AS vs. PSST, again
By Arnold Kling
The debate is hotting up, as our friends across the pond would say. Some random comments.
1. The Washington Post reports that some on the left want to see older workers encouraged to retire, to make room for young workers. If you believe in AS-AD, I suppose that makes sense. If you believe in PSST (or anything like elementary economics), it’s nuts. From a PSST point of view, taking away market activity from some people will reduce, not increase, the market economic activity of others. I should point out that this applies to sending home illegal immigrants–from a PSST point of view I would expect this to reduce employment of the native population, not increase it.
2. Nick Rowe talks about the effect of technological improvement on labor demand. However, he uses a single production function. That either means he will tell a partial equilibrium story or that he will tell a GDP factory story.
3. Scott Sumner responds to my response.
The trend rate of growth is around 2.5% to 3%, and you’d expect no change in the unemployment rate if growth is at trend. Our growth may have been a tad above trend (it’s hard to know for sure) but it’s also true that unemployment has fallen slightly since the 10.1% peak in 2009. No significant mystery to be solved, although I acknowledge that each recession is slightly different in terms of Okun’s Law, Beveridge curves, etc.
Until the most recent recessions, the tendency was for output to fluctuate more than employment. Thus, if you drew a trend line for productivity growth, productivity growth would be below trend during recessions and above trend during booms. The more recent recessions, particularly in 2001 and in 2007-2009, have not followed this pattern.
4. Tyler Cowen has much more. One point he makes is that “trend productivity growth” is not some deux ex machina operating outside the business cycle.
5. I want to reiterate that I would like to see the Fed behave as if this were an AD-caused recession. However, we should be prepared for the possibility that it is not, in which case expansionary policies will cause price bubbles in some sectors without doing much for employment and output.
6. I do not see ZMP as a characteristic that inheres in a worker. You don’t have a “Z” stamped on your forehead. I see ZMP as characteristic of many modern jobs–the Garett Jones jobs of building organizational capital. Another point is that the critical value of marginal product does not have to be at zero. “Z” can mean “not enough to cover health insurance, office space, training costs, etc., and still exceed after-tax opportunity costs.”