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Last Build Date: Mon, 22 May 2017 08:50:12 -0500

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Solar Power: Lots of Jobs per KWH is Bad, not Good, by David Henderson

Mon, 22 May 2017 08:50:12 -0500


Creating jobs is not the same as creating wealth.

When I start a class in economics, I start with the Ten Pillars of Economic Wisdom. The pillar above about jobs and wealth is #8. When I teach it, I use Dwight Lee's now-classic article "Creating Jobs versus Creating Wealth."

Mark Perry has done a great service by applying this principle to energy. In "Inconvenient energy fact: It takes 79 solar workers to produce same amount of electric power as one coal worker," he writes:

To start, despite a huge workforce of almost 400,000 solar workers (about 20 percent of electric power payrolls in 2016), that sector produced an insignificant share, less than 1 percent, of the electric power generated in the United States last year (EIA data here). And that's a lot of solar workers: about the same as the combined number of employees working at Exxon Mobil, Chevron, Apple, Johnson & Johnson, Microsoft, Pfizer, Ford Motor Company and Procter & Gamble.

In contrast, it took about the same number of natural gas workers (398,235) last year to produce more than one-third of U.S. electric power, or 37 times more electricity than solar's minuscule share of 0.90 percent. And with only 160,000 coal workers (less than half the number of workers in either solar or gas), that sector produced nearly one-third (almost as much as gas) of U.S. electricity last year.

Of course, to do a complete analysis, one would want to look at capital and other costs, not just labor costs. But given the overwhelming data on labor, it's hard to believe that other costs for solar would be so much lower as to make solar less expensive. And we don't have to speculate. If solar power weren't more expensive, governments wouldn't need to subsidize and regulate so heavily to get people to use it.


Wages are the key to the business cycle, by Scott Sumner

Sun, 21 May 2017 14:34:54 -0500

Back in the 1980s and 1990s, I did some research with Steve Silver on sticky wages and the business cycle. Using postwar data, it's very difficult to draw any conclusion, as the economy was hit by both supply and demand shocks, which have very different impacts on real wages.

During the interwar period, however, demand shocks are much easier to identify and the role of wages really stands out. In the following graph we inverted the real wage series (top line), and compared it to industrial production (bottom line), to make it easier to see the strong countercyclicality of real wages:

We found that there were two factors that reduced output during the interwar years. First, falling prices in the face of sticky wages---which occurred on and off throughout the entire interwar period. Second, an autonomous rise in nominal wages (caused by government labor market policies)---which mostly occurred during the period after 1933.

While cleaning out my office I came across a 1996 QJE paper by Ben Bernanke and Kevin Carey. Here's a portion of their conclusion:

First, like Eichengreen and Sachs [1985], we verified that during much of this period there existed a strong inverse relationship (across countries as well as over time) between output and real wages, and also that countries which adhered to the gold standard typically had low output and high real wages, while countries that left gold early experienced high output and low real wages. It does not appear that any purely real theory can give a plausible explanation of this relationship. Among theories emphasizing some type of monetary non-neutrality (i.e., a non-vertical aggregate supply curve), there are basically only two types: theories in which the price level affects output supply because of nominal-wage stickiness, and theories in which the price level affects output supply for some other reason. We find that, once we have controlled for lagged output and banking panics, the effects on output of shocks to nominal wages and shocks to prices are roughly equal and opposite. If price effects operating through nonwage channels were important, we would expect to find the effect on output of a change in prices (given wages) to be greater than the effect of a change in nominal wages (given prices). As we find roughly equal effects, our evidence favors the view that sticky wages were the dominant source of non-neutrality.
That's why Bernanke was my first choice for Fed chair back in 2006.

PS. Is the 1985 paper that Bernanke and Carey cite co-authored by the Jeffrey Sachs who defended Bernie Sanders and a higher minimum wage? I believe it is. I think it's fair to say that the policy views of economists are not based on the outcome of their empirical research.

PPS. Steve Silver and I had a paper on real wage cyclicality published in the 1989 JPE. We did a follow-up paper focusing on wages and prices during the interwar years, which was published in 1995 in the Southern Economic Journal.


