Wednesday, September 7, 2011

There were two gentlemen who led me into disputation, early in life. Their names are Arthur M. Okun and Arthur F. Burns. Or, the Two Arts. (Disclosure: my oldest son's middle name is Arthur.)

The importance of Professor Okun is, that he was one of the earlier economists to take a greater, modern and statistical approach to the study of economics. There are several conditions that P. Okun introduced that still effect the difference between fiscal and monetary policy.

Professor Okun came up with a statement about employment. It was a fairly simple statement, since econometrics is a school of endeavour that relies upon simple statements about economic activity. How "scientists" can come up with statements like, "propensity of belief" being a proof of a theoretical remains, to this day, beyond my ken.

Let's look at Okun's theory of employment.

Okun simply conjectured that employment had an effect on output.

Okun suggested that, as employment increases, output increased. Let's do that again. Some variables are exogenous. Some variables are endogenous.

As exogenous variables either increase, or decrease, their effects, (that is, the effects of those exogenous changes) will either affect employment, or not. At the same time, if exogenous variables didn't affect output, then, some autonomous force--neither fiscal or monetary policy--were having an effect upon whether or not economic output increased or decreased.

When you learn about math, one of the things you learn about is subtraction. Normally, when you take a subtraction question, you're asked about two numbers, and the difference between those two numbers. Like, "4 - 2 = 2."

It is somewhat easy to follow the logic of such an expression. (A mathematical expression.)

You have four. You subtract two. The difference between that which you started with, and that which was taken from you leads you to what was left with you. In this case, two.

Okun's Law follows much the same approach. In economics, we refer (as short-hand) to the economic output of a nation--GDP--with the letter y. We do this because when you spend a lot of time in front of a chalk board in front of a lot of first- or second-year college students, it's simply easier to do a two-stroke than a multiple stroke on the chalk board. (And lots of first and second year students are just as lazy as the rest of us. Let's all try to get along, okay?)

So, y is GDP. Or, domestic annual output. Or, national product. Or, national income. Or, some other metric, that takes into account all of the variables or our, or some other, national economy.

Y is something else. Sure, it looks a lot like y, but I guarantee you Y is not y. Y is a theoretical of what actural y is. With Y, you are making a statement about what y may be. Let's look at Y. Y is the "perfect" level of GDP. (Imagine, having a pre-cogniscent ability to predict perfect GDP.) What Arthur Okun said was, that the relationship of y was a statement of Y, and its relationship to employment. That is, the change of y had a relationship to the change of those who weren't employed (u).

This is pretty good stuff.

Today, most statements of econometric theses attempt to control, and explain, statements that include up to 32 different variables, or more. Given small weighting, some of these models may, indeed, express some notional expression of variability that more elegant models may miss. But bet my money on the truly elegant models, please.

Okun's model is fairly blunt:
is constant national economic output, at full employment. the "natural rate of unemployment."
"u" is the actual rate of unemployment, and
"c" is the external constant, that relates to the lag in employment and unemployment. It is external, since, to simplify examination, no changes in the endogenous variables will result in changes of y.

A lot of critics of economics tend to view this as one of the rules of economic behaviours that follow from Keynesian economics. I believe that Okun's rule is simply an earlier statement of the Laffer Curve. Arthur Okun realised that the rate of employment was more worthy of concern than any policy that claimed to increase national levels of employment. We are better off, as a national economy, when more of us are employed than when few of us are employed. Incremental changes in employment have short-term effects.

It isn't hard, at this point, to direct our attention to the efforts of the "other" Arthur.

Federal Reserve Chairman Arthur Burns also advocated policies that attempted to affect the employment rate. While questions existed around what would be the value of natural rate of unemployment) in an economy at full employment, Burns posited that that natural rate would be around four percent.

There are loads of articles and books written about Chairman Burns' proposition. The point I wish to make is, that those periods where we were at or around four to six percent rates of unemployment were periods where large, interventionist policies weren't necessary. Market adjustments in employment occur and equilibrium may have a lag. But normal lags are usually short in duration.

As we look forward with anticipation to tomorrow night's revelation from our current President, it's natural to assume that the reason why our current policies are failing to make a dent in our nation income crisis will be revealed. I don't think so.

I happen to believe that our current President is self-enamored. As would be any recent graduate of law from Harvard. I just happen to believe that our President has never had to come to grips with the fact that beyond his degree, comes a record. A record of performance.

Our President has a record.

What you choose to make of this statement is up to you.

1 comment:

MAX Redline said...

Intervention is, in most cases, a very bad thing, and prone to unintended consequences - especially where government is involved.

Why are energy prices so high (and continuing to climb)? Governmental intervention. Government says that electric utilities must acquire 25% of energy from "renewable resources" (and hydro is not considered "renewable").

Drilling for oil is disallowed; forcing dependence upon foreign sources and escalating the price-tag.

Cement companies are severely restricted because the production process emits mercury. So the companies relocate to China, hindering American employment, raising the price of building materials - and because of planetary rotation, prevailing winds move the mercury by-product to: the Americas.

These issues and many others are united in one common bond: governmental interference.