The Other McCain

"One should either write ruthlessly what one believes to be the truth, or else shut up." — Arthur Koestler

What Matthew Yglesias Doesn’t Understand About Economics

Posted on | April 18, 2010 | 14 Comments

Besides everything, I mean. Christine Romer’s neo-Keynesian analysis of the economic slump — “It’s Aggregate Demand, Stupid” — inspires Yglesias to spout ignorantly about “structural” unemployment:

Every time there’s a downturn a certain swathe of the elite starts to label it unfixable and structural.

He then goes off to argue that the problem with U.S. policy is that it has been too cautious:

The fact of the matter is that key people responsible for running the global economy—people at the European Central Bank and the Federal Reserve Board, and the Bank of Japan, people in the United States Senate, people in the Germany cabinet—are screwing up. In the developed world, those countries who’ve been able to respond aggressively to the crisis with aggressive expansion-via-devaluation are all doing pretty well. The bigger developed economies can’t do that exact thing, but they can mount more aggressive expansionary responses — they just aren’t.

All this is a convenient excuse for not bothering to grasp the differences between structural and cyclical unemployment. Joseph Lawler had an excellent in-depth discussion of this issue in the December-January issue of the American Spectator, which I summarized in March:

Boiling down a complex discussion to its essence, we must understand the difference between cyclical unemployment — a temporary situation caused by short-term downward trends in the business cycle — and structural unemployment, which is the result of fundamental changes in the economic structure of society.

If Yglesias is too lazy to wrap his mind around that issue, I can’t force him to do so, but I must point out that “structural” is not a synonym for “unfixable.” The problem is that the kinds of government interventions that help ease cyclical unemployment may actually hinder recovery when there are structural changes in the economy.

Are we looking at a temporary slow period in the business cycle or are we looking at the results of structural changes in the economy? The question is not moot, nor is it a matter of political preference. If the government is shoving unemployment benefits and public assistance at people, encouraging them to wait around for the jobs to come back when, in fact, those jobs aren’t ever coming back, then your policies are doing more harm than good.

Arguments about economics have an unfortunate way of becoming arguments about politics because there is always the question of what policies the government should pursue. Yet we cannot forget there is an underlying economic reality that is immune to our political wishes.

UPDATE: A liberal who actually knows something about economics weighs in:

The important point is that while it isn’t structural now, the longer high unemployment persists the more the amount of structural unemployment will increase. There are a couple of mechanisms for this, the most obvious one being that over time, the skills of unemployed workers deteriorate as technology/practices change. This mismatch between skills of the unemployed and the needs of employers grows.

Ah, but Duncan, how can you so blithely conclude that current unemployment is not structural?

The housing boom created jobs for a lot of unskilled and semi-skilled workers who are now unemployed and who, barring a re-inflation of the “bubble,” are unlikely to find such good employment prospects in the immediate future. Furthermore, these people are in many cases the same ones who signed on for those low-doc option-ARM mortgages and are now living in houses worth less than they owe on them. So they’re doubly screwed.

All of which goes back to a point I’ve been pounding home for months: You can’t make capitalism work without capital, and the biggest problem in the U.S. economy today is a capital shortage. The housing meltdown wiped out $7 trillion in asset value, and there is simply no way to recover quickly from that kind of wipeout. So when you keep pretending that recovery is just around the corner — it’s not — you’re undermining your own credibility.

Frankly, liberals were on more solid ground with their original argument: “Blame Bush!”

Category: Economics

Comments

14 Responses to “What Matthew Yglesias Doesn’t Understand About Economics”

  1. MrPaulRevere
    April 18th, 2010 @ 11:50 pm

    Outstanding analysis Mr. McCain, thanks. It’s very clear, succinct and a breath of fresh air.

  2. MrPaulRevere
    April 18th, 2010 @ 6:50 pm

    Outstanding analysis Mr. McCain, thanks. It’s very clear, succinct and a breath of fresh air.

