What High Tech Employee Shortage?

Noah Smith looks at the law of supply and demand and explains why there can't be a shortage of high tech workers.   If the demand for high tech employees exceeded the supply, wages for high tech workers would rise and the supply of workers increase in response to higher wages. However, the real wages for high tech workers have not increased since 1999.  This suggests that we have an over-supply of high tech workers.  High tech firms continue to pretend that a shortage exists so that they can bring in lower priced labor from overseas.  They are more interested in growing profits and their stock price than anything else.  The supply shortage that they use to increase the number of green card workers is a fiction.

Its easy to understand the motivation of high tech managers and their interest in increasing profits.  Smith raises a more interesting question, however, about economics.  Economists are trained to place the efficiency of the economy above all other concerns.  In fact, the recent attention that economists are devoting to the distribution of income, is a departure from the traditional focus of the profession on efficiency.  In fact, that assumption that wages are determined by the marginal productivity of labor,  precludes any discussion of income maldistribution.  According to this doctrine, everyone's wages are fairly earned by their contribution to production.  The rising share of income going to a small percent of the population suggests that more attention needs to be given to the institutional changes that have occurred in the rich nations.  The managers of our large corporations have figured out how to increase their share of the income.  This has little to do with their marginal contribution production.

Obama's Environmental Legacy Based Upon 1970 Law

This article describes how President Obama is using the Clean Air Act, which was passed in 1970, to empower the Environment Protection Agency to reshape the production of electricity.  Rules imposed by the EPA will spell the end of coal as the source of energy.  EPA rules will also require the auto industry to produce more energy efficient cars by 2025.

The Clean Air Act was approved by the Senate without a single dissent from the Republicans.  It was also used by two Republican presidents to limit air pollution.  Unfortunately, the Republican Party has been purchased by the most reactionary sectors of the US economy.  It no longer represents the national interest.  It gets the majority of its funding from the energy sector and it has been working hard to link the use of coal and oil to lower energy prices and job creation.  It has also aligned itself with a variety of media outlets to misinform the public about the risk of global warming and the impact of pollutants on the health of US citizens.

Travel Time

I will be on the road for a few days.  Will be back on the air after Thanksgiving.  Enjoy your holiday.

In Praise Of Keynes

Bloomberg Business Week provides a clear and cogent description of the macro economy that was invented by Keynes (with some help) to explain the Great Depression and the problem of restoring full employment.  Keynes viewed the economy in terms of the spending by households, business and government.  Recessions occur when one or more of these sectors decide to spend less and increase their savings.  The "Paradox of Thrift" explains why savings, which is necessary in an economy, and is regarded as a virtue when it applies to individuals,  can lower aggregate demand below the level required for full employment.  Ordinarily, the central bank can use monetary policy to restore spending and increase employment.  Conventional monetary, however, loses its effectiveness when interest rates approach zero.  Keynes explained how fiscal policy can prime the pump and create the conditions for aggregate demand to rise to the level required for full employment.  He also argued that governments should run budget surpluses in good times so that they have the means to run budget deficits during deep recessions.

The success of Keynesian theory in explaining the recovery from the Great Depression led to wide acceptance of his theory.  Some economists, particularly those at the University of Chicago, objected to Keynesian theory for a variety of reasons.  They favored a view of the economy that did not require an active role by the government.  They also wanted to explain the macro economy in the terms of the micro theories that they knew and loved.  That is, they hoped to reduce macro economic theory to micro theory as one might reduce chemistry to physics.  Over time, they won the debate within the academy and most of the research in macroeconomics was focused on the development of models based upon the key assumptions embedded in microeconomics.  They won the academic debate, but the models founded on micro economic assumptions have been less than useful in forecasting macroeconomic events like recession and inflation.  Nevertheless, economists schooled int this tradition have powerfully resisted the use of fiscal policy to restore aggregate demand.  They favor supply side theories which argue for structural changes in the economy.  Unfortunately, structural changes take a long time to implement.  Moreover, the intent is to make a nation's economy more competitive so that growth can be restored by increasing exports and running current account surpluses.  Keynes argued that this could not restore global economic growth. It is impossible for every country to run trade surpluses because the sum of surpluses and deficits must be equal to zero.

