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Jobs Are Not Scarce

Don's most recent post brings to mind a point with which most of our regular readers will be familiar, but which always bears repeating: The idea that jobs are a scarce resource is a fallacy.

In a world of finite resources and infinite demands, there's no shortage of useful work to be done. This is why the number of jobs correlates so strongly with the size of the labor force; if someone is willing to provide labor, someone else will find a way to utilize it productively, barring third-party interference or unrealistic expectations on the part of the job seeker.

The interesting question is not the quantity of jobs, but their quality--how much they pay, what the working conditions are like, etc. And job quality is largely a function of labor productivity. If a worker is highly productive, his employer can afford to pay him well and maintain good working conditions.

So it's not jobs that are the scarce resource. What's scarce is capital--the equipment and skills necessary to make labor more productive. Any claim that something will "create jobs" without increasing the supply of capital available to enhance labor productivity is to be viewed with great suspicion. Such claims generally rely on a variant of the fallacy of the broken window.

Negative Amortization and Consumption Smoothing

I've been thinking about mortgages recently (mostly out of idle curiosity--I'm not planning on buying a house any time soon). When I first heard about interest-only and negative amortization loans, I thought they were recipes for disaster. But after some additional thought I've realized that they actually make a lot more sense than traditional mortgages.

The aspect of traditional mortgages that strikes me as suboptimal is the fact that the monthly payment is fixed. Fixed for a period of thirty years, during which inflation may reduce the real cost of the payment by a factor of two or three, and during which a combination of inflation and promotions may increase the borrower's nominal income severalfold.

In short, the payment is greatest in real terms when the borrower's income is least. From a consumption-smoothing perspective, this is precisely backwards. At the very least, the payment schedule should allow for inflation, and there's a good case to be made for (conservatively) adjusting it to allow for expected increases in real wages, as well.

I think that the ideal mortgage for most people would be one in which the monthly payment grew by 3-4% per year, or some other conservative estimate of the nominal growth rate of the borrower's income. In a 30-year loan, this would generally result in negative amortization for the first few years, but the payment would quickly grow to the point where it would exceed accrued interest and start chipping away at the principal.

I can see some potential problems with this type of loan:

1. Some people will buy houses so expensive that they can barely make the initial payments. This eliminates any margin of safety, making default almost certain if their incomes fail to grow as quickly as predicted at any point during the next 30 years. This is probably true in some cases, though the desire of lenders not to lose money should help to check this tendency.

2. Children are expensive, perhaps so much so that the amount of money available for housing expenses doesn't actually grow much over the typical person's lifetime. I'm not sure whether this is true, but it is worth noting that renters also have to deal with monthly payments that grow over time, and they seem to be able to handle it.

3. People don't save enough for retirement as it is; if smaller mortgage payments give them extra disposable income now, they'll end up consuming some or all of it. This will reduce total saving and make them even worse off in retirement. Perhaps, but stocks, particularly when held in a tax-deferred retirement account, generally give better returns than paying off a mortgage early. Paying less for your mortgage now and investing the difference has positive expected value.

More Notes from Formosa

Notes from my trip to Taipei, continued from Tuesday:

Motor scooters are very common in Taipei. With train coverage being as spotty as it is, this seems like a convenient and economical alternative to taking the bus or buying a car, but I have to admit that I'd be worried about riding a motor scooter in Taipei's traffic. I'm told that they cost about $25,000 ($750 USD). Read more »

Notes from Formosa

I just got back from a week-long trip to Taipei, Taiwan's capital and largest city. I don't have anything particularly insightful to say, but I can't charge the trip to Catallarchy's lavish expense account unless I blog about it, so here we are. I forgot my camera and couldn't take any pictures, so I'll just link to other people's pictures where appropriate. They're probably better than the ones I would have taken anyway. They're definitely better than the ones Dr. Read more »

Georgists Are Nuts---A Recycled Comment

I honestly don’t get the Georgist obsession with land. I can kind of understand Henry George’s obsession with it—once upon a time, land was wealth, and wealth was land. If you had it, you were set, and if you didn’t, you’d probably never amount to anything. Read more »

Policy and Procedure

Kevin Drum on the three rights which he believes define a decent liberal society, and why that means convicted felons should be allowed to vote:

I figure that if a country guarantees the following three rights, it's probably a pretty decent place:

  1. The right to free speech
  2. The right to a fair trial
  3. The right to vote

...There are plenty of other highly desirable rights, but these are the three cornerstones that define a decent liberal society. So here's a question: Do you think convicted felons who have served their time should be prohibited from speaking freely? Do you think they should lose the right to a fair trial? No? Then why do they lose the right to vote in 20 states?

