Yes, Wages are Sticky; No, I’m not a Keynesian

Bryan Caplan has always believed that sticky wages are partially the product of government intervention, but much more significantly a product of behavioral psychology. He has recently gotten excited about it and challenged anti-keynesians to register their responses to Truman Bewley’s magnum opus on sticky wages with the presumption being that significant and persistent unemployment caused by non-legislatively induced wage stickiness suggests expansionary monetary/fiscal policy as the only reasonable solution. If you’re a GDP fetishist, you’re a Keynesian plain and simple, if you oppose non-voluntary unemployment (lost gains from trade), these facts would seem to recommend Keynesianism as well.  Interestingly, I see this as a watershed in the liberty vs. efficiency debate, where the advocates of efficiency break toward Keynes and the advocates of liberty must bear some lost gains from trade to respect the rights of savers, ill-positioned (vis a vis stimulus) businesses, and, most interestingly, the unemployed and those businesses who refuse to hire them at lower wages.

First off, you might be wondering how I think the liberty vs. efficiency debate even applies here. I take liberty to imply both complete freedom to use those resources to which you are entitled and complete responsibility for what comes of those decisions. One thing people are entitled to under any reasonable version of entitlement theory is their psychological disposition, so long as they bear the full cost to themselves and others. The disposition at issue is the common unwillingness to be a reasonably productive worker when you (wrongly) feel you’re being undercompensated. The cost of that disposition to you is non-voluntary unemployment. If I could wish that cost or disposition away so you could rejoin the workforce and add to society’s bounty, I absolutely would. Unfortunately, the Keynesian remedy comes at a greater cost than a passing thought and pair of crossed fingers; it requires a reallocation of resources away from the distribution currently geared toward those who’ve managed to justify their wages and it punishes those people who appreciate the difference between nominal and real wages enough to bid their numbers down without sacrificing productivity (and those who’ve cultivated the willingness/ability to recognize this from a hiring perspective).

The end result? You tricked a relatively undesirable portion of the workforce into thinking they’re worth more than they are by actually diminishing the compensation of the relatively productive. And you’ve done all this without the consent of those who’ve borne the cost. There are two inclusive arguments against my point here 1) If the employed had all the relevant information, they’d consent to it because 2) re-employing unutilized resources meaningfully grows the economy and compensates for a very large part of any transfers that took place. Liberty and efficiency!

Obviously, the first point doesn’t quite measure up, the proposal is a risk and a difficult to gauge one at that, surely there’d be plenty of risk-averse wage earners not willing to bear the costs of misallocation and inflation. On the second, the size of this compensation is not at all clear, and there are plenty of reasons to doubt it would recoup the social cost. Among these is the fact that, in most cases, businesses have discretion with regard to who gets laid off, and the body of the long-term unemployed population will largely be comprised of low skill/wage ratio individuals. That means higher nominal wage targets will need to be met with more aggressive (inflationary/distorting) stimulus to add some of the most relatively low-productivity workers to (hopefully) relevant/valuable sectors of the new economy. The act itself subsidizes their problematic dispositions, and the results are not obvious boons either.  You’ve just about tricked a handful of people into not being zero-marginal-product workers; not only does this violate liberty, it likely comes well short of clearing the efficiency bar as well.

Follow the Goods, not the Money: The ‘I Am Rich’ App and its Discontents

A bit late to the party, I recently stumbled upon this story and, more importantly, this response to it. It naturally got me thinking about wealth transfers since the moral and economic consequences of purchasing the ‘I am Rich’ app lends themselves more toward that description than one of proper consumption.* Treating and scorning these purchases as bona fide consumption I think is an instance of a common economic fallacy: following the money.

All exchange is fundamentally the same phenomenon at the micro level: someone values a physical good, service or any psychological consequence that comes of transferring their resources to someone else, so they do it and, if the exchange was voluntary, there is an ex ante increase in utility for both parties. At the macro level, however, it becomes useful to delineate consumption and transfer; the implications for society matter. Pure transfers have no effect on the allocation of resources unless some very specific behavior induced the transfer and would do so predictably in the future. If transfers like this were profitable enough for many prospective recipients, it would soon develop into a market for services, much like I speculate the market for street beggars to be. However, to the extent transfers are not behavior induced or are sufficiently isolated/unpredictable, their effect on the structure of production is precisely a transfer from the marginal consumption pattern of the transferer to the marginal consumption pattern of the transferee with a magnitude of the sum transferred. To call money wasted or opportunities foregone in this instance is very inappropriate, it depends on what the recipient will do with his windfall.