  3. Adobe Walls
    April 19th, 2010 @ 12:10 am

    Part of the problem is that people believe that $7 trillion dollars of asset value existed in reality in order to be lost. Some part of that wealth was purely theoretical, and in fact any given individual’s share of that sum could only exist if and at the exact moment, one sold the “asset” before the music stopped.

  4. Adobe Walls
    April 18th, 2010 @ 7:10 pm

    Part of the problem is that people believe that $7 trillion dollars of asset value existed in reality in order to be lost. Some part of that wealth was purely theoretical, and in fact any given individual’s share of that sum could only exist if and at the exact moment, one sold the “asset” before the music stopped.

  5. The Javelineer
    April 19th, 2010 @ 12:35 am

    Our massive unemployment is structural.

    It appears that the govenment has intentionally dispossesed its people.

    Reagan economic advisor, Paul Craig Roberts, explains it all in his book How the Economy Was Lost.

    You can read his article by the same name at Counterpunch,

    […] negligence in Washington DC aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.

    Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.

    This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of foreign labor was available at practically free wages.

    To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

    As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

    “Free market economists” covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs.

  6. The Javelineer
    April 18th, 2010 @ 7:35 pm

    Our massive unemployment is structural.

    It appears that the govenment has intentionally dispossesed its people.

    Reagan economic advisor, Paul Craig Roberts, explains it all in his book How the Economy Was Lost.

    You can read his article by the same name at Counterpunch,

    […] negligence in Washington DC aided and abetted the erosion of America’s economic position. What we didn’t give away, the United States let be taken away while preaching a “free trade” doctrine at which the rest of the world scoffed.

    Fortunately, the U.S.’s adversaries at the time, the Soviet Union and China, had unworkable economic systems that posed no threat to America’s diminishing economic prowess.

    This furlough from reality ended when Soviet, Chinese, and Indian socialism surrendered around 1990, to be followed shortly thereafter by the rise of the high speed Internet. Suddenly, American and other first world corporations discovered that a massive supply of foreign labor was available at practically free wages.

    To get Wall Street analysts and shareholder advocacy groups off their backs, and to boost shareholder returns and management bonuses, American corporations began moving their production for American markets offshore. Products that were made in Peoria are now made in China.

    As offshoring spread, American cities and states lost tax base, and families and communities lost jobs. The replacement jobs, such as selling the offshored products at Wal-Mart, brought home less pay.

    “Free market economists” covered up the damage done to the US economy by preaching a New Economy based on services and innovation. But it wasn’t long before corporations discovered that the high speed Internet let them offshore a wide range of professional service jobs.

  7. Robert Stacy McCain
    April 19th, 2010 @ 1:26 am

    Part of the problem is that people believe that $7 trillion dollars of asset value existed in reality in order to be lost. Some part of that wealth was purely theoretical . . .

    Nothing has greater value than the price for which it can be sold at any particular moment. It is only at the point of sale that actual value is determined. A merchant can put a product on the shelf with a $5 price tag, but if it doesn’t sell until he marks it down to $2, then it was never worth $5. However, this does not mean that value is “theoretical.”

    Say you own a house in a development where all the houses are roughly similar in design and construction. In 2002, your neighbor on left sells his house for $250,000; in 2003, your neighbor on the right sells his house for $300,000; and in 2004, your neighbor across the street sells his house for $325,000.

    Now, suppose you purchased your house for $150,000 in 1995 and so by 2005, the value of your house is at least twice what you paid for it. That additional value is real — you may borrow against it, taking out a home equity loan, or you can cash it in by selling your home.

    However, if you sold at $350,000 in 2005, you were faced with the question of where to live. Maybe if the kids had grown and you wanted to move to a smaller place — a bungalow next to a rural pond, or a two-bedroom apartment — you could actually cash in some of your gains. But in an overheated “bubble” housing market, you couldn’t sell a $350,000 house and expect to buy anything remotely similar for much less.

