Monday, December 9, 2013

UI and Unemployment

I was reading Paul Krugman's NYT column this morning, and ran across the following:
Proponents of this story like to cite academic research — some of it from Democratic-leaning economists — that seemingly confirms the idea that unemployment insurance causes unemployment. They’re not equally fond of pointing out that this research is two or more decades old, has not stood the test of time, and is irrelevant in any case given our current economic situation.
I'm not sure what research the "proponents of this story" or Krugman are paying attention to, but the mainstream theory of search and unemployment - our standard tool for understanding how the labor market works - is both old and new, has certainly stood the test of time, and it tells us that more generous unemployment insurance (UI) increases the unemployment rate.

In standard search models, there are several channels through which UI affects the unemployment rate. In early one-sided search models, e.g. McCall (1970) an unemployed worker searches until he or she finds a job that is sufficiently attractive. The unemployed worker has a reservation wage strategy - offers at or above the reservation wage are accepted and those falling below it are rejected. More generous UI makes the opportunity cost of searching lower, and the unemployed worker increases his or her reservation wage. Why not be more picky if searching is less painful? This tends to increase the average duration of unemployment for any unemployed worker, and therefore to increase the unemployment rate.

Economists later developed two-sided search models. The big innovators in this research area were Dale Mortensen and Chris Pissarides. In a two-sided search model there are firms looking for workers, and would-be workers looking for firms, and it takes time for them to match. In this model, the effect of UI works somewhat differently from what happens in the one-sided search model. In a Mortensen-Pissarides (MP) model, most or all of the action is isolated in the behavior of firms. Unemployed workers simply search no matter what, but firms face a choice as to whether or not to bear a cost of searching for workers (posting a vacancy). If UI is more generous, this makes the bargaining position of workers better when negotiating with firms, because the opportunity cost of rejecting a job offer is lower (in this sense the effect has some similarity to what happens with one-sided search). This has the effect of increasing the wage the worker receives, which is bad for firms. As a result, fewer firms post vacancies in the labor market, the job finding rate of unemployed workers drops, and the unemployment rate rises.

Another strand of economic research studies the optimal design of UI systems. Like any form of insurance, UI is doing something useful - it provides insurance - but there are incentive effects to worry about. Insurance companies that provide auto insurance and fire insurance understand that there is a moral hazard problem - the better the insurance the less care the insured takes to prevent a loss. And it is difficult to observe the insured's effort in preventing losses. Similarly, in the case of UI, the search effort of an unemployed worker will affect the would-be worker's chances of finding a job, and that search effort is difficult to observe. More generous UI, as above, reduces the opportunity cost of searching for work, and one of the adjustments the would-be worker makes is to put less effort into search. This increases the average duration of unemployment and the unemployment rate. Work in this area (e.g. Hopenhayn and Nicolini's work) shows that, if the UI system is designed to account for moral hazard, that UI benefits should last for a long time after a worker becomes unemployed, and the benefit level should decline during a worker's spell of unemployment.

These predictions - which come from theory - are broadly consistent with empirical evidence. For example, if we look at a cross section of countries, what we observe is that countries with more generous UI systems than in the US (Western Europe, UK, Canada) tend to have higher unemployment rates.

Search models have been very widely used, and they are currently ubiquitous. They're used by labor economists and macroeconomists (New Keynesians too). Further, Diamond, Mortensen, and Pissarides received the Nobel prize in economics for their work on search theory. Quoting from the Nobel committee's announcment:
This year's three Laureates have formulated a theoretical framework for search markets. Peter Diamond has analyzed the foundations of search markets. Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The Laureates' models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy. This may refer to benefit levels in unemployment insurance or rules in regard to hiring and firing. One conclusion is that more generous unemployment benefits give rise to higher unemployment and longer search times.
Note the last sentence.

UI benefits were extended for the long-term unemployed in the US during the last recession, and those extended benefits are still in place. Krugman wants to argue that cutting off those benefits would be bad policy. There may be good reasons why Krugman's conclusion is correct. For example, the standard UI system in the US whereby benefits are cut off after 6 months may be suboptimal. As well, it may be the case that the effect of extended benefits on the unemployment rate is not quantitatively important. But it only weakens Krugman's case to make statements that are false.

