No Reason to Think? Delong vs the Austrians, Evidence vs Ideology
Delong has a recent piece on the Beveridge Curve in which he asserts that:
There is no reason to think that June 2009 was a magic moment after which “skill–needs mismatch” took a sudden upward leap.
No reason? Actually, Austrians, and those inspired by their theory like Arnold Kling, have argued that in general the greater diversity and specificity of labour and complexity of the economy in in recent decades made recover slower and made government programs less effective.
Delong offers no evidence to support his view, he only says that it seems likely to him, but there is reason to believe that there has been a jump - just look at the evidence. The more complex the economy the more trip-ups policies are likely to face, the harder it is to be enlightened and run an economic plan smoothly. Very small economies with simple homogeneous systems can just about get away with it - think Sweden. Creator of the "Great Stagnation" theory, Tyler Cowen, also sees evidence for a long recalculation in today's complex US economy:
In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people? This stylized fact seems to point toward search and recalculation ideas, with some zero marginal products tossed in.
Although Delong argues that businesses will have been " reconfiguring jobs to make more use of low-wage “unskilled” labor," Cowen cites statistics that show that the unskilled are facing 30% unemployment rates, while the skilled face only 3% unemployment. From Kling's very readable and sensible (at least hiss main foundational argument, or "mantra"):
the last 75 years has made labor much more heterogeneous and put greater "distance" between the different kinds of work people do. More specifically, a far lower percentage of labor is physical in the ways that the WPA and CCC demanded. And perhaps most importantly: an economy that is orders of magnitude more complex than that of the 1930s will be one in which it's much harder to figure out what sorts of government make-work programs will match the human capital structure of the unemployed labor.
and, more specifically, he argues that the Great Recession has been experiencing a "jobless recovery" because of this:
Labor markets and unemployment are having trouble recovering perhaps because the very specificity of labor makes the recalculation process more protracted, and the variety of ways in which policy makers are complicating the process with stimulus spending and extended unemployment benefits is not helping.Contra Delong, Austrians like Steve Horwitz argue the specificity of labour in the highly complex economy makes readjustment more difficult and recovery slow, and this means that there is reason to believe that there was a time in about 2009 (just after the crash) "after which “skill–needs mismatch” took a sudden upward leap." Unless Delong is saying that the moment should have been earlier, one must assume that he has not have read the Austrian arguments that explain why. As one example, Horwitz explains:
As the boom pulls highly specific factors of production into the artificially stimulated areas, it will also increase the incentives for developing very specific sorts of human capital (one need think only of the high-end financial markets here). Come the bust, this human capital may well have next best uses that are a far cry from the value it had been producing.
Rather than a more complex, wealthier economy having greater dampening effects on the volatility of cycles, it may well be the case that an economy with a greater division of labor and specialization, and therefore more heterogeneous human and physical capital will actually suffer larger booms and longer and deeper busts from the same bout of inflation than would simpler economies. There's a reason that red line is so deep for so long.
This also means that the recalculation process will both take more time to sort out and that it will be that much harder for governments to try goose aggregate demand with make work programs. What exactly government is supposed to do to "directly employ" unemployed folks with these highly specific skills? I really am waiting for someone to argue government should pay them to build websites and databases and then just delete what they've done.
This brings us back to the EPJ article. Perhaps ironically--if you are of the mind, as one branch of Austrian economics is, that central banks cause misallocations regardless of how they may try (as all central planners do) to be careful and not cause them--the Federal Reserve bank of St. Louis was among those who published on the issue of labour mismatch during the Great Recession. Does Horwitz have a "jumbled message" because he supports central banking? The article says that Horwitz's support for central banks is "is as far from Austrian theory as you can get. Austrian school economists see central bank monetary expansion as distorting the economy."
Although one Austrian strand takes this point of view--that all central banking must cause misallcoations-- it is not the strand (which some might call less ideological and more "nuanced," and "moderate") of Steve Horwitz, who is a proponent of an Austrian theory of Monetary Equilibrium (ME) using central banking. And, no, this is not a contradiction in terms.
I used to call market socialism a contradiction in terms, and then I was sure that libertarian socialism was a complete contradiction, impossible. Just as a purist view can see socialism as impossible--because it sees complete central planning and the socialist goals as defining socialism, much like one might say true communism is impossible--one might see libertarian socialism as impossible. But it is the black and white of this approach that makes useful discussion between opposing political and economic viewpoints so difficult - impossible, if you will.
To see these - and an Austrian that is OK with central banking - as contradictions is to see them as too pure or perfect, which is to see a complex interconnected society filled with complex humans as something that can be treated as a perfectly uniform system fully represented by a single model.
Finally, although I think Austrians have the right idea regarding misallocation and labour specificity, I do have some qualms with Kling's arguments. Klng argues that " Jobs like website development and social-media marketing are very far removed from the final stage of production." It is not just capital involved in "roundabout production," and therefore misallocated, as part of the ABCT, it is labour too:
This explains how we can have a “jobless recovery,” meaning a large percentage increase in output without a comparable percentage increase in employment. For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently.
For firms in today's economy, labor represents an investment. Firms hire workers in order to develop capabilities that will eventually produce output more efficiently. The return on an investment in workers may take as long or longer to realize as the return on investment in a machine. The return on investing in workers may be at least as uncertain as the return on investing in equipment.But is it fair to say that website design and social media marketing are long-term investments that would not be cut back easily, and would lead to misallocation of resources? It is not my intention to take on all of ABCT here, but I will note that although Kling suggests that "Real employment in today's economy represents a long-term investment, not short-term make-work," the American economy is far more flexible with the hiring and firing of labour than the UK or European labour markets (thanks to more flexible regulations and labour law), such that forms do lay-off workers quickly when they see profits fall.
In complex free market economies, it is important to experiment and hire for short periods by contract before finally hiring full-time, permanent employees, and this is frequently done. More to the point, many website designers and social network marketing workers work for companies dedicated to those things - so when profits fall, they are indeed laid off right away (I remember the dot.com crash!) especially because those companies primarily invested in labour, with few other assets.
Some companies, especially large ones like pharmaceutical companies and large publishing companies, have on-sitef social media marketing (if they have a marketing department rather than outsourcing/contracting this function), will they lay off these staff when hit by drop in sales/ profit? I guess it depends and will be a choice made by the CEO. He or she will have to determine the cause for the drop--if it is the recession and not something the company has done wrong or needs to change to keep up with competition, what should they do? Perhaps the best long-term strategy, given a short-term recession, is to keep these staff, but then if marketing can shrink in the short-term during recession, might it not be cheaper to make layoffs and re-hire, even with training costs?
Labels: economic theory