Posted by: theoptimisticconservative | September 28, 2010

It’s the (Policy) Structure, Stupid

Paul Krugman, Nobel-prize-winning economist, assures us in today’s op-ed that the problem with our economy and our high unemployment isn’t what other silly people are saying it is.  The silly people are saying that the problem is a mismatch between job skills, worker location, and the jobs that are on offer.  Krugman points out, in effect, that that’s just silly.  The silly “structural” analysis offered by these silly people is, well, silly.  The real problem, as Krugman points out, is “inadequate demand – full stop.”

To read Krugman’s argument, you’d think “inadequate demand” was a non-structural culprit.  He decries the “mismatched job skills” argument as structural, you see.  He debunks it basically by asserting that it’s wrong, but his point is that it is overly structural.  His title is, after all, “Structural excuses.”

For the record, I actually agree with Krugman that the job-worker mismatch argument is all wet.  Where I disagree with him is on the implication that it’s not equally structural to propound “inadequate demand” as one’s all-purpose explanation.  To invoke Krugman’s own rhetorical device, “inadequate demand is a structural explanation – full stop.”

The question begged by the “inadequate demand” analysis is, inadequate in what context?  What does it mean, “inadequate demand”?  Demand is demand.  People demand what they have the means and desire to demand.  There is an ocean-full of demand out there right now:  for personal financial security, in the face of costs being driven up by government policies, and epic uncertainty about what our tax schedules and the business climate will look like in the near future.  We have lots of demand; it’s just not demand for many of the things that used to keep Americans employed.

It takes a whole heap of ideological faith to blind an economist to reality.  The reality is, government can’t scare the people with wildly inflationary spending, punitive and secretive policies that distort gigantic sectors of the economy, and coy indecision about tax policy, without affecting the people’s economic behavior.  Current demand is exactly adequate to the concerns and expectations of the spending public.  What millions of Americans are concerned about is continuing to feed their families and keep a roof over their heads in the next 24 months.  When you don’t know what’s coming, but you do know it’s really likely to be bad, consumption goes by the wayside.

There is no way to artificially prop demand up at some “ideal” previous level – any more than there’s a way to preserve today’s industrial employment picture in amber, and guarantee that everyone who is employed doing X right now can remain employed doing X until he’s 65.  The closest you can come to maintaining the current situation is not messing around with it.   And even then, it’s going to change through the momentum of quiescent societal dynamics.

But government policy inherently messes around with current situations.  It changes what people do.  Tax something more, you get less of it.  Leave the people uncertain about what they’ll have in the bank in six months, they buy less now.  Guarantee they can’t be turned down for insurance, they wait until they need it to buy it.  It’s abstract, unrealistic “structural” thinking that supposes otherwise – that imagines it’s somehow possible to prop up union jobs and high-risk lending at the expense of small business and the non-unionized, and yet not see economy-wide consumption decline as the private sector, under assault, battens down the hatches.

We have hit the cross-over point at which the cost of government policies has become too high for the market economy to bear their burden.  Government policies restrict supply artificially, create artificial demand for what no one would willingly supply at the designated price, and make what is voluntarily supplied and willingly demanded cost more than it otherwise would.  Those are the effects government can have.  Whatever it does, government is always having one of those effects.

And some level of government is a necessity, of course.  It’s overhead for civilized human life, like paying a utility bill.  But the cross-over point is hit when the market economy of willing transactions can no longer operate in a healthy manner under the burden of government policies.  We’ve hit that point.  We have made business and employment cost so much that in too many industries, it is artificially uneconomic to attempt them.  It’s government policy that, too often, has inserted itself between our justly famous work ethic and the productive economic activity we could be engaging in.  An economy can bear only so much of a burden of politically-motivated tinkering before the people’s behavior changes.  And ours has changed.

The good news is that, in the abstract, Krugman is right.  “We aren’t suffering from a shortage of needed skills; we’re suffering from a lack of policy resolve.”  Indeed.  But the policy resolve we need – something Krugman never specifies, incidentally, in spite of his certainty about inadequate demand – is a resolve to roll back and eliminate much of the burden of policy on our economic expectations and behavior.  You want “adequate demand” – that’s the deal.

Cross-posted at Hot Air.


Responses

  1. Krugman lives large at Princeton, a storied life he shares with Van Jones, Cornell West and Toni Morrison. This is the pinnacle of American education, but hopefully the footsteps they must hear are real.

    I think much depends on the upcoming elections.

    We will see if there really is a tidal wave. It will be a tidal wave if both Carly and Meg win in California, if Harry Reid looses and the stupid Mum in sneakers is sent home too. A great victory for the small government side can be the start of a great awakening, the start of another march toward great prosperity, creativity and joy.

    If there is no tidal wave or if it is just a little roller, we will be in deep doo doo. As we learned with Goldwater, all will not be lost if November is disappointing, but, if Nancy P is able to raise her fist in victory 7 weeks from now, there will be a shudder and a shroud of misery throughout our land.

    Don’t forget to vote.

    • Do you really think a few different different politicians in D.C. will arrest the growth of the federal bureaucracy that really manages the country? Do you really think that if Carly Fiorina becomes a senator or Henry Waxman loses the next election that the various department heads in the EPA and the FDA and the NTSB and HUD and all the other initialized agencies are going to undergo some kind of epiphany and quit issuing regulations? It doesn’t matter who the president is, or who the majority in the houses of congress might be, the great federal juggernaut keeps right on rolling. http://mises.org/daily/4715

  2. Amen, my brother. Vote! Let not death itself prevent you.

    • I thought it was the Democrats who didn’t let death prevent them from voting.

      • That’s how it used to be.

        • Yea, I live in Cheekago and know about this stuff.

          If you woik for streets and san or da park distrik, you gotta make sure all the dead people and the moved people get a chance to vote. It makes for a long day but somebody’s gotta do it.

          • Well, didn’t Burke say that tradition was the democracy of the dead? A solid majority should be conservative, in that case.

  3. I shake my head when I see what Krugman writes. I’m at the point now if someone has won the Nobel prize for Peace or Economics, I automatically assume that the winner won more for having “proper” political inclinations than for anything else.

    • Check out U of Chicago’s Gary Becker, one of the good ones.

      Of all the quotations re economics, the best is “Politics rule economics and economics rule the world.” Not sure who originally said it, but I took notes about 27 years ago when I heard it from Art Laffer.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: