Getting Past Econ 101

(In general, I use the space here to indulge in writing that is a bit more philosophical than what I had done on my prior blogs, where sarcasm and mockery were often the order of the day. Today I am going to revert to form, if only a little. )

Kevin Hassett, Director of Economic Policy Studies at AEI, has a piece up on Bloomberg that is so profoundly ignorant of reality and of economics. It seems the product of an overconfident C student in econ101, crossed with a pathological blindness to reality. Let’s dig in.

Hassett’s main contention is that unemployment levels remain high because of sticky wages. It’s unremarkable that wages are sticky. We know this, just as we know prices can be sticky. But wages are always sticky, so why should their stickiness be to blame for our current crisis? Wages were sticky during the recession in the early 2000’s, in the early 90’s and during every other recession in modern American history.

For Hassett, the central problem is that the sticky wages are preventing the labor market from clearing. Because every C student of micro101 understands that perfectly competitive markets should clear. (Of course, the A and B students also realize that there is no such thing, really, as perfect competition. And that there are a number of assumptions baked into the model that are nearly impossible to attain in the real world.) According to Hassett, the labor market is not clearing due to several factors- plain old wage stickiness, minimum wage laws, unemployment insurance, and union contracts (apparently non-union contracts, like those of managers and executives are not so pernicious).It should be noted that the latter three contribute to the former, but there is a type of stickiness that has nothing to do with minimum wage or contract issues.

Let’s take a look at each of these in turn.

1. Wage stickiness- Hassett argues that, “A $60,000-a-year office worker might have an extra-hard time coming to terms with becoming a $40,000-a-year worker.” I’m not sure what world Hassett is living in, but I don’t think anyone would gleefully accept a 1/3 pay cut. However, in the real world we live in, hundreds of thousands (millions?) of workers have accepted pay cuts, benefit cuts and unpaid furloughs in order to retain their jobs.

2. Minimum wage- Hassett would like us to believe that the increase in the minimum wage has increased unemployment, especially among teens. In order to believe that, you’d have to ignore the fact that teens possess less skills and are often not as good as workers as their adult competitors. The real driving force for teenage unemployment is the high number of unemployed adults, whose work experience makes them much more attractive candidates. Though, in fairness to Hassett, he probably believes that the absence of a minimum wage would open the floodgates to teenagers working for $1.25/ hour.

3. Unemployment insurance- Hassett posits that the reason for geographic mismtach is unemployment insurance- “So why isn’t there a traffic jam of job-seekers trekking from Las Vegas to Fargo, and from other high-unemployment areas to high-employment ones? One reason is unemployment insurance.” This is similar to Casey Mulligan’s notion that the unemployed are just taking unpaid vacations in its foolishness and lack of understanding reality. Unemployment insurance provides, at best, roughly 40% of what a person earned while employed.

This raises two points. First, to imagine that unemployment provides some sort of strong incentive to not work is beyond silly. How many people can afford to subsist on 40% of their former wage rate? Second, how does Hassett expect people receiving a fraction of their former wages to be able to afford to move? Remember that bit above about perfect competition? Well, one of the assumptions is perfect mobility. Ooops.

4. Union contracts- Hassett writes, “because union contracts generally cover multiple years, adjusting wages in response to economic circumstances would require a return to the bargaining table, which rarely happens.” Sure, contracts generally do cover multiple years. Yet examples abound of unionized workers accepting wage and benefit cuts and furloughs (as noted above). Though a good deal of this has been in the public sector, the folks in the UAW and other large unions have accepted wage concessions during this recession.

Either Hassett is truly this dumb, or he thinks Bloomberg’s readers are too dumb to see through his trope. This is standard issue conservative economics- blame unions and the government for the minimum wage and unemployment insurance- that is trotted out no matter what the economic situation. They will say it when the economy is humming and when it’s mired in recession and every point in between.

What is astounding is that Hassett seems intent on making this argument despite ample evidence to the contrary. Does he not know anyone currently unemployed? Does he not read a paper to see that plenty of people have taken pay cuts in some form?

Perhaps most troubling, though, is his inability to think through his argument. There is at least some reason to believe that large scale downward wage adjustments could crater aggregate demand. Even if we assume unemployment is reduced under his plan, it’s unclear that it would offset the decline in consumption caused by lower wages. And, of course, there is always price stickiness to deal with. Not to mention deflation.

It’s almost as if Kevin Hassett puts his ideology ahead of his intellectual honesty. At AEI? Quelle surprise!

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