It’s like 42nd Street. The last minute stand-in is better than the star. Economist Garrett Jones, standing in for Megan McArdle at The Atlantic, has a pair of good posts. In the first he writes:
The Keynesian theory of stimulus is elegant: When a recession needlessly throws people out of work, the government can hire them, and then those people take their paychecks and buy stuff made in the private sector. So it’s a win-win: The government and the private economy both expand. No cruel tradeoff: the pie is bigger than before, there’s a “multiplier effect.” I imagine Keynes genuinely loved the thought of saving his beloved market economy.
Is that what we did? Or did we boost wages for people who weren’t out of work? And produce a smaller boost for the economy than could otherwise have been realized? In the second post he partially answers that question:
In a normal economy, 40% of new hires are people who switched right over from another job: Friday at Walmart, Monday at Target. The other 60% come from some mix of the unemployment lines and the ether.
In this normal economy, a slowly-growing pool of workers play a high-speed game of musical chairs with a slowly-growing number of jobs: Workers are constantly switching in and out of employment, sometimes voluntarily, sometimes not. Yes, workers who switch jobs often get replaced, eventually, but those new hires are rarely net hires: This is the world of churn, John Haltiwanger’s world of endless job creation and destruction.
When Rothschild and I sent out surveys to organizations that received ARRA stimulus funding –the first and unfortunately still only study of its kind — we asked newly-hired workers a simple question: What were you doing right before this job? 47% said they came directly from another job — perhaps slightly higher than the amount of “job shifting” or “poaching” in a normal economy. In a recession, you should do even better than that, since there are so many unemployed workers to choose from.
Consequently, a good bit of the stimulus raised wages for people who were already employed and produced less actual stimulus than it otherwise might have. I thought and think this was obvious at the time.
Note, however, how much better Keynesian stimulus would work in a society that wasn’t already mobilized to exploit permanently enhanced levels of government spending or to defend against competitors.
Too bad he can’t have her column permanently. I have always found his writings to be better written and more likely to use data. Maybe he just writes better as a guest.
Steve