    Therefore, many people leveraged their enhanced home equity through refinancing — which seemed like a smart idea until 2007, when the bubble burst, and people discovered to their chagrin that value doesn’t always increase. People who used refinancing to pay for extra luxuries — “Hey, now we can afford to spend two weeks cruising the Mediterranean!” — find themselves mortgaged to the hilt on a house they can’t sell for what they owe on it.

    There were very few people smart enough to anticipate the bursting of the housing bubble and act on that expectation. On the other hand, most people didn’t get so giddy as to stake their entire fortune on a continued rise in housing prices. Yet everyone, whether wise or foolish — including folks who don’t own homes — experiences the decline of housing value as a loss.

    That’s $7 trillion in capital (or, alternatively, $7 trillion in consumer demand) that has been wiped off the books. To disparage that value as “theoretical” is to misunderstand how economic value is calculated. The real point, however, is that recovering from this kind of loss will take a long time and it won’t be easy. We simply cannot afford the amount of neo-Keynesian “stimulus” spending it would take to overcome that kind of loss, and justifying more stimulus spending is what Yglesias is all about.

  8. Robert Stacy McCain
    April 18th, 2010 @ 8:26 pm

    Part of the problem is that people believe that $7 trillion dollars of asset value existed in reality in order to be lost. Some part of that wealth was purely theoretical . . .

    Nothing has greater value than the price for which it can be sold at any particular moment. It is only at the point of sale that actual value is determined. A merchant can put a product on the shelf with a $5 price tag, but if it doesn’t sell until he marks it down to $2, then it was never worth $5. However, this does not mean that value is “theoretical.”

    Say you own a house in a development where all the houses are roughly similar in design and construction. In 2002, your neighbor on left sells his house for $250,000; in 2003, your neighbor on the right sells his house for $300,000; and in 2004, your neighbor across the street sells his house for $325,000.

    Now, suppose you purchased your house for $150,000 in 1995 and so by 2005, the value of your house is at least twice what you paid for it. That additional value is real — you may borrow against it, taking out a home equity loan, or you can cash it in by selling your home.

    However, if you sold at $350,000 in 2005, you were faced with the question of where to live. Maybe if the kids had grown and you wanted to move to a smaller place — a bungalow next to a rural pond, or a two-bedroom apartment — you could actually cash in some of your gains. But in an overheated “bubble” housing market, you couldn’t sell a $350,000 house and expect to buy anything remotely similar for much less.

    Therefore, many people leveraged their enhanced home equity through refinancing — which seemed like a smart idea until 2007, when the bubble burst, and people discovered to their chagrin that value doesn’t always increase. People who used refinancing to pay for extra luxuries — “Hey, now we can afford to spend two weeks cruising the Mediterranean!” — find themselves mortgaged to the hilt on a house they can’t sell for what they owe on it.

    There were very few people smart enough to anticipate the bursting of the housing bubble and act on that expectation. On the other hand, most people didn’t get so giddy as to stake their entire fortune on a continued rise in housing prices. Yet everyone, whether wise or foolish — including folks who don’t own homes — experiences the decline of housing value as a loss.

    That’s $7 trillion in capital (or, alternatively, $7 trillion in consumer demand) that has been wiped off the books. To disparage that value as “theoretical” is to misunderstand how economic value is calculated. The real point, however, is that recovering from this kind of loss will take a long time and it won’t be easy. We simply cannot afford the amount of neo-Keynesian “stimulus” spending it would take to overcome that kind of loss, and justifying more stimulus spending is what Yglesias is all about.

  9. The Javelineer
    April 19th, 2010 @ 1:45 am

    RSM wrote, “Nothing has greater value than the price for which it can be sold at any particular moment.”

    Respectfully, I disagree. Price and value are not the same thing. Mathematically, value is strictly ordinal while price is cardinal.

    Here is a counter-example to your claim: air. Air is free, yet it is immensely valuable to everyone. The price of a good reflects not its value but only the relations of supply and demand for the good.

    The US uses a debt-money system. Debt obligations can be created without any underlying asset by, for example, derivitives. The bankers rob the people with this kind of wealth-by-inflation. I suspect this is the ‘theoretical’ wealth Adobe Walls refers to.

