Noah Smith: Supply and Demand Does a Poor Job of Explaining Depressed Wages: “The standard framework that economists traditionally used to understand job markets is just supply and demand…

…But… even very large, sudden waves of low-skilled immigration didn’t hurt the wages of native-born Americans, as the theory suggested should happen when there’s a positive shock to labor supply. Adjusting the model to match this reality wasn’t too hard. Economists just had to assume that immigration produces a positive shock to labor demand as well as supply—immigrants buy things locally, creating jobs for the native-born. But the minimum-wage effect posed more of a problem to the theory—no matter how you slice it, price controls should lower employment in a competitive market. The likeliest reason that this doesn’t happen is that employers have market power—that it’s so costly and difficult for workers to find new jobs that they simply accept lower wages than they would demand in a well-functioning market. If employers have market power, modest minimum-wage rise will tend not to increase unemployment, because they force companies to move back toward the wage levels that would prevail if competition were working the way it should. In that model, a small increase in minimum wage could even increase the number of jobs.

New evidence is showing that employers have more market power than economists had ever suspected…. José Azar, Ioana Marinescu, and Marshall Steinbaum… Efraim Benmelech, Nittai Bergman, and Hyunseob Kim…. Together with the evidence on minimum wage, this new evidence suggests that the competitive supply-and-demand model of labor markets is fundamentally broken…. Textbook writers and instructors should respond by changing the baseline model of labor markets that gets taught in class. Students ought to start with a model of market power, in which a few companies set wages below levels found in a competitive market unless prevented from doing so. That model is about as easy to work with as the traditional supply-and-demand setup, but matches the data much better.

In any scientific discipline, theories should evolve as new evidence comes in. That’s true both of what gets used in research and what gets taught in class. The evidence on labor markets has evolved, and the dominant theories need to change with the times…

National Taxpayers Union: More Than 1,100 Economists Join NTU to Voice Opposition to Tariffs, Protectionism: “The lowering of trade barriers between nations has been one of the great achievements of the global economic system in the postwar era…

…Trade agreements have enriched economies around the world and allowed people access to goods that would have been unimaginable in a harsh climate of economic protectionism. The current political moment has seen new trade barriers erected as well as additional threats to rescind trade agreements and play politics with trade conventions that have benefited everyone. National Taxpayers Union is joined by more than 1,100 economists urging opposition to this new economic protectionism in the following letter…

Am I wrong to be appalled at how there are too many economists whose knowledge of models carries with it negative knowledge about the economy? I always thought that technique was to be in the service of understanding, not a substitute for it. Yet whenever I look at a David Andolfatto claiming that there is no relationship between unemployment and inflation or a Robert Lucas claiming that private decisions fueled by increasing money balances to spend affect production and prices but public decisions do not… or Eugene Fama and John Cochrane trying to resurrect Say’s Law 190 years after it had been abandoned by Jean-Baptiste Say… I am, to say the least, not impressed at all: Paul Krugman: Immaculate Inflation Strikes Again: “We’re currently well above historical estimates of full employment, and inflation remains subdued. Could unemployment fall to 3.5% without accelerating inflation? Honestly, we don’t know…

…I would also argue that the Fed is making a mistake by tightening now…. We really don’t know how low U can go…. The costs of getting it wrong are asymmetric…. Finally, there are very good reasons to believe that the Fed’s 2 percent inflation target is too low; certainly the belief that it was high enough to make the zero lower bound irrelevant has been massively falsified by experience.

But should we drop the whole notion that unemployment has anything to do with inflation? Via FTAlphaville, I see that David Andolfatto is at it again…. Even if you think that inflation is fundamentally a monetary phenomenon (which you shouldn’t, as I’ll explain in a minute), wage- and price-setters don’t care about money demand; they care about their own ability or lack thereof to charge more, which has to–has to–involve the amount of slack in the economy. As Karl Smith pointed out a decade ago, the doctrine of immaculate inflation, in which money translates directly into inflation–a doctrine that was invoked to predict inflationary consequences from Fed easing despite a depressed economy–makes no sense. And the claim that there’s weak or no evidence of a link between unemployment and inflation is sustainable only if you insist on restricting yourself to recent U.S. data. Take a longer and broader view, and the evidence is obvious….

Economics is about what people do, and stories about macrobehavior should always include an explanation of the micromotives that make people change what they do. This isn’t the same thing as saying that we must have “microfoundations” in the sense that everyone is maximizing; often people don’t, and a lot of sensible economics involves just accepting some limits to maximization. But incentives and motives are still key. And it’s ironic that macroeconomists who are deeply committed to the microfoundations project–or, as Trump might say, the “failing microfoundations project”–also seem to be especially likely, perhaps due to their addiction to mathiness, to forget this essential rule…

The question of whether the U.S. national debt is too high—and of what it should be—is a very knotty one. Interest rates are telling us that the debt is too low: that there are too few safe assets in the world, and that more U.S. Treasury debt would be very valuable in this world in which nobody trusts private sector organizations to create AAA assets, for which the demand is high. But asset quantities relative to historical norms and policy projections are telling another story. Is this one of those times when we should listen to financial markets’ judgments? Or is this one of those times when we should disregard them? Alan J. Auerbach, William G. Gale, and Aaron Krupkin: THE FEDERAL BUDGET OUTLOOK: EVEN CRAZIER AFTER ALL THESE YEARS: “New Congressional Budget Office (CBO) projections… prospect of routine trillion-dollar deficits… underlying problem is even more serious….

