Norm Ornstein Is Tired of Trying to Reason with Republicans Like Mitch McConnell
David Cay Johnston: Real Wages Fall

Noted for June 25, 2013

  • Barbara Bergmann (2007): Hail the new empiricism: "How do economists know what they know? In a call for a new empiricism, Barbara Bergmann asserts that economists mainly make it up…. 'The most intensive interaction with business people so far seems to have been carried out as a solo venture by Truman Bewley who interviewed about 300 business managers, asking why they don’t lower wages in a depression. The failure to do so, which may (or may not) be an important reason for the failure of unemployment to dissipate rapidly, has long been a subject of speculation among economists. Bewley’s book lists no less than 25 published theories that economists had invented to explain the phenomenon, 24 of which were wrong. Bewley was the first who dared to go out and ask those making the decisions what they did and why. They told him that to lower wages would create severe morale problems, and so would interfere with the operations of their firm.' This study was indeed daring. As if business people could know better than economists why they behave. The presumption! (For more details see Bewley's book, Why Wages Don't Fall During a Recession, and discussion papers). Bergmann concludes: 'While observation-less theorizing is still the most common way economists think to advance the science, the new interest being shown to behavioral and experimental methods at places like Princeton and Harvard is an encouraging sign. But actual observation of business behavior has barely started. Whether it will flourish depends on whether an ever increasing corps of economists willing and able to do the work of observation gets trained and then finds jobs. A few years ago I had occasion to ask Truman Bewley whether he was training students at Yale to carry on research like that he did on wages. His answer, I am sorry to report, was, “No, that would ruin their careers.”'"
  • Bob Margo: Economies of Scale in Nineteenth Century American Manufacturing Revisited: A Resolution of the Entrepreneurial Labor Input Problem: "In a famous paper, Kenneth Sokoloff argued that the labor input of entrepreneurs was generally not included in the count of workers in manufacturing establishments in the early censuses of manufacturing. According to Sokoloff, this biased downward econometric estimates of economies of scale if left uncorrected. As a fix Sokoloff proposed a particular 'rule of thumb' imputation for the entrepreneurial labor input. Using establishment level manufacturing data from the 1850-80 censuses and textual evidence I argue that, contrary to Sokoloff’s claim, the census did generally include the labor of entrepreneurs if it was economically relevant to do so, and therefore Sokoloff’s imputation is not warranted for these census years. However, I also find that the census did understate the labor input in small relative to large establishments as Sokoloff asserted, but for a very different reason. The census purported to collect data on the average labor input but, in fact, the data most likely measure the typical number of workers present. For very small establishments the reported figures on the typical number of workers are biased downwards relative to a true average but this is not the case for large establishments. As a result, the early censuses of manufacturing did overstate labor productivity in small relative to large establishments but the size of the bias is smaller than alleged by Sokoloff."

  • Olivier Coibion, Yuriy Gorodnichenko, and Johannes Wieland: The Optimal Inflation Rate in New Keynesian Models: Should Central Banks Raise Their Inflation Targets in Light of the ZLB?: "We study the effects of positive steady-state inflation in New Keynesian models subject to the zero bound on interest rates. We derive the utility-based welfare loss function taking into account the effects of positive steady-state inflation and solve for the optimal level of inflation in the model. For plausible calibrations with costly but infrequent episodes at the zero-lower bound, the optimal inflation rate is low, less than two percent, even after considering a variety of extensions, including optimal stabilization policy, price indexation, endogenous and state-dependent price stickiness, capital formation, model-uncertainty, and downward nominal wage rigidities. On the normative side, price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability. These results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero-bound episodes."

  • Tyler Cowen sends us to Theory of Justice: the Musical! | Edinburgh Festival Fringe: "To draw inspiration for his magnum opus, John Rawls travels back in time to converse (in song) with political philosophers, including Plato, Locke, Rousseau and Mill. As he pursues his love interest, Fairness, through history, he must escape the machinations of his libertarian arch-nemesis, Robert Nozick, and his objectivist lover, Ayn Rand. Will Rawls achieve his goal of defining Justice as Fairness? 'Entertaining and educational, a truly remarkable musical. You would be a fool to miss it.' 'Energy, ingenuity, and intelligence: strong performances, artful lyrics, toe-tappingly marvellous music'"

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