Liquidity Preference on the F Line

Sitting on the subway today, I was struck by the fact that the three ads immediately opposite me were all for what you might call liquidity services. On the left was an ad for “personal asset loans” from something called Borro: “With this necklace … I funded my first business,” says a satisfied customer. Next to it was an MTA ad trumpeting the fact that you can pay your fare with a credit card. And then one from AptDeco.com, which I guess is a clearinghouse for used furniture sales, with the tagline “NYC is now your furniture store.”

the Borro ad was the next one to the left

This was interesting to me because I’ve just been thinking about the neutrality of money, and what an incoherent and contradictory idea it is.

The orthodox view is that the level of “real” economic activity is determined by “real” factors — endowments, tastes, technology — and people simply hold money balances proportionate to this level of activity. In this view, a change in the money supply can’t make anyone better or worse off, at least in the long run, or change anything about the economy except the price level.

Just looking at these ads shows us why that can’t be true. First of all, the question of what constitutes money. All three of these ads are, in effect, inviting you to use something as money that you couldn’t previously. Without the specialized intermediary services being hawked here, you couldn’t pay the startup costs of a business with a necklace (what’s this thing made of, plutonium?), or pay for a subway ride with a promise to pay later, or pay for much of anything with a used couch. And this new liquidity has real benefits — otherwise, no one would be buying it, and it wouldn’t be worth the cost of producing (or advertising) it. The idea — stated explicitly in the Borro ad — is that the liquidity they provide allows transactions to take place that otherwise wouldn’t. The ability to turn a piece of jewelry or a car into cash allows people to use productive capacities that otherwise would go to waste.

And of course this makes sense. The orthodox view is that money is useful — there must be a reason that we don’t live in a barter world, and more than that, that all this huge industry of liquidity provision exists. But money, for some reason, is not subject to the same kind of smoothly diminishing returns that other useful things are. There is a fixed amount you need, you can’t get by with less, and there’s no benefit at all in having more. The problem is worse than that, since the standard view is that money demand is strictly proportionate to the volume of transactions. But, which transactions? Presumably, the amount of economic activity depends on the availability of money — that’s what it means to say that money is useful. And furthermore, as these ads implicitly make clear, some transactions are more liquidity-intensive than others. No one is offering specialized intermediary services to help you buy a hamburger. So both the level and composition of economic activity must depend on money holdings. But in that case, you can’t say that money holdings depend only on the volume of activity — that would be circular. In a world where money is used at all, it can’t be neutral. An increase in the money supply (or better, in liquidity) may raise prices, but it won’t do so proportionately, since it also enables people to benefit from increasing their money holdings (or: shifting toward more liquid balance sheet positions) and to carry out liquidity-intensive transactions that were formerly unable to.

This is a very old issue in economics. The idea that money should be neutral is as old as the discipline, and so is this line of criticism of it. You can find both already in Hume. In “Of Money,” he lays out the argument that money must be neutral in the long run, since it is just an intrinsically meaningless unit of measure; real wealth depends on real resources, not on the units we count them in. Unlike most later writers, he follows this argument to its logical conclusion, that any resources devoted to liquidity provision are wasted:

This has made me entertain a doubt concerning the benefit of banks and paper-credit, which are so generally esteemed advantageous to every nation. That provisions and labour should become dear by the encrease of trade and money, is, in many respects, an inconvenience; but an inconvenience that is unavoidable, and the effect of that public wealth and prosperity which are the end of all our wishes. … But there appears no reason for encreasing that inconvenience by a counterfeit money, which foreigners will not accept of in any payment, and which any great disorder in the state will reduce to nothing. There are, it is true, many people in every rich state, who having large sums of money, would prefer paper with good security; as being of more easy transport and more safe custody. … And therefore it is better, it may be thought, that a public company should enjoy the benefit of that paper-credit, which always will have place in every opulent kingdom. But to endeavour artificially to encrease such a credit, can never be the interest of any trading nation; but must lay them under disadvantages, by encreasing money beyond its natural proportion to labour and commodities, and thereby heightening their price to the merchant and manufacturer. And in this view, it must be allowed, that no bank could be more advantageous, than such a one as locked up all the money it received, and never augmented the circulating coin, as is usual, by returning part of its treasure into commerce.

