Mike the Mad Biologist

For today, anyway. Brad DeLong is the only one out there who is as flummoxed, not to mention frustrated, as I am about the complete lack of responsiveness by the political system to nine percent U3 unemployment, and one out of six U.S. workers being un- or underemployed. DeLong nails it (italics mine):

There is a line of argument that I do not understand — even though it is made by economists I respect. It is that our current labor-market depression was baked in the cake from the moment that Alan Greenspan decided to keep interest rates low in the early 2000s, declining to stop would-be homeowners from borrowing from would-be mortgage lenders who were eager to lend. I disagree. I think that our current labor-market depression was baked in the cake when we started electing leaders who put other political and policy objectives far in advance of maintaining full employment….

Yes, the collapse of the housing boom and the consequent $8 trillion reduction in household wealth does mean that consumer spending will be significantly below trend for quite a while to come. But when the consumer stops spending and sits down, the government and the exporter — and also the capacity-building business — can stand up: There is no chain of logical necessity leading from the collapse of the housing boom to a prolonged period of very high unemployment.

…Of course, if boosts to economy-wide spending led to inflation instead of increases in capacity utilization, then we would have a very big problem; we would be in the alternative universe of the Hayekians in which we have a fundamental mismatch between the skills of our labor force and the goods wanted by consumers. But there are no signs that we are in that alternative universe — no signs at all.

What, then, is our immediate problem?

It is political.

The Federal Reserve would rather let unemployment remain above 8 percent for a good long while than run the slightest risk of higher inflation. The Treasury would rather let unemployment remain above 8 percent for a good long while than say that a strong dollar is not in America’s interest (even though it is not). The Republican decision-makers in Congress would rather let unemployment remain above 8 percent for a good long while than let Obama win legislative victories.

Most puzzling, the Obama administration would rather let unemployment remain above 8 percent for a good long while than make what it thinks is likely to be an unsuccessful push that will reveal its lack of control over the government.

Sigh.

Comments

  1. #1 Nick
    February 26, 2011

    But when the consumer stops spending and sits down, the government and the exporter — and also the capacity-building business — can stand up

    ==============

    And where does the government get its cash?

    1. The taxpayer, or consumer, which means they have less money to consume.

    2. Future taxpayers – children – by borrowing, and then stinging them for the tax plus the interest on top.

  2. #2 lynxreign
    February 26, 2011

    Sorry Nick, but no. Look at some of the earlier posts on this blog about fiat currency. They print it. The dollar becomes weaker in the short term, people have money to spend and the economy gets back on its feet.

    If you absolutely MUST cut spending, cut defense. Stop both wars of choise that we’re in and cut defense spending by half and we’ll still spend more on it than any other nation in the world.

  3. #3 FrauTech
    February 26, 2011

    In my experience inflation is in their best interest as well though. With inflation we don’t realize how stagnant the wages are of those of us with jobs.

    I think it was on this blog that I read either you Mike or a commenter talking about how when the Great Depression was over factories reopened. And how now, there’s no more factories left to open. There’s no strong manufacturing sector we can open again once the economy recovers. I agree defense should be cut along with other cuts, but honestly the defense industry (along with the automakers) are the last people actually making things in this country and still hiring Americans. You can’t outsource security clearances…for now.

  4. #4 Miles
    February 27, 2011

    @FrauTech, The capital of the U.S. is no longer sunk into physical factories to the degree it once was but is instead sunk into the education and skill set of workers.

    @Nick, Borrowing from the future is a stupid thing to do when you have full unemployment, because the engine of the economy is already cranking out product as fast as it can and any additional profits will be nothing but numbers on paper. When you are far from full employment, however, stimulating the economy actually can cause real production to increase.

  5. #5 Troublesome Frog
    February 28, 2011

    Nick:

    And where does the government get its cash?

    From lenders everywhere who have, since the beginning of the crisis, been climbing all over each other to lend to the US government at ridiculously low interest rates. Even without the stimulative effects of the additional spending, any sensible business would be crazy not to use those cheap funds to invest like crazy.

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