Financial crisis or monetary policy failure?, by Scott Sumner

Fri, 19 May 2017 10:52:50 -0500

I often debate the question of whether severe slumps are caused by financial crisis or tight money. In my view it's usually tight money, with financial stress being a symptom of falling NGDP. So how would we test my hypothesis? While cleaning out my office at Bentley, I came across an old NYT article from June 11, 1933: Wall Street notes a remarkable contrast between the attitude toward the war debt question last December and that of the present time. Last year, financial circles began to become apprehensive about the war debt question long before December 15. By late November the pound sterling had fallen to a record low of $3.14 1/2 and the financial markets were severely depressed. At the present time, although the war debts payments are due by next Thursday, there has been almost no discussion of the subject in financial circles, and the possibilities of wholesale default have left the markets unperturbed. Why did the markets suddenly stop caring about the war debts issue in June 1933? For the same reason they suddenly started caring about the war debts issue in mid-1931. War debts disturbed the financial markets when they led to devaluation fears, which triggered massive gold hoarding. By June 1933, the US was off the gold standard, and hence gold hoarding no longer exerted a deflationary impact on the US. However, gold hoarding continued to be a problem for countries still on the gold standard, such as France. In my book entitled "The Midas Paradox", I did a very extensive empirical study of this question. The price of German war debt bonds suddenly become highly correlated with US stock indices in mid-1931 (when Germany got into financial trouble), and this continued through 1932. Fears of German default were triggering a loss of confidence in the international gold standard. That loss of confidence was justified, as Germany adopted exchange controls in July 1931 and the UK devalued in September 1931. At that point people started worrying about a US devaluation, and gold hoarding rose sharply. Because the supply of newly mined gold doesn't change very much from year to year, big changes in the value of gold are primarily caused by shifts in gold demand. But once the US began devaluing the dollar in April 1933, increases in gold demand no longer had a significant deflationary impact on the US. Gold kept getting more valuable, but now the dollar was losing value. (Recall that price deflation means that money is getting more valuable.) Back in 1932, the vast majority of serious people rejected my "tight money" explanation of the Depression. It was "obviously" caused by financial turmoil, both domestic and international. Falling NGDP was seen as a symptom. Only a few lonely exceptions like Irving Fisher and George Warren took a "market monetarist" perspective, urging a shift toward expansionary monetary policy. Because we were near the zero bound, they recommended a depreciation of the dollar against gold. In 1933, FDR adopted their suggestion, and it worked just as Warren and Fisher predicted---prices and output immediately began rising sharply. The policy would have been even more effective if not offset by the NIRA, which sharply reduced aggregate supply. And there is lots more evidence for the tight money--->falling NGDP---> financial distress chain of causation. After the dollar started depreciating against gold in April 1933, domestic bank failures ceased almost immediately. Some people claim that tight money did not cause the Great Recession, because there was no alternative monetary policy at the zero bound of interest rates. But something similar occurred in the 1980s, when we were not at the zero bound. Between 1934 and 1980, there was a period of calm in the banking system. Some people wrongly attribute that to regulation, but in fact it was caused by higher rates of inflation and NGDP growth during 1934-80, which made it easier for debts to be repaid. As soon as the Fed adopted a tight money policy in 1981, and NGDP [...]

Nowrasteh on E-Verify, by David Henderson

Thu, 18 May 2017 21:31:23 -0500

I asked Alex Nowrasteh for his input on the E-Verify issue that I posted about yesterday.

Here's what he wrote:

E-Verify won't work because employers ignore it in states where it is required with virtually zero legal consequences (see blog post). Enforcing E-Verify laws is about as difficult as enforcing current I-9 violations. If Arizona won't enforce its own E-Verify mandate and the Feds won't enforce their own I-9 mandate, there is no good reason to expect them to enforce E-Verify.

As Nowrasteh and Harper write in their policy analysis on pages 10-11, E-Verify has barely turned off the wage magnet that attracts illegal immigrants in Arizona (second link). E-Verify is a failed program that will raise hiring costs. What's worse is that its failure will prompt calls for a national biometric identity system to plug E-Verify's "loopholes." That system's potential will be abused in short order. Best to forestall that.

The policy analysis he refers to is Alex Nowrasteh and Jim Harper, "Checking E-Verify: The Costs and Consequences of a National Worker Screening Mandate," July 7, 2015.


