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Rod Long on the Plight of the Worker, by Bryan Caplan

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In response to my Nickel and Dimed posts, my old friend Roderick Long referred me to his original review of the book.  Highlights of Rod’s review:

Ehrenreich went “undercover” to document the lives of the working poor and the Kafkaesque maze of obstacles they face: the grindingly low wages; the desperate scramble to make ends meet; the perpetual uncertainty; the surreal, pseudo-scientific job application process; the arbitrary and humiliating petty chickenshit tyrannies of employers; the techniques of intimidation and normalisation; the mandatory time-wasting; the indifference to employee health; the unpredictably changing work schedules, making it impossible to hold a second job; etc., etc.

None of this was news to me; I’ve lived the life she describes, and she captures it quite well. But it might well be news to those on the right who heroise the managerial class and imagine that the main causes of poverty are laziness and welfare.

Of course the book has its flaws…

But Ehrenreich’s misguided diagnoses and prescriptions occupy at most a tenth of the book. The bulk of the book is devoted to a description of the problems, and there’s nothing sneerworthy about that. And libertarians will win few supporters so long as they continue to give the impression of regarding the problems Ehrenreich describes as unimportant or non-existent. If you’re desperately ill, and Physician A offers a snake-oil remedy while Physician B merely snaps, “stop whining!” and offers nothing, Physician A will win every time.

Rod’s solutions:
First: eliminate state intervention, which predictably works to benefit the politically-connected, not the poor. As I like to say, libertarianism is the proletarian revolution. Without all the taxes, fees, licenses, and regulations that disproportionately burden the poor, it would be much easier for them to start their own businesses rather than working for others. As for those who do still work for others, in the dynamically expanding economy that a rollback of state violence would bring, employers would have to compete much more vigorously for workers, thus making it much harder for employers to treat workers like crap…
Second: build worker solidarity. On the one hand, this means formal organisation, including unionisation – but I’m not talking about the prevailing model of “business unions,” conspiring to exclude lower-wage workers and jockeying for partnership with the corporate/government elite, but real unions, the old-fashioned kind, committed to the working class and not just union members, and interested in worker autonomy, not government patronage.
I’ve had similar debates with Rod before, but I still can’t resist responding.  Verily, I do “heroise” the managerial class.  And at least in the First World, I do think that irresponsible behavior (partly fueled by the welfare state) is the main cause of severe poverty.  Specifically:
1. Management quality is vital for productivity – and measured management quality really is high in First World countriesContrary to stereotypes, poor countries have very little big business. Instead, their economies are dominated by “informality” and self-employment.  So yes, I am most grateful to managers for doing their jobs – especially given all the abuse that intellectuals and activists have heaped upon them.
2. In rich countries, non-work is the main cause of severe poverty.  A small percentage of non-workers are seriously disabled or genuinely can’t find a job.  The overwhelming reason for non-work, though, is behavior that intuitively seems highly irresponsible.  Such as?  Not searching for a job.  Not showing up for work on time – or at all.  Having impulsive sex.  Committing crimes.   Sloth (“laziness”) is one poverty-inducing vice, but don’t forget lust and wrath.
3. There are, of course, many full-time workers who – like Ehrenreich and most of her co-workers – end up moderately poor.  How is this possible?  I endorse the standard economic explanation: low-paid workers are, on average, low-skilled.  Since their aren’t very productive, employers don’t bid much for their services.
4. Why, though, do low-skilled workers endure such unpleasant working conditions?  Again, I endorse the standard economic explanation: making work more pleasant costs money – and low-income workers don’t want to take a pay cut to get more pleasant working conditions.
5. Rod apparently rejects both textbook stories.  Instead, he blames the government for using “taxes, fees, licenses, and regulations” to prevent the poor from “starting their own businesses rather than working for others.”  While I would be happy to see “taxes, fees, licenses, and regulations” go away, I’m afraid there’s little reason to think this would sharply increase the poor’s rates of self-employment or small business ownership.  Why not?  Because  it’s far from clear that regulation on net penalizes small businesses relative to big businesses.  Yes, some regulations impose fixed costs, which discourage small business and self-employment.  However, many regulations specifically exempt small business.  Furthermore, it is much easier for small business to evade regulation.  I wouldn’t be shocked if self-employment and small business became somewhat bigger under laissez-faire, but Rod’s confidence that this effect would be big is wishful thinking.
6. I totally agree with Rod’s view that government hurts the poor by suppressing economic growth.  Because government hurts almost everyone by suppressing economic growth.
7. I’m honestly puzzled by Rod’s desire to see the poor start their own businesses.  Romantic thinking aside, most people lack the competence for self-employment. With or without regulation, it’s incredibly hard.  I get that Rod has seen the ugly side of low-skilled employment first-hand.  But what about the ugly side of low-skilled self-employment?  Instead of bosses mistreating you, you’re mistreated directly by customers.  If you can actually get some customers, which is like pulling teeth.  Imagine how bleak Ehrenreich’s book would have been if, instead of trying to find a bunch of low-skilled jobs, she tried to found a bunch of low-skill businesses!  Without her savings, she probably would have ended up homeless.
8. I’m even more puzzled by Rod’s desire to “build worker solidarity” and support for unions.  The standard economic story says that unions are labor cartels; they improve wages and working conditions for members at the expense of other workers and the rest of society.  While I’ll defend the legality of unions on libertarian grounds, they’re nothing to celebrate.  The best I can say is that without government help, very few people will belong to unions.  Indeed, even with hefty pro-union regulations on their side, private sector unions have almost disappeared in the U.S.  But isn’t solidarity nice?  Not solidarity with large, unselective groups like “workers” – and not when you build solidarity by scapegoating employers as exploiters and managers as bullies.
9. General observation: If you know a little social science and a lot of libertarianism, Rod Long’s story sounds great.  If you want to sell libertarianism to leftists, his approach is plausibly more persuasive than mine.  Alas, if you take the time to learn more social science, Rod’s story isn’t tenable.

