Arnold Kling  

Be Careful What You Wish For

Acemoglu on the Economy and Ec... Contractor Cutoffs...

Nick Schulz emailed me this paragraph from the Bureau of Labor Statistics:

Eleven of the most populous metropolitan areas are composed of 34
metropolitan divisions, which are essentially separately identifiable
employment centers. In November, Detroit-Livonia-Dearborn, Mich.,
again registered the highest division jobless rate, 10.6 percent,
followed by Los Angeles-Long Beach-Glendale, Calif., and Warren-Troy-
Farmington Hills, Mich., at 8.7 percent each. Bethesda-Frederick-
Gaithersburg, Md., continued to report the lowest unemployment rate
among the divisions, 3.8 percent.

We already have lower unemployment in the D.C. area than in the rest of the country. Putting more of the economy under the control of Washington is going to exacerbate that differential.

For another argument against more government spending, see Eileen Norcross and Frederic Sautet.

job counts are taken as evidence of guaranteed economic activity. But for economic benefits to occur, it matters how jobs are created. Jobs created by the private sector result from entrepreneurial innovation and trade. This process leads to real productivity gains and higher standards of living. At the end of the day, the government cannot replicate what only private entrepreneurial activity can do

You will hear Keynesians cry over the "lost output" that results from having unemployment. That is somewhat misleading. The reason we are getting less output from home builders, mortgage securitizers, and auto makers is that we do not want so much of from them. Putting them back to work doing stuff people don't want may produce output in an accounting sense, but in economic terms it is still lost output.

Comments and Sharing

COMMENTS (13 to date)
Joe Marier writes:

Have you ever heard the construction worker phrase "backing up to the pay window"? I think that's what you're getting at, in a macroeconomic sense...

Greg Ransom writes:

It's simple micro -- explained in Hayek (1941). If market distortions in finance & interest rates rain money and resources into a group of sectors in an unsustainable fashion, you will get massive over-supply in those sectors, pushing future prices down below where they were prior to the bubble/boom. Paul Krugman calls this "phlogiston theory'.

Arnold wrote:

"The reason we are getting less output from home builders, mortgage securitizers, and auto makers is that we do not want so much of from them. Putting them back to work doing stuff people don't want may produce output in an accounting sense, but in economic terms it is still lost output."

Bill Woolsey writes:

It is great that it appears to be simple to identify the sectors where too many resources have been devoted.

Where are the sectors with the matching shortages?

Where are the sectors starved for resources including labor?

Shouldn't there be signs of growing production, rising prices and profits, and greater employment in those other sectors?

What is wrong with the alternative explanation that there has been a large increase in the demand for money?

What is wrong with the explanation that the market clearing nominal interest rates on short term, low risk assets, like currency, T-bills, and bank reserves are negative. And the current levels of the interest rates are generally slightly above zero (and zero with currency?)

It is always only a matter of imbalance only if it is assumed that the price level, including wages, is _always_ at the level where the real supply of money equals money demand.

If you want to make that argument--do so explicitly. If, instead, you will grant that the equilibrium pice level (including wages) has substantially fallen, then, at least, mention that you are calling for a general deflation as well as a sectoral shift.

Curt Gardner writes:

I don't buy the definitive stance of this claim:
"At the end of the day, the government cannot replicate what only private entrepreneurial activity can do."

Sure, some government spending is essentially "make work" that doesn't achieve much if anything in terms of productivity, etc.

But doesn't some government spending, particularly on infrastructure or 'platform' investment, such as the interstate highways or the early internet, create the conditions for big gains in the private sector?

It may be a bit of gamble since you can't always be sure that such investment will really pay off, but when it does it seems well worth it...

Curt Gardner writes:

Arnold writes: "The reason we are getting less output from home builders, mortgage securitizers, and auto makers is that we do not want so much of from them."

Or is it that we can no longer afford to pay for that output (and haven't really been able to for a number of years...). The explosion of available credit seems to have created all sorts of poor signals about what we 'need' and can afford to buy.

Alternatively, as Krugman puts it today in the NYT: "Given sufficient demand for its output, America would produce more than $30 trillion worth of goods and services over the next two years. But with both consumer spending and business investment plunging, a huge gap is opening up between what the American economy can produce and what it's able to sell."

Then he goes on to say that Obama's stimulus plan "is unlikely to close more than half of the looming output gap".

Is it possible we have too much productive capacity? Is this the result of our 'triumph over scarcity'?

Could we possibly cure this by handing out about 100 million credit cards in China, to keep the party going? (just kidding, sort of)

Scott writes:

The most recent estimates are 775 billion in stimulus to 'create' 3.5 million jobs. Why not just find 3.5 million unemployed and give them 200,000? Let them figure out what to do with it, get retrained, save it, spend it, whatever. That would likely be a more prudent and successful stimulus than all the bridges to nowhere we are about to see. This is going to be the biggest boondoggle in he history of boondoggles. Sickening.

bc writes:

I have always been a list oriented guy. How good was our list of vertical markets and new opportunities coming out of WWII? Antibiotics, jet aircraft, synthetic polymers, microwaves, computers, catalysts, super alloys, nuclear, was one hell of a rich, diverse list. Today, Moore's law is playing out, flat panel TV is big, internet is big, environment is big, bio tech is big, but our current list is not as long or as diverse as it was after WWII. Many credit Keynes and WWII as an example of how to get out of a depression/debt deflation. If that's true, focus on the list we will have after the trillions are spent.

