Friday, June 21, 2013

Complementarity and Substitutability between Labor and Capital

A nice commentary on the CBO's scoring of the upcoming Comprehensive Immigration Bill.

Some thoughts:
1. Instinctively, labor and capital are thought to be substitutes, but in practice they have a large complementary dimension between them as well. A man with a bulldozer can put several men with shovels out of business, but the bulldozer driver can command higher wages because his labor is more productive when supported by a capital investment.

2. There is more overlap between complementary and substitutability than you might think. For example: albums and live concerts.

3. The impact of capital on different forms of labor may vary. Labor is heteregenous, and skilled labor is likely to increase in productivity more than unskilled labor. But think of manufacturing before trade -- did that really benefit the manager and the capitalist more than the unskilled labor at the line?

4. Total Factor Productivity is the secret sauce that makes an economy accelerate above and beyond countable labor and capital increases. I understand why the CBO scored it as it did, but I don't think it will reflect reality.

5. It is uncontroversial to note that, in a low aggregate demand environment, increasing unskilled labor will put additional pressure on wages at the low end, worsening the lot of unskilled labor that is already here. Other complementary elements of the economy may benefit from lower unskilled labor costs.

Tuesday, June 11, 2013

RIP Robert Fogel

I only heard Fogel guest lecture a couple of times, but other Professors cited his work and methodology quite often. In a discipline that is heavy on theories, Fogel actually did the work and built up data sets. Murphy learned from him. A great example of how applied and theoretical both work best when married.

Monday, June 10, 2013

Steve Keen and Accounting

Occasionally, I've been asked about Steve Keen, and what I think about him from an MMT perspective. Keen surprises me because, while he seems to understand (more or less) that loans create deposits, and that the private sector generates gross assets by expanding both sides of its balance sheet, he does not extend this insight to the public sector and see how the Government, a currency issuer, creates net financial assets for the private sector.

So he can see how the private sector can become over-levered, but does not see how the public sector can step in to manage this and support aggregate demand through a deleveraging.

Anyway, JKH goes into detail about how Keen is trying to re-create double entry bookkeeping but getting it wrong. Worth reading in full, but here is a key graph:
Third, we turn to what must now be noted as an accounting error of extreme proportions – which is that it is certainly not the case that the Fed draws on its equity account when it acquires assets. The Fed creates reserve liabilities as a result of the payments process that is used in the acquisition of assets. The phrase “loans create deposits”, which has become popularized in the endogenous money view of commercial banks, applies equally to the Fed in its own case of asset acquisition and reserve creation. The equity account is not touched in such a transaction, just as it is not touched when a commercial bank makes a loan and credits a deposit to the borrower’s account.
An accounting error of extreme proportions indeed. Steve lost me at the start of his article when he says:
Double-entry bookkeeping (DEB for short) enforces this equation in two ways. Firstly, it records any Asset as a positive amount, and Liabilities and Equity as negative amounts. Secondly, it ensures that any transaction between accounts sums to zero. So, for example, if a rich aunt died and left you $1 million in her will, your accountant would show that as your Assets changing by plus $1 million and your Equity changing by minus $1 million. It sounds counter-intuitive when you first learn it, but it works to make sure you don’t make mistakes when tracking financial transactions.
Really? This may be a strange artifact of how Steve chooses to model the asset and liability side of the balance sheet, but in standard accounting, a $1M windfall would be booked as an asset ($1M in your bank account) plus an increase in equity to balance that (assets = liability + equity). Maybe it's a "credits/debits" nomenclature thing.

That said, I think the point Steve was trying to make is that all Quantitative Easing does is have the Fed alter the compositional mix (and therefore term structure) of extant assets but not the total absolute quantity of those assets themselves. They are changing $1 for $10, but the amount of money in circulation is the same (bad analogy, it gets the technical elements totally wrong by conveys my intent). I'm also exaggerating, as interest rates on Government bonds are an income channel for the private sector and therefore have a fiscal effect. Nevertheless, the core point still holds.