Arnold Kling  

Spending, Comparative Advantage, and Unemployment

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Steve Randy Waldman writes,

Idle unemployment is a problem in societies that are highly productive but very unequal. Here basic goods (food, clothing) can be produced efficiently by the wealthy via capital-intensive production processes. The poor do not employ one another, because the necessities they require are produced and sold so cheaply by the rich.

Pointer from Tyler Cowen. I recommend Waldman's entire post, for I found it difficult to excerpt.

One advantage of the PSST approach is that I do not think of the economic coordination problem in terms of spending vs. saving. Instead, I think of it in terms of finding comparative advantage. So, in Waldman's story/model, I ignore the problem of the rich not wanting to spend their wealth. Instead, I focus on what makes people idle. When I read, "The poor do not employ one another," I want to focus on why they do not. Comparative advantage is always present. And, in the PSST way of thinking of things, comparative advantage is all that you need to generate employment, as long as entrepreneurs are able to discover patterns of trade that work. The problem is that the chains of trade can be very complex, and the Rubik's Cube with Disturbances becomes hard to solve.

The PSST model suggests that any distribution of income and wealth can be consistent with full employment. Only large economic disturbances can cause patterns of trade to become unsustainable, leading to coordination problems that cause high unemployment.

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CATEGORIES: Macroeconomics

COMMENTS (16 to date)
Tom West writes:

I'd say that in our current economy the "comparative advantage" for many workers would be working for below subsistence wages.

Since that's not going to happen, workers are idle.

David S writes:

below subsistence wages

I see that a lot - what does it mean? I worked for less than $8K per year when I first lost the ability to walk, and received no government assistance. Did I not subsist at that point? Should I have switched to a life of crime or something, instead of continuing to work and pulling myself back up?

Thomas DeMeo writes:

"Comparative advantage is always present"

Doesn't this idea really only work as long as we are comparing human beings? When machines can be substituted on a sufficient scale, doesn't this fall apart?

Becky Hargrove writes:

Only the tradables are produced cheaply. People have responded to this by producing non-tradables through all conceivable non cheap rates and means, which upsets the entire applecart. Plus, even though non-tradables can be produced in more reasonable ways, the inherent comparative advantage amongst human beings must converge in unique ways for that to happen, i.e. not the traditional monetary means which demands one rate of production efficiency. The primary challenge then becomes finding links between the two different kinds of productivity convergences. A simple way to think about this process is what sometimes exists in society - a monetary and physical wealth base with knowledge as a free form operating procedure.

Glen Smith writes:

The problem is when the work available returns less than the cost of that work. In most cases, a marginal worker is a marginal worker because the work available to them has high costs relative to the revenue produced. Some marginal workers are temporarily marginalized due to an exogenous shock but a chronic marginal worker is usually marginal due to not having the skills (high time preferences, lack of vision and pain endurance) needed to deal with those exogenous shocks. This is what subsistence wages are. It is when MY costs of living are greater than the best I can earn by working.

David S writes:

The poor do not employ one another

On this aspect, how is this measured? For example, when I was far below the poverty line I "hired" some friends to help me with work. This varied from paying someone to write a program to take advantage of an opportunity I had, to having people over for pizza and helping me to move. Since the government was not involved with any of those transactions, how would an economist measure such a thing?

Shayne Cook writes:

@ Tom West (and Arnold):

Tom first (sort of) ...
I (almost) agree with your first statement. Where it is wrong - within the context of both "comparative advantage" AND Arnold's PSST model - is that "working for below subsistence wages" is inherently, and by definition, "comparative DIS-advantage". What Arnold is suggesting is to to seek "comparative advantage".

Paying uncompetitive workers to remain idle is an insidiously defective strategy. That is especially true given that those payments are at once, "below subsistence wages" as you bemoan, and yet something akin to 20 or more times the prevailing unskilled GLOBAL wage rates - that led to the U.S. unemployment in the first place. Not to mention the drain on productive resources required to provide those payments.

U.S. unskilled labor has 2 insurmountably powerful economic factors working against it right now and for the future: 1.) A 2 Billion+ strong global unskilled labor force that is eager to work for 10% of the cost of prevailing (and legislated minimum) U.S. wage rate, and 2.) Technology, and it's inherent goal of replacing unskilled labor at any price.

U.S. unskilled labor has 2 very powerful economic factors working for it right now: 1.) It exists within the wealthiest country (jurisdiction) in human history, and 2.) It exists within the most socially and economically unrestricted and mobile society in human history.
(Number 2 begets number 1, by the way.)

For quite a few years now (more than just the past 5 years), U.S. policy (and expenditure) has been focused on attempting to protect unskilled labor from both of the insurmountably powerful forces working against it. While that strategy seems compassionate, it is insidious and sinister in that it propagates the notion that those prior U.S. unskilled labor jobs, at prior U.S. wage rates will someday return. They won't. Not ever. It is past time for U.S. unskilled labor to seek other work. It is available within the domestic (internal U.S.) economy, but only where global, lower cost unskilled labor can't compete simply due to lack of geographic proximity.