Further, in the quote I started with, Krugman seems to want to argue that there is something about our current situation that is so different that everything we know gets turned on its head. That's not so obviously false, but I think it's incorrect.

59 comments:

  1. "These predictions - which come from theory - are broadly consistent with empirical evidence. For example, if we look at a cross section of countries, what we observe is that countries with more generous UI systems than in the US (Western Europe, UK, Canada) tend to have higher unemployment rates."

    As correlation doesn't prove causation how do we know that more generous UI benefits are responsible for the difference-and if so to what degree?

    The U.K. unemployment rate may be higher than the U.S. right now but not by much if so-a couple of years the U.S. unemployment rate was higher.

    How do we account for countries like Germamy with lower unemployment and much more generous UI benefits?

    As far as I understand it, Canada does not have higher unemployment or certainly their long term trend isn't higher.

    on the intuitive level it's hard to believe that the effect of the meager U.S. benefits has more than a negligible impact as you admit is possible.

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    1. I don't have all of the empirical work at my fingertips, but it's safe to say that when you take everything into account, most empirical work on UI tells us that more UI increases the unemployment rate. The question is, how much? As with anything in economics, you'll get some very different estimates of the quantitative effect.

      "As far as I understand it, Canada does not have higher unemployment or certainly their long term trend isn't higher."

      This I do have at my fingertips. If you look at the time series, the unemployment rate is on average higher in Canada. There's a measurement issue, but Canada has an unemployment measure that uses the U.S. approach, and that allows you to compare. In the recent recession, the unemployment rate went up more in the U.S. than in Canada, to the point where the U.S. unemployment rate exceeded that in Canada. Of course, there's another factor at play there - Canada in general weathered the recession much better than the U.S. did, due to its sturdy banking system.

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  2. I am not sure what empirical research PK has in time, but to quote from Elsby, Hobijn, Sahin, and Valletta (2011):

    "Recent research on the effect of Emergency Unemployment Compensation (EUC) has shown that EUC has likely had an impact on the evolution of the natural rate of unemployment. While estimates range from 0.3-3 percentage points, most studies find an effect of around 1 percentage point or less. (See Aaronson, Mazumder, and Schecter, 2010; Farber and Valletta, 2011; Fujita, 2010; Nakajima, 2010; Rothstein, 2011; Valletta and Kuang, 2010; and Valletta, 2010)."

    This recent finding is certainly consistent with theory, and contrasts PK's claims.

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  3. I think it would've been useful to quote one additional paragraph from Krugman's column:

    "The view of most labor economists now is that unemployment benefits have only a modest negative effect on job search — and in today’s economy have no negative effect at all on overall employment. On the contrary, unemployment benefits help create jobs, and cutting those benefits would depress the economy as a whole."

    When he says "most labor economists", his reference is this: http://www.jec.senate.gov/public/index.cfm?a=Files.Serve&File_id=e1cc2c23-dc6f-4871-a26a-fda9bd32fb7e.%2520

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    1. His source is Lawrence Katz's testimony to the U.S. Congress. The key paragraphs he seems to be referring to is this (sorry for the long quote):

      "But the most compelling research suggests only modest impacts of UI extensions on the search effort and duration of unemployment of unemployment insurance recipients (Card and Levine 2000; Schmieder, Von Wachter, and Bender 2009). Furthermore, previous estimates of larger impacts of unemployment durations of UI extensions for the United States (Katz and Meyer 1990) are based on data from the 1970s and early 1980s in with much of the responsiveness coming from firms and industries using temporary layoffs and the sensitivity of recall dates to unemployment insurance benefits. This layoff-recall process is much less important today than it was in the 1970s and early 1980s downturns. Unemployment insurance extensions also have important consumption smoothing benefits for the unemployed (Gruber 1997) and much of the impact on job search comes from reducing liquidity (credit-constraint) problems rather than traditional job search disincentives (Chetty 2008). Traditional microeconomic estimates of the impact of UI on the unemployment durations of UI recipients further tend to overstate the aggregate impact by ignoring the spillover effects of shorter unemployment spells for the other unemployed workers no receiving UI benefits (Levine 1993). They also ignore the macroeconomic stimulus impacts of increased consumption expenditures by the unemployed from UI raising aggregate demand and labor demand during a deep recession as well as the gains from keeping more of the long-term unemployed attached to the labor market rather than moving onto disability programs."

