301. gwindau - June 17, 1999 - 10:08 AM PT
jayackroyd re: #295
Mea culpa, I used another 'non-economics term'. Was everyone confused by this horrible term (enjoy)? Should I have said 'marginal utility' or are we not allowed to use Marshall's terminology? It is quite hilarious to me that we are descending into 19th century labor policies but can't quote any 19th century economists anymore. Let's see, is there not a current discussion of 'child labor' going on right now? Oh, my, do I have my facts wrong? Ha Ha Ha!
302. jayackroyd - June 17, 1999 - 10:10 AM PT
19th century labor policies? What are you talking about?
303. thoughtful - June 17, 1999 - 10:20 AM PT
I'll have to wipe myself again, I see.
gwin, productivity *is* measured in output terms, not dollar terms. Once again you prove you have no understanding of real, nominal and deflators...and you increasingly demonstrate an unwillingness to learn.
I will leave it to others with more patience than I to see if that steel trap can't be cracked just a tad.
I'm done.
304. thoughtful - June 17, 1999 - 1:10 PM PT
Just ran across this interesting tidbit from the American Economic Review: In 1880, the average US male spent 3100 hours a year at work; by 1995, it had dropped to 1700.
305. Slackjaw - June 17, 1999 - 1:14 PM PT
what's the annual hours worked profile over the last say 30 years? Last 10? Does it say?
306. jayackroyd - June 17, 1999 - 1:15 PM PT
How about by household?
307. MsIvoryTower - June 17, 1999 - 1:27 PM PT
gwandiu reMessage #293
What tripe.
This is neither a useful commentary on my earlier post OR as an example of anything in a market economy. IF there was slave labor in corporations in Nazi Germany, they were there due to political policies, and had nothing to do with how the market would have allocated labor, or how producers would have reacted to various wage rates in a competitive (or even quasi-competitive) environment.
Regarding Message #294
Jaysus, what in the world are you talking about? By definition, if Ford opens a new plant he has immediately brought about a shift outward in the demand curve for labor (ie, has INCREASED the total demand for labor). The doubling of the wage rate was simply his way to bring about an instantaneous pool of labor available to him for his new plant. Total supply doesn''t change, but the other firms competing for the same local labor suddenly face shortages if they refuse to raise their wage rates.
I don't know why people are spending so much time on your ramblings, they are nonsense.
308. thoughtful - June 17, 1999 - 1:39 PM PT
Sorry -- only have that tidbit -- no details.
309. gwindau - June 17, 1999 - 9:50 PM PT
jayackroyd re: #299
Yes, forced overtime is more, how shall I say this, 'profitable' for corporations than hiring more workers at straight time to do the same work. No one said, to my knowledge, anything about it being related to any motivation about enslaving workers. What prompted you to say this? This profit motive is also the reason for going toward two tier-wage rates, part-time workers and on and on. The point I was trying to make here is that this all relates to the productivity of the labor-dollar spent by corporations in getting at that profit dollar. Productivity, as an issue today, is not merely about labor-saving devices or processes. It is a scheme to get more work out of fewer people for less money. 'Nuff said.
310. gwindau - June 17, 1999 - 10:07 PM PT
jayackroyd re: #300
I am not sure what you are asking me here. Let me just recapitulate a bit. The wage level IS NOT set by the 'supply of, and demand for labor' which, excuse me if I misrepresent anyone, seems to be the general opinion around here (and elsewhere). Labor is demanded at a certain general wage level that an enterprise is willing to pay such that it considers that it can make a profit from production and sales of a product. If, through labor-saving innovations or certain more efficient organizations of labor, productivity should increase (as with Mr. Ford's assembly line innovation) then labor might get a percentage of that productivity gain. Not anymore, however. Almost all productivity gains are now going to the enterprise, with little or none going to labor. Only if unions struggle to get their piece of the pie, will labor get a chunk of the productivity gains in an enterprise. With no unions, no chunk of productivity. 'Fordism' is stone cold dead. Supply and demand is irrelevant.
311. gwindau - June 17, 1999 - 10:11 PM PT
thoughtful re: #303
I am very willing to learn. Please teach me about how you know that productivity is measured. There are various methods, that much I know. If I made a mistake, sorry. You have my undivided attention. Pontificate onward.
312. gwindau - June 17, 1999 - 10:20 PM PT
MsIvoryTower re: #307
I used the example of 'slave labor' (which is never at exactly a zero wage, but somewhat close) to make the point that even if labor is not a producer cost (like a natural process, let's say like making 'sun tea' in a jar in your back yard. Sunlight is free, I think.) that producers will only use the number of 'slaves' it needs for its production process and not fill their buildings with 'slaves' because they enjoy the pitter-patter of slave feet on the floor. No matter if a billion slaves are offered at wage rate = 0 (or close to zero), there is no utility in consuming more slaves than required as there would be with consuming ice cream if it were free. (You can even over-consume ice cream, I might add).
313. gwindau - June 17, 1999 - 10:33 PM PT
jayackroyd re: #302
Let me explain what I meant by 19th century labor policies. The 'maquilladora' zones just south of the US-Mexico border are designed to side step pro-labor laws in the US concerning wages, hours and working conditions. The sub-manufactures produced in these zones are not shipped to Singapore or Paris, they simply hop over the border and go to US industries for assembly or directly to US consumers. Likewise certain sweat shops in the American Somoa and other US territories use, shall we say, questionable labor policies while retaining their right to be called "made in the USA". Furthermore, child labor is tollerated in the foreign shoe and clothing manufactures that are shipped to the USA. While Japanese steel is soon to face high tarriffs (no children made that steel), there is no high tarriffs against child labor companies that ship clothes and shoes to the USA. Shall I go on or have you had enough? Did I make my case?
314. cdm1110 - June 18, 1999 - 1:37 AM PT
gwindau
I said (#286), "Finally, you have still conspicuously failed to decribe the economic model that you are using, despite my repeatedly challenging you to do so. (An incoherent description of a single market, which is the most you have so far given us, does not constitute a macro model, BTW.)"
You say, in response (message 292), "When we were discussing Japan I specifical built upon Prof. Krugman's Investment and Savings vs real interest rates (where he describes the 'liquidity trap' and the savings over investment gap). You complained that my model was too complicated. I explained my underlying equations (Prof. Kalecki's equations) and tried to translate those to a modification of the 'I' and 'S' vs 'r' model."
I say, "An incoherent description of a single market, which is the most you have so far given us, does not constitute a macro model."
MsIT is right: this is a waste of time. Your postings are nonsense, you're not interested in listening, and you're not interested in learning. The fact that almost everyone here agrees that your analysis is deficient in logic, facts, and theory doesn't even for a moment divert you from your confident belief that you understand economics better than anyone else here. You're delusional.
I'm done.
315. Slackjaw - June 18, 1999 - 2:36 AM PT
well, nice try anyway.
316. gwindau - June 18, 1999 - 4:41 AM PT
cdm1110 re: #314
You don't have to leave on my account. I wanted to leave a long time ago. I was told that I was disappointing someone by not staying to explain myself. Now I see that I have disappointed you because I have not capitulated to your views. I offered to send you some documents. You declined. Can you accept the fact that you appear to be 'unreasonable' to me? (No matter how delusional I may appear to you?). I told you that I was using Kalecki's 'Macro' models. If your curiosity consumes you, perhaps you might want to add some of Prof. Kalecki's works to your library. Or, are motivated by an urge to cure 'delusional' people? How noble of you!
