Bryan Caplan  

Mish Bet Redux

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Here's Mish's take on our unemployment bet.  Frankly, he's got a pretty funny model of the economy.  When Mish writes...
There is always a chance that some new technological revolution will happen to undermine my pessimistic scenario. Certainly a development in clean energy could create a massive number of jobs. There is also a chance of an advancement in the medical field that would do the same.

I am sure something good will eventually happen, it always does, but I doubt it will be that soon or even if it does happen soon, that it will create huge jobs in the United States as opposed to elsewhere.
... I can only furrow my brow.  My view, like almost all economists', is that you don't need new technology to "create jobs."  All you need to employ any number of people at any state of technology is for prices and wages to adjust.  And while these adjustments don't happen instantly, five years is plenty of time for the labor market to get itself in order.


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COMMENTS (20 to date)
Joe Cushing writes:

I am seeing signs that the job market will come roaring back this summer.

wlu2009 writes:

"All you need to employ any number of people at any state of technology is for prices and wages to adjust."

Isn't this only true up until the natural rate of unemployment is reached? Is it possible Mish is arguing that the crisis has (at least for the forseeable future) changed the natural rate of unemployment, and therefore without some major gain in productivity or technology, unemployment will remain high?

Ted Craig writes:

You're both missing a factor - cultural imperative. Many people would rather not work, and as long as it's acceptable to stay in your parents' basement and play Madden all day, they won't.

Matthew writes:

Perhaps the air is a bit thick around DC, but out here in the sticks it is very clear that the labor market, along with just about every other market, is being strangled to death with regulation and continuous new costs, such as the new health care mandates.

This is not to mention the hideous state of balance sheets at the private sector and governmental levels.

When the actual economy is looked at with real numbers like tax receipts instead of bogosities like "same store sales" (which go up when your competitors go out of business and when stores close), the "recovery" ain't doing so hot, either. . .

Jim writes:

All you need to employ any number of people at any state of technology is for prices and wages to adjust. And while these adjustments don't happen instantly, five years is plenty of time for the labor market to get itself in order.

Unless you have some authority that continually intervenes in the economy to prop-up prices and wages.

Good thing we don't have that, huh?

8 writes:

He's looking at debt and he sees the cost of debt adjusting upwards. There are massive pension liabilities, entitlements, public debt and outstanding private debt. The government is forestalling an adjustment in home prices, debt and interest rates.

From his statement, he does see wages adjusting: globally. If a company closes a factory in New York and opens one in Mexico, they probably increase the global employment rate while lowering wage costs.

SydB writes:

Peak oil is upon us. Human society is energy dependent. Unfortunately, Mr Caplan furrows his brow in a vacuum. His brow furrowing is based on nothing more than anecdotal evidence--as are most economists' arguments (unlike physicists, who can repeat experiments ad nauseum so that anecdote largely becomes invariable law).

Hence Mr Caplan simply does not know what the unemployment rate will be. True, his argument is squishy, as he can argue that "employment" means little more than slave labor. Not worth much to slaves, but it could be used to cover his bet.

So he makes a bet, but please note that bets prove nothing. Just another anecdote. So we have anecdotal thinking demonstrated through an anecdotal bet.

Perhaps he should give ecological economics a try. Human society is a system. Energy is necessary to drive this system. And the future Energy returned on energy invested (EROEI) doesn't look too good. Not necessarily the end of the world, but it could interfere with his bet.

Josh Weil writes:

@Syd

If peak oil is upon us then you should be shorting the stock of oil companies and making a fortune!

Allan Walstad writes:

Why would a technological advance create a net change in the number of jobs? Many tech advances make it possible to produce the same goods and services with less labor. But then the freed labor can set to work producing other goods and services that weren't high up enough on most people's priority lists to command the labor before. On the other hand, if green energy commands more labor, won't brown(?)energy command less? If tech advances produced more jobs, presumably our cave ancestors were lying around all day with comparatively little to do.

SydB writes:

Josh Weil: I invested heavily in oil approximately 8 years ago based upon analysis of production and consumption, alternatives, etc. And yes, it has been a very good investment.