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    2. So, that says there is a lot going on. Social insurance is important, particularly in a recession. Transfers are an important part of social insurance, and you can make the case that it's more effective social insurance if the transfers go to the unemployed. But there's a cost, which as the research in one of the comments above says, amounts to about one percentage point in unemployment. So, in principle we could work out an optimal policy. But, it would be wrong to say that unemployment does not increase due to UI. And you don't need to make that argument to argue for the policy.

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    3. Actually it's not 1 percent but '1 percent or less.' As Rick's quote shows Krugman doesn't deny there is any negative impact just that it's negligible particularly during a bad recession.

      Let me ask you this Mr. Williamson. Would you agree or not with this statement of Krugman's-and how much do you agree or not agree?

      "The point is that employment in today’s American economy is limited by demand, not supply. Businesses aren’t failing to hire because they can’t find willing workers; they’re failing to hire because they can’t find enough customers. And slashing unemployment benefits — which would have the side effect of reducing incomes and hence consumer spending — would just make the situation worse."

      http://www.nytimes.com/2013/12/09/opinion/krugman-the-punishment-cure.html?hp&rref=opinion&_r=1&

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    4. What Krugman should be saying, if he was honest is the following: "The economy is currently depressed because there are sticky wages and prices." I don't agree with that statement. The financial crisis and ensuing recession started more than five years ago. Even if the sticky wages and prices were important at some stage in the dynamics, it's hard to argue that most of the price adjustment wouldn't have happened by now. So I think there is something else going on.

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  4. We are all New Monetarists now? A guide for the perplexed.

    http://diaryofarepublicanhater.blogspot.com/2013/12/we-are-all-new-monetarists-now.html

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    1. Excellent. Better to produce perplexity than boredom, I always say.

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  5. Reducing the length of unemployment insurance or the monthly amount of payments (these are not "benefits", it is a public insurance !) has supply side effects. So in normal times one should think about it.
    But right now unemployment is high because aggregate demand is low.

    Krugman's point is that many economists are too stupid or too much under the influence of ideology to care about this stuff from Econ 101.
    Hell, Keynes wrote about how the normal supply side arguments do not apply during demand side recessions and people still repeat the same old mistakes after more than 70 years.

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    1. Actually, I'd say that people are too wrapped up in econ 101. Forget the demand side/supply side. The effect is operative whether you think there are sticky price frictions, sticky wage frictions, you're in a liquidity trap, or whatever.

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    2. Just to be clear, I'm far from an academic economist. I'm just a-very interested-layman. My impression from lsitening to many of the economists is that the AS/AD model is pretty important.

      For example, Scott Sumner always likes to say 'never reason from a price change' which means that you have to know wether it's demand or supply induced.

      When talking about macro isn't the idea tha it's more short term and about demand whereas the long term is about supply and microecon?

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    3. If by "pretty important" you mean "totally wrong and useless", then you've got it about right.

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    4. Of course the effect is always operative. Any kind of insurance creates moral hazard / adverse incentives.
      The question is whether this is of quantitative significance during this horrible recession. Furthermore you know very well that the only people who bring up this issue in public discourse are the ones who wanna destroy unemployment insurance. They merely point out the downsides but neglect to mention that people demand unemployment insurance and that you have to do it publicly as at least one part of the risk of becoming unemployed is structural (a private unemployment insurance company could theoretically insure against individual risks and firm-specific risks but not against structural risks).

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    5. "...many of the economists is that the AS/AD model is pretty important."

      None of the economists I know in the academic world or the policymaking world ever argue their points in terms of AS/AD. The "demand/supply" language comes from that model. Thus, if you're not going to argue your points in terms of that model, you're not talking about demand and supply.

