Dollars and Jens
Monday, March 15, 2010
productivity, growth, employment, and Okun gaps
On some level, I think it is common sense that the path to wealth is to have people able to produce things as efficiently as possible. At least in the long run, I think a full and detailed understanding gives the same result. Most people seem to be stuck on a middle kind of understanding in which it seems as though inefficiency is good, and I think that's partly due to a fixation on the business cycle; if you have a three year time horizon and we're going into a recession, there may well be things you could give people to do that are better than unemployment, even if they aren't efficient, but in the long run it probably means they will be doing the wrong kinds of things, or doing them poorly.

A lot of the neoclassical assumptions about smoothly functioning and adapting markets hold fairly well in the long run, and if they held in the short run as well, I think this would be more intuitive to people: if you have a fixed number of people doing things, to a large extent the tradeoffs you make (on a societal level) involve whether those people are providing health care or building computers, and the fact that someone who works as a doctor can't then be an electrical engineer during that time as well. The most reasonable time not to think this way is during a recession — you don't, on some level, have a fixed number of people doing things; if you can turn an unemployed person into a doctor, you don't have to give up any computers. You'd have to have a pretty gloomy outlook, though, to think that the tradeoff doesn't exist in the long run, that the number of useful jobs will be essentially independent of the number of people in the labor market over long periods of time. (In fact, if you want to predict how many jobs the economy will create in the next year or two, you might get your best estimate from an economic model, but if you want to predict how many jobs the economy will create in the next two decades, I'd steer you to a demographic model. How many more people will want to be in the work force in 20 years than there are now? That's about how many jobs will be created.)

So here's the upshot: for most government programs — e.g. road building — the benefit is the obvious output -- more or better roads. "Jobs created" are the single biggest cost. If the road isn't worth that cost, you shouldn't build the road. It's not completely insane on a short-term basis during a recession to think that labor is less of a cost than it usually is, particularly if the people being hired are likely to be those who are currently unemployed and who are particularly likely not otherwise to become employed in the near future. It's entirely wrong, though, on a longer term. (This is the single biggest reason I roll my eyes when I hear about "green jobs". The environment is worth something, and it's worth paying for a better environment, but long-term employment in making the environment better is a cost, not a benefit, and needs to be recognized as such; "we take people out of other production and improve the environment" isn't win-win.) Even if politicians understand this, though, I never expect to hear them betray it, especially (again) during a recession.

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