In the case of the app, its developer did adjust his behavior to meet some perceived market demand and his minor success may have signaled others to do likewise and, to that extent, it was a humanitarianly wasteful venture. I, however, measure this extent to be quite small in comparison to the money he received given his presumably moderate opportunity costs and very low resource commitment to the project. This was mostly a one-off transfer in my view and its effects on the actual distribution of resources in the world are negligible given the sums involved; their impact was (circa 2008) still yet to be determined. Armin Heinrich can still make the world a better place, and the world has lost very little for his app.

Critical Analogies and Dis-Analogies Between the Trolley Car and Emergency Organ Harvest Experiments

I, like almost everyone else in the world, am not a utilitarian. More surprisingly, I reject utilitarianism for almost the same reasons as everyone else, almost. Is pleasure preferable to pain? Of course. Should maximizing net pleasure be the sole concern of our moral inquiries? probably not.  Utilitarianism, like almost all absolutist moral philosophies, is subject to damning counter examples, one of which I’ll focus on here.

Judith Jarvis Thomson:

A brilliant transplant surgeon has five patients, each in need of a different organ, each of whom will die without that organ. Unfortunately, there are no organs available to perform any of these five transplant operations. A healthy young traveler, just passing through the city the doctor works in, comes in for a routine checkup. In the course of doing the checkup, the doctor discovers that his organs are compatible with all five of his dying patients. Suppose further that if the young man were to disappear, no one would suspect the doctor.

On its face, it’s identical to a trolley car experiment: kill one to save five. The difference is, here, no one regards the decision to be as easy as flipping the switch on the trolley car. I think I can safely put the variance in responses up to people simply not understanding thought experiments, but some elaboration is in order.

In the trolley car experiment, the probability of the five being killed in lieu of a track switch is 1, the probability of the one being killed and five being saved with a switch is 1. The experiment’s beauty is in its simplicity; people understand that there really are only two possible outcomes here. When hearing the emergency transplant scenario, however, people implicitly reject these probabilities even though they assent to them, their real-world knowledge weighs too heavily on them: the patients are old and sick, their donor is young and healthy, no surgeon is perfect.

The other side of the coin is viscerality: The traveler is completely innocent and you’re going to strap him to a table and carve him open with your own hands. The man tied to the rails must have found himself there somehow and he’s probably expecting a trolley to come barreling down any minute; it will never look like anyone intentionally killed him. All moot, the parameters of the experiment are such that both these men were completely safe and free from any danger until an agent’s utilitarian calculation worked against them. Each life in the experiments will be equally long and happy after they’re conducted, all there is to do is for your intuition to dictate whether five go on or one does.

The interesting thing is, when fully appreciated, these experiments tell us precisely nothing. When utility is the only value at stake, of course you maximize it. However, loosening the constraints of either experiment and actually allowing other values a stake in the decision does illustrate why people who do and don’t fully understand the experiments ultimately reject utilitarianism.

Naturally, the more easily adaptable experiment is the emergency transplant. Adding a combination of uncertainty and a reasonable person standard with regard to choices immediately engenders huge and justified sympathies for the traveler. Yes, his life still likely represents a new lease on five others (or, make it seven so we can say the expected value stays the same), but our general experience of the world tells us that a person making his sequence of choices to end up in the hospital should expect no harm to come to him and indeed deserves no harm to come to him. Of course, the same could be said of the patients, none of whom may have any behaviorally caused ailments.

It seems as though a bullet must be bitten either way. My very narrow contention is that, while the patients may not have merited their conditions, the forces of history have nevertheless placed them here at deaths door. Now, the surgeon does have the option of taking history into his own hands and establishing a principle that allows moral agents to make their mark on the procession of existence to a degree rivaling fate, The question is: need we favor the will of many to exercise their liberty over fate over one whose liberty was granted by fate?

I worry about the consequences.

