Thursday, January 12, 2012

Hungarian Outrage

I stumbled across this lovely little post from Hungary, titled "This is why I don't give you a job"

It's full of classic unintended-consequence reminders for economists.  For example, protecting people by not letting employers fire them means that people don't get jobs in the first place.

It has some good reminders for the US as well.

Unemployment is still a huge problem. Policy after policy is advanced to do something about "jobs." Yet, like Hungary, our Government puts all sorts of barriers in to place that discourage employment.  Payroll tax, income tax, benefits regulation, workplace regulation, to say nothing of the tender ministrations of the nlrb, eeoc, osha, immigration and so on.   "Get out of the way" sounds simplistic, but there is a lot IN the way. I'd love to see a comparable, accurate post for the US. (Maybe I'll write it)

This thought also informs the "Macro vs. Micro" debate. Many macroeconomists, well exemplified by Bob Hall's AEA presidential address and subsequent work, are worried about the "zero bound" on interest rates. Because nominal interest rates can't fall (much--see German bonds) below zero, we can't have a real interest rate lower than the negative of the inflation rate, or less than about -3% right now. That is a potential "wedge," a distortion in the economy, and policies from fiscal stimulus (Christiano, Eichenbaum and Rebelo for example) to a time-varying tax on consumption (Correia, Nicolini, and Farhi for example) are proposed to deal with it.

But is this the first-order, most important "wedge" distorting the decision to hire more people? Is a -3% real rate really the Big Problem in our economy? Or are the manifest financial, legal, and regulatory barriers to hiring people a larger distortion in labor markets? I haven't jumped on the zero bound bandwagon, in part because my finance background leads me to look more at credit spreads than the level of short-term government rates, but also partly on a suspicion that the really big wedges lie elsewhere. As they surely do in Hungary.

(Hungary is a beautiful place by the way. I enjoyed three weeks in Szeged in 2010 while flying in the world gliding championships, getting to see the countryside a little closer-up than I had planned. My heart goes out to the wonderful people I met there.)


  1. So which is the biggest wedge right now?

  2. Isn't the real wedge, at the highest level, simply good ol' aggregate demand? It doesn't exist, so corporations continue to hold cash, and people continue to be unemployed. The cycle continues until an impetus breaks it.

    And did regulations, in your opinion, play any role in getting us into the current crisis? Or was it lack of financial regulation given new innovations, inability to recognize downside risks of MBSs, and expanded financial counterparties?

    Why is easing regulations the panacea to stimulate aggregate demand and get the economy moving? What key regulations would need to be addressed?

    - Booth student

    1. I'm with the Booth student. Scott Sumner has made quite a persuasive case that when people start expecting NGDP to fall, sales go down and unemployment goes up. When the Fed announces an unexpectedly loose monetary policy, the opposite happens almost immediately. If you've got graphs showing the economy changing in reaction to the expectation of other "wedges" (I recall Smoot-Hawley being a famous example of this graph-reaction technique), I'd like to see them.

  3. I would suggest that folks read Atlas Shrugged by Ayn Rand. She's a little out there on some of her thoughts but 90% of it is dead on in terms of how our country(s) are circling the bowl because of nanny state socialism. I am a self-employed individual and after having the fun of being a manager in several companies where I was more of a baby sitter than a boss, then enough was enough. I always said that I would grow my business as much as I could until I had to hire an assistant and then I would stop right there. If I need help with a client or a contract I sub out a portion of the work to an independent contractor with the appropriate expertise and when the project is over then it's so long until next time. That's just my two cents but then again that's about all I have left after taxes as a self-employed "evil capitalist".

    1. I would suggest that folks read Capital by Karl Marx. He's a little out there on some of his thoughts but 90% of it is dead on in terms of how our country(s) are circling the bowl because of exploitive hypercapitalism.

      Only joking. Marx was good at describing the symptoms of the desease, but his idea of a cure was as much nonsense as Rand's lunacy (which was based much more on her ideological anti-socialism than on any realistic observations of human nature). The solution lies somewhere in the middle between both extremes, and that's what the discussion should be about. There will always be more workers and employees than employers, and an ideal (= least of all evils) society has to provide a good living for the vast majority of the citizens (not only for those who own the productive means).

  4. So your wife comes hem ii tears. Her boss has told her to "put out or get out." No more paycheck for the mortgage, kids' colleges.

    Milton Friedman says no regs needed for the above event. I reluctantly agree.

    But really, is this so clear cut? Do you like some regs and not others?

    1. This is idiotic. No regulation is needed. Blackmail and extortion are illegal already. You don't need OSHA to get someone arrested for extortion. It's like claiming people against hate crimes legislation are in favor of hate crimes. No, they are already illegal and the opposition is based on not elevating one class or race or subsection of the populace above another.

  5. We need to think not just in terms of wages (which debates about min wage focus on) and instead the Total Cost of Employment - TCE.

    Some of the things that raise TCE have high social value. Whether it is enough social value is a different question.

    But for some number of "low wage" jobs, the TCE would be high even if actual wages fell to zero. I suggest this has the effect of making low-marginal-output people unemployable.

    Also, the qustion is not just "should we have safety, anti-discrimination, etc." rules, but also - what is the best way to have those effects? Are there mechanisms with lower TCE that still protect people from abuses by employers?

  6. We had all the same rules and regulations in 1999 and 2000 and the economy was humming. Hell, we even had the same rules and regulations in 2007 and it was humming. How can it be rules and regulations that stop employment? Why is it so difficult to admit the possibility that low aggregate demand is the ultimate culprit?

  7. Because that's not what the oligarchal masters wanna hear from their Chicago boys. Blaming nasty labour market regulations on the other hand is something they like their minions to repeat ad infinitum.

  8. That Hungarian is a nutcase (and according to recent news, that country has more than its fair share of dumb guys). All his brouhaha only makes him confused about the one point that should matter to him: Would he increase his income by hiring an additional staffer, by an amount that makes it worth the risk, yes or no?

    Under the current recession plaguing Hungary, probably no (and he really should worry about much more dangerous developments than labor laws or EU subsidies). Not even if he could hire and fire at will, with no legal limits attached. But even if the economic conditions were better, the point is: Hungarian laws (as described by him) aren't that much different from those in many other European nations, where millions of entrepreneuers successfully create jobs. If he thinks he can't work under these "restraints", he probably isn't enough of an enterprising personality. Well, maybe he should try to migrate to the more laissez faire US, if that will help him to overcome the ideological worries that hinder his decision making. His hungarian competitors will be glad to take over his share of business.


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