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Max Huppertz—The Decline in Labor Force Participation: Speed Bump, Hysteresis, or “I, Robot”?

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Max Huppertz is a student in my "Monetary and Financial Theory" class and has his own Tumblr blog, Liberal Animation. Of all my current students, Max is the one whose writing reminds me most of Noah Smith’s style on Noahpinion. To get a full picture of Max’s sense of humor, you will have to go to his blog Liberal Animation, but the guest post below shows the depth of Max’s analysis. Max:

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Evan Soltas had an interesting post about labor market tightness a couple of weeks ago. His main point is that, looking at the quits rate, you might think that labor markets are pretty tight right now. That might be a sign that, overall, there’s not a lot of unused economic capacity, or at least, not a lot of unused capacity that matters (more on that below). If you think that’s the case, you’d reach very different policy conclusions when it comes to monetary tightening than someone who thinks there’s still plenty of slack in the economy.

Quite a few people have given their 2 cents already. John Aziz makes a point about the potential benefits of overshooting: it might create jobs for some of the long-term unemployed.

Evan may have a good reason for disregarding the long-term unemployed. John’s proposal might be all we need. But if neither of the two is completely right, we may be in trouble.

Why does Evan think that the long-term unemployed don’t matter? He says that if they don’t compete with more active members of the labor force, they can’t hold back wage growth or interfere with employer/employee matching (because they won’t keep people from quitting a job they don’t like for one they enjoy). Which is a valid point.

But in the medium to long run, a drop in lower labor force participation seems like somewhat of an issue. And participation is down:

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It seems to me that there are three possible reasons for this, and three scenarios how this could play out:

  1. The decrease in labor force participation is transitory. In that case Evan’s assessment is correct, although you could still argue that the possibility to overshoot is a risk worth taking, given its potential benefits.
  2. The decrease is more or less permanent, due to labor market hysteresis. In that case, overshooting alone might do the trick.
  3. The decrease is more or less permanent, and it’s a (labor!) demand trend. In that case, we might have a real issue on our hands.

1) Will it all be over soon?

Evan seems pretty convinced that the long-term unemployed “really can’t matter much in a macroeconomic sense”. I think that statement makes sense only if you assume that, in the long run, labor force participation will return to its pre-crisis level. Else, I would like to see an argument as to why we should ignore the fact that 3% of the total US labor force decided to take some time off. Changes of that magnitude are the ones that tend to matter little now, but a lot if they turn out to be persistent over several years’ time.

2) The UI forever (well, kinda…)

Just so we’re clear: economists have a somewhat peculiar interpretation of the word permanent. When I say that the drop in labor force participation might be permanent, I don’t really mean forever. I mean, “for around ten years or so”. Which is substantially longer than recovering from the recent crisis will take (hopefully, anyway), and thus covers a much longer time span than scenario one. So why might participation be depressed for a whole decade?

There are a few stories you could tell that might lead to scenario two. Maybe people lost a lot of human capital while they were unemployed, and have genuine trouble finding a job. Or maybe, employers regard long-term unemployment as a signal. Long-term unemployment might indicate that you’re not the kind of person people would want to employ. Granted, it might also mean you were just unlucky and got laid off at a time when it was really hard to find a new job. But so long as employers have plenty of ‘good’ applicants to choose from – people who aren’t sending out the long-term unemployment signal – they might be okay with rejecting you anyway.

I’m not sure how likely this scenario is, but if this is the one we’re in, definitely overshoot! Temporarily overheating the economy may raise inflation a little, but it would also mean more job openings and fewer people applying. Making job applicants scarce would provide an incentive for employers to take a closer look at the long-term unemployed, and to figure out whether what happened to them was just bad luck – or whether they’re actually bad apples.

3) Rise of the Robot Lords

What if the long run equilibrium level of employment is actually decreasing over time? Take a look at the bigger picture:

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For a while now, there has been stagnation and quite a substantial drop in labor force participation, even before the dot-com bubble. If employers desperately needed these people, wouldn’t you expect them to raise wages and try to lure some of them back into the game?

I know this sounds a little like a sci-fi cliché, but if falling demand for labor due to increased mechanization were responsible for discouraging workers from even trying to find a job, overshooting will at best give a temporary boost to labor force participation. After that, we’re back to the downward trend.

The remedies for this kind of situation are very different from what we need to do in the other two cases. Increasing the general level of education would be a good idea (it generally is, but especially in this case).

