Real Business Cycles: Altig Replies, DeLong Asks “Huh”, and What Charles Bean Said

Before I return to the RBC debate, let’s all pray that FEMA picks the pace. Our prayers all with the Gulf Coast residents and we know our nation can do better.

Back on August 21, I should have led with:

I should mention one problem with my fourth and favorite real business cycle suggestion, which is the fact that productivity seems to continue to rise.

Seems to – did I say. Well, Brad DeLong graphs the continuing increases in productivity and then asks “Huh” in reference to Robert Hall’s explanation of the 2001 recession.

Mark Thoma has added some interesting discussions and links to New Economist who notes that measuring the Keynesian output gap may be a difficult exercise and then notes a reply to Hall from Charles Bean that argues that we have been below full employment:

Thus, given current technology, there is always some degree of uncertainty in our gap measure even if it is a theoretically sound principle.

I suspect Arthur Okun had similar sentiments when he devised his rule of thumb known as Okun’s Law.

David Altig kindly replies to some of my musings, but alas I think he missed my point:

Health insurance is the largest single component of employee benefit expenditures. For a given total amount of compensation, increasing payments in the form of more insurance expenditure means less in other forms – including wages. Whether we get more or less for those higher insurance expenditures is an interesting and important question, as is the question of whether the tax code is introducing welfare-degrading means of compensating workers.

Actually, there are three issues embedded in this passage. One issue involves how one measures the cost of living. Kash has argued that the apparent rise in real compensation raises the price index problem as workers are not getting more in the form of fringe benefits even if employers are paying more. What I was trying to concede to David – who is still convinced the weakness in the labor market is not a sign of Keynesian disequilibrium – was that the Kash effect is a form of an RBC effect. But let me add one more complaint to the massive confusion known as Stephen Moore. As AB notes, the WSJ correction stated:

Fringe benefits have exploded in recent years because benefits are tax free to employees, but wages are taxed.

As AB notes:

Benefits have been tax free to employees, and wages have not, for as long as I can remember. So the ongoing taxability (to the employee) of wages but not benefits simply cannot explain why wage growth has been flat in the last 4 years.

While the tax effect does not pass muster, the Kash effect does. But I’m still not convinced that market clearing models can fully explain why the employment to population ratio remains below 63%.