317. MsIvoryTower - June 18, 1999 - 5:36 AM PT
One more comment on the nonsense in Message #312.
No economist would argue that the demand for labor by an individual firm is infinite. The discussion of supply of and demand for labor usually takes place at the level of a market, either for a single industry or for a region or for the economy as a whole. To assert that because a producer does not increase his labor demand infinitely in the face of a zero wage this then challenges the veracity of supply and demand as forces setting wages is specious.
What will happen, and has happened, and does occur throughout the world, is when labor is cheaper than capital, producers demand for labor in the production process is vastly greater than their demand for capital. Labor substitutes for capital, and the production process itself will be labor intensive. When the average wage rate is higher than the average price of capital available for a particular industry or firm (used in their production process), producers will demand more capital and less labor. Capital substitutes for labor.
We see this everywhere. In industrialized countries where the price of capital competes very well with the wage rate, producers use very capital intensive production processes. In less developed countries, where the price of capital (technology) is very high relative to the price of labor, producers unambiguously prefer labor intensive production techniques.
There is no question as to the veracity of the relationship between supply of labor and demand for labor in setting wage rates, even in non-competing labor markets.
318. MsIvoryTower - June 18, 1999 - 5:40 AM PT
In other words, the demand for factors is always a derived demand. It emerges out of the production process itself, the PRODUCTION FUNCTION.
This is basic, I mean, basic economics.
319. gwindau - June 18, 1999 - 5:58 AM PT
cdm1110 re: #314
I am very interested in "listening" and "learning". I suspect that most of the participants of this forum would prefer to see me go away instead of you. As I said earlier, I am willing to share what I know (or think I know). I am not trying to upset or enrage people, although it appears that I have done both. I don't think I am "delusional" but I probably should check it out just in case (I like that insult, however, it is funny. It is simply more of the "attack the 'thinker' instead of the 'thought'" tactics. Has this tactic served you well in the past?). So rather than see people have to 'wipe' themselves after each of my posts (How horrible! Must I live with all this guilt?), I shall retire to some theraputic psychology thread to work out my 'delusions' and resolve all the 'guilt' I bear. I know that you all wish me well (NOT). If I leave laughing, does this imply 'manic' behavior?
(BTW, Krugman's _Return_of_Depression_Economics_ is magnificent!!)
320. cdm1110 - June 18, 1999 - 6:01 AM PT
gwindau
Don't worry, I'm not leaving the forum; I'm just leaving this particular discussion. I'm quite sure I appear unreasonable to you. I'm sure that everybody else who has pointed out your errors (FTC, Rask, Slack, MsIT, thoughtful, Au Naturel, jayackroyd...) also seems unreasonable to you. That's precisely my point.
You might be surprised to know that I *do* have Kalecki's work on my shelves. You might be even more surprised to know that I admire aspects of his work. You might be most surprised, however, to discover that macroeconomics has made progress beyond Kalecki in the last 60 years or so.
I'm done. Really.
321. MsIvoryTower - June 18, 1999 - 6:50 AM PT
A note regarding slave labor:
One factor that must be addressed when discussing slave labor is that although the wage rate may appear to be zero, in fact, the cost of labor to the firm is NOT zero. Slave labor, by definition, is owned labor, and someone must pay their maintainance costs. That is, because slave labor is a human resource, it is not self maintaining, it requires food, shelter, clothing, and yes, even medical care to maintain it as suitable for production.
So, while one can use an example of slave labor as representing the case where the apparent wage rate = 0, this still does not represent a case where the cost of labor to the producer is zero, unless, of course, one assumes that the producer (user of the labor) can pass all maintainance costs onto other agents within the society.
322. thoughtful - June 18, 1999 - 7:16 AM PT
Alan spoke yesterday, making one of the clearest statements about raising rates as he ever has. If you're interested is seeing his full testimony, click here.
323. jayackroyd - June 18, 1999 - 9:13 AM PT
Message #313
Wage rates are lower outside the OECD, yes.
In particular, unskilled wage rates are much lower outside the OECD. Development economists have told various stories about why this is so, but it is so. American companies employing these workers will, as you say, save money vs paying American wage rates, and following American regulations.
Setting tariffs against countries with these workers would not help them. They would lose jobs that, generally speaking, they would rather have than the alternative opportunities facing them. There is nothing the United States can do to regulate labor laws in other sovereign states. If you are worried about these workers being treated fairly, you really have no alternative that will help the workers other than to engage in publicity campaigns and boycotts to pressure the companies to engage in labor practices you think are fairer.
These kinds of campaigns have been successful in the past, and there is some sign that current campaigns against shoe companies is having an effect.
As for your other posts, they seem to consist of unarticulated policy positions involving intervention by the government into the labor market to improve workers' bargaining position. In this group, you'll find more interest if you use economic reasoning to support this position, once you articulate it.
324. MsIvoryTower - June 19, 1999 - 11:11 AM PT
Thoughtful, Slack, DaveCook, et all
Greenspan says in his address:
"Despite its extraordinary acceleration, labor productivity has not grown fast enough to accommodate the increased demand for labor induced by the exceptional strength in demand for goods and services.
"Overall economic growth during the past three years has averaged four percent annually, of which roughly two percentage points reflected increased productivity and about one point the growth in our working age population. The remainder was drawn from the ever decreasing pool of available job seekers without work."
Can someone refresh me on this equation? I'm not used to thinking of growth in these terms.
325. MsIvoryTower - June 19, 1999 - 11:17 AM PT
Greenspan also says:
"To be sure, labor market tightness has not, as yet, put the current expansion at risk. Despite the ever shrinking pool of available labor, recent readings on year-over-year increases in labor compensation have held steady or, by some measures, even eased. This seems to have resulted in part from falling inflation, which has implied that relatively modest nominal wage gains have provided healthy increases in purchasing power. Also, a residual fear of job skill obsolescence, which has induced a preference for job security over wage gains, probably is still holding down wage levels."
My guess (and cursory observation among various occupations) is that labor has been doing a great deal of shifting over the last few years, jockeying for better positions and securing employment more in line with their interests, than in worrying about large increases in salary. That would explain why the relative tightening of the labor market hasn't put undue pressure on wages yet.
326. MsIvoryTower - June 19, 1999 - 11:21 AM PT
Thoughtful
I agree, my guess is that Greenspan is priming us to raise the rates after next months FOMC meeting.
It was a good piece, btw.
327. cdm1110 - June 20, 1999 - 5:36 AM PT
MsIT (#324)
The typical "growth accounting" equation decomposes overall economic growth (increases in GDP) into subcomponents based on the various factors of production. For example, if we write Y = AF(K, L), where Y is GDP, K is the capital stock, L is labor input, and A is a measure of technology, then the idea is to decompose growth in Y (4% in Greenspan's numbers) into the part due to growth in L, the part due to growth in K, and the part due to growth in A. Greenspan is saying that 2 percentage points come from growth in L, which he further decomposes into overall pop (roughly, labor force) growth, and growth in L due to decreased unemployment. The other 2 percentage points come from growth in K or A.