Rethinking the social safety net would be another (this is probably worthy of a post of its own, but let me give you my intuition). Many of the labor-intensive industries of today might rethink their business model once robots become more cost-effective. What happens if mechanization puts us into a position where the vast majority of workers in classic manufacturing jobs (cars, steel) – and possibly also a fair few in the service sector (eventually, burger-flipping robots will be the norm) – are no longer needed? And when, at the same time, the new ‘employees’ – machines – won’t ever ask for pensions, or unemployment benefits? Well, it seems to me that indefinite unemployment insurance, or a guaranteed basic income, might not be so Utopian in this scenario.

Faced with this kind of affluence, society might well decide that the dangers of ‘paying people to be unemployed‘ are far outweighed by the benefits of getting much closer to what John Rawls would call a well-ordered society. And, especially in a highly educated society, I think we have reason to believe that people actually want to work, instead of being on the dole. As Jeffrey Smith nicely said (referring to Arno Duebel, a German who had been living off unemployment benefits for 36 years straight):

The actual mystery, though, is not the existence of someone like Arno, but rather, given the relative generosity of many European welfare states, their relative scarcity.

By the way, labor force participation isn’t just down for low-skill workers; this may be an issue that affects us all, even those with a college education (albeit to a lesser degree):

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Like I said, this deserves a post of its own.

Humans good, robots bad?

I think that the third scenario is the one we want to be in. Any kind of job that a robot (or machine in general) can do better then a human – why not let it do it?

But it’s also the most difficult one to come to terms with, politically and ideologically. The left would need to give up part of its struggle for the ‘working class’, at least in the classical meaning of the word – factory workers, hard manual labor, that kind of thing. The right, on the other hand, might need to concede that in this kind of environment, maybe having a basic income won’t annihilate the US economy.

Issues like these would have to be dealt with during the next few years and decades. Or, who knows, maybe we are in scenario one, and Evan is right, or two, and John is right. But if not – and there are good reasons to believe this – we might want to start thinking about the implications.

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Mormon Hell Tweets

Yesterday I posted my favorite song from the musical “The Book of Mormon”: the very moving "Sal Tlay Ka Siti." The title of the storified tweets linked from the title above is inspired by another, much campier, song from “The Book of Mormon”: "Spooky Mormon Hell Dreams." The tweets themselves are about Noah Smith’s guest post "Mom in Hell."

By the way, it is worth listening to the song “Sal Tlay Ka Siti” here and then reading "Mom in Hell" again with “Hell” replaced with “desperate poverty abroad” and “Heaven” replaced by “America.”

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The Message of “Sal Tlay Ka Siti”

To folks in desperate poverty around the world, America is heaven on earth. Maybe we should let people into heaven.  

I saw the musical “The Book of Mormon” in London with my family during the week I went to the Bank of England to talk about eliminating the zero lower bound (and wrote A Minimalist Implementation of Electronic Money  and How to Set the Exchange Rate Between Paper Currency and Electronic Money).

To me, the most moving and powerful song was the one above: “Sal Tlay Ka Siti.” Though Salt Lake City is a very nice city, the song is really about America and what America means to people in other countries much poorer than ours. I hope you take time to listen to the song and think about its message. Here is the link to the video above that has the lyrics and audio for the song Sal Tlay Ka Siti from the play. But you can watch it right here. (The music starts about 15 seconds in.)

Note: my column “The Hunger Games is Hardly Our Future: It’s Already Here" has the same message. I think you will like it. I also put out a couple of tweets about immigration on Monday morning while reading the Wall Street Journal article “Jeb Bush to Decide by Year-End Whether to Run for President”:

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Quartz #45—>Actually, There Was Some Real Policy in Obama’s Speech

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Link to the Column on Quartz

Here is the full text of my 45th Quartz column, “Actually, there was some real policy in Obama’s speech,” now brought home to supplysideliberal.com. It was first published on January 29, 2014. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© January 29, 2014: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2015. All rights reserved.

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In National Review Online, Ramesh Ponnuru described last night’s State of the Union speech as “… a laundry list of mostly dinky initiatives, and as such a return to Clinton’s style of State of the Union addresses.” I agree with the comparison to Bill Clinton’s appeal to the country’s political center, but Ponnuru’s dismissal of the new initiatives the president mentioned as “dinky” is short-sighted.

