Look: I am eager to learn stuff I don't know--which requires actively courting and posting smart disagreement.

But as you will understand, I don't like to post things that mischaracterize and are aimed to mislead.

-- Brad Delong

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Wednesday, December 22, 2010

Thinking Like an Economist Means That . . .

Zombie ideas eat your brain!

I love Calculated Risk, and have great respect for whoever it is that puts it together.  But that doesn't mean that they are always right.  A post today titled Older Workers and the Lump of Labor Fallacy resurrects the "Lump of Labor Fallacy" fallacy, and illustrates one of my really big problems with economics and economists.

The idea in the CR post is that older workers staying in the work force - a phenomenon happening with continuously greater frequency over the last 20 or so years - does not take jobs away from younger workers.  LoLF believers will tell you that additional workers - whether they are ought-to-be-retired codgers, immigrants, fresh graduates, or zombies risen from the grave - expand the economy by going to work, buying lunch, new clothes, new cars, and renting apartments.

OK - maybe not the zombies, who have rather a different concept of utility.

Now, the LoLF is a truly great idea, and like most great ideas, it's true some of the time.  But other parts of the time, for example when U6 unemployment has been stuck at over 16% for over a year, businesses are sitting on piles of cash like brooding hens instead of investing in either capital improvements or labor, and even the illegal immigrants can't find jobs, it's high time to start thinking outside of the tidy little economic coffin.

This, come to think of it, is actually the same disagreement I had with Karl Smith recently, though we didn't use the LoLF vocabulary.

What Karl, the good folks at CR, and economists in general refuse to factor into their thinking is the current unpleasant reality, which gives me an opportunity to quote myself.

And what makes this case different is the liquidity trap at the 0-interest bound, and the aggregate demand shortfall due in part to private deleveraging that causes the unwillingness of corporations to invest in either equipment or employees, compounded by the unwillingness of banks to lend at any level of risk when then can get an absolutely risk-free 0.25% on excess reserves from the Fed. Whether the collapse of the M1 multiplier is cause or effect remains a mystery to me.

We are hovering at the edge of a deflationary spiral, similar to the situation in 1929; but austerity rules the day, almost world wide. I am deeply pessimistic about this turning around any time soon – or even over the next several years. The incoming Repug majority in the House will only make it worse.

Since then, I've learned a couple of things that illustrate that the situation is already worse than I thought.  Here's an example.

Pedro Pablo slowly folds up his American flag blanket and stuffs it in his duffel bag. With it goes his American dream.

"I left my family and lost four years with them. I will ask them to forgive me," he said.  Pablo is an illegal immigrant from Guatemala who came to the United States to support his wife and five sons back home. When he arrived, construction jobs were plentiful. Over the last year, he says, he's worked three days.

He recently boarded a bus with a one-way ticket home, paid for by the Guatemalan consulate in Los Angeles. "I thought I could get ahead here. I regret coming."

Across the United States, tens of thousands of immigrants -- those here legally and illegally -- are facing a similar dilemma: Do they continue to search for jobs in a struggling U.S. economy or return home to an even bleaker economic situation?

"Things are very dire, and I think it's impacting those at the very bottom even more so," said Abel Valenzuela, a professor at the University of California-Los Angeles who has spent years studying day laborers.  "Day laborers are being really, really impacted."

On the TV news last night I saw a young couple with $250,000 in student loan debt who are unable to find relevant employment, have no idea how to service this debt, and will likely lose their modest home.  They aren't alone.  Thousands of recent college graduates clutching their freshly-minted degrees proudly set out to enter the job market only to find that there isn't any.   If nothing else, this has opened up a whole new set of opportunities for vultures.

New public, private and college-based programs are targeting a grim and growing market: unemployed college graduates who can't afford to repay their student loans. 
This week, BridgeSpan Financial, a start-up based in Washington, D.C., introduced SafeStart, a product designed to protect borrowers from the risk of defaulting on their loans. For an upfront payment of $40 to $60 per $1,000 of student debt, SafeStart will provide an interest-free line of credit that borrowers can use to repay federal student loans for up to five years after graduation.

Lovely.  For a mere $12,500, give or take 20%, that young couple might be able to buy a five year reprieve from interest on their student loan debt.  I wonder where they'll borrow the $12,500?

Young, educated people can't pay off their student loans.  Immigrants are returning to their impoverished native lands in despair.   All because there aren't any jobs to be had.  But economists simply can't get beyond that old "Lump of Labor Fallacy" fallacy.

As Krugman said in his Monday op-ed piece, on a different aspect of stubbornly wrong headed thinking (emphasis added):

  Yes, politics is the art of the possible. We all understand the need to deal with one’s political enemies. But it’s one thing to make deals to advance your goals; it’s another to open the door to zombie ideas. When you do that, the zombies end up eating your brain — and quite possibly your economy too.


42 said...

Unless you are a medical student, accumulating $250,000 in student loan debt is kind of hard to do unless you insist on attending elite haut-snobbe colleges or spend years toiling away on that PhD in whatever so you can compete with 2500 others for one seasonal adjunct professor job that pays nothing and has no benefits. Please, kids, plan this shit out, and remember you can NEVER get rid of student loan debt by any means other than death.

I know, education costs have soared, but you can still get a shiny new degree from a state school for a hell of a lot less than $125K each.

Jazzbumpa said...

42 -

You are indeed the answer to the ultimate question of life, the universe, and everything.


Sandwichman said...

Hey JzB,

I've posted a reply to Bill McBride's Calculated Risk posting at Ecological Headstand. "Older Workers and the PHONY Lump of Labor Fallacy" and I'll be following up with a second post on Angry Bear.