BTW, we can't measure A directly, but under some assumptions (mainly that F() is constant returns to scale and that factor markets are competitive), it turns out that we can write dY = dA + adK + (1-a)dL, where dX signifies the growth rate of X and a is capital's share of output. Since we can measure dY, dK, dL, and a, we can infer how much growth is *not* accounted for by capital or labor growth, and hence must be due to some kind of technical progress. This is dA, and is called the "Solow residual", after Robert Solow, who developed these ideas of growth accounting in the 50s.
328. MsIvoryTower - June 20, 1999 - 6:59 AM PT
Damn
I knew that cdm, I just couldn't place his breakdown....
Oh, I'm getting rusty, veerrry rusty.
Thanks a bunch.
329. thoughtful - June 20, 1999 - 6:40 PM PT
cdm, Mit, et. al. As you know, I am a simple person. I put Greenspan's equation in much simpler, though less complete and less elegant terms: Real GDP= Output/worker * # of Workers. Output/worker translates roughly into productivity and workers translates roughly into the labor force. This is the equation for potential GDP if the economy is at full employment. We used to talk about both labor force and productivity growing at 1 1/4 % for a total potential GDP of 2 1/2%. However, the economy has been growing at nearly 4% for the past 3 years leading some to question things such as NAIRU. Some now think productivity has advanced to 2% growth allowing the GDP to reach up above 3% without inflation. However, the data to support this argument is still very unsatisfactory. Many have pointed to serendipitous occurrences that have offset the strong growth in wages such as cheaper imports via a strong dollar and a collapse in oil prices. The folks at the CBO have put together a reasonable argument suggesting productivity growth has picked up 7/10%: about half of which is due to the investment boom which has increased the capital stock resulting in a rise in productivity; about half of which is a result of the changes in how we measure inflation. The latter leaves nominal GDP unchanged but attributes more of the growth to output than to prices.
Regardless, Greenspan is clearly worried about what the inflation picture will look like in 12-18 mos and wants to treat it now. Especially since the reason for the last 3 rate cuts -- the Asian/Brazilian financial crisis -- has clearly dissipated.
330. thoughtful - June 20, 1999 - 6:44 PM PT
Also, an important point which a lot of economists miss, which Greenspan does point out is, the recent deceleration in wage increases is because inflation is so low that wages can decelerate and *still* have a rise in real wages. That's what's been happening. Don't forget too that an important part of inflation is inflation expectations which have been very low recently, keeping a lid on the overall inflation rate.
331. MsIvoryTower - June 21, 1999 - 10:40 AM PT
"However, the economy has been growing at nearly 4% for the past 3 years leading some to question things such as NAIRU."
Are the questions about where the NAIRU is or about whether it exists? I could see the former, but not the latter. I've always thought the NAIRU, if it exists (which I think it does in the real world because of lags - mobility and information ones) is more like 3-4% anyway.
I've always had a hard time with the sudden jump in the NAIRU from around 3% in the 60's to around 5% in the 70's and 80's. That seemed more structural and investment driven than lag driven.
"The folks at the CBO have put together a reasonable argument suggesting productivity growth has picked up 7/10%: about half of which is due to the investment boom which has increased the capital stock resulting in a rise in productivity; about half of which is a result of the changes in how we measure inflation."
Yep, this works for me. And confirms my view of what occurred during the 70's and 80's wrt the NAIRU.
332. MsIvoryTower - June 21, 1999 - 10:43 AM PT
Thoughtful reMessage #330
Yes, thats a good point, but I also think that workers have used this period of high demand to make a lot of lateral movement, positioning themselves in better (more stable) employment situations with less focus on WAGES per se. A result of the high instability of the market from the 80's and early to mid-90's.
333. MsIvoryTower - June 21, 1999 - 10:46 AM PT
I should say,
this period of sustained high demand....
334. thoughtful - June 21, 1999 - 11:03 AM PT
Mit, you know economists -- they'll argue about the existence of NAIRU *and* it's level -- sometimes at the same time! I've seen the arguments run the gamut. Take a look at the Brookings Macro paper 98:2 for an article by Robert Gordon, "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU." He points to Ed Yardeni, see here, , as a new pardigmist who clamins technology and globalization have made capacity constraints obsolete. He points to Robert Eisner as one who says NAIRU doesn't and has never existed.
In my view, NAIRU does exist and it's about 5.5%. The reason we've been able to operate with lower unemployment and tame inflation is due to some exceptional situations including collapsing oil, market reforms on health care costs, strong dollar and accelerating declines in chip costs which are a growing share of the economy. I agree with the CBO folks as well about shifting measures. Of course there have been structural changes which have allowed a lower NAIRU as well including the aging of the population, reducing the share of the labor force in the "hard to employ" teenage years.
335. MsIvoryTower - June 21, 1999 - 11:10 AM PT
Yeah, I know we've always argued about both, I just wasn't sure what you were referring to in that quote of yours earlier. Thanks for the link, I'll look at it when I get a moment to reflect.
"In my view, NAIRU does exist and it's about 5.5%."
Oh, I'm with you on the NAIRU, but I think that's too high. I think the strongest argument for the existence of the NAIRU is related to it's inflationary effects. That is, potential growth is more constrained by mobility and information lags/costs wrt factors than by investment factors. Hence, IF the NAIRU exists, it's because these lags/costs don't ever completely go away.
336. thoughtful - June 21, 1999 - 11:15 AM PT
I don't think you need a new paradigm to explain all this. Rather the old one fits fine -- the old one of the 60s. No doubt there are productivity improvements from technology (see the decline in inventory/sales ratios in mfg.) The question is if it is significant enough to lead to a new paradigm? Probably not. There are lots of good things flowing out of the reduction in borrowing costs due to the wringing out of the inflation premium in financial markets and an increase in national savings due to the federal surplus...not the least of which has been the boom in investment spending. Each alone is probably not large enough to affect the total, but aggregating all the benefits (including increased foreign trade, deregulation, etc.) it probably matters.
337. thoughtful - June 21, 1999 - 11:27 AM PT
The problem with your supposition about lateral moves is that the % of job leavers has been fairly stable until recently, and it remains well below the peaks reached in 1990.
The reason why I pick 5.5% as NAIRU is, that's what the data show. I wish I had a way of posting a chart I've used in a number of presentations. I'll describe it. Plot the unemployment rate on the left scale from 4.5% to 8%; plot average hourly earnings % change from 2.5% to 5% on the right scale. Draw a line at 5.5% unemployment rate and you'll notice that, until very recently, every time the unemployment rate gets near 5.5%, wages accelerate. As unemployment rate goes above that, wages decelerate.
The recent gap is largely explainable by those other elements I described including the $, oil prices, benefits costs, etc.
338. MsIvoryTower - June 21, 1999 - 12:37 PM PT
Thoughtful
"The problem with your supposition about lateral moves is that the % of job leavers has been fairly stable until recently, and it remains well below the peaks reached in 1990."
Well, I'd expect this under my supposition, given that the labor market has only begun tightening in the last two years AND given that expectations regarding the favorable labor market have been well below what has actually existed (I think a holdover from the 80's and early 90's).
My hypothesis is regarding what's been holding down wage increases (in part, only, you understand, because I agree with your deflation comment above) in the last two years since we've seen such low unemployment rates.
And I'd be interested in seeing your chart, particularly, what's the time line?
339. MsIvoryTower - June 21, 1999 - 1:00 PM PT
Thoughtful
This discussion of the NAIRU raises an interesting question (to me, at least), what exactly is the NAIRU meant to represent?