In the storm and fury of the political gridiron, the thing to watch is where the line of scrimmage is. And it is precisely initiatives that seem “dinky” because they might have bipartisan support that best show where the political and policy consensus is moving. Here are the hints I gleaned from the text of the State of the Union that policy and politics might be moving in a helpful direction.

  • The president invoked Michelle Obama’s campaign against childhood obesity as something uncontroversial. But this is actually part of what could be a big shift toward viewing obesity to an important degree as a social problem to be addressed as communities instead of solely as a personal problem.
  • The president pushed greater funding for basic research, saying: “Congress should undo the damage done by last year’s cuts to basic research so we can unleash the next great American discovery.” Although neither party has ever been against support for basic research, budget pressures often get in the way. And limits on the length of State of the Union addresses very often mean that science only gets mentioned when it touches on political bones of contention such as stem-cell research or global warming. So it matters that support for basic research got this level of prominence in the State of the Union address. In the long run, more funding for the basic research could have a much greater effect on economic growth than most of the other economic  policies debated in Congress.

  • The president had kind words for natural gas and among “renewables” only mentions solar energy. This marks a shift toward a vision of coping with global warming that can actually work: Noah Smith’s vision of using natural gas while we phase out coal and improving solar power until solar power finally replaces most natural gas use as well. It is wishful thinking to think that other forms of renewable energy such as wind power will ever take care of a much bigger share of our energy needs than they do now, but solar power is a different matter entirely. Ramez Naam’s Scientific American blog post “Smaller, cheaper, faster: Does Moore’s law apply to solar cells“ says it all. (Don’t miss his most striking graph, the sixth one in the post.)
  • The president emphasized the economic benefits of immigration. I wish he would go even further, as I urged immediately after his reelection in my column, “Obama could really help the US economy by pushing for more legal immigration.” The key thing is to emphasize increasing legal immigration, in a way designed to maximally help our economy. If the rate of legal immigration is raised enough, then the issue of “amnesty” for undocumented immigrants doesn’t have to be raised: if the line is moving fast enough, it is more reasonable to ask those here against our laws to go to the back of the line. The other way to help politically detoxify many immigration issues is to reduce the short-run partisan impact of more legal immigration by agreeing that while it will be much easier to become a permanent legal resident,citizenship with its attendant voting rights and consequent responsibility to help steer our nation in the right direction is something that comes after many years of living in America and absorbing American values. Indeed, I think it would be perfectly reasonable to stipulate that it should take 18 years after getting a green card before becoming a citizen and getting the right to vote—just as it takes 18 years after being born in America to have the right to vote.

  • With his push for pre-kindergarten education at one end and expanded access to community colleges at the other end, Obama has recognized that we need to increase the quantity as well as the quality of education in America. This is all well and good, but these initiatives are focusing on the most costly ways of increasing the quantity of education. The truly cost-effective way of delivering more education is to expand the school day and school year. (I lay out how to do this within existing school budgets in “Magic Ingredient 1: More K-12 School.”)
  • Finally, the president promises to create new forms of retirement savings accounts (the one idea that Ramesh Ponnuru thought was promising in the State of the Union speech). Though this specific initiative is only a baby step, the idea that we should work toward making it easier from a paperwork point of view for people to start saving for retirement than to not start saving for retirement is an idea whose time has come. And it is much more important than people realize. In a way that takes some serious economic theory to explain, increasing the saving rate by making it administratively easier to start saving effects not only people’s financial security during retirement, but also aids American competitiveness internationally, by making it possible to invest out of American saving instead of having to invest out of China’s saving.

Put together, the things that Barack Obama thought were relatively uncontroversial to propose in his State of the Union speech give me hope that key aspects of US economic policy might be moving in a positive direction, even while other aspects of economic policy stay sadly mired in partisan brawls. I am an optimist about our nation’s future because I believe that, in fits and starts, good ideas that are not too strongly identified with one party or the other tend to make their way into policy eventually. Political combat is noisy, while political cooperation is quiet. But quiet progress counts for a lot. And glimmers of hope are better than having no hope at all.

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Jeff Smith: Why I Won’t Sign a Petition to Raise the Minimum Wage

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Link to this post on Jeff’s blog

I want to thank my colleague, labor economist Jeff Smith, for permission to mirror his post here.

You can see what I have to say about the minimum wage on my Labor & Industrial Organization sub-blog. Here is what Jeff has to say:

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This post is about why I will not be adding my name to the current petition of economists in favor of increasing the US minimum wage, which you can view (and add your name to, if you are a Ph.D. economist) here.