You can find similar language in “On the Balance of Trade”:

I scarcely know any method of sinking money below its level [i.e. producing inflation], but those institutions of banks, funds, and paper-credit, which are so much practised in this kingdom. These render paper equivalent to money, circulate it throughout the whole state, make it supply the place of gold and silver, raise proportionably the price of labour and commodities, and by that means either banish a great part of those precious metals, or prevent their farther encrease. What can be more shortsighted than our reasonings on this head? We fancy, because an individual would be much richer, were his stock of money doubled, that the same good effect would follow were the money of every one encreased; not considering, that this would raise as much the price of every commodity, and reduce every man, in time, to the same condition as before. …

It is indeed evident, that money is nothing but the representation of labour and commodities, and serves only as a method of rating or estimating them. Where coin is in greater plenty; as a greater quantity of it is required to represent the same quantity of goods; it can have no effect, either good or bad, taking a nation within itself; any more than it would make an alteration on a merchant’s books, if, instead of the Arabian method of notation, which requires few characters, he should make use of the Roman, which requires a great many.

From this view — which is, again, just taking the neutrality of money to its logical conclusion — services like the ones being advertised on the F train are the exact opposite of what we want. By making more goods usable as money, they are only contributing to inflation. Rather than making it easier for people to use necklaces, furniture, etc. as means of payment, we should rather be discouraging people form using even currency as means of payment, by reducing banks to safe-deposit boxes.

That was where Hume left the matter when he first wrote the essays around 1750. But when he republished “On the Balance of Trade” in 1764, he was no longer so confident. [1] The new edition added a discussion of the development of banking in Scotland with a strikingly different tone:

It must, however, be confessed, that, as all these questions of trade and money are extremely complicated, there are certain lights, in which this subject may be placed, so as to represent the advantages of paper-credit and banks to be superior to their disadvantages. … The encrease of industry and of credit … may be promoted by the right use of paper-money. It is well known of what advantage it is to a merchant to be able to discount his bills upon occasion; and every thing that facilitates this species of traffic is favourable to the general commerce of a state. But private bankers are enabled to give such credit by the credit they receive from the depositing of money in their shops; and the bank of England in the same manner, from the liberty it has to issue its notes in all payments. There was an invention of this kind, which was fallen upon some years ago by the banks of Edinburgh; and which, as it is one of the most ingenious ideas that has been executed in commerce, has also been thought advantageous to Scotland. It is there called a Bank-Credit; and is of this nature. A man goes to the bank and finds surety to the amount, we shall suppose, of a 1000 pounds. This money, or any part of it, he has the liberty of drawing out whenever he pleases, and he pays only the ordinary interest for it, while it is in his hands. … The advantages, resulting from this contrivance, are manifold. As a man may find surety nearly to the amount of his substance, and his bank-credit is equivalent to ready money, a merchant does hereby in a manner coin his houses, his household furniture, the goods in his warehouse, the foreign debts due to him, his ships at sea; and can, upon occasion, employ them in all payments, as if they were the current money of the country.

Hume is describing something like a secured line of credit, not so different from the services being advertised on the F line, which also offer ways to coin your houses and household furniture. The puzzle is why he thinks this is a good thing. The trade credit provided by banks, which is now “favourable to the general commerce of the state,” is precisely what he was trying to prevent when he wrote that the best bank was one that “locked up all the money it received.”Why does he now think that increasing liquidity will stimulate industry, instead of just producing a rise in prices that will “reduce every man, in time, to the same condition as before”?

You can’t really hold it against Hume that he never resolved this contradiction. But what’s striking is how little the debate has advanced in the 250 years since. Indeed, in some ways it’s regressed. Hume at least drew the logical conclusion that in a world of neutral money, liquidity services like the ones advertised on the F train would not exist.

[1] I hadn’t realized this section was a later addition until reading Arie Arnon’s discussion of the essay in Monetary Theory and Policy from Hume and Smith to Wicksell. I hope to be posting more about this superb book in the near future.

