Creating Jobs

How does one get to be an economist these days? Is there some baseline level of expertise required or do you just need to find a school that will give you a degree? Or do you just hang up a shingle?

In an article at economist Veronica de Rugy presents a premise with which I agree and supports it with reasoning that is very, very flawed. The premise under which she’s operating is that the federal government doesn’t really know how to create jobs and the tools that they’re using to create jobs are poorly suited to the task, rather in the same way that a golf club is poorly suited to inserting a ball into a hole. I tend to agree with that.

However, here’s her reasoning:

The idea behind the $787 billion stimulus bill is that government can create jobs by spending money. For now, let’s ignore fact, history, and economic theory and assume that government spending can actually create jobs.

In that case, we should expect the government to invest relatively more money in the states that have the highest unemployment rates and less money in the states with lower unemployment rates. So let’s check the data.

Was that the idea behind the stimulus bill? Or was it the idea that as the spender of last resort the federal government could stimulate the economy by spending money and a growing economy creates more jobs than a contracting one does? Judging by this comment circa January 2009 from stimulus fan Paul Krugman that certainly would appear to be the case. Onwards

The second flaw in the reasoning is that it conflates the unemployment rate on a per state basis with the effect of creating jobs on the national unemployment rate. They aren’t the same thing.

The third flaw in the reasoning is that the median cost of creating a job in any given state is probably inversely proportional to the unemployment rate in the state, maybe even tautologically so. That means that if your objective is to reduce the national unemployment rate you’ll probably get more bang for your buck if you engage in the perverse strategy of spending in the states that have lower unemployment rates (at least to the extent that you can get away with it politically).

Which brings us to the final, critical point. Ours is a political system rather than an engineered system. Whenever you do anything at the federal level, you must do whatever gets you enough votes to pass the legislation rather than what’s the most effective. That means you spend money in Vermont even if the unemployment problems are in Michigan.

And so we finally arrive at the point I’ve been making around here for months. Michigan’s problems are different from California’s problems are different from Florida’s problems. One size does not fit all however easy that single size makes things to administer.

I don’t think that means that the federal government is completely useless in facing problems of the sort that confront us today but I do think it means we should be looking for a different role for the federal government than the one that the powers that be seem to be envisioning. It may be that Michigan really needs to change its strategies and it will need help to do that. Or it may be that a regional approach would be more effective in helping Michigan deal with its problems. After all Michigan’s problems overflow into Ohio, Indiana, and Illinois.

Bottom line: back to the drawing board, Ms. de Rugy. Knowledge and ability are not the same thing. Marginal effect and need are not the same thing. Just because a system is political doesn’t mean it’s useless.

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