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    6. "...you know very well that the only people who bring up this issue in public discourse are the ones who wanna destroy unemployment insurance."

      Two wrongs don't make a right. You don't tell a lie because some people on the other side of the argument are being dishonest.

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    7. His argument might not fully fledged out but he writes op-eds and not long articles.
      What he does not point out clearly enough is that reducing unemployment insurance in terms of length or benefits has always positive effects on labour supply (he does correctly point out though that it is of little quantitative significance right now)

      What he does point out brilliantly though is that cutting unemployment insurance also has a negative effect upon demand. All he does is general equilibrium instead of partial equilibrium analysis, something which Keynes also did in his General Theory.

      All I would change (if I were able to write such op-eds which I am obviously not) would be to mention that there is not just a negative effect upon aggregate demand but also a small positive effect upon labour supply.

      You might also wanna keep in mind that Krugman is not writing for economists but for the general public. All they hear is partial equilibrium stuff so somebody has to tell the entire story. Ignoring some details and being slightly polemical is not a sin. A small lie of omitting is peanuts compared to the large lie, demand denial, of the other side.

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    8. "...has always positive effects on labour supply.."

      No, that's not it. Now you're getting in trouble with the language, as we're not talking standard demand/supply competitive equilibirum. We're thinking about a labor market with frictions - search. The idea is that unemployment insurance has the effect of gumming up the works. The unemployed will spend longer searching, because the opportunity cost of doing so is lower. One effect is that the unemployment rate will go up, but there's a real economic loss associated with that. The rate at which would-be workers match with firms will be lower, and output will be lower as a result. Further, wages will be higher. So it's nothing like an increase in labor supply, which in a competitive model will make output go up and wages go down.

      "What he does point out brilliantly..."

      I'm not sure why it's brilliant when a Nobel prizewinner thinks like an undergraduate.

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    9. Steve, I think he is talking about cutting unemployment insurance, not implementing it. In this case the effect on wage and employment in the search model is not different than that resulting from an increase in labor supply in the competitive model.

      In fact, I think that in general the two models deliver similar predictions, expect that the search model sheds light to additional details. For example, it distinguishes between unemployed workers and those not in the labor force, it explains the co-existence of unemployment and vacancies, and so on. But the effect of an increase in unemployment insurance or productivity on employment and the wage is the same. I am not sure about an increase in government spending though.

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    10. Yes, I had in my mind UI going up. But, suppose that UI benefits go down. It's not in all ways like an increase in labor supply in a competitive model. First, we know that wages will be lower, because the bargaining position of workers is weaker (higher opportunity cost due to lower UI). Second, an unemployed worker who is searching will search harder, and be less picky about the jobs he or she accepts, which reduces unemployment duration and lowers the unemployment rate. So, what happens to labor force participation? Not clear. Because wages are lower and UI benefits are lower, the expected payoff to entering the labor force is lower, and so participation will tend to go down. But, since wages are lower, this induces firms to post vacancies, which will make the labor market tighter, which induces more labor force participation. In the usual Mortensen-Pissarides setup, you don't have the labor force participation effect.

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    11. The most general way to tell the story (using a search model is pretty specific), increasing unemployment duration or benefits decreases incentives to quickly find a job. This means that the labour supply curve shifts inwards, labour goes down, wages goes up.

      Same result as you got but with some of this oh-so-unsophisticated undergraduate thinking. Ironically Krugman' general equilibrium story point is better than your partial equilibrium search model stuff (which doesn't take into account the positive effects of a more generous unemployment insurance upon agg.dem.).

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  6. SW I'm not quite sure where you're coming from or what you're about but my interest is piqued. I will get to the bottom of it.

    Here's the first part of the puzzle: how does someone who calls himself any kind of 'Monetarist' think that Fed is basically in a trap or out of bullets. Isn't this a Keynesian position?

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    1. I know you weren't talking to me, but the Fed isn't the government...they aren't controlled by the government and aren't technically a part of it at all, so this cannot be Keynesian thinking. Yes, it is focusing on the demand side of things, but there is no political influence.

