What A "Guide to Discontinuity/ZMP for Skeptics" Should Look Like
In my last reply to Arnold, I asked for a “Guide to Discontinuity/ZMP for Skeptics.” Arnold’s response:
The main evidence that I cite against the AD/AS story is the length of
unemployment spells and the large number of workers who are not going
to return to jobs in their previous industry, much less their previous
employer. At some point, even the 99 weeks of unemployment benefits is
not sufficient to explain long-term (approaching permanent)
If Arnold wants skeptics (like me) to take PSST seriously, he’s going to have to try a lot harder. As a skeptic, I immediately wonder:
1. Why can’t AD/AS explain long unemployment spells? This fits perfectly with an Akerlof-Dickens-Perry story where a long-run inflation/unemployment trade-off emerges at low inflation rates.
2. Why can’t AD/AS explain industry shifts? There are always struggling industries. During a recession, you’d expect whatever industries were struggling during the boom to suffer even more. What theory doesn’t predict this?
3. Why can’t 99 weeks of unemployment benefits aggravate nominal rigidities enough to explain the slow recovery? Free money doesn’t just hurt the incentives of the unemployed to search for/settle for a new job. It also hurts the incentives of employers to cut wages of existing employees.
4. What about my health insurance fairness story as a supplement to the standard wage fairness story?
5. Perhaps most importantly, skeptics want careful quantitative comparisons between (a) past recessions and today’s, and (b) quick-to-recover economies and ours. How do the length of spells and industry shifts today compare to those of the Reagan recession? The Great Depression? Why would entrepreneurial adaptation to technological innovation be so much smoother in e.g. Sweden and Australia than the U.S.?
A solid “Guide to Discontinuity/ZMP for Skeptics” would anticipate and answer all of these questions – and many more. With all due respect to Arnold, I don’t see that he’s even trying to do this.
I often take contrarian positions. Emotionally, I’m on Arnold’s side here. But when you play the contrarian, you can’t expect skeptics to do your legwork for you.
Nov 15 2011 at 3:13pm
For one, I think you are vastly understating how much established evidence there is for ZMP-like ideas; start with the literature on labor hoarding, and discussions of the sudden switch to countercyclical labor productivity. Measures of the impact of unemployment insurance so far are not coming out very large. No one need deny that AD has a big role.
Nov 15 2011 at 5:40pm
A deep point: market equilibration of the macroeconomy is SLOW. There are a lot of moving parts, a lot of things to figure out. Lots of employees are ZMP for the first few days or weeks, and then there were the costs of designing a job. It might take quite a while for a new hire to pay off. If rapid technological change and political risk make you uncertain how you’ll be doing business in five years’ time, the new hire may not be worth it. Also, foolproof jobs tend to be the ones that get automated, while jobs that require judgment, character, initiative etc. are jobs for somebody you know and/or somebody with a relevant track record. Technological employment is occurring all bunched up because the Fed and the government sheltered us from it with low interest rates and deficit spending as long as they could. They’re still trying to, but it doesn’t work anymore.
Nov 15 2011 at 9:09pm
Of course equilibration is slow. The New Keynesians have all sorts of hypotheses for why it is slow: efficiency wages, menu costs and monopolistic competition, worker morale, semi-stable sunspots, etc. And their mechanisms imply such and such effects of monetary or fiscal policy.
Kling has search for PSST for the mechanism, briefly, that search for long-term profitability just takes lots of time and no other short-term non-market-clearing equilibrium is ‘sustainable’. Fine. Great. Ignore the truly weird general equilibrium dynamics required by this for the moment. So why is expenditure on said search procyclical rather than anticyclical? There’s a simple correlation problem here, same as that which bites a lot of RBC theories. Bunched-up technological unemployment would imply anticyclical investment in new technologies. Instead it is procyclical. So…?
Or, as Bryan points out, why would finding new PSST be coincidentally faster in countries with better monetary policy if it is fundamentally a real process?
Nov 16 2011 at 9:32am
ASAD: A SAD DEVELOPMENT IN MACROECONOMIC PEDAGOGY
Roger W. Garrison, Auburn University
Paper available as pdf: http://mises.org/pdf/Garrison/asad.pdf
[url added with permission of commenter–Econlib Ed.]
Nov 17 2011 at 8:02pm
Re #2: AD/AS doesn’t have “industries”. There is only the GDP factory, and perfectly substitutable labor & capital.
Nov 17 2011 at 8:29pm
In asking what PSST can tell us that AS/AD can’t, Bryan seems to be assuming that AS/AD makes sense. But if AD/AS never made much sense to begin with, AD/AS with bells and whistles is an easy rival to beat.
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