海角大神

Is unemployment an 'oversight'?

Experts clash over the true nature of the economic downturn

With the latest employment numbers looking bleak, the Usual Suspects are out in droves explaining why after spending trillions of dollars, the economy continues to sink. Leading the way is because the government has been 鈥渃oncentrating鈥� on the wrong thing: budget deficits.

Krugman writes:

I don鈥檛 mean to dismiss concerns about the long-run U.S. budget picture. If you look at fiscal prospects over, say, the next 20 years, they are indeed deeply worrying, largely because of rising health-care costs. But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits we鈥檙e running right now 鈥� deficits we should be running, because deficit spending helps support a depressed economy 鈥� are no threat at all.

And by obsessing over a nonexistent threat, Washington has been making the real problem 鈥� mass unemployment, which is eating away at the foundations of our nation 鈥� much worse.

The Keynesian explanation of what is happening is pretty straightforward, and Krugman does it on a regular basis (along with Brad DeLong and, to a lesser extent, ). Details include:

• The economy operates in a circular motion, with consumer spending propping up business activity, which in turn provides jobs for consumers so that they can continue to spend and give themselves jobs (so that they can continue to spend);
• If marginal taxes on the wealthiest people are not high enough to confiscate much, if not most, of their income, then the rich will 鈥渉oard鈥� the money and not spend enough, which slows and ultimately breaks what Reich calls the 鈥渧irtuous circle鈥� of spending;
• When that happens, government must raise tax rates on the 鈥渞ich鈥� ( that existed in 1981) in order to get money into the hands of the 鈥渕iddle class鈥� (which apparently is a creation of the State) so that the spending circle can be revived;
• At the present time, interest rates are very low, which means that the economy is in a 鈥渓iquidity trap鈥� in which the only way that the spending circle can move is via more government spending, which should be financed by borrowing, and since interest rates are low, the
• If a person makes a point of discussion that deviates from what has been presented, that person is motivated by hatred of the unemployed and wants people to lose their jobs and wants the economy to tank;
• Thus, in the end, the debate on Keynesian 鈥渟olutions鈥� ultimately is a debate on good and evil. Those who support Keynesianism are 鈥済ood鈥� and those who disagree are evil.

In the numerous columns and blog posts Krugman has written in the past few months, the theme is consistent: there can be no intellectual disagreement with Keynesian analysis because the truth of the Keynesian position is self-evident. Anything else is evil and delusional. For example, the 鈥� and others have taken is nothing more than a figment of one鈥檚 imagination:

O.K., I know what the usual suspects will say 鈥� namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. (Emphasis mine) Multiple surveys have shown that lack of demand 鈥� a lack that is being exacerbated by government cutbacks 鈥� is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.

For example, when recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?

So short-run deficits aren鈥檛 a problem; lack of demand is, and spending cuts are making things much worse. Maybe it鈥檚 time to change course?

While all of this seems to be self-evident to Krugman, there are some important things that are left out. The first is the role of the economist, who is supposed to be able to look beyond the rhetoric and the 鈥渕an on the street鈥� view that ultimately leads to the 鈥淏roken Window Fallacy.鈥� For example, the marginalist position on value is one that is not easily seen or understood by the typical layperson, who is more likely to believe that the value of a final product is determined by its cost of production.

The second is that the typical small business owner is not going to be able to relate how government 鈥渏ob-saving鈥� programs like the subsidizing of corn-based ethanol or the bailout of General Motors has diverted resources from productive to unproductive uses. Instead, the business owner is going to see how people directly are purchasing products and what it costs to make them, and then make decisions from that vantage point.

As I said before, economists are supposed to be able to take in the whole picture, or to contemplate not only what is . In other words, one should expect a journalist to concentrate on what is 鈥渟een,鈥� and to miss the aspects of the larger picture. That is excusable, even if it is irritating.

However, it is unexcusable for an economist, and especially one who has the stature of a winner of the Nobel Prize, to concentrate only on what is seen and not only to ignore those important things not seen, but then to personally attack other economists who do their real duties to examine the entire picture and declare that their motivation for doing so is that they are evil and want Americans to lose their jobs.

The truth is that Krugman鈥檚 argument is a red herring; had the Obama administration and Congress done nothing but talk about jobs and launch one employment program after another, the rate of joblessness still would be high, and the fiscal picture of this government and this country would be as bad as it is now. The U.S. economy is not doing poorly because of lack of 鈥渃oncentration鈥� by government officials, but because the government stands in the way of an economic recovery.

By bailing out the banks, by bailing out companies, by spending at record levels, and by holding down interest rates, the U.S. Government is preventing resources from moving from lower-valued to higher-valued uses. Furthermore, the government through political intimidation (see the ) and hostile rhetoric against firms that are legitimately profitable is sending the message that private enterprise is the enemy that ultimately must be replaced by state-sponsored enterprise.

There is another problem to this 鈥渙versight鈥� issue, and that is the promotion of the wrong view of a 鈥渏ob鈥� itself. As I read the Progressives on jobs, I have come to realize that they (and that includes 鈥渆conomists鈥� such as Krugman) see the 鈥渏ob鈥� solely as a transmission mechanism for income and, therefore, spending.

In other words, the actual services that one provides are irrelevant in and of themselves, or at best are secondary to the income that those providing them receive for their work. In that view, an economy is just one big circle of spending, with 鈥渟pending鈥� itself taking on a meaning that is quite removed from the actions and desires of consumers.

Spending, according to the Keynesians, is rather impersonal, and it cannot be tied to purposeful behavior by individuals. The value of 鈥渟pending鈥� is not that individuals are able to purchase goods and services in order to meet their needs, but instead is a mechanism that keeps that 鈥渧irtuous circle鈥� known as an 鈥渆conomy鈥� moving in the 鈥渞ight鈥� direction.

This is not economics; it is a mechanistic view of the world that ignores individual preferences and the actual movement of resources and factors of production. Unfortunately, people like Krugman add to the tragedy by claiming that those who look to actual economic explanations of this continuing saga by employing the tools of economic analysis do so because they are both stupid and evil. When the 鈥渓eading lights鈥� of modern academic economics claim that the employment of historically-accepted intellectual instruments is in itself 鈥渆vil,鈥� then one must wonder about the very future of this discipline.