Now in Washington and have been for the past two days. Yesterday, the Wall Street Journal ran an article by Alan Blinder which led me to write a letter in response. Blinder’s article was titled, “The Economy Needs More Spending Now” which drew this comment from me:
I have a double barreled worry when I read articles such as Alan Blinder’s “The Economy Needs More Spending Now” in The Wall Street Journal. I worry because of the argument which is wrong but I also worry because you have published it which suggests an editorial policy in its support. There are plenty of other places one can go to for arguments supporting a continuation of public spending as a stimulus aimed at encouraging employment. What worries me is that there is virtually nowhere to go if one wishes to hear and understand the other side.
The distinction Blinder makes is between the need to encourage public spending in the short run which will eventually become unnecessary in the long run. The trouble is, he does not address the true nature of the problem which is that public spending – especially on the list of items that are considered as part of a stimulus package – are never value adding. They drain the economy rather than building it up and therefore make employment more tenuous, not less. Blinder is 100% right to note that long-run growth is supply-determined. If he would only recognise that short-run growth is identically supply-determined. All employment is based on entrepreneurial expectations that what employees are producing can be sold at a profit. To think there is some distinction over the nature of employment that makes the short run different from the long run is the very kind of muddled thinking he criticises others for having.
Blinder actually wrote an almost perfect para explaining the nature of economic activity in its relation to employment near the very start of his article:
Long-run growth is supply-determined; it depends on an economy’s ability to produce more goods and services from one year to the next. To accomplish that, you need four basic ingredients: more labor, more capital, better technology, and—if you can manage it—a better-functioning economy that utilizes inputs more efficiently. These four ingredients constitute the essential core of supply-side economics, and deficit reduction helps boost growth via the second: more capital.
Where he goes wrong in a way that every classical economist could see is that the short run is just the same. All production short or long is forward looking. Entrepreneurs will not produce unless they believe the particular goods and services they are producing will be bought so all of the concerns Blinder thinks of as long-run concerns are actually the immediate concern of every business at all moments in time. Anyway, while they didn’t publish my letter, they published the letter of my mate Jimmy Adams, the author of the wonderful Waffle Street. And what he wrote also went right to the point with this the key passage in his letter.
Mr Blinder errs in failing to recognize that demand has one, and only one, source, the production of those goods and services that can be sold at cost-covering prices. . . . This principle – Say’s Law of Markets – was broadly accepted by economists from the mid-19th century until John Maynard Keynes attacked a straw-man version in his General Theory in 1936.
I could not have said it better myself and very nice to have seen it in the WSJ.
From Catallaxy 10 July 2013.