Innovation in Higher Ed, 1680 Edition

Does anybody read Bagehot’s Lombard Street any more? You totally should, it’s full of good stuff. It’s baffling to me, as a sometime teacher of History of Economic Thought, that most of the textbooks and anthologies don’t mention him at all. Anyway, here he’s quoting Macaulay:

During the interval between the Restoration and the Revolution the riches of the nation had been rapidly increasing. Thousands of busy men found every Christmas that, after the expenses of the year’s housekeeping had been defrayed out of the year’s income, a surplus remained ; and how that surplus was to be employed was a question of some difficulty. In … the seventeenth century, a lawyer, a physician, a retired merchant, who had saved some thousands, and who wished to place them safely and profitably, was often greatly embarrassed. … Many, too, wished to put their money where they could find it at an hour’s notice, and looked about for some species of property which could be more readily transferred than a house or a field. A capitalist might lend … on personal security : but, if he did so, he ran a great risk of losing interest and principal. There were a few joint-stock companies, among which the East India Company held the foremost place : but the demand for the stock of such companies was far greater than the supply. … So great was that difficulty that the practice of hoarding was common. We are told that the father of Pope, the poet, who retired from business in the City about the time of the Revolution, carried to a retreat in the country a strong-box containing near twenty thousand pounds, and took out from time to time what was required for household expenses…

The natural effect of this state of things was that a crowd of projectors, ingenious and absurd, honest and knavish, employed themselves in devising new schemes for the employment of redundant capital. It was about the year 1688 that the word stock-jobber was first heard London. In the short space of four years a crowd of companies, every one of which confidently held out to subscribers the hope of immense gains, sprang into existence… There was a Tapestry Company, which would soon furnish pretty hangings for all the parlors of the middle class and for all the bedchambers of the higher. There was a Copper Company, which proposed to explore the mines of England, and held out a hope that they would prove not less valuable than those of Potosi. There was a Diving Company, which undertook to bring up precious effects from shipwrecked vessels, and which announced that it had laid in a stock of wonderful machines resembling complete suits of armor. In front of the helmet was a huge glass eye like that of Polyphemus ; and out of the crest went a pipe through which the air was to be admitted. … There was a society which undertook the office of giving gentlemen a liberal education on low terms, and which assumed the sounding name of the Royal Academies Company. In a pompous advertisement it was announced that the directors of the Royal Academies Company had engaged the best masters in every branch of knowledge, and were about to issue twenty thousand tickets at twenty shillings each. There was to be a lottery : two thousand prizes were to be drawn; and the fortunate holders of the prizes were to be taught, at the charge of the Company, Latin, Greek, Hebrew, French, Spanish, conic sections, trigonometry, heraldry, japanning, fortification, book-keeping, and the art of playing the theorbo.

Many of Macaulay’s examples, which I’ve left out here, are familiar, thanks to Charles Mackay and more recent historians of financial folly. (Including everyone’s favorite, the company that raised funds “for an Undertaking which in due time shall be revealed.”) The line about Pope is also familiar, at least to reader of The General Theory: Keynes cites it as an illustration of the position of the wealth-holder in a world where the rentier had been successfully euthanized. But I, at least, had never realized that the diving suit was a product of the South Sea bubble. And I’d never heard of this spiritual ancestor of Chris Whittle and Michelle Rhee.

It would be interesting to learn more about the claims that were made for this company, and what happened to it. Alas, Google is no help. Although, “Royal Academies Company” turns out to be a weirdly popular phrase among the Markov-chain text generators that populate fake spam blogs. (Seriously, guys, this is poetry.) We can only hope that today’s enterprises that promise to give gentlemen a liberal education on low terms (or at least an education in japanning and/or ski area management) will vanish as ignominiously.

Strange Defeat: An Exchange

My EPW article with Arjun prompted an interesting exchange with Parag Waknis. Since the letters, like the article, are behind a paywall, I’m reposting them here, below the fold. Waknis’ letter is first, followed by our response.

Austerity or Fiscal Stimulus? On Modern Macroeconomics and the Importance of Context

Parag Waknis, Assistant Professor of Economics, UMass Dartmouth.

Email: parag.waknis@umassd.edu

This discussion refers to the article titled, “Strange Defeat” by J W Mason and Arjun Jayadev in the Economic and Political Weekly, August 10, 2013 Vol. 48 No. 32. Though in general, the paper rightly points out the similarities in the New Keynesian and New Classical macroeconomics and the prescriptions that follow from them concerning austerity vs. fiscal stimulus, it fails to highlight the importance of context in resolution of such debates. According to me the austerity issue in the European Union (EU) has to be treated differently than in the US and certainly different in countries like India and there is a good amount of literature in modern macroeconomics itself that provides justification for this approach.

