Posts Tagged ‘ Bryan Caplan ’

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.

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My Ride-sharing Soap Box

This post will be longer than I’d like most of my posts to be, but I imagine this is one cost of starting a blog a considerable amount of time after being born. I have a lot of old ideas I would like to reference, but since I’ve developed them elsewhere, the blog needs to be caught up before I can develop them in a more incremental, and palatable, manner.

Last month, Bryan Caplan posed this question to his students: how to spend a billion dollars most efficiently and, alternatively, in such a way as to maximize utility. Part of the idea was undoubtedly to distinguish utility from efficiency by proposing plans that differed in their espousal of each principle. Another part was to see whether students could actually identify any low hanging fruit: is there something we obviously could and should do that we haven’t already done?

My proposal would be that we pay ~8 million Americans to become casual cab drivers. Here it is important to qualify “casual;” no one is leaving his job to drive people around, in fact, they’ll be asked to go no more than a few minutes out of their way. Smartphones have made it incredibly easy for people to impersonally coordinate time and locations, why not pay someone a trifling amount to take you to work when you’re right on their way?

There are two general reasons why it wouldn’t work, one preferential, the other structural. The preferential case revolves around general insularity (stranger danger, social awkwardness, misanthropy) and is more difficult to predict as it’s unclear at what prices people would be willing to shrug it off. The structural case is simply that a widespread and reliable ride-sharing network needs a big push and it’s hard to see how you could get the gains from such a scheme to accrue to the source of the push. I think a billion dollars simultaneously remitted to to a few million active participants in a handful of major cities would be sufficient to get the project off the ground and its evident convenience would sustain it from there.

There are a litany of potential benefits. Most immediate is the relief of traffic jams in major cities, perhaps to the extent that it eliminates the need for congestion charges which are a net social gain, but privately costly in terms of time/money/planning. Secondly, its short term labor labor-saving effects would free up cabbies and public transportation workers/dollars while providing people with a lower cost service across the board (t/m/p). The long-term gains are by far the largest. Ownership of private passenger vehicles is the second largest expense most Westerns face in their lives, in many cases approaching one third of the median income (consider these figures for the US). If there were a convenient, reliable way for commuters travelling in the same direction to ride-share, I’m keen to entertain estimates of how many active vehicles could be taken off the road in 15 years.

In the interest of quantifying the efficiency gains, I’ll say that we can reduce the number of passenger vehicles by 15% in 15 years (Ceteris Paribus). There were 255 million registered passenger vehicles in the US in 2007. In the interest of conservatism, I’ll suggest 265 million as a current figure. At roughly $9,000 per car per year the annual expenditure hits $2.835 trillion. 15% of that?  ~$358 billion per year. Say my plan has a low probability of success, or the reduction in car ownership wouldn’t be so great, how low would it have to be and how small would the change have to be? Even if there were only a 3.5% chance of the strategy reducing the number of cars on the road by 1%, you’d still get your principle back in savings every year.

While it may not be the most efficient way to spend $1 billion, it is perhaps the one most highly relevant to the everyday lives of Americans. Also it’s much more easily quantifiable than the promotion of natalism, unspecified scientific breakthroughs, or immigration.

I think I’ve done enough to answer Bryan’s prompt and don’t wish to make this post any longer, though I have much more to say on the topic. For those curious about how far private money has gotten in this endeavor, look in to Lyft and Uber, two services being developed while I’ve been day dreaming.