GOP Led House Panel Concludes That Government's Response To Benghazi Attack Was Appropriate

After several year of accusations about the flawed government response to the attack on the Benghazi Embassy, the GOP led House committee concluded that the government agencies and the military  responded heroically to the attack.  Apparently, the GOP and Fox News have decided that they milked that "controversy" for all that it was worth.  They may be gearing up for a rationale to impeach President Obama. In any case, Fox News, which breathlessly reported on the government mistakes at Benghazi for several years needs some fresh material.  Anything that the executive branch of the government does when it is headed by the opposition party is potentially grounds for impeachment.  It is not supposed to function without approval from the party that lost the presidential election.

Wall Street Bankers Testify At Senate Hearing On Unfair Commodity Trading

Wall Street investment banks are essentially gamblers.  They place bets on the price changes in a host of commodities, interest rates, and assets such as stocks and bonds.  Every gambler would like to have better information about the direction of prices than other gamblers.  Regulations which used to prevent banks from owning the commodities that they traded were eliminated in the Clinton Administration with strong support from Republicans.  There was no gridlock in Washington on bank deregulation which enabled investment banks to enter into previously forbidden markets.  This Senate hearing was about the potential for insider information that might enable Wall Street banks to influence the price of commodities that are actively traded on the commodity futures market. 

Three of the Wall Street investment banks acquired ownership positions in some commodity markets in which they trade.  One of the banks was fined for manipulating the energy market through its ownership position in that market.  It has exited that market, and along with one of the other banks, plans to exit other ownership positions that it has in commodity markets.  The exception is Goldman Sachs.  In particular, it was questioned extensively about its ownership of an aluminum warehouse that enabled it to influence the supply of aluminum and therefore the price of aluminum.  Large purchasers of aluminum testified that Goldman's ability to influence the supply of aluminum had an effect on the prices that they paid.  Since Goldman could influence the price of aluminum, its traders also might benefit from insider information in the futures market if they knew what its warehouse might be doing.  Goldman executives were insulted by any insinuation that its traders might have information that was unavailable to its counterparties who traded in the futures market.  They argued that there is a Chinese Wall between its traders and the aluminum warehouse which prevents the passage of information between them.  With the exception of a Senator from Ohio, who defended Goldman, a Republican Senator and the Democratic Chairman of the committee, were skeptical.

The theatrics in the Committee hearing were interesting.  The executives from JP Morgan Chase and Morgan Stanley agreed that it was not a good idea for them to own interests in the commodities that they actively traded.  The executives from Goldman Sachs, which has not agreed to exit the commodities business,  were not contrite.  They fired back at members of the committee who attacked their integrity.  In effect, they acted as if they were superior to members of the Senate who were raising questions about the potential for insider trading.  Perhaps that it is the real order in the hierarchy that exists between government and Wall Street bankers.

Robert Lucas Fails to Understand Understand the Business Cycle

Robert Lucas developed the rational expectations theory that dominated economic thinking in the US, and apparently in Germany as well.  His views are graphically illustrated by a long term trend line that shows the economy sticks close to the trend line over time.  External shocks to the economy may lead to small blips below the trend line but market forces will return the economy back to the trend line without government interference which only distorts the market.  In fact, the rational agents, that are assumed to exist in his theory will any efforts by government to stimulate the economy.  For example,  if the government runs a budget deficit they will expect that taxes must rise in the future to reduce the deficit.  Therefore, they will reduce their spending and save money to pay for the future taxes that they anticipate. 

The US economy is not operating the way Lucas imagines that it should operate.  It experienced a deep recession and it has not returned to the Lucas trend line.  In fact, most projection of future growth are below the Lucas trend line.  The shock from the Great Recession seems to have had a permanent effect on potential growth in the US.  The power of the Lucas theory, and the models of the economy that have been developed to reflect his views, have a force in economic thinking that is resistant to empirical reality.