Category Archives: PSST and Macro

PSST Watch

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Kerwin Kofi Charles, Erik Hurst, and Matthew J. Notowidigdo write,

while the decline in manufacturing and the consequent reduction in demand for less-educated workers put downward pressure on their employment rates in the pre-recession 2000–2006 period, the increased demand for less-educated workers because of the housing boom was simultaneously pushing their employment rates upwards (Charles, Hurst, and Notowidigdo 2016, 2015). For a few years, the housing boom served to “mask” the labor market effects of manufacturing decline for less-educated workers. When the housing market collapsed in 2007, there was a large, immediate decline in employment among these workers, who faced not only the sudden disappearance of jobs related to the housing boom, but also the fact that manufacturing’s steady decline during the early 2000s left them with many fewer opportunities in that sector than had existed at the start of the decade.

This seems like yet another paper supporting a PSST interpretation of macroeconomic phenomena instead of an AS-AD interpretation.

Contradictory Sentences

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From Larry Summers.

although 2009 could have seen a repeat of 1929-33 and it did not happen, there are no grounds for complacency. As the chart below illustrates, on current forecasts the economy will have performed as badly over the 2007-18 period as it did over the Depression period from 1929-40.

So we avoided another Great Depression, except that we didn’t. On a charitable interpretation, these sentences are not directly contradictory. The good news is that the economy performed better from 2007-2011 than it did from 1929-1933. The bad news is that it seems on track to perform worse from 2012-2018 than from 1934-1940, so that for the periods as a whole we came out the same.

I would suggest looking at both long periods from a PSST perspective. The Great Depression represented a failure to come up with new patterns of specialization and trade to deal with workers with 8th-grade educations, including farm laborers displaced by tractors and factory workers displaced by electric motors. The recent period represents a failure to come up with new patterns of specialization and trade for workers displaced by Chinese labor and computers.

Secular Dis-Stagnation

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Check out this chart, which was linked to by one of Scott Sumner’s commenters.

It shows a large secular increase in the spread between risky corporate bonds and 10-year Treasuries.

To me, this chart provides evidence of the bogosity of the secular stagnation story. That story claims that “the” real interest rate has been declining in recent decades, so that we face a constant threat of too-low “aggregate demand.” But focusing on 10-year Treasuries to tell that story is a swindle. Looking at risky corporate bonds, we see signs of dis-stagnation.

There is no unique real interest rate. It’s not just that risk premia diverge. Prices of various goods and services are rising and falling at different rates. In health care and education, where prices have been rising, real interest rates indeed have been negative (a “stagnation” story). For many types of durable goods, where quality-adjusted prices have been falling, real interest rates are decidedly positive (dis-stagnation).

Talking of “the” real interest rate reflects GDP-factory thinking. I look forward to a day when PSST thinking has replaced GDP-factory thinking. Then economists will stop fooling themselves with notions like secular stagnation.

PSST: the idea is spreading

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Mark Muro writes,

Adjustment happens, but it’s a far more painful process than the models and textbooks have imagined. Policy, and the economists, should take it seriously.

Pointer from Mark Thoma.

Difficulty with adjustment is the essence of the PSST story for recessions. If the economy were a GDP factory, then the factory foreman would be temporarily confused about which job to give to which person. Of course, for the factory foreman, substitute the set of entrepreneurs and potential entrepreneurs.

Muro cites three recent papers, two of which I have covered. The new one is by Danny Yagan, who writes,

living in 2007 in a below-median 2007-2009-fluctuation area caused those workers to have a 1.3%-lower 2014 employment rate. Hence, U.S. local labor markets are limitedly integrated: location has caused long-term joblessness and exacerbated within-skill income inequality. The enduring impact is not explained by more layoffs, more disability insurance enrollment, or reduced migration. Instead, the employment outcomes of cross-area movers are consistent with severe-fluctuation areas continuing to depress their residents’ employment. Impacts are correlated with housing busts but not manufacturing busts, possibly reconciling current experience with history. If recent trends continue, employment rates are estimated to remain diverged into the 2020s—adding up to a relative lost decade for half the country. Employment models should allow market-wide shocks to cause persistent labor force exit, leaving employment depressed even after unemployment returns to normal.

The standard remedies for adjustment, including trade adjustment assistance, and worker re-training, are among the least effective programs government has ever tried. Not surprisingly if decentralized entrepreneurs are having calculation problems, the socialist calculation problem proves worse.

Yes, I Saw This

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From Claudio Borio and others.

The hitherto unsuspected villain in this story is the misallocation of resources – in our case, labour – during the credit boom and its long post-crisis shadow. More generally, the findings support the view that the disappointing developments we have been witnessing may be the result of a major financial boom and bust that has left long-lasting scars on the economic tissue (e.g. BIS 2014, Borio 2014, Borio and Disyatat 2014, Rogoff 2015) rather than the reflection of a structural, deep-seated weakness in aggregate demand.

Pointer from Tyler Cowen.

Yes, this seems to support PSST, but they use methods that are of a sort that I cannot endorse. I do not think that “aggregate” productivity growth is well measured to begin with, and then when you try to decompose that into smaller pieces, you really lose me. Another way of putting this is that aggregate productivity is a concept borrowed from the model of the economy as a GDP factory. If your conclusion is that reallocation of resources matters for economic performance, then that suggests that the GDP factory is not a good model, which in turn makes your methods suspect.