The problem with this argument is that it fails to acknowledge the distinction between policy and procedure. Policy is the set of laws and regulations in force in a society. Things like the tax code, the welfare system, whether and for what crimes we impose the death penalty, and whether marijuana may be used for medical purposes, for recreational purposes, or not at all, are all aspects of policy. Read more »

Where\'re the Weasel Words?

Half Sigma links to an article in the New York Times about the decision by the national leadership of the Delta Zeta sorority to expel 23 or the 35 members of the DePauw University chapter, allegedly because they were too unattractive:

On the Other Hand...

It occurred to me that the issues around medical history and anonymous sperm donation for which I proposed a solution here are probably already moot. All the relevant information that could be derived from family medical history, and more, is encoded in the child's genes. Read more »

Diminishing Marginal Utility Cuts Both Ways

A familiar argument for wealth redistribution is that diminishing marginal utility means that the benefits of wealth distribution to the poor are, in the aggregate, greater than the costs to the wealthy. While I don't agree that this argument is invalid because interpersonal utility comparisons are impossible, I do think that the law of diminishing marginal utility cuts both ways. Read more »

Who\'s Your Daddy?

Over at Agoraphilia, Glenn Whitman discusses the ethical issues around anonymous sperm donation from a utilitarian perspective. The discussion is interesting (though I don't think that either total or average utilitarianism is particularly useful), but I think I have a solution (shamelessly plagiarized from my comment on Whitman's post) that could render the ethical questions moot: Read more »

The Left\'s Love-Hate Relationship With IQ

In general, the left is fairly hostile to the idea that IQ has any significant explanatory power outside of academics, particularly when it comes to things like the racial income gap or the apparent decline of social mobility in the United States. Read more »


Brad DeLong on what does and does not constitute default on the bonds in the Social Security Trust Fund*:

It depends on what kind of Social Security reform we are talking about. There's one reform in which benefits are cut and taxes are raised but the equality:

Venezuelan Deathwatch

The BBC reports:

Venezuela's National Assembly has given initial approval to a bill granting the president the power to bypass congress and rule by decree for 18 months. President Hugo Chavez says he wants "revolutionary laws" to enact sweeping political, economic and social changes. He has said he wants to nationalise key sectors of the economy and scrap limits on the terms a president can serve.


Strategies for Success

Robert Hayes, the other libertarian gadfly at Alas, has an excellent comment on Ampersand's response to The Pursuit of Happyness:

You’re quite right that it was a 1 in a million jump for Gardner, because he went from being very-lower middle class (and that mostly through his wife’s income, IIRC) to very wealthy in one jump. That’s a damn hard jump to make.

But (and this is the part we talked about in class), it’s about the only jump that many black people get to see being others of their race make when they’re growing up. Oprah makes it to billionaire status, Michael Jordan goes from wherever he started to superstar, etc. Those transitions are spectacular (and praiseworthy, when like Gardner’s, Jordan’s, Oprah’s they come from skill and brains and effort rather than luck), but they aren’t the transitions that create real social mobility. Mobility in the mass comes from people moving from lower-middle to upper-middle, or poor to lower-middle, or desperately dirt-poor to stable working poor, and so on.

There's more, and it's worth reading. But come back, because I like to think that what I have to say is worth reading, too.

This brings to mind a theme first brought to my attention by a post Patri made here back in 2005. As in poker, some strategies for success in life are riskier than others, and selection bias tends to make the high-risk strategies appear to work better than they actually do. Read more »

Nature of the Beast

Over at Alas, Maia is shocked---shocked!---to read that unions have a history of actively obstructing women's attempts to enter the workplace: Read more »