If we take it to mean simply that rate of unemployment below which the economy begins to heat up into inflationary pressures (the classic cost-push inflation dynamic) then the NAIRU fluctuates over time, and is a simple statistical target.
If we take it to mean that level of unemployment necessary to maintain a non-inflationary environment given real world lags due to information gaps and limited mobility of labor resources, that is, related to the level of employment possible if the economy is growing at its potential (potential output), then this suggests more stability in the NAIRU.
I've always thought that the situation in the mid-70's to late 80's was the abberation rather than the trend, myself.
340. CalGal - June 21, 1999 - 1:08 PM PT
I'm not sure if I ever posted the Economics Archive in here.
I went through the old Economics archive and broke it down by topic. Also took Slack's lectures from Philosophy and Math.
If anyone is interested in giving me feedback on this, great. Also, anyone who might want to check the Economics section of the International and let me know if these topics should be included on the Economics archive, I'd appreciate the advice.
This thread will eventually show up on the archive, of course, but I haven't gotten to it yet.
341. thoughtful - June 21, 1999 - 5:50 PM PT
I'm at home now and don't remember the timeframe on my chart. I also have to check which earnings series I used -- I think I plotted it as a % change from same quarter a year ago, but I'll have to check.
Just went to see if I could find a copy of it on line (seeing as I stole..er..paid someone the highest compliment by using it... from someone else) but they don't have a version posted. If you haven't been there, you might want to check out dismal science. It's a good econ web site. For those interested, you can also sign up to have them deliver an e-mail when they release their analysis of the latest econ indicators. I've found this to be very useful for my work.
They have an article there about the Phillips curve, but I always thought it was really wages vs. unemployment, not inflation -- or am I confusing that with Nairu?
342. thoughtful - June 21, 1999 - 5:55 PM PT
My thinking on Nairu is that it can shift over time, reflecting secular labor market trends e.g. demographic changes. Thus changes increasing the long-run efficiency of labor markets, eg. national job postings on the web, can have an impact. But the idea that, as someone in the 70s said, "Did you hear Nairu hit 10% this month!" was just silly.
343. thoughtful - June 21, 1999 - 5:59 PM PT
"given that the labor market has only begun tightening in the last two years..."
At my Nairu of 5.5%, the unemployment rate's been there since the end of '94.
344. thoughtful - June 21, 1999 - 6:06 PM PT
Of course, your lateral moves presumes workers know which jobs are "safe" but I would argue that's difficult to know in this age of record merger activity. I would suggest another factor holding down wage gains though as non-standard compensation packages including stock options which are not measured as part of compensation costs. Those silicon valley millionaires didn't make it on an hourly salary.
345. MsIvoryTower - June 21, 1999 - 6:30 PM PT
"At my Nairu of 5.5%, the unemployment rate's been there since the end of '94."
Yes, but real wages didn't even begin to move up until sometime in late 95, early 96 if I remember correctly. IF the NAIRU is *really* in the 5.5% range, that's a very late response to labor market tightening.
My take is that the NAIRU is really down around 4%, and if so, this is more in line with the noticed tightening of labor markets over the last few years, AND the slow increase in real wages, even if they have been strongly pushed upward by falling prices.
"Of course, your lateral moves presumes workers know which jobs are "safe" but I would argue that's difficult to know in this age of record merger activity."
No, no, not safe, but hold more promise of stability and longer term employment, AND in areas labor wants to be working in.
Finally, I'd say that dim employment prospects meant that many workers began taking any job they could get by the early 90's, and stuck with them far longer than they needed to out of misreading both the depth AND the sustainability of the current expansion. I put a lot of emphasis on worker expectations, and that those expectations kept many in jobs longer than they would had they expected the recovery to last and to work to their employment advantage.
I agree with all the things you've mentioned as factors, but I can't get out of my head that there has been a gradual increase in confidence in both the sustainability of the expansion AND employment outlook over the last few years.
346. MsIvoryTower - June 21, 1999 - 6:33 PM PT
As an example I note the changes that I've seen in academia. Our new grads both this year and last have faced tougher competition for tenure-track positions from faculty ALREADY degreed and at other institutions. This suggests a great deal of movement to improve both the institution and the prospects of lots of junior faculty, ie. lateral movement in the field.
I've heard from others that this same thing is going on in other fields in my area, but perhaps this is unique to my high growth state.
347. MsIvoryTower - June 21, 1999 - 6:42 PM PT
And now you have me wondering if I've confused the Phillips Curve with the NAIRU.......
Damn, and I'm not at my office with my resources to look it up either.
I say we need some clarification.
348. MsIvoryTower - June 21, 1999 - 7:14 PM PT
Thoughtful,
Went to the NBER and found some papers on the subject. One definition of the NAIRU and its rate that supports your position:
"The NAIRU is the unemployment rate that is consistent with a constant rate of inflation. Its value is determined in an econometric model in which the inflation rate depends on its own past values ( inertia ), demand shocks proxied by the difference between the actual unemployment rate and the estimated NAIRU, and a set of supply shock variables. The estimated NAIRU for the U.S. economy differs somewhat for alternative measures of the inflation rate. The NAIRU estimated for the GDP deflator varies over the past forty years within the narrow range of 5.7 to 6.4 percent; its estimated value for the most recent quarter (1996:Q1) is 5.7 percent. In that quarter a lower NAIRU of 5.3 percent is obtained for the chain-weighted PCE deflator."
from Robert Gordon, "The Time Varying NAIRU and its Implications for Economic Policy". NBER Working Paper No. W5735, May 1997.
But then one paper by Arturo Estrella and Frederic S. Mishkin,
"Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty" (NBER Working Paper No. 6518, April 1998), had the following comment in its opening abstract:
"In this paper we rethink the NAIRU concept and examine whether it might have a useful role in monetary policy. We argue that it can, but success depends critically on defining NAIRU as a short-run concept and distinguishing it from a long-run concept like the natural rate of unemployment."
Now, I have to admit to some confusion, since I've been thinking of the NAIRU *as* the natural rate of unemployment. What's with this separation of the NAIRU from "a long-run concept" of the natural rate of unemployment?
349. cdm1110 - June 22, 1999 - 6:13 AM PT
This is interesting stuff. Wish I had time to contribute, but I'm *totally* swamped right now. Sorry.
350. thoughtful - June 23, 1999 - 9:03 AM PT
cdm, I wish you could contribute too as I'd be interested in your take.
Mit, I don't understand this short run NAIRU either -- I thought we had a short run deal called the cyclical unemployment rate which was intentionally designed to be distinct from NAIRU which represents structural and frictional unemployment rate, no?
351. thoughtful - June 23, 1999 - 9:09 AM PT
Now that I'm back in the office, according to my trusty "MIT Dictionary of Modern Economics" the Phillips curve is the unemployment rate (x axis) vs. the rate of change of money wage (y axis).
352. thoughtful - June 23, 1999 - 9:19 AM PT
Re the chart, plot it quarterly from 881-984 (last I updated it) and the wage series is Employment cost index for civilian workers, wage & salaries. I plot this as a % change from the same quarter one year earlier, so 98:Q4=% change from 97:Q4. The unemployment rate is just the unemployment rate.
353. thoughtful - June 23, 1999 - 9:23 AM PT
Re Message #346 as you well know, the plural of anecdote ain't data.
