Social Studies 50th Anniversary Symposium: Is There Hope for the Rule of Law in America?
links for 2010-09-26

The Sad Thing Is That Narayana Kocherlakota Was Supposed to Be the Smart One Among the Minnesota Economists...

...and that Bill Clinton once knew what economists to talk to to construct his talking points.

Paul Krugman:

Structure of Excuses: What can be done about mass unemployment? All the wise heads agree: there are no quick or easy answers. There is work to be done, but workers aren’t ready to do it — they’re in the wrong places, or they have the wrong skills. Our problems are “structural,” and will take many years to solve. But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act. In other words, structural unemployment is a fake problem, which mainly serves as an excuse for not pursuing real solutions.

Who are these wise heads I’m talking about? The most widely quoted figure is Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, who has attracted a lot of attention by insisting that dealing with high unemployment isn’t a Fed responsibility: “Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs,” he asserts, concluding that “It is hard to see how the Fed can do much to cure this problem.” Now, the Minneapolis Fed is known for its conservative outlook, and claims that unemployment is mainly structural do tend to come from the right of the political spectrum. But some people on the other side of the aisle say similar things. For example, former President Bill Clinton recently told an interviewer that unemployment remained high because “people don’t have the job skills for the jobs that are open”...

When jobs are open, it is because employers think that they could sell what new employees would make for a handsome price and profit. Therefore they will be eager to hire--and eager to pay what the market will bear in order to hire. If it is indeed the case that people do not have the skills for the jobs that are open, or if firms have jobs but cannot find appropriate workers, then we ought to see tight labor markets and rapidly rising wages in those occupation-region pairs where there are ample jobs.

We don't.

Both Kocherlakota and Clinton appear to be following the doctrines that French economist Jean-Baptiste Say set out in 1803: that if there is excess supply in one industry for one kind of labor, then there must be a countervailing excess demand in another industry for another kind of labor--and if unemployment stays high it is a "structural" problem because workers with the skills needed to work in the declining industry don't have the skills needed for the rising industry.

As economist Thomas Robert Malthus pointed out at the time, this argument sounds good in theory but fails in practice:

It may be said, perhaps, that the cotton trade happens to be glutted; and it is a tenet of the new doctrine on profits and demand, that if one trade be overstocked with capital, it is a certain sign that some other trade is understocked. But where, I would ask, is there any considerable trade that is confessedly under-stocked, and where high profits have been long pleading in vain for additional capital?

And Jean-Baptiste Say had come around to Malthus's view, and argued that high unemployment in Britain in 1825=6 was the result of derangement in the financial sector rather than of inadequate skills on the part of workers that kept them from satisfying excess demand for labor in expanding industries:

The Bank [of England]... ceased to put new notes into circulation...cease[d] to discount commercial bills. Provincial banks were... obliged to follow... commerce found itself deprived at a stroke of the advances on which it had counted.... As the bills that businessmen had discounted came to maturity... each was forced to use up all the resources at his disposal. They sold goods for half what they had cost. Business assets could not be sold at any price. As every type of merchandise had sunk below its costs of production, a multitude of workers were without work...

As Paul writes:

[W]hat should we be seeing if statements like those of Mr. Kocherlakota or Mr. Clinton were true?... [S]ignificant labor shortages somewhere... major industries that are trying to expand but are having trouble hiring, major classes of workers who find their skills in great demand, major parts of the country with low unemployment.... None of these things exist. Job openings have plunged in every major sector, while the number of workers forced into part-time employment in almost all industries has soared. Unemployment has surged in every major occupational category. Only three states, with a combined population not much larger than that of Brooklyn, have unemployment rates below 5 percent....

So all the evidence contradicts the claim that we’re mainly suffering from structural unemployment. Why, then, has this claim become so popular? Part of the answer is that this is what always happens during periods of high unemployment — in part because pundits and analysts believe that declaring the problem deeply rooted, with no easy answers, makes them sound serious.... [P]owerful forces are ideologically opposed to the whole idea of government action on a sufficient scale to jump-start the economy. And that, fundamentally, is why claims that we face huge structural problems have been proliferating: they offer a reason to do nothing about the mass unemployment that is crippling our economy and our society.

So what you need to know is that there is no evidence whatsoever to back these claims. We aren’t suffering from a shortage of needed skills; we’re suffering from a lack of policy resolve. As I said, structural unemployment isn’t a real problem, it’s an excuse — a reason not to act on America’s problems at a time when action is desperately needed.

The kicker, of course, is that if we do not act now when our unemployment problem is one of deficient aggregate demand, two years from now we will have a different unemployment problem--our big problem will turn from cyclical into structural unemployment.