Coordination Problem

"Treat employees like they make a difference and they will."

|Peter Boettke|

That is Jim Goodnight, CEO of SAS.  SAS just got named the #1 company to work for by Fortune, and was profiled this morning on CBS Sunday Morning, in a piece that addressed the claim that the rich have gotten richer and the poor poorer during the last 20 years.

My idea of a vibrant intellectual/academic environment fits with the description given of firms such as SAS or Google, and actually what I saw in operation at Stanford and to a considerable extent NYU. An environment where the faculty are constantly fending off offers from competing institutions because their work is widely recognized for its high quality, but who constantly choose to stay because their current environment is one that is intellectually dynamics and provides them with all the financial and non-financial benefits that can be offered anywhere else.  In short, they view the entire package of their current work environment too attractive to leave even though an alternative offer might be attractive on a particular margin of salary, prestige, office space, teaching loads, etc.. The signal of turn-over of senior faculty, or the inability to attract first-choice faculty during searches should cause departmental leaders and university administrators to "soul-search" and rethink the intellectual-work environment that is currently in existence and how to improve it because if you are unable to retain and attract those who you have identified as top flight, then it must be more than on one margin that you are falling behind.

My question is if "efficiency wages" increase productivity by both eliminating turn-over and making for a more attractive (for potential employees) and enjoyable (for existing employees) workplace, then why is this often seen as flipping the causal relationship between value and price rather than an interesting way in a dynamic world for employers to capture the opportunity for productivity gains and reward employees accordingly?

Why No Tea Parties in Europe?

Steven Horwitz

I've been doing a little reading this morning about the Greek crisis and related problems in Europe.  One take, and it makes sense to me, is that many European countries have such low fertility rates that even with some degree of immigration, they simply will not have the future population levels necessary to pay for their current deficit spending without extraordinary levels of taxation.  If each generation produces fewer children than it numbers, you have an inverted family tree and a crushing level of debt on future generations.  This requires the sorts of austerity measures being proposed in Greece and elsewhere now, lest the whole game collapse. 

Many folks have said that the US is on the same ultimately unsustainable path, just a generation or two earlier down the road.  What's interesting is that both the US and Greece have seen protests growing with respect to government policy.  Interestingly, though, in Greece, the protests are by current beneficiaries who do not want to see cuts, while here in the US, the protests, at least in the form of the various Tea Parties, have focused on the need to stop the spending now before the burden of the debt becomes the problem it has elsewhere.  

I think this distinction is related to the question I ask in my title:  why no Tea Parties in Europe?

The answer may be that with European fertility rates, there just aren't enough people who imagine they, or their descendants, will bear the burden of the debt to unite in such a way as to protest the spending orgies of the past or present.  Plus, if Europe is that much farther down the road to ruin/serfdom, it's too late for the kind of arguments the Tea Partiers have made:  Europe is already where they wish to prevent the US from going.

If I'm broadly correct, it suggests an interesting hypothesis about the Tea Partiers:  to the degree they really are concerned about the future burden of spending and debt, their membership should strongly overlap with the demographic groups most likely to have an above average number of children and grandchildren.  If the Tea Partiers are more exurban, politically conservative, religiously traditional, and likely to attend church than the average American, and it seems like they more or less are from what I've seen, then this is some evidence for the hypothesis. 

There's no Tea Parties in Europe both because they are farther down the road and because they lack a significant demographic group that is committed to above replacement fertility.  If what unites the Tea Partiers is a self-interested concern about their children and grandchildren's future, it explains their high degree of motivation to get involved and explains why they have not taken off in Europe.

Reading Hayek -- Or Why I Think Monetary Policy Based on Monetary Equilibrium Theory Might Run Into Problems in a World of Central Banking

|Peter Boettke|

Monetary Equilibrium Theory is a beautiful theory, but in a world of central banking I wonder if it can ever be implemented effectively.  And if it cannot, does it then run the risk of being discredited?  There are two impediments -- (1) inability to sort out in real time the difference between "good" and "bad" deflation, and (2) the political consequences of inflation and deflation being such as they are that there is a bias in political actors to avoid deflation at all costs.

In turns out, Hayek identified this problem: "the chief source of the existing inflationary bias is the general belief that deflation, the opposite of inflation, is so much more to be feared that, in order to keep on the safe side, a persistent error in the direction of inflation is preferable.  But, as we do not know how to keep prices completely stable and can achieve stability only by correcting any small movement in either direction, the determination to avoid deflation at any cost must result in cumulative inflation." (Constitution of Liberty, 1960, p. 330)

I have begun working on a paper with Dan Smith, which building on the idea of "robust political economy" that Pete Leeson and I developed, we are looking at the search for rules and institutions for monetary policy by the three leading classical liberal political economists of the 20th century: Hayek, Friedman, and Buchanan.  Each thought hard throughout their respective careers to find the appropriate monetary rule that would effectively bind the monetary authority.  Each were frustrated with earlier answers and this led them to continue their search.  In his 90s, James Buchanan is still searching for the appropriate monetary constitution.

Public Debt and Public Choice in the EU

~ Frederic Sautet ~

Noel Campbell over at Division of Labour points to an interesting WSJ article on EU budget rules and government behavior. EU rules require members to cap debt levels at 60% of their gross domestic product and their annual budget deficits to no more than 3%. As any student of Public Choice economics would expect, this has led to all sorts of “exotic maneuvers” aimed at meeting the rules while in fact spending more than authorized. Governments’ deceitful actions range from off balance sheet budgeting to the use of currency swaps and other derivatives “to artificially massage cash flows and liabilities” in order to meet debt and deficit thresholds.