Also, it should be noted that the tendency to immediately dismiss the idea of dynamic optimizing agents as absurd, however tempting, only comes at the cost of clarity and rigor. If plausibility of such assumptions is to be questioned, then why not question the analysis based simply on macroeconomic aggregates with no regard to the process of their emergence! I think, as a social scientist, one has to have some faith in people’s ability of making choices and that they have some agency. However, once we do that policy prescriptions cannot be made without considering how people would react to it- a point, which simplistic analysis based on Hicks-Hansen IS-LM or AS-AD framework seems to so often miss[1].

Austerity vs. Fiscal Stimulus- Importance of Context:

Let us take the example of the EU debt crisis. The fact that EU is a monetary union but not a fiscal union creates inherent instability in the system and I think that the EU debt crisis is just its logical consequence. Ideally, Greece should not have been able to borrow at the interest rate Germany is able to borrow. However, in the pre housing crisis world, creditors treated the debt issued by these countries at the same level and corrected their perceptions only after the crisis (Martin & Waller 2011). Without a fiscal union such free riding by members, otherwise not having creditworthiness to borrow at a lower rate, is bound to happen. Hence, the question of an appropriate policy in this context becomes important. Should we allow such free riding or take away each member’s individual right to issue bonds and just float Eurobonds? The answer I guess depends on how far do the EU members want to take the idea of a union. As argued by Sargent (2012) for a monetary union to be successful it also needs to be a fiscal union. In fact, I think that is an economic definition of a country- a fiscal and a monetary union.

Does that make austerity good for every country? Let us first talk about the US. In a couple of influential papers, Valerie Ramey addresses this issue. Based on theoretical work, aggregate empirical estimates from the United States, and cross-locality estimates, Ramey (2011a) shows that for a temporary, deficit-financed increase in government purchases, the expenditure multiplier estimates are between 0.80- 1.5 and based on a narrative methodology of identifying government spending shocks, Ramey (2011b) shows them to be between 0.6-1.2. These estimates mean that not much can be expected through stimulus spending, at least in the US, because a dollar spent by the US government either crowds out private consumption and investment or at best adds 50 cents to the real GDP.

What about the monetary policy? There is not much hope from this front either. The fact that the Federal Reserve currently pays a positive interest on reserves and has kept the federal funds rate (the US counterpart to call money rate in India) hovering at zero means that any swap of debt through quantitative easing is not going to do much in terms of increasing the spending in the economy (Williamson 2012). Most of the funds that the Fed is releasing in the system just stay put as reserves because short term lending is not profitable. So as a plausible alternative, it might be a good idea to look at some tax or other supply side incentives to create jobs or to stimulate investment spending. There is also the issue of fixing the financial system that still needs to be effectively addressed despite the passing of Dodd-Frank Act.

Where does this leave the developing countries on the question of appropriate fiscal and monetary policy? To answer this question we should look at the unique features of developing countries that separate them from developed countries. I think these features provide a sufficient rationale for running government deficits in developing countries like India. One such factor is presence and size of the informal sector. If the informal sector is substantial then the ability to raise tax revenues from it is limited and then a viable alternative is an inflation tax. This public finance motive has been shown to account for cross-country dispersion of inflation rates quite well (Koreshkova 2006).

According to Ghate, Pandey & Patnaik (2013), private consumption expenditure in India is more variable than the real GDP at business cycle frequencies. This is in contrast to the US and other developed countries where consumption is bit less volatile than real GDP. These differences imply that unlike consumers in the US, consumers in India seem to be less able to smooth consumption suggesting a lack or substantial inequity in access to credit markets. In such situations, government expenditure might provide an opportunity to smooth consumption. Expenditure on employment support schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA), which has been argued to be influential in reducing poverty from 2004 to 2013 (Kotwal & Sen2013), are a case in point.

These intellectual justifications come with some caveats though. It has been highlighted time and again that a large part of inflation in countries like India is a supply side phenomenon putting a limitation on the ability to control or alleviate inflation through just monetary policy or reduced government spending. Add to these the pressures of maintaining stability in the foreign exchange market and policy conundrum just worsens because of the exchange rate pass through (Bhattacharya, Patnaik and Shah, 2011). Also, government’s intertemporal budget constraint is not merely a figment of imagination of New Classical macroeconomists. It does bind at some point as clearly shown by the case of Zimbabwe recently. The only way to give some incentives to the creditors for a debt rollover is robust economic growth. So what should be the optimal policy given these benefits and costs of government spending or should the fiscal and monetary authorities continue relying on discretionary responses only to address pertinent issues at a given point in time? I think that answer to this question will only come from rigorous research followed by a substantial debate on the appropriate or optimal fiscal and monetary policy mix in the Indian context.

