Arnold Kling  

Discontinuity, Revisited

Wing-Walking Revisited... Discontinuity and the Real Wor...

Bryan writes,

(c) Workers continue to be employed at their old job for 5, 10, or 20% lower wages until an entrepreneur makes (b) happen.

So, if the demand for mortgages collapses, all it takes to get back to 2006 levels is for mortgage underwriters to take a 20 percent pay cut?

In a world with no discontinuities, we would not get crazy subprime lending and sudden sharp drops in demand. The no-discontinuity world is what classical economists are trained to work with. Too bad it is not the real world.

[Update: Another way to put this is that if you are a mortgage company in 2008 and an underwriter you just laid off begs you for his job back and says he'll take any wage you are willing to offer, your response is to hand him a dish and say, "20 cents an hour. Start washing."]

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CATEGORIES: Macroeconomics

COMMENTS (7 to date)
Sonic Charmer writes:

Bryan's comment works fine if you just multiply "5, 10, or 20%" by some factor L representing the intrinsic leverage, or profitability net of cost, or something along those lines, of the business in question.

Of course, if L>>1, there starts to be a problem...

Es writes:

I think you are hitting onto something here - but the sensible reading of the economy probably needs to invoke both PSST and some model of insufficient demand/NGDP etc., possibly both closely connected. While boosting the NGDP in very big way could temporary avoid the PSST problem, it would not probably last. However, the stickiness in prices/wages together wih decrease in demand due to PSST difficulties leads to job losses unrelated to PSST.

Nathan Smith writes:

I don't see how this is responsive to Bryan's point.

Adam M writes:

It might help communication if you two would swear off using terms like "nominal rigidities". Once they become unclear, get specific. Such terms can be so broad that they hide points of disagreement (and agreement).

Silas Barta writes:

Good update at the end. I don't think it makes sense to talk about hiring someone back to their previous job at a lower wage, if it turns out their work as actively value-destructive. Any re-hiring would be to have them do something else, hopefully.

Jason writes:

I'm pretty sure there is high unemployment in a lot of other industries besides housing.

Kevin writes:

I would bet that if it weren't for UI a lot of folks would have picked up the dish and started washing for the 20 cents as long as they were still called underwriters.

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