Larry Summers, in retrospect

Not really any surprises in Peter Baker's article on the White House economic team. Still slightly annoying that reappointing Bernanke and waiting so long to fill the Fed vacancies doesn't register at all, much less as clear and critical mistakes. Always breathtaking how little those who cover economics for the NYT actually know. Peter Orszag comes out looking awful -- caring about the short-term budget deficit is actually counterproductive in a severe recession/liquidity trap. Summer's ability to get others to lie for him continues to be amazing -- the White House spokesman who said Summers didn't ask for a car when others have said he did. Summers looks to have been on the right side of the Auto bailouts, Goolsbee on the wrong side (which we already knew, but is still a bit troubling, as Goolsbee still has Obama's ear).

I'm still curious how the $900 billion that Summers & Romer thought were prudent got turned into just $825 in the ask to Congress. Annoying Baker still quotes the "$800 billion stimulus" when it was actually $700 net of the AMT patch. If political considerations were really why Summers & Romer went small on the stimulus, then why didn't they do it in patches (like, insist the AMT get done separately, or put a chunk of stimulus in the budget/health care)? Or make it conditional on the economic performance? And why did they pretend for the next year and a half that they had gotten the stimulus exactly right?

The answer is, of course, that Larry Summers cares about Larry Summers. Larry Summers is brilliant -- he doesn't make mistakes of this nature. Therefore, there was to be no altering of the stimulus once it was a done deal -- even once it was clear to all that the stimulus was too small. And especially since it was clear from day 1, that would have just wounded Summer's pride all that much more. Admitting a clear mistake on what was actually a conceptually simple issue would have demystified Summer's supposed brilliance, and so he had to hang on. And that's how the Democrats lost 61 seats.

I'm actually somewhat hopeful that Obama Economic Team II will be a touch better...
but step #1 would be to move heaven and earth to get Peter Diamond confirmed. I'm not getting that vibe from the WH...

Robots and Wages...

What is the impact of Robots on Wages? Yglesias linked modeled behavior .

My take, of course, is that it's impossible to say but that if there are specific jobs robots can do, then there is likely to be short-term wage pressure on those jobs. In the long run, however, I'd discount the idea that this will necessarily have a huge impact on wage inequality. Turns out robots can probably never do the type of face-to-face, human-like interaction which will only become more valuable in the future. Jobs like being waited on, having your house cleaned, getting a massage... Jobs for which the demand will increase more than 1 for 1 with GDP per capita... (I really doubt massage chairs reduced demand for actual massages...) Second point is, robots fall into the "extremely high TFP" category generally, which means they could be subject to digital camera or computer-like price declines, quickly becoming affordable for rich and poor alike.

Long story short is that even cheap-labor replacing technological advance alone necessarily carries no implications for wage inequality. (Could go either way...)

The interesting thing from the Modeled Behavior post was the view that the income difference between the US and Mexico is only due to a change in institutions. Hence, they argue, take a housekeeper in Mexico, put her in LA, and voila, because of the better institutions in LA, she can now clean more houses because she's more productive, thanks to the unique institutions in LA, such as good traffic, that Mexico cannot replicate.

Of course, that is not the case. She would get paid more for the same work because the US is far wealthier than Mexico, and because Americans are wealthier, we can afford to pay more for a housekeeper. Also, there are relatively fewer unskilled workers in the US, so of course the demand-and-supply yield a different equilibrium. The income-level difference could, of course, be primarily a story of institutions, but it need not be the proximate cause of the wage differential any more than the wage differential between Delaware and West Virginia (at $64k to $26k, is similar to the difference between the US $45k and Mexico $15k is necessarily due to institutions. Human capital, history, trade costs, and historical trade costs could all be factors as well...

Larry No More...

This Administration just got better...

The Euro...

OK, the Euro, as a common currency, has probably not increased trade much, if at all. The basic logic -- separate fiscal authorities, and less-mobile labor markets in the US -- mean that it's clearly less desirable to have a common currency than in the US.

And yet, is this factor at the core of the European problem now? See Krugman's latest.

I tend to think this is just a small part of the problem, albeit larger for the smaller countries within Europe... Since those are higher risk countries, they get double-whammied having their currency float with Germany, meaning that they can't save themselves by devaluing in times of trouble.

But, the real problem, make no mistake, is that Jean-Claude Trichet and other European central bankers are complete fools. His big fear over the past few years has been inflation, a fear which has proven to be unfounded. Had the smaller, poorer countries been able to devalue, then Germany would be doing comparatively worse. But Germany isn't doing well, even though their currency has been much cheaper (thanks to being pegged to troubled countries), which isn't what we'd expect according to the Euro-was-a-bad-idea-and-is-at-the-heart-of-it mess...

The Euro might have been misguided, but the real idiots are Europe's monetary authorities...

Contrast this with Japan. Japan is also not doing well. Hasn't done well for nearly a generation. Should we therefore conclude that Shikoku and Tohoku, heck, the entire Inaka secede from the Yen? Actually, might not be a bad idea... But yet, that the Kanto and Kansai regions, and Japan's economy over all, have not done well imply that a good bit of the blame lies with Japan's foolishly conservative central bank, not the monetary policy decision of Chiba.