Wednesday, January 17, 2007

A Conversation with Nobel Laureate Edmund Phelps

Here it is loyal readers, the blowout event I shamelessly touted last week in a desperate attempt to drive traffic...

Tonight I was thrilled to attend a "Conversation with Edmund S. Phelps" who, of course, is the 2006 recipient of the Nobel Prize in Economics. While I promised that this would be a stupendous, not to be believed event that would make me a blogging immortal, I clearly overpromised and heretofore is my underdelivery. It was a nice event but the extent to which we got to hear from Prof. Phelps was limited due to two factors. First, there were too many of those tedious ceremonial introductions, particularly the introduction and enumeration of the research interests of nine Columbia Economics Department faculty members in attendence, who were not Ned Phelps. Second was Prof. Phelps's speaking style itself. His speaking style is pensive, deliberative and prone to digression. Clearly he is a deep thinker and not a glib, extemporaneous speaker (after all, why should he be?) so the ground covered in the time alloted was meager.

Nonetheless, obviously he had some interesting things to say.

The first question was posed by some whipper-snapper asset management professional based in New York City who wondered what he thought of Larry Summers's assessment of global capitalism relative to his assessment of capitalism. To begin with, he said, global capitalism is not synonomous with American capitalism, which is consistent with his article in the WSJ. "The working poor suffer more in the European corporatist capitalism than in American capitalism" He went on to doubt that Larry Summers had a large indictment of capitalism in mind but obviously something more nuanced, and then he said something quite interesting. Over time, he said, every group has had its ups and downs with capitalism. Now it may be the middle class that is not experiencing the full benefit yet there have been times when the working poor significantly lagged, and other times when the ownership class have taken a beating - he specifically referenced periods where stocks were depressed and returns to capital were meager. I found this explanation refreshingly odd that he accepted Summers's view but brushed it off as something that works itself out over the long haul. Here he summed up by drawing from his Rawlsian view (more on that later) to claim that "low wage people don't always have a monopoly on deprivation and frustration" and made the claim that depriving the entrepreneurial class an outlet for their expression and fulfilment, as some economic systems do, is also unjust.

Next he tackled productivity, and after some esoteric thoughts about the productivity data and productivity gaps, he claimed that he didn't see a repeat of the way the Europeans closed the productivity gap with the US from the mid 1950s-1970s. "Europe is not very good at coping with novelty," he said, fingering the European consumer as not as willing to try new things and create markets for novelty to the extent that Americans are.

Next, Prof. Phelps was asked what he meant when he said once that we've gotten so wealthy that we've lost the will to work. He went into a technical discussion how the wage rate was not the sole factor in determining the supply of labor, that it was also the income from wealth that had to be factored in. In a typical pattern, he said, a tax cut on wages would prompt more labor to be supplied to the market, a supply-side effect, which would lead to more earnings, greater savings and eventually greater income from wealth. That income from wealth would ultimately dissipate the zeal to supply labor in response to changes in wage rates. Phelps stressed that this was not to be considered too deeply, but I considered it a pretty clear explanation of the American system where many folks rise up the ladder from laborers to owners and over time supply less labor and more capital.

The conversation then moved to that bane of Rubinomics types, income inequality. Here, Phelps was quite direct. He admitted that a preponderence of University professors were egalitarians on this point but that he was a Rawlsian (which you could pick up from his article) and he summed up his view succinctly, "I am not ready to condemn an economy on the evidence of inequality, especially where the poor are constantly doing better." Not to put words in Phelps's mouth, but it was obvious that he views a rising tide lifting all boats as something to be celebrated.

Next we moved on to the role of labor unions and he told an anecdote that stressed his belief that the world of academic economists was and is divided on the role of labor unions, but he did offer that labor unions in Europe had too much power and were inhibiting economic growth there, principally through their participation in corporate governance decisions.

Finally, Phelps addressed the most topical question, that of the new minimum wage proposal's effect on employment should it become law. His first reaction, he said, would be that it would be catastrophic to employment theoretically, but that much higher state minimum wages would mean that such a federal increase's impact would be muted. In addition, he claimed that total employment might not fall as much as expected as employers substitiute mid-level employees for lower wage employees, so that the composition of employment will change. Overall though, he expects the minimum wage law to contract employment. In terms of reducing poverty, he stressed his preference for a "low wage employment subsidy" as a means of reducing poverty over minimum wage laws. It sounded alot like Milton Friedman's negative income tax but we didn't pursue that idea any further...time for cocktails.

That's it dear readers. Keep coming back!


Blogger Tax Shelter said...

I struggle whenever I read articles written by Phelps. How could someone so smart writes that way? It reminds me of the way Greenspan talks.

Did anyone ask for Phelps' opinion on the Fed's current monetary policy with respect to its heavy reliance on the Philips Curve theory?

7:51 AM  
Blogger Donny Baseball said...

No, there was no discussion of current monetary policy. Phelps briefly mentioned that he felt his Nobel was awarded based on the work he did that challenged the tradeoff mentality of the Philips Curve. Ironically, one of the hosts who introduced Prof. Phelps, committed a delicious gaffe and referred to him as Prof. Philips.

10:31 AM  

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