Joe Roser writes:

The Keynesian point of view seems to make perfect sense if one assumes that unemployment causes recessions and not the other way around.

John Spencer writes:

The $700 billion (or more) stimulus package would not be much of an issue or non existent if we didn't have a $700 billion trade deficit. In fact, we were well above this when oil was $140/bbl.

Putting up trade restrictions will not work though, it could create huge issues between Countries. But we can figure out how to be more competitive so the price on the store shelves for our products are the same or lower than the price from other countries. For instance, we import a lot of machinery (packaging equipment for instance) from western Europe. Why? because we are not as good as them in this area, why because we don't have to be, we were fully employed, so why bother. Time to change things like this. It is not just stuff from China that is hurting us, it is all imports where we chose not to be competitive.

corbusier writes:

There are certain sectors in the construction industry that view itself as adding much needed value regardless of whether there is any want for them. Among many of my fellow architects, they will argue that the value they helped create in the designs of buildings that were meeting demand in the market place during the recent boom years were in reality a lot less worthwhile than the buildings the market will not bear now were it not for government subsidy.

I explore this anti-economic strain among architects in in my recent blog post:

Bill Woosley writes:

"Is it possible we have too much productive capacity? Is this the result of our 'triumph over scarcity'"

No, it is't possible that we have too much productive capacity. We have not triumphed over scarcity. If all of these various goods and services were given away, (say the unsold cars currently on the lots) I am sure that people would take them and use them.

There is never a problem of "us" not being able to afford all that we can produce. We don't have to all borrow money to afford everyting.

Production always generates an equal income. People could use substantially more consumer goods and services.

It is possible to have overcapacity in some industries, but what that means is that the scarce resourcs there could be better used to produce other good and services. That is what
costs, and profits, and losses, and unemployment
are generally about.

Do prices always adjust so that people actually want to buy the total amount that can be produced? Or could prices be wrong, so that while we can afford total production and we could use the goods, people don't want to buy that much? Is it possible to have a situation where prices cannot possibly adjust enough? Should government buy things in that situation?

These are the live questions.

Curt Gardner writes:

Bill Woolsey writes:
"No, it isn't possible that we have too much productive capacity."

I'm not fully convinced. If prices are 'wrong' then poor signals are sent to producers about how much profit is potentially available. If the price at which the market will clear is substantially lower than the price anticipated when the products were built, then probably many more products were produced than would have been at the lower price (i.e. productive capacity is ramped up 'too high'). Now maybe this is only true in certain industries (housing, autos, finance), but I have to wonder about how the generally easy access to credit for many years has distorted (i.e. propped up) prices and thus investment decisions.

There also seem to be distributional issues - perhaps in a mathmatical sense 'production always generates an equal income' - but big portions of income tend to be distributed to a small portion of the population. They don't spend all their income (nor do they need 10 or 15 times more of everything than the average person). So the 'rest of us' may need credit to buy things.

Dan H. writes:

To the extent that a Keynesian stimulus ever made sense, the main argument would be that if you have a *temporary reduction in demand due to external factors, stimulating demand might prevent the production capacity from vanishing (i.e. viable businesses going under because there's no demand), and therefore real wealth is destroyed. Then the demand returns to normal the productive capacity is gone and has to be rebuilt. So by keeping demand stable, you protect your industrial capability.

But there are so many problems with this that it's hard to know where to start. The big one is that I would not trust any central planning authority to tell me whether a reduction in demand is 'temporary', or represents a permanent shift away from a non-competitive product or industry.

Even if demand is down across the board, that does not mean that when it returns, it will all want to return to the status quo. So if you stimulus freezes the status quo instead of allowing the market to use the opportunity to do some pruning and 'creative destruction', you could wind up wasting a lot of money and pushing the economy into a less-productive position.

Finally, the Keynesian model might have some justification in a normal business-cycle recession, but the one we're in now is a structural recession. Balance sheets are out of whack, bubbles have popped, and the economy now needs to restructure. Less home building, less debt, more savings, fewer risky investments in speculative investment vehicles, etc. This restructing has to be allowed to take place if we want to get out of this mess.

People and businesses are responding rationally to the realization of debt exposure by saving money and lowering debt. This necessarily causes an economic contraction. The government's answer is to take that choice away from them by borrowing the money on their behalf and saying, "Now either spend this money, or we'll give it to someone else to spend."

The end result of this could easily be a few years of distorted price signals and confusion by the constant manipulation of the economy by the government, causing investment capital to stay on the sidelines, followed by a slow recovery that will be cut off at the knees when the budget blows out in a few years and Washington is forced to raise taxes dramatically.

That sounds surprisingly like the result of the New Deal during the depression. Except this time we have the added fun of a whole bunch of baby boomers retiring over the next ten years, demanding their Medicare and Social Security. That fiscal calamity is going to hit right about the same time that these insane multi-trillion dollar deficits push the debt to the breaking point.

Comments for this entry have been closed
Return to top