risk and loss. Enlarged perceptions of risk and diminished expectations of gain. Not until they are assuaged or countered, not until those demands are satisfied can growth resume. In part the hoarding is thwarted by unemployment, forcibly turning savers into spenders. In part people doing what they must to survive. In part austerity fatigue. In main by the monetary authority persuading it has the power and the will to reverse it by providing the money needed.

Sunday, February 6, 2011

Living with Standards

Consider if you went to the store to buy bread and five varieties were offered all at the same cost. The next time you went fifty varieties were offered but still at the same cost. The cost of living remains unchanged. Since you are unlikely to eat any more, the economy hasn't grown either. Yet you have many more choices. Most would say they are better off even though the change would not show up in the data but how much better off. What if it came with the effect that oven hot fresh bread was no longer available? Would you consider yourself better off then? How much does the fiftieth variety add to your well being? How much would it add if it became the most popular and in fact extinguished five lesser varieties? Would you be better or worse off? Most would be unaffected by most changes but a few will be so in aggregate little of significance is changed, yet the aggregate of many such changes still can be. We have no method of measuring these for the individual much less between individuals or in aggregate. Living standards can improve or diminish without appearing in the measurements.

Saturday, January 29, 2011

Seasons of the Economy

Thinking in terms of Patterns of Sustainable Specialization and Trade, one could say that the economy develops such patterns over time but these patterns are subject to instability and collapse which then have to be rebuilt, usually in a new and different manner. One can consider it seasons of growth and decay. In spring, growth and production is low but improving, over summer strengthens and becomes vigorous, bearing the bounty and fruit of fall, in winter decaying and collapsing to a low level from which new growth develops. In summer, production and profits are high with high levels of specialization and trade, but winter comes, production and profits fall, and specialization and trade collapses. The economy itself is less productive until new patterns can be found to support growth. Meanwhile, people are left with time on their hands and find it cheaper to learn to do it themselves or do without than hire. One can argue this occurs continually so what is it that causes this to overwhelm the entire system and result in a recession? Just a matter of size and scope of the change required or errors and mistakes in trying to compensate for them, or in suddenness and rapidity with which it strikes?

This brings to mind the various kinds of specialization available to those of differing productivity and wealth, such as creator or owner that capitalizes on his creations or assets to extract rents if they can obtain and sustain them, performer that relies on his unique knowledge and talents to produce for the few or the many, and servant that relies on his general knowledge and specific spatial and temporal presence to produce. Creators and owners earn incomes without effort or with past effort and are not dependent on their efforts for their current incomes. Performers rely on their efforts and can work in conjunction with other performers to produce for many. Servants have little specialization to trade other than their general knowledge, effort, and specific presence. Servants lack the specialization to make it worthwhile to trade with each other. The best they can hope for is to work for one of the former or become one. If it becomes more difficult for creators and owners to sustain their rents and performers find it more difficult to sustain their advantage due to offshoring, greater numbers of servants will have difficulty as well. Sustaining incomes monetarily would still help through lowered exchange rates or inflation in countries with pegged currencies.

Thursday, December 23, 2010

Growth vs. Population

Economists believe increasing population increases growth. It does increase gdp, but it does not generally increase gdp per capita. It can create larger markets and more specialization over time, but before it does so it also increases the supply of labor, lowers its income share, and diminishes the incentive for most technological advancement, labor saving rather than material saving. Population growth did not contribute to gdp per capita growth during the Malthusian Era. Only technology did that and population is better considered the result of growth than the cause of it.

The UK has had a stable population for over 30 years and has grown gdp per capita at rates greater than the US over that period. When population lags, investment in human capital becomes more attractive and takes up some of the slack. An aging population does slow demand growth, but still increases demand relative to supply of labor. They still need product even if they no longer need jobs. Growth slows but steadies. Transfers will rise, but government less transfers should steady or even fall with productivity as expansion is no longer necessary but sustainment still is. It does tend to be deflationary, but labor will do better than capital in such an environment. Nothing to fear, but something to expect. Need I say, deflation is (almost) always and everywhere a monetary phenomena?

In a world of more or less free trade, the question of whether population growth here is good is an anachronism. The real question lurking beneath the surface is if it were, why wouldn't population be growing on its own as a result? I am sure economists can come up with some excuses, but they fall flat in the face of evidence.

Wednesday, December 8, 2010

Welcome to the Antipodes

There is an argument that follows from the standard New Keynesian monetary model in cutting the payroll tax one should favor the employer over the employee. The reason being that current real wages are too high, so by lowering them to the employer, the employer will be encouraged to expand hiring, while increasing real after tax incomes of employees will just make them more high. Normally this would be correct, but not during a depression. The key element of a depression is the demand for money and its preference to the demand for goods. Cutting employer costs will increase their profits but their demand for money will override their demand for goods, investment or otherwise. They will not invest it unless they see demand increase which this won't do. Cutting employee costs will increase their take home cash and their demand for money would override their demand for goods, but they are frequently credit constrained. As they are more likely to be credit constrained, increasing their cash flow will lead to more demand for goods to which employers will respond. This is a demand, not supply problem, the demand for money. Giving money to those that need it most is most stimulative of demand. Given the regressiveness of the payroll tax, and the greater credit constraints of the employees, giving money to the employees is most effective. This would not be the case if demand were growing sufficiently, but will be until the demand for money is satisfied.

Friday, December 3, 2010

Employment for a Day

The problem as I see it, is unemployment. There are two approaches, blame the unemployed for their unemployment, saying what they produce is no longer desired and they must accept whatever they can find or go without resulting in deflation, or blame the employed, saying their wages are now too high and allow inflation to lower them and raise employment. The former attempts to preserve the value of debt but erodes the amount through default while the latter erodes the value of debt but preserves its amount. What do the employed owe the unemployed? What is the moral position and what will produce the best outcomes? Will real growth increase before inflation as well?

Deflation can work to a point, generally to the extent of productivity growth so nominal wages don't have to be reduced. Beyond that it doesn't. Deflation increases real debt faster than default can eliminate it. It is not effective in the face of high unemployment. Inflation can work to a point. That point is where most resources, or at least critical resources, are in use and it is anticipated. It is effective in the face of abundant unused resources. More inflation is warranted here and now.

Ideally, there is a middle ground that lets the most heavily indebted default, the burdened have their loads lightened, and promotes sufficient growth to ease unemployment. The same level of unemployment may not be reachable if the real output potential of the economy has fallen, but the only way high unemployment can be sustained is through both market failure and monetary failure.