28
Jul
11

Demand leads to jobs, right?

My simpleminded understanding of the rationale behind Keynesian stimulus looks something like this:

Everyone’s scared because there’s a recession on, so they’re saving their money rather than spending it on stuff — which means less stuff gets bought, so less stuff gets made, so fewer people have jobs making stuff, and so on in a vicious cycle.  If we borrow money at low interest rates and give it to people, they’ll go out and buy stuff, which means more stuff will be made (to satisfy the increase in Aggregate Demand), and the stuff-makers will have to hire more people to make the stuff.  Those people will get paid to make stuff, and will therefore have more money to buy stuff, increasing AD even more and so on until we climb out of the recession and hit something not entirely unlike full-employment equilibrium.

It sounds great, but there are a few implementation issues that get glossed over.  The first one is how you get the borrowed money to the people.  Maybe you find a bunch of unemployed folks and give them Good Government Jobs digging holes and filling them back in.  Maybe you give the money to state governments and well-connected government contractors, as we tried most recently.  Or maybe you just cut everyone a check, as we tried before then.  However you make it work, you’re giving money to scared people and expecting them to spend it as if they were sanguine.  Yeah… not so much.


The next problem is the leap from “more stuff gets produced” to “more people have jobs producing stuff”.  Turns out, not so much.  Here’s a relevant graph from Arnold Kling:

And a macroeconomic puzzle:

Explain why, with unemployment over 9 percent, there has emerged the phenomenon of self-service frozen yogurt shops.

Tyler Cowen finds some additional relevant figures:

Over the past 10 years:

• The U.S. economy’s output of goods and services has expanded 19%.

• Nonfinancial corporate profits have risen 85%.

• The labor force has grown by 10.1 million.

• But the number of private-sector jobs has fallen by nearly two million.

• And the percentage of American adults at work has dropped to 58.2%, a low not seen since 1983.

Could it be that creating employment isn’t as simple a matter as simply dropping money out of a helicopter?  Could it be that improving the economy is simply too hard a problem for one person — or five hundred and thirty eight — to analyze, solve, and orchestrate, let alone sell to an apathetic audience in carefully-chosen sound bites?  Ya fuckin’ think?

(Oh, where is all that stuff coming from if the number of stuff-making people hasn’t increased?  Robots.)

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1 Response to “Demand leads to jobs, right?”


  1. 1 TMI
    July 30, 2011 at 19:10

    I’m impressed. With this post.

    The foundation of Keynesian economics is found in the marginal propensity to consume. No more, no less.

    But every economist of any stripe will tell you that the fundamentals are changed by animal spirits, those forces that we cannot imply any constancy toward. It’s hard to put a hard bar over “C” when that hard bar implies that all other forces, ceterus paribus remain unchanged. Democrats, for years, have always based their economic analysis on static assumptions, and static analysis. What happens if preference curves have an endogenous shift? Certainly, exogenaity may have some effect, but the predicted shifts of the mpc simply don’t make sense.

    C + I + G is a simple statement. Any economist, Left or RIght should be able to pronounce that if equilibrium is going to be achieved, that shifts in any of the components of GDP can give you an indication of what GDP will be. Growth rates? Shmroth rates. When GDP approaches zero, can’t economists, even Krugman, begin to offer that increases in G will lead to decreases in C or I?

    Your criticism is spot on. I don’t see a increase in productivity, since investments are down due to increased government expenditures. Yes, the mpc is still functioning, and given increased income, I’m likely to spend more rather than less. Which is especially true if I’m in the lower brackets of income.

    But, let’s think. What would I spend my money on, if I were in the lower brackets of income? Camels instead of generics. Whiskey instead of beer.

    Not much of a way to build an economy, is it?
    .


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