Thursday, January 22, 2009

Bush's legacy: Keynsian revival

When I was in undergraduate school, we were taught that giving jobs to the unemployed to dig ditches and then fill them in would boost our aggregate income. But by the time I got to graduate school I was told that these jobs had to be paid for, which represent future liabilities and taxes, which takes resources from the private sector.
What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.
It is interesting that one of George Bush's legacies is the revival of Keynesian stimulus--his tax cuts were classic fiscal policy designed to offset economic downturns to "fine tune" the economy.

1 comment:

  1. "Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system."

    Speaking specifically of unemployed labor, our rabid affection for price floors prevents the private market and price system from moving unemployed labor to its highest valued use. As .gov tells me that I must pay a certain dollar wage or provide a certain benefit, the list of people who will never be employed grows. That's not a problem with the private labor market or price system, it's a problem with the .gov distortions to those systems.

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