Matt Nolan

Workers are different

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It is true, and yes it is obvious … however, just because it is obvious doesn’t make it a useless fact – in truth it is an essential, and oft ignored point to keep in mind.  As raised here (ht MR):

Those of us who actually work in industry and are involved in large engineering projects of the type the stimulus was designed to ‘stimulate’ could have told you this without waiting for a study. We tried to. No one was listening.

It is maddening to hear ‘workers’ talked about as if they are interchangeable – Oh, a whole bunch of home construction workers have been layed off? Don’t worry, we’ll build a road or a bridge and employ them!” The only problem being that the type of construction home builders are trained for has nothing to do with bridges.

This is an undeniable fact – and is something that it is important to keep in mind when discussing labour market dynamics.  Now, the article goes on to say that only Austrain economists look at this issue – I call bull on that, there is a whole bunch of literature on heterogenous labour in labour economics, during the recession New Zealand economists have constantly talked about job mismatch (an understanding of that is one of the reasons why any stimulus spending has been more targeted), and the only reason it is often not modelled explicitly is because it can be hard to describe/make the model solve.

Even in the most general and non-detailed areas of applied macroeconomics, economists often use empirical models with some sort of implied labour market friction that is meant to proxy the mismatch – not a perfect solution, but definitely an indication that it isn’t being ignored.

In fact, I’ve been reading a lot of commentators in NZ discussing the areas where skill shortages still existed in the middle of the recession – in this country policy analysts, economists, and humans all seem to have a good understanding of the differences in labour and the value of human capital … maybe this is just an issue that NZ is more informed on.

Matt Nolan

Youth training policy

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I see that Labour has suggested a youth training policy – I like it.  I am not a fan of their tax policy (I’d fund by reproritising spending, or just increasing tax rates if society so desires, or best of all – actually improving the tax system), but that has nothing to do with this.

I’ve long stated that tax, benefit, and training policies should be more highly integrated, and I see this as a step in the right direction.

I am surprised to see National’s reaction.  For one, they suggested a similar thing prior to last election.  Also, they seem to be going on that Labour keeps announcing this and never doing it – but if this is good policy (something National hasn’t disputed) then why does their policy differ?  If its good its good – criticise policy on its merits right.

Matt Nolan

A quick question … and an answer

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From point 3 on this piece on Rates Blog we have the following statement:

It’s good to see the issue of free trade being debated. Frankly, it hasn’t worked for the middle classes of the developed world. They got cheap stuff, but lost their jobs.

How exactly does this make sense when during the “peak” interventions by China (in terms of their devalued currency) our unemployment rate was at record low levels …

I’ll answer, its because the idea of “taking jobs” doesn’t really make sense – they subsidised their exports, and lent the money to buy them at a low rate of interest (driving down real interest rates, and driving up borrowing).  This imbalance creates losers – the solution isn’t to copy it.

“Jobs” aren’t being created now because of uncertainty – that is the key.  We need to talk about ways that we can deal with uncertainty at the moment (if at all) – not start arbitrarily restricting trade.

Protectionism is not the way to go.  There are two types of people who want protectionism:  People like Bernard who want us to do something they believe will improve outcomes, and people like car manufacturers in Aussie who are just self-interested.  I promise you that if we go down the protectionist root route (turns out I’m illiterate, especially when writing these things at 1am), the only people that will be happy will be these car manufacturers – not society, and not many of the people asking for such measures now.

 

 

Matt Nolan

Social physics … which is in fact equivalent to mainstream economic modelling

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This post is on economic methodology – so may seem a bit wonkish to some.  However, if you aim to tell economists why they are dumb asses and that physical scientists should do it – it is probably worth having a look at this.

While trawling the internet (in an environmentally sustainable way) I ran into a comment on the Dim Post blog by Lyndon.  This comment mentioned a book called “Critical Mass” which sells the idea of a “physics of society”.  The idea behind this is:

Over the past several decades, social, economic and political scientists have begun a dialogue with physical and biological scientists to try to discover whether there is truly a ‘physics of society’, and if so, what its laws and principles are. In particular, they have begun to regard complex modes of human activity as collections of many interacting ‘agents’ – somewhat analogous to a fluid of interacting atoms or molecules, but within which there is scope for decision-making, learning and adaptation.”

