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:

http://tinyurl.com/3c2poga

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.