Back to basics

Sacrificing the real economy – where people earn incomes by providing goods and services that other people buy – to worries about fiscal balance is insanity. We’re not “living beyond our means”: we have the capacity to produce more than we now consume. The problem is the under-utilization of that capacity, and the solution is fiscal stimulus.

Francis Bator points out something all the debt-and-deficit hysterics want us to forget: The point of macro policy is to influence the activity in the real economy where people have jobs and make things or provide services that other people buy.

Our problem right now is not that we’re “living beyond our means” as a country; in fact, total private consumption plus gross private domestic investment plus government spending is considerably less than our capacity to produce goods and services. If we stimulate demand, the real cost of the resulting production is zero. The position of the short-run deficit hawks is that we should continue to leave money on the table, on the ground that (other people’s) pain is good.

A separate point, not Bator’s but mine: If we were truly concerned about “the grandchildren” we’d be putting more money into basic research. With both NSF and NIH funding only a tiny fraction of the proposals they get (the top 6.5% for NIH, last time I checked), there’s tens of billions of dollars’ worth of “shovel-ready” activity that would provide jobs (and incomes that stimulate demand and thus more jobs) right now, and benefits for the future.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

12 thoughts on “Back to basics”

  1. I don't believe that there is more capacity. A few years ago, GDP was juiced up due to building houses in Las Vegas, financing houses in Las Vegas, people in California paying off their credit cards debts (generated by trips to Las Vegas) with home equity loans, which build casinos in Las Vegas. Yes, we had a lot of capacity to build houses in marginal exurbs a few years back, which proved to be a monumental waste. That "capacity" was a cancerous tumor. The whole cycle was aided and abetted by the government. Now, all of the people who were enticed into that cycle of activity (many of whom likely wasted formative years that could have been spent pursuing more durable occupations) that could need to find something else to do, which will understandably take a long time. It's easy to fall into that kind of trap, so therefore if the government has any responsibility it's to stay the hell out of the way and introduce as little distortion into the economy as possible so that young people don't waste valuable time, say sitting around too many .com offices in the early 2000s or getting involved in real estate in the mid to late 2000s. We want good, strong, durable growth, with a minimum of malinvestment which is why it's necessary to maintain hard-money, non-intermeddling economic policy. It's going to suck for the people out of work, but there's ultimately no way around it.

    If the government were serious about giving temporary relief to the willing-to-work population, why don't they just offer jobs to anyone who's willing to show up at, say $10/hr. to clean the subway stations or parks? And they won't do that because of Davis-Bacon and other distortion inducing garbage.

  2. Why assume that we necessarily are unable to produce goods for ourselves that we produced for ourselves just a decade ago? People who used to build planes for McDonald/Douglass are now working for McDonald's…but those people (and their progeny) can just as easily go back to work building things we now get from China as flipping burgers and greeting you at the door of the Chinese Import Store (aka WalMart).

    Where I grew up we used to have the following: several airplane plants, two automobile plants, a number of appliance manufacturers, dairies, farms and ranches. Today all those are gone far away, and instead we have suburbs and large empty industrial spaces abutting airports that get converted into "big box" stores or vacant lots.

    And we did all that so that the "job creators" of Wall Street could take home outsized "bonuses" which get taxed at a lower effective rate than the greeter at WalMart's salary.

    It's a choice. You want to get serious about stuff, stop advancing polices that make America just like Mexico, without the charm.

  3. The whole debate over whether current, high rates of unemployment are due to

    "cyclical factors" or "structural factors"

    strikes me as almost insanely stupid, on both sides.

    The "cyclical factors" school, well-represented by Paul Krugman, tells a realistic enough story, but makes the solution seem too easy — "just spend (borrowed) money" willy nilly — and the argument, through the lack of explanatory detail about how we get back to a sustainable economy, defeats itself, among the majority for whom fear induces caution.

    The "structural factors" folks appear only to want a bumper sticker for a do-nothing approach. Not our responsibility, really, say the mandarins at the Fed.

    Neither argument is very enlightening about the nature of our present, sad predicament, nor does it help clarify the political conflict, which has left the country paralyzed over a response. As long as neither argument explains its own opposite, we won't be discussing the actual collective action problem, or be able to identify compromises that might get us moving out of it.

    The "living beyond our means" meme does have a referent: the persistent trade and payments deficits, which have left the country importing much of what it consumes (beginning with oil), and paying for it with exported debt paper. That makes it more reality-based than the "cyclical" v. "structural" debating society.

    Looking forward, to peak oil and global warming, "living beyond our means" has an even more vivid meaning, as we are eating the seed corn and salting the fields for our posterity at an alarming rate. But, in the present, our political paralysis is due to the immediate effects on vested interests of any policy of motion. Our political leadership has chosen stability through stagnation, to preserve the wealth and power of those, who are wealthy and powerful. We will soon be asked to sacrifice Social Security, to keep this system going.

    If we were to act, to spend a $2 trillion fiscal stimulus package, say, on replacing oil in our energy system, health insurance companies in our health care system, or to resolve the vampire banks from 7% of our economy back to the 1% to 2% of the 1960s, we would be goring the ox herd of wealthiest 1/2 of 1%.