I find this interesting, mainly for the fact that this has been the explicit foundation of economic modelling for at least 150 years (in terms of the “thought process it has been like this for a lot longer).

The implicit appeal to methodological individualism is the same, and the concerns about the status of “free will” are also the same as what is being thought about in economic methodology – hell, even a know nothing blogger like myself has discussed these issues here (MI, FW, FW, FW).

In essence, when economists go out to build a model they are trying to understand how the interaction of individual agents leads to outcomes – given the constraints of scarcity, and given the constraint that individuals make choices.  IMO it is methodologically equivalent to a “physics of society”.

I have no doubt that, by coming at it from a different angle, a physics of society can add a lot of value – by helping to shine a light on methodological and practical issues with types of modelling.  However, the behavioural relationships in economics can be a lot more “subjective” than in the physical sciences – and being careful to make any implicit subjective assumptions explicit is a very important methodological issue in economics – in this sense any “social physicists” should make sure they talk carefully with economists regarding these issues … or else they may fall into the same traps that some economists have many many years ago. When looking help in to face the years to come, see here these blogpost about where to get good psychic readings.

Update:  Via Twitter Bill Kaye-Blake points to an article by Krugman where he discusses an engineer deciding to just “do economics” for us.  I am sure that the work in Critical Mass isn’t quite as blinkered 😀

Matt Nolan

A note on NZ’s debt level

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Over at his blog Roger Kerr shows a graph of net external liabilities for a range of different countries – showing that in March 2009 New Zealand was pretty far out there.

It is true that our net international liability position is pretty big, it is also true that even though it might be exagerrated in the statistics (due to what is counted, and what is missing) it is something that is concerning – and worth keeping an eye on and trying to understand.  However, I’m not going to do either of those things here.

Furthermore remember that “net debt of 90% of income” doesn’t sound quite as scary – even though that is what any ratio of GDP will be.  There could be a number of demographic reasons – reasons that may not really matter (especially if the debt is tied to say, young individuals), there could have been a big temporary negative shock to incomes (which there was), and there could be a number of other reasons why the stock of debt was so large relative to current income.  However, I’m not going to go into this either.

Here is a graph, that shows this position between 1989 and 2011 (although the 2011 figure is estimated, I used the quarterly NIIP data and the current price expenditure GDP data to fill in the gaps for the March 2011 year).

Source (the excellent Stats NZ infoshare site)

To start with, note that the position mentioned in March 2009 was the most extreme on record.

Now, the position looks like it improved a lot – but a bunch of that was earthquake related (given that future claims that haven’t been paid out yet are counted as an “asset” for NZ).  The key thing I want to point out is that this elevated debt position figure is a longer terms phenomenon then is being suggested in some places – it didn’t turn up during the housing boom, it has been sitting around all along.  As a result, if we want to understand it, this is an important point to keep in mind 😉

One thing I will bother to mention – “high” debt is the symptom of an issue, not the cause of a problem.  The difference between those two ways of viewing it is substantial (and less pedantic then you may think).  This is why we need to understand what is going on and  Get Help to deal with the problem directly – rather than just arbitrarily trying to tackle debt.

Matt Nolan

Robots, uber richness, unemployment: Points to keep in mind

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I think the statement “points to keep” in mind is currently my favourite thing around … however, I digress and I haven’t actually started the post yet.

Over at the Dim Post Danyl has an interesting point, derived from this post:

If some future entrepreneur invents a labour saving device that makes them a multi-trillionaire but puts dozens of millions of people out of work, should the government redistribute their private wealth?

To put my value judgments on the line, yes I do think that the more technological advancement we have, and the less “scarcity” exists, the more sense it makes to have more redistribution.  However, that is my values – as an economist I want to put them to the side for a moment and think about the idea of allocation objectively.  Here we go:

tl;dr labour saving devices are really just cost reductions – as society adjusts either people are no worse off, or everyone is better off.

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