    Thomas Jefferson said,

    I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

    We’re just about homeless, but we’re far from waking.

  10. The Javelineer
    April 18th, 2010 @ 8:45 pm

    RSM wrote, “Nothing has greater value than the price for which it can be sold at any particular moment.”

    Respectfully, I disagree. Price and value are not the same thing. Mathematically, value is strictly ordinal while price is cardinal.

    Here is a counter-example to your claim: air. Air is free, yet it is immensely valuable to everyone. The price of a good reflects not its value but only the relations of supply and demand for the good.

    The US uses a debt-money system. Debt obligations can be created without any underlying asset by, for example, derivitives. The bankers rob the people with this kind of wealth-by-inflation. I suspect this is the ‘theoretical’ wealth Adobe Walls refers to.

    Thomas Jefferson said,

    I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

    We’re just about homeless, but we’re far from waking.

  11. Robert Stacy McCain
    April 19th, 2010 @ 2:08 am

    Air is free, yet it is immensely valuable to everyone.

    Ah, but air is not always free! When the tire on my car gets a slow leak, I stop at the convenience store and pay 50 cents for enough air to fill it up again.

    When I speak of “value,” I intend merely to speak of economic value. That there are other kinds of value, I readily admit. But the type of value that we speak of when we say that the collapse of the housing market resulted in the loss of $7 trillion is not sentimental value or moral value or anything else but economic value.

    One of the frustrating things about discussing economics is when, inevitably, someone says, “Economics isn’t everything.” Well, nobody said it was. But insofar as we are discussing economics, only economic considerations are relevant to that discussion, and we must lay aside personal preferences that are irrelevant.

    This is the great error of modern-day liberalism, by the way. They approach economics with the aim of using it as a tool to achieve some moralistic goal (e.g., “social justice” or “sustainable energy”) and disregard every other consideration. Whereas most conservatives are chiefly concerned with economic policy that promotes growth and prosperity — a difficult enough feat — liberals seem to take for granted that the private-sector goose will keep laying golden eggs for them to reallocate for the “greater good.”

    When you get into a situation like we are in now — the goose ain’t laying too many golden eggs lately — liberals become extremely vexed and begin lashing out at enemies, seeking scapegoats to blame for economic failure.

  12. Robert Stacy McCain
    April 18th, 2010 @ 9:08 pm

    Air is free, yet it is immensely valuable to everyone.

    Ah, but air is not always free! When the tire on my car gets a slow leak, I stop at the convenience store and pay 50 cents for enough air to fill it up again.

    When I speak of “value,” I intend merely to speak of economic value. That there are other kinds of value, I readily admit. But the type of value that we speak of when we say that the collapse of the housing market resulted in the loss of $7 trillion is not sentimental value or moral value or anything else but economic value.

    One of the frustrating things about discussing economics is when, inevitably, someone says, “Economics isn’t everything.” Well, nobody said it was. But insofar as we are discussing economics, only economic considerations are relevant to that discussion, and we must lay aside personal preferences that are irrelevant.

    This is the great error of modern-day liberalism, by the way. They approach economics with the aim of using it as a tool to achieve some moralistic goal (e.g., “social justice” or “sustainable energy”) and disregard every other consideration. Whereas most conservatives are chiefly concerned with economic policy that promotes growth and prosperity — a difficult enough feat — liberals seem to take for granted that the private-sector goose will keep laying golden eggs for them to reallocate for the “greater good.”

    When you get into a situation like we are in now — the goose ain’t laying too many golden eggs lately — liberals become extremely vexed and begin lashing out at enemies, seeking scapegoats to blame for economic failure.

  13. McGehee
    April 19th, 2010 @ 11:57 am

    Yglesias wrote:

    …key people responsible for running the global economy…

    I don’t care who you are, that’s funny right there.

  14. McGehee
    April 19th, 2010 @ 6:57 am

    Yglesias wrote:

    …key people responsible for running the global economy…

    I don’t care who you are, that’s funny right there.