But I'm not sure why you would short oil companies. Go long. The oil business will increase in value because EROEI declines demand higher prices for oil and more expenditures to tap into less productive sources (e.g. off shore drilling). Hence one should be long the oil business, not short. Only short it if you know of alternatives. I don't. Not now at least.

I guess I'm not sure what you were proposing.

Lord writes:

Mish just believes in recalculation more than you; that it is not simply a matter of price but of skills and usefulness. What price would it take if the competition is in China? Not that I think this will be sufficient for him to win his bet but these scenarios would be ways of him losing it. Even without such developments, people will fall off the rolls, leave the workforce, retire, and new entrants will avoid declining industries.

Chris writes:

That technological advances will always result in enough employment rests on two assumptions:

A) People are readily interchangeable
B) The economic roles people fill are infinite

Broadly speaking, the wide array of jobs in the economy are actually variations on just a few roles. If technology eliminates a role previously filled by people and those people are unable to fill another role (say, creativity), they become unemployable.

During the industrial era, technology provided energy and a lot of the direct physical manipulation while people provided computation, the execution of a series of predefined steps to get a desired result, for production. Computers are able to do this far more efficiently, making people redundant in an increasingly larger fraction of any kind of production. The remaining roles that only people can fill are creative/administrative type jobs and 'human service' type jobs. Demand for human service jobs are uniquely constrained by the overall human population and a large fraction of the population is incapable of performing any economically useful creative/admin type roles.

mattmc writes:

But doesn't the minimum wage prevent wages from adjusting to match competition in other countries?

karl writes:

As an avid reader of Mish's blog, I can tell you that he is down with the concept of wages adjusting. He often mentions it when writing about public sector unions and the cutbacks they face. At the end he will write that no one has to lose their jobs, they just all need to take pay and benefit cuts. To which he will then add that he doesn't expect union leadership to take that option.

More generally, I would say that fundamentally Mish sees the government and powers that be fighting the necessary adjustments to wages and benefits that would allow unemployment to fall and that is why he made the bet.

On a related note, Barry Ritholtz at The Big Picture has some data about employment today.
http://www.ritholtz.com/blog/2010/03/change-in-us-employment-recession/

Jim Glass writes:

Milton Friedman used to say that if we really want to "create jobs", just ban tractors, reapers and other equipment from farms. So if we want to eat to stay alive, we have to produce all our food by hand. There'd be no end of jobs created by that. If the policy objective really is to create jobs.

Lord writes:

The bet he should have made was that employment will not have achieved its last peak in five years. That is a pretty safe bet.

ziel writes:

If peak oil is upon us then you should be shorting the stock of oil companies and making a fortune!

We need to make that the latest corollary to Godwin's law - when someone challenges another's views of the economy with "If your so sure that [assessment of economy is true] then why don't you just short [some vague entity presumably correlated on a one-to-one basis with the stated economic phenomenon], it's time to invoke the "saggy shorts" rule and declare the offender out of order.

"Shorting" something is a reckless financial act that should only be attempted by a professional or very savvy investor. The old saying "The market can stay irrational longer than you can stay solvent" is quoted for a reason. Sure, there are ETF's, but you'd still have to be in it for a good chunk of change and the above warning still applies.

jstaples writes:

Matthew, I just wanted to give you credit for probably the best new word I have learned in years. Bogosity. I will make a point to start using this.

As another reader of Mish's blog I have to agree that Mish made his wager on the assumption that the government is going to do everything in it's power to prevent adjustment in prices and wages.

We all know letting businesses fail and prices adjust would solve this "crisis" rather quickly. It would be painful in the short term, but over soon. For whatever reason, that is not being allowed to happen.

jb writes:

I am reminded of a great quote from not that long ago - if you are long Oil, you are short Ingenuity.

I guess we'll see what happens. I find human ingenuity endlessly surprising and inventive.

SydB - it would be interesting if you could describe your "slave" scenario in testable terms, so we could bet on it.

Jacob writes:

Wouldn't said technology probably be disruptive and reduce the number of jobs in the short to medium term? When some people say clean energy creates jobs they are actually stating that clean energy is less productive, and thus needs more labor input. Perhaps in this case, technology = government picking a less productive winner, which causes more jobs? Maybe I just don't follow all of the steps of the argument.

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