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Economy

Dorothy Theresa Sawchak Mankiw

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Above is a picture of my mother as a young woman. I would like to tell you about her.

My mother was born on July 18, 1927, the second child of Nicholas and Catherine Sawchak.

Nicholas and Catherine were immigrants from Ukraine. They came to the United States as teenagers, arriving separately, neither with more than a fourth-grade education. Catherine was from a farming area in western Ukraine. She left because her family wanted her to marry an older man rather than her younger boyfriend, who had been conscripted into the army. Her first job here was as a maid. Nicholas was from Kiev, where he had been trained to be a furrier. In the United States, he worked as a potter, making sinks and toilettes. When Nicholas and Catherine came to the United States, they thought they might return home to Ukraine eventually. But World War I and the Russian Revolution intervened, causing a change of plans. Catherine’s boyfriend died in the war. Nicholas and Catherine met each other, married, and settled in a small row house in Trenton, New Jersey, where they lived the rest of their lives.

Catherine and Nicholas had two children, my uncle Walter and my mother Dorothy. When my mother was born, her parents chose to name her “Dorothy Theresa Sawchak.” But because Catherine spoke with a heavy accent, the clerk preparing the birth certificate did not understand her. So officially, my mother’s middle name was “Tessie” rather than “Theresa.” She never bothered to change it.

Nicholas and Catherine were hardworking and frugal. They saved enough to send Walter to college and medical school. He served as a physician in the army during the Korean war. Once I asked him if he worked at a MASH unit, like in the TV show. He said no, he worked closer to the front. He patched up the wounded soldiers the best he could and then sent them to a MASH unit to recover and receive more treatment. After the war, he became a pathologist in a Trenton-area hospital. He married and had two daughters, my cousins.

My mother attended Trenton High School (the same high school, I learned years later, attended by the economist Robert Solow at about the same time). She danced ballet. She water-skied on the Delaware River. She loved to read and go to the movies.

In part because of limited resources and in part because of the gender bias of the time, my mother was not given the chance to go to college. Years later, her parents would say that not giving her that opportunity was one of their great regrets. Instead, my mother learned to be a hairdresser. She was also pressured to marry the son of some family friends.

The marriage did not work. With my mother pregnant, her new husband started “running around,” my mother’s euphemism for infidelity. They divorced, and she kicked him out of her life. But the marriage did leave her with one blessing—my sister Peg.