Me on Anarcho-Capitalism on the Rubin Report, by Bryan Caplan

Thu, 18 May 2017 14:02:44 -0500

Whatever you think about anarcho-capitalism, the production values of my Rubin Report interview on the subject are top notch!  Enjoy.

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In other news, Mike Huemer and I have a fan from the NFL (and GW Law).


Echo Chambers and the Prevalence of Motivated Reasoning, by Contributing Guest

Thu, 18 May 2017 09:39:45 -0500

by Nicolás Maloberti When it comes to information, we have growing powers to filter out what we don't like. Suppliers have also growing powers to cater to our demand without us having to make any conscious choices. This is worrisome since we might end up living in different political universes; or "echo chambers," as Cass Sunstein puts it in his latest book #Republic: Divided Democracy in the Age of Social Media. In this week's edition of EconTalk, host Russ Roberts and Sunstein discuss the main themes of the book. Why are echo chambers problematic? Because they prevent us from facing views dissimilar to ours. As a result, we could be led to take falsehoods for truths, become more extreme in our views, and regard others as enemies or adversaries. Part of the value of the right of free speech is that it creates an environment in which our own views are constantly challenged. Sunstein's worry is that this value could be greatly reduced, even when all the legal guarantees of free speech are observed. That is because echo chambers are simply by-products of our individual decisions as consumers. This very fact imposes constraints in terms of the solutions we can call for, as Sunstein recognizes. To counteract the market architecture of increasing powers to filter out information, Sunstein suggests an "architecture of serendipity". He argues we need to increase the likelihood of getting exposed to views and materials that we have not sought out. An issue that doesn't come up in Sunstein's and Roberts's conversation is the connection between echo chambers and the more general problem of motivated reasoning. Echo chambers are a manifestation of this problem, but there are many others. In some of those cases, perhaps the government does have a more active role to play. We tend to derive important psychological benefits from belonging to groups and holding the shared views of their members. In the podcast episode, Sunstein recalls how in the very early days of behavioral economics the psychological benefits of being part of the group of people advancing this new paradigm were quite palpable. For many people, the benefits of belonging to distinct political groups are equally palpable. In order to maximize those psychological benefits, experimental research shows that we tend to engage in motivated reasoning; that is, our judgements dictate how we process and integrate information rather than the other way around. The very fact that we often seek confirmatory evidence seems to indicate, however, that we also care about being right. Motivated reasoning would be a waste of time and effort if the need for accuracy were not also part of our psychological make-up. Motivated reasoning is thus a strategy to keep high cognitive dissonance costs at bay. This all suggests that there is a limit to what our self-deception capabilities can accomplish. The benefits we derive from holding our most cherished beliefs start to dissipate quickly in the presence of growing doubts. Echo chambers protect us from doubt, and thus they help us to keep the costs of motivated reasoning low. We simply don't face the sort of evidence that could truly challenge the powers of our reasoning- or at least we don't face it often enough. Certain aspects of our institutional democratic architecture seem to play a functionally equivalent role: they lower the costs of our motivated reasoning by making it harder to confront potentially inconvenient evidence. The main mechanism by which institutional structures have this effect is by lowering the salience of the costs and consequences of alternative policies. Echo chambers protect our self-image by keeping some information out of our field of vision. Low-salience costs do it by making that information invisible to our imperfect eyes. In both cases, the architecture of our environments enables us to reach the judgements we want rather easily. In particular, both echo chambe[...]

E-Verify: Let's Make Us More Like Europe, by David Henderson

Wed, 17 May 2017 15:56:49 -0500

One of the main things the United States has going for it is its relatively fluid labor market, relative, at least, to labor markets in much of Europe.

I wrote over 20 years ago about the Europeanization of the U.S. labor market, but I did not see E-Verify coming. E-Verify, if implemented nationwide, would be a system of work permits. If you started a new job, you would need the federal government to verify that you are legally allowed to have that job. How long would it be before the government started making judgements about who should be allowed to work? Convicted sexual predators, even those who were, say 19, and sleeping with a consensual 16-year-old, have to register for life and are told that they can't live in certain parts of a city. Is it entirely inconceivable that some would ultimately be told that they can't work?

