Brad’s Bloviations, Part #2,235

3 February 2010 at 3:08 pm 8 comments

| Peter Klein |

Brad DeLong accuses non-Keynesians (Austrians, Chicagoites, and other sensible people) of “los[ing] themselves amidst their early-nineteenth century books, one hundred and seventy years behind the state of the art in economics,” just because they think public spending and deficits might be crowding out private-market activity, making it difficult — impossible, actually — to come up with meaningful estimates of “jobs saved” by stimulus spending. If you can get past Brad’s adolescent writing style (anyone citing Bastiat, for example, is “a truly clueless idiot”), you find that he is indeed very “progressive” in his thinking — he’s made it all the way to 1950. Brad, like most Keynesians, is stuck in the C + I + G world of undergraduate macro. His argument is that the stimulus can’t be crowding out private-sector jobs because (a) wages aren’t rising (implying that stimulus-funded workers aren’t being bid away from other potential opportunities) and (b) T-bill prices aren’t falling (suggesting that private employers aren’t competing with the Feds for credit).

Leave aside for the moment that Brad has no idea what wages and bond prices would be in the absence of stimulus. The key problem with Brad’s argument, noted by Russ Roberts, is its reliance on crude macroeconomic aggregates. As pointed out here many times, heterogeneity matters. Sensible economists care not about the aggregate unemployment rate, but the effect of stimulus activity on individual labor markets. Stimulus affects the composition of employment, not just its level.

For example, here in Missouri the governor used Federal stimulus money to balance the state budget, a chunk of which goes to the University of Missouri. Some university staff, contract faculty, and the like who might have been let go were retained, putting upward pressure on their wages and keeping them taking positions elsewhere (crowding out). But this wage effect doesn’t show up in the aggregate data, because (for instance) the local construction market continues to lag, and wages of plumbers and carpenters are low. To Brad, unless the economy-wide average wage rate goes up, there is no crowding out, and every job funded by stimulus is a net job saved. During a recession, according to Keynesian doctrine, the normal rules don’t apply, opportunity costs are zero, and free lunches abound, if only the government can force people to spend the money they’re otherwise irrationally hoarding. But here let me quote the wise Jerry O’Driscoll:

A recession is not “an abnormal event,” which suspends economic theory. A recession is a theoretical construct, not datum. It is word we use when the normal churn reaches an arbitrary point. The resource reallocations going on in a recession may be different in degree, but not in kind from what occurs every day in a market economy.

Of course, because Keynesian economics is an essentially static theory, Brad also ignores any intertemporal effects (e.g., the future jobs lost due to inflation, massive deficits, regime uncertainty, and so on). But we’ll let that go. It would perhaps be more than he can handle.

Update: Here’s more from David Henderson, making my same baseline point above. Brad says “we detect crowding out through the rise in wages and the wage inflation accompanying the non-creation of private sector jobs.” David:

Focus on the last sentence. It’s wrong. And, ironically, given the way DeLong dumps on Bastiat, it’s wrong because, in a sense, DeLong forgets to look at what is unseen. If wages are not falling, then that well could be due to extension of unemployment benefits and some of the additional spending in the stimulus package. DeLong has arbitrarily chosen zero real-wage increase as his baseline. But in a readjustment, what Arnold Kling calls a recalculation, there’s a case to be made for some real wages to fall. At those lower real wages, some of the currently unemployed would be employed. Those jobs that aren’t created, therefore, are a cost of the stimulus package.

Entry filed under: - Klein -, Austrian Economics, Bailout / Financial Crisis, Classical Liberalism, Myths and Realities, People.

Stuck on the Methodological Hamster Wheel “I, Pencil,” Updated

8 Comments Add your own

  • 1. Per Bylund  |  3 February 2010 at 3:25 pm

    At least you have to grant Brad DeLong that he’s keeping up with technology and acts on the opportunities it creates. He seems particularly good at deleting comments on his blog questioning his economic “reasoning.” I’ve commented only a few times, but my comments (all written respectfully, of course) were obviously not very well formulated – they never survived the 5-minute mark. Perhaps it is because I’m a truly clueless idiot…

  • 2. Peter Klein  |  3 February 2010 at 3:29 pm

    Yes, he is notorious for not only deleting, but also editing — to change the meaning! — comments on his blog. A rather insecure fellow, it appears.

  • 3. Per Bylund  |  3 February 2010 at 3:31 pm

    So you are saying I should be glad that my comments were deleted – that Brad was gentle on me. The alternative would have made me look like a full-blown Keynesian…?

  • 4. Per Bylund  |  3 February 2010 at 3:36 pm

    Wait, did you just edit my previous comment…? ;-)

  • 5. Recomendaciones « intelib  |  3 February 2010 at 4:20 pm

    […] Brad’s Bloviations, Part #2,235, by Peter Klein […]

  • […] los comentarios sigue la discusión. Peter Klein en Organizations and Markets también replica. Le cito extensamente: The key problem with Brad’s argument, noted by Russ Roberts, is its […]

  • 7. David Smith  |  4 February 2010 at 8:18 am

    So I’ll not take it personally that he deleted my comment disagreeing with his viewpoint in mild-mannered, polite terms. He’s thin-skinned and does it all the time.

  • 8. Brad’s bloviations, part #2,235 - Viewsflow  |  4 February 2010 at 8:42 am

    […] Peter Klein's critique of Brad DeLong on the O&M blog. DeLong will hold forth on Bloomberg's On the Economy program today, and Tom Keene reveals he is en fuego, calling this one and that "idiots."Close […]

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