Executive Compensation Part II: Spoiling the Good Child

Aside from the objectively huge effect that executive decisions can have on a firm’s bottom line, there is at least one more compelling reason to pay top executives more than their own marginal product (in a sense). A professor once suggested to me that a CEO’s full marginal product includes not only the value of his policy, branding, and motivational actions, but also his motivational inactions. Basically, by over-compensating a CEO in terms of what he actually does, a firm presents a big carrot to anyone within shouting distance of the position. Of course, this practice shouldn’t begin or end with a company’s top man; indeed there are gains to be had from over-compensating employees at every level, even the ground level (consider a firms desire to attract the best entry-level applicants).

Obviously, this practice will always scale with the classical value of the positions in question; how big is the spread between the median dishwasher and one who performs in the 95th percentile? It will also compound towards the top, each supervisor is paid to increase the output of those beneath her, both explicitly and implicitly; the more supervisors and the more tiers beneath you, the great the ripple effect of your desirable salary.

I don’t think this theory is far-fetched in the least. As I’m not so well versed on the subject, it may even be common knowledge in relevant circles. What I do find very interesting are this strategy’s applications outside of the hierarchical firm.

All of this came very keenly to mind when talking to my 24 year-old friend who still lives quite amicably off the trough of her parents. The interesting thing is, her 21- year old brother is being cut off. My friend’s justification for her disproportionate compensation? She stays out of trouble, got through college in a reasonable amount of time, and does errands upon request. Her brother is hardly a degenerate; he does poorly in school, but still attends regularly, he stays away from hard drugs, doesn’t run in criminal or otherwise dangerous circles and is usually home at a decent hour. He is more impulsive, serially lazy, and temperamental, but you can squeeze a favor out of him now and then.

Basically, children are always better compensated, often into their twenties than the services they provide to their parents would ever warrant. But why the disparity in the case of my friend? She does provide more than her brother, but not nearly to the degree (and length of time) that she’s been better taken care of. My leading hypothesis is that my friend is enjoying the spoils of implicit motivational compensation. Just by being a relatively good child next to a less well behaved sibling, she enjoys the fruits of being a vegetable (carrrot), that she likely wouldn’t if her wayward brother wasn’t around to, perhaps, learn his lesson.

There’s a Silverware Lining to the Restaurant Recovery

mjreard:

This. So Much This.

Originally posted on This is Ashok.:

I’ve seen many posts today about our sluggish jobs recovery. Most people are pointing to data that show most of the job creation is in ultra low-wage, crappy sectors like fast food. (Here are James Pethokoukis, Tyler Cowen, and Mark Thoma on the matter.)

I think there’s a silver lining to this. Without considering part time jobs (which are not relevant to this post) there are three types of households: dual income, single income, and no income. The latter two indicate that one or both earners, respectively, cannot hold their job consistently, have high turnover, and are living off insurance.

Dual-income families have higher median incomes not only because there are two earners, but each individual earns more on average. Educated people from healthier backgrounds are more likely to get married – and stay married.

Let’s say I’m a genie. I can create jobs as I want. The…

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Executive Compensation Part I: Resolving Market Failures

When it comes to executive compensation, most people like to make it a distributive issue; the asymmetry of the typical large firm is just very off-putting for many. And the feeling comes from the tendency in most arguers to identify with the mass of workers near the bottom of the hierarchical firm, regardless of where their place may actually be. Some others go as far as saying that excessive compensation of CEOs is actually bad for the firm insofar as it increases turnover and decreases the quality of work at the bottom and over all demand for product (this last claim is common, but ridiculous). Overall, I’m not here to make a comment on what I believe optimal executive-worker compensation ratios are, or how distant those are from what we observe. I’m here to point out some interesting ways in which top executives, who seem so detached from a business’s direct sources of revenue, justify their enormous salaries. My general theory is that their skills and attributes as employees serve only to get them into top positions, but it’s the positions themselves, which are so valuable to good corporate governance, that demand high valuation.

Top executives are trusted to make sweeping policy decisions that can easily move markets and earnings in huge ways and, often enough, make or break entire companies. It’s my belief that the fact that most CEOs tend not to make horrible gaffs speaks less to the ease of the decisions (made with great advisory teams on hand) and more to the ability of boards to select great decision-makers.  One thing I’d like to consider is the kind of policy an executive hands down to alter employee behavior in such a way as to neutralize intrafirm market failures: instances in which rational behavior for individual employees collectively destroys earnings.