Even if you don't fear that, Cato Institute immigration policy analyst David Bier has shown how bad the E-Verify system is. It makes a lot of mistakes and those mistakes cause completely legal people to lose jobs. Here's a snippet from his recent report:

The system has already proven remarkably ineffective at its intended purpose--keeping unauthorized workers away from jobs. In fact, in many cases, it does the opposite--keeping authorized workers away from employment. While many have focused on how making it mandatory would increase the number of these errors, E-Verify is already causing headaches and costing jobs for legal workers. In fact, from 2006 to 2016, legal workers had about 580,000 jobs held up due to E-Verify errors, and of these, they lost roughly 130,000 jobs entirely due to E-Verify mistakes.

So even if the feds never get really, really nasty to U.S. citizens and permanent residents, E-Verify would slow down adjustments and make our labor markets more rigid. Sad.


The "Real X" Defense, by Bryan Caplan

Wed, 17 May 2017 14:34:57 -0500

Consider these two couplets:Couplet #1: "Socialism has failed."  "No, real socialism has never existed."Couplet #2: "Libertarianism has failed." "No, real libertarianism has never existed."In both cases, the point of the first clause is to discredit an economic system.  In both cases, the point of the second clause is to shield an idea.And in both cases, the shielding comes at a high intellectual cost: You escape blame for real-world failures, but also lose credit for real-world successes.Strategically, then, you'd expect advocates of views with few successes and many failures to adore the "real X" defense.  Advocates of views with ample successes and few failures, in contrast, will use it more reluctantly.  This expectation holds up: Though both groups have been known to invoke the "real X" defense, socialists are far more likely to deny the relevance of actually-existing socialism than libertarians are to deny the relevance of actually-existing capitalism.But the fact that an argument is strategically useful (or harmful) for an intellectual movement doesn't speak to its truth.  Maybe socialists are wrong to evade blame for their system's failures.  Maybe libertarians are wrong to claim credit for "their" system's successes.  How would you know?One approach is to drop binary thinking - "real" or "not real" - and classify actually-existing economic systems on a continuum.  Set pure socialism - full government ownership of the means of production - equal to 0, and anarcho-capitalism - full private ownership of the means of production - equal to 1.  Countries below .2 are at least approximately real socialism; countries above .8 are at least approximately real libertarianism.Ideally, you could just outsource this to e.g. Fraser's Economic Freedom rankings.  But there are two problems.  First, extreme socialist regimes like North Korea and Cuba don't even get ranked, presumably due to lack of trustworthy official data.  Second, the rankings are top-coded.  Hong Kong gets the high score - 9.03 out of 10, but it's a far cry from minarchism, much less anarcho-capitalism.  In any case, believers in the "real X" defense would probably just dispute the methodology.  Suppose Fraser gave North Korea a 0.1, and Hong Kong a 6.0.  Libertarians would eagerly conclude, "Socialism has been tried; libertarianism hasn't."  But who else would concur?The better approach, in my view, is historical.  To ascertain whether "real X" ever existed, you have to find self-conscious believers in X who were, at some point, a powerless fringe movement.  Why a fringe movement?  Because it demonstrates that they weren't significantly compromising their ideals to gain power.  Next, you have to find the subset of such movements that subsequently ruled a country.  Then, you have to find the subset of such movements that were so politically dominant during their reign that they had little need to compromise with any other viewpoint.  Finally, you have to find the subset of the subset of such movements that retained extreme political dominance for many years - enough time to actually implement their ideals.By these historical standards, real socialism has happened dozens of times.  Look at Lenin's Bolsheviks.  Before World War I, they were a powerless band of socialist fanatics.  Fellow socialists often loathed them, but for their dogmatism and cruelty, not lack of commitment to socialism.  Then, a perfect storm gave the Bolsheviks absolute power over Russia - power that lasted over 70 years.  The origin stories of the other triumphant Marxist-Leninist movements fit the same mold, though the socialists of the Soviet satellite states did have to compromise with the socialists of the Soviet Union proper.And by these standards, I'm sorry[...]

Do robots reduce employment?, by Scott Sumner

Wed, 17 May 2017 11:11:21 -0500

A new NBER paper by Daron Acemoglu and Pascual Restrepo finds that "deployment of robots reduces employment and wages, but they caution that it is difficult to measure net labor market effects."

Here is a graph that summarizes their results:

Notice that cities with auto factories such as Detroit and Lansing have above average robot adoption and below average employment growth (actually negative.)

