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If you truly want to understand the Tea Party vs. Boehner split these days, there’s really only one place to go: Taiwan!

The Kauffman Foundation’s econo-blogger survey is out and chock-full of interesting stuff. With word today that the economy’s slowdown has been worse than previously thought, it’s a good time to highlight the question I asked the group.

One reason to get the debt ceiling fight behind us is that it’s an interminable bore. Another reason is we really need to focus on growth.

Basketball has a lot to teach us about economics and life. Robert Nozick understood that. In a post titled “It’s Not Just Aggregate Demand,” Tyler Cowen gets in on the basketball act and makes an excellent point:

You might hear the argument that if demand were higher, employment would be higher too.  That’s true, but consider a comparable claim.  Let’s say you were a 6’2″ basketball player with a so-so outside shot.  If you were seven feet tall, that problem wouldn’t matter so much because you could just dunk the ball.  In the meantime you could say “It’s not my shot that’s the problem, it’s my height.  If I were taller, they would all go in.”

At the end of the day, this player still has a problem with his shot, no matter how true his counterfactual.  In the macroeconomics of 2011, it is important that we understand our problems as existing along multiple margins.

Earlier in his post, Tyler mentions David Wessel’s article asking What’s Wrong With America’s Job Engine? In that article Wessel notes:

Even though the government counts 4.68 unemployed workers for every job opening, some employers insist they can’t find workers with the skills they need at wages they can afford.

Federal Reserve surveys of local economies find employers from Boston to Kansas City to San Francisco reporting difficulty in hiring workers “with specialized technical skills, particularly in the healthcare and technology sectors.”

With respect to healthcare it might have something to do with government involvement in the New Commanding Heights.

In our work on public sector pay, Jason Richwine and I have attempted to put a dollar value on the greater job security enjoyed by government employees, which acts as a free insurance policy against losing your job. Estimating the value of job security from the data is tough, however, for technical reasons outlined in our working paper on federal pay. Instead, we use an economic model, calibrated with a variety of data, to arrive at an estimate.

Our baseline result was that job security for federal government employees was equivalent to a 1.5 percent to 3 percent increase in pay. (There is some recent academic work cited in our paper showing that this may be an underestimate—a German survey found that individuals stated they would accept a more than 10 percent pay cut to receive public sector levels of job security.) Importantly, though, our baseline result assumes that federal employees who lost their jobs would, after a period of job-searching, find new employment at similar pay. However, our working paper also showed that federal workers receive a significant salary and benefits premium over similar private sector employees. This is where job security becomes particularly valuable, because it protects not only against lost income during unemployment but also against being forced into a lower paying job afterward. When this factor is accounted for, the value of job security rises to around 17 percent of pay.

As noted above, there isn’t much data to confirm or deny these results. One piece of evidence, which we cited in our paper, is that congressional employees—who do not enjoy the job protections of other federal workers—receive higher pensions in explicit compensation for their lesser job security.

But thanks to my AEI colleague Mark Perry, we have another interesting data point. In a recent post, Mark highlights the cost of private supplemental unemployment insurance for workers in different job categories. This unemployment insurance, offered by a company called Income Assure, will top up any government payments you receive so that your total income in unemployment equals half your working income. These payments last for 24 weeks, about as long as government unemployment insurance.

Significantly, supplemental unemployment insurance costs a lot more for private sector workers than it does for individuals working in “public administration,” which denotes certain classes of government employees. For instance, individuals working in “professional and business services” pay premiums 2.6 times higher than public employees for the same level of protection.

Based on these different prices, it is possible to back out the implicit value of public sector job security. I compared salaries between public and private sector workers’ net of supplemental unemployment insurance premiums sufficient to protect against all loss of income during unemployment. The difference in salaries indicates the job security premium paid in the public sector. The answer I found was around 2.4 percent, which was a right in line with our baseline results. Given that total compensation for a typical federal employee is well over $100,000, even this baseline 2.4 percent job security premium is worth several thousand dollars. When you add that it protects a job paying a wage and benefits premium, the value of public sector job security is far higher.

It would be nice to have more data, such as whether supplemental unemployment insurance premiums differ for federal employees versus those in state or local governments, and I will look into this more closely. But for now, these data confirm what we already know: better job security in public sector employment has a real value.

We have had a good deal of financial agonizing of late about whether problems with the U.S. government’s debt limit might mean a loss of status for Treasury debt so that we would no longer have a “risk-free [interest] rate.” Well, not having one is not much of a problem, because there never was a risk-free rate, or a risk-free anything else—including government debt.

Lending money to a sovereign power, which might just choose not to pay you back, has occasioned many a lender’s loss. An essential distinction is that the debt is that of the government, not of the country. Consider the bonds of Czarist Russia or the Confederate States of America.

Sovereign debt was never risk free, and financial history is replete with defaults by governments on their debt. Carmen M. Reinhart and Kenneth Rogoff (This Time Is Different) chronicle 250 such defaults since 1800. The notion that sovereign debt is “risk-free” should be considered primarily a marketing slogan for borrowing governments and bond salesmen.

European banks are staring at potentially huge losses on sovereign debt in their portfolios. This reflects a long history and much precedent: one key purpose of banks going back at least to the founding of the Bank of England in 1694 was to lend money to the government in exchange for getting charter privileges.

Reflecting this, it is commonplace to find regulatory policies and bank capital requirements written to encourage banks to hold a lot of government debt. In the United States, this was extended by regulatory policies to encourage banks to hold large quantities of the government-sponsored debt of Fannie Mae and Freddie Mac, and also of their preferred stock, in order to promote housing. These policies exacerbated the hyper-leveraging of the housing finance sector.

An irony is that the banks themselves represent indirect government debt, since their most stable funding sources are deposits guaranteed by the governments.

The lack of a risk-free anything forces us to contemplate a difficult truth. The financial universe, like the physical universe, is Einsteinian, not Newtonian. There is no absolute frame of reference. There are only many financial things, all moving with respect to each other, with constantly changing exchange rates between them, all subject to various risks and to guessable, but unknowable, uncertainties.