International Financial Crisis Seminar

I'm taking a seminar this semester on the International Financial Crisis with University of Michigan Professor Emeritus Robert Stern. We are reading Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan. Some of his arguments are very persuasive. I like how he presents the problems in the global economy in terms of systemic tensions. Although he doesn't exactly say it this way, my conclusions after reading some of his book is that no country in the world really knows how to shift to an economy where low-skilled labor is no longer really needed. In other words, in a world where you only need a few highly skilled people to produce the majority of goods, how do you still distribute the goods? Maybe finally, this is where communism comes in.

At the same time, perhaps the case is overstated. Clearly we still have plenty of things to do for low-skilled labor on farms and perhaps cleaning the environment. But there is much more money for skilled labor perhaps because there is not enough supply of skilled labor. At the same time, I'm not sure if this is correct because there is plenty of unemployed skilled labor as well as unskilled labor in Europe.

In Fault Lines, Rajan talks about how many financial crisis such as the Great Depression and Great Recession were related to expansions of credit for housing. Because housing itself is a necessity and that the education system in the US is funded by local taxes, housing is particularly important in the US for social mobility and neighborhood stability. It made me think about how many people make money from investments, but because of the transaction costs, it only makes sense if you have a certain amount of income. Perhaps there is a way to lower the entry costs so that there is more of a cushion for lower income households.

Where do we go from here? Unclear. I suppose we continue to muddle through.

Green Economy Labor Economics

Yesterday I applied for a research job at the UCB Institute for Research on Labor and Employment to do research on the minimum wage.

On their main page, they were spotlighting research by the Vial Center on Employment in the Green Economy. They just put out a new report that "California’s energy efficiency policies have a big job impact, but state needs to support more highly skilled and highly paid construction trades work force."

Effect of Climate Change on Economies

Here is some interesting research done at Columbia U on how increased temperature may cause reduced economic output because of changes in human behavior and reduced productivity. I think I had first-hand experience since I had to move last week when it was in the mid-90's.

In the Line of Fire : Unemployment Benefits

Some good analysis on unemployment from the WSJ. They use a graphic and some analysis about who was laid off during this recession from Professor Autor! The article is about how even though unemployment is very high, companies are having trouble hiring for a variety of reasons. Many people are less able to move during this recession because it was a housing bubble, and people either don't want to or are unable to take a loss selling their house. Some people are choosing to stay on unemployment benefits rather than take a low paying job. The deteriorating education system also seems to have caused the quality of the labor force to be lower, which makes it difficult for companies looking for people with specialized skill, especially since many companies are either unable or unwilling to pay very much. During the recession, it is mainly middle skilled workers who are laid off, who don't necessarily have the skills that companies are currently looking for.

While an obvious solutions seems to be to stop unemployment benefits, it may be a short-sighted thing to do. Stiglitz encouraged extending unemployment benefits because stopping or even reducing them would make reduce consumer spending and increase foreclosures, so even if those people got lower paying jobs, there may not be a net aggregate benefit to the economy. It may arguably help reduce government expenditures, but it may also make things worse by reducing state and local revenues.

Another obvious need is to improve the skill level of the labor force by investing in education. However, this is expensive, and I think part of the problem is also that companies also used to pay more for their workers to go to training classes, but now that financial burden needs to be borne by either the workers or government training programs. Perhaps a more efficient use of the unemployment benefits should be in the form of money for taking classes.

Stiglitz also makes a good argument that since the recession was caused by a bubble in the financial and housing markets, there is no reason that people in other sectors should be taking the hit for it, especially since real wages for the middle class have been stagnant. Income disparity has been growing the United States, implying that some have gotten rich at others' expense. The fact that the financial industry has pretty much recovered since the crash means that those who benefited are likely to keep their gains and will likely gain further since others are being pressured to take lower paying jobs.