My mother continued life as a single mother. Some years later, she met my father, also named Nicholas, through social functions run by local Ukrainian churches. They both loved to dance. He wanted to marry her, but having been burned once, she was reluctant at first. Only when she realized that he had become her best friend did she finally accept.

In 1958, nine months after I was born, Mom, Dad, Peg, and I left Trenton for a newly built split-level house in Cranford, New Jersey. My father was working for Western Electric, an arm of AT&T, first as a draftsman and then as an electrical engineer. He worked there until his retirement. One of his specialties was battery design. When I was growing up, I thought it sounded incredibly boring. Now I realize how important it is.

My mother then stopped working as a hairdresser to become a full-time mom. But she kept all the hairdresser equipment from her shop—chair, mirrors, scissors, razors, and so on—in our basement. She would cut the hair of her friends on a part-time basis. When I was a small boy, she cut my hair as well.

I attended the Brookside School, the public grade school which was a short walk from our house. When I was in the second or third grade, my mother was called in to see the teacher. The class had been given some standardized aptitude test. “Greg did well,” the teacher said. “We were very surprised.”

At that moment, my mother decided the school was not working out for me. I was talkative and inquisitive at home but shy and lackluster at school. I needed a change.

She started looking around for the best school she could find for me. She decided it was The Pingry School, an independent day school about a dozen miles from our house. She had me apply, and I was accepted.

The question then became, how to pay for it? Pingry was expensive, and we did not have a lot of extra money. My mother decided that she needed to return to work.

She started looking for a job, and an extraordinary opportunity presented itself. Union County, where we lived, was opening a public vocational school, and they were looking for teachers. She applied to be the cosmetology teacher and was hired.

There was, however, a glitch. The teachers, even though teaching trades like hairdressing, needed teacher certification. That required a certain number of college courses, and my mother had not taken any. So she got a temporary reprieve from the requirement. While teaching at the vocational school during the day, she started taking college courses at night to earn her certification, all while raising two children.

My mother taught at the vocational school until her retirement. During that time, she also co-authored a couple of books, called Beauty Culture I and II, which were teacher’s guides. From the summary of the first volume: “The syllabus is divided into six sections and includes the following areas of instruction: shop, school, and the cosmetologist; sterilization practices in the beauty salon; scalp and hair applications and shampooing; hair styling; manicuring; and hairpressing and iron curling.” I suppose one might view this project as a harbinger of my career as a textbook author.

When my parents both retired, they were still the best of friends. They traveled together, exploring the world in ways that were impossible when they were younger and poorer. During my third year as an economics professor, I was visiting the LSE for about a month. I encouraged my parents to come over to London for a week or so. They had a grand time. I believe it was the first time they had ever visited Europe. When I was growing up, vacations were usually at the Jersey shore.

My father died a few years later. My mother spent the next three decades living alone. She was then living full-time at the Jersey shore in Brant Beach on Long Beach Island. The house was close to the ocean and large enough to encourage her growing family to come for extended visits. Two children, five grandchildren, four great-grandchildren. The more, the merrier. Nothing made her happier than being surrounded by family.

My mother loved to cook, especially the Ukrainian dishes she learned in her childhood. Holubtsi (stuffed cabbage) was a specialty. Another was kapusta (cabbage) soup. One time, the local newspaper offered to publish her kapusta soup recipe. They did so, but with an error. Every seasoning that was supposed to be measured in teaspoons was printed as tablespoons. The paper later ran a correction but probably to no avail. I am not sure if anyone ever tried the misprinted recipe and, if so, to what end.

During her free time in her later years, my mother read extensively, played FreeCell on her computer, and watched TV. A few years ago, when she was about 90 years old, I was visiting her, and I happened to mention the show “Breaking Bad.” She had not heard of it. She suggested we watch the first episode. And then another. And another. After I left, she binge-watched all five seasons.

As she aged, living alone became harder. When she had trouble going up and down the stairs, an elevator was added to her house. But slowly her balance faltered, and she fell several times. She started having small strokes, and then a more significant one. She moved into a nursing home. Whenever I visited, I brought her new books to read. Her love of reading never diminished.

This is, I am afraid, where the story ends. Last week, Dorothy Theresa Sawchak Mankiw tested positive for Covid-19. Yesterday, she died. I will miss her.