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    2. There are two kinds of traps. One is the liquidity trap. If you think that's a Keynesian phenomenon, you're talking to the wrong people. My recent academic work is full of liquidity traps - and not the conventional ones which have to do with the Friedman rule (not the constant money growth rule - the optimum quantity of money rule). No sticky prices or wages, or anything else that looks Keynesian to get that phenomenon. The other trap I was discussing is a trap the central bank gets in at the zero lower bound because it misunderstands what is going on.

      If you want to call me a Keynesian, that's OK with me. You could call me a socialist too if you want. I grew up in Canada, where we are all socialists.

      More seriously though, here's how a New Monetarist differs from an Old Monetarist:

      A New Monetarist is disinclined to separate assets into ones that are "money" and ones that are not. That isn't useful. A New Monetarist is more interested in the details of theory than Milton Friedman ever was. A New Monetarist is concerned with financial intermediation - why we have banks, the role they play in the economy and how they matter for monetary policy. For Friedman, the banking sector was a black box, and he was happy to impose 100% requirements on banks. I think narrow banking is a bad idea.

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    3. "but the Fed isn't the government...they aren't controlled by the government and aren't technically a part of it at all, so this cannot be Keynesian thinking."

      No, this is very important. The Fed may have independence, but it would be a big mistake to think of the Fed as "not the government." Fiscal and monetary policy are inextricably linked, and we'll make errors if we don't concern ourselves with that.

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    4. Actually, the problem is that the term "Keynesian position" is ill-defined. What makes a position Keynesian? Choosing from The General Theory, is it that it prescribes fiscal expansion as a remedy for a recession? Is it that it assumes that the main source of inefficiency is wage stickiness? Is it that it identifies animal spirits as the driving force of fluctuations? If only one is required, then many very different models can be described as Keynesian, simply because they share that one feature. If all of the above are required, very few models should be called that.

      What is Keynesian depends on the definition one uses, and this really shouldn't matter except for classification purposes. In principle, ideas should be judged not based on how "Keynesian" they are, but on their own merit. Unfortunately, some have turned Keynes into a badge you wear on the sleeve to prove something, I am not sure what. Interestingly, in his book, Peter Clark quotes Keynes as saying after a meeting with American disciples, "I was the only non-Keynesian there". I am not sure Keynes himself would have approved of people trying so hard to prove their Keynesian credentials, or adhering religiously to his rather vague book. And he would have been right!

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    5. SW, I was fortunate enough to listen to a lecture by Chris Sims at my school. His talk was partially on how monetary policy and fiscal policy are linked together. For those people interested:

      Slides: http://hhei.umn.edu/assets/pdf/2013SimsTalk.pdf

      Video: http://hhei.umn.edu/news/pastEvents/2013ChristopherSims.php

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    6. Very good. Ideas like that were floating around Minnesota in the 1980s, for example. Sargent and Wallace wrote some about this as well. Some of the ideas show up in the "fiscal theory of the price level," though that's a little hard to figure out. Sims, Woodford, and Cochrance all wrote about that.

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  7. "Krugman's point is that many economists are too stupid or too much under the influence of ideology to care about this stuff from Econ 101."

    He obviously writes while thinking of himself.

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  8. Keynesian is not an insult out of my mouth. As for my reading liqiudity trap as Keynesain-this is the impression if you spend as much time at Sumner's Money Illusion as I do.

    With your focus on banks what comes to my mind are the MMTers-are you familiar with them? I wouldn't guess they'd be to your taste but in any case though talk a lot about banks.

    http://moslereconomics.com/

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    1. Vaguely. Don't think I have much in common with those people.

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    2. "...if you spend as much time at Sumner's Money Illusion as I do. "

      My understanding is that Sumner thinks that the Fed could announce a path for nominal income, and it would come to pass, like when you wish and blow out the candles. Doesn't seem to understand that this has to be done with policy decisions and directives to the New York Fed about how to intervene in financial markets.

