Post-Keynesian Observations

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Archive for July 2009

Create Jobs Now!

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I have a conference in London starting Thursday (Association for Heterodox Economics at Kingston University) and have been busy preparing for that. But I suddenly find myself pretty much packed, so here’s a quick entry before I head off tomorrow! I wanted to draw your attention to two posts on the UMKC Dept of Economics web site, both authored by Pavlina Tcherneva.:

“Bring the Stubborn Unemployment Numbers Down Now”

(Tcherneva 1)

and

“A Message to President Obama: Stop Priming the Pump, Hire the Unemployed”

(Tcherneva 2)

What she is essentially arguing is that trying to create jobs by stimulating the macro economy (via spending and tax cuts) is too indirect. We are expecting private sector spending to pick up sufficiently to employ the unemployed or, at least, stop the layoffs. But the private sector has already failed us and is in headlong retreat. Banks, firms, and households are not likely to take any newfound tax savings or stimulus money and rush out to buy goods and services or build new physical capital (and remember from the series of lessons below that it is the latter that is the most crucial element in determining the overall level of economic activity). Money will be saved and debts paid down.

This is not to say that there will be no positive effect from the stimulus. Of course, some jobs will be saved/created, but we get very little bang for our buck. It very likely will not be enough and that may provide naysayers with the ammunition to block further efforts (which the Obama administration has generally right, but remains handicapped by the advice being proffered–a bit more about this below). Why not, argues Tcherneva (following a long line of Post Keynesian economists, including her colleague, Randy Wray) directly hire people through government works projects? She writes:

An immediate targeted intervention is precisely what Keynes would have prescribed–ambitious and creative public works projects that put the unemployed men and women to work. A number of us on this blog have long advocated large scale New Deal-type programs. If President Obama expects to meet (and possibly exceed) his job promise, targeted intervention in the form of direct job creation is in order. If he wishes to create 4 million jobs, he can immediately put 4 million people to work (recall that most New Deal programs were up and running in just a few months).

This is dead on. In this effort, I would argue that the government should find tasks that are 1) not profitable, since profitable undertakings are the realm of the private sector (there is no point in the government duplicating the efforts of the private sector by opening a chain of restaurants, for example), and 2) of obvious and accepted social benefit so that the jobs created are considered legitimate by the public. From an economic perspective, the latter is not strictly necessary, but it’s politically important and, why not? We might as well get something done we’ve all thought needed to be done, but wasn’t profitable to undertake (and therefore had not already been addressed, or addressed adequately, by the private sector).

We shouldn’t have much trouble finding projects that meet these criteria. During the FDR administration, historians were hired to, among other things, go around the country and interview the few remaining ex-slaves (all of whom had been children at the end of slavery). Their words and thoughts would have been lost forever, but they were recorded for posterity. Right now, we have the WWII generation almost gone. Who knows what stories are about to be lost forever? A far more important place jobs could be created is public education, which is constantly starved of resources (particularly right now when state governments are having to rein in spending). I don’t’ think those of us who are relatively well off have any understanding of how basic resources are in many school districts. My wife, who teaches in a working-poor neighborhood, remembers when a very controversial plan to shift funds to her area (and others like it) allowed them to finally buy carpet for their library. She said it made a huge difference in making it a quiet and comfortable place to sit and read. In terms of making jobs, keeping class sizes small and being able to pull students out for one-on-one work is terribly important, but will no doubt be among the first casualties of falling spending–hire more teachers and aids!!! This could be a source of important employment whose ultimate impact would be felt for years to come. It is an investment in our country’s future. There are many more non-profitable but socially-useful opportunities for hiring: long-term research, defense spending, infrastructure, law enforcement, education, social services, etc., etc. When we run out of social problems, then we’ll deal with that problem! Remember throughout all this that our economy absolutely and without question has the physical ability to produce plenty of goods and services for all. We have the capacity, but what we lack is a consistent means of generating sufficient jobs so that everyone can share in the output. And the private sector simply can’t do it alone. Nor can the stimulus package as currently designed.

President Obama, start hiring people now!

AN ASIDE ON ECONOMIC THEORY AND OBAMA’S ADVISORS

Keynes wrote in the General Theory, “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slave of some defunct economist.” When I read this the first time in graduate school, I didn’t buy into it. But, over the years, I have come to realize just now correct he was. While we can certainly place a lot of blame on our current woes at the feet of various policy makers, it was the economics profession that gave them the intellectual authority to act. Had economists stood up and said, “No, don’t deregulate the banking industry!” for example, then it wouldn’t have happened. Indeed, many economists rushed to approve of policies that assumed that markets are rational, efficient, benevolent, and natural.

I argued in my series of lecture posts below that this characterization of markets is faulty. I won’t go into it again here, but, generally speaking, markets are nothing more than tools. For some jobs, they are ideal; for others, they are wholly inappropriate. It’s up to use to use our reasoning powers to decide which is which (without assuming the answer ahead of time). Furthermore, markets are every bit as fickle, ignorant, and arbitrary–or consistent, well-informed, and rational–as those populating it.

Going back to my main point here, it distresses me that Obama’s economic advisors are drawn basically from the same group that approved of the earlier policies that made the financial crisis possible. Christina Romer, Timothy Geithner, and Lawrence Summers are members of the Neoclassical school of thought:

Wikipedia Entry Neoclassical Economics

Though they belong to a less orthodox strain thereof, they still have as their basic premise the idea that the market economy works well and takes care of itself. They think that events like our current recession are transitory, unusual, and eventually correct themselves. I hope that this advice does not condemn the policy coming from the Obama administration to being too little, too late. Worse still, I fear that any policy failures caused by this timidity may give ammunition to those from the hard-core camp who believe that what we need now is to retreat and let the market “correct” itself on its own. It would very quickly correct several million more jobs out of existence.

Written by rommeldak

July 7, 2009 at 1:46 am

Some Recommendations for Further Reading

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Since I have been very busy this summer and am about the leave the country for a conference, I thought I’d recommend a couple of sites in lieu of doing something myself:

UMKC Economists Blog Spot: http://neweconomicperspectives.blogspot.com/
You won’t find the Department of Economics at the University of Missouri at Kansas City on any lists of “top” economics programs, but if those rankings really counted something useful then they’d be very near the top. It’s readable and relevant.

Levy Institute: http://www.levy.org/
One of the top think tanks in the world. You can spend hours sifting through the materials (and you’ll see some overlap in personnel with UMKC).

Duncan’s Economic Blog: http://duncanseconomicblog.wordpress.com/
Duncan’s economics is very much like mine, but he actually keeps up with his blog!

Now to finish packing for London!

P.S. I did an edit of the previous post–hope it comes across more clearly now!

Written by rommeldak

July 4, 2009 at 10:12 am

Posted in Uncategorized