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Wednesday, July 13, 2011

What IS the disconnect b/w Spending and Jobs?

I am still thinking on this topic. The standard Keynesian line, which I am right now listening to a summary of on today's Diane Rehm Show, is that pumping money via spending or unemployment benefits increases spending which increases jobs. The former can be shown to be true, but the last connection - that between spending and jobs is a bit more suspect. It certainly hasn't materialized during this 'expansion'. We stand still at 9.2% unemployment while spending has increased over the past 2 years and as corporate profits have risen to historic highs.

So where are the jobs? If Keynesianism can't come up with a theory to connect spending to jobs DIRECTLY, then they have no real theory at all. Standard macro textbooks have no theory, other than that 'spending is too low' and that more spending will create more jobs. But never is that actual mechanism explained anywhere. And as I've pointed out in a previous post, even John Keynes himself was vague on this meachanism - preferring to assume it to be true that of course spending would lead to more jobs. The New Keynesians say that prices and wages must adjust before employment starts moving - well it's been 4 years and wages (and to a lesser degree until recently, prices) have been flat, so what is the problem?

Here's what I see reality as being: Spending leads to more spending which, in connection with an already weak labor market and productivity gains (at the expense of employees and the unemployed) lead to higher profits. That's as far as we can get today with mainstream economics. How do you get from higher profits and spending to higher employment, other than the passage of time and allowing the normal long-run profit expectation mechanism, or at the other extreme, direct hiring programs to lead to jobs creation - both of which come with costs.

Regardless, (mainstream) New Keynesianism has a lot more explaining to do because right now, the theory is rather lackluster. I've heard some sympathetic to this concern slighly revise their logic to say, "well, ok, Keynesianism is often only good at preventing further free-fall and not so good and driving out of recessions absent a huge spending package (war)...." Well, I'm sorry, but I'm sick of people creating conveniently made-up realities to match their models. I want an economics to look at reality and try to explain it - as a (former) fellow economist, I say to economists to get your nose out of calculus books and simulated equations and start paying attention to reality.

7 comments:

Decapod73 said...

I could argue that FDR's new deal bridged the gap by providing the jobs directly, and ensuring that the products of those jobs were worthwhile in the long run (infrastructure for transit, electricity, and water; public parks and schools). And I could then ask why the current administration has not proposed such direct hiring programs this time around, but I suppose that still leaves the same question you already posed: How does keeping those employed out of poverty create the demand for private-sector jobs for them to fill after the direct hiring programs inevitably expire?

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