Unemployment in Western Europe vs. US:

The authors claim that, “These core intellectual commitments of modern economics have contributed to the weakness of efforts to reduce unemployment in the US and Europe.” I am not sure if that is true either. It is by now common knowledge that many countries in Western Europe offer extremely generous unemployment benefits and higher minimum wages than the United States. This in itself is one of the reasons why many west European countries have much higher unemployment rate than the US. This outcome is well predicted by modern macroeconomics where agents choose how much to work depending on the opportunity cost of not working. Generous unemployment support systems reduce incentives to look for work (Kreuger & Muller 2009). How would this insight into people’s behavior contribute to weakness in effort to reduce unemployment? In fact it tells you exactly what needs to be done to increase employment. I think the political costs of reducing unemployment benefits are the ones that are keeping these economies back, not modern macroeconomics.

The similar seems to be the story of unemployment in the US during the Great Recession. Mulligan (2012) argues that many changes in the labor market policies that have been enacted after the 2007 recession have actually ended changing the incentives for people to work and firms to hire making this recession deepest and longest to recover. Again most of this analysis has come from a macroeconomic framework that emphasizes microfoundations.

Concluding Comments:

While it is true that certain research gains primacy as intellectual justification for policy choices, albeit even without explicit support from the authors themselves (for example Rogoff and Reinhart paper pointed by the authors), the crisis and the recession that followed have brought diverse perspectives to contribute to the debate[2]. I have tried to point out some of such research in this write up. Also, availability of large scale data sets on prices of various goods and services have helped to situate the debate on price and wage stickiness in a firm empirical ground (Klenow and Malin, 2010). Given this and the rich possibilities of improved data collection and computing power, I sincerely hope that economists keep on researching and debating theories in the light of current macroeconomic problems. I certainly do not see any defeat in it.

References

Bhattacharya Rudrani, Ila Patnaik & Ajay Shah &, 2011. "Monetary policy transmission in an emerging market setting," IMF Working Papers 11/5, International Monetary Fund.

Ghate, Chetan & Pandey, Radhika & Patnaik, Ila, 2013. "Has India emerged? Business cycle stylized facts from a transitioning economy," Structural Change and Economic Dynamics, Elsevier, vol. 24(C), pages 157-172.

Klenow, Peter J. & Malin, Benjamin A., 2010. “Microeconomic Evidence on Price-Setting,” Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284 Elsevier.

Koreshkova, Tatyana A., 2006. "A quantitative analysis of inflation as a tax on the underground economy," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 773-796, May.

Kotwal Ashok and Pranob Sen, 2013, What explains the steep poverty decline in India from 2004 to 2011? http://ideasforindia.in/article.aspx?article_id=171 accessed on August 12, 2013.

Krueger Alan B.  & Andreas Mueller, Job search and unemployment insurance: New evidence from time use data, Journal of Public Economics, Volume 94, Issues 3–4, April 2010, Pages 298-307

Martin Fernando M. & Christopher J. Waller, 2011. “Sovereign debt: a Modern Greek tragedy,” Annual Report, Federal Reserve Bank of St. Louis, pages 4-19.

Mulligan, Casey, 2012, “The Redistribution Recession- How Labor Market Distortions Contracted the Economy” Oxford University Press, New York.

Ramey Valerie A., 2011b. "Identifying Government Spending Shocks: It's all in the Timing," The Quarterly Journal of Economics, Oxford University Press, vol. 126(1), pages 1-50.

Ramey Valerie A., 2011a. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, vol. 49(3), pages 673-85, September.

Sargent Thomas J., 2012. “Nobel Lecture: United States Then, Europe Now,” Journal of Political Economy, University of Chicago Press, vol. 120(1), pages 1 – 40.

Williamson Stephen D., 2012. “New Monetarist Economics: Understanding Unconventional Monetary Policy,” The Economic Record, The Economic Society of Australia, vol. 88(s1), pages 10-21, 06.

[1] Paul Krugman has been dabbling in Kalecki’s approach along with IS-LM. However, he does not follow through to get to the implications. See Stephen Williamson’s post “Deconstructing Krugman” athttp://newmonetarism.blogspot.com/2013/07/krugman-deconstructed.html for an illuminating analysis.