}:-)
354. MsIvoryTower - June 23, 1999 - 10:00 AM PT
ouch!
Smart aleck!
Yesssss, yessssssss, we knows that preciousssssssss......
355. MsIvoryTower - June 23, 1999 - 10:00 AM PT
More thoughts later, I'm just peeking in for a moment.
356. MsIvoryTower - June 29, 1999 - 7:41 AM PT
This thread needs an injection.....
I can see my discussion of the NAIRU went nowhere, so, what's the next topic laddies?
Let's make economics ROCK!
357. Slackjaw - June 29, 1999 - 1:34 PM PT
computational economics & agent based-modeling?
358. MsIvoryTower - June 29, 1999 - 2:19 PM PT
How about the role of government in a well run economy?
How about the impact of government on economic growth and development (both pluss and minus)?
How about an analysis of what a market economy would look like in a libertarian world? Or even one where there IS no government?
I'm tired of all this nonsense about how government is the root of all evil in our economy, and if only it wasn't there, the system would run so much better (implying that everyone would be better off as well).
359. AzureNW - June 30, 1999 - 4:48 PM PT
Frontline: The Crash analyzed the dynamics a stock market crash that occurred in August 1998 and suggested that the cause was trade liberalization, or globablization, as PE would call it. The report described how money made in the stock market hinges on a game of trust and bluff and how short-term capital movements in the 'self-regulated' stock market lead to the collapse of Asian and Latin American currencies. I wondered if any economists here watched this report and had comments on its conclusions?
360. AzureNW - June 30, 1999 - 4:51 PM PT
The bottom line was that the lack of regulation in a globalized economy was destroying third world economies and would lead to a global economic meltdown when the overvalued US stock market crashed.
361. gwindau - June 30, 1999 - 7:23 PM PT
AzureNW re: #359
Thanks for the link to the "Frontline" site. It was great, I wish that I had not missed that show. As far as comments, I have some, but I have learned to merely "listen and learn" on this thread. I have caused a few riots around here, so it is best if I just sit quietly and listen.
362. Slackjaw - June 30, 1999 - 8:16 PM PT
no, it isn't. The fact that people berate, browbeat and cajole you, and you them, is not an indication that something went wrong.
363. stostosto - July 1, 1999 - 1:33 AM PT
Azure
That link is interesting. It could form basis for some discussion here. I don't have time to go into the substance of it right now. I only note that the observers or commentators who have contributed are a very mixed bunch.
I am instinctively skeptic about anything that William Greider or George Soros say. That doesn't make their comments uninteresting, mainly because they have a great ability to influence the public debate.
On the other end of the spectrum, I am inclined to pay attention to what Jeffrey Sachs says, basically because he knows what he is talking about.
And this whole issue of globalization and currecy speculation is a complex one. I believe there is no panacea. I think it's a question of having to choose between conflicting goals.
The free movements of capital has its benefits. But there are costs as well. Restrictions on capital movements have their benefits - and costs.
There is probably also all sorts of classic conflicts between short term and long term goals. E.g. clamping down on capital movements may be beneficial in a situation of an acute crises - but it may hamper long term future investment and development.
I don't think we are talking about a morality play here. It's not in any way a simple struggle between good and evil.
I don't know if this particular TV show portrays it that way. But the media has a propensity to fall into that trap - and some even make carreers out of it. Mr Greider is a case in point.
364. gwindau - July 2, 1999 - 5:56 AM PT
"Look at Japan right now. It's an economy that's been shrinking for the past two years. Prices are falling. Wages are falling, which never happens. You say, 'Well, they must be moving heaven and earth to get that economy moving again.' The answer is, they aren't. They're spending a lot of money on public works, but they're not printing a lot of money. When the yen surged in value for complicated market reasons, which is a terrible thing for an economy that's on the verge of a deflationary spiral, the Japanese actually seem to be proud of it." --- Paul Krugman, "Frontline" synopsis website
With all due respect to Prof. Krugman, wages are not "falling", they are being "crushed" in a systematic policy move. The Japanese also seem to be predisposed against Krugman's 'managed inflation' strategy as a domestic policy. It remains to be seen whether Japan will sink into a deflationary "spiral" but 'deflation' seems to be part of Japan's plan. BTW, the Japanese economy grew somewhat in Q1 of 1999.
365. gwindau - July 2, 1999 - 5:57 AM PT
"Look at Japan right now. It's an economy that's been shrinking for the past two years. Prices are falling. Wages are falling, which never happens. You say, 'Well, they must be moving heaven and earth to get that economy moving again.' The answer is, they aren't. They're spending a lot of money on public works, but they're not printing a lot of money. When the yen surged in value for complicated market reasons, which is a terrible thing for an economy that's on the verge of a deflationary spiral, the Japanese actually seem to be proud of it." --- Paul Krugman, "Frontline" synopsis website
With all due respect to Prof. Krugman, wages are not "falling", they are being "crushed" in a systematic policy move. The Japanese also seem to be predisposed against Krugman's 'managed inflation' strategy as a domestic policy. It remains to be seen whether Japan will sink into a deflationary "spiral" but 'deflation' seems to be part of Japan's plan. BTW, the Japanese economy grew somewhat in Q1 of 1999.
366. gwindau - July 2, 1999 - 6:04 AM PT
Sorry about the double posting. Technical difficulties!
367. thoughtful - July 2, 1999 - 6:58 AM PT
Mit, when people at work start talking about how government doesn't add productivity to an economy, I always reply, "Oh yeah? Let's see you get to work tomorrow morning *without* crossing a bridge, and see how productive you are."
I also point to Russia as an example of how protection of property rights is so critical to a sound economy. I say, the reason why only the mob flourishes in Russia is because they *know* how to enforce contracts!
368. stostosto - July 2, 1999 - 7:38 AM PT
thoughtful
That is quite right. Russia is a instructive and very sorry example of how markets need the framework of effective government to function. I once had a quarrel with PE who opined that there had been *no* market reforms in Russia, by which he meant (at least in my interpretation) that the required institutional framework had never been implemented.
Our quarrel was not substantive, only over words, since my opinion was, and is, that Russia needs government reform, not market reform. It has largely carried through everything the IMF could think of (give or take). But it needs government reform precisely in order to get the markets to function properly. And an all-important issue here is credibility - as in enforcement of contracts, as you point out.
The Russian state lacks in the very basic stuff a state is supposed to do: Territorial borders (latent and some times open disputes with the Ukraine and Chechnya, meddling in conflicts in the Caucasus etc.); monopoly of violence (weapons are circulating around alarmingly uncontrolled, soldiers and officers who don't get paid, the mafia); judicial system/rule of law; monetary system; fiscal system, including monopoly of taxation (that's right, effective taxation is an essential government function. It seems the Russian mafia is better at raking in protection money than the state its taxes).
And I am not even mentioning education or infrastructure or social protection or income redistribution or health programmes, or...
369. FreeToChoose - July 2, 1999 - 9:32 AM PT
In the NOTD, a discussion started that lead to some interesting economic issues. I will attempt to reprise it here, on the chance that there will be more interest here. (I won't attempt to identify the participants, because if I mischaracterize the salient points, I'll catch hell. I trust that if anyone thinks I do not accurately capture the substance of the issue, they will correct me).