Geographic proximity to the extreme wealth within U.S. borders is the foundation and key to U.S. unskilled labor's potential "comparative advantage". And the social and economic mobility allowed, fostered and encouraged within the U.S. borders is the other key to unskilled labor's potential "comparative advantage".

That, I believe, is the essence of Arnold's PSST model.

Floccina writes:
The PSST model suggests that any distribution of income and wealth can be consistent with full employment.

I really cannot understand how this could not be true. Even if machines could do everything that low intelligence people could do at some point the machine cost more than the people. The machines make things affordable to the low intelligence people so they can afford to live.

Their is still plenty of work that would benefit that could be done by low intelligence people.

andy writes:

"The poor do not employ one another, because the necessities they require are produced and sold so cheaply by the rich."

So they are productive enough to earn enough to buy the cheap necessities from the rich....where is the problem?

Ghost of Christmas Past writes:

Comparative advantage or no, an individual will remain unemployed until his own little supply and demand curves cross at a price greater than his subjective value of leisure plus his gains from social welfare payments, crime, etc.

There are several minimum wages: the obvious cash wage floor set by the government, the various reservation wages of prospective workers, and the prospective employer's expected costs of employing any particular worker--which may be higher than the government wage floor because the employer has to deal with additional factors (e.g., the cost of insuring against workers' errors). When any of those is higher than the employer's expected gains from the worker's labor, unemployment will result.

Not even comparative advantage can guarantee that the "market clears" with everyone employed. When no employer will offer a particular worker a wage higher than his reservation wage, he will remain unemployed. Even personal service (e.g., working as a housemaid or footman) may not command an acceptable wage.

Even if the government wage floor is zero and social welfare payments close to nil, large-scale unemployment is still possible, as the history of industrializing countries in the 19th and 20th centuries reveals. I fully accept Prof. Kling's basic PSST argument, but further estimate that "unsustainable" patterns may persist indefinitely. I am not convinced that there "must exist" any PSST which produces full employment. Some would-be workers are simply "ZMP" under all reasonable assumptions.

Thomas DeMeo writes:

The problem is that using people has both significant costs, and even more importantly, significant risks, even at zero wage. Some of these costs and risks are inherent, and some are added by government.

There is no reason why technology can't reach a threshold where it drives costs well below this level.

Floccina writes:

One more point: Historically their were times when the income was far more uneven and yet employment was high.

Philo writes:

“I ignore the problem of the rich not wanting to spend their wealth.” What “problem” is this? The term ‘spending’ normally means *exchanging money for some non-monetary good or service*, so the phrase ‘spending one’s wealth’ (as opposed to ‘spending one’s money’) is a solecism. The rich do tend to *consume*, in a given period, a lesser percentage of their wealth than do the poor, so perhaps instead of ‘spend’ you meant to write ‘consume’. But why would restrained consumption—i.e., a propensity to *save*--be a *problem*?

Are you thinking of the possibility that the rich will *hoard money* (i.e., increase their holdings of money, as opposed to investing their assets)? This might be a problem, *ceteris paribus*, but only if the monetary authority fails to increase the money supply to accommodate the increased demand for money.

Whatever this “problem” is, you do well to ignore it!

As for “the poor do not employ one another” (cf. David S's comment, above): they do so *indirectly*, as the poor customers of McDonalds and Wal-Mart are (sort of) “hiring” the (mostly low-wage) employees of these firms. And poor customers occasionally even pay poor workers directly—barbers, pushcart vendors, street performers, etc.

Glen Smith writes:

Yes, David S, does this account for the one-off jobs and the in-kind stuff. I know for a first-hand fact that many OWSers did household chores for a few bucks or food (also for drugs and a place to stay I'd imagine).

Joe Cushing writes:

Shane Cook

"economically unrestricted"

If you look at the hertiage foundations index of economic freedom, you will find that the US is not the most economically unrestricted place in history. It was once less restricted and there are 9 other places that are currently less restricted. When I started paying attention, we were in third place. We've fallen to 10th and we just keep on falling. This is the problem. The only time unemployment exists for any time is when economic freedom is restricted.

Shayne Cook writes:

@ Joe Cushing:

Thanks for the pointer to the Heritage Foundation Index of Economic Freedom.

Note however, that it actually supports my point, rather than indicating my claim was incorrect. Yes, the overall index score for the U.S. has declined, as you note. But the overall index is derived as an average of several specific "economic freedom" factors.

If you look at those individual factors, rather than just the overall average, you'll see that U.S."Labor Freedom" is still the highest in the world. It is the U.S. "Government Spending" dominant low factor that drags down the overall average.

Precisely to the point of my comment above, "Government Spending" focused at compensating idle unskilled resources - especially at 10 times higher than prevailing global compensation rates - isn't clever. Worse, it's not even compassionate. Even worse yet, it dissuades idle unskilled labor from even availing itself of the extraordinary degree of "Labor Freedom" that still exists in the U.S.

By the way, my name is actually spelled, Shayne Cook.

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