[2] Carmen Reinhart and Kenneth Rogoff have responded to the criticism of their “Growth in the time of Debt” paper. Readers should take a look at it to get a balanced perspective.

We thank Parag Waknis for his comment. If nothing else, it succeeds -albeit unintentionally -in providing a fine illustration of the problems with contemporary economics that our article described.

In our article, we suggested that the methodology that has dominated economics for the last generation leaves economists unequipped to make arguments for active macroeconomic policy. Since agents know the true parameters of the distribution of future outcomes and intertemporally optimize at all points based on that, the link between current income and current expenditure, and the consequent centrality of aggregate demand, are broken. The result of this approach is that recessions and periods of high unemployment are simply assumed to be the result of optimizing choices on the part of agents. Waknis does not challenge the accuracy of this description of current economic practice; he just doesn’t see anything wrong with it.

Waknis employs a common rhetorical sleight of hand, conflating the undisputed importance of expectations and profit-seeking behavior, with one specific approach to them. Economists have always been interested in how people make choices, and analysis of aggregates has always incorporated stories about the individual behavior underlying them. What is new to the modern consensus is the idea that the only legitimate way to handle expectations, is to assume that all economic actors know the true probability distribution of all possible future events. When people like Waknis say that we must think about expectations, what they really mean is that we must not think about what happens when expectations are distorted or differ between actors, or about the concrete process through which expectations are formed.

However much this approach monopolizes the textbooks, it is not useful for describing real-world booms, cycles and crises, as Waknis himself inadvertently demonstrates. In the paragraph immediately following his lecture urging “faith in people’s ability to make choices,” he announces that investors in Europe made consistently wrong choices about the riskiness of public debt! Waknis may be right that Southern European public debt was systematically mispriced, but it is logically incompatible with the models economists use to think about government budgets, which assume that financial market participants know the true expected values of government spending and taxing across all future time.

Turning to questions of policy, it appears that Waknis does not understand what a multiplier is. He notes a range of multiplier estimates around one, and takes this to mean that increased public borrowing crowds out an equal quantity of private spending. But as anyone who has sat through an undergraduate macroeconomics course should know, what the multiplier measures is the ratio of the change in total output to the change in government output. So with a multiplier of one, there is no crowding out; government spending increases real output dollar for dollar. Under today’s conditions, most empirical economists prefer estimates at the high end of Waknis’ range; the chief economist of the IMF recently suggested a typical value “substantially greater than one.” (Blanchard and Leigh, 2013) But even lower values still mean that higher government spending will raise output and reduce unemployment. Waknis thinks he is bringing these estimates up as arguments for austerity, but he is really offering testimony for the other side. His confusion on this elementary point suggests a harsher judgment on the state of economics than anything in our original article.

Waknis’ inability to grasp the role of aggregate demand is striking, but sadly not unusual. It leads naturally to the claim that high unemployment, especially in Europe, is due to over-generous benefits to those out of work. There is an immense empirical literature on this claim, which finds the evidence for it somewhere between weak and nonexistent. (Howell et al., 2007) Indeed, the countries with the highest and most comprehensive unemployment benefits (Norway and Denmark) have substantially lower unemployment than the US (OECD, 2013). The argument also fails the test of common sense. Today, unemployment in the European Union is about five points higher than in the US. But as recently as the fall of 2009, US and EU unemployment rates were identical. Surely the European welfare state is not a fresh creation of the past four years? More fundamentally, if the rise in unemployment is due to declining “incentives to work,” it follows that newly unemployed prefer their current state of leisure to the jobs they had before. Professor Waknis ends his letter with a call for continued research. One useful contribution he might make is interviewing unemployed workers, and asking them how they are enjoying the vacations they’ve chosen. We expect he will find the answers most stimulating.

Arjun Jayadev and J. W. Mason

Works cited:

Howell, David R., Dean Baker, Andrew Glyn, and John Schmitt. “Are protective labor market institutions at the root of unemployment? A critical review of the evidence.” Capitalism and Society 2, no. 1 (2007).

Blanchard, Olivier J., and Daniel Leigh. Growth forecast errors and fiscal multipliers. No. w18779. National Bureau of Economic Research, 2013.

OECD (2013). Organisation for Economic Cooperation and Development Short-Term Labour Market Statistics : Harmonised Unemployment Rates (HURs). Available at http://stats.oecd.org/Index.aspx?QueryId=36324