Paul Krugman’s NY Times pieceÂ Â focuses on the government’s ability to stimulate short run demand and employ unemployed people.
“For the fact is that right now the economy desperately needs a short-run fix. When youâ€™re bleeding profusely from an open wound, you want a doctor who binds that wound up, not a doctor who lectures you on the importance of maintaining a healthy lifestyle as you get older. When millions of willing and able workers are unemployed, and economic potential is going to waste to the tune of almost $1 trillion a year, you want policy makers who work on a fast recovery, not people who lecture you on the need for long-run fiscal sustainability.”
This isÂ a powerful (and dramatic) paragraph.Â Â I am puzzled about how the U.S will get its groove back.Â Â Which of our private sector firms are actually creating new jobs right now?Â What occupations are they hiring in?Â Â Net job growth = job creation – job destruction and job destruction is certainly taking place.Â One salient example is Â Margot Roosevelt losing her job at the LA Times.
In Econ 101, we teach that during bad times wages fall and firms will seek to hire workers at these lower prices.Â Â But, how much of total compensation is health care?Â Are firms afraid to hire full time workers due to expected health care obligations?
I am in Berkeley right now and my pro-Krugman piece of my brain is alert.Â I would be happier endorsing Dr. Krugman’s stimulus plan if the government could pre-commit to how it would be financed andÂ to build in safeguards so that the money would be spent on productive activities (such as rebuilding infrastructure).Â
There are millions of unemployed people today.Â Do you expect them to be hired by companies such as Facebook or IBM or by service firms?Â If the RBC could interview a representative sample of unemployed people, what type of work do they seek?Â What is the lowestÂ wage that they would accept for doing this work?Â I would then want to speak to employers concerning whether they are considering posting jobs with these attributes and what is the highest wage they would be willing to pay for such workers?Â Â Are there gains to trade in the labor market and search frictions have slowed these mutually beneficial transactions down?
The final issue that has not been discussed by “serious people” is duration dependence.Â Â Does the experience of being unemployed lower your future job prospects as your skills and self discipline erode? If the answer is yes, then the “Krugman case” is even stronger. Labor economists have long debated this point.