By the way, there will be some discussion of PSST in a podcast I did with Russ Roberts that will come out in a few weeks, which in turn is about my forthcoming book, Specialization and Trade, which will come out early this summer. Meanwhile, you will find relevant papers here.

Genghis Khan on Macro

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Stanley Fischer said,

one of the major benefits that were expected from the introduction of inflation-indexed bonds (Treasury Inflation-Protected Securities, generally called TIPS), namely that they would provide a quick and reliable measure of inflation expectations, has not been borne out, and that we still have to struggle to get reasonable estimates of expected inflation.

He cites a paper by D’Amico, Kim, and Wei arguing that a large liquidity premium can suddenly appear in the TIPS market.

Pointer from Mark Thoma.

There is much of interest in Fischer’s speech, but I was particularly struck by the remark on TIPS.

One more excerpt:

it remains a pity that the fiscal lever seems to have been disabled.

I have some objections to that statement.

1. The “automatic stabilizer” components of fiscal policy are significant and certainly have not been disabled.

2. The stimulus package enacted in 2009 was quite large.

3. To the extent that the fiscal lever has been used less than some Keynesians might want, this could perhaps be blamed on the high levels of debt that governments accumulated, even when times were good. If anything has been disabled, it has been the “off switch” for fiscal stimulus. When you run deficits at full employment, this is going to limit your flexibility to increase deficits during a recession.

Eliminate the Middleman

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In a Russ Roberts podcast, Marina Krokovsky says,

I mean, if we really stop to think about what we do and the role that we play in our own social network, we are all middlemen.

Listen to the whole thing. By the way, there is a nice profile of Russ Roberts at a site called priceonomics. Recommended

Some pundits predicted that the Internet would eliminate middlemen, instead linking producers and consumers directly. I think that this is a misleading way to think about things.

In The Book of Arnold (which will appear this fall I hope), I point out that very few people engage in producing goods and services directly for consumers. Patterns of specialization and trade are highly complex, and nearly all of us are involved in intermediate and support roles.

What we mean by eliminating the middleman is a re-arrangement of the patterns of specialization and trade. When a pattern of specialization and trade involving physical books becomes less sustainable, Borders Books goes out of business. Other processes for connecting authors with consumers use different patterns of specialization and trade.

I think that what ought to be eliminated is the concept of “middleman.” I do not believe that it is a useful concept. It is misguided to think of economic activity as “production,” “consumption,” and “other.” (Note, however, that standard economic textbooks do nothing to discourage this way of thinking.) Instead, it is better to think in terms of the Austrian concept of roundabout production, the Smithian concept of division of labor, and the Schumpeterian concept of creative destruction. Put those together, and you have PSST.

Overblown, you say?

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Timothy Taylor writes,

I’ll add my obligatory reminder here that just because past concerns about automation replacing workers have turned out to be overblown certainly doesn’t prove that current concerns will also prove out to be overblown. But it is an historical fact that for the last two centuries, automation and technology has played a dramatic role in reshaping jobs, and also helped to lower the average work-week, without leading to a jobless dystopia.

He quotes from a speech warning of technological displacement of workers that was given in 1927 by then Secretary of Labor James J. Davis.

Taylor writes as if the dire prediction proved false. And yet, within 5 years, unemployment hit 25 percent. Those dots connect in the PSST story, but too many economists are fixated on Keynesian AD.

The Plunge in Manufacturing Jobs in the U.S.

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Mark Muro and Siddharth Kulharni write,

globalization, offshoring, and automation have since 1980 liquidated nearly 7 million manufacturing jobs in U.S. communities—more than one-third of U.S. manufacturing positions—as manufacturing employment plunged from 18.9 million jobs to 12.2 million. Moreover, as the chart depicts, while the trend is longstanding, it actually accelerated in the 2000s.

The role of China’s expansion in this process is the subject of a Russ Roberts podcast with David Autor.

See comments by four of us here.
My comments on the podcast are below the fold. Continue reading →

Evidence for Nominal Wage Rigidity

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Bruce C. Fallick, Michael Lettau, and William L. Wascher write,

Given the relative magnitudes of the various measures of rigidity at the 1- and 2-year horizons, it seems clear that nominal rigidities are less important when one takes the longer view of wage changes over more than one year, suggesting that time is, indeed, an ally of wage flexibility. Even at the 2-year horizon, however, operative wage rigidity appears to have increased in the low-inflation environment of recent years.

Pointer from Mark Thoma.

The paper thus goes against my own views. The excerpt I pulled out is the one that comes closest to giving comfort to my way of thinking.

As you know, I think that many macroeconomists rely much too heavily on the sticky-wage story, which says that real wage rates are strongly countercyclical. I do not think of the job market as a single firm, laying off and hiring workers. Instead, I think in terms of PSST.

The data on Job Openings and Labor Turnover show millions of jobs being lost and found each month. When the creation of new jobs is 10 percent less than the flow of lost jobs, you see a large increase in unemployment. If the creation of new jobs is too slow, I do not attribute much of that to the stickiness of wages in existing jobs.

Given that it took until 2015 for labor utilization to recover from its collapse in 2009 (and it might be argued that labor utilization remains below trend), I think that the sticky-wage story is hard to defend as a main causal factor. It is even more difficult to argue that the 2015 recovery was due to a dramatic upsurge in inflation and consequent decline in real wages.