Saturday, April 2, 2011

Hidden Premises and MMT vs nonMMT, Part Deux

I know this was also the topic of my last post at Mike Norman Economics, but I really think that it is absolutely vital and largely ignored. That is, the importance of the hidden assumptions regarding the operation of the macroeconomy that lie behind MMT versus nonMMT arguments. The idea that the private sector cannot generate sufficient demand to employ all willing workers is key to our view (for most of us, derived from Keynes or Kalecki). This is why we see government spending as, far from crowding out the private sector, benefitting the market economy. Meanwhile, many nonMMTers operate with a mental model in which the private sector is fully capable of expanding to the level necessary to generate full employment. In fact, it is eager to do so, and the best thing the government can do is stay out of the way.

These hidden premises are rarely mentioned out loud (that’s why they are called “hidden!”), yet they are very powerful in terms of creating the framework in which arguments are presented. See for example this article from a recent Wall Street Journal:


Read the opening paragraphs (emphasis added):

If you want to understand better why so many states-from New York to Wisconsin to California-are teetering on the brink of bankruptcy, consider this depressing statistic: Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million). This is an almost exact reversal of the situation in 1960, when there were 15 million workers in manufacturing and 8.7 million collecting a paycheck from the government.

It gets worse. More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined. We have moved decisively from a nation of makers to a nation of takers. Nearly half of the $2.2 trillion cost of state and local governments is the $1 trillion-a-year tab for pay and benefits of state and local employees. Is it any wonder that so many states and cities cannot pay their bills?

“Depressing?” “It gets worse?” “Makers” versus “takers?” Note that there is no explanation for this tone having been taken. The author, Stephen Moore, assumes that we are all on the same page. In his mind, it is self-evident and widely accepted that the contributions of police officers, firemen, teachers, building inspectors, soldiers, sailors, airmen, marines, etc., are inferior to those of restauranteurs, gas-station attendants, WSJ columnists, financial market CEOs, pharmaceutical industry lobbyists, and so on. Otherwise, why should we be upset about these trends?

But this goes deeper than evaluations of the worth of those working in the public versus private sectors. After all, that’s a going to be a sticky argument. How does one quantify what a police officer does versus an investment banker? Personally and as an economist, I am quite comfortable with the idea that what those in government do can be every bit as useful as what those in the market do, and that enterprises in each can also be a waste of resources. But there is no need to even go there, for if the private sector is unable to generate sufficient demand to hire everyone who is willing to work, then the creation of employment by the government means that more, not fewer, jobs will arise in the market. In other words, we could even grant Mr. Moore’s dubious premise that public sector employees are leeches and we still arrive at a position where we need more, not less, government involvement, because that means more private-sector jobs.

Recall these statements from above:

Today in America there are nearly twice as many people working for the government (22.5 million) than in all of manufacturing (11.5 million).

More Americans work for the government than work in construction, farming, fishing, forestry, manufacturing, mining and utilities combined.

What happens to those jobs in construction, farming, fishing, forestry, manufacturing, mining and utilities, Mr. Moore, if we start laying off government workers? What makes you think that it would be helpful to lower the overall level of aggregate demand by eliminating teachers, firemen, policemen, etc.? I’ll tell you what makes him think that: he believes that the economy automatically tends toward full employment. He didn’t say it, but that’s what he is thinking. He sees the government as crowding out the private sector rather. Furthermore, this is so second nature to him that he doesn’t mention it–and that’s what so dangerous. Three guesses who made this relevant statement (here are three clues: JMK):

The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds.

The full-employment assumption is so deeply ingrained that it operates below the surface, framing the discussion and never being questioned because participants in the debate forget that it is even there.

I want to repeat what I said in the earlier blog post–we need to be hitting on this harder, we need to be pulling it to the forefront. The private sector cannot generate sufficient demand. In such a world–even if you operate with perverse assumptions about the worth of public sector employees versus private sector ones–government involvement in the economy causes us to have a larger market sector, not a smaller one. If we made that idea the one that ramifies into every corner of our minds and is so obvious that it no longer needs to be mentioned, then 90% of our battle is won.