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Economy

Guest Contribution: “Uncovered Interest Rate Parity Redux: Non-Uniform Effects”

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Today, we’re pleased to present a guest contribution written by Yin-Wong Cheung and Wenhao Wang (City University of Hong Kong). 


The Empirical Failure of UIP

Despite the fact that the uncovered interest rate parity (UIP) hypothesis plays a key role in model building and related analytical work in theoretical international economics, its empirical applicability has been seriously challenged. The Fama β-estimate (henceforth, the “β-estimate”) – the estimate of the cross-country interest rate differential coefficient – is commonly found to deviate from the value of one predicted under UIP, and is even negative in some instances.

Studies have noted that omitted variable bias can be a source of the empirical failure of UIP. Specifically, the canonical bivariate UIP regression should be augmented to, say,

where yt is the exchange rate change, ∇it is the corresponding cross-country interest differential, and zt includes control variables accounting for factors that affect the β-estimate. The representative control variables include empirical proxies for covered interest rate parity (CIP) deviations, risk premiums, and expectational errors. Not surprisingly, different empirical UIP studies employed different empirical proxies that were derived from similar or different theoretical models, and from either economic or non-economic data. To what extent these different empirical proxies capture the attributes of unobservable factors that are relevant to UIP?

 Non-Uniform Effects

In a recent study (Cheung and Wang, 2020), we assess the empirical relevance of UIP with an empirical framework that allows for non-uniform effects due to model uncertainty and time-varying parameters. Technically, the Bayesian dynamic linear model (DLM) approach is used to accommodate time-varying parameters. And, a data-driven modified dynamic model averaging (DMA) procedure is used to assess the relevance of the empirical proxy variables and, hence, address model uncertainty.

We consider end-of-quarter observations of the exchange rates of the Australian dollar, Canadian dollar, Euro, Japanese yen, New Zealand dollar, Norwegian krone, Pound sterling, Swedish krona, Swiss franc against the US dollar, and the corresponding three-month forward exchange rates, and the three-month euro-currency deposit rates from 1990Q1 to 2018Q4.

From the existing studies, we collect a total of 27 empirical proxy variables; one proxy for CIP deviations, 15 different proxies for risk premiums, and 11 different proxies for expectational errors. Our empirical framework allows these proxy variables to display shifting levels of relevance and time-varying parameters. We focus on the behavior of the β-estimate in the presence of these proxy variables, and use it to infer the implications of these proxies for the empirical relevance of UIP.

Some Findings

Our empirical exercise indicates that the (augmented) UIP regression is subject to both time-varying parameters and model uncertainty – hence the set of relevant explanatory variables can change over time. We use the New Zealand dollar (NZD) case to illustrate some empirical findings.

Figure 1. β-estimates from the Bivariate DLM UIP Specification – NZD

First, the UIP relationship, as indicated by the β-estimate, is time-varying. Figure 1 shows β-estimates (solid line; the dash horizon line is the 1-horizon line.) from the NZD bivariate DLM regression. The 95% credible region (gray area) is quite wide and makes it impossible to infer a precise value of β. Also, the β-estimate around the GFC turns to positive from negative (also, see Bussiere et al., 2018).

Figure 2. β-estimates from Bivariate and Synthetic Augmented UIP Regressions – NZD

Second, our results show that the inclusion of these proxies to the canonical bivariate UIP regression can yield a β-estimate closer to the value of one predicted under UIP. Figure 2 shows that, in the presence of selected proxy variables, β-estimates are closer to the horizontal line of one than those from the bivariate specification.

Figure 3. The Empirical Density Distributions of absolute differences from one – NZD

Figure 3 that plots the two empirical density functions of the absolute values of (β-estimate -1) of these two cases re-enforces the result. The presence of selected proxy variables moves the mass of absolute deviation from the theoretical value of one towards zero.

However, it should be pointed out that, while the presence of proxies reduces the deviation of the β-estimate from one, it does not reduce its sampling uncertainty.

Third, the set of proxy variables that alleviates the degree of UIP failure is not the same for all exchange rates under consideration. Further, both its composition, and the effects of its components can display wide variability over time.