The current list features some heavy hitters (e.g. Larry Summers and Larry Katz), some usual suspects (e.g. Robert Reich) and some (to me anyway) surprises (e.g. Melissa Kearney and Angus Deaton).

Here is the petition’s survey of the state of play of the empirical research:

In recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labor market. Research suggests that a minimum-wage increase could have a small stimulative effect on the economy as low-wage workers spend their additional earnings, raising demand and job growth, and providing some help on the jobs front.

Oddly, for a petition from (mostly) academic economists, no citations to the literature are provided to support these claims.

Even more oddly, the research summary fails to distinguish between employment effects in the short-run, which can be estimated using compelling partial equilibrium identification strategies, and employment effects in the long-run, which generally cannot. Unfortunately, the compelling evidence we have about low short-run employment effects is largely irrelevant to policy, which should concern itself with long-run effects. My favorite minimum wage paper shows that small short-run effects are quite consistent with large long-run effects.

In addition to concerns that the short-run effects may differ substantially from the longer run effects due to delayed capital-labor substitution and other factors, I have three other concerns about the minimum wage:

1. It is poorly targeted relative to alternative policies such as the Earned Income Tax Credit (EITC). And, yes, I am familiar with the argument that the minimum wage and the EITC are complements; what is thin on the ground, so far as I am aware, is evidence of the empirical importance of this argument.

2. As pointed out recently by Greg Mankiw, it distributes the costs of the increased minimum wage in a less attractive way than alternative policies such as the EITC, which implicitly come out of general tax revenue.

3. Most importantly, raising the minimum wage fails to address the underlying issue, which is that many workers do not bring very much in the way of skills to the labor market. Rather than having a discussion about raising the minimum wage, we should be having a discussion about how to decrease the number of minimum wage workers by increasing skills at the low-skill end of the labor market. This would, of course, mean challenging important interest groups. It is also a bigger challenge more broadly because it is less obvious how to do it. But that is the discussion we should be having because that is the one that will really help the poor in the long run, in contrast to a policy that feels good in the short run but only speeds the pace of capital-labor substitution in the long run.

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Quartz #40—>”The Hunger Games” Is Hardly Our Future—It’s Already Here

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Link to the Column on Quartz

Here is the full text of my 40th Quartz column, “The Hunger Games is hardly our future—it’s already here,” now brought home to supplysideliberal.com. It was first published on December 8, 2013. Links to all my other columns can be found here.

If you want to mirror the content of this post on another site, that is possible for a limited time if you read the legal notice at this link and include both a link to the original Quartz column and the following copyright notice:

© December 8, 2013: Miles Kimball, as first published on Quartz. Used by permission according to a temporary nonexclusive license expiring June 30, 2017. All rights reserved.

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The Hunger Games paints an eerily apt picture of the world’s reality. The Capitol is the rich nations of the world: the US, Canada, Australia, Japan, Israel, New Zealand, some oil kingdoms, most European nations. The Districts are the poor nations of the world—Haiti, Nepal, Bangladesh, Cambodia, Laos, Papua New Guinea, many countries in central Asia and Africa, all of which have per capita incomes less than $10 per day.

The Capitol, with all of its abundance of food, advanced medical care, and gadgets, is surrounded by a giant high-tech, booby-trapped WALL. The point of the Games is to burrow through the WALL to get to the material paradise of the Capitol without getting killed or caught and sent back to the Districts to starve.

The most important difference between Suzanne Collins’s Hunger Games and my variant is that the poverty in the real world is unfathomably worse than the poverty depicted in the series. The only way I know to convey this to my students who have never left the United States is to read to them every word of Nicholas Kristof’s New York Times essay, “Where Sweatshops are a Dream.”

The other difference is that, in Suzanne Collins version, the evil the Capitol does with its Games has roots as deep as the nation itself, while in the United States, at least, we build a wall to keep immigrants out in contradiction to our own historical traditions and the example set by the founders of our nation. We do this not only heartlessly, for the sake of what are in all likelihood relatively small gains for a modest slice of our population, but also stupidly. The tight restrictions we impose on immigration come at great cost to our economy, to future government budgets and the future geopolitical power of the United States.