Two asides. One, it’s interesting how often those on the right refer to government workers as leeches at the same time they place firemen, policemen, and members of the armed forces on a pedestal. I pointed this out to a very conservative guest at our Christmas party this year and she went quiet, stared at the floor for a moment, and finally said “I’d never thought about that.” Second, I do think Mr. Moore has a point on one front, just not the one he thinks he does. He’s right that it’s a damn shame that we’ve lost so many manufacturing jobs; but it’s not the government that is as fault, it’s our willingness to import from often oppressive countries that follow next to no health, safety, or environmental regulations. And yet I’ll wager that’s something he eagerly encouraged as being “capitalism,” even though our main competitor in this area is a communist dictatorship.

8 comments:

Tom Hickey said...

Of course, the logical extension of "makers v. takers" is that all service workers are takers. That is going to get interesting in a predominantly service economy. The only way to reverse this and make "makers" numerically predominant is, presuming free trade, to drive US wages below wages in the developing nations in order to bring "making" jobs back. Where does anyone think that those jobs went? Welcome to Third World America, brought to you by your neoliberal masters.

John Harvey said...

Of course, ultimately, if technology continues to increase in manufacturing, then the shift to "takers" is inevitable. What to do then if we continue to use our current system for production, allocation, and distribution? Hopefully, we'll have starships by then and will be able to spend out time exploring the galaxy!

Sorry, too much Star Trek!

mike norman said...

Moore is the clownish propaganda "minister" for supply side economics and the neoliberal party line.

In Warren's book he recounts a Q & A session he did with Moore several years back where Moore basically agreed with all of Warren's arguments that privatizing Social Security did nothing other than reshuffle the current, investor/saver composition.

When Warren asked Moore, "So why do you want to do it if it does nothing?" Moore stated, "I just like privatization."

In the article you refer to, Tom, Moore purports to "analyze" education (a major public sector "good"), with arguments that have been thoroughly refuted by many, many, studies.

The fact is, students attending private schools score the same or worse (for example, in math) on standardized tests once you adjust for social differences.

While private schools have the luxury of being able to pick from the cream of the crop, public schools must admit all students, regardless of race, family income, social status, etc. This makes a HUGE difference.

Moore's goal is to attack the supposed, "record size of the government workforce" yet he fails to mention that we are still running with a sizable output gap. (I'm sure he would ascribe that to fictional, "crowding out.") His "remedy?" Cut the workforce even further. What an imbecile! Seriously...this is not economics.

Finally, where is Moore's reasoning for wanting things produced domestically? Why is that good? He doesn't say.

I think anyone (other than an ideological zeaolot) understands what's important is the access to goods and services, not where they come from. Possible exception being things that are necessary to ensure national security.

Moore is a clown, a total clown.

mike norman said...

Sorry, John, I meant to type your name in my comments, but wrote Tom. Thank you for this excellent post.

John Harvey said...

Yeah, I got to looking at some of his other articles, Mike, and saw that there was clearly a pattern! Didn't know about the Mosler interview, though. Very revealing!

The Arthurian said...

MMTers is such an awkward term. You guys might gain supporters just by fixing that.

"many nonMMTers operate with a mental model in which the private sector is fully capable of expanding to the level necessary to generate full employment."

"The private sector cannot generate sufficient demand."

I would agree that it DOES not (as opposed to CAN not) but I must ask WHY?
Do you have an explanation? This is the key to the whole economic problem.
I remind you that these ideas are extremely simple and should be obvious.

Otherwise, good post on an important topic.

ArtS

John Harvey said...

Ask and ye shall receive!

http://www.econ.tcu.edu/harvey/blog/summary.pdf

A summary of my blog posts on the financial crisis, starting with an explanation of how the macroeconomy works. I have other stuff, but I think this is the easiest to read.

Thanks!

John

The Arthurian said...

Thank you. Will read.