Figure 4. Retrospective Inclusion Probabilities of lagged cross-country growth rates – NZD

For the NZD case, Figure 4 shows the time-varying retrospective inclusion probability of including lagged cross-country growth rates – which is one of the macro risk proxies – in the model. The time variability of the degree of relevance, indicated by the inclusion probability, is quite apparent.

Figure 5. Model Averaging Retrospective Coefficient Estimates of lagged cross-country growth rates – NZD

The time variability of the coefficient estimate of this variable is depicted in Figure 5.

These findings corroborate the scapegoat theory that refers to shifting roles of determinants in foreign exchange markets, and is suggestive of factors that affect the arbitrage behavior underlying the UIP condition can change over time and exhibit time-varying effects. It is conceivable that shifting roles and time-varying effects of proxies for unobservable factors due to, say, changes in market perceptions can contribute to the difficulty of rectifying the empirical UIP failure. Further, the exchange-rate specific results present challenges to developing a general explanation for the observed failure.

Additional Discussion

Undeniably, our exercise is mainly an empirical one that highlights non-uniform effects. One relevant issue that we revealed but offered no insight into is the finding that the β-estimate tends to change from negative to positive after GFC. Why the switch in the coefficient estimate? Some comment on the reduced interest in carry trade activity. Bussiere et al. (2018) notes there is a change in the correlation between expectational errors and interest differentials. Our exercise affirms both time-varying effects and shifting roles of individual factors. However, we provide no substantive economic interpretation.

Extra efforts are warranted for assessing the extent to which these empirical proxy variables capture the attributes of the unobserved factors relevant to the UIP discussion, the conditions under which these proxy variables are good empirical proxies, and the factors that determine their shifting roles. Nonetheless, an empirical model for explaining UIP failure is likely to be one that allows for both a time-varying set of explanatory variables and time-varying parameters.

 


This post is written by Yin-Wong Cheung and Wenhao Wang.

 



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Economy

Quotation of the Day…

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… is from page 208 of Philipp Blom’s superb 2010 book, A Wicked Company:

The first problem with Rousseau’s concept of the social contract is that the “general will” he posits has, like God, no voice to make itself heard directly. For its expression and interpretation, it must rely on particular, wise individuals to lend it theirs.

DBx: Surely among the top three greatest fallacies of the modern age – the age that was only beginning to form when Rousseau and his contemporaries were on the scene – is the notion that a group of people has a will and that this will of the People is only, or at least most reliably, revealed in the results of majoritarian democracy.

If this notion were true, it would indeed be obnoxious to impose restraints upon the expression of this ‘will’ and on it being carried out. But there is no will of the People. No group of people has a will because no group of people has a mind. A group of people is a group of different wills and different minds. These different minds might well share many preferences. Each of these minds – being human – certainly is influenced in its thoughts and preferences by what that mind imagines the other minds think of it. But a group of people, as such, has no will.

And that which doesn’t exist cannot be discovered or put into action.

There are many goods and services that are best supplied simultaneously to a group of people in a manner that makes it impossible, or too costly, to exclude particular individuals from being able to consume the good or service. An example is the reduction of air pollution in the Los Angeles basin. Every person in the basin gets to breathe the cleaner air whether or not he or she contributed to the effort to cleanse it. This inability to exclude non-payers creates obvious challenges to those who would, through private initiative, provide the service of cleansing the air.

Some group effort to cleanse the air, therefore, is likely appropriate. And individualist principles counsel that every individual who will plausibly be significantly affected by the collective effort cleanse the air have a say into whether or not, and how, that effort is carried out. Majoritarian democracy is one such way, and this way might be, all things considered, the best way.

Yet the result of majoritarian voting ought not be sold as being more than it is. The result of majoritarian voting – or, indeed, of any sort of voting or of any collective-choice process – is simply the result of that collective-choice process. This result is categorically different from the result of an individual choosing some course of action from among perceived alternatives. The latter can with accuracy be said to reveal the individual’s will; the former cannot be accurately said to reveal the will of the group or of the voters.

Among the practical and important implications of the above reality is that anyone who asserts that he or she is the voice of ‘the people’ or is carrying out ‘the will of the People’ is either delusional or lying, and in either case is not to be trusted.

The post Quotation of the Day… appeared first on Cafe Hayek.



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