Tuesday, August 23, 2011

Pick Your Poison: More Debt or Inflation?

Here is a clash of two titans named Krugman and Rogoff.  Dr. Krugman says that it is cheap for the U.S to borrow right now and that there must be some NPV>0 projects that the federal government can invest in --- so we should increase our debt to stimulate the economy now.   Rogoff appears to want to reduce our debt overhang by igniting some moderate (6%?) inflation.  The Chinese will be grateful for that!

I disagree with these esteemed scholars.  I propose that the Obama Administration adopt four policies.  First, the minimum wage is abolished.  Second,  the earned income tax credit is expanded.  Third, we sell off 3 million passports to the top international bidders immediately.  Fourth, employers can fire workers without cause.      

The combination of these four policies will reduce unemployment, increase home prices, reduce foreclosures and reduce the federal government deficit.  I don't mean to be heartless with respect to policies #1 and #4. Instead, I'm trying to make employers more comfortable with taking risks of hiring workers during uncertain times. If you know you can fire bad workers, then you will be more comfortable ex-ante hiring workers whose productivity you are uncertain about.  The labor market is a "matching market" similar to the marriage market.  Firms must decide whether a worker is a good match for a particular occupation and firm. Firms won't experiment if they anticipate that they are stuck with any worker they actually hire.


Sextus Empiricus said...

"Fourth, employers can fire workers without cause."

A substantial majority of US workers can already be fired without cause - that's the default rule in the US. The main exceptions are workers represented by a union and contract employees. Are you proposing getting rid of the exceptions, or something else?

24b365c4-ce93-11e0-a591-000bcdcb8a73 said...

This is my first visit to this website and for a second I thought it was a joke. Aside from the obvious self glorification, by the way I wrote a book "I'm awesome" available for $299.99 on Amazon, the comments are hilarious.

I'll pick on the most recent post to start. 'Abolish the minimum wage.' I get it, from a theoretical point jobs will stop moving overseas, but you forgot a few little things that also make sub-minimum wage jobs in America impossible.

All kinds of taxes (social security payment for employers, medicare, payroll, etc), the fact that factories etc would have to be rebuilt, and quite honestly American worker entitlement (when is the last time you saw anyone but a teenager working fast food). The list goes on and on.

Expand EITC, sure great I have no qualms with that.

Sell 3 million passports? LOL. What in the world would that do but provide a tiny amount of income. Aside from that how many international millionaires would be interested in such a program and what price would they pay? I'm guessing only the poorest would be interested, along with a healthy dose of terrorists, after all the very point of this argument is that America is in dire straits. We don't exactly have a million Saudi princes beating down our door to get in do we? U.S. debt is approximately 14 trillion, lets say we sell 3 million passports for $10,000 each (ridiculous but I'll give it to you). That's 30 billion, a drop in the bucket. Also I think you are confusing a passport with citizenship. After all, it's not hard to get a passport at all.

Employers can fire workers without cause? As a faculty member at UCLA you are undoubtedly a unionized employee. Maybe you've been out of the private sector for too long, but newsflash...you can fire employees easily. Last I checked employers main complaint is a lack of qualified talent, not a anchor of inept employees on the books.

All these ideas are pretty outrageous. Oh hey sounds like my other book "1+1=5". By the way the obviously self written review of your book on your profile page is awesome.

The Head Idiot said...

Regarding issue #4

Mirroring what others have said, the majority of workers in the U.S. are "at-will" means they can leave or get fired at any time. No restrictions other than normal fear of getting sued because wrongful termination, which is a whole different contentious issue.

A lot of employers are moving towards temporary/contract employees, just look at the huge growth of staffing agencies over the past 3-4 years. Firms need more workers, they get them from an agency. Don't have to worry about the whole hiring process. Need to get rid of said workers? Tell them the contract work is finished. No hard feelings.

Downside is that it costs a little more due to the agency adding it's fees (but maybe not if you factor in lack of benefits for contract employees). Upside is that they can hire and fire as need be, and temp employees usually have different expectations than full-time hires.