Posts Tagged ‘ productivity ’

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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Admirable Leftists Are Teachers

In my last post, I criticized the argument for redistribution as justice; People below a certain standard of living have claims on the property of others by virtue of their existence alone. I find this line morally repugnant in the same way I imagine its proponents see vast inequities in wealth as morally repugnant. It’s truly an impasse of sentiments for which I can hardly imagine an agreeable form of adjudication.

The most popular alternative argument for progressive wealth redistribution is a pragmatic one. This argument is far more noble in my view for more than just its susceptibility to empirical and theoretical testing. The view simply states that a more even distribution of wealth allows for larger swathes of the population to have the time and resources to grow both in number and human capital leading to a bigger pie for all. The argument is more pro-human, pro-progress and anti-the political vitriol of the “soak the rich because they’re rich” entitlement argument.

Proponents of this latter view are environmentalists, not the kind that like trees, but the kind who think your low productivity is a consequence of your father hitting you rather than your having the genes of a father who would hit his own child. If our experiences, exposure and guidance were right and well focused enough, any one could be nearly as productive as anyone else. The reason the low-productivity workers live relatively worse and have children who follow in their footsteps can be put up to a lack of resources which is very difficult to overcome. Obviously, people have broken the cycle in the past and some do today, but the theory is that only a little cushion between each pay check and the hours of work that go into them would give the poor time to develop human capital and be more productive, have better pay, and a greater bounty from which to consume.

So, if you believe this and find yourself a young person in in the 60+ percentile of a developed nation, you become a teacher. The young poor have the time and resources (public education) to improve their human capital and build a better life for themselves and their children if only they’re properly motivated and directed in that time. Thinking as you do, who better to give them that motivation and direction?

As admirable as both the form of the argument and the follow-through of its adherents are, another merit of the argument, its falsifiability, lets it down, if only somewhat. The social science research comes down markedly in favor of genetic explanation for variance in income and intelligence. For income, genetic effects account for about 50% of income variation among men in Finland, a much less genetically diverse country than the United States. IQ studies trend toward 75% heritability. This means that environment can still account for up to half of income variation, but much of this can be put up to extremities much greater than the quality of individual educators.

This is, of course, one of the most contentious debates in academia and all I wanted to say is that there is a more admirable argument for redistribution than the one from justice and it happens to explain why teachers are so much more likely to be democrats without relying on the shoddy self-interested voter hypothesis.

The Best Time to Alienate Readers is Before I Have Any

This. So. Much. This.

Is what a demonstrably intelligent, college educated acquaintance of mine had to say about what was actually just this.

There’s so much I can say, but long windedness on my part doesn’t even do me any good, let alone you. I’ll elaborate two points: first, this is a prime example of populist irrationality. By populist irrationality, I simply mean that, given the underlying values, the proposed solution does more harm than good. Second, the irony of those values which claim to abhor selfishness, but are themselves motivated only by the sense that some owe others merely for existing and irrespective of what they have to offer in return.

First:

Let’s assume we have some minimal standard of human dignity that it is our sworn duty to uphold for all people at any cost. According to the article, this entails independent living space with climate control, an automobile, access to Western medical care, cable internet and telephone service with ~$25 a day left over for food and miscellany in addition to at least 120/168 hours of sleep/leisure per week. Assuming no effect on the prices of these goods, no transactions costs, no misallocations of capital, and no negative production change as a result of fewer hours worked, all we would need to do is double world GDP and distribute accordingly.* While all of those assumptions are far off the mark, simply redistributing income after production is a much sounder strategy to uphold a given standard of living than what the populist view suggests: raising the minimum wage.

Unfortunately, as is often the case, the emotionally satisfying response is the one that holds sway in the market for intellectual garbage. If people were genuinely interested in rectifying what they see as an inequity, they would understand and admit to disemployment effects and misallocations (high skill workers taking low skill jobs that pay like high skill jobs). Beyond that, they’d advocate that workers be paid what the market will bear in the interest of allocating to maximize gains from trade and leave no resources idle so that a redistribution after the fact could be maximally effective in improving the lives of the least well off. The appeal of the minimum wage vis a vis this suggestion is that it pays workers for their toil, which advocates interpret as desert, forgetting that low skilled workers are providing very little value to the society that is supposed to satisfy their compensatory expectations. 

Second:

“Human beings are worth more than that. Anyone who works 40 hours a week (nevermind 74 hours) ought be able to take care of all the basic necessities in life.”

By virtue of birth, humans are entitled to take more from the people who were here before are willing to give them for whatever it is they do. Those people never had any say in whether or not you were born, but now that you’re here, they owe you what you think is fair and anything less is criminal. In all sincerity, I’d like someone to explain to me why they’re the selfish ones.

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*Assuming an adult population of 5.5 billion at $24,000 annual income (a bit less than the article suggested) the total comes to ~132 trillion 2012 WGP was ~71 trillion.