…First, the projections assume that the economy is at full employment, on average, over the next decade. If (when?) we face a recession, the medium-term fiscal outlook may look significantly worse. Second, under a “current policy” scenario similar to CBO’s alternative fiscal scenario–in which policy makers routinely extend temporary provisions–we project a debt-GDP ratio of 106.5 percent in 2028, which would be the highest ratio in U.S. history. This compares to CBO’s current-law debt-GDP projection of 96 percent in that year. Third, the situation only gets worse after the first decade. Under current policy, we find that to ensure the debt-GDP ratio 30 years from now does not exceed the current ratio would require a combination of immediate and permanent spending cuts and/or tax increases totaling 4.0 percent of GDP. This represents about a 21 percent cut in non-interest spending or a 24 percent increase in tax revenues relative to current levels. To put this in perspective, the 2017 tax cuts and 2018 spending deals will raise the deficit by slightly more than 2 percent of GDP in 2019. The required adjustments to keep long-term debt at its current ratio to GDP are about twice as big and in the opposite direction…

The extremely sharp Joe Romm: Trump voters hurt most by Trump policies, new study finds: “Failure to stop business-as-usual global warming will deliver a severe economic blow to Southern states, a recent paper by the Federal Reserve Bank of Richmond finds…” and he sends us to: Riccardo Colacito, Bridget Hoffman and Toan Phan: Temperature and Growth: A Panel Analysis of the United States: “Seasonal temperatures have significant and systematic effects on the U.S. economy… Continue reading “The extremely sharp Joe Romm: Trump voters hurt most by Trump policies, new study finds: “Failure to stop business-as-usual global warming will deliver a severe economic blow to Southern states” →

The well-worth reading Ryan Cooper trolls me: Ryan Cooper: It’s time to normalize Karl Marx: “For elite American economists, Marx has long been viewed as absolutely anathema, if not some kind of demon…

…producing an enormous taboo against seriously considering or even mentioning his ideas. Back in 2006, liberal Berkeley economist Brad DeLong jokingly sneered his book Capital would “introduce serious, permanent bugs into your wetware” (that is, your brain), and therefore reading it “should only be done by somebody with immunity to the mental virus — by a trained intellectual or social or economic historian, or by a trained neoclassical economist.” In other words, the best person to crack the dread tome is someone who is already a committed right-winger…

Ima not going to rise to the bait. But you can read what I really wrote a decade ago, if you wish…

The highly-estimable Steve Randy Waldmann hoists the banner of “employment for societal usefulness, not for profit”. Smart guy: Steve Randy Waldman: Smile: “Pairing a UBI with a job guarantee would mitigate the risk that we neglect the broader project of integrating one another into a vibrant society…

…that we let a check in the mail substitute for human engagement. If we could get both a UBI and a JG, that’d be great. (Of course, if we did get both, we’d want the numbers to be different than either as a standalone.) However, I am not so worried about an embarrassment of riches. We’ll be fortunate to get one, either one, implemented well enough not to subvert its purpose. I see no reason not to advocate both. People make this stupid argument about how we have to choose where we want to “expend our political capital”…. But most of the time this quasi-material analogy is worse than dumb. Political capacity is much more like muscle than gold, the more you use it the more you have. Advocating for UBI and advocating for a job guarantee are complementary activities. Both push against the present, barbaric consensus, under which human sacrifice to a drunken god of business cycles and market forces is defended by the fearfully fortunate as a price that must be paid. The way we squander our political capacity is not by arguing for UBI when we should be arguing for JG or vice versa. It’s when we argue with one another about which we should argue for…. Much of the take-making on the subject of a job guarantee has been driven first and foremost by authors’ self-positioning as advocate or critic….

One of the things that I think is a mistake in the current job guarantee debate is a focus on productivity too narrowly defined…. In the hallowed private market, it is not uniformly the case that a need is identified and then the cog—um, I mean, the body—is hired to fill it. Successful firms define roles to make the most of unusually talented people they are fortunate to have. An increasing share of private work cannot be easily codified and Taylorized, but involves ongoing improvisation, collaboration, and negotiation…. A job guarantee that had an unlimited number of slots on a mid-20th Century assembly line producing valuable, salable widgets might be easy to defend as “productive”, but would be wasteful of worker talents and poor preparation for participation in the modern economy….

For a job guarantee program… success… shouldn’t… be a “market test”…. In much of the conversation about a job guarantee, advocates understandably work hard to argue that employment on the proposed terms can provide “real” value, and so emphasize activities whose importance and moral worth is difficult to deny…. In a job guarantee context, I don’t think we will get to keep the valuable but largely hidden eldercare if there are not also things whose social worth will be more contestable by naysayers and scolds but also visible and enjoyable to a broad base of voters and taxpayers. Wherever the job guarantee is, there should be festivals and block parties. There should be children’s theater in the park. There should be visible beautification, beyond just the cleaning of litter…. Should a locally administered, Federally funded job guarantee program come to exist, a litmus test for its success will be the reaction of localities. Usually, localities compete with one another to shed the unemployed…. The job guarantee will succeed only if officials who reverse that impulse, who welcome job guarantee workers (and the Federal money they bring), are rewarded at the voting booth for doing so…