Search This Blog

Sunday, August 29, 2010

Making it more difficult than it needs to be

An IBD editorial nails it pretty well right here:

Jobs: Obamanomics has done more than just keep unemployment high during a modest recovery. It may also be keeping high joblessness permanent by raising the costs to businesses of hiring new workers.

July's 9.5% unemployment level was bad enough. But the real problem is that the private-sector jobs machine, which is usually going full tilt at this point in a recovery, now seems to be broken.

To many, it's becoming clear that if President Obama's radical job-killing agenda stays in place, job growth will be nonexistent.

One of America's great advantages has always been its flexible, private-sector labor markets. From 1985 to 2008, U.S. unemployment averaged 5.6%. For the six largest economies in the European Union, the average rate was 34% higher, at about 7.5%.

Yet many of those countries now have jobless rates lower than ours. Why? They've been dropping Keynesian stimulus as a strategy and moving more toward cutting spending and, in some cases, cutting taxes.

Businesses today face rising burdens — from ObamaCare, the financial overhaul, the expiration of tax cuts for entrepreneurs, the threat of new energy taxes or the surge in growth strangling regulations on business — that discourage hiring.

"The real threat to a robust recovery on the labor side," Gary Becker, a Nobel Prize-winning economist, warned recently, "has come from employer and entrepreneurial fears that once the economic environment improves, a Democratic Congress and administration will pass pro-union and other pro-worker legislation that will raise the cost of doing business and cut profits."

It's never been costlier to hire and keep a worker employed. And as ObamaCare kicks in and Bush's tax cuts expire — not to mention the huge tax hikes that will be needed to make Social Security and Medicare solvent — businesses will simply quit hiring.

This Keynes-on-steroids model has been tried before, in Europe. It didn't work. It led to permanently high levels of joblessness — what economists call structural unemployment.

A recent peer-reviewed study in Sweden found that for every 100 new jobs government creates, 114 are destroyed in the private sector. Similarly, a French study of data from OECD countries from 1960 to 2000 discovered, on average, "creation of 100 public jobs may have eliminated about 150 private sector jobs."

In short, it was a disaster that the U.S. is now duplicating. The next Congress should have no greater priority than reversing it all.

If the european statists realize that at some point the state starts to crowd out the private sector in a destructive manner, shouldn't we?

The very nature of an economy

Arnold Kling gives us his ideas about economic circumstances here: (heavily excerpted)

In the United States, the economic mystery of 2010 is the persistence of high unemployment, in spite of the application of the stimulus treatment that follows the prescription of the prevailing Keynesian orthodoxy. I wish to offer an alternative to that orthodoxy.

For the followers of John Maynard Keynes, economic activity consists of spending. When economic activity slows down, their prescription is to increase spending by government, businesses, consumers, or all three. Instead, what I like to say is that “economic activity consists of sustainable patterns of specialization and trade.” This is my mantra of macroeconomics.

Here is a simple pattern of specialization and trade: Suppose that all of us eat grain and fruit, which we could grow for ourselves. If some of us have land better for fruit trees, while others have land better for growing grain, then specialization and trading can pay off. It is inefficient to waste good tree land by growing grain on it and to waste good grain land by planting trees on it. Instead, economic activity gives all of us more to eat.

What I mean by a sustainable pattern of specialization and trade is that everyone involved would voluntarily continue to follow the pattern. In accounting terms, profits are a sign of sustainability. If the accounts show a profit, then the value of output exceeds the cost of input. If not, then the pattern is not sustainable.

As conditions change, the patterns of specialization and trade evolve. For example, improvements in transportation make new trade patterns sustainable. Recall the changes brought about by ocean-crossing sailing ships, then steamboats, then railroads, then the automobile and the airplane. As new patterns become sustainable, older patterns become unprofitable and therefore unsustainable. The truck replaced the horse-drawn cart.

Patterns of specialization and trade have become more complex over time. The example of fruit pickers and grain harvesters could have been used hundreds of years ago. But many of the jobs that form today's pattern of specialization and trade are less than 50 years old—or younger.

The contemporary pattern of specialization and trade can be described as roundabout production. I first heard the term in a course on capital theory that Alan and I took from Paul Samuelson. Samuelson was explaining the Austrian theory of capital, as articulated by Eugen von Böhm-Bawerk, who developed his analysis more than a century ago.

The idea of roundabout production is to use intermediate activities to increase final output.

The trend is for the proportion of people employed in final-stage production to get smaller and smaller. Two or three generations ago in the United States, agricultural workers and manufacturing production workers made up half of the labor force. Today, that figure is less than 10 percent. However, thanks to roundabout production, we can produce more manufactured goods and more food than ever.

Much of today's American workforce is engaged in roundabout production, which Böhm-Bawerk equated with capital. There is no longer a meaningful distinction between labor and capital. Labor is capital.

If labor is capital, then we have lost the automatic tight connection between spending and employment. Firms can vary their output with little or no variation in employment. This explains how we can have a “jobless recovery,” meaning a large percentage increase in output without a comparable percentage increase in employment. For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently. The return on an investment in workers may take as long or longer to realize as the return on investment in a machine. The return on investing in workers may be at least as uncertain as the return on investing in equipment.