Take a simple example. At one point, “employees must wash hands” wasn’t even posted in the toilets at fast food restaurants and this was of course long before the days of disposable food prep gloves. No employee would go through the trouble of bringing in their own sanitary gloves when it wasn’t expected and some portion might not have even bothered washing their hands. One bold, though retrospectively easy, decision from a top executive immediately reduced instances of food poisoning and the associated legal/reputational liability and instilled a sense of cleanliness and security that dramatically increased brand value. After years and years as the law of the land, you can imagine the millions that such a marginal decision could tally up. All of that increased income is down to a single employee who, in making across the board cost-saving and revenue increasing decisions for his front-line workers, has increased their productivity in ways they would have never bothered to with very rare exception.

Regress of Authority: My Theory on The Foundation of Noetic Structures

While beginning to draft a post offering my theory on why I write what I write, think what I think, and do what I do, I found it was essential to explain my theory of the origin of noetic structures. Another thing I found is that a cursory search will not turn up a satisfactory explanation of what a noetic structure even is, allow me. A noetic structure is a web of all an individual’s beliefs, the vast majority of which depend on other beliefs. A noetic structure, if drawn out, would show all the ways in which beliefs depend on each other for validation in the mind. In order to believe that you’re sitting in front of a screen, you need to believe that your senses give accurate representations of the external world, the existence of which you must also hold true. If you’ve ever entertained a child who asked you a simple question and followed it up with an endless string of “whys,” you’ve taken that child on a tour of your noetic structure.

Any non-self-referential (circular) noetic structure would have to contain some foundational, or ‘basic,’ beliefs that are not justified with reference to any further beliefs. Strictly speaking, the only beliefs of this nature that stand up to philosophical scrutiny cannot be used as justification for others, but as a matter of convention, we accept the existence of the external world and other minds along with all that they imply. Beyond those two, most seem to take as given the reliability of ‘experts.’ You believe protons exist, but you’ve never seen the evidence for yourself; you take it on faith that the chain of claimants from the community of people directly observing election clouds to the person who told you they exist have been reasonably prudent in their assessment of the claim. From whence comes this faith on which modern humans rely for a huge part of their world view? My claim is that it comes from Mom.

My theory assumes that infants regard their most immediate care-givers as essentially gods, capable of manipulating the whole of reality (as the infant sees it) on a whim; They can remove, fear, discomfort, and hunger with ease and right when its needed. Some anecdotal evidence for the continuance of this view into early childhood can be seen when toddlers run to mom to save them from a monster, something they seem not to know mom is woefully ill-equipped to handle. As they grow up, children only assent to the claims of others with mom’s blessing. “Listen to what Ms. Vicky has to say, she’s very good and has a lot to teach you,” “My mom says Billy only says Santa isn’t real because he got coal in his stocking this year.” Consistent reinforcement of the epistemic authority of teachers, books, and other knowledgeable adults is what weens children off of absolute deference toward their parents and ultimately empowers these other sources of knowledge with the ability to endorse further claimants with epistemic import. 

I find the anomalous cases in which parents refuse to relinquish some measure of epistemic control the most compelling evidence for their place at the base of almost everyone’s noetic structures. Family-centric cults are probably the most glaring example of children discrediting sources for lack of their parents approval, but everyday religion provides ample evidence of otherwise intelligent people who’ve been through no special religious education foregoing their normal criteria for belief in favor of deferring to the claims their parents likely repeated and defended for much of their lives. Of course the mechanism doesn’t remain the same as a child with any sort of freedom grows and thence comes the market for pseudo-academics and social niches for any crazy belief you can imagine. Once parents let children engage with society and its customary populist mode of argumentation, they need to defer to sources beyond themselves to repel the counter-current provided by outsiders.

My claim is ultimately that parents have the requisite tools to control which sources their children will take as credible, although control over content will scale with either the parents ability to exercise direct and absolute control over their child or the relative popularity of the desired content in society. Once you’ve ceded ground to schoolteachers or neighbors, it’s very easy to have sewn the seeds of your own incredulity. In principle though, the absence of any parental concession seems to guarantee a very shallow noetic structure, while liberal concession leads to many layers of differently weighted authorities whose claims are more susceptible to an informed sense of judgement.            

 

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