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    3. Yes that's it basically. The idea is that if the Fed says it will hit say an NGDP target of 5% it will happen so long as the markets think the Fed has credibility

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    4. Yes, and if everyone believes you can walk on water, surely you can do it.

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    5. "Doesn't seem to understand that this has to be done with policy decisions and directives to the New York Fed about how to intervene in financial markets."
      Ah, what Nick Rowe calls the "people of the concrete steppes". I believe Sumner's proposal for an NGDP futures market does include policy actions to be taken by the Fed that will change nominal income.

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    6. I would like to see Sumner write down a serious model in which there is an NGDP futures market, monetary policy is implemented in the way he says it should be, and it turns out this is a good idea. In its current form, the idea is just chit-chat.

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    7. That would require skills that Sumner does not possess.

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  9. Anon's right. The only person less equipped to write a model is me! Here is the kind of triumphalism he sometimes spouts that makes me enjoy the idea that you took the New Monetarist handle before he did.

    "Does that mean progress is not possible? No, at the end of January I plan to do a long post carefully explaining exactly why the market monetarist framework has been far more successful in explaining the past 5 years than any of the competing frameworks. I’ll explain what went wrong with our competitors, and why. I hope that when bright young students at schools like Michigan and Princeton see that we are more successful, market monetarism will gain new adherents. That’s how progress is made. Successful schools of thought get everyone to talk their language."

    "The older people stuck in their ways? One funeral at a time . . ."

    http://diaryofarepublicanhater.blogspot.com/2013/12/stephen-williamson-vs-nick-row-in-epic.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29

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  10. Here is Sumner and Nick whining that you took New Monetarist first. I love it.

    "So can we (market monetarists) now have the “new monetarist” label that we deserved all along?
    "Update: Nick Rowe had a similar reaction."

    http://diaryofarepublicanhater.blogspot.com/2013/12/bob-murphys-touching-concern-for.html

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  11. Thing is SW is I used to not like you as all I really knew about you is that you seem to really not like Krugman-whom I do like.

    However, I'm starting to see there's a lot more to you. For one thing you have a rival Monetarist school which might tone down some of the Market Monetarist triumphalism.

    So funny enough it seems that maybe it's possible to like both Krugman and Stephen Williamson. One thing you have over him is you've actually answered comments of mine-that would never happen with Krugman though I don't really think that's because he's a bad guy.

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    1. Claiming that you're a school of thought is a little dangerous. For example, at least one of my good friends who works in monetary economics thinks it was a bad idea to introduce the "New Monetarist" label. Someone else I know (an auction theorist) thought it was dumb to call anything "new" as it quickly becomes old. The whole school-of-thought idea can be a little weird in any scientific field where ideas are constantly evolving. That said, it helps to give yourself a name so that people sit up and take notice.

      But, suppose that we can divide the world into schools of thought. In order for a school of thought in economics to be successful, the members of the school have to work on multiple levels to convince everyone. You have to play the academic game and be rigorous about the ideas; you have to play the policy game and convince policy makers; maybe you want to convince lay people. Perhaps Sumner has had some success on the latter dimension through his blog, but convincing lay people is second order. You can't get traction without doing the serious science and convincing the policymakers.

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    2. I wonder if he's had some success with policymakers-although certainly not rigorous academics. I think even the Fed looked at NGDP at one point.

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    3. Of course it came up. To my knowledge, it's not taken seriously in the Fed system.

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    4. I agree on the label "New". Also, "neo" and possibly "post". "Moneyness" economics would sound strange as well though.

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  12. I am willing to offer Scott Sumner options contracts that specify the number of top 50 economics faculty who subscribe to MM; he pays if there are none. He is delusional to think that MM has been successful and will attract any serious economists.

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  13. If the search models are so powerful, I think the readers would like to know the results of search model analysis as applied to an economy which is driven by bubbles, tens of trillions dollars invested in derivatives trading, bad-banks, multi-billion bonus industry, etc. etc. Shouldn't we be analyzing the effects of frictions caused by these agents on inflation, unemployment and GDP growth. I think this would be more fruitful than to worry about the small effect of reservation wage on current unemployment.