This study reminded me of the 2016 Autor, Dorn and Hanson study of the impact of Chinese trade on local labor markets. Even the time period was the same (1990-2007). As with robots, automation reduces employment in local markets, but this does not tell us much of anything about the effect on aggregate employment. Workers losing jobs in Detroit might migrate to Texas, where jobs are plentiful.

Do we have any evidence of the effect of trade and automation on total employment? Let's look at the unemployment rate from 1990 to 2007 (both were peak years of the business cycle.)

The unemployment rate fell slightly during this 17-year period, and thus provides no evidence that either trade or automation negatively impacted employment. However the unemployment rate is only one indicator, and many people prefer the employment to population (above age 16) ratio:

As you can see the employment ratio was about the same in 2007 as in 1990, and hence the aggregate data shows no evidence that either trade or automation reduced employment during the period studied by Autor, Card and Hanson, as well as Acemoglu and Restrepo.

Of course that doesn't mean these factors have not had a negative effect on overall employment, just that doing so would require a very sophisticated study. Unfortunately, the science of economics has not yet advanced to the point where that sort of study is feasible. And thus we are forced to admit that we simply don't know if there is any effect on overall employment.

But I do think that we know that trade and automation raise real GDP.


What can we expect from Macron?, by Alberto Mingardi

Tue, 16 May 2017 17:53:11 -0500

As you know, Emmanuel Macron is the new President of the French Republic. Macron has beaten Marine Le Pen with a substantial majority: 66% of the votes. Most commentators- at least, most of European commentators, were so relieved by Le Pen's loss, that they have quickly transformed Macron into an icon. But what can we actually expect out of Macron? I've read Macron's book, Revolution, and came to think that he, as a smart politician, is being most careful and purposefully ambitious in crafting this message. This makes plenty of sense for the leader of a movement that was to go beyond traditional parties both on the left and on the right. I thought, however, that to get a better picture I may benefit from the views of those that follow French politics more closely. This is why I've quizzed a few French friends by e-mail and I publish here, with their permission, their answers. Macron as a minister To understand where Macron is heading, it might be helpful to see where he is coming from. I thought that it might be useful to have my correspondent's opinion on Macron's tenure as Minister of the Economy, in the government of Manuel Valls. Alan Kahan, a professor of history at Sciences Po Saint-Germain-en-Laye and the author of the remarkable Mind Vs Money, reminds me that Macron made his reputation abroad for a package of "liberalisations", which included the opening to competition of the long-distance bus industry. "The reforms were very modest, but at least we now have inter-city bus service, and the way in which he dealt with the Socialist Party showed character". Cécile Philippe, the director of Institut Molinari, a public policy think tank, commented that Macron was "amazingly energetic and showed an amazing amount of persistence for a law that was unfortunately very light and on some issues even counterproductive. You could not help but admire how he responded to questions and fought for his law. But at the same time, it was so disappointing to see that the only thing which in the end he was able to reform was the bus sector". So Philippe and Kahan seem to agree that Macron was forceful and committed, but didn't accomplish much. Far more trenchant is Pascal Salin, an accomplished economist and a member and past president of the Mont Pelerin Society. Salin reminded me that "before being minister of the economy he was the economic adviser of François Hollande and he has a great responsibility for the destructive economic policy of François Hollande (increase in public spending and in taxation, regulations, etc..). Therefore, from what he did, both as an adviser and as a minister, one should consider that he is a traditional socialist". On the other hand, Ran Halévi, a well known historian and the director of Centre de recherches politiques Raymond Aron, points out that "Macron didn't influence much Holland's policies when he was a senior adviser at the Elysée. But it took him quite a long time -- too long -- to realize how little influence he exercised there". The upcoming elections France is going back to the ballot in one month, for parliamentary elections. They will be crucial for securing a viable majority to Mr Macron. It is very unlikely that he could be an effective leader if he needs to engage in continuous bargaining with a hostile Parliament. For Kahan, "Only a fool has confidence about the results of the parliamentary elections. But whether En Marche wins an absolute majority or not, I expect he will be able to make deals with former Socialist and Republican splinter groups and have a working majority". Halévi is less hopeful: "I doubt he may obtain absolute majority. At best, probably he will have to form a coalition, but nobody knows with whom, since both the Republicans and the Socialists are divided and prone to dissidence among their ranks". [...]