The phenomenon of roundabout production suggests a story for the current recession. The economy was suddenly caught in an unsustainable pattern of production, which involved too much housing construction in the “sand states” of Florida, Nevada, and California as well as too much financial activity related to mortgages and mortgage securities.

The suddenly unsustainable housing and mortgage boom comes atop the ongoing obsolescence of various patterns of specialization, as the Internet and globalization continue to foster new forms of organization and competition. The result of the boom-bust cycle superimposed on the ongoing obsolescence is to overload the market's ability to reconfigure production patterns so that workers are fully employed.

The market needs to undertake a recalculation in order to deploy workers in a new, sustainable pattern of specialization and trade. The process involves gradual, decentralized trial and error. Firms need to be launched by entrepreneurs, who will make risky investments in employees. The failure rate will be high, but eventually the successes will have a cumulative effect that brings about more economic activity.

The challenge is made difficult by the increasing specialization of labor-capital. The problem of matching skills with needs in roundabout production is much more complex than the problem of adding or subtracting workers in final-stage production.

The Keynesian prescription for a recession is to increase government spending. Even if the resulting output is not valuable (the proverbial digging ditches and filling them in again), the thinking is that this will stimulate productive output. Again, this is based on the theory that economic activity is spending. Supposedly, spending will encourage more spending, through the “multiplier” effect.

From our more Austrian perspective, the Keynesian prescription will fail. Government spending tends to create or reinforce unsustainable patterns of production—temporary housing booms, transitory increases in auto sales, and the like. However, there is no reason to expect unsustainable patterns of production to stimulate the creation of sustainable patterns of specialization and trade. If anything, it would seem likely that government support for unsustainable patterns of production could make the market's recalculation problem more confusing. It will delay long-term recovery, rather than hasten it.

What needs to emerge are new, sustainable patterns of specialization and trade. Government does not have much incentive to create sustainable patterns of specialization and trade. In fact, the political system tends to favor subsidies to outmoded and unsustainable businesses.

Government could reduce the cost of investing in labor-capital. If it can be done in a fiscally responsible way, it would help to reduce the marginal tax rates on investment (the corporate profits tax) and employment (the payroll tax). This may require offsetting tax changes, such as eliminating the mortgage interest deduction or the deductibility of employer-provided health insurance.

On the whole, the best way to help the process of market recalculation and the creation of sustainable patterns of specialization and trade may be for government to get out of the way.

Well there are some things that might help but policy makers have chosen not to do them. Many of the things that have been done are counterproductive.

Saturday, August 21, 2010

It's not pretty to watch

My impression is that the current president is moderately bright and moderately clever in a narrow way. I see little evidence of very high intelligence or impressive breadth and depth of knowledge. Jennifer Rubin captures things rather well:
To be blunt, Obama suffers from a lifetime of others excessively praising his intellect. It insulates him from ideas and facts that conflict with his pre-existing liberal rubric (so “every economist” believed his stimulus would work). It leaves him unprepared to engage in real debate with informed opponents (e.g. the health-care summit). It skews his understanding of how geopolitics works, as he imagines that his own wonderfulness can sway adversaries and override nations’ fundamental interests (the Middle East).

It’s a deadly combination — intellectual arrogance and lack of sympatico with the public — that leads him again and again to stumble. And when his shortcomings lead to embarrassment or failure, he strikes out in frustration — at Israel, at the media, and at the American people. The image of himself clashes with the results he achieves and the reaction he inspires. No wonder he’s so prickly. You’d be, too, if everyone your entire life had told you that you were swell but now, when the chips are down and the spotlight is on, you are failing so badly in your job.

Friday, August 20, 2010

We the People vs. The Elites, yet again

Thomas Sowell holds forth:

At the time when it was written, however, the Constitution was a radical departure from the autocratic governments of the 18th century. Since it was something so new and different, the reasons for the Constitution’s provisions were spelled out in the Federalist, a collection of essays written by three of the writers of the Constitution, as a sort of instruction guide to a new product.

The Constitution was not only a challenge to the despotic governments of its time, but has been a continuing challenge — to this day — to all those who think that ordinary people should be ruled by their betters, whether an elite of blood, or of books, or of whatever else gives people a puffed-up sense of importance.

It is no coincidence that those who imagine themselves so much wiser and nobler than the rest of us should be at the forefront of those who seek to erode constitutional restrictions on the arbitrary powers of government. How can our betters impose their superior wisdom and virtue on us, when the Constitution gets in the way at every turn, with all its provisions to safeguard a system based on a self-governing people?

To get their way, the elites must erode or dismantle the Constitution, bit by bit, in one way or another. What that means is that they must dismantle America. This has been going on piecemeal over the years, but now we have an administration in Washington that circumvents the Constitution wholesale, with its laws passed so fast that the public cannot know what is in them, its appointment of “czars” wielding greater power than Cabinet members’, without having to be exposed to public scrutiny by going through the confirmation process prescribed by the Constitution for Cabinet members.

Those ideas are captured rather well in this video: