Thursday, October 11, 2007

Krugman = Dystopian?

I really don't want to start a Paul Krugman watch on this blog. But I may not be able to help myself. I learned a LOT from reading his popular econ books in the early 90s when I was a young Air Force officer stationed overseas and dreaming about becoming an economist someday. Then I learned even more from his high-level research as a Ph.D. grad student. My guess is the man will win the Nobel prize someday. Not only is a great writer and economist, but he grew up loving science fiction. And was inspired by it! Some of his essays from his "unofficial" website are must reading.

So, it makes me a little sad to see him positioned so solidly on the partisan fringe nowadays. I can't help but feel some irony in that. The stereotype is that academic economists are calm, objective, balanced souls. The other stereotype is that political economists are partisan, subjective, hyperventilating types.

But you have to say this for Krugman: he's provacative and asks good questions. So I was happy to see that he is also starting a blog, and happy that he penned a note on our favorite topic of perceptions of the economy. PK says:

The people at Polling Report have a convenient page that, for example, gives you the Gallup results on state of the economy back to the late 1990s. Gallup’s question is subtly different: “How would you rate economic conditions in this country today — as excellent, good, only fair, or poor?”

In the latest poll, only 31% said the economy is either excellent or good; 69% said fair or poor. Responses to the same question taken in 1998 were almost the reverse: 65% or more said excellent or good, around 35% said fair or poor. What’s interesting is that the average unemployment rate in 1998 was 4.5%, basically the same as it is now. So why were people so much happier?

That's a great question. My recollection from Econ 101 says that appetites are insatiable, so no amount of material wealth will ever make you truly happy (though I am willing to test that theory, honey). I also recollect something about decreasing marginal utility. So doubling wealth will improve utils (our way of counting happiness) by less than 100 percent. The standard "liberal" argument is that incomes are becoming less equal meaning the poor are being (note the rhetoric, kids) "left behind."

Time for a thought experiment. Suppoese every citizen's incomes increase by the same percentage. The rich get richer, and the poor get richer. But the rich get absolutely richer. What would happen to relative utility? Assuming all citizens share a similarly shaped utility-income curve, then will the rich or poor have higher absolute utility gains?

That would make a nice paper. Maybe it has already been done? I know the counterpoint is that incomes have not risen by the same percentages because the rich have REALLY gotten richer, which is a good point. But if we're going to get all sensitive about what the REAL data are, then why (oh why) does Krugman keep trying to suggest that the current unemployment rate of 4.7 is flawed?

Measuring jobs is demographically sensitive, so the ideal measure would be a measure of labor market utilization that is demographically neutral. This is why economists pay such close attention to the unemployment rate, and also one of the reasons I argue that the payroll measures of net job gains is less important.

Krugman's blog says "the low unemployment rate masks a relatively low rate of employment" (original italics), and he may actually be right. But here are three reasons that he may be wrong:

1. Teen workforce participation rates plummeted after 9/11 (see above). Importantly, these are not teens who were working and have become discouraged. The 16-19 year olds who are not working today were 10-13 year olds in 2001.
2. Employment levels do not measure work preferences or demographiucs, and those matter. Increasing college attendance rates, early retirment, longevity, lower infant mortality, will drive raw unemployment rates down. Would you implement government policies to reverse course on these things?
3. It's a free country. People shouldn't have to work if they don't want to. And I am dedicating this comment to mom, who retired early and is living large in Florida.

Actually, the third point I want to make ties back to rising inequality. That too has demographic roots. A recent paper in the the Brookings Papers on Economic Activity by Bill Gale (wish I could link to it) leaves a powerful impression that rising inequality is not so simple as the rich getting richer, rather it looks unmistakably like the "Old getting richer" and the young being left behind. No wonder they kids have left the U.S. labor force. The deck is stacked against 'em!
I think a more honest debate would say: American unemployment rates are low and that's great news, but inequality is rising between the generations and something has gone off kilter. Should the younger generations feel stressed? Probably so because they can see the income disparity between themselves and their elders, and they can barely pay for college, let alone a house someday. Their future doesn't look grim so much as it looks unaffordable. They are told that higher human capital is essential to get ahead, yet tuition keeps rising faster than inflation. They're also chided for leaving the labor force, and also for dismal savings rates, and also for not getting good enough SATs. How should they feel? More imortantly, what is Krugman going to do to encourage smart policies that rebalance young-old incomes?


t11s said...

You may want to examine results from "the ultimatum game" experiments in Social Psychology.

From the Economist:

What Dr Burnham's result supports is a much deeper rejection of the tenets of classical economics than one based on a slight mis-evolution of negotiating skills. It backs the idea that what people really strive for is relative rather than absolute prosperity. They would rather accept less themselves than see a rival get ahead.

I am convinced that perception of inequality is unfortunately an inborn problem in humans, the kind of thing that could lead to political policies that retard growth.

Perhaps it could be "unlearned" on a cultural basis, but it would take a lot of effort.

Dr. T said...

I'm looking at whe drop-offs in teen employment and noticing that there is a strong correlation between war (look at the dates for Korea, Vietnam, Gulf War I, and Gulf War II) and fewer teens working. Why, do you suppose, that is? One could argue that it doesn't quite correlate during the Vietnam War, but teen employment goes up only after Nixon got rid of the draft.

I think that, overall, it is far more dangerous for teens to be unemployed then even adults, because bored teens too often turn criminal. I know that minimum wage caused increased teen unemployment, which gets masked by the fact that teens aren't considered in unemployment statistics -- but this correlation with war further masks the statistics we have on teen employment. We would have to untangle all the effects contributing to teen employment fluctuation to see what is causing what, when. Further, I think this correlation between increased teen unemployment and war should be investigated. What is going on there?

Thomas Shawn said...

Krugman is a neo-socialist, his Nobel prize is 100% guaranteed.