1938 and Obama's employment plan
Topics: Stimulus
06 Feb 2009
From: Ervan Darnell
Many of the reasons being offered for stimulating employment are not
sufficient to make the case.
I've now heard several times (most prominently from Krugman[1]), that
1938 shows the value of deficit spending to lower unemployment. The
argument is that efforts to balance the budget in 1938 caused
unemployment to rise and the return to deficit spending in 1939 reversed
the trend (graph in [1] as well).
I'll accept that as being true, but it doesn't prove what it seems to.
It only says that when the government pays money it buys something. Of
course. It fails to answer the question: at what cost? In this
particular case (1938,1939) it might well be that the unemployment
figures would have been 21% and 15% but instead deficit spending made
them 19% and 17%. That is, deficit spending "buys" employment one year
but paying back the debt "sells" employment the next. Is that an
improvement? Not really. It's the same net amount of unemployment.
There is a psychological difference in that the bigger numbers are
scarier, and people are overreacting to them. I think that's what is
happening now (that, and over discounting the future).
There are second order effects and those are the ones that matter. The
libertarian argument is direct: government jobs programs are much less
likely to be productive than private sector jobs because the latter are
doing things people actually want done. The liberal argument is that
the near-term boost of higher spending will somehow be greater than the
long term deficit of paying for that spending. I'm not sure if that's
right or not, but it's a subtle point requiring careful justification,
and that justification is not being made. And, it needs to be compared
against the frictional productivity loss of inefficient unemployment.
One might respond that government jobs are actually an investment in
their own right. Some of them might be, but those tend to be the ones
that take time to ramp up. The near term ones aren't. Many liberals
are arguing it doesn't actually matter [e.g. 3] and all that matters is
the spending. That's a tough claim to believe. Yes, you can lower the
official unemployment numbers by paying people to do nothing useful.
But that doesn't really achieve anything. It would be better to just
extend unemployment. That what would have the advantage of paying out
less money and it would make it easier for people to transition back to
private (i.e. productive) employment as jobs become available. It would
especially reduce the risk of these short term jobs programs becoming
permanent boondoogles.
Krugman again [4]:
> Indeed. F.D.R. was able to enact Social Security in part because the
> Great Depression highlighted the need for a stronger social safety
> net. And the current crisis presents a real opportunity to fix the
> gaping holes that remain in that safety net, especially with regard to
> health care.
And, social security is a disaster. The excuse of more government aid
in the short term during the Depression left us with the largest deficit
ever, in a bankrupt Ponzi scheme. Krugman is explicitly endorsing the
same trick of using the recession as an excuse for a permanent increase
in welfare. Even if you think that's a good social policy, it clearly
lays lie to the claim that it is a counter-cyclical Keynesian stimulus
to boost employment in the short term. Not only is it meant to be
long-term, it's not likely to be short-term even since medical care is
one of the fields experiencing the lowest unemployment rate.
Returning to the cost of the jobs created and Obama's plan specifically,
his adviser confessed that:
> STEPHANOPOULOS[2]: The other substantive point that Boehner makes, he
> circulated a fax sheet, he says, if you look at $825 billion piece of
> legislation, 3 million jobs, that's $275,000 a job. Is that the most
> efficient way to create jobs?
> [Obama Senior Adviser] AXELROD: George, he's missing the fundamental
> point. We're not just spending money to create jobs, we're investing
> money to strengthen this economy. We're investing in areas like energy
> independence. We're investing in creating the classrooms of the 21st
> Century for our kids to give us the kind of education system we need.
> [etc.]
$275K/job? For an ordinary job that's about 5 years worth of
employment. That's not a thorough economic analysis accounting for
failing to account for job loss due to crowding out in the credit
markets, nor job gain due to the (claimed) spending stimulus effects,
but that Axelrod was even willing to accept the number says how pathetic
this approach is. Look at it another way, extracting that money from
the economy is the equivalent of destroying five ordinary jobs to create
one. Only a liberal could love math like that. Cato puts the actual
number at $646K/job [5], and makes other good points on how these are
the wrong jobs.
Axelrod is curiously making the same style of argument used to justify
Social Security: Q:"It's a terrible welfare program". A:"It's not
welfare, it's a retirement plan." Q:"It's a terrible retirement plan
because the net yield is very low, it introduces all sorts of economic
distortions, etc." A:"Yes, but it's actually a welfare plan." Here's
the jobs stimulus version: Q: "This is a terrible jobs program because
it destroys more jobs than it creates and it creates those jobs in
fields where not it's not needed at some future date where it's not
needed." A: "It's not about jobs, it's an investment." Q:"The
investment part of the jobs bill is mostly wasted pork barrel and more
government bureaucrats." A: "Yes, but it's a jobs stimulus, it doesn't
matter how we spend it." Only a small fraction of it goes to anything
that resembles investment. That argument stands or falls on its own.
In this bill, it's only an argumentation device, not a serious defense.
The jobs stimulus part of the "stimulus" bill will not obviously boost
the real employment rate, it will buy a short-term decrease in the
measured rate because it measures the wrong thing (nice example from
Mankiw[6]) and ignores the long-term consequences, and that will be
called success. If this sort of "stimulus" could actually help in the
long run, it needs a much better defense than the jobs one.
-----------------
[1] http://krugman.blogs.nytimes.com/2008/11/08/new-deal-economics/
Krugman is a Nobel laureate in economics who writes a prominent opinion
column for the NYT. When I'm bashing liberals by choosing him, I'm
choosing someone who is surely a fair example of the intellectual side
of liberalism.
[2] http://abcnews.go.com/ThisWeek/Inauguration/Story?id=6674014&page=3
[3] Dean Baker, co-director of the Center for Economic and Policy
Research on the News Hour:
http://www.pbs.org/newshour/bb/business/jan-june09/joblosses_01-26.html
[4] http://www.nytimes.com/2009/01/30/opinion/30krugman.html
[5] http://www.cato.org/pub_display.php?pub_id=9913
[6]
http://gregmankiw.blogspot.com/2008/12/how-not-to-stimulate-economy.html
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