Marty Frankel is alleged to have defrauded some insurance companies of roughly 100 million dollars. An assertion has been made that virtually none of it can be passed onto customers. A counter assertion was made that virtually all of it can be passed onto customers.
I contend that neither position is correct; that the proportion of the loss that will be passed onto consumers is something other than 0% or 100%, although in this specific situation, I believe it is much closer to zero than to 100%. To add spice, I throw out for discussion that, in general, the proportion (of a specific cost incurred by a company) that will be recouped from the customers is not even bounded by (0,1) but can exceed 100%, or be less than 0.
One question is whether this is generally accepted dogma by economists, in which case there isn't much to be said (unless someone finds it counter-intuitive). If this isn't generally presumed by economists, then perhaps it would be worthwhile to discuss whether it could possibly be true. One possibility is that such a situation could occur, but the language of economics would define some of the results as something other than recoupment.
370. FreeToChoose - July 2, 1999 - 9:51 AM PT
In message 12083 (of the NOTD thread) MsIvoryTower says:
FTC "But it also seemed obvious that a decent economist would know better than to imply that companies can pass along their costs. (Sometimes they can; sometimes they cannot. Importantly, in the specific example under discussion they *cannot*.)"
MSIT "This, of course, is a lie. Companies can, and do, pass along their costs when possible, and if they cannot pass them along at the moment of the increase, over the longer run they can and do."
Help me understand the distinction between what I said, and you said. I say that companies can pass along their costs sometimes. You say they can when possible. I agree. They do when it is possible, and they do not when they cannot. Are we in agreement so far?
My guess is that there are (at least) two potential areas of disagreement. You want to make a distinction between short term and long term. Under the short term, I'm guessing we will disagree as to the proportion of costs that can be passed along. Under the long term, I'm reasonably sure we will disagree, as it appears you think all costs can be passed along, and I do not.
If I have fairly summarized the issue, I'll explain why I don't believe some costs can be passed along over the long term, and we will find out whether we merely have definitional differences, or fundamental disagreements about the economics.
371. Slackjaw - July 2, 1999 - 3:53 PM PT
"One possibility is that such a situation could occur,"
yes, due to scale effects, for example.
"but the language of economics would define some of the results as something other than recoupment."
not really a standard part of the lexicon--seems a more individual choice. You can define it however you want, as long as its consistent.
372. Slackjaw - July 2, 1999 - 3:59 PM PT
In standard models of competitive equilibrium, whether cost increases are borne by consumers in the short run depends on the market elasticities of demand and supply. The more elastic is demand/inelastic is supply, the more the cost increase is borne by the producers. In the "long run," when all resources can be reallocated, all cost increases are reflected in prices.
373. MsIvoryTower - July 2, 1999 - 4:32 PM PT
Slack
Of course. FTC has claimed some amount of economic knowledge, and so I *assumed* he understood this. My bad for not spelling it out at a more rudimentary level.
Btw, VOTE FOR ME in the election!
vK/MsIt: Brains, Beauty and Style!
374. gwindau - July 3, 1999 - 6:25 AM PT
FreeToChoose re: #369 You wrote: "Marty Frankel is alleged to have defrauded some insurance companies of roughly 100 million dollars. An assertion has been made that virtually none of it can be passed onto customers. A counter assertion was made that virtually all of it can be passed onto customers."
Pricing power comes from a price structure that relates more to the section of the demand curve which is 'inelastic', as with monopolies or with sectors with fewer competitors. Low pricing power comes in highly competitive sectors where the price structure relates more to the 'elastic' section of the demand curve. This is not my idea, it was expounded first (to my knowledge) by Prof. Michel Kalecki in the 1930's.
BTW, Marty is an old friend of mine, have not heard from him nor seen him in about seven or eight years however.
375. Slackjaw - July 3, 1999 - 8:38 AM PT
gwindau:
First, it's not just elasticity of demand that matters, but the elasticity of supply as well when determining how much of a cost increase gets passed on. Second, the relationship between elasticities and prices goes back to Marshall at least, quite before Kalecki.
376. gwindau - July 3, 1999 - 8:43 AM PT
Slackjaw re: #375
I stand corrected, thank you!
377. Slackjaw - July 3, 1999 - 10:35 AM PT
well, I have some time to kill before I catch a plane, so...
I am writing this from the Santa Fe Institute, where I have been for the last couple weeks. Every summer they have a graduate workshop in computational economics, and I went this year (it was the 5th one).
I applied because I think there are important aspects of social & economic relationships that are not captured and are very difficult or impossible to capture in pen-and-paper analytical models. It seems to me that computational models, on the other hand, can deal with some of these things fairly well. I am not alone in thinking this, but on the other hand it's far from widely accepted. Economists like Greek letters in their papers, but they don't necessarily play too big a role in genetic algorithms.
Ultimately I think computational economics will succeed, for two reasons: first, it opens up areas of inquiry that were not open before. In this way it is much analogous to game theory in relation to general equilibrium theory. GE theory was able to succeed because the institutional framework it presumes is so very sparse, which was very important at a time when rigorous modeling of institutions was not possible. Game theory has succeeded because it provides a formal and flexible language to discuss institutions, among other things, that could not be flexibly captured in GE models.
Second, computational models are certainly sophisticated and rigorous enough to satisfy the economist's penchant for those things. The results are amenable to statistical techniques, for example.
378. Slackjaw - July 3, 1999 - 10:36 AM PT
Standard analytical models are based on optimization of some objective function by the agents in the model. This means the model has to be simple enough to write down and solve in closed-form, which is to say, it has to be VERY simple. The problems faced by social actors are sometimes difficult and/or complex, and it is possible that something is lost in translating these environments to the Greek letter environments of journal articles. This is what computational modeling is very good at. It allows for a better translation. Families of computational models like genetic algorithms allow for the study of adaptive behavior, as opposed to optimizing behavior. So the agents can be purposive but still not quite perfect, and yet not stupid.
There is a strong emphasis on dynamics and paths to convergence, as opposed to steady states (even "steady state dynamics" as in Stokey and Lucas), which is refreshing. Models with cellular automata allow for a natural representation of space when many agents are present in several dimensions, which has proved exceptionally difficult in formal economics. In political science, of course, equilibrium models are basically useless when these environments represent spaces of possible policies, as shown by Plott & McKelvey (unless some strict institutional form is assumed, per Shepsle). The range of interaction of agents is easily controlled, and in particular limited to local interaction if desired.
379. Slackjaw - July 3, 1999 - 10:36 AM PT
These types of models should succeed because they tell us interesting things standard models cannot. Think of Schelling's model of racial segregation--racial segregation can emerge at a global scale if a bunch of agents, interacting only with their immediate neighbors, have mild preferences to be around just a few people of their own race. That kind of thing really turns an economist's crank. It is exactly a cellular automaton model with local interaction, except he did it with coins on a checker board, a much more limiting procedure of course.
380. Slackjaw - July 3, 1999 - 10:36 AM PT
The Santa Fe Institute is a funny place, and a very interesting one. It is very small in the physical sense--the building itself is a large ranch house with a recently added addition. It seems to have been fairly successful in minimizing the bureaucratic organization that invades a maturing organization (it is 15 years old). It also seems very personality-dependent, with a few very magnetic people (some Nobel laureates, some of the inventors of the study of complex systems, inventors of Artificial Life) dominating the tenor of the place.