    America is a plutocracy, and we, Americans, are peons. This is how peons live. Get used to it, or find ways to change it. But, stop thinking that your political opponents are stupid. Your political opponents are rich, at your expense, and are not going to volunteer to change that.

  4. horseball: "And they won’t do that because of Davis-Bacon and other distortion inducing garbage."

    Hmmmmm . . . let's see, the Davis-Bacon act requires payment of prevailing wages for workers employed for federal projects and the prevailing wage is determined primarily by the marketplace, so it's not clear how this act is "distorting" anything, unless you mean to say that the free market distorts wages . . .

  5. GDP don't mean squat if it's all sevice jobs. This point always comes up in these kinds of discussions and then the response is 'but what can we do since manufacturing is gone so get used to it, woe is us?!?!'

    So the question is not where did the manufacturing go (we know that) but why and that points to when? And the answer is in the 1980s when we stopped having tariffs on selected goods that our workers were making a living creating.

    Tariffs built the US manufacturing power that built America and the american middle class. Americans need protection from third world workers who work for $0.50 an hour (really the SOBs that run the factories) more than we need protection from armies or terrorists. What are you more afraid of: getting blown up or losing your job?

    This nonsense about it being a flat world and how dare we even think of monkeying with that reality is the BS the Wall Streeters use to keep their guchi heels on our throats.

  6. "and the prevailing wage is determined primarily by the marketplace,"

    "Prevailing" wages, like "fair market value", is a pseudo market concept. In the market, you don't pay a "prevailing" wage, you pay what people are willing to work for. You don't need a freaking law to pay people the market wage. Unless you're getting your employees by press gang that's what you'll be paying, by definition.

    Pretty much anybody who's not an idiot is aware that "prevailing wage" laws are intended to force federal contractors to pay ABOVE market wages, in order that union shops won't be outbid by non-union shops.

  7. I hate to break it to you, Brett, but the "market" of commonplace discussion of political economy is "a pseudo market concept" — a misleading label we put over a complex web of social games and implicit or explicit contractual relationships.

  8. I know this is blasphemy to most. But in situations in which there is a net benefit to foreign workers, what right do we have to those jobs – especially considering we demand much more for them?

    To the degree that this is simply lining the pockets of those with access to wealth and a net loss to American workers, it seems terrible. But I don't see how a moral case can be made that we are entitled to keep foreign workers from jobs they would otherwise love to have. Just like illegal immigration, does it come down to nationalism, or "uterine rights"?

  9. Eli, the simple answer is that it comes down to most people not being any sort of utilitarians. That it's moral to care first about your self, relatives, and neighbors, (In generally that order.) is pretty much the default position, and for obvious evolutionary reasons.

    Not being able to imagine any theory of morality except your own being defended strikes me as a bit parochial.

  10. Brett: "Pretty much anybody who’s not an idiot is aware that “prevailing wage” laws are intended to force federal contractors to pay ABOVE market wages, in order that union shops won’t be outbid by non-union shops."

    The "prevailing wage" is determined by marketplace surveys. Therefore, the "prevailing wage" directly reflects "market wage." It is not a calculation or something made up by the government, as you suggest.

  11. Brett: "You don’t need a freaking law to pay people the market wage."

    Yes, you do, to encourage companies getting federal contracts to hire from the locality where they are implementing the federal contract rather than importing workers from cheaper labor areas and devastating local economies through such market manipulation, among other reasons.


    Professor Daniel H. Kruger

    School of Labor and Industrial Relations, Michigan State University

    The Michigan prevailing wage is under attack. Several ill-informed legislators . . . Enacted MORE THAN THREE DECADES AGO, Michigan's Prevailing Wage Act has:

    1. Provided protection to the state's construction industry (both workers and responsible contractors alike) by

    – Ensuring that skilled construction workers will be paid at least the wages and benefits that "prevail" in their local communities, and

    – Ensuring that predatory contractors will not have an incentive to underbid established businesses by using unskilled or low-skilled workers imported from other parts of the country who are willing to work for less than the local labor market is paying.


    Eighteen additional states,4 including Ohio, and the federal government adopted prevailing wage laws

    during the Great Depression of the 1930s amidst concern that acceptance of the

    low bid, a common requirement of government contracting for public projects, when

    government had become the major purchaser of construction, would operate to

    reduce the wages paid to workers on those projects to a level that would disrupt

    the local economy.5

  12. As one commentator on prevailing wage laws notes: [t]he proponents of prevailing wage legislation wanted to prevent the

    government from using its purchasing power to undermine the wages of its citizens. It was believed

    that the government should set an example, by paying the wages prevailing in a locality for each

    occupation hired by government contractors to build public projects.6


    Thus, these laws were designed to prevent government spending from having artificial effects on local economies. In other words, it was government spending on large projects that was distorting market wages, for which the prevailing wage was adopted to counteract.

    You and horseball can go live in your other reality, however, Brett, a reality where a heel on the ear is a foot on the shoulder.

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