Are immigration restrictions necessary? There may be some limit to the speed at which we can take in newcomers. But there is good reason to think it is much higher than the current rate of immigration. In the decade from 1900 to 1910, immigration was over 1% of the US population per year. There were some strains, but things didn’t fall apart, and America is much stronger now because of those early 20thcentury immigrants and their descendants. For comparison, the number of permanent legal immigrants into the US now is only 0.33% of the US population per year and the entire stock of undocumented immigrants in the US, from many many years of migration, is only 3.7% of the US population—nothing close to the 1% immigration rate the US had in the first decade of the 20th century. And those immigrants would assimilate much more quickly into our communities if they didn’t have to hide in the shadows because of the laws that brand them as criminals.

The philosopher Michael Huemer gives a good discussion of the ethics of immigration restrictions here.  A key point is that many US citizens would love to host immigrants from other countries. Some Americans are preventing other Americans from welcoming immigrants as they would like to. And many people around the world would be delighted to come to the United States even if they were totally barred from receiving any public assistance whatsoever.

In the real world, exclusion is a form of cruelty that we take for granted. Keeping people out of a material paradise for no good reason turns utopia into dystopia. By keeping immigrants out, the United States—like the other rich nations of the world—plays the role of the Capitol in my twist on The Hunger Games. But all we need to do to change that is to honor once again the words on the Statue of Liberty: “Give me your tired, your poor, your huddled masses yearning to breath free …”

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Recasting “The Hunger Games” as a Parable about Immigration Policy

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Katniss crossing the electric fence

When I drafted the column "Catching Ire: The Hunger Games is hardly our future—it’s already here,” I spelled out how the story could be modified into a parable about immigration policy in more detail than made it into the final version. 

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The Capitol—with all of its abundance of food, advanced medical care, and gadgets—is surrounded by a giant high-tech WALL, well-stocked with booby-traps. The point of the Games is to burrow through the WALL to get to the material paradise of the Capitol without getting killed or caught and sent back to the Districts to starve. Here is the outline:

  • Book 1: Katniss and Peeta set off to try their luck against the WALL. By dint of wits, physical courage, and learning to trust each other, they make it through into the Capitol. Gale is left behind with the task of somehow trying to keep all of their families alive while Katniss and Peeta face the WALL.
  • Book 2: Katniss and Peeta go back to District 12 to show their families and friends how to get through the WALL. They win out and settle in the Capitol. There, they live in the shadows, are despised by many, but have enough to eat.
  • Book 3: Citizens of the Capitol who are disgusted with the inhumanity of the WALL work with Katniss, Peeta, Gale and others from the Districts to engineer a regime change.  At the end of the book, the WALL is torn down.

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Enlightened Self-Interest vs. the Anti-Immigration Mob

Illustration of the Rock Springs Massacre from Harper’s Weekly

H. W. Brands, writing in The American Colossus: The Triumph of Capitalism 1865-1900 (p. 300):

The formal effect of the Chinese Exclusion Act was to bar most new immigration from China, but its informal effect was to declare open season on Chinese already in America. Within months of the act’s passage, what the Chinese called the “driving out” began. White hooligans waged racial war against Chinese across much of the West, killing twenty-eight in Rock Springs, Wyoming, thirty-one on the Snake River in eastern Washington, and smaller numbers elsewhere. Occasionally whites stuck up for their Chinese neighbors, if sometimes from selfish motives. A white gambler in Denver pulled six-guns on an anti-Chinese mob and told them to desist. “If you kill Wong, who in the hell will do my laundry?” he demanded. But in most places the mobs had their way. Rural communities of Chinese largely disappeared, their inhabitants driven off, their homes burned, their property seized by those doing the driving. 

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Andrew Carnegie on Cost-Cutting

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Link to a New York Times review of American Colossus by reviewer John Steele Gordon

In his book American Colossus: The Triumph of Capitalism 1865-1900, H. W. Brands writes this, quoting from his earlier book Masters of Enterprise: Giants of American Business from John Jacob Astor and J.P. Morgan to Bill Gates and Oprah Winfrey (p. 59) and from Joseph Frazier Wall’s Andrew Carnegie (p. 337):

Carnegie obsessed over cost because it was the one part of his business he could control. “Carnegie never wanted to know the profits,” an associate said. “He always wanted to know the cost.” Carnegie himself explained: “Show me your cost sheets. It is more interesting to know how well and how cheaply you have done this thing than how much money you have made, because the one is a temporary result, due possibly to special conditions of trade, but the other means a permanency that will go on with the works as long as they last.” (p. 93)

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