It seems to be a very productive place, though it is still (rightly, in my opinion) more famous for the hype of "complexity theory" than for sustained scientific output. But, now that the pop-science and Jurassic Park-type nonsense has died down a bit, that seems to be changing.
Social science leads an interesting life at SFI. It is clearly very important to the place because it generated heaps of money. Some well respected older and very interesting younger economists are affiliated with the place. Most of the other scientists are interdisciplinary minded people, so they have an interest in social science too, and it's sort of nice when they try social science and realize it's really difficult. As Murray Gell-Mann has said, imagine how difficult physics would be if electrons could think. Well, that's economics. There are a few scientists, however, who view the SFI economics program as nothing more than a cash cow, a necessary evil.
On the terrace they actually have a contraption that dumps sand grain by grain onto a modified ping pong table, with a mirror positioned so that the observer can see all sides of the growing sand pile. People with IQ's in excess of 180 or so watch this for fun, just to see the dynamics of the growing pile.
381. Slackjaw - July 3, 1999 - 10:37 AM PT
And yes, I did meet Brian Arthur, subject of the infamous exchange in Slate last year between Krugman and Arthur supporters, including Ken Arrow. (That whole thing seemed like posturing to me; Krugman is very into complex systems lately and of course did a lot of work on increasing returns earlier in his career; I think he's waiting for his Nobel medal.) I didn't get to know Arthur very well, of course, but I will say that he was verging on meek, which was a surprise to me.
Guess that's enough time.
382. Slackjaw - July 3, 1999 - 10:49 AM PT
okay, one more.
To illustrate what I mean, consider mechanism design in a common pool resource. There is a HUGE collection of possible mechanisms to choose with many different components to a single mechanism, just based on the case study literature. There is substantial nonlinearity between various components of a mechanism, and mechanism selection in such an environment would be a very difficult task for a fishery or irrigation ditch manager.
On the other hand, communication among managers and crashes in resources over time militates in favor of an adaptive search for mechanisms. This would be very difficult to model analytically, but is doable in a genetic algorithm. The paper I wrote for the workshop constructed a genetic algorithm to model adaptive mechanism selection, which I think is very important in bridging the gap between mechanism design theory and the incentive structures one finds in field settings.
Think about an object for several complementary goods, for example, like pieces of a network or PCS spectrum. Analytically this is exceptionally difficult. A genetic algorithm in which both the mechanisms and the bidding behavior coevolve could be illuminating.
I do not think computational models can, will or should supplant pen and paper techniques, to which I am still partial, I must confess. But computational models can be a nice complement to standard techniques, as the research in this burgeoning subfield has already shown.
383. wexxford1 - July 4, 1999 - 4:27 AM PT
White Collar crime seems to be having a mighty bullishseason under the new People's Capitalism. Proof... Most independent brokers on the floor of the New York Stock Exchange , according to the Feds ,arranged their own financial relief programson the floor -- at the expense of the investors . And good Ole Bear Stearns is the subject of criminal investigations regaring its shenanigans . Is there a Wall Street outfit that has not paid a big fine ? No! There are no rules, of course , in the future of capitalism . The only mantra is ' Get it while you can, buddy ." We can't blame the Russian exCommie rats for following Wall Street's lead, now can we , folks ?
384. wexxford1 - July 4, 1999 - 4:39 AM PT
Oh Slackjaw ! I would be careful not to buy anything from those Santa Fe Nobelists . You may lose your britches . We had a few Nobelists working for Long Term Capital Corp in Greenwich . As the whole world knows, those clowns conned everyone who bought the notion that Nobel chatter meant something good .In fact, nada for those who bought the game theory shit .
Losses by the Long Term outfit caused a midnight rescue operation for the world's biggest financial institutions ---called by the Fed .Oh, yes, baby. I'd forget all that Nobelist nonsense in light of the fact that the Nobelists who gave their names to the new automated put and call systems were dummies who got conned themselves by Wall Street sharpies . Look up all the yarns about Wall Street's John Merrieweather creating a loss of $500 billion for clients who were overly impressed by the Nobelists blather. He brought a pair of Nobelists around with him to meetings while blathering to his clients . Let's get real.And watch out for them Nobelists . They're out to get a few bucks, too.
385. uzmakk - July 4, 1999 - 10:17 AM PT
You know, Slackjaw, I never did get back to you on what my mathemetician sister said about Philo and Mathematics. I believe the following is an accurate paraphrase:
I like to do mathematics where I know there is a direct application. Please understand that there is nothing wrong with the thread and that this is simply a personal preference. What I liked best was when people asked the mathemetician if game theory or mathematics could be applied to a specific situation.
386. MsIvoryTower - July 4, 1999 - 10:31 AM PT
Uzmakk
Your sibling demonstrates the difference between practice and theory. In every field, there are those who like to push the parameters of theory, abstract conceptualizations of 'what ifs', and there are those who'd rather spend their time applying what is already known to real situations and events. They ask the question, "does it work here?".
Nothing wrong with either, but both are needed if progress is to be made in expanding the knowledge base.
I, myself, am an applied economist, and quite uninterested in theory beyond the framework it provides for solving real problems, however, I am a great admirer of Slack and the theoretical games he plays.
387. uzmakk - July 4, 1999 - 10:52 AM PT
Thank you, Msit. As you say, it takes all types.
388. AdamSelene - July 4, 1999 - 7:16 PM PT
Slackjaw,
Well, I've been away running a business. Just checked in to see how the old crowd was doing, and I'm very pleased to read about your SFI visit. Not that I know any of them personally, but I applaud their work on nonlinear dynamics and self-organizing systems. Glad to see that you are getting out of your old straightjacket. For the obvious reason of course, but also that "we" need the classical formalism perspective that your school can bring. Synergists, Unite!
389. FreeToChoose - July 5, 1999 - 1:23 PM PT
Slackjaw
I, too, have a few minutes before catching a plane, so I'll see if I can dash off a quick response. I was going to ask you to say hello to Brian Arthur for me, but if I read your message correctly, you will have left by the time you read this.
Your response Message #372 was interesting, but doesn't answer the question. However, it does raise some interesting (at least to me) points, and perhaps we can discuss them and find out whether they are interesting in general, or whether they have standard answers that I have not seen or recalled.
First, I accept that if we were talking about prospective costs (an increase in wages due to a union agreement, or an increase in raw material costs), the analysis of elasticities makes sense. In this particular example, a specific insurance company incurred an increase in costs. Given that (for many forms of insurance) there are close substitutes, this suggests that most of the cost will be borne by the producer, not by the consumer. Do you agree?
390. FreeToChoose - July 5, 1999 - 1:24 PM PT
continued
However, we are not talking about prospective costs, we are talking about a cost associated with a past event. If we recoup *any* of the cost, we are expecting a new cohort of insureds to pay for a past cost. (Some other time I will elaborate on the fact that this is prohibited by professional standards.) Does economics make a distinction between the upcoming costs for a widgit about to be sold (the normal case for most manufactured goods) and retrospective costs incurred after the widget, or service has been sold? I think an argument can be made that the treatment should be different, but my (admittedly cursory) review of an economics textbook doesn't seem to make the distinction. Does this mean that the same rules apply, or do the basic and intermediate textbooks only cover prospective costs?
Second, even if elasticities is the way to answer the question, this still begs the question of the appropriate elasticities in the specific example. The question was not to list the appropriate economic terms (although that is a good start) but to provide an answer to the question.
