Archive for the ‘ Distributive Issues ’ Category

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

Bryan Caplan believes 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 an interventionist plain and simple, if you oppose involuntary unemployment (lost gains from trade), these facts would seem to recommend intervention as well. 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 “involuntary” 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’ve tricked a relatively undesirable portion of the workforce into thinking they’re worth more than they are by diminishing the real 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!

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/or 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 – thoughtfully construed – 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 lend 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 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.

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 (carrot), 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

This. So Much This.

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.

People Who Complain About Growing American Income Inequality Are Sorry Excuses For Cosmopolitan Thinkers

Here is the kind of chart they like and here is another.

Here is a powerful theoretical explanation for stagnant or stalling average wages in a country and a world where many many more people are far far better off then they were in the 70s.*

Conjecture on why the theoretical explanation almost certainly applies:

The Second World War left the (only recently) industrialized world in ruins. While Europe and Japan rebuilt, American capital and infrastructure were wholly intact. When you consider the huge relative advantage of working in an industrialized economy to begin with, it becomes very hard to understate the significance of the United States’ position at the time. Moreover, Women had not broken into the peacetime workforce and bid down the wages of men. Median/Average income was at an all time high, shocking.

When would we say all of these socio-economic/historical factors began to shift against the lone male American household income earner? Hard to venture a better guess than the 1970’s. The European and Japanese recoveries/miracles were hitting full swing, we opened trade with China, women started entering the workforce in droves and the US economy hit a rough patch. By the time the domestic economy turned around, foreign competition in the labor market was well established and Reagan’s more liberal immigration policy coupled with the recovery to increase the number of low-income earners entering the American economy from abroad.

These trends have largely continued through today and they have been a boon to everyone. It would be very difficult to show that the median American family, or indeed the median Chinese or Indian family is not much better off than they were 40 years ago when we had so much more domestic equality. Technology and efficiency gains have been huge and they’ve been distributed all over the American economy; you’re reading this online article over free wi-fi on your smartphone, you’re no one-percenter and your parents would be awed by your lifestyle at this age.

So America’s middle class of old is in far better shape, the new middle class is lightyears ahead of what was likely third-world poverty a generation ago, but our focus needs to be the fact that we all live like shit because the greed and privilege of 3 million Americans making more than $250,000/yr is robbing us of the life we deserve. The truth seems to be that the middle class were the privileged ones, getting to press buttons and pull levers for fat suburban incomes while the rest of the world lived in real poverty. Now that those people who were once desperate have joined the global economy and proven themselves no less skillful than their American counterparts, the latter have lost their privilege that came at a great price to many millions of people and now sulk despite still living in the lap of luxury.

On the other side are the 1%: A tiny minority of people with highly specialized skills that few have learned despite many having the chance because they are that difficult to master and that dismal to learn even though they are the skills that let you make extremely important decisions about the structure of production that effect the income and consumption of millions. Given the boon to living standards we’ve seen due to globalization and the successful adoption of new technologies on an industrial scale, I’d say the people organizing it deserve quite a premium over the people stamping jars and balancing cash registers.

The moral of the story is that the people narrowly focusing on the slightest possibility that wealthy middle class Americans have been given a raw deal are they same people who call themselves champions of the poor and proponents of progress. My understanding is that humanism was progress in the 17th century and 19th/20th century nationalism was the conservative backlash; yet many on the left prioritize a return to a world of abject poverty for billions so a select few among their countrymen needn’t feel inferior to an even more select few, though this connection very likely does not occur to them. They are, at the very least, myopic, if not outright selfish and malicious in their drive to cultivate an elite that coheres to their aesthetic.



*The second graph was the best I could find in a lengthy search, nothing on global median income, but an endless trove of the headlining charts. This heavily underscores my point.

Completing the Redistributionist Trilogy

There is a third popular argument for redistribution that falls somewhere in between the argument from justice and the pragmatic argument. Fittingly, it’s a hybrid of the two. Despite constant attempt to re-brand it, it is the argument from reparations.

Any one who has come across them understands that arguments from reparations are riddled with potential pitfalls ranging from problems with predicting alternate realities, to measuring effects, to estimating the decay of effects over time, to it being unclear whether wealth today was actually derived from crimes passed, or whether there are undesirable social consequences for groups paying or receiving reparations etc. etc. etc. My concern may actually lend some precision to a reparationist case, but cost it considerably in terms of scale. Those who can reasonably be held accountable for crimes whose effects span generations are few in number and small in wealth compared to the demands of those who feel they are its victims.

Basically, any individualist account of slavery or similar atrocities can hold accountable only those people who directly devised or carried out criminal orders. That means the small group of powerful men who devised slave expeditions and those who came to own slaves as well as those who were directly involved in the handling of slaves in between. If it sounds like a substantial part of the population from whom white Americans, consider that this excludes everyone involved in building the ships, guns, nets, clothes, and food for the slave expeditions themselves and everyone involved with every other industry in the western world who wasn’t a slave owner, wrangler, or conspirator.

I suggest that, while many of these other people profited from the slave-trade and other atrocities through exchange with those responsible, burdening them responsibility for any wrong-doing in the entire structure of production leading back to them would be supererogatory and, as a consequence, wildly inefficient (i.e. causing people to surrender huge amounts of utility to transactions costs).

So, even if we can clean up everything else about reparationist arguments, the money just isn’t there, unless you want to convict the blameless for not plunging us into a dark age by tracing every possible moral consequence of their micro-decisions.