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.)