The EU imposes rules to its members within its euro-zone to maintain (somewhat) healthy fiscal positions. But the members also decide what the rules are and how they should be enforced. There is little or no third-party enforcement in place. This goes to show that the forces of public choice are very strong in European parliamentary systems because the incentive to spend now and pay later is magnified in social democracies. It is fair to say that EU fiscal rules are just a show that no one really takes seriously. If EU elected officials really wanted to impose fiscal discipline, they would have adopted fiscal rules that truly constrain government behavior, such as tax and expenditure limits as in Colorado's Taxpayers Bill of Rights. The Old-Time Fiscal Religion is long gone in Europe (and in the US for that matter). No one really sees permanent deficit spending as immoral (let alone economically tragic). The problem for EU social democrats is that the consequences of fiscal recklessness and government bad policies cannot be avoided and Greece is but the first country to hit the wall. Others will soon follow...

The irony is that private sector firms that have engaged in this type of behavior have been pilloried and their executives faced prison time. None of that will happen to government members and parliamentarians; that’s the privilege of making the rules and enforcing them.

Addendum (March 3rd):

Read another WSJ article on the same subject making similar points: "Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country's finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules."

Rediscovering Fire

|Peter Boettke|

 That is the title of Guinevere Nell's forthcoming book on the Soviet experience.  Nell has been a frequent commentator on the blog, and spent some quality time studying and interacting with many of us at GMU and at various seminars, etc.  She has a very unique educational background and I would describe her as an intellectual pit-bull.  She tenaciously pursues her intellectual passions and her research projects.  So I am very excited to read her book on this subject --- which if I am reading Facebook correctly, was sent to the publishers and will be out soon.  This is a research topic that I care deeply about, and I am very anxious to see what she has dug up in her studies, and how she develops her argument (which I expect to be one that I am in complete sympathy with, though I do also expect to learn much from what she has done with the argument in terms of new theoretical twists and new empirical applications).

Congratulations Guinevere.

This Cannot Be Good Can It?

|Peter Boettke|

New unemployment benefit claims up.

The Keynesian Debate in the UK

|Peter Boettke|

While we have been hit hard by winter here in Virginia, things have heated up in the UK with the debate among economists on the fiscal state of affairs.  A group of leading British economists, Tim Besley, Charles Goodhart among them, published a letter in the Sunday Times of London arguing that the government had to get control of the fiscal situation or UK economic policy will loose all credibility and the economy would suffer instability and the economy recovery would be thwarted.  The fiscal framework must be credibly salvaged for the UK economy to recover, and the only way to do that is to get spending once again under control.

Of course, as soon as these words were uttered Keynesian economists from the UK and US stepped in to urge the UK government to stay the course of deficit spending as the only policy path to economic recovery.  The debate mimics earlier debates in 20th century economic history, and should in my opinion also lead to a serious debate concerning US policy among the leading economic thinkers.

Matthew Lynn provides commentary and also links to the discussion. 

Walmart vs. Whole Foods: The Great Grocery Smackdown Ends in a Draw

Steven Horwitz

In the March issue of The Atlantic, there is a fascinating article by Corby Kummer that explores Walmart's foray into organic and locally-grown foods.  Kummer is no fan of Wally World and in several aside reveals some real economic ignorance (no, the world would not be a better place if we grew our own food or bought it directly from those who did), but he also comes at the issue with an open enough mind to see the good things that Walmart has done in helping revive local agriculture in some areas.

The most interesting part, however, is the taste test.  Kummer bought the same set of ingredients from Walmart and Whole Foods and had an Austin, TX chef prepare the identical meals with each set.  He then had a group of 16 foodies compare the dishes.  The results?  Basically a draw.  He also notes, but doesn't make much of it, that the ingredients at Walmart cost $126.02 but $175.04 at Whole Foods.  If there was no major difference, in the aggregate, in the quality and flavor, why pay $50 more? 

This is yet another example of Walmart extending the consumption possibilities of the rich to the poor, as has been the ongoing trend since the Industrial Revolution.

It is Walmart's very size, so hated by so many progressives and conservatives, that has enabled it to be such a powerful player in the local/slow/organic food markets.  Yes, it's after the bottom line, but the unintended consequence of their search for new markets and profits is that they have brought higher-quality food to the masses and at 25% or more less than places like Whole Foods.  With Walmart offering a healthy array of fruits and vegetables, the claims that cheaper food makes us fatter, already cast into doubt by Charles Courtemanche and Art Carden, becomes weaker yet.

Will a piece like this reduce the whining and griping about the Evil Walmart Empire?  Doubtful.  But it should be required reading for those who blame Walmart for every American problem and who contrast it with Whole Foods. 

The March 2010 Freeman is Available

Steven Horwitz

The new issue of The Freeman is available online, and it includes contributions by Gene Callahan, Jerry O'Driscoll, and yours truly writing on "Unintended Consequences."

"The fiscal stimulus package of 2009 was a mistake. It follows that an additional stimulus package in 2010 would be another mistake."

|Peter Boettke|

That is Robert Barro writing in the Wall Street Journal.  By his calculation, we are getting $600 billion of government spending at the cost of $900 billion private sector expenditure.  Crowding out combined with inefficiency in operation, not very promising to help us reverse course on the economy.