Are there generally accepted answers for the elasticity of insurance? If so, what would those standard answers tell us in this instance?
391. MsIvoryTower - July 5, 1999 - 8:42 PM PT
"In this particular example, a specific insurance company incurred an increase in costs. Given that (for many forms of insurance) there are close substitutes, this suggests that most of the cost will be borne by the producer, not by the consumer. Do you agree?"
Only in the short run, in the longer run, the company will shift the costs onto consumers, either by raising prices, or reducing standard coverage, or possibly both.
Even in the short run, it's a big assumption to assume that demand is elastic with insurance, it depends on the type of insurance. If it's auto insurance, then the demand is likely highly inelastic because of state laws that often force people to have insurance or be banned from driving (no license). In those states, demand becomes inelastic, since the consumer MUST purchase insurance to begin with, they don't have the option of leaving the market.
Thus, over time, cost increases are MUCH easier to pass onto consumers under these sorts of forced arrangements.
It's probably true that demand for other types of insurance is more elastic, life and medical being two that come to mind, because the consumer can always choose to end the contract without legal reprocussions. Price is more sensitive even in the longer run with more elastic demand. However, then the firm will choose to reduce other costs, perhaps by reducing coverage and benefits, thereby indirectly raising price anyway.
Btw, I said all this, albet briefly, in my posts to JJB, and later you.
392. MsIvoryTower - July 5, 1999 - 8:49 PM PT
Another example of inelastic demand for insurance, and certainly a degree of price insensitivity, is mortgage insurance. Banks require it when people purchase a home with a deposit below 10% of the purchase price (the minimum can be different by state). The consumer has no choice, is forced to purchase the insurance, in order to purchase the home. Well, their choice would be to wait till they have the minimum deposit necessary to avoid it, but this is frequently seen as a penalty, not a choice.
Other forms of home insurance tied to bank loans are similar, if somewhat less restrictive, than the mortgage insurance bit, but they also generate some inelasticity of demand.
The point, however, is that mortgage insurance is usually something imposed on the buyer, with little or no ability to effectively 'shop around' for more competitive rates. The consumer typically takes what the bank offers, again, because they are a captive audience, and thus, any costs can be immediately passed on to the consumer in these circumstances.
393. MsIvoryTower - July 5, 1999 - 8:56 PM PT
"However, we are not talking about prospective costs, we are talking about a cost associated with a past event. If we recoup *any* of the cost, we are expecting a new cohort of insureds to pay for a past cost."
And?
This is somehow remarkable in your view?
Nothing different about this from many other situations producers face. Here's a quick example.
A baker contracts with a chain to sell his bread for $1.50 a loaf, based on his costs at the moment. The contract takes effect next month, and is for one year. The baker goes to his supplier when he's preparing to meet the first month's order, but finds the supplier has suddenly raised the cost of flour by 25% due to unexpected shortages in milled flour.
The baker now must abide by this contract for the following year, making, at the very least, 25% less than he anticipated when the contract was signed.
The following year, the chain again wants a contract with the baker (the bread is a solid sales hit), but the baker now raises his price to cover not only the higher price on new breads, but includes the costs he had to bear over the last year. The contract is signed.
The baker has now established a price that covers his higher costs now and recoups him some of his lost profits from the last year.
Not a hard example to come up with, and one that is replicated in the real business world all the time.
394. MsIvoryTower - July 5, 1999 - 9:05 PM PT
"Does economics make a distinction between the upcoming costs for a widgit about to be sold (the normal case for most manufactured goods) and retrospective costs incurred after the widget, or service has been sold?"
The only distinction is if the sale is instantaneous or under some contract form. If instantaneous, then the next time the widget is sold, the price will be higher immediately, if under contract, then the firm will only recoup those costs when the contract is renewed and a new price (or reduced service) is negotiated.
"I think an argument can be made that the treatment should be different, but my (admittedly cursory) review of an economics textbook doesn't seem to make the distinction."
No, because an unexpected cost is an unexpected cost. In fact, the very nature of unexpected would suggest that it was not accounted for in the last production cycle, and so much now enter into the cost picture for the new production cycle.
So, in other words, the distinction you're making is trite. But go ahead and make such an argument if you think it can explain anything.
395. MsIvoryTower - July 5, 1999 - 9:08 PM PT
Btw, supply is always elastic in the long run, in competitive equilibrium (and I'd argue even with imperfect markets). The firm always has the ability to rearrange factors and to shift costs to consumers.
396. thoughtful - July 6, 1999 - 9:54 AM PT
Admittedly knowing very little about it, I would suggest a big factor allowing insurance companies to pass along costs is very imperfect information for consumers. Trying to compare competing insurances is almost impossible due to minor differences in coverage, deductibles, etc. I would imagine the possibility of dealing with strong-arm insurance salespeople also discourages consumers from switching. Perhaps the internet will change that.
397. MsIvoryTower - July 6, 1999 - 10:07 AM PT
Thoughtful
I was thinking of the role of imperfect information in this process as well. It works mainly to the advantage of the supplier, IMO.
398. thoughtful - July 6, 1999 - 6:12 PM PT
Don't think Challenge Magazine has on line articles, but if you run across the latest issue, they have a nice article pulling together all the doubtful evidence of a new paradigm. I have it at work so I can post more details when I get there.
399. stostosto - July 7, 1999 - 12:56 AM PT
I don't quite follow this insurance cost discussion. Is the question specific to insurance or is it a general question of whether producers can pass unexpected costs on to consumers? If the latter is the case, I think Slackjaw made the point that this depends on the degree of competition in the market. If consumers can easily choose a different supplier, the producer has to bear the cost. If not, not. There is a difference between an unexpected cost which hits one particular supplier, as in FTC's example, and the case where it hits all suppliers in the industry (as would be the case in MsIt's baker example - only this particular baker was prevented by contract to raise his price). If a cost hits all suppliers, it is immediately passed on to consumers. Like in an oil price hike.
Btw, if the firm has sufficient market power that it can pass all costs to consumers, why hasn't it done so already? I mean, why hasn't it raised prices in accordance with its monopoly position, not to pass costs but to boost profits?
400. MsIvoryTower - July 7, 1999 - 5:58 AM PT
stostosto
Believe it or not, the discussion began over in NOTD regarding the impact of fraud and corruption in the private sector as opposed to the public sector.
I had argued that both cost the public in the longer run, particularly if fraud and corruption in the private sector is more than a one time event. JJB argued that producers have to absorb fraud and corruption costs (of course, he didn't really know why).
FTC sides with JJB, particularly in the specific case of insurance.
I have made the point, besides the obvious one that this must be more than a one time event (although it does NOT have to plague every firm within the industry at the same time), that there are short run and longer run differences with respect to how firms can pass costs onto consumers. This is directly related to the elasticity of demand and supply, but moreso to demand elasticity.
FTC would like this conversation to be exclusively about the insurance industry, but I've been floating between a general discussion and one directed at this industry specifically. I don't think it matters that much to the points I've been making anyway, although it seems to be a barrier to understanding for FTC.
In any case, I'd hardly label the insurance industry as highly competitive, given that the number of insurance firms is not that large in any one state. Oligopolistic is more like what I'd describe it, which isn't to say that there isn't competition, but that this does not seem to be an industry where the conditions of a highly competitive market exist.