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    1. Here's a conference where some of what was discussed is the relationship between labor market frictions and financial markets:

      http://research.stlouisfed.org/conferences/moneycreditfriction/

      Search is a useful way for thinking about how the labor market works. That doesn't mean that to understand dysfunctional financial markets I need to integrate that with labor search. Of course, if I want to understand what the financial crisis has to do with the recent performance of the labor market, search could be very helpful.

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    2. I should add that it's about time that undergraduate students in economics learned about search and unemployment. The current edition of my book has a chapter on it:

      http://www.pearsonhighered.com/educator/product/Macroeconomics/9780132991339.page

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    3. Sorry, I was not implying that we should use labor markets to explain the dysfunctional markets. I was referring indeed to the context where you said search theory would be useful. Namely, how has financial markets collapse led to the unemployment. Isn't this the topic worthy of study?
      Is it not likely to show that current unemployment is not due to high reservation wage but rather what the financial industry did and does. Is it not likely to demonstrate that we should stop bashing the current unemployed to be too comfortable and instead target the legitimately guilty?

      I think it would be very interesting if economists would use Diamond's and Pissarides or any other model to find out
      what happens in an economy where the markets are looking to produce financial goods and products - namely
      producing money with money and producing more and more debt with capital. In particular, it would be useful to see what
      the reservation wage of workers who produce/trade financial products is and to
      compare its value with the reservation wage of a worker who produces standard products.

      The analysis could then be generalized to compare two categories of workers in a single economy - namely, workers which
      work for an industry which earns 30%/yr on equity with workers which have return on equity equal to real interest rate
      (-2%) in the economy. It would be instructive to calculate the ratio of the equilibrium wage of the workers in the two industries?

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    4. Steve, yes, I enjoyed going over the search model with students using your book. I would take it a step further though. I think the search model should eventually replace the competitive model in general equilibrium models. What is the point of teaching the search model, then reverting back to the competitive one?

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    5. I'm not sure you want to throw everything in the model at once. Too much going on, especially at that level. But maybe there's a way to do it.

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    6. Anon 12:55 isn't too bright. He also doesn't seem to be able to write English properly.

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  14. Sorry, but the "New Monetarist" should re-read Keynes' GT chapter 17 before arguing. "A New Monetarist is disinclined to separate assets into ones that are "money" and ones that are not. That isn't useful." Really?

    Didn't know you had a text. Won't read it. Did you know? "Search" works both ways. In the absence of unemployment insurance, employers become monopsonists, in the sense of Fleeming Jenkins, able to prey on their prospective employees' desperation.

    Obviously this inefficiency is much more of a moral hazard today than the minimal problems of labor supply you are so disingenuously concerned with.

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    1. Apologies. Read your blog, so of course I'm curious and will read your book when it falls to hand. Till then, I'll remain hopeful that it contains a discussion of the costs to the whole economy of inadequate resources devoted to reproducing labor at all life stages.

      Meanwhile, do you really think incrementally reducing UI with unemployment duration is a productive strategy? In my world, when money becomes short, I do my laundry less often, skimp on the more expensive and nutritive fruits and vegetables, and have to pull up my socks more at work, being unable to afford new ones. So, because everybody loves a sinner, the dirtiest, grumpiest, and most resentful unemployed will be most attractive to employers?





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  15. "In order for a school of thought in economics to be successful, the members of the school have to work on multiple levels to convince everyone. You have to play the academic game and be rigorous about the ideas; you have to play the policy game and convince policy makers; maybe you want to convince lay people."

    That's probably how it works today. It's hard to believe that Keynes was able to singehandedly change the world based on just one book-the GT of course in 1936.

    I do think that it's possible to have a big impact with policymakers even if you haven't impressed academic economists much. Let's be honest: if someone can influence policymakers that's the name of the game-they are the one's who make policy. If you can have that without the approval of academics you probably wont lose much sleep over it.

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    1. Indeed, they're the ones who make policy, but in most endeavorswe think that policy should be informed by science. Some policymakers think that global warming has nothing to do with